Broadstone Net Lease, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless otherwise noted, dollar figures below are in millions. Broadstone is an externally managed REIT focused on long-term net-leased commercial properties. At quarter-end it owned 644 properties across 42 states, with 99.8% of rentable area leased and a 12.0-year weighted-average remaining lease term.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date | Change or context |
|---|---|---|---|
| Lease revenue | $68.4 | $55.6 | Up 23.1%, primarily from portfolio growth and rent escalations |
| Net income | $15.0 | $19.0 | Down 20.9%; approximate net margin declined to 22.0% from 34.2% |
| Net income attributable to Broadstone; diluted EPS | $13.9; $0.62 | $17.6; $0.92 | Diluted EPS down 32.6% |
| FFO; FFO per diluted share | $38.9; $1.62 | $34.9; $1.68 | FFO up 11.7%; per-share amount down 3.6% |
| AFFO; AFFO per diluted share | $34.2; $1.42 | $30.3; $1.46 | AFFO up 12.9%; per-share amount down 2.7% |
| Net cash from operating activities | $31.6 | $32.2 | Down $0.6 |
| Cash and restricted cash | $13.2 | $19.0 at Dec. 31, 2018 | Quarter-end cash and restricted cash decreased $5.8 during Q1 |
| Total indebtedness, gross; leverage ratio | $1,442.3; 40.8% | 41.7% leverage at Mar. 31, 2018 | Leverage measured against approximate market value of assets; within stated 35%–45% target range |
Operating expenses were $38.3 million, including $24.3 million of depreciation and amortization, $5.1 million of asset-management fees, and a $1.0 million impairment charge. Interest expense rose 41.6% to $15.8 million; the weighted-average borrowing rate was 4.42%, versus 3.29% a year earlier. The filing does not present a conventional gross-margin measure.
Total assets were $3,131.9 million and total liabilities were $1,559.9 million at March 31, 2019. Debt included $139.9 million drawn on the revolver, $300 million drawn under the new 2019 term loan, $455 million under other term loans, $475 million of senior notes, and $72.4 million of mortgage and other notes before net debt costs. The company reported $460.1 million of unused revolver capacity and $150 million available under the new term loan. It said it was in compliance with all debt covenants and held a Moody’s Baa3 investment-grade rating.
Material changes and operating activity
- Revenue growth reflected acquisitions made since Q1 2018, rent escalations, and portfolio performance. Operating expenses grew 31.7%, with higher depreciation, management fees, property expenses, and impairment contributing to the increase.
- Lower GAAP earnings also reflected higher interest expense, a $0.7 million debt-extinguishment cost, and smaller real-estate sale gains ($1.4 million versus $3.3 million). The company attributed lower per-share FFO and AFFO partly to delayed acquisitions and increased diluted shares.
- Acquired 27 properties for $73.1 million at a 7.4% weighted-average initial cash capitalization rate and 14.8-year weighted-average remaining lease term. Sold four properties for $11.3 million gross, generating $10.6 million net proceeds.
- Operating cash flow was below investment outflows: investing activities used $64.6 million, while financing activities provided $27.2 million. Equity issuance generated $74.9 million, including $14.9 million in DRIP shares.
- Adopted ASC 842 on January 1, 2019. The company said adoption had no material effect; it changed revenue presentation, including combining lease and certain nonlease income into “Lease revenues.” Comparative-period revenue was reclassified.
Outlook, risks, and unusual items
- No formal earnings or revenue guidance was provided. Management said available operating cash flow, ongoing equity offering proceeds, cash, borrowing capacity, and access to debt markets were expected to fund operations and planned acquisitions for the foreseeable future.
- Management identified tenant financial health, local real-estate conditions, acquisition timing, and capital availability as risks. Inflation could outpace contractual rent increases; some leases also leave the company responsible for certain structural or capital costs.
- Interest-rate exposure remains: $760.0 million of variable-rate debt notionals was covered by 28 cash-flow hedges. Swap fair value fell to a net asset of $3.2 million from $15.8 million at year-end, contributing to a $12.6 million other comprehensive loss in Q1.
- A $1.0 million impairment was recorded on one property after concerns about tenant viability and a change in investment strategy. The company reported no material pending litigation and no material change to its previously disclosed risk factors.
- The company is externally managed by related parties. Q1 asset- and property-management fees totaled $7.0 million; potential termination fees, if agreements were terminated under specified circumstances, were $20.7 million and $57.4 million, respectively. Tax-protection agreements could entail up to $12.3 million in aggregate damages, which management said were not likely to arise in the foreseeable future.
- Monthly distributions were increased to $0.44 per share/unit for May–July 2019. Q1 declared distributions were $32.0 million; the filing says distributions were funded by operating cash flow. These distributions included cash payments and reinvestment in shares.
- After quarter-end, the company acquired a property for $76.0 million and assumed $49.8 million of related debt. The board set the share value at $86.00 for May–July 2019, versus $85.00 previously.
Investor verification priorities
- Review the drivers of lower GAAP EPS and per-share FFO/AFFO despite growth in total FFO and AFFO, including acquisition timing, interest costs, and dilution.
- Verify liquidity and refinancing assumptions against debt maturities, floating-rate exposure, and the availability and terms of undrawn facilities.
- Assess tenant credit quality and concentration, particularly the disclosed tenant-viability impairment and the portfolio’s restaurant and healthcare exposure.
- Evaluate distribution coverage using operating cash flow and AFFO, and distinguish cash distributions from DRIP-issued shares.
- Review related-party management arrangements, fee structure, potential termination fees, and the valuation assumptions underlying NAV and the $86.00 share value.
- Track the post-quarter acquisition, assumed debt, and subsequent revolver activity, and confirm their effects on leverage and liquidity in later filings.