Broadstone Net Lease, Inc. — 2020 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Business context
Broadstone is a REIT investing primarily in long-term, net-leased commercial properties. At quarter-end, it reported a diversified portfolio of 627 properties across 41 U.S. states and one Canadian province, with approximately $4.0 billion in gross asset value. The portfolio was 99.8% leased, with a 10.8-year weighted-average remaining lease term and $288.0 million of annualized base rent.
Key 2020 events included the February internalization of management and a September four-for-one stock split and IPO. The IPO issued 33.5 million Class A shares at $17.00 per share; the shares were listed on the NYSE as BNL. Class A shares were scheduled to convert one-for-one to common shares in March 2021.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Lease revenue, net | $80.7 million | $76.4 million | $239.3 million | $213.9 million |
| Net income | $9.7 million | $25.0 million | $38.7 million | $57.4 million |
| Net income attributable to Broadstone | $8.8 million | $23.4 million | $34.9 million | $53.5 million |
| Basic and diluted earnings per share | $0.08 | $0.24 | $0.32 | $0.57 |
| Funds from operations (FFO), non-GAAP | $54.7 million | $43.3 million | $148.8 million | $122.1 million |
| Adjusted FFO (AFFO), non-GAAP | $47.1 million | $38.8 million | $134.2 million | $107.6 million |
Lease revenue rose 5.7% in Q3 and 11.9% year to date. Net income as a percentage of lease revenue was approximately 12.0% in Q3 2020 versus 32.8% in Q3 2019; this comparison reflects significant changes in impairments, asset-sale gains and other items. The filing does not present a directly comparable operating-margin measure.
- Cash flow: Nine-month operating cash flow was $133.0 million, versus $110.9 million in 2019. Investing activities provided $16.2 million, compared with $870.2 million used in 2019, primarily reflecting the absence of major 2020 acquisitions. Financing activities used $60.5 million, versus $784.4 million provided in 2019.
- Liquidity: September 30 cash and cash equivalents were $101.8 million; cash plus restricted cash was $109.0 million. The company had a $900 million revolving facility with no balance drawn, subject to approximately $738 million of borrowing capacity under its covenants.
- Debt: Total debt was $1.549 billion, including $108.8 million of mortgages and notes and $1.440 billion of unsecured borrowings before debt issuance costs. Net debt was $1.440 billion. Net debt to annualized adjusted EBITDAre, a non-GAAP measure, was 5.20x, down from 7.18x at September 30, 2019. The weighted-average interest rate on outstanding borrowings was 2.80%, before swaps.
- Distributions: The company temporarily suspended distributions in May amid pandemic uncertainty, then reinstated a quarterly distribution of $0.135 per share for Q3, paid October 15. On November 5, it declared $0.25 per share for Q4, payable on or before January 15, 2021.
Material changes versus the prior comparable period
- Q3 net income fell 61.2%; nine-month net income fell 32.7%. Lower real-estate sale gains and higher impairment and depreciation charges weighed on results. In Q3, impairment expense was $14.7 million versus $2.4 million, while gains on property sales were $1.1 million versus $12.6 million.
- Nine-month depreciation and amortization increased to $102.5 million from $78.0 million, and interest expense rose to $59.0 million from $51.0 million. Revenue growth was primarily attributable to properties acquired in 2019.
- Management internalization ended external asset- and property-management fees after February 6. Those fees declined, while general and administrative expense rose with the addition of employees; management said the G&A increase was less than the reduction in management and disposition fees.
- No rental-property acquisitions were completed in the first nine months of 2020, compared with 66 acquisitions in 2019. The IPO raised $532.3 million net through quarter-end, largely used to repay revolving-facility and term-loan balances. The company also replaced its $600 million revolver with a $900 million facility.
Outlook, risks and unusual items
- COVID-19: The company granted partial rent deferrals to 14 tenants and partial abatement to one tenant, across 93 properties representing approximately 9.8% of ABR. Q3 rent collection was 97.9%: 0.6% was deferred, 1.4% abated and 0.1% associated with bankruptcy. All deferred rent due for repayment in Q3 was collected; management reported 98.5% collection of October contractual base rent as of the filing date. Future collections remain exposed to the pandemic, tenant distress and renewed restrictions.
- Acquisition plans: Management described a pipeline and two properties under purchase agreements for approximately $33 million, at an expected initial cash capitalization rate of 7.03%, with closing anticipated in Q4 2020. Completion was not assured.
- Impairments and valuation: Q3 impairment charges affected three properties; nine-month charges affected six. Management cited changes in hold strategy and unfavorable conditions, including for vacant properties marketed for re-leasing or sale, and warned that further impairments may occur. Goodwill of $339.8 million arose from the internalization and was to receive its first annual impairment test in Q4 2020.
- Earnout and contingencies: The internalization included potential earnout consideration of up to $75 million. The September 30 recorded earnout liability was $13.2 million; changes in fair value generated $6.4 million of Q3 income and $8.5 million of nine-month income. Four tax-protection agreements could create approximately $22.3 million of indemnity liability if specified taxable dispositions occur; management did not believe triggering events were likely in the foreseeable future. A separate Founding Owners agreement has a stated maximum liability of $10 million.
- Capital and market risks: The company reported compliance with debt covenants but cautioned that pandemic-related tenant defaults could affect compliance and potentially restrict distributions. Interest-rate swaps had an $81.3 million liability fair value at quarter-end. Management cited uncertainty around tenant credit, property-sale markets, interest rates and access to capital. No earnings or FFO guidance was provided in the filing text.
Important facts for investors to verify
- Subsequent rent collections, deferral repayments and any new tenant relief or bankruptcy developments.
- Whether the two announced acquisitions closed, their final pricing and financing, and the pace of future acquisitions.
- Debt covenant headroom, liquidity availability and the trajectory of net debt to adjusted EBITDAre.
- Impairment assumptions, the Q4 goodwill test, and the remaining earnout amount and conditions.
- The sustainability and cash coverage of the reinstated distributions, particularly if tenant collections or operating cash flow weaken.