Business context and reporting period
Broadstone Net Lease, Inc. is an externally managed REIT focused on long-term net-leased commercial properties. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the first quarter of 2017. At quarter-end, the company owned 550 properties in 40 states; all were leased, across 137 tenants, with no tenant representing more than 4% of annual rent. The weighted-average remaining lease term was approximately 13 years.
Financial performance and position
Amounts below are in millions except per-share data.
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $55.6 | $42.2; up 31.8% |
| Operating income | $26.5 | $20.6 |
| Net income | $19.0 | $13.7 |
| Net income attributable to Broadstone | $17.6 | $12.6 |
| Diluted GAAP EPS | $0.92 | $0.81 |
| FFO per diluted share | $1.68 | $1.62 |
| AFFO per diluted share | $1.46 | $1.42 |
| Operating cash flow | $32.2 | $24.0 |
| Cash and restricted cash | $24.8 | $39.6 at March 31, 2017 |
- Revenue growth primarily reflected 2017 acquisitions; higher depreciation, management fees and interest costs partially offset portfolio growth. Interest expense rose to $11.2 million from $7.9 million.
- Five property sales generated a $3.3 million gain, versus $0.8 million on one sale in Q1 2017. FFO and AFFO are non-GAAP measures; FFO was $34.9 million and AFFO was $30.3 million.
- Quarter-end total assets were $2.68 billion and total equity was $1.35 billion. Total debt was $1.225 billion; debt to approximate market value of assets was 41.7%. The company reported compliance with debt covenants.
- Revolver borrowings were $317 million, with $108 million available; an additional $90 million remained undrawn under the delayed-draw term loan at quarter-end. Cash distributions paid in cash were $14.7 million, while total distributions including reinvestment were $25.9 million.
Material changes versus the prior comparable period
Portfolio expansion drove higher revenue and operating cash flow: the company acquired 27 properties for $100.5 million in Q1 2018, compared with 10 properties for $89.7 million in Q1 2017. The diluted weighted-average share count increased 21.8% to 20.7 million, tempering per-share growth. Debt increased, and interest expense rose 40.7%. The company disposed of more properties and recorded larger sale gains. The fair value of interest rate swaps increased; the resulting $17.0 million gain was recorded in other comprehensive income, not operating income.
Outlook, risks and unusual items
- No quantified earnings or acquisition guidance was provided. Management said available operating cash flow, private-offering proceeds, cash and borrowing capacity should fund operations and planned growth for the foreseeable future. It intended to access the private debt market in 2018 and continue acquisitions.
- The $325 million unsecured term loan matures in February 2019, with extension options subject to conditions. Management stated its intention to extend, refinance or replace maturing borrowings; inability to refinance could require property sales. Floating-rate exposure remains, although swaps hedged $770.2 million of notional debt at quarter-end.
- Acquisition funding depends on continuing access to debt and equity capital. The private offering had a $15 million monthly cap through July 2018. Lease escalations averaged 2.1%; management cautioned inflation could outpace contractual increases and affect tenant creditworthiness.
- The company is externally managed by related parties. Q1 asset and property management fees totaled $5.7 million. Conditional termination fees at March 31 were estimated at $16.0 million for the property management agreement and $47.1 million for the asset management agreement.
- Tax protection agreements could create up to approximately $12.3 million of aggregate damages in specified circumstances; management said the triggering events had not occurred and were not considered likely in the foreseeable future. The company reported no material pending litigation or material environmental matters.
- After quarter-end, the board declared monthly distributions of $0.43 per share or unit through July 2018, and the determined share value rose to $83.00 from $81.00. These are not earnings guidance.
Most important facts for investors to verify
- Whether the 100% leased portfolio and high rent collection continue, particularly given tenant credit and industry concentration.
- How the company will address the $325 million 2019 maturity and fund acquisitions while maintaining its leverage target and investment-grade rating.
- Whether FFO and AFFO growth and operating cash flow support distributions, considering share issuance, reinvestment and non-GAAP adjustments.
- The assumptions behind portfolio valuations and the $83.00 determined share value; management estimated a 0.25 percentage-point cap-rate increase would reduce NAV per share to $78.16.
- Potential costs and governance implications of related-party management agreements, including termination provisions, and the contingent tax-protection obligations.