Broadstone Net Lease, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Broadstone is an industrial-focused, diversified net-lease REIT; it owned 800 properties across 44 U.S. states and four Canadian provinces at quarter-end.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Lease revenues, net | $109.5 million | $103.5 million | $337.9 million | $295.4 million |
| Net income | $52.1 million | $28.7 million | $156.5 million | $92.7 million |
| Net income attributable to BNL | $49.7 million | $27.1 million | $149.0 million | $87.4 million |
| Diluted earnings per share | $0.26 | $0.16 | $0.80 | $0.52 |
| Net cash from operating activities | Not separately stated for quarter | Not separately stated for quarter | $210.5 million | $195.5 million |
- Nine-month lease revenue increased 14.4%, primarily from portfolio growth and higher lease-termination income. Over the 12 months ended September 30, 2023, the company invested $362.5 million in 28 properties at a 6.7% weighted-average initial cash capitalization rate.
- Nine-month net income rose 68.8%, with the increase substantially reflecting $48.0 million of real-estate sale gains versus $5.3 million a year earlier. Q3 net income also included a $15.2 million sale gain. These gains make reported earnings comparisons sensitive to asset-sale timing.
- Nine-month interest expense increased 11.3% to $61.1 million, mainly reflecting a higher weighted-average borrowing cost, partly offset by lower average borrowings. Depreciation and amortization increased 9.3% to $119.3 million.
- Nine-month cash from investing activities was $73.9 million, compared with $585.2 million used in 2022, reflecting lower investment volume and higher dispositions. Financing activities used $293.9 million, including distributions and net revolver repayments. Cash and restricted cash totaled $50.5 million at September 30, 2023.
Portfolio, debt and liquidity
- The 800-property portfolio was 99.4% leased, with a 10.5-year ABR-weighted average remaining lease term. Industrial properties represented 51.2% of ABR; no tenant exceeded 4.0% and no state or province exceeded 9.9%. Leases covering 97.3% of ABR had rent escalators, with a 2.0% weighted-average annual minimum increase.
- Gross debt was approximately $1.904 billion and net debt was $1.853 billion; net debt to annualized Adjusted EBITDAre was 4.9x, versus 5.5x a year earlier. Management targets a sustained ratio generally below 6.0x and reported investment-grade ratings of BBB from S&P and Baa2 from Moody’s.
- Unsecured revolving-credit availability was $925.9 million. The company reported covenant compliance and no material debt maturities until 2026. It reported a 3.71% weighted-average borrowing rate including swaps, versus 5.30% excluding swaps.
- Operating cash flow was $210.5 million for the nine months, compared with $195.5 million in 2022. The company expects to meet near-term operating, interest and mortgage obligations from operating cash flow, and expects to use its revolver for investment commitments and declared dividends.
Changes, outlook, risks and unusual items
- Acquisitions were markedly lower than in the comparable 2022 period: six properties with a stated acquisition price of $43.4 million in the first nine months of 2023, versus 69 properties and $578.9 million in 2022. The company disposed of nine properties for $183.6 million in 2023, versus five for $18.8 million in 2022.
- No financial guidance was provided in the supplied filing text. Management described its capital strategy as preserving investment-grade leverage and funding growth through operations, debt and equity markets, and selective property sales. The board declared a fourth-quarter distribution of $0.285 per share and OP Unit, payable on or before January 12, 2024.
- The company had $157.3 million remaining to fund two build-to-suit transactions through October 2024. A broader contractual-obligations table reports $238.9 million of investment-funding commitments, including acquisitions under control and other commitments. A separate post-quarter lease amendment commits $16.9 million toward a tenant building expansion.
- A healthcare property with a $55.3 million carrying value was deemed recoverable, but management said a change in holding plans or cash-flow estimates could lead to a potentially material impairment. Nine-month sale-related activity included a $7.5 million lease termination fee and $32.0 million of proceeds from an office property sale.
- Tax-protection agreements could produce approximately $20.4 million of liability if specified properties were sold in taxable transactions; management did not believe triggering events had occurred or were likely in the foreseeable future. The company reported no material litigation, no material change in risk factors, and effective disclosure controls.
- The filing’s market-risk discussion says all variable-rate debt was 100% swapped, while the MD&A also describes USD revolver borrowings as variable and unhedged. The precise debt exposure and hedge coverage should be clarified.
Important facts for investors to verify
- Reconcile sale gains and lease-termination income with recurring earnings and cash generation.
- Confirm floating-rate debt, swap coverage, maturities and the reported interest-rate exposure.
- Track leasing and tenant performance at the healthcare property subject to impairment risk, and monitor the company’s remaining build-to-suit commitments.
- Review the company’s ability to fund distributions, investment commitments and future debt maturities under changing financing-market conditions.