Broadstone Net Lease, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Financial amounts are in U.S. dollars; millions are used unless otherwise noted.
Business context
Broadstone is an internally managed REIT focused on long-term, net-leased commercial properties. At quarter-end, it owned 661 properties across 41 U.S. states and British Columbia, with 28.4 million rentable square feet. The portfolio was 99.7% leased, with a 10.6-year weighted-average remaining lease term and $302.3 million of annualized base rent (ABR). Industrial properties represented 45.6% of ABR; no tenant represented more than 2.4%.
Key financial results
| Metric | Q1 2021 | Comparable period |
|---|---|---|
| Net lease revenue | $82.7 million | $78.2 million in Q1 2020; up 5.7% |
| Net income | $24.0 million | $11.8 million in Q1 2020 |
| Net income attributable to Broadstone | $22.2 million | $10.8 million in Q1 2020 |
| EPS, basic and diluted | $0.15 | $0.10 in Q1 2020 |
| FFO / AFFO | $51.9 million / $49.4 million | $37.6 million / $41.1 million in Q1 2020 |
| Net cash from operations | $51.8 million | $40.3 million in Q1 2020 |
Operating expenses were $48.0 million, including $10.6 million of general and administrative expense and $2.0 million of property impairment. Interest expense was $16.1 million, down from $21.0 million a year earlier. Net income comparisons reflect non-recurring and variable items, including gains on property sales and changes in the earnout liability; the filing does not provide a single adjusted GAAP profit measure excluding these effects.
Financial position, liquidity and capital allocation
- Total assets were $4.21 billion and total equity was $2.49 billion at March 31, 2021.
- Gross debt was approximately $1.51 billion; cash and cash equivalents were $10.2 million and restricted cash was $8.1 million. Net debt was $1.49 billion. Net debt to annualized Adjusted EBITDAre was 5.25x, versus management’s stated objective of generally remaining below 6.0x.
- The company had $15 million drawn on its $900 million revolving credit facility, leaving $885 million available at quarter-end. It reported compliance with debt covenants.
- Cash and restricted cash declined by $92.4 million during the quarter. Operating cash flow of $51.8 million was outweighed by investing outflows of $67.7 million and financing outflows of $76.5 million.
- The company acquired 28 properties for approximately $87.3 million and sold eight properties for $23.1 million, recognizing $4.7 million in gains on sale.
- Quarterly distributions declared were $0.25 per share and OP Unit. In April, the board declared a second-quarter distribution of $0.255 per share and OP Unit.
Material changes and management commentary
- Year-over-year revenue growth was primarily attributed to portfolio acquisitions. Net income increased substantially, reflecting lower interest expense, higher revenue, and a more favorable change in the earnout liability, partly offset by lower property-sale gains and higher G&A.
- G&A rose to $10.6 million from $5.8 million in Q1 2020, mainly due to the internalization of management in February 2020 and, in Q1 2021, severance and accelerated stock compensation associated with executive departures.
- In January 2021, S&P assigned a BBB rating with stable outlook; Moody’s reaffirmed Baa3 and changed its outlook to positive. The rating led to lower borrowing margins. The company also repriced its 2026 term loan in March and made a $50 million principal repayment.
- Management expects short-term liquidity needs to be met through operating cash flow, cash balances and revolving-credit borrowings. It expects to address the $60 million 2022 term-loan maturity through cash or revolver borrowings. No quantitative earnings or acquisition guidance was provided.
Risks, contingencies and unusual items
- Management noted that COVID-19-related market conditions could put some property values below carrying values. It considered carrying amounts recoverable at quarter-end, but deterioration in conditions or changes in expected holding periods could lead to additional impairment. One property impairment of $2.0 million was recorded in Q1.
- The company uses interest-rate swaps to hedge floating-rate debt: 32 swaps with $824.7 million aggregate notional. It estimated that a 1% rate change would affect annual interest expense by approximately $1.1 million after swaps.
- Tax-protection agreements could result in approximately $22.3 million of liability if specified properties or the company were sold in taxable transactions. Management did not believe triggering events had occurred or were likely in the foreseeable future.
- The company reported no material litigation, no material changes to the risk factors in its 2020 Form 10-K, and effective disclosure controls. It cautioned that forward-looking statements are subject to risks and actual results may differ.
Important facts for investors to verify
- Whether tenant rent collection, occupancy and tenant credit quality remain resilient, particularly in restaurant and other exposed industries.
- How much reported earnings growth reflects recurring property operations versus earnout fair-value changes, property-sale gains, impairments and severance.
- The sustainability of AFFO relative to distributions, and the effect of acquisitions, dispositions and share-based compensation on per-share performance.
- Debt maturities, available revolver capacity, covenant headroom and the company’s ability to maintain its leverage objective and investment-grade ratings.
- Potential future impairments and the circumstances that could trigger the tax-protection obligations.