Broadstone Net Lease, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Broadstone is an externally managed REIT focused on long-term net-leased commercial properties. Its portfolio spanned 42 U.S. states and British Columbia; management reported 99.7% occupancy and rent collection above 99% during the quarter.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Lease revenue | $76.4 million | $61.8 million | $213.9 million | $174.4 million |
| Net income | $25.0 million | $23.1 million | $57.4 million | $60.4 million |
| Net income attributable to BNL | $23.4 million | $21.3 million | $53.5 million | $55.8 million |
| Diluted earnings per share | $0.95 | $1.03 | $2.28 | $2.81 |
| FFO | $43.3 million | $45.0 million | $122.1 million | $114.2 million |
| AFFO | $38.8 million | $31.3 million | $107.6 million | $91.5 million |
| AFFO per diluted share | $1.47 | $1.40 | $4.28 | $4.26 |
- Cash flow: Nine-month operating cash flow was $110.9 million, up from $93.5 million. Investing used $870.2 million, primarily for acquisitions; financing provided $784.4 million. Cash and restricted cash totaled $44.1 million at quarter-end, including $14.0 million of unrestricted cash.
- Debt and liquidity: Debt carrying value was $2.096 billion, versus $1.451 billion at December 31, 2018. The company reported a 47.5% debt-to-approximate-market-value leverage ratio, above its stated 35%–45% target range; it was in compliance with debt covenants. The $600 million revolver had $296.7 million available. Weighted-average borrowing cost was 3.89% at September 30.
- Assets and distributions: Total assets were $3.992 billion and total equity $1.729 billion. The board declared monthly distributions of $0.44 per share/unit through January 2020. Nine-month distributions totaled $97.6 million, which the company reported as funded from operating cash flow.
Changes and drivers versus comparable periods
- Q3 revenue rose 23.7%; nine-month revenue rose 22.7%, primarily from acquisitions, rent escalations and portfolio growth. The company acquired 66 properties for $993.7 million in the first nine months, compared with 70 properties for $365.3 million in the prior-year period.
- Q3 net income increased 8.6%, but diluted EPS fell 7.8% as the weighted-average diluted share count grew 18.3%. Nine-month net income declined 5.0% and diluted EPS fell 18.9%.
- Q3 FFO fell 3.8% and FFO per diluted share fell 18.8%; nine-month FFO increased 6.9%, while FFO per diluted share declined 8.5%. AFFO grew in both periods, but nine-month AFFO per diluted share was nearly flat, up 0.5%.
- Interest expense increased 27.5% in Q3 and 33.9% year to date, reflecting higher borrowings. Real estate sales generated gains of $12.6 million in Q3 and $16.8 million year to date. The prior-year periods included an $8.5 million gain on sale of a related-party investment.
- Q3 comprehensive income attributable to BNL was $8.1 million, versus $27.1 million a year earlier, largely reflecting an unfavorable change in swap fair value. Nine-month swap-related other comprehensive loss was $52.2 million.
Outlook, commentary and risks
- Management said it intended to reduce leverage toward the range consistent with its investment-grade rating through private-offering proceeds and increased property dispositions. It expected recent acquisitions and the higher Q3 leverage to support positive Q4 AFFO results. The filing provides no formal earnings or revenue guidance.
- After quarter-end, BNL announced a planned internalization of its external manager, targeted to close in Q1 2020 subject to conditions. Consideration includes approximately $206 million base consideration plus assumption of approximately $94 million of debt, with up to $75 million in milestone-based earnouts. Management cited potential cost savings and reduced conflicts, but warned benefits are not assured and costs, dilution, execution and litigation risks could be material.
- Other risks include tenant credit and concentration exposure, impairments, interest-rate and refinancing risk, access to capital, and the possibility that cash flows may not cover dividends or debt service. Four properties were vacant; nine-month impairment charges were $3.5 million. The company disclosed potential tax-protection damages of approximately $12.3 million if specified properties were sold in taxable transactions, which management did not believe likely in the foreseeable future.
- Related-party management agreements renewed through 2021; hypothetical termination fees at September 30 were $22.965 million for property management and $63.306 million for asset management. The filing says these fees would not be payable as a result of the proposed internalization.
Important facts for investors to verify
- Progress toward reducing leverage from 47.5%, and the funding plan for the $300 million 2020 term loan due August 2020, including any extension or refinancing.
- Internalization closing conditions, final consideration and earnout terms, expected recurring savings versus added costs, and potential dilution or liabilities.
- Underlying per-share trends: Q3 FFO per diluted share declined despite higher revenue, while AFFO per diluted share rose; assess the reconciliation and sustainability of each non-GAAP measure.
- Tenant credit and vacancy exposure, impairment assumptions, and the sensitivity of reported NAV to property capitalization rates. BNL estimated that a 0.25 percentage-point increase in its September valuation capitalization rate would reduce NAV per diluted share to $78.18, versus reported NAV of $84.12.
- The filing gives inconsistent portfolio counts in different sections (including 661 versus 662 properties); verify the correct quarter-end count and related occupancy disclosures.