Broadstone Net Lease, Inc. — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019. Broadstone is a REIT that owns and leases primarily single-tenant commercial properties on long-term net leases. Its portfolio spans industrial, healthcare, restaurant, office and retail properties. At year-end, it reported approximately $4.0 billion in gross asset value, $292.1 million of annualized base rent (ABR), and operations across 41 U.S. states and British Columbia.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Lease revenue | $298.8 million | $237.5 million | +25.8% |
| Net income | $85.1 million | $75.1 million | +13.3% |
| Net income attributable to Broadstone | $79.4 million | $69.4 million | — |
| Diluted earnings per share | $3.31 | $3.43 | -3.5% |
| FFO, non-GAAP | $167.5 million | $150.7 million | +11.2% |
| FFO per diluted share, non-GAAP | $6.51 | $6.88 | -5.4% |
| AFFO, non-GAAP | $149.2 million | $124.1 million | +20.3% |
| AFFO per diluted share, non-GAAP | $5.80 | $5.66 | +2.5% |
| Net cash from operating activities | $147.4 million | $128.0 million | +15.1% |
Operating expenses were $163.8 million, up 27.9%; depreciation and amortization was $108.8 million. Net income included $29.9 million of gains on real estate sales, $3.5 million of property impairment charges, and $3.7 million of Internalization expenses. The filing does not present a single headline operating-margin measure.
Cash, debt and liquidity. Year-end cash and cash equivalents were $12.5 million; cash plus restricted cash totaled $20.3 million. Principal debt was approximately $2.0 billion (carrying value of debt was $1.989 billion); total liabilities were $2.139 billion and total equity was $1.779 billion. The company reported leverage of 45.8% of estimated market asset value, versus 41.5% in 2018, and a Baa3 Moody’s rating with stable outlook. It had $197.3 million drawn on its $600 million revolving facility. The $300 million 2020 unsecured term loan matured in August 2020, with two optional six-month extensions subject to conditions.
Operating cash flow exceeded 2019 distributions of $133.6 million, which included cash payments and reinvested distributions. Cash distributions were $70.5 million and reinvested distributions $63.0 million. The declared annual dividend was $5 per share. About 95% of gross assets were described as unencumbered.
Material changes versus 2018
- Revenue rose 25.8%, supported by acquisitions, rent escalations and strong rent collection; net income rose more slowly, while diluted EPS declined as the share base and financing costs increased.
- Acquired 74 properties for approximately $1.0 billion, including a 23-property industrial and office/flex portfolio acquired for $735.7 million. Sold 49 properties for net proceeds of $168.8 million and recorded $29.9 million in gains.
- Debt and interest expense increased with acquisition financing. Interest expense rose to $72.5 million from $52.9 million, despite a lower weighted-average cost of debt (3.68% versus 4.23%).
- Completed the transition from external to internal management on February 7, 2020, after the reporting year. Historical 2019 results include external management fees and do not include the full direct employee and related costs expected under internal management.
Outlook, risks and unusual items
Outlook. Management intends to pursue acquisitions, contractual rent growth and active portfolio management while maintaining investment-grade credit and prudent leverage. It provided no quantified earnings, FFO, AFFO or acquisition guidance. Management expects post-Internalization general and administrative costs to include compensation for 71 employees and other costs not previously incurred, while stating these expenses should grow more slowly than the portfolio and lease revenue.
Portfolio and financing risks. The business depends heavily on tenants’ ability to pay rent under single-tenant leases. Risks include tenant default or bankruptcy, re-leasing specialized properties, competition for acquisitions, capital-market access, interest-rate exposure and the ability to refinance debt. Approximately 15.7% of ABR came from investment-grade-rated tenants; most tenants were unrated. Restaurant and retail exposure, economic conditions, property concentration, and environmental or uninsured property losses are also identified risks. About $1.4 billion of debt was LIBOR-linked; $909.9 million was hedged with swaps. The company disclosed the planned LIBOR transition and associated uncertainty.
Internalization and liquidity events. The Internalization involved approximately $209.5 million of base consideration, about $90.5 million of assumed debt, and potential earnout consideration of up to $75 million tied to share-price or AFFO-per-share milestones. The company also disclosed tax-protection obligations, including an estimated $12.3 million exposure under prior agreements and a separate Internalization agreement capped at $10 million. In January 2020, it suspended its private share offering and terminated its dividend reinvestment and share redemption programs effective February 10. There is no established public trading market for its shares, limiting investor liquidity.
Management reported no material pending legal proceedings and stated it was in compliance with debt covenants at year-end. The independent auditor issued an unqualified opinion on the financial statements; the auditor was not engaged to opine on internal-control effectiveness. Management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Portfolio counts differ within the filing: several sections report 645 properties, while others report 646. Occupancy is also stated as both approximately 99.8% and 99.7%; confirm the applicable definition and property count.
- Track the August 2020 maturity of the $300 million term loan, extension conditions, revolver availability, debt covenants and refinancing plans.
- Assess whether post-Internalization operating savings offset employee, professional-service and other incremental costs, and monitor any earnout payments or equity issuance.
- Review tenant credit quality, including exposure to unrated tenants and the largest tenants and industries, as well as rent collections, impairments and lease expirations.
- Consider the valuation and liquidity limitations: shares had no established public market, redemption and reinvestment programs ended, and estimated NAV depends on appraisal and capitalization-rate assumptions.
- Confirm the treatment and cash implications of REIT distributions, tax-protection agreements and the Internalization-related tax items.