2023-05-15 08:27:43 ET
Summary
- BNL is a diversified net lease REIT similar to WPC.
- Its operational metrics are stellar, but given its very short track record, there are risks to consider.
- I present my thesis for the company.
Recently I started looking more into investing into net lease REITs, for the simple reason that I believe they will do well in most scenarios that could be ahead of us. If we have a soft landing and rates decrease, prices should go up, given the long duration of these assets. If we have a hard landing and rates decrease, then these are probably some of the safest investments you can make and with a well diversified and crisis-resistant tenant mix, you can continue to count on the 5% or so dividend and ride things out. Finally, if inflation and rates stay high, the REIT will be able to raise rents and depending on the proportion of near term lease expiries vs debt maturities, some could even benefit from the environment. Any way you look at it, I don’t see a scenario in which net lease REITs would suffer, of course provided we pick the right ones. A couple days ago I wrote an article on NNN REIT which is of the safest and most established net lease REITs out there. Today I want to have a look at a younger and less established REIT, but one that seems really promising for a number of reasons – Broadstone Net Lease ( BNL ).
BNL is a new company, which only went public in 2020 and owns and operates just over 800 properties across the US and Canada (but Canada only accounts for a handful of properties). This means that the company only has a couple of properties in each state which can be quite ineffective. Combined with the fact that the company is spread across multiple industries, a bit like W. P. Carey ( WPC ), it feels a bit like the company tries to be a jack of all trades, though management is obviously selling this as diversification. In terms of exact exposure, industrial properties account for 51% of total NOI, followed by healthcare at 17%, restaurants at 13% and retail at 12%. Office which has been very unpopular lately only accounts for 7% of total NOI. With over 200 tenants and no single tenant bigger than 4%, the tenant mix is fairly nice.
This, combined with a very young age of the portfolio has enabled the company to retain a very high occupancy (99.4%) with 100% rent collections. Things are great for BNL right now, but I want to point out one thing. From my research, it seems that occupancy is always high for new buildings, but problems start to arise as properties age and major tenants don’t renew their leases, but rather move into other new properties. Afterall, that’s why the tenants rent rather than own. This represents a risk to the company, but luckily with very long leases averaging almost 11 years, I don’t see this as an immediate threat. With such long leases, it’s important to have built-in rent increase clauses, because a renewal when the company can increase its rent as much as it wants only happens so often. Luckily, BNL is pretty strong on this front too. They have 2% average rent increases build into 85% of their lease with the rest being CPI-related. This is especially powerful in times of low inflation, but even now that inflation is stubbornly high it gives investors at least some piece of mind.
So on an operational basis, the company is doing very well. From a liquidity standpoint, the situation is also pretty good. This is a BBB rated company with no debt maturities until 2026 and a vast majority of their debt (90%) fixed. This means that there will likely be no high interest rate induced surprises in the coming years. Combined with industry leading lease terms, this results in very visible earnings.
The company has done well since it went public a couple years ago which is why last year alone they increased the dividend twice. Currently, the stock yields nearly 7% which is very high in comparison to most other net lease REITs that tend to average around 5%. Not only is the dividend high, but it’s slightly better covered than WPC’s (78% payout ratio vs 82% for WPC). A dividend at this level plus a 2% FFO growth or so which management guides towards already gives us a total expected return of around 9% before considering any multiple expansion.
Of course, to generate alpha most investors are looking for double digit returns. Currently, BNL trades at 11.5x forward FFO. That’s below WPC’s multiple of nearly 14x and NNN’s multiple of 13.5x, but frankly both companies deserve a premium since they’re more established players with larger portfolios and a longer track record. With that said, I don’t think there is a positive risk adjusted return to be expected from multiple expansion vs peers. That’s why I rate BNL as HOLD for now. I like the direction is going but want to wait for a couple more quarters to get a feel for how management is doing, especially because this is a very young company.
For further details see:
Broadstone Net Lease: Good On All Levels, But Unproven