Broadstone Net Lease, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Broadstone Net Lease is a REIT focused on long-term net-leased commercial properties. At quarter-end it owned 635 properties across 41 U.S. states and British Columbia; the portfolio was 99.6% leased, with an 11.3-year weighted-average remaining lease term.
Financial performance and position
- Revenue: Lease revenue was $78.2 million, up 14.3% from $68.4 million in Q1 2019, primarily reflecting portfolio growth and rent escalations.
- Profit: Net income was $11.8 million, down 21.1% from $15.0 million. Net income attributable to the company was $10.8 million; basic and diluted EPS was $0.41 versus $0.62. Results included a $7.6 million gain on property sales, $2.1 million of property impairment, $1.2 million of internalization costs, and a $4.2 million noncash increase in the earnout liability.
- REIT operating measures: FFO was $37.6 million, down 3.5%; FFO per diluted share was $1.29 versus $1.62. AFFO rose 20.2% to $41.1 million, while AFFO per diluted share was nearly flat at $1.41 versus $1.42. These are non-GAAP measures defined by the company.
- Cash flow: Operating cash flow was $40.3 million versus $31.6 million. Investing activities provided $4.5 million, including $35.4 million of net property-sale proceeds, partly offset by $30.9 million paid for the internalization. Financing activities provided $31.6 million. Cash and restricted cash totaled $96.7 million at quarter-end, versus $13.2 million a year earlier.
- Debt and liquidity: Debt carrying value was $2.14 billion; total liabilities were $2.40 billion. Cash and cash equivalents were $93.2 million on the balance sheet. The company reported a 45.7% leverage ratio and said it was in compliance with debt covenants. It reported $246.7 million of revolver capacity before covenant limitations, but only $50.7 million of available borrowing capacity under covenants at March 31, excluding a subsequent $25 million draw. Weighted-average interest on borrowings was 3.03%.
- Margins and operating metrics: The filing does not present conventional operating or net margin measures. Occupancy was 99.6% at quarter-end; contractual rent escalations applied to 98.4% of leases, with a 2.1% weighted-average minimum increase.
Changes from the prior comparable period
- Revenue grew with the larger portfolio; the company acquired 74 properties for approximately $1.0 billion during 2019, but made no property acquisitions in Q1 2020.
- Higher depreciation and amortization, interest expense, impairment, and internalization-related costs contributed to lower GAAP net income. Property-sale gains increased year over year.
- The February 7 internalization ended external asset and property management agreements. Management fees declined, while general and administrative expense rose to $5.8 million from $1.1 million, including employee-related costs and incremental legal expense.
- Unrealized losses on interest-rate swaps drove a $46.3 million comprehensive loss, compared with $2.3 million of comprehensive income in Q1 2019. The swap liability increased to $79.6 million from $24.5 million at year-end.
Outlook, risks, and unusual items
- COVID-19 and rent collection: Management said the pandemic had not materially affected Q1 results or liquidity through March 31, but the outlook was uncertain. Through April 30, tenants representing 36.3% of annualized base rent had requested relief; the company said it was negotiating deferrals, not forgiveness or permanent abatements. It collected 87.8% of April rent and 77.5% of May rent due through May 6. Repayment of deferred rent is uncertain.
- Distribution: On May 7, the board temporarily suspended monthly distributions to preserve cash. The already announced April distribution of $0.44 per share and OP Unit remained payable May 15; the board planned to reassess distributions in August. The company said it may make a special distribution if needed to maintain REIT status.
- Debt maturity and liquidity actions: The company drew an additional $25 million on its revolver after quarter-end. It gave notice on May 5 to exercise the first six-month extension of its $240 million term loan, moving maturity from August 2020 to February 2021, subject to conditions. Management stated liquidity was sufficient to meet obligations for at least four quarters even before collecting additional rent, but covenant compliance and tenant performance remain risks.
- Internalization and IPO: The internalization involved approximately $209.5 million of base consideration plus a contingent earnout with a $44.3 million quarter-end fair value and a contractual maximum of $75 million. The company revised its weighted-average expected IPO date assumption to March 15, 2021, while stating it would pursue an IPO when market conditions allow. Mezzanine equity issued in the transaction has contingent redemption rights if an IPO does not occur within specified periods.
- Valuation and contingencies: The board set a share value of $82.00 for May–July 2020, versus $85.00 previously. Management cautioned that the valuation did not reflect the pandemic’s potential impact and might lag market conditions. Tax-protection agreements could produce approximately $22.3 million of liability if specified taxable dispositions occur; a separate agreement has a stated maximum liability of $10 million. Management did not believe triggering events were likely in the foreseeable future.
- Other material risks include tenant defaults or bankruptcies, particularly in restaurants and retail; declining property values or additional impairment; constrained real estate transactions and financing; and possible future covenant breaches. The company recorded $2.1 million of impairment in Q1 and cautioned that further impairment could result if conditions worsen.
Important facts for investors to verify
- Subsequent rent collections, tenant relief agreements, deferred-rent recoveries, and the concentration of requests by tenant and industry.
- Available liquidity after subsequent revolver borrowing, covenant headroom, and progress on the extended $240 million loan maturity.
- Distribution policy after the planned August review and any steps required to maintain REIT status.
- IPO timing, earnout valuation and potential payments, and redemption rights attached to internalization consideration.
- How pandemic-related tenant weakness affects property valuations, impairment testing, and the relevance of the $82 share value.
- Whether the internalization’s expected cost savings offset new payroll and corporate expenses, including the effect on per-share AFFO.