Business context and reporting period
Broadstone Net Lease, Inc. (NYSE: BNL) filed this Form 10-K for the fiscal year ended December 31, 2023; it is an annual report, not a standalone fourth-quarter filing. BNL is an industrial-focused, diversified net lease REIT. At year-end it owned 796 properties across 44 U.S. states and four Canadian provinces, with approximately 38.3 million rentable square feet and $392.2 million of annualized base rent (ABR).
The portfolio was 99.4% leased, with a 10.5-year ABR-weighted average remaining lease term. Industrial properties represented 51.5% of ABR. Approximately 97.3% of ABR had contractual rent escalations, averaging a 2.0% minimum annual increase.
Financial and operating performance
| Metric | 2023 | 2022 |
|---|---|---|
| Lease revenues, net | $442.9 million | $407.5 million |
| Net income | $163.3 million | $129.5 million |
| Diluted EPS | $0.83 | $0.72 |
| FFO per diluted share | $1.52 | Not stated in the supplied comparative highlights |
| Core FFO per diluted share | $1.52 | Not stated in the supplied comparative highlights |
| AFFO per diluted share | $1.41 | Not stated in the supplied comparative highlights |
| Cash provided by operating activities | $271.1 million | $255.9 million |
Revenue rose 8.7% and net income rose 26.1%. Calculated net income margin was approximately 36.9%, versus 31.8% in 2022. FFO was $298.6 million, Core FFO $298.9 million, and AFFO $277.7 million; these are non-GAAP measures. The company collected 99.8% of base rent due during 2023.
Operating expenses increased 14.8% to $251.9 million, primarily reflecting a $31.3 million property impairment charge, compared with $5.5 million in 2022. The largest 2023 impairment was $26.4 million on a healthcare property after a deterioration in the tenant’s ability to perform and a change in BNL’s holding strategy. Gains on sale of real estate were $54.3 million, versus $16.0 million in 2022. BNL sold 14 properties for $200.1 million gross proceeds and invested $165.6 million, including development funding.
Debt, liquidity and cash flow
Gross debt was approximately $1.92 billion and net debt $1.90 billion at year-end. Net debt to Annualized Adjusted EBITDAre was 5.0x, down from 5.2x in 2022; management targets leverage generally below 6.0x. The company reported $19.5 million of cash and cash equivalents and $909.6 million of available revolver capacity. Weighted-average borrowing cost was 3.73% including swaps. BNL reported 99.2% of debt fixed, including hedges, and was in compliance with debt covenants.
Cash from operations increased to $271.1 million. Investing activities provided $24.3 million, mainly reflecting property-sale proceeds; financing activities used $334.8 million, principally as borrowings declined and distributions were paid. Total cash and restricted cash fell to $20.6 million from $60.0 million at year-end 2022. There are no material debt maturities before 2026; scheduled 2026 obligations include $400 million of term loans and the $90.4 million revolver balance, in addition to mortgage principal.
Material changes, outlook and risks
Revenue growth reflected a full year of rent from 2022 acquisitions and lease termination income, partly offset by dispositions. 2023 investment activity was markedly lower than 2022, when BNL invested approximately $907 million in property acquisitions. The increase in net income also benefited from higher sale gains, while the higher impairment charge was a substantial offset. Interest expense increased modestly as higher variable rates were partly offset by lower average borrowings.
The filing provides no quantitative 2024 earnings or investment guidance. Management expects to meet short-term needs with operating cash flow, cash, revolver borrowings and selective dispositions. Approximately $214.1 million of contractual obligations were scheduled for 2024, including $118.7 million of investment commitments, $55.9 million of declared dividends, $37.2 million of interest and $2.3 million of mortgage amortization. A build-to-suit commitment had $111.0 million remaining to fund through October 2024; rent is scheduled to commence at construction completion or by October 2024, whichever occurs first. The board declared a first-quarter 2024 dividend of $0.285 per share and OP Unit.
Key risks include tenant default and vacancy, interest rates and refinancing, competition for acquisitions, and inflation that may outpace fixed lease escalators. Only 15.3% of ABR was from investment-grade tenants. The top five states represented 35.2% of ABR, while the largest state concentration was Texas at 9.7%. Tax-protection agreements could create approximately $20.4 million of liability if specified taxable dispositions occur; management said it did not believe triggering events were likely in the foreseeable future. No material litigation was reported. The auditor issued unqualified opinions on the financial statements and internal controls; long-lived asset impairment was identified as a critical audit matter.
Most important facts for investors to verify
- Reconcile the improvement in GAAP earnings with property-sale gains, lease termination income and the elevated impairment charge; assess the affected healthcare asset’s value and potential further impairment.
- Review tenant credit quality and exposure to unrated tenants, particularly given the concentration of revenue in single-tenant and master-lease arrangements.
- Assess 2026 refinancing needs, variable-rate exposure after swaps mature, and whether the 5.0x leverage ratio remains consistent with management’s target.
- Monitor completion, remaining funding and rent commencement for the $111.0 million build-to-suit commitment, as well as execution of the broader investment pipeline.
- Evaluate whether contractual rent increases and cash available for distributions can keep pace with inflation and support the declared dividend.
- Confirm the assumptions underlying the $31.3 million impairment and the contingent tax-protection exposure if properties or the OP are sold.