Broadstone Net Lease, Inc. — Q2 2021 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2021. Broadstone is a REIT focused on long-term net-leased commercial properties. At quarter-end it owned 684 properties across 42 U.S. states and British Columbia; the portfolio was 99.7% leased, with a 10.4-year weighted-average remaining lease term and $313.2 million of annualized base rent (ABR).
Financial performance and position
| Metric | Q2 2021 | Comparable period |
|---|---|---|
| Lease revenue, net | $84.8 million | $80.4 million in Q2 2020 (+5.5%) |
| Net income | $22.8 million | $17.1 million in Q2 2020 |
| Net income attributable to Broadstone | $21.2 million | $15.4 million in Q2 2020 |
| EPS, basic and diluted | $0.14 | $0.14 in Q2 2020 |
- Six-month results: Lease revenue was $167.5 million versus $158.6 million; net income was $46.8 million versus $28.9 million; diluted EPS was $0.30 versus $0.25. AFFO, a non-GAAP measure, was $101.4 million versus $87.1 million.
- Cash flow: For the six months, operating cash flow was $99.0 million (up from $79.5 million); investing cash outflow was $242.7 million; financing cash inflow was $120.0 million. Cash and restricted cash totaled $87.0 million at June 30, 2021, including $79.0 million of cash and equivalents.
- Debt and liquidity: Reported debt was approximately $1.496 billion, with no revolving-credit-facility borrowings at quarter-end. Net debt was $1.409 billion; net debt to annualized Adjusted EBITDAre was 4.76x. The company reported full availability under its $900 million revolver and compliance with debt covenants. Weighted-average interest on borrowings was 2.46%, excluding swaps.
- Equity and distributions: A June follow-on offering raised $253.5 million net; proceeds repaid $160.6 million of revolver borrowings, with the balance intended for general purposes, including acquisitions. The company declared a $0.255-per-share/unit quarterly distribution for Q2 and declared the same rate for Q3.
Material changes versus prior periods
- Q2 revenue increased 5.5% year over year, primarily reflecting acquisitions. The company acquired 62 properties for $281.3 million during the first half; no property acquisitions were completed in the first half of 2020.
- First-half net income rose 61.6% and diluted EPS rose 20.0%. Management attributed the improvement principally to revenue growth, lower depreciation and interest expense, and the absence of 2020 internalization expenses; higher G&A and earnout fair-value expense partly offset these benefits.
- First-half interest expense declined to $31.5 million from $40.5 million, reflecting lower average borrowings and borrowing costs. A BBB S&P rating and the March amendment/paydown of the 2026 term loan reduced applicable margins.
- Q2 diluted EPS was unchanged year over year despite higher earnings, alongside a materially higher weighted-average share count following the IPO and subsequent equity issuance.
Outlook, commentary, risks and unusual items
- No quantified earnings or acquisition guidance is provided. Management said operating cash flow, cash balances and available revolver capacity are expected to meet near-term needs; it expects to fund longer-term needs through debt and equity financing and selective property sales. It seeks to maintain net debt to annualized Adjusted EBITDAre generally below 6.0x.
- Management reported a 99.7% leased portfolio, diversified across tenants and property types; no tenant accounted for more than 2.3% of ABR. Approximately 97.9% of leases have contractual rent escalations. These portfolio statistics do not eliminate tenant-credit, leasing, or market risks.
- The Q2 earnings comparison included a $5.6 million expense from an increase in the fair value of the Internalization earnout liability, primarily reflecting the share-price movement. A $2.0 million property impairment was recorded in Q1; none was recorded in Q2.
- After quarter-end, the company met the $23.75 VWAP threshold for earnout tranche 2, triggering consideration in cash, shares and OP units. It also acquired approximately $38.7 million of additional property and refinanced one mortgage, as disclosed in subsequent events.
- Interest-rate exposure remains: $824.7 million of variable-rate borrowings was hedged with swaps, which had a $46.3 million liability fair value. Management estimated a 1% rate move would change annual interest expense by about $1.0 million after swaps. Covenant default could accelerate repayment and restrict distributions above REIT-required amounts.
- Tax-protection agreements could result in approximately $22.3 million of liability if specified properties or the company were sold in taxable transactions; management said triggering events were not believed likely in the foreseeable future. The filing reports no material legal proceedings or material change in risk factors.
Important facts for investors to verify
- Assess tenant credit quality, rent collection, lease rollover exposure, and the concentration of restaurant and healthcare ABR; confirm the effect of any tenant distress on occupancy and cash receipts.
- Review the earnout’s remaining milestones, valuation assumptions, and potential cash and equity dilution, including the post-quarter tranche 2 payout.
- Confirm debt maturities, covenant headroom, refinancing plans, and the effectiveness and counterparty exposure of interest-rate swaps.
- Reconcile AFFO and Adjusted EBITDAre adjustments to GAAP results; these non-GAAP measures use management-defined adjustments and may not be comparable across REITs.
- Monitor acquisition returns, funding needs, distributions, and the contingent tax-protection exposure if asset-disposition plans change.