2023-03-09 03:57:35 ET
Summary
- Broadstone Net Lease operates a portfolio of primarily single-tenant properties net leased to a diversified tenant base.
- In recent periods, the company has made significant strides in acquiring properties in more favored industries, such as industrials.
- While the company remains at the mercy of the transactional markets, they are nimbly navigating through the challenging environment.
- At their current trading multiple, shares offer prospective investors modest upside potential in addition to an attractively yielding dividend payout.
Broadstone Net Lease ( BNL ) owns a portfolio of primarily single-tenant properties that are net leased on a long-term basis to a diversified tenant base.
Their property types are weighted most heavily to Industrials. These classes of properties currently account for 51% of their annualized base rent (“ABR”). Healthcare, Restaurants, Retail, and, to a lesser extent, Offices, then represent the remaining share of ABR.
Though the stock is up about 7.5% YTD, they are still down over 17% over the past year. In addition, shares are currently commanding a discounted multiple of about 12.5x forward funds from operations (“FFO”)
For investors, an investment in BNL provides an attractive dividend yield, in addition to upside potential at a reasonable level of risk.
Recent Results and Current Portfolio Metrics
BNL generated adjusted FFO of $1.40/share for the full 2022 fiscal year. This represents 6.9% YOY growth from 2021 due in part to essentially full cash collections and occupancy levels of 99.9% and 99.4%, respectively. In addition, they realized the accretive effects of over +$900M in investments during the year.
Looking ahead, management is guiding for adjusted FFO to land in a range of $1.40 to $1.42/share. This would imply growth of 1.4% at the midpoint of the range. The lower growth is due in part to a more challenging comparable environment to a strong fiscal 2022 and a more conservative outlook on acquisitions, which is expected to be just +$400M at the midpoint of their stated range.
Overall, the portfolio metrics remained largely status quo in relation to the three prior quarters in 2022, as well as at year end in 2021. Their top tenant concentration, however, did tick about 200 basis points (“bps”) higher. And their exposure to investment grade tenancy did trend lower during the quarter. The percentage of their total portfolio on master leases is now also over 40%.
Q4FY22 Investor Supplement - Summary Of Key Portfolio Metrics By Quarter
During the fourth quarter, BNL acquired 17 properties for a total acquisition price of about +$300M and an average cash cap rate of 6.7%. This is up 100bps from the average cap rates in Q1.
Q4FY22 Investor Supplement - Acquisition Summary By Quarter
It’s also worth noting that in Q1, 87% of the ABR on their acquisition volume came from restaurants and retail assets. Yet at year end, about 70% of their total investment activity was in industrial assets.
Q4FY22 Investor Supplement - Acquisition Summary By Property Type
During the quarter, BNL also acquired seven mission critical industrial facilities and leased them back to a large food manufacturer, Roskam Baking Company, which is now also their single largest tenant, at 4% of ABR.
Q4FY22 Investor Supplement - Summary Of Top 10 Tenants
In addition to being active in acquisitions, the company also sold three properties during the quarter for total net proceeds of +$39.2M. This came at a weighted average cap rate of 5.8%. Furthermore, subsequent to year end, they also sold an office asset for nearly +$40M in proceeds, representing an exit cap rate of 6%.
Following the sale, total office exposure stands now stands at 5.9%. This is down from 6.5% at the end of fiscal 2022.
The Bull View
BNL’s total portfolio is diverse , with over 200 tenants and brands operating in 55 industries. Leased occupancy within this portfolio currently stands at 99.4%, and it has consistently remained at these levels, even through the worst months of the COVID-19 pandemic in 2020. The full occupancy levels are complemented by full collection rates of 99.9%.
Q4FY22 Investor Supplement - Historical Occupancy Data
BNL has also proved nimble in pivoting their portfolio to more favored industries. They’ve reduced their office exposure through dispositions and recycled the proceeds into more accretive investments. Their industrial exposure, for example, is currently 51%, and about 70% of their total acquisitions in 2022 were attributable to this asset class. This came even as a greater share of their volume was directed towards restaurants and retail assets earlier in the year.
In addition to healthy portfolio metrics, BNL also maintains an investment grade balance sheet, with significant available liquidity. At year end, they had about +$825M in liquidity and a total leverage profile of 5.2x EBITDA, which is consistent with prior periods, despite an uptick in acquisition volume. Furthermore, they have a favorable debt stack, with no significant maturities until 2026, at the earliest.
The Bear View
The weighted average lease term (“WALT”) in BNL’s portfolio is almost 11 years . And looking ahead, less than 5% of total ABR is expiring each year through 2025.
While the limited expirations do provide stability to the overall portfolio and durability to the reoccurring cash flows, it inhibits BNL from capitalizing on attractive mark-up opportunities. Pure-play industrial REITs, for example, are realizing rent spreads well in excess of 20% on their renewals. This compares to an average annual escalation of just 2% in BNL’s portfolio.
Peak occupancy levels further constrain BNL’s internal growth opportunities. As such, like other industry participants, BNL remains at the mercy of external transactional markets. To date, this hasn’t limited the company from achieving their goals. In 2022, however, increased hesitancy in the second half of the year resulted in full year investment activity just above the low end of their guidance range.
And looking ahead, management is seeing just +$500M in acquisitions in 2023 at the top end of the range. This would be their second lowest volume since 2015, ahead of only 2020, where they were effectively on the sidelines.
February 2023 Investor Presentation - Acquisition Summary By Year
A slower pace of acquisitions would then place greater pressure on their existing properties to uphold current performance. While that isn’t a significant concern, the restaurant industry still represents their highest share of overall ABR, even if their property types are weighted more heavily to industrials. This exposes them to heightened risk if certain operators become troubled or more troubled, in the case of Red Lobster.
Q4FY22 Investor Supplement - Partial Summary Of Top Industries Served
The Bottom Line
Little can be said about BNL’s portfolio metrics that hasn’t already been said before. This is simply due to the outstanding nature of their reported data. Occupancy and rent collections, for example, are just shy of 100%. Their tenant base also remains well diversified across multiple industries.
These characteristics provide predictability to their operations. For investors seeking low volatility in an otherwise frenetic trading environment, they are bound to find it in BNL. Shares, after all, trade at a spread of less than $10 from their 52-week endpoints.
Their operations, however, are not without risk. A slowing transactional environment weighs more heavily due to the company’s dependence on it for growth. In addition, concentration has ticked up in recent periods, both from a tenant perspective and from the viewpoint of their master leases. The loss of a key tenant could, therefore, have more concerning ramifications.
These risks are offset by the company’s current trading multiple, which stands at just 12.5x forward FFO. Others within the sector trade a few turns higher than that. In addition, the stock comes paired with an attractive dividend payout that is currently yielding nearly 6.4%. At a forward payout ratio of just 80%, investors could also take comfort in its probable continuity.
At $20/share, BNL stock would trade just above 14x forward earnings, which is still less than their peer set. And this would imply upside potential of over 15% from current trading levels. For investors seeking an alternative to suddenly attractive risk-free Treasury’s, BNL offers an adequate value proposition.
For further details see:
Broadstone Net Lease: Over 6% Dividend Yield With Modest Share Price Upside Potential