Broadstone Net Lease, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Dollar amounts are in millions unless noted.
Business context
Broadstone is an internally managed REIT investing primarily in long-term, net-leased commercial properties across industrial, healthcare, restaurant, retail and office sectors. At quarter-end, it owned 790 properties; the portfolio was 99.3% leased, with a 10.7-year weighted-average remaining lease term and $371.9 million of annualized base rent. No tenant represented more than 2.4% of annualized base rent. During the first nine months, the company acquired 69 properties for approximately $578.9 million and reported total investment activity of $596.9 million.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Lease revenues, net | $103.5 | $122.8 | $295.4 | $290.2 |
| Net income | $28.7 | $30.5 | $92.7 | $77.3 |
| Net income attributable to BNL | $27.1 | $28.7 | $87.4 | $72.1 |
| EPS, basic and diluted | $0.16 | $0.18 | $0.52 | $0.48 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $195.5 | $187.3 |
- For the nine months, operating expenses were $158.2 million, including $109.2 million of depreciation and amortization and $5.5 million of property impairment. Nine-month interest expense was $54.9 million.
- Cash and cash equivalents were $75.9 million at September 30; restricted cash was an additional $6.4 million. Net cash used in investing was $585.2 million, primarily reflecting acquisitions.
- Gross debt was $2.065 billion and net debt was $1.982 billion. Net debt to annualized Adjusted EBITDAre was 5.5x; management seeks to maintain this measure generally below 6.0x. The company reported $780.5 million of available revolving-credit capacity and investment-grade ratings of BBB from S&P and Baa2 from Moody’s.
- The company declared third-quarter distributions of $0.27 per share and OP Unit. A subsequent fourth-quarter distribution of $0.275 was declared, payable by January 13, 2023.
Material changes versus comparable periods
- Q3 revenue declined 15.7% year over year, while nine-month revenue increased 1.8%. The nine-month increase primarily reflected acquired properties; it was partly offset by the absence of the prior-year $33.5 million lease-termination income.
- Q3 net income fell to $28.7 million from $30.5 million, and EPS declined to $0.16 from $0.18. The prior-year quarter included substantial lease-termination income. Q3 2022 also recorded $4.2 million of impairment, higher depreciation and interest costs, partly offset by portfolio growth and a $4.9 million unrealized foreign-exchange gain.
- Nine-month net income increased 19.9% and EPS rose from $0.48 to $0.52. Lower impairment charges and other income more than offset higher depreciation, interest expense and lower gains on property sales. The nine-month 2021 impairment included $25.7 million related to a lease termination and property sale.
- Operating cash flow increased to $195.5 million from $187.3 million. Investing cash outflow rose to $585.2 million from $448.4 million, while financing cash inflow rose to $444.3 million from $170.4 million.
- Debt increased from $1.598 billion at September 30, 2021 to $2.065 billion at September 30, 2022, largely to fund acquisitions. The company issued $200 million and $300 million variable-rate term loans in August 2022, repaid its $190 million 2024 term loan and used remaining proceeds to reduce revolver borrowings.
Outlook, risks and unusual items
- No formal earnings or acquisition guidance is provided in the supplied filing text. Management expects to fund liquidity needs through operating cash flow, the revolving facility, debt and equity financing, and limited property sales; acquisition growth depends in part on access to capital markets.
- Management states that cash flow should cover current obligations and describes no anticipated significant capital expenditures, while noting inflationary pressures. Subsequent to quarter-end, the company completed approximately $283.1 million of acquisitions, borrowed $259 million under the revolver, and entered a commitment to fund a further $33 million tenant expansion in exchange for increased rent.
- Interest-rate exposure remains relevant: $973.0 million of variable-rate debt was hedged through swaps, and management estimated that a 1% rate change would alter annual interest expense by approximately $1.5 million after swaps. Swap fair value was a $66.6 million asset at quarter-end. Rising borrowing costs contributed to higher interest expense.
- Other risks include tenant credit and lease renewals, property impairments, capital-market access, foreign-exchange movements and debt-covenant compliance. The company reported covenant compliance at September 30. Tax-protection agreements could create approximately $22.3 million of liability if specified properties were sold in taxable transactions; management said triggering events were not believed likely in the foreseeable future.
- The company recorded $4.2 million of Q3 impairment on two properties following changes in its long-term hold strategy. Management reported no legal proceeding expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether acquisition-driven rent growth and portfolio occupancy sustain revenue and cash flow, given the prior-year termination-fee comparison.
- Debt and liquidity after post-quarter revolver borrowing and acquisitions, including progress toward the stated leverage objective below 6.0x.
- Effects of higher interest rates, refinancing and hedge coverage on interest expense and distributions.
- Tenant credit quality, lease expirations, impairment assumptions, and the rent economics of the $33 million expansion commitment.
- Timing and net proceeds from settling the August 2022 forward equity sale, expected to provide approximately $270.7 million by its August 2023 maturity date.