Broadstone Net Lease, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Dollar amounts are in millions unless otherwise stated. The company is an externally managed REIT focused on long-term net-leased commercial properties. At quarter-end it owned 459 properties in 37 states, was 100% leased to 113 tenants, and reported no tenant above 5% of annual rent.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $43.7 | $34.8 | $85.9 | $66.4 |
| Operating income | $21.6 | $13.8 | $42.3 | $29.2 |
| Net income | $16.0 | $5.4 | $29.7 | $11.1 |
| Net income attributable to Broadstone | $14.7 | $4.8 | $27.3 | $9.9 |
| GAAP earnings per share | $0.89 | $0.38 | $1.70 | $0.81 |
| FFO per diluted share | $1.40 | $1.15 | $3.01 | $2.27 |
| AFFO per diluted share | $1.33 | $1.36 | $2.75 | $2.68 |
Q2 revenue rose 25.4%, primarily from portfolio growth; the operating margin was approximately 49.6%, versus 39.5% a year earlier. Net income included a $5.5 million property-sale gain. Six-month net income included a $6.3 million property-sale gain. FFO and AFFO are non-GAAP measures and may not be comparable with other REITs.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $45.3 million, compared with $29.3 million. Investing used $170.3 million, mainly for acquisitions; financing provided $139.1 million. Cash and cash equivalents ended the period at $35.8 million, with restricted cash of $8.0 million.
- Total assets were $2.14 billion and total equity was $1.17 billion at June 30, 2017. Reported debt, before unamortized issuance costs, was approximately $883.4 million; management reported leverage of 37.0% of market-value assets. The weighted-average interest rate on borrowings was 2.86%.
- The new $800 million unsecured credit facility included a $400 million revolver, a funded $250 million term loan and an undrawn $150 million delayed-draw term loan. The revolver had $310 million available at quarter-end. The company also issued $150 million of 10-year senior notes at 4.84%.
- Six-month distributions declared were $43.8 million; cash distributions paid were $24.0 million, with additional distributions reinvested. The company reported that six-month distributions were funded from operating cash flow.
Material changes versus prior year
- Revenue increased as the portfolio expanded. The company acquired 48 properties for $192.9 million in the first half, compared with 41 properties acquired for $245.6 million in the comparable period.
- Net income growth also reflected higher property-sale gains and the 2017 accounting change that capitalized qualifying acquisition costs. The company capitalized $4.2 million of such costs in the first half; in 2016, acquisition expenses were expensed.
- Six-month interest expense fell to $15.8 million from $19.6 million, partly because 2016 included swap ineffectiveness not recognized in 2017. The company incurred $3.6 million of debt-extinguishment costs in 2017 in connection with its refinancing.
- AFFO per diluted share increased for the first half but declined in Q2, to $1.33 from $1.36. The company cited lower adjustments for swap-related and other non-cash interest items, among other factors.
Outlook, risks and unusual items
- No specific earnings or acquisition guidance was provided. Management said available operating cash, equity proceeds, cash balances and borrowing capacity were expected to fund operations and planned growth for the foreseeable future.
- Management intends to continue acquiring properties and expects to draw on the undrawn $150 million term loan as acquisitions proceed. It expects to refinance, extend or replace debt as it matures; the $325 million term note is due in 2019 before extension options. Management cautioned that adverse markets could limit refinancing or acquisition funding and, if debt cannot be refinanced, operating cash flow may not cover principal repayments, potentially requiring property sales.
- Interest-rate exposure remains: the company had $665 million of swap notional across 25 agreements and seeks to limit floating-rate exposure to 5% of total assets. Swaps carry counterparty risk; a decline in the Baa3 investment-grade rating could also increase borrowing margins.
- All leases had contractual escalations averaging 2.1%, but management warned inflation could exceed rent increases and could weaken tenant creditworthiness. Portfolio concentrations included restaurants at 27.1% and healthcare facilities at 21.7% of next-12-month rent.
- Three properties sustained fire damage in the first half. The company recorded $2.9 million of insurance recovery receivables against depreciation and said a future gain could result if insurance proceeds exceed the book value of destroyed property.
- Related-party asset and property management fees were $9.2 million in the first half. Potential termination fees, if relevant agreements were terminated under specified conditions, were $38.4 million for the asset management agreement and $13.4 million for the property management agreement.
- The board declared monthly distributions of $0.415 per share for August through October 2017. The share value used for subscriptions from August 1 through October 31 was set at $80.00.
Key investor checks
- Assess recurring earnings and distribution coverage separately from property-sale gains, refinancing costs and acquisition-accounting effects; compare AFFO per share with declared distributions.
- Verify the availability and terms of refinancing for the $325 million 2019 term note, and monitor debt maturities, covenant compliance and borrowing costs.
- Review whether acquisition growth, tenant and industry concentration, and rent escalations support sustainable cash flow and management’s leverage targets.
- Track insurance collection and final accounting for the three fire-damaged properties, and review the company’s sensitivity to its real-estate valuation assumptions.
- Consider related-party fees, agreement termination provisions, and the limits and conditions of the share-redemption program.