Broadstone Net Lease, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts are U.S. dollars unless stated otherwise.
Business context
Broadstone is an industrial-focused, diversified net-lease REIT. At quarter-end it owned 801 properties across the United States and Canada; the portfolio was 99.4% leased, with a 10.7-year weighted-average remaining lease term and $391.0 million of annualized base rent (ABR). Industrial properties represented 51.6% of ABR. No tenant exceeded 4.0% of ABR.
Key financial metrics
| Metric | Q2 2023 / June 30, 2023 | Comparable period / change |
|---|---|---|
| Lease revenues, net | $109.4 million | Up 11.6% from Q2 2022 |
| Net income | $63.0 million | $35.6 million in Q2 2022 |
| Net income attributable to Broadstone | $60.0 million | $33.5 million in Q2 2022 |
| Basic and diluted EPS | $0.32 | $0.20 in Q2 2022 |
| Interest expense | $20.3 million | $17.9 million in Q2 2022 |
| Net cash from operating activities | Not separately stated for Q2 | Six months: $136.6 million, versus $118.0 million in 2022 |
| Cash and cash equivalents | $20.8 million | $21.8 million at Dec. 31, 2022 |
| Total debt, including mortgages | $1.953 billion | $2.034 billion at Dec. 31, 2022 |
| Net debt / annualized Adjusted EBITDAre | 5.0x | 5.1x at March 31, 2023; company target generally below 6.0x |
The filing does not present a conventional operating margin measure. For the six months, non-GAAP AFFO was $136.5 million, up from $123.2 million in 2022; these non-GAAP measures may not be comparable with similarly titled measures at other companies.
Changes and notable items
- Six-month lease revenue rose 19.0% year over year, primarily reflecting portfolio growth and increased lease-termination income. Operating expenses increased 14.2%; interest expense increased 19.1%, reflecting higher borrowing costs and average borrowings.
- Q2 included a $29.5 million gain on sale of real estate, compared with $4.1 million in Q2 2022. The six-month gain was $32.9 million, versus $5.3 million in 2022. This materially contributed to reported net income growth.
- During the first half, the company sold seven properties for $121.3 million and acquired five properties for $42.9 million. It also invested $37.4 million in property under development. Investing cash flow was positive $31.3 million, compared with negative $380.0 million in the first half of 2022, when acquisitions were substantially higher.
- Financing activities used $191.7 million in the first half, including $103.5 million of distributions to stockholders and net revolving-credit repayments. No shares were repurchased under the $150 million repurchase authorization; $145.4 million remained available under the ATM equity program.
Liquidity, outlook and risks
- The company reported $877.1 million of available capacity on its $1.0 billion revolving credit facility and no material debt maturities before 2026. It said it was in compliance with debt covenants and held investment-grade ratings of BBB from S&P and Baa2 from Moody’s.
- At June 30, the weighted-average rate on outstanding borrowings was 5.23% before swap effects. Interest-rate swaps covered $975.4 million of notional debt; management estimated a 1% rate move would change annual interest expense by about $0.5 million after swaps.
- A remaining $167.3 million build-to-suit funding commitment is expected to be funded through October 2024. The company expects rent to begin at construction completion or October 2024, whichever occurs first. Contractual obligations also include $84.5 million of investment commitments for the rest of 2023.
- Tax-protection agreements could result in an estimated $20.4 million liability if specified taxable property disposals occur; management said it did not believe triggering events had occurred or were likely in the foreseeable future. The filing reports no material litigation or material changes to previously disclosed risk factors.
- The board declared a third-quarter distribution of $0.28 per share and OP Unit, payable by October 13, 2023. No numerical earnings or investment guidance was provided in the filing.
Important facts for investors to verify
- How much of earnings growth is attributable to recurring rental operations versus property-sale gains and lease-termination income.
- Tenant credit quality, lease rollover exposure, and the company’s ability to sustain 99.4% occupancy and contractual rent escalations.
- Execution, funding needs, and expected returns for the $167.3 million remaining build-to-suit commitment.
- Debt costs and refinancing exposure as variable rates remain elevated; confirm the amount of floating-rate debt not economically hedged.
- Cash available for distributions and future investment, alongside leverage, covenant headroom, and potential equity issuance.