Broadstone Net Lease, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also reports fourth-quarter results. Filed February 25, 2021. Broadstone is an internally managed REIT focused primarily on long-term, single-tenant net-leased commercial properties.
Business context and portfolio
At year-end, the company reported approximately $4.0 billion of gross asset value, about 28.2 million rentable square feet, and a portfolio spanning 41 U.S. states and one Canadian property. Industrial represented 46.3% of annualized base rent (ABR), healthcare 19.3%, restaurants 15.6%, office 9.9%, and retail 8.9%. Occupancy was 99.2%, and the ABR-weighted average remaining lease term was 10.7 years. About 98.3% of leases had contractual rent escalations, averaging a 2.1% annual minimum increase.
Key financial metrics
| Metric | 2020 | 2019 | Change / note |
|---|---|---|---|
| Lease revenue, net | $321.6 million | $298.8 million | Up 7.6% |
| Net income | $56.3 million | $85.1 million | Down 33.9% |
| Net income attributable to Broadstone | $51.2 million | $79.4 million | Down 35.5% |
| Diluted earnings per share | $0.44 | $0.83 | Down 47.0% |
| FFO | $193.0 million; $1.50 per diluted share | $167.5 million | FFO up about 15.2% |
| AFFO | $181.1 million; $1.41 per diluted share | $149.2 million | AFFO up about 21.4% |
| Cash provided by operating activities | $179.0 million | $147.4 million | Up about 21.5% |
| Cash and cash equivalents | $100.5 million | $12.5 million | Restricted cash was an additional $10.2 million |
| Total debt, approximately | $1.5 billion | $2.0 billion | Net debt was $1.44 billion |
| Net debt / annualized Adjusted EBITDAre | 5.15x | 7.04x | Company target is generally below 6.0x on a sustained basis |
The filing does not provide a clear conventional operating-margin measure. Interest expense was $76.1 million, versus $72.5 million in 2019. The company reported $19.1 million of property impairment charges, compared with $3.5 million in 2019.
Fourth quarter: Lease revenue was $82.3 million versus $84.9 million in fourth-quarter 2019; net income was $17.6 million versus $27.7 million; and diluted EPS was $0.11 versus $0.25. Fourth-quarter rent collections were 98.8% of contractual rent due.
Material changes versus prior period
- Revenue rose mainly because of portfolio growth from 2019 acquisitions. The company made no acquisitions during the first ten months of 2020, then acquired 19 properties for approximately $100.3 million in the fourth quarter at a 6.9% weighted-average initial cash capitalization rate. 2019 acquisitions totaled approximately $1.03 billion.
- Net income fell despite revenue growth, reflecting higher depreciation and amortization, increased impairments, lower gains on property sales, and higher interest expense. Net income per share also reflected a larger weighted-average share count following the IPO and Internalization.
- In February 2020, the company internalized management, paying approximately $209.5 million in base consideration and assuming approximately $90.5 million of debt. It recorded $339.8 million of goodwill and $3.7 million of 2020 Internalization expenses. Up to $75 million of additional earnout consideration may be payable if specified milestones are met.
- The September IPO raised $588.3 million net. The company used about $456.7 million to repay borrowings and accrued interest, and replaced its $600 million revolving facility with a $900 million facility maturing in September 2023, subject to extension options.
- The company sold 24 properties for $77.5 million net proceeds and recorded a $15.0 million gain. In 2019, it sold 49 properties and recorded a $29.9 million gain.
Liquidity, capital allocation, and outlook
At December 31, 2020, the $900 million revolving credit facility had no borrowings outstanding. The company reported $1.44 billion of unsecured term loans and senior notes, plus approximately $107.7 million of mortgages and notes payable. It had $969.8 million of LIBOR-linked debt, of which $859.8 million was covered by interest-rate swaps. Management said the company was in compliance with debt covenants at year-end. It received an initial BBB rating with stable outlook from S&P in January 2021; Moody’s had reaffirmed its Baa3 rating in July 2020.
The company collected 97.7% of contractual rent due for 2020. It granted partial relief to 15 tenants across 93 properties: 14 deferrals and one partial abatement. At year-end, all deferral periods had ended and less than $1 million remained to be repaid; the abatement ended in January 2021. The filing says the pandemic’s future effects remain uncertain and does not provide numerical earnings or acquisition guidance.
To preserve liquidity during the pandemic, the board suspended monthly distributions for May through July 2020, then reinstated distributions quarterly. Dividends declared totaled $0.83 per share for 2020, versus $1.32 in 2019. A $0.25-per-share first-quarter 2021 dividend was declared in February 2021. Management expects to pursue acquisitions and balance debt and equity financing while generally maintaining leverage below 6.0x.
Risks, contingencies, and unusual items
- Tenant credit and collections remain central risks in a single-tenant portfolio. Only 17.2% of ABR came from investment-grade-rated tenants; the company highlighted pandemic exposure in restaurant, retail, and certain healthcare businesses.
- The 2020 impairment charge was $19.1 million across seven properties. Management cited changes in its hold strategy and adverse market trends; further impairment is possible if conditions worsen.
- Art Van filed for bankruptcy in March 2020. The company re-leased several former Art Van sites, generally at lower rents, and received a $2.35 million bankruptcy settlement. Some re-leasing actions continued after year-end.
- Tax-protection agreements could create approximately $22.3 million of liability if specified assets or the company are sold in taxable transactions. The Internalization also created an estimated $50.7 million of potential built-in gain tax exposure if relevant assets are disposed of within the applicable five-year period.
- Interest-rate, refinancing, covenant, and LIBOR-transition risks remain. The filing reported $72.1 million of swap liabilities at year-end and noted uncertainty around replacement of LIBOR.
- Other risks include property concentration, lease renewal and re-leasing costs, environmental liabilities, insurance limitations, REIT qualification, and the company’s reliance on the operating partnership for funds. The company reported no material legal proceedings and an unmodified audit opinion; the auditor did not attest to internal-control effectiveness, as the company was not required to obtain that attestation.
Important facts for investors to verify
- Reconcile the 2020 GAAP earnings decline with growth in FFO and AFFO, including the effects of impairments, asset-sale gains, Internalization costs, and higher share counts.
- Track rent collections, repayment of deferred rent, tenant credit quality, and any further pandemic-related concessions or bankruptcies.
- Confirm post-IPO leverage, liquidity, debt maturities, covenant headroom, and the effect of the S&P rating on borrowing costs.
- Assess whether acquisitions can resume at attractive yields after the 2020 slowdown and whether management can sustain its stated leverage objective.
- Review distribution coverage and the board’s future dividend decisions; distributions are discretionary and subject to REIT requirements and debt restrictions.
- Check portfolio counts and disclosures: the filing generally describes 640 properties, while certain tables show 641, and verify the status and economics of vacant properties and properties being re-leased or sold.