Broadstone Net Lease, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are in millions.
Business context
Broadstone is a self-managed REIT focused on long-term net-leased commercial properties. At quarter-end, it owned 696 properties across industrial, healthcare, restaurant, retail and office categories; occupancy was 99.8%, with a 10.6-year weighted-average remaining lease term. Industrial properties represented 47.5% of annualized base rent (ABR), and no tenant exceeded 2.2% of ABR.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Lease revenue, net | $122.8 | $80.7 | $290.2 | $239.3 |
| Net income | $30.5 | $9.7 | $77.3 | $38.7 |
| Net income attributable to BNL | $28.7 | $8.8 | $72.1 | $34.9 |
| GAAP earnings per share, basic and diluted | $0.18 | $0.08 | $0.48 | $0.32 |
| FFO | $91.9 | Not shown | $194.1 | $148.8 |
| AFFO | $55.8 | Not shown | $157.3 | $134.2 |
Q3 revenue included $35.0 million of lease termination income. The associated termination and property sale transactions, including $25.7 million of impairment and accelerated amortization, increased net income by approximately $4.0 million. The fee increased reported FFO but was excluded from AFFO. Nine-month GAAP interest expense declined to $47.1 million from $59.0 million; general and administrative costs rose to $27.8 million from $18.8 million, and impairment expense rose to $28.0 million from $17.4 million.
- Cash flow, nine months: Operating cash flow was $187.3 million, investing cash outflow $448.4 million, and financing cash inflow $170.4 million. Cash and restricted cash ended at $20.1 million, including $16.2 million unrestricted cash.
- Investments: The company acquired 80 properties for $511.7 million, excluding capitalized acquisition costs; it reported $507.2 million invested excluding those costs in its portfolio discussion. Acquisition funding included cash, debt and equity proceeds.
- Debt and liquidity: Gross debt was $1.598 billion and net debt $1.578 billion. The weighted-average rate on borrowings was 2.71%, before swap effects. The $900 million revolver was undrawn at quarter-end. Net debt to annualized Adjusted EBITDAre was 5.06x, versus 4.76x at June 30, 2021; management targets a sustained ratio generally below 6.0x.
- Distributions: The company declared $0.255 per share and OP Unit for Q3 and subsequently declared $0.265 for Q4 2021.
Changes versus comparable periods
- Nine-month lease revenue increased 21.3% year over year, reflecting the termination fee and portfolio expansion. The company acquired no properties in the first three quarters of 2020, versus substantial acquisitions in 2021.
- Nine-month net income doubled, while diluted EPS rose from $0.32 to $0.48. The increase reflected revenue growth, lower interest expense and the absence of 2020 internalization expenses, partly offset by higher impairment, G&A and earnout fair-value expense.
- Nine-month operating cash flow increased from $133.0 million to $187.3 million. Investing cash flow shifted from $16.2 million provided to $448.4 million used, primarily because of acquisitions.
- In September, BNL issued $375 million of 2.60% senior notes due 2031, repaid the revolving facility and 2023 term loan, and funded acquisitions. It also completed a $253.5 million net follow-on equity offering in June.
Outlook, risks and unusual items
- No specific earnings or acquisition guidance was provided. Management expects to meet short-term obligations from operating cash flow, cash and revolver capacity; it expects to address the $60 million February 2022 term-loan maturity with cash or revolver borrowings.
- Management expects to fund longer-term needs through revolver borrowings, future debt and equity financings, and limited property sales. Access to capital may be affected by market conditions, and acquisitions depend on financing availability.
- Floating-rate debt creates interest-rate exposure. Of $657.5 million in variable-rate borrowings at quarter-end, $640.0 million was hedged with swaps. Management estimated that a 1% rate increase would add about $0.2 million of annual interest expense after swaps.
- 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 expected in the foreseeable future. A $17.4 million building-expansion commitment is expected to be completed in 2022.
- Management reported compliance with debt covenants, effective disclosure controls, and no material change in risk factors or material litigation. The filing cautions that impairments, lease terminations, market conditions and financing access may affect results; it provides no formal forward guidance.
Important facts for investors to verify
- How much future rental growth and earnings depend on acquisitions versus existing-portfolio rent escalations, and whether acquisition returns meet the disclosed 6.4% weighted-average initial cash capitalization rate.
- The recurring earnings and cash-flow effect of the $35.0 million termination fee, related impairment, and other property dispositions; distinguish GAAP results, FFO and AFFO.
- Debt maturity and refinancing plans, especially the $60 million February 2022 maturity, floating-rate exposure, and the 5.06x net-debt leverage measure.
- Whether operating cash flow supports distributions and planned growth while unrestricted cash remains low; assess the company’s reliance on capital markets and the $400 million ATM program.
- Potential tenant credit deterioration, lease renewal or termination rights, impairment assumptions, and the contingent tax-protection exposure.