Broadstone Net Lease, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Broadstone is an externally managed REIT that owns U.S. commercial properties, primarily leased to single tenants under long-term net leases.
Business context and portfolio
- At year-end, the portfolio comprised 621 properties in 42 states, approximately 19.0 million rentable square feet, and 161 tenants. All properties were leased; occupancy was 99.7%. The company collected more than 99% of rent due during 2018.
- Weighted-average remaining lease term was approximately 12.1 years. Restaurants represented 20.9% of next-12-month rent; retail properties represented 33.0%.
- The common stock had no established public trading market. Shares were sold through an ongoing private offering; the offering price was $85 per share for February-April 2019.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $237.5 million | $181.6 million |
| Net income | $75.1 million | $59.6 million |
| Diluted earnings per share | $3.43 | $3.21 |
| FFO per diluted share | $6.88 | $6.00 |
| AFFO per diluted share | $5.66 | $5.38 |
| Cash provided by operations | $128.0 million | $97.9 million |
- Revenue increased 30.8%; net income increased 26.1%. Management attributed growth chiefly to portfolio expansion. Net income also included an $8.5 million gain from selling an investment in a related party.
- Interest expense rose 52.1% to $52.9 million, primarily reflecting higher borrowings. Total operating expenses increased 33.4% to $128.9 million. Net income was 31.6% of revenue.
- Investing activities used $510.5 million, largely for property acquisitions. Financing activities provided $391.3 million. Cash and restricted cash totaled $19.0 million at year-end.
- Year-end debt was approximately $1.451 billion, equal to 41.5% of estimated asset market value; the company reported compliance with all debt covenants. The $425 million revolving facility had $141.1 million drawn and $283.9 million available at year-end.
- Declared distributions totaled $113.0 million, compared with $150.7 million of FFO and $124.1 million of AFFO. The monthly distribution increased from $0.415 per share in January 2018 to $0.43 from February 2018; $0.44 monthly distributions were declared for February-April 2019.
Fourth quarter: Revenue was $63.1 million, net income was $14.7 million, and diluted EPS was $0.63. The filing does not provide a clear standalone fourth-quarter comparison of FFO or AFFO.
Material changes, outlook and risks
- Completed 26 acquisitions totaling $606.8 million, adding 113 properties; the acquisitions had a 6.9% weighted-average initial cash capitalization rate and an 11.0-year weighted-average remaining lease term. Sold 20 properties for $54.0 million in net proceeds.
- Issued $325 million of fixed-rate senior notes in 2018: $225 million at 5.09% due 2028 and $100 million at 5.19% due 2030. The Operating Company had a Moody’s Baa3 rating with stable outlook.
- After year-end, refinanced the $300 million 2015 term loan with a new seven-year facility, drawing $300 million of a $450 million commitment, and increased the revolving facility to $600 million. The 2019 term loan is floating-rate.
- No formal earnings or acquisition guidance is provided. Management said existing operating cash, private-offering proceeds, borrowing capacity, and access to long-term debt were expected to support operations and strategic acquisitions for the foreseeable future.
- Key risks include tenant credit/default and industry concentration, particularly restaurants and retail; interest-rate and refinancing exposure; access to capital; property illiquidity and valuation uncertainty; REIT qualification and distribution requirements; and reliance on affiliated external managers. LIBOR-based debt and swaps faced benchmark-transition uncertainty.
- Net asset value and the stated share value are estimates, not a public market price or assured realizable value. The share redemption program is restricted and the company is not obligated to repurchase shares.
- Three UPREIT tax-protection agreements could result in aggregate payments of up to approximately $12.3 million under specified circumstances; management said triggering events had not occurred and were not considered likely in the foreseeable future. The company reported no material pending legal proceedings.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the financial statements; it did not audit internal-control effectiveness.
Important facts for investors to verify
- Whether tenant rent coverage, credit quality, and restaurant-sector exposure remain consistent with the reported collections and occupancy.
- Debt maturities, floating-rate exposure after hedging, covenant headroom, and the terms and use of post-year-end financing.
- Distribution sustainability against operating cash flow and AFFO, including the effects of growth, share issuance, and interest expense.
- Assumptions underlying estimated NAV and the $85 private-offering price, including sensitivity to capitalization rates; the filing estimates a 0.25 percentage-point cap-rate increase would reduce NAV per diluted share to $79.72.
- Limits on share transfers and redemptions, related-party management fees and termination provisions, and potential tax-protection obligations.