Broadstone Net Lease, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. This quarterly report covers the three and six months ended June 30, 2022. Broadstone is an internally managed REIT focused on long-term net-leased commercial properties. At quarter-end, its portfolio included 764 properties across the U.S. and Canada, was 99.8% leased, and had a weighted-average remaining lease term of 10.6 years.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Lease revenue, net | $98.0m | $84.8m | $191.9m | $167.5m |
| Net income | $35.6m | $22.8m | $64.0m | $46.8m |
| Net income attributable to Broadstone | $33.5m | $21.2m | $60.3m | $43.4m |
| Diluted EPS | $0.20 | $0.14 | $0.36 | $0.30 |
| Cash from operating activities | — | $118.0m | $99.0m | |
| AFFO (non-GAAP) | $62.8m | Not clearly provided in the comparable table | $123.2m | $101.4m |
Q2 lease revenue increased 15.6% year over year; six-month revenue rose 14.6%. Management attributed the growth primarily to acquisitions. Q2 net income increased 55.8% year over year, while diluted EPS rose from $0.14 to $0.20. Results also reflected nonrecurring and variable items, including real estate sale gains, impairment, and foreign-exchange movements. The filing does not provide a conventional operating-margin measure.
- Portfolio and rent: ABR was approximately $360.0m. About 97.3% of ABR was subject to rent increases; the weighted-average annual minimum increase was 2.0%. Management reported no tenant above 2.0% of ABR.
- Investments: The company reported investing $392.4m in 42 properties during the first half, excluding capitalized acquisition costs, at a 6.1% weighted-average initial cash capitalization rate.
- Debt and liquidity: Gross debt was $1.856bn and net debt $1.827bn; net debt to annualized Adjusted EBITDAre was 5.3x. Cash and cash equivalents were $16.8m, with a further $12.2m of restricted cash. The $1.0bn revolver had $679.3m of available capacity.
- Cash flow and investment: First-half operating cash flow was $118.0m; investing activities used $380.0m, primarily for property acquisitions. Financing activities provided $263.2m.
Material changes and unusual items
Compared with the first half of 2021, revenue growth and higher operating cash flow reflected portfolio expansion. Depreciation and amortization increased 12.7%, and interest expense rose 10.3% to $34.8m, reflecting increased borrowings and their cost. The company recorded a $1.4m impairment on one property, versus $2.0m in the prior-year period, and $5.3m of real estate sale gains, versus $8.6m. First-half 2021 results included a $4.5m expense from a change in the fair value of the earnout liability; no such expense was recorded in 2022.
In the first half, Broadstone issued 9.5m shares through its ATM program for $202.6m of net proceeds. It amended and expanded its revolving credit facility to $1.0bn and repaid a $60m term loan using revolver borrowings. Interest-rate swaps had a $717.7m notional amount at quarter-end; their fair value moved from a $27.2m liability at year-end 2021 to a $26.6m asset at June 30, 2022.
Outlook, risks, and contingencies
The filing provides no formal earnings or acquisition guidance. Management said it expects short-term needs to be met through operating cash flow, cash, and revolver borrowings, and long-term needs through debt and equity financings and limited property sales. It seeks to keep net debt to annualized Adjusted EBITDAre generally below 6.0x and stated that it was in compliance with debt covenants at June 30.
- Management estimated that a 1% interest-rate change would affect annual interest expense by approximately $2.0m after swaps. It also noted that higher rates may raise refinancing costs.
- The company identified access to debt and equity markets, leverage, tenant performance, and acquisition financing as risks to its growth and liquidity plans. It said risk factors were not materially changed from its 2021 Form 10-K.
- Tax protection agreements could result in approximately $22.3m of liability if specified taxable sales occur; management said triggering events were not believed likely in the foreseeable future. The company reported no litigation or environmental matters expected to have a material effect.
- After quarter-end, Broadstone acquired approximately $80.2m of additional properties. On August 1, it entered into $200m and $300m variable-rate term loans, using proceeds to repay the $190m 2024 term loan and reduce revolver borrowings. It also reported subsequent revolver activity and additional ATM share sales.
- The board declared a third-quarter distribution of $0.270 per share and OP Unit, payable on or before October 14, 2022, to holders of record September 30.
Important facts for investors to verify
- How acquisition yields and rent escalators compare with Broadstone’s borrowing costs, particularly as variable rates rise.
- Whether operating cash flow and AFFO support distributions and acquisition spending; AFFO is a non-GAAP measure and may not be comparable across REITs.
- The effect of continuing ATM issuance on share count and per-share results; $166m of gross ATM capacity remained at June 30.
- Debt maturities, covenant headroom, and the terms and interest-rate exposure of the post-quarter term loans.
- Tenant credit quality and lease expirations, as well as potential impairment, tax-protection, and other contingent exposures.