Business context and reporting period
Broadstone Net Lease, Inc. (BNL) is a REIT that owns primarily single-tenant commercial properties leased on a long-term, net-lease basis. This Form 10-Q covers the three months ended March 31, 2022; comparisons below are primarily with the three months ended March 31, 2021. At quarter-end, BNL owned 752 properties across the U.S. and Canada. The portfolio was 99.8% leased, with a 10.5-year weighted average remaining lease term.
Financial and operating metrics
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Lease revenue, net | $93.8 million | $82.7 million; up 13.5% |
| Operating expenses | $48.2 million | $48.0 million |
| Net income | $28.4 million | $24.0 million; up 18.7% |
| Net income attributable to BNL | $26.8 million | $22.2 million |
| Diluted EPS | $0.16 | $0.15 |
| Net cash from operating activities | $59.1 million | $51.8 million |
| AFFO (non-GAAP) | $60.4 million | $49.4 million; up 22.2% |
| Cash and cash equivalents | $54.1 million | $21.7 million at Dec. 31, 2021 |
Calculated from reported figures, net income was approximately 30.3% of lease revenue. Interest expense was $16.9 million, versus $16.1 million a year earlier. BNL declared distributions of $0.265 per share and OP Unit for the quarter.
Total debt was approximately $1.8 billion, including $266.1 million drawn on the revolving facility; net debt was $1.74 billion. Net debt to annualized Adjusted EBITDAre, a non-GAAP measure, was 5.14x, compared with management’s stated sustained target generally below 6.0x. The amended $1.0 billion revolver had $733.9 million of available capacity. The weighted average rate on outstanding borrowings was 2.69%, excluding swaps. BNL reported compliance with its debt covenants.
BNL invested $210.0 million in 27 properties during the quarter, at a 5.7% weighted average initial cash capitalization rate. Investing cash outflow was $207.7 million; financing cash inflow was $186.4 million. Cash, cash equivalents, and restricted cash totaled $65.5 million at quarter-end.
Material changes versus the prior comparable period
- Revenue growth was primarily attributable to property acquisitions completed since March 2021. Over the preceding 12 months, BNL invested $777.4 million in 115 properties.
- Net income increased, supported by higher revenue, no impairment charge versus $2.0 million in Q1 2021, and lower general and administrative expense. Offsetting items included higher depreciation and interest expense and lower gains on property sales.
- Depreciation and amortization rose 11.6% to $34.3 million, largely reflecting portfolio growth. G&A declined 17.0% to $8.8 million, partly because Q1 2021 included executive departure-related severance.
- Property sale gains fell to $1.2 million on one property, from $4.7 million on eight properties a year earlier.
- BNL issued 6.27 million shares under its at-the-market program for $134.3 million of net proceeds. The larger acquisition program was funded with operating cash, equity proceeds, and revolver borrowings.
Outlook, commentary, risks and unusual items
BNL did not provide quantified earnings or acquisition guidance in the supplied filing text. Management expects operating cash flow to meet near-term obligations and expects to use cash, its revolver, and future debt and equity financing for liquidity and growth. It stated that acquisition funding depends on access to capital on favorable terms. Management cited investment-grade ratings of BBB from S&P and Baa2 from Moody’s and aims to maintain leverage below 6.0x on a sustained basis.
Interest-rate exposure remains relevant: 28 swaps with $720.1 million aggregate notional were outstanding. After swaps, a 1% rate change was estimated to change annual interest expense by approximately $1.4 million. Swap fair value moved from a $27.2 million liability at year-end 2021 to a net asset position at March 31, 2022; the quarter included $35.0 million of other comprehensive income from swap fair-value changes. BNL also recorded a $1.1 million unrealized foreign-exchange loss on Canadian-dollar revolver borrowings.
Other items to note include a $17.4 million commitment for a building expansion expected to finish in 2022, with scheduled rent increases beginning in August; and tax protection agreements that could trigger approximately $22.3 million of liability in certain taxable dispositions. Management said it did not believe the triggering events were likely in the foreseeable future. The filing reports no material change to the risk factors in the 2021 Form 10-K and no litigation expected to have a material effect. Disclosure controls were reported effective.
Subsequent to quarter-end, the board declared a second-quarter distribution of $0.270 per share and OP Unit. BNL also completed $27.2 million of additional acquisitions and issued 542,929 shares under the ATM program through May 2, 2022.
Most important facts for investors to verify
- Whether acquisition yields and rent escalations remain adequate relative to financing costs, and whether planned growth is accretive.
- Debt maturities, revolver usage, covenant headroom, and the effect of rising reference rates after the interest-rate swaps.
- Tenant credit, rent collections, and the durability of the 99.8% occupancy and long lease term; accrued rental-income write-offs were $1.3 million in Q1 2022.
- How AFFO and leverage are calculated, and how distributions compare with recurring cash generation; these are non-GAAP measures.
- Potential exposure under tax protection agreements and the funding, timing, and rental return of the $17.4 million expansion commitment.