Broadstone Net Lease, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company is an externally managed REIT investing in single-tenant commercial properties, primarily under long-term triple-net leases. It reported one operating segment.
Business context and portfolio
- Owned 528 properties in 40 states, totaling approximately 15.9 million rentable square feet; the portfolio was 100% leased to 134 tenants, and no tenant represented more than 4% of annual rent.
- Weighted-average remaining lease term was 13.1 years. More than 99% of rent due was collected during 2017.
- Rent exposure included retail at 34.2% of next-12-month rent, industrial at 31.1%, healthcare at 21.2%, and office at 9.7%. Restaurants represented 22.5%.
Financial results and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $181.6 million | $142.9 million | +27.1% |
| Operating income | $84.9 million | $63.6 million | +33.4% |
| Net income | $59.6 million | $40.3 million | +47.9% |
| GAAP diluted earnings per share | $3.21 | $2.76 | +$0.45 |
| FFO per diluted share | $6.00 | $5.53 | +$0.47 |
| AFFO per diluted share | $5.38 | $5.40 | -$0.02 |
| Cash from operating activities | $97.9 million | $67.2 million | +45.8% |
| Interest expense | $34.8 million | $30.0 million | +16.0% |
Operating margin was approximately 46.7% of revenue and net margin approximately 32.8%, calculated from reported figures. Revenue and operating cash flow growth primarily reflected acquisitions and the full-year contribution from prior-year acquisitions. FFO and AFFO are non-GAAP measures and should not be treated as substitutes for GAAP earnings or operating cash flow.
- Assets totaled $2.58 billion; rental property, net, was $2.23 billion. Total liabilities were $1.29 billion and total equity $1.28 billion.
- Total debt was approximately $1.18 billion, versus $869.5 million at year-end 2016. Debt to estimated market value of assets was 41.6%, within the company’s 35%–45% target range. Moody’s Baa3 investment-grade rating was reaffirmed in March 2017.
- Cash and cash equivalents were $9.4 million, down from $21.6 million. The $880 million unsecured credit facility had $152 million available on the revolver and $90 million undrawn under the delayed-draw term loan at year-end, subject to facility terms.
- Operating cash flow covered 2017 declared distributions of $92.8 million; distributions paid totaled $90.7 million, including reinvestments. The company reported that 2017 distributions were funded from operating activities.
Material changes and unusual items
- Acquired 124 properties for $683.6 million in 2017, compared with $518.8 million of acquisitions in 2016; initial cash capitalization rate averaged 7.2% and acquired lease term averaged 15.0 years. Sold 13 properties for $63.3 million net proceeds and recorded a $13.0 million gain.
- Refinanced and expanded debt: issued $150 million of 4.84% fixed-rate notes due 2027 and closed an unsecured credit facility expanded to $880 million. Interest expense rose with borrowings; $5.2 million of debt-extinguishment costs related chiefly to the refinancing.
- Early adoption of ASU 2017-01 led the company to capitalize $12.3 million of 2017 acquisition costs rather than expense them, affecting comparability with 2016 earnings and AFFO.
- Recorded a $2.6 million impairment on four properties following rental nonpayment and concerns about tenant viability. No impairment was recorded in 2016 or 2015.
- Determined Share Value increased to $81 from $77 at year-end 2016; estimated NAV was $81.40 per share. Management disclosed that a 0.25 percentage-point increase in the implied capitalization rate would reduce estimated NAV to $76.45 per share.
Outlook, risks, and contingencies
- No numerical earnings or acquisition guidance was provided. Management said cash from operations, ongoing private-offering proceeds, cash on hand, and borrowing capacity should fund operations and planned acquisitions for the foreseeable future. It expects to refinance or extend debt as maturities approach; the 2015 term loan had $325 million due in 2019 before extension options.
- The board declared monthly distributions of $0.43 per share/unit for the early-2018 payment periods, following a 2017 rate of $0.415 per share for February through December. Distributions remain subject to board discretion and available cash.
- Key risks include tenant defaults and bankruptcy, retail and restaurant-sector pressure, interest rates and refinancing access, acquisition competition, REIT qualification, and the illiquidity of real estate. The company has no public trading market; share redemptions are limited and not guaranteed.
- External-management arrangements involve related-party fees and potential conflicts. In 2017, asset- and property-management fees totaled $19.7 million; acquisition and disposition fees also applied. Management agreements renewed with revised terms effective January 1, 2018, including three-year renewal periods and termination provisions.
- Tax-protection agreements could require payments of up to approximately $12.3 million in specified circumstances; management said triggering events had not occurred and were not expected in the foreseeable future. No material pending litigation was identified.
- The 2017 Tax Cuts and Jobs Act introduced tax changes effective after year-end; the company reported no related financial-statement adjustment at December 31, 2017. It noted that further guidance or changes could affect the analysis.
Important facts for investors to verify
- Tenant credit and rent collections, particularly among restaurant and other retail tenants, and the status of properties underlying the $2.6 million impairment.
- Debt maturities, refinancing plans, covenant headroom, interest-rate exposure, and the availability and terms of undrawn credit commitments.
- Distribution sustainability relative to operating cash flow and AFFO, including the effects of equity issuance and the timing of acquisitions.
- The assumptions supporting the $81 Determined Share Value and $81.40 estimated NAV; neither establishes a realizable sale price, and there is no public market for the shares.
- Related-party management fees, termination costs, and the operational and governance implications of the external-management structure.
- Audited financial statements received an unqualified opinion. The auditor did not attest to internal control over financial reporting; management concluded disclosure controls were effective.