Broadstone Net Lease, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Dollar amounts below are in millions unless noted. Broadstone is an externally managed REIT focused on long-term net-leased commercial real estate. At quarter-end, it owned 646 properties in 42 states, totaling approximately 20.3 million rentable square feet; 99.8% of rentable space was leased, and the weighted-average remaining lease term was 11.9 years.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Lease revenue | $69.1 | $57.0 | $137.5 | $112.6 |
| Net income, consolidated | $17.3 | $18.4 | $32.4 | $37.4 |
| Net income attributable to Broadstone | $16.1 | $17.0 | $30.1 | $34.5 |
| GAAP diluted EPS | $0.70 | $0.86 | $1.32 | $1.77 |
| FFO | $39.8 | $34.4 | $78.8 | $69.2 |
| FFO per diluted share | $1.60 | $1.60 | $3.22 | $3.28 |
| AFFO | $34.4 | $29.9 | $68.5 | $60.2 |
| AFFO per diluted share | $1.38 | $1.39 | $2.80 | $2.85 |
- Q2 operating expenses were $37.8 million, up 23.2%; depreciation and amortization rose 25.0% to $25.3 million. The filing does not present a standalone operating margin.
- Q2 interest expense was $16.7 million, up from $12.5 million. Management cited higher debt and a higher weighted-average borrowing rate, reflecting acquisitions and longer-duration refinancing.
- Six-month operating cash flow was $64.7 million, versus $58.7 million. Investing used $120.9 million; financing provided $49.9 million. Cash and restricted cash totaled $12.7 million at June 30, 2019, including $10.3 million of unrestricted cash.
- Total debt carrying value was approximately $1.475 billion, compared with $1.451 billion at December 31, 2018. Debt fair value was estimated at $1.530 billion. The reported leverage ratio was 40.2% of approximate asset market value; management’s policy range is 35%–45%.
- The $600 million revolving facility had $123.6 million drawn and $476.4 million available at quarter-end. The company reported compliance with all debt covenants.
- Monthly distributions were $0.44 per share/unit from February through June (January was $0.43). Six-month distributions totaled $63.5 million, including $30.0 million reinvested through the DRIP; the company reported funding distributions from operating cash flow.
Changes versus comparable periods
- Q2 revenue grew 21.1%, but consolidated net income fell 5.7% and GAAP diluted EPS fell 18.6%. Higher portfolio-related expenses and interest expense, along with lower gains on property sales, more than offset revenue growth.
- For the first half, revenue rose 22.1%, while net income declined 13.4% and diluted EPS declined 25.4%. FFO and AFFO increased 13.8% each, but per-share amounts declined 1.8%, reflecting share-count growth and the funding mix.
- Acquisitions totaled $200.5 million for 34 properties in the first half, versus $254.8 million for 41 properties in the prior-year period. Nine properties were sold for $35.1 million in aggregate; the company recognized a $4.2 million gain, down from $7.6 million.
- A $1.0 million impairment was recorded in Q1 2019 on one property following concerns about tenant viability and a change in investment strategy; there was no comparable impairment in the first half of 2018.
Outlook, risks and unusual items
- No formal earnings guidance was provided. Management said the portfolio acquisition announced July 23, 2019—23 fully leased industrial and office/flex properties for $735.7 million—was expected to close in August, subject to due diligence and other conditions. It expected the transaction to be accretive, but also to raise leverage temporarily.
- Management expected to fund that acquisition with private-offering proceeds, the remaining $150 million commitment under the 2026 term loan, a new $300 million delayed-draw loan, and revolving-credit borrowings. It planned to reduce leverage through equity proceeds and increased property dispositions.
- After quarter-end, the company reduced the 2024 term-loan spread from LIBOR plus 1.90% to 1.25%, and entered into the $300 million one-year delayed-draw facility. No borrowing under that new facility had been funded through August 7, 2019.
- Interest-rate sensitivity remains relevant: 33 swaps with approximately $885 million aggregate notional were outstanding. Their net fair value moved from a $15.8 million asset at year-end 2018 to a $20.0 million liability at June 30, 2019; the resulting first-half fair-value loss was recorded in other comprehensive loss.
- ASC 842 was adopted January 1, 2019. Management said adoption had no material financial-statement impact; comparative revenue presentation was recast into a single “Lease revenues” line.
- Related-party asset and property management fees were $14.3 million in the first half. Potential termination fees at June 30 were $60.5 million for the asset management agreement and $21.7 million for the property management agreement, subject to contractual conditions.
- Tax-protection agreements could create approximately $12.3 million of damages if specified contributed properties are sold in taxable transactions; management said triggering events were not expected in the foreseeable future. The filing reported no material pending litigation or material environmental matters known to management.
- Key risks include tenant credit deterioration, real estate market and valuation changes, access to financing, interest-rate exposure, and execution/funding of the pending large acquisition. Management cautioned that inflation could exceed fixed contractual rent increases.
Important facts for investors to verify
- Whether the $735.7 million acquisition closed on expected terms, its funding mix, resulting leverage, and subsequent deleveraging progress.
- Whether FFO/AFFO and per-share performance improve as acquired assets contribute rent, given rising interest expense and dilution from equity issuance.
- Tenant credit quality and rent collections; management reported collections above 99.9% and no tenant above 3.3% of next-12-month contractual rent.
- Debt maturities, borrowing costs, swap coverage and fair-value movements, covenant headroom, and access to the remaining committed facilities.
- Assumptions used in property valuations and NAV: management estimated that a 0.25 percentage-point increase in the portfolio capitalization rate would reduce NAV per diluted share from $84.68 to $79.47.
- Distribution sustainability and the distinction between cash distributions and DRIP-issued shares; also monitor related-party fees and tax-protection obligations.