Broadstone Net Lease, Inc. (NYSE:BNL) Q3 2023 Earnings Call Transcript

Broadstone Net Lease, Inc. (NYSE:BNL) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Hello, and welcome to Broadstone Net Lease’s Third Quarter 2023 Earnings Conference Call. My name is Cole and I’ll be the moderator for today’s call. Please note that today’s call is being recorded. I will now turn the call over to Mike Caruso,. Senior Vice President of Corporate Strategy and Investor Relations at Broadstone. Please go ahead.

Mike Caruso: Thank you, operator. And thank you everyone for joining us today for Broadstone Net Lease’s third quarter 2023 earnings call. On today’s call, you will hear prepared remarks from CEO, John Moragne; President and COO, Ryan Albano; and CFO, Kevin Fennell. All three will be available for the Q&A portion of this call. Before we begin, I would like to remind everyone that the following presentation contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially due to a variety of factors. We caution you not to place undue reliance on these forward-looking statements and refer you to our SEC filings including our Form 10-K for the year ended December 31, 2022, for a more detailed discussion of the risk factors that may cause such differences. Any forward-looking statements provided during this conference call are only made as of the date of this call. I will now turn the call over to John.

John Moragne: Thank you, Mike. And good morning, everyone. From what continues to be a challenging and dynamic net lease and capital markets environment, I am pleased to report another strong quarter of results. As you have heard us say consistently throughout 2023, we believe our prudent and highly selective approach to capital allocation is the best path forward in our mission to maximize long-term shareholder value; and our third quarter results and slightly revised guidance for 2023 reflect that. While we are maintaining our AFFO guidance range of $1.40 to $1.42 per share for the year, we are slightly adjusting our investments, dispositions and G&A guidance. More to come from Kevin on this. Notwithstanding, the difficult environment, our pipeline of potential investment opportunities continues to grow as we evaluated over $10 billion of potential new acquisitions, our third straight quarter of sourcing above-average volumes but while sourcing and underwriting remained highly active, the number of investment opportunities that met our buy box were minimal, as interest rates expanded nearly 100 basis points throughout the quarter.

And the dislocation between public and private markets continued to widen with new investment cap rates lagging the pace of interest rate increases. Of particular note, we recently walked away from a large significant late-stage investment opportunity as we could not agree on final pricing terms amidst the rapid increase in rates. The lag we are seeing in cap rates and risk-reward trade-offs has been a persistent theme for this year and the recent run-up in interest rates and treasuries only exacerbated the disconnect further. Despite that, we remain opportunistic in sourcing investment opportunities; and are committed to the prudent, patient and disciplined capital allocation strategy we have employed throughout 2023. We continue to believe that strategy will be key to avoiding missteps in such an uncertain market and providing long-term shareholder value.

Given the current investment environment and our highly selective strategy, our third quarter results were driven by continued solid portfolio performance and incremental asset recycling during the first half of the year. Our existing portfolio of 800 assets with 220 unique tenants who operate across 54 different industries and our best-in-class diversification have positioned us to provide durable and consistent cash flows across any market cycle. We continue to view our tenant and industry diversification as a key differentiator for BNL, which when combined with top-tier annual rent escalations of a weighted average 2% provides significant downside risk mitigation benefits, especially in difficult or uncertain markets like this one. Our real estate portfolio, which is predominantly leased to industrial and defensive retail and restaurant tenants, continues to perform exceptionally, well as evidenced by 99.9% rent collections during the third quarter and 99.4% occupancy as of September 30, 2023.

As of quarter end, only two of our 800 properties were vacant and not subject to a lease. We have seen corporate- or site-level improvements in many of our headline watch list tenants, with the main lingering issue in our portfolio continuing to be Green Valley medical center. Similar to our update last quarter, the tenant continues to fail to meet certain milestones as defined by our agreement. Based on the tenant’s lack of progress, we are no longer anticipating operations to commence in Q4 of this year. While we have yet to receive rent that commenced on October 1, the tenant continues to maintain the property and cover carrying costs. We are closely monitoring their progress towards reopening the hospital but we have also begun evaluating all potential alternatives and may look to bring a clear end to the outsized distraction that this single asset has caused our company for over a year.

As noted in my comments earlier, we had only a limited number of investments meet our criteria during the quarter, with the majority of investments driven by development fundings and revenue-generating CapEx. Partnering with current tenants and developers has created additional ways to add value and continues to supplement our more traditional investment-sourcing efforts. Our team remains focused on these relationships along with establishing new partnerships further diversifying our business. Despite the challenging lending environment, we have continued to have success selling select assets that either possessed a credit and/or residual risk throughout the quarter. These sales continue to provide benefits in both mitigating risk within our current portfolio while also building dry powder to be accretively recycled when the time and investment are right.

The resiliency of our portfolio paired with our flexible and fortified balance sheet gives us great confidence as we navigate this higher-for-longer interest rate environment. We ended the quarter at 4.9 times leverage on a net debt-to-annualized adjusted EBITDAre basis, giving us ample liquidity and flexibility to deploy capital when an investment opportunity meets our criteria. I’ve said this before and I’m sure I will say it again. The decisions we made throughout 2022 and year-to-date in 2023 continue to put us in a position to make decisions that we want to not decisions that we have to, which remains an important distinction in today’s real estate market. In a higher-for-longer interest rate environment, where the outsized growth of the post-GFC years will be difficult to achieve, operational expertise, financial flexibility, solid portfolio performance and durable cash flows will be key to success.

And you have seen all four of those things from BNL throughout this year, and you will continue to heading into 2024. With that, I’ll turn the call over to Ryan, who will provide an update on our portfolio.

Ryan Albano : Thanks, John. And thank you all for joining us today. As John noted, our efforts in disposing of select assets that either possessed a credit or residual risk remained successful throughout the quarter. We sold two properties for gross proceeds of $62.3 million at a weighted average cash cap rate of 6.2%. Year-to-date inclusive of asset sales closed since quarter end, we have sold 11 properties for gross proceeds of $189.1 million at a weighted average cash cap rate of 6% on tenanted properties. We intend to continue to opportunistically execute on asset sales in the fourth quarter and into 2024. On an external growth front, price discovery in the transaction market persists. The upward trajectory of treasury yields continue to influence the capital allocation decisions of buyers at a more accelerated pace than the price expectations of sellers, leading to widening of bid-ask spreads and an overall decline of the transaction volume in the broader market.

As John highlighted, we remain focused in our efforts of sourcing the right investments and highly selective in the pursuit of opportunities as the market continues its price discovery. Our investment activity during the quarter consisted entirely of fundings related to UNFI and incremental revenue-generating CapEx. UNFI our previously announced $204.8 million build-to-suit transaction remains on track to open in the third quarter of 2024 with rent commencing no later than October of next year. Year-to-date, we have funded approximately $58.4 million and expect to fund an additional $37.5 million throughout the remainder of the year. We will continue to look at similar opportunities to partner with developers in this capital-constrained environment, while remaining highly selective and cautious as the macro environment evolves.

From a watch list standpoint similar to last quarter, we still do not see any notable overarching thematic trends across our portfolio. Specific assets such as Red Lobster, Carvana and Green Valley medical center remain a key focus. While we recognize that Red Lobster continues to evaluate ways to improve the company’s overall operating performance, site-level performance across our sites continues to improve. We remain focused on these assets. And we’ll look to confirm these trends over the next several quarters beginning with Thai Union’s third quarter results, which will be released next week and through ongoing corporate and site-level financial reporting. As for Carvana, we remain confident in our investment’s defensive positioning driven by both the mission-critical nature of our industrial sites, as well as the longer-term fundamentals in a submarket in which they are located.

As we highlighted last quarter, we are encouraged by the steps they took during the second quarter to increase the company’s financial flexibility and its planned path forward. With that, I’ll turn the call over to Kevin for commentary on our financial results for the quarter.

Kevin Fennell : Thank you, Ryan. Turning to our financial results. During the quarter, we generated AFFO of $70 million, or $0.36 per share, an increase of 1.3% in per share results quarter-over-quarter. Results were largely driven by same-store portfolio growth and incremental asset recycling in the first half of the year. Additionally, we incurred $7.9 million of cash G&A, which tracks slightly better than planned. We once again ended the quarter in a strong and flexible financial position despite no capital markets activity. Our success in disposing off selective assets allowed us to further reduce the balance on our revolver by $49 million in the quarter, resulting in more than $925 million of remaining capacity. From a leverage perspective, John mentioned we ended the quarter at 4.9 times down slightly from five times at the end of last quarter.

Given the current market dynamics, it is worth reminding everyone again that our mostly fixed-rate debt capital structure has insulated us from the surge in interest rates and the higher-for-longer expectations. At our quarterly meeting, our Board of Directors approved a $0.285 dividend per common share and OP unit. This is a 1.8% increase compared to last quarter and a 3.6% increase over the dividend declared in the fourth quarter of 2022. This quarter’s increase marks our sixth semiannual dividend increase since our IPO and is payable to holders as of December 29, 2023 on or before January 12, 2024. The dividend remains well covered and aligns with our targeted AFFO payout ratio in the mid to high-70% range and represents an attractive dividend yield relative to many of our peers.

Finally, we are maintaining our 2023 per share guidance today with an AFFO range of $1.40 to $1.42 per share. We’ve been navigating this year with a focus on strong operating performance and self-financing our capital deployment. And as John alluded to in his comments, we are revising our investment volume from between $300 million and $500 million to up to $250 million for the full year 2023. As Ryan talked about our success on the disposition front, we are also revising our total disposition volume from between $150 million and $200 million to approximately $200 million. Finally, G&A has been well controlled throughout the year and as a result, we are revising cash G&A from between $32 million and $34 million to between $31 million and $33 million.

Please reference last night’s earnings release for additional detail. And we will now open the call up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Mitch Germain with JMP Securities. Your line is now open.

Mitch Germain: Thanks for taking my questions. I appreciate it guys. Nice quarter. This is the second quarter in a row where we’ve seen a bit more of industrial on the disposition front. And I’m curious. Is it — I know that you guys have talked about specific assets and what the requirements are for you to sell, but is it also a little bit where the demand is in the market for sales?

John Moragne: Yeah. It’s a little Column A, a little Column B. Thanks for joining, Mitch. We certainly have continued our trend this year of looking at dispositions where we continue to have either credit or lease rollover risk. And so we’re looking to do risk mitigation at the same time that we’re trying to generate proceeds. And to hit the old cliché in many cases real estate is a local game. And so when we’re looking at where we have an opportunity to sell something particularly when more than 50% of our portfolio is made up of industrial assets there’s going to be some industrial assets that make their way into it. There still continue to be some good demand for those assets. And where we’ve got some concerns we’re happy to move some of those along.

Mitch Germain: Great. And John the runway, so if I think about obviously you guys have a fantastic balance sheet lots of liquidity, but if I’m thinking about your funding growth heading into 4Q and 2024, how much of a — you still have a pretty decent runway in terms of the ability to sell properties in this market?

John Moragne: Yeah. Yeah. We feel pretty confident about it. Our current view — and you can call it conservative but our view is that 2024 is going to look a lot like 2023. We’re not anticipating that the equity market is going to turn our way where we’re going to be raising significant amounts of equity capital if at all, so we’ll continue to look to self-fund and control what we can control. And so we’ve got an ample pipeline of opportunities that we’re evaluating on the disposition front, a handful of the things that are in the same vein that we looked at this year looking at some incremental reductions in health care exposure. And so we’ll continue to do that and prepare ourselves for another run in 2024 like we did for 2023.

Mitch Germain: Got you. It seems like you’ve got some frustration regarding Green Valley. Where do we hit a certain head where you start to evaluate alternatives there?

John Moragne: We’re already there. Green Valley as I said in my prepared remarks has been the single largest distraction that we’ve had as a company over the last year. Where we stand today we have 800 properties. And the large majority of my time and almost every conversation I’ve had externally has been focused on one of them so we have been absolutely hopeful and supportive of our operator and trying to get them up and running. We will continue to do that and — but at the same time this has been an outsized distraction. It’s 0.8% of our ABR so it’s immaterial overall. We did not include any rent in our 2023 guide. We will not be including any rent in our 2024 guide so it doesn’t have a material impact on how we’re thinking about financial results for this year or for next year. And it’s time to look at all the options we have to clean that up if we can.

Mitch Germain: Is it a labor issue?