Broadstone Net Lease, Inc. quarterly report, Q1 FY2023

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Broadstone Net Lease, Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.

Business context

Broadstone is a REIT that owns and manages primarily single-tenant commercial properties leased on a long-term, net-lease basis. At quarter-end, its 801-property portfolio spanned 44 U.S. states and four Canadian provinces. The portfolio was 99.4% leased, with a 10.8-year weighted-average remaining lease term and $389.5 million of annualized base rent. Industrial properties represented 51.8% of annualized base rent. No tenant represented more than 4% of annualized base rent.

Financial performance and position

  • Revenue: Net lease revenue was $119.0 million, up 26.8% from $93.8 million in Q1 2022. Growth primarily reflected portfolio expansion and $7.5 million of lease termination income.
  • Earnings: Net income was $41.4 million, up 45.5%; net income attributable to Broadstone was $39.3 million. Basic and diluted EPS were $0.21, versus $0.16. Operating expenses rose 23.7% to $59.6 million; interest expense increased 25.1% to $21.1 million.
  • Cash flow: Operating cash flow was $74.4 million, versus $59.1 million. Investing activities provided $29.6 million, compared with $207.7 million used in Q1 2022, reflecting lower acquisition volume and higher property-sale proceeds. Financing activities used $144.7 million. Cash and restricted cash totaled $19.3 million at quarter-end, including $15.4 million of cash and equivalents.
  • Debt and liquidity: Gross debt was approximately $1.94 billion; net debt was $1.93 billion. Net debt to annualized adjusted EBITDAre was 5.1x, against management’s sustained target of generally below 6.0x. The $1.0 billion revolving facility had $891.7 million of available capacity. The weighted-average borrowing rate was 5.03% before the effect of swaps. The company reported compliance with debt covenants.
  • REIT operating measures: FFO was $81.2 million, Core FFO $74.5 million, and AFFO $67.5 million. These are non-GAAP measures and may not be comparable across companies.
  • Margins: The filing does not present a standardized operating-margin measure. Operating expenses were 50.1% of net lease revenue.

Material changes versus Q1 2022

  • Revenue increased $25.2 million, supported by acquisitions made since March 2022 and higher lease termination income.
  • Net income rose $12.9 million. Higher revenue and property-sale gains were partly offset by increased depreciation and amortization, interest expense, general and administrative expense, and a $1.5 million impairment charge.
  • Interest expense increased $4.2 million, reflecting higher average borrowings and borrowing costs. The company had $973.8 million of interest-rate swaps outstanding; management reported approximately $34.4 million of variable-rate debt exposure after swaps.
  • Operating cash flow increased $15.3 million. Acquisition spending was substantially lower: the company acquired one property for $5.2 million in Q1 2023, versus 27 properties for $210.0 million in Q1 2022.

Outlook, commentary, risks and unusual items

  • No formal earnings or acquisition guidance is provided. Management expects operating cash flow to cover current obligations, including interest, and anticipates using revolving borrowings, future debt and equity financing, and selective property sales for longer-term needs.
  • Management cited an investment-grade balance sheet, with ratings of BBB from S&P and Baa2 from Moody’s, and intends to manage leverage below 6.0x on a sustained basis. Access to capital markets and financing on favorable terms remains important to its acquisition strategy.
  • Three properties were sold for aggregate proceeds of $51.9 million, producing a $3.4 million gain. One sale involved a simultaneous office lease termination: the company received $7.5 million in termination income and $32.0 million from the property sale. One property impairment of $1.5 million followed a change in the company’s long-term hold strategy.
  • Q1 general and administrative expense included accelerated stock compensation and executive transition costs related to the previous CEO’s departure. The filing reports no material change in risk factors from the 2022 Form 10-K.
  • Tax protection agreements could result in approximately $20.4 million of liability if certain properties were sold in taxable transactions; management does not believe such events have occurred or are likely in the foreseeable future. Building-expansion funding commitments were $8.2 million. The company reported no litigation expected to have a material effect.
  • Subsequent events: the board declared a $0.28-per-share quarterly distribution for Q2 2023. Through May 4, 2023, the company sold three properties for $42.4 million, reporting an estimated $21.8 million gain after expenses.

Important facts for investors to verify

  • Whether recurring rental growth and cash generation support distributions as the portfolio expands.
  • Debt maturities, refinancing costs, covenant headroom, and the company’s ability to maintain its leverage target amid higher rates.
  • Tenant credit quality and the portfolio’s exposure to its largest tenants and industries, including the performance of properties subject to master leases.
  • The sustainability of reported earnings after excluding lease termination income, property-sale gains, impairment, and executive-transition items; review non-GAAP reconciliations.
  • Liquidity and capital needs, including use of the revolving facility, remaining ATM capacity, and the newly authorized $150 million repurchase program, under which no shares had been repurchased as of quarter-end.