NYSE:BNL Broadstone Net Lease Q2 2024 Earnings Report $16.03 -0.06 (-0.39%) As of 12:47 PM Eastern This is a fair market value price provided by Polygon.io. Learn more. Earnings HistoryForecast Broadstone Net Lease EPS ResultsActual EPS$0.19Consensus EPS $0.34Beat/MissMissed by -$0.15One Year Ago EPS$0.35Broadstone Net Lease Revenue ResultsActual Revenue$105.91 millionExpected Revenue$105.95 millionBeat/MissMissed by -$40.00 thousandYoY Revenue GrowthN/ABroadstone Net Lease Announcement DetailsQuarterQ2 2024Date7/30/2024TimeAfter Market ClosesConference Call DateWednesday, July 31, 2024Conference Call Time11:00AM ETUpcoming EarningsBroadstone Net Lease's Q1 2025 earnings is scheduled for Wednesday, April 30, 2025, with a conference call scheduled on Thursday, May 1, 2025 at 11:00 AM ET. Check back for transcripts, audio, and key financial metrics as they become available.Conference Call ResourcesConference Call AudioConference Call TranscriptPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfilePowered by Broadstone Net Lease Q2 2024 Earnings Call TranscriptProvided by QuartrJuly 31, 2024 ShareLink copied to clipboard.There are 8 speakers on the call. Operator00:00:00Hello, and welcome to Prostel Netlist Second Quarter 2024 Earnings Conference Call. My name is Kiki, and I will be your operator today. Please note that today's call is being recorded. I will now turn the call over to Brent Madel, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead. Speaker 100:00:22Thank you, everyone, for joining us today for Broadstone Net Lease's Q2 2024 Earnings Call. On today's call, you will hear prepared remarks from Chief Executive Officer, John Marana President and Chief Operating Officer, Ryan Albino and Chief Financial Officer, Kevin Funnel. All three will be available for the Q and A portion of this call. As a reminder, the following discussion and answers to your questions contain forward looking statements, which are subject to risks and uncertainties that can 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 ks for the year ended December 31, 2023, for a more detailed discussion of the risk factors that may cause such differences. Speaker 100:01:11Any forward looking statements provided during this conference call are only made at the date of this call. With that, I'll turn the call over to John. Speaker 200:01:19Thank you, Brent, and good morning, everyone. I am pleased to report another strong quarter of results. We are on the cusp of substantially completing our healthcare portfolio simplification strategy, having fully redeployed those proceeds into closed and committed investments, and are continuing to build a strong pipeline focused on our core building blocks of growth, seeing incremental revenue generating capital expenditures with our existing tenants and build to suit funding opportunities with our development partners that supplement our traditional net lease acquisition pipeline. I'm exceptionally proud that we were able to successfully navigate that process at the same time we redeployed the proceeds into attractive investment opportunities. We are incredibly proud of the progress we've made on our strategic objectives for 2024. Speaker 200:02:01While we recognize that the current outlook for interest rates has provided a tailwind for the broader net lease space, We believe investors are beginning to reward our consistent and successful execution on our strategic initiatives. Our shares are now trading at or around an 18 month high, and we believe there is still plenty of room for continued multiple expansion as we fulfill our growth objectives. As we previously reported and discussed on last quarter's call, the majority of the $217,300,000 of cash flowing investments we made in Q2 were closed early in the quarter and sourced through direct relationships. Throughout the quarter, we continued to creatively source investment opportunities that fit within our buy box, notably including build to suit and forward commitments through existing relationships. We believe these opportunities are important part of our core building blocks and a key differentiator in our mission to drive long term sustainable growth. Speaker 200:02:52As we move into the back half of the year, we are maintaining our AFFO guidance range of $1.41 to $1.43 per share and slightly adjusting our investment disposition and cash G and A ranges. Starting this year with a view that a neutral AFFO per share result might be our best case scenario as a result of our decision to strategically exit clinical health care, I am pleased that our execution this year will result in modest growth for 2024 and, more importantly, will set us up well for 20252026. Before I walk you through details on our growing investment pipeline, which now encompasses nearly $408,600,000 of new investments under control and commitments to fund developments, I would like to further highlight the significant progress we've achieved this year on our clinical healthcare simplification strategy. Our team executed decisively early in the Q1 and through the first half of the year, completing the sale of 38 assets for $262,000,000 This momentum continued early in the Q3 with a third party buyer completing due diligence on 15 additional assets, posing on 5 of them in early July with the remaining 10 assets scheduled to close in October. These successful transactions will bring our total clinical healthcare dispositions to $342,500,000 year to date at a weighted average cash cap rate of 7.9%. Speaker 200:04:09Combined with our redeployment efforts and incremental investment activity, we anticipate this will reduce our healthcare exposure to approximately 11% of our total ABR at the end of 2024. While we continue to engage in negotiations and marketing for our remaining clinically oriented healthcare assets, we anticipate these sales will follow a more typical asset management approach and take time to achieve optimal disposition outcomes. With a substantial majority of our clinical healthcare simplification strategy successfully behind us, I'm excited to look ahead and walk you through our evolving investment pipeline that we announced last night, including a number of highly compelling build to suit transactions we have been pursuing as part of our overall mission to drive long term sustainable growth. Of the $408,600,000 in investments under control and commitments to fund developments, approximately $307,000,000 are brand new specialized industrial and QSR build to suit assets, including food distribution, cold storage and manufacturing properties delivering in 20252026. These investments represent unique opportunities for us to capture higher going in cash cap rates and straight line yields compared to much of the regular way product that we are seeing in the traditional acquisition market. Speaker 200:05:20We are achieving these attractive yields not because we are running up the risk spectrum, but because we are creatively sourcing and structuring investment opportunities with our developer partners. Once construction is completed and these assets are stabilized, we believe they would trade up to 150 to 200 basis points tighter than where we executed. We are not only generating attractive yields on high quality build to suits, we are also creating long term value and NAV accretion. Ryan will go into more detail on some of the specifics around our current pipeline and opportunity set. We view these development opportunities as an increasingly important part of our core building blocks to sustainable long term growth, which include best in class fixed rent escalations, revenue generating CapEx investments in our existing tenants and assets, development funding opportunities and traditional external acquisitions. Speaker 200:06:09While the commercial real estate and lending environment has certainly played a role in generating these opportunities, we believe there's a long term role for Broadstone Net Lease as the funding partner of choice for our development partners, even when interest rates eventually decline. The regular way transaction market is beginning to show increased activity as we get into the back half of the year, though absolute levels remain compressed and much of what we are seeing continues to price at levels we believe misrepresent the underlying risks. We remain highly selective and are excited about the $69,300,000 of investments we have under control and expect to close in the Q3. The combination of our building blocks will naturally vary based on market conditions as is the case today with more muted volumes for traditional sale leaseback and assumption deals. Our ability to rely on more than channel and allocate capital to the areas where we see the best risk adjusted return opportunities provides a compelling path to near and medium term value creation and earnings growth. Speaker 200:07:04Turning to our portfolio. Through dispositions and ongoing investment opportunities, our portfolio composition is becoming gradually more weighted towards our industrial and defensive retail and restaurant sectors. These assets continue to perform well during the quarter as evidenced by 99.8% rent collections excluding Green Valley and 99.3 percent occupancy as of June 30, 2024. While our overall operating results remain strong, we are seeing incremental pockets of credit risk as the broader impact from the duration of higher interest rates appears to be having an effect on consumer centric industries and entities with less flexible capital structures. We remain vigilant in our tenant monitoring efforts and maintain great confidence in our portfolio due to its diversified construction, which limits the impact of any potential individual credit event and our proven ability to manage through any such situation that may arise. Speaker 200:07:52With that, I'll turn the call over to Ryan, who will provide additional details on our transaction efforts, our building blocks for growth and portfolio updates. Speaker 300:08:01Thanks, John, and thank you all for joining us today. Before turning to routine portfolio updates, we wanted to expand on our growing pipeline of build to suit opportunities. As John mentioned, we have currently committed to fund 7 opportunities for a total estimated cost to build of approximately $307,000,000 While still subject to final structuring and relevant permitting approvals, we anticipate funding of these developments will have varying construction start dates through the end of 2024, anticipate rent commencement dates that will be phased in over the period of Q1 2025 and Q2 of 2026. Outside of these seven opportunities, there are more than $400,000,000 of additional build to suit investments that we are actively evaluating as we balance this robust pipeline alongside other traditional acquisition activity. These opportunities typically represent initial cash yields in the mid-7s to low-8s and taken together with long lease terms and rent escalations between 2% 4% translate into straight line yields north of 9%. Speaker 300:09:18We believe these built to suit investment opportunities are highly compelling with newly constructed buildings, typically well located assets and strong tenant credit with yields that are superior to most of the regular way transactions that we have evaluated since the interest rate hiking cycle began. Now turning our attention back to routine updates. As John mentioned, during the first half of the year, we were able to execute on key pieces of our healthcare portfolio simplification strategy through the completion of a portfolio sale during the Q1, comprised of 37 assets for $251,700,000 at a 7.9% cap rate. Further, shortly after the quarter, we sold the 1st tranche of a 2 phase 15 properties healthcare portfolio for just inside an 8% cap rate. And the next tranche is scheduled to close in early October. Speaker 300:10:17As we step through this disposition effort and begin focusing on the remaining properties identified, we anticipate various transaction timelines that comfortably extend into 2025 given the need to address some combination of shorter lease duration, space utilization rates and elevated credit risk. As we have communicated in the past, we are intently focused on the tactical execution of our healthcare property sales and maximizing value for our shareholders. In addition to executing the portfolio sale during the Q2, we sold 3 other properties on an individual basis, including 1 healthcare property, 1 industrial property and 1 small vacant office property for $24,400,000 representing a 7.3% cap rate on tenanted properties. Alongside our disposition efforts, we executed on a strong set of investment opportunities, closing $247,800,000 of investments. This investment activity included 100 and $65,100,000 of acquisitions with a corresponding cap rate of 7.3 percent, an additional 30 $500,000 of funding associated with our UNFI build to suit investment and $52,200,000 related to the previously discussed transitional capital. Speaker 300:11:40As part of our investment activity during the quarter, we are excited to add Jelly Belly Candy Company, a newly acquired subsidiary of Ferrara Candy Company to our top 20 tenant roster. As a quick update on our UNFI build to suit investment, we have funded approximately $161,300,000 through June 30, and the project remains on track for delivery and rent commencement no later than October of this year. As we look towards the earlier stages of our investment pipeline, we continue to source opportunities across all of our core building blocks and generally favor investments where we can provide a holistic capital solution where price is not the sole variable of importance to the seller, as evidenced by our transitional capital investment and our growing pipeline of build to suit investments. Now, I'll briefly shift our focus towards the strength of our in place portfolio. As we progress through the Q2, trends remain largely unchanged. Speaker 300:12:40Our high degree of rent collections for the quarter continue to provide confidence in the overall strength of our portfolio. While we remain confident that our portfolio will continue to deliver strong performance and generate durable and predictable cash flows, we remain cautious of the macroeconomic backdrop, which includes continued caution on industries that are sensitive to discretionary consumer spending. Our watch list has remained fairly consistent so far this year and consumer centric tenants as well as some of our remaining clinically oriented healthcare properties remain in focus. As we've highlighted in previous quarters, Red Lobster, which represents 1.6% of ABR remains on our watch list. As reported in recent headlines, the company appears to be heading towards a resolution of its Chapter 11 proceedings in the second half of the year. Speaker 300:13:37Our 18 master lease properties remain open and we continue to work towards a resolution alongside the proceedings and will provide updates as available. With recurring negative headlines related to the home furnishing space, we continue to monitor the sector specifically including our tenant at home, which represents approximately 1% of ABR. We own a distribution center in Plano, Texas and a strong retail site in Raleigh, North Carolina, both of which we expect would be assumed through any potential reorganization event. Further, both sites are well located in strong markets and we believe they would garner significant interest from alternative users if we were ever to get them back. Lastly, we only had 3 vacant properties as of June 30, including 2 for which we were actively negotiating leases with new tenants. Speaker 300:14:35We anticipate these leases to commence and begin paying rent late this year or early next year, resulting in minimal downtime at the properties. In summary, while the broader market environment for regular way net lease acquisitions that align with our targeted investment criteria remains challenging, We continue to demonstrate our differentiated approach to capital allocation, focusing on the pursuit and execution of investments that enhance the value of our highly diversified portfolio, while simultaneously employing an active portfolio management strategy to drive strong operating performance. With that, I'll turn the call over to Kevin for him to provide an update on our financial results for the quarter. Speaker 400:15:21Thank you, Ryan. During the quarter, we generated AFFO of $70,000,000 or $0.36 per share, an increase of 2.9% in per share results year over year. Results were largely driven by lower interest expense and partially offset by lower lease revenues, both as a result of our healthcare simplification strategy. As John and Ryan mentioned, our portfolio continues to show resiliency, realizing 33 basis points of bad debt year to date, excluding Green Valley. Cash G and A continues to be well controlled, incurring $7,800,000 during the quarter or a 1.4% decrease year over year. Speaker 400:15:58As a result, we are lowering our G and A guidance from $32,000,000 to $34,000,000 to $31,500,000 to $33,500,000 Once again, we ended the quarter in a strong and flexible financial position with leverage of 5.1x net debt, up slightly from 4.8x at the end of the Q1. Our net debt on a pro form a basis for our UNFI build to suit was 4.9x, which combined with approximately $920,000,000 of revolver availability gives us ample capacity as we evaluate incremental investment opportunities. To reduce rate uncertainty through 2025 and mitigate some of our near term rolling swap maturities, we executed $460,000,000 in forward starting sulfur swaps during the quarter. These new swaps are scheduled in our supplemental and begin in March of next year with maturity spread across 2,030, locking in a weighted average sulfur rate of 3.7%. At our quarterly meeting, our Board of Directors maintained our $0.29 dividend per common share in OP unit, payable to holders of record as of September 30, 2024 on or before October 15, 2024. Speaker 400:17:08Given our successful redeployment efforts, our dividend remains well covered and still represents an attractive relative yield in this market environment. Lastly, we are reaffirming our AFFO guidance range of $1.41 to $1.43 per share. In addition to the cash G and A reduction I previously mentioned, we are raising the low end of investment guidance from $350,000,000 to $400,000,000 and tightening our dispositions range to $350,000,000 to $450,000,000 Please reference last night's earnings release for additional details. And with that, we will now open the call for questions. Operator00:17:47Thank you. The first question is from Eric Borton from BMO Capital Markets. Your line is now open. Please go ahead. Speaker 500:18:15Hey, good morning out there. John, you've certainly made some solid progress sourcing a number of investments through multiple investment verticals. Just curious, not asking for guidance here, but how does the next 12 months play out for you in terms of the mix of development opportunities, pure play acquisitions and any other things that may be developing in the pipeline? Speaker 200:18:42Yes. Thanks, Eric. So it's a balance here. With the $307,000,000 and the 7 development deals that we have in the active pipeline, plus another $400,000,000 or so in that active prospect bucket, we've got a lot of really great opportunities in the development build to suit that we're very excited about As one of the core building blocks that we have for providing sustainable growth, we're very excited that we're laddering into this development process in the way that we had planned and have talked about with investors starting earlier this year. So the strategy is playing out well, but there's still a balance. Speaker 200:19:14We've got $69,300,000 of regular way acquisitions in the pipeline today. We still continue to be a little disappointed in the volumes that are out there as well as what we're seeing in terms of the quality of the product and where pricing is landing. But if you've got a view towards having a little bit of relief on the interest rate side, depending on how the Fed meeting goes today and over the course of the next 3 to 12 months or so, I think you start to see a little bit more regular way acquisition volume. The great thing with where we sit today from a balance sheet standpoint is that we're at 4.9% on a pro form a basis. We have evaluated where we would land over the course of that development pipeline and we stay comfortably below 6% throughout it. Speaker 200:19:50And we've got ample liquidity as well as ample room to be able to do regular way acquisitions. So our goal is to be able to balance those things together and give the type of attractive growth that we know our shareholders are expecting. Speaker 500:20:03I appreciate that. And then on the capital allocation side, just with shares up 23% over the last 3 months, has your thoughts on capital outlay changed? Are you willing to issue equity here today? Or will the majority of future investments be funded via the capital recycling program and potentially on a leverage neutral basis? Speaker 200:20:28Yes. So the equity is certainly more constructive today than it was 3 months ago. That being said, we don't need any right now. We've got ample liquidity. Our leverage is well south of where we are looking to operate on a sustained basis. Speaker 200:20:40We've got pretty great availability on our revolver today. We've also been very successful in the last 18, 24 months on capital recycling between the $200,000,000 we did last year at a 6 cap and the clinical healthcare assets we've been selling this year as well as a handful of things that we've identified that we'd be able to sell if we needed to. We're very comfortable continuing to fund our growth through recycling and through dispositions if the cost of capital that we're looking at in the equity and debt markets isn't attractive to us. So opportunity set of course plays a role in this as well and we'll balance all those things together, but certainly more constructive, but not where we want it to be, and it's something that we don't need right now either. Speaker 500:21:20And last one for me, just on the new development opportunities. Ryan, sorry if I missed this, but did you say the cash yields you're targeting are in the mid-7s up into the low-8s? Speaker 200:21:31Yes. So if you're looking at the development opportunities right now, we've got upfront cash yields in the mid-7s. And then when you straight line it over the term of the lease that we're looking at, you're in that mid-8s, sometimes low-9s. So very attractive relative to what we're seeing in the regular waste space, which is still sort of settling in that low-7s on an upfront cash yield basis getting into the 8s on a straight line. Speaker 500:21:54Thank you. Appreciate the time. Speaker 300:21:57Thank you. Operator00:22:00Thank you. The next question is from Appur Rana from KeyBanc Capital Markets. The line is now open. Please go ahead. Speaker 600:22:10Great. Thank you for taking my question. You mentioned the development funding commitments of $339,000,000 Any additional color you can provide on those commitments? Speaker 200:22:21Yes. So we've got UNFI is part of that and we got about maybe another $32,000,000 on UNFI. We're very excited about the progress there. Looking for that to come online late Q3, rent commencement no later than mid October. We got about $32,000,000 or so left, but the project we're expecting to come in slightly under budget and slightly ahead of schedule. Speaker 200:22:39So that feels really good. Of the $307,000,000 in the build to suits for new ones, there are 7 different opportunities that range from things as small as $2,000,000 in the QSR space to as large as $170,000,000 in distribution and manufacturing spaces. These are all from new and existing development relationships. So we're expanding the roster of folks that we're working with and we feel really good about the active prospects we have, as Ryan mentioned, with another $400,000,000 or so that we're actively evaluating. Speaker 600:23:06Great. That was helpful. And then in terms of the healthcare simplification strategy, so it looks like you completed about 65%. On the remaining 35%, are those the one offs that you had mentioned in prior calls that will take some time to kind of get off your portfolio? Speaker 200:23:25Yes. Those are all the onesie twosies that we'll work through in a traditional asset management approach. There are some in there that have great value that we're just making sure that we're getting the right value out of, and there's a handful that will require maybe a lease extension, some tenant improvement, some work on our end to make sure that we can get the right value out of those. So the timeline on those will comfortably extend into 2025. Speaker 600:23:46Okay, got it. And then lastly on maybe cap rates here, it seems like maybe where do you think 3Q kind of trends from here and any early indication on where maybe 4Q might be headed? Speaker 200:24:05Yes. I mean, we've seen cap rates sort of plateau this year. If you look at like sort of mid market industrial, that's been really hot this year, as hot as we saw it in 2022. You're getting 20 bids on any particular acquisition that's out there. You're starting to see those creep down past the low 7s into the high 6s. Speaker 200:24:24We're still solidly in the sevens as we think about capital allocation. So we're looking for the right opportunity. As you heard Ryan say in his remarks, we're continuing to be very disciplined and focused on where we're looking to allocate capital. And if we're not seeing it in regular way deals, we're very fortunate to have multiple channels that we can allocate capital to with the build to suits where we're getting those mid-seven upfront cash rates and those cash cap rates and then the straight line yields in the mid-8s to low-9s. So our expectation is back half of the year, you're going to start to see some more product come online as there's a little bit more certainty around the interest rates. Speaker 200:24:57And hopefully, we'll see a more constructive environment in terms of pricing on a risk adjusted basis. Speaker 600:25:03All right. Great. That was helpful. Thank you. Operator00:25:08Thank you. The next question is from Caitlin Burrows from Goldman Sachs. Your line is now open. Please go ahead. Speaker 700:25:24Hi, good morning. Maybe just on the acquisition pipeline, I think you said it was about $70,000,000 Could you go through if to what extent that's a mix of like a lot of QSR type small deals versus just a couple of larger industrial or yet what that mix might be as we try to get a sense for what could ultimately close? Speaker 200:25:44Yes. So a portion of it is a retail acquisition, large single site sporty goods. And then the other is a fairly large industrial acquisition. So there's 2 deals in that pipeline. Speaker 700:25:57Got it. Okay. And then back to the build to suit topic, I think I've kind of asked this in the past, but we've heard build to suit can be difficult because it's tough to get the land. So can you just talk through again how you would do that if there's been any change in thinking? And I think you mentioned in the past that you'd be working or buying from somebody who already has the land, so you wouldn't need to like go, I guess, get approvals and source it yourself. Speaker 700:26:20But yes, is that still the case? And how do you kind of get past that hurdle of getting the land that's attractive for this user that they want? Speaker 200:26:31Yes. So that's a great question. The build to suit strategy is very different than your regular way net lease, sale leaseback and assumption process where the land is already in hand with someone else. The way that we've been thinking about our commitments to fund developments is to have the certainty around that to be able to report it out to you all. The land needs to be in hand. Speaker 200:26:50It's not necessarily in our hand yet, but we'll have an opportunity to acquire it across the over the course of the process. But the land is under control by the developer or by the tenant depending on the situation. We're in a place where we feel very comfortable that the business deals have been agreed to between the developer and their client and the relationship between us as the funding partner here. You're still in the process of negotiating final documentation, but our ability to have surety around that development pipeline starts with is the land under control because that's going to be critical to whether or not the client decides to move forward with the project. And for the $7,000,000 that we have and the $307,000,000 in that pipeline, that is the case. Speaker 700:27:29Got it. Okay. Thanks. Operator00:27:34Thank you. As we currently have no further questions, I'd like to hand over to John Morina for closing remarks. Speaker 200:27:43Thank you, Kiki, and thank you everyone for joining us today. We are incredibly excited and proud of all that we've accomplished so far this year, but we're just getting started. So we'll have more to come with our Q3 earnings call come October, November. Thank you all for joining us, and enjoy the rest of your day.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallBroadstone Net Lease Q2 202400:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsPress Release(8-K)Quarterly report(10-Q) Broadstone Net Lease Earnings HeadlinesBroadstone Net Lease, Inc. (NYSE:BNL) Receives $18.83 Average Price Target from BrokeragesApril 23 at 1:14 AM | americanbankingnews.comBroadstone Net Lease Schedules First Quarter 2025 Earnings Release and Conference CallApril 3, 2025 | finance.yahoo.comThe Crypto Market is About to Change LivesI've discovered something so significant about the 2025 crypto market that I had to put everything else aside and write a book about it. This isn't just another Bitcoin prediction – it's a complete roadmap for what I believe will be the biggest wealth-building opportunity of this decade. 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Email Address About Broadstone Net LeaseBroadstone Net Lease (NYSE:BNL) (the Corporation) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (REIT) commencing with the taxable year ended December 31, 2008. Broadstone Net Lease, LLC (the Corporation's operating company, or the OP), is the entity through which the Corporation conducts its business and owns (either directly or through subsidiaries) all of the Corporation's properties. The Corporation is the sole managing member of the OP. The membership units not owned by the Corporation are referred to as OP Units or non-controlling interests. As the Corporation conducts substantially all of its operations through the OP, it is structured as what is referred to as an umbrella partnership real estate investment trust (UPREIT). The Corporation's common stock is listed on the New York Stock Exchange under the symbol BNL.View Broadstone Net Lease ProfileRead more More Earnings Resources from MarketBeat Earnings Tools Today's Earnings Tomorrow's Earnings Next Week's Earnings Upcoming Earnings Calls Earnings Newsletter Earnings Call Transcripts Earnings Beats & Misses Corporate Guidance Earnings Screener Earnings By Country U.S. Earnings Reports Canadian Earnings Reports U.K. Earnings Reports Latest Articles Seismic Shift at Intel: Massive Layoffs Precede Crucial EarningsRocket Lab Lands New Contract, Builds Momentum Ahead of EarningsAmazon's Earnings Could Fuel a Rapid Breakout Tesla Earnings Miss, But Musk Refocuses and Bulls ReactQualcomm’s Range Narrows Ahead of Earnings as Bulls Step InWhy It May Be Time to Buy CrowdStrike Stock Heading Into EarningsCan IBM’s Q1 Earnings Spark a Breakout for the Stock? 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There are 8 speakers on the call. Operator00:00:00Hello, and welcome to Prostel Netlist Second Quarter 2024 Earnings Conference Call. My name is Kiki, and I will be your operator today. Please note that today's call is being recorded. I will now turn the call over to Brent Madel, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead. Speaker 100:00:22Thank you, everyone, for joining us today for Broadstone Net Lease's Q2 2024 Earnings Call. On today's call, you will hear prepared remarks from Chief Executive Officer, John Marana President and Chief Operating Officer, Ryan Albino and Chief Financial Officer, Kevin Funnel. All three will be available for the Q and A portion of this call. As a reminder, the following discussion and answers to your questions contain forward looking statements, which are subject to risks and uncertainties that can 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 ks for the year ended December 31, 2023, for a more detailed discussion of the risk factors that may cause such differences. Speaker 100:01:11Any forward looking statements provided during this conference call are only made at the date of this call. With that, I'll turn the call over to John. Speaker 200:01:19Thank you, Brent, and good morning, everyone. I am pleased to report another strong quarter of results. We are on the cusp of substantially completing our healthcare portfolio simplification strategy, having fully redeployed those proceeds into closed and committed investments, and are continuing to build a strong pipeline focused on our core building blocks of growth, seeing incremental revenue generating capital expenditures with our existing tenants and build to suit funding opportunities with our development partners that supplement our traditional net lease acquisition pipeline. I'm exceptionally proud that we were able to successfully navigate that process at the same time we redeployed the proceeds into attractive investment opportunities. We are incredibly proud of the progress we've made on our strategic objectives for 2024. Speaker 200:02:01While we recognize that the current outlook for interest rates has provided a tailwind for the broader net lease space, We believe investors are beginning to reward our consistent and successful execution on our strategic initiatives. Our shares are now trading at or around an 18 month high, and we believe there is still plenty of room for continued multiple expansion as we fulfill our growth objectives. As we previously reported and discussed on last quarter's call, the majority of the $217,300,000 of cash flowing investments we made in Q2 were closed early in the quarter and sourced through direct relationships. Throughout the quarter, we continued to creatively source investment opportunities that fit within our buy box, notably including build to suit and forward commitments through existing relationships. We believe these opportunities are important part of our core building blocks and a key differentiator in our mission to drive long term sustainable growth. Speaker 200:02:52As we move into the back half of the year, we are maintaining our AFFO guidance range of $1.41 to $1.43 per share and slightly adjusting our investment disposition and cash G and A ranges. Starting this year with a view that a neutral AFFO per share result might be our best case scenario as a result of our decision to strategically exit clinical health care, I am pleased that our execution this year will result in modest growth for 2024 and, more importantly, will set us up well for 20252026. Before I walk you through details on our growing investment pipeline, which now encompasses nearly $408,600,000 of new investments under control and commitments to fund developments, I would like to further highlight the significant progress we've achieved this year on our clinical healthcare simplification strategy. Our team executed decisively early in the Q1 and through the first half of the year, completing the sale of 38 assets for $262,000,000 This momentum continued early in the Q3 with a third party buyer completing due diligence on 15 additional assets, posing on 5 of them in early July with the remaining 10 assets scheduled to close in October. These successful transactions will bring our total clinical healthcare dispositions to $342,500,000 year to date at a weighted average cash cap rate of 7.9%. Speaker 200:04:09Combined with our redeployment efforts and incremental investment activity, we anticipate this will reduce our healthcare exposure to approximately 11% of our total ABR at the end of 2024. While we continue to engage in negotiations and marketing for our remaining clinically oriented healthcare assets, we anticipate these sales will follow a more typical asset management approach and take time to achieve optimal disposition outcomes. With a substantial majority of our clinical healthcare simplification strategy successfully behind us, I'm excited to look ahead and walk you through our evolving investment pipeline that we announced last night, including a number of highly compelling build to suit transactions we have been pursuing as part of our overall mission to drive long term sustainable growth. Of the $408,600,000 in investments under control and commitments to fund developments, approximately $307,000,000 are brand new specialized industrial and QSR build to suit assets, including food distribution, cold storage and manufacturing properties delivering in 20252026. These investments represent unique opportunities for us to capture higher going in cash cap rates and straight line yields compared to much of the regular way product that we are seeing in the traditional acquisition market. Speaker 200:05:20We are achieving these attractive yields not because we are running up the risk spectrum, but because we are creatively sourcing and structuring investment opportunities with our developer partners. Once construction is completed and these assets are stabilized, we believe they would trade up to 150 to 200 basis points tighter than where we executed. We are not only generating attractive yields on high quality build to suits, we are also creating long term value and NAV accretion. Ryan will go into more detail on some of the specifics around our current pipeline and opportunity set. We view these development opportunities as an increasingly important part of our core building blocks to sustainable long term growth, which include best in class fixed rent escalations, revenue generating CapEx investments in our existing tenants and assets, development funding opportunities and traditional external acquisitions. Speaker 200:06:09While the commercial real estate and lending environment has certainly played a role in generating these opportunities, we believe there's a long term role for Broadstone Net Lease as the funding partner of choice for our development partners, even when interest rates eventually decline. The regular way transaction market is beginning to show increased activity as we get into the back half of the year, though absolute levels remain compressed and much of what we are seeing continues to price at levels we believe misrepresent the underlying risks. We remain highly selective and are excited about the $69,300,000 of investments we have under control and expect to close in the Q3. The combination of our building blocks will naturally vary based on market conditions as is the case today with more muted volumes for traditional sale leaseback and assumption deals. Our ability to rely on more than channel and allocate capital to the areas where we see the best risk adjusted return opportunities provides a compelling path to near and medium term value creation and earnings growth. Speaker 200:07:04Turning to our portfolio. Through dispositions and ongoing investment opportunities, our portfolio composition is becoming gradually more weighted towards our industrial and defensive retail and restaurant sectors. These assets continue to perform well during the quarter as evidenced by 99.8% rent collections excluding Green Valley and 99.3 percent occupancy as of June 30, 2024. While our overall operating results remain strong, we are seeing incremental pockets of credit risk as the broader impact from the duration of higher interest rates appears to be having an effect on consumer centric industries and entities with less flexible capital structures. We remain vigilant in our tenant monitoring efforts and maintain great confidence in our portfolio due to its diversified construction, which limits the impact of any potential individual credit event and our proven ability to manage through any such situation that may arise. Speaker 200:07:52With that, I'll turn the call over to Ryan, who will provide additional details on our transaction efforts, our building blocks for growth and portfolio updates. Speaker 300:08:01Thanks, John, and thank you all for joining us today. Before turning to routine portfolio updates, we wanted to expand on our growing pipeline of build to suit opportunities. As John mentioned, we have currently committed to fund 7 opportunities for a total estimated cost to build of approximately $307,000,000 While still subject to final structuring and relevant permitting approvals, we anticipate funding of these developments will have varying construction start dates through the end of 2024, anticipate rent commencement dates that will be phased in over the period of Q1 2025 and Q2 of 2026. Outside of these seven opportunities, there are more than $400,000,000 of additional build to suit investments that we are actively evaluating as we balance this robust pipeline alongside other traditional acquisition activity. These opportunities typically represent initial cash yields in the mid-7s to low-8s and taken together with long lease terms and rent escalations between 2% 4% translate into straight line yields north of 9%. Speaker 300:09:18We believe these built to suit investment opportunities are highly compelling with newly constructed buildings, typically well located assets and strong tenant credit with yields that are superior to most of the regular way transactions that we have evaluated since the interest rate hiking cycle began. Now turning our attention back to routine updates. As John mentioned, during the first half of the year, we were able to execute on key pieces of our healthcare portfolio simplification strategy through the completion of a portfolio sale during the Q1, comprised of 37 assets for $251,700,000 at a 7.9% cap rate. Further, shortly after the quarter, we sold the 1st tranche of a 2 phase 15 properties healthcare portfolio for just inside an 8% cap rate. And the next tranche is scheduled to close in early October. Speaker 300:10:17As we step through this disposition effort and begin focusing on the remaining properties identified, we anticipate various transaction timelines that comfortably extend into 2025 given the need to address some combination of shorter lease duration, space utilization rates and elevated credit risk. As we have communicated in the past, we are intently focused on the tactical execution of our healthcare property sales and maximizing value for our shareholders. In addition to executing the portfolio sale during the Q2, we sold 3 other properties on an individual basis, including 1 healthcare property, 1 industrial property and 1 small vacant office property for $24,400,000 representing a 7.3% cap rate on tenanted properties. Alongside our disposition efforts, we executed on a strong set of investment opportunities, closing $247,800,000 of investments. This investment activity included 100 and $65,100,000 of acquisitions with a corresponding cap rate of 7.3 percent, an additional 30 $500,000 of funding associated with our UNFI build to suit investment and $52,200,000 related to the previously discussed transitional capital. Speaker 300:11:40As part of our investment activity during the quarter, we are excited to add Jelly Belly Candy Company, a newly acquired subsidiary of Ferrara Candy Company to our top 20 tenant roster. As a quick update on our UNFI build to suit investment, we have funded approximately $161,300,000 through June 30, and the project remains on track for delivery and rent commencement no later than October of this year. As we look towards the earlier stages of our investment pipeline, we continue to source opportunities across all of our core building blocks and generally favor investments where we can provide a holistic capital solution where price is not the sole variable of importance to the seller, as evidenced by our transitional capital investment and our growing pipeline of build to suit investments. Now, I'll briefly shift our focus towards the strength of our in place portfolio. As we progress through the Q2, trends remain largely unchanged. Speaker 300:12:40Our high degree of rent collections for the quarter continue to provide confidence in the overall strength of our portfolio. While we remain confident that our portfolio will continue to deliver strong performance and generate durable and predictable cash flows, we remain cautious of the macroeconomic backdrop, which includes continued caution on industries that are sensitive to discretionary consumer spending. Our watch list has remained fairly consistent so far this year and consumer centric tenants as well as some of our remaining clinically oriented healthcare properties remain in focus. As we've highlighted in previous quarters, Red Lobster, which represents 1.6% of ABR remains on our watch list. As reported in recent headlines, the company appears to be heading towards a resolution of its Chapter 11 proceedings in the second half of the year. Speaker 300:13:37Our 18 master lease properties remain open and we continue to work towards a resolution alongside the proceedings and will provide updates as available. With recurring negative headlines related to the home furnishing space, we continue to monitor the sector specifically including our tenant at home, which represents approximately 1% of ABR. We own a distribution center in Plano, Texas and a strong retail site in Raleigh, North Carolina, both of which we expect would be assumed through any potential reorganization event. Further, both sites are well located in strong markets and we believe they would garner significant interest from alternative users if we were ever to get them back. Lastly, we only had 3 vacant properties as of June 30, including 2 for which we were actively negotiating leases with new tenants. Speaker 300:14:35We anticipate these leases to commence and begin paying rent late this year or early next year, resulting in minimal downtime at the properties. In summary, while the broader market environment for regular way net lease acquisitions that align with our targeted investment criteria remains challenging, We continue to demonstrate our differentiated approach to capital allocation, focusing on the pursuit and execution of investments that enhance the value of our highly diversified portfolio, while simultaneously employing an active portfolio management strategy to drive strong operating performance. With that, I'll turn the call over to Kevin for him to provide an update on our financial results for the quarter. Speaker 400:15:21Thank you, Ryan. During the quarter, we generated AFFO of $70,000,000 or $0.36 per share, an increase of 2.9% in per share results year over year. Results were largely driven by lower interest expense and partially offset by lower lease revenues, both as a result of our healthcare simplification strategy. As John and Ryan mentioned, our portfolio continues to show resiliency, realizing 33 basis points of bad debt year to date, excluding Green Valley. Cash G and A continues to be well controlled, incurring $7,800,000 during the quarter or a 1.4% decrease year over year. Speaker 400:15:58As a result, we are lowering our G and A guidance from $32,000,000 to $34,000,000 to $31,500,000 to $33,500,000 Once again, we ended the quarter in a strong and flexible financial position with leverage of 5.1x net debt, up slightly from 4.8x at the end of the Q1. Our net debt on a pro form a basis for our UNFI build to suit was 4.9x, which combined with approximately $920,000,000 of revolver availability gives us ample capacity as we evaluate incremental investment opportunities. To reduce rate uncertainty through 2025 and mitigate some of our near term rolling swap maturities, we executed $460,000,000 in forward starting sulfur swaps during the quarter. These new swaps are scheduled in our supplemental and begin in March of next year with maturity spread across 2,030, locking in a weighted average sulfur rate of 3.7%. At our quarterly meeting, our Board of Directors maintained our $0.29 dividend per common share in OP unit, payable to holders of record as of September 30, 2024 on or before October 15, 2024. Speaker 400:17:08Given our successful redeployment efforts, our dividend remains well covered and still represents an attractive relative yield in this market environment. Lastly, we are reaffirming our AFFO guidance range of $1.41 to $1.43 per share. In addition to the cash G and A reduction I previously mentioned, we are raising the low end of investment guidance from $350,000,000 to $400,000,000 and tightening our dispositions range to $350,000,000 to $450,000,000 Please reference last night's earnings release for additional details. And with that, we will now open the call for questions. Operator00:17:47Thank you. The first question is from Eric Borton from BMO Capital Markets. Your line is now open. Please go ahead. Speaker 500:18:15Hey, good morning out there. John, you've certainly made some solid progress sourcing a number of investments through multiple investment verticals. Just curious, not asking for guidance here, but how does the next 12 months play out for you in terms of the mix of development opportunities, pure play acquisitions and any other things that may be developing in the pipeline? Speaker 200:18:42Yes. Thanks, Eric. So it's a balance here. With the $307,000,000 and the 7 development deals that we have in the active pipeline, plus another $400,000,000 or so in that active prospect bucket, we've got a lot of really great opportunities in the development build to suit that we're very excited about As one of the core building blocks that we have for providing sustainable growth, we're very excited that we're laddering into this development process in the way that we had planned and have talked about with investors starting earlier this year. So the strategy is playing out well, but there's still a balance. Speaker 200:19:14We've got $69,300,000 of regular way acquisitions in the pipeline today. We still continue to be a little disappointed in the volumes that are out there as well as what we're seeing in terms of the quality of the product and where pricing is landing. But if you've got a view towards having a little bit of relief on the interest rate side, depending on how the Fed meeting goes today and over the course of the next 3 to 12 months or so, I think you start to see a little bit more regular way acquisition volume. The great thing with where we sit today from a balance sheet standpoint is that we're at 4.9% on a pro form a basis. We have evaluated where we would land over the course of that development pipeline and we stay comfortably below 6% throughout it. Speaker 200:19:50And we've got ample liquidity as well as ample room to be able to do regular way acquisitions. So our goal is to be able to balance those things together and give the type of attractive growth that we know our shareholders are expecting. Speaker 500:20:03I appreciate that. And then on the capital allocation side, just with shares up 23% over the last 3 months, has your thoughts on capital outlay changed? Are you willing to issue equity here today? Or will the majority of future investments be funded via the capital recycling program and potentially on a leverage neutral basis? Speaker 200:20:28Yes. So the equity is certainly more constructive today than it was 3 months ago. That being said, we don't need any right now. We've got ample liquidity. Our leverage is well south of where we are looking to operate on a sustained basis. Speaker 200:20:40We've got pretty great availability on our revolver today. We've also been very successful in the last 18, 24 months on capital recycling between the $200,000,000 we did last year at a 6 cap and the clinical healthcare assets we've been selling this year as well as a handful of things that we've identified that we'd be able to sell if we needed to. We're very comfortable continuing to fund our growth through recycling and through dispositions if the cost of capital that we're looking at in the equity and debt markets isn't attractive to us. So opportunity set of course plays a role in this as well and we'll balance all those things together, but certainly more constructive, but not where we want it to be, and it's something that we don't need right now either. Speaker 500:21:20And last one for me, just on the new development opportunities. Ryan, sorry if I missed this, but did you say the cash yields you're targeting are in the mid-7s up into the low-8s? Speaker 200:21:31Yes. So if you're looking at the development opportunities right now, we've got upfront cash yields in the mid-7s. And then when you straight line it over the term of the lease that we're looking at, you're in that mid-8s, sometimes low-9s. So very attractive relative to what we're seeing in the regular waste space, which is still sort of settling in that low-7s on an upfront cash yield basis getting into the 8s on a straight line. Speaker 500:21:54Thank you. Appreciate the time. Speaker 300:21:57Thank you. Operator00:22:00Thank you. The next question is from Appur Rana from KeyBanc Capital Markets. The line is now open. Please go ahead. Speaker 600:22:10Great. Thank you for taking my question. You mentioned the development funding commitments of $339,000,000 Any additional color you can provide on those commitments? Speaker 200:22:21Yes. So we've got UNFI is part of that and we got about maybe another $32,000,000 on UNFI. We're very excited about the progress there. Looking for that to come online late Q3, rent commencement no later than mid October. We got about $32,000,000 or so left, but the project we're expecting to come in slightly under budget and slightly ahead of schedule. Speaker 200:22:39So that feels really good. Of the $307,000,000 in the build to suits for new ones, there are 7 different opportunities that range from things as small as $2,000,000 in the QSR space to as large as $170,000,000 in distribution and manufacturing spaces. These are all from new and existing development relationships. So we're expanding the roster of folks that we're working with and we feel really good about the active prospects we have, as Ryan mentioned, with another $400,000,000 or so that we're actively evaluating. Speaker 600:23:06Great. That was helpful. And then in terms of the healthcare simplification strategy, so it looks like you completed about 65%. On the remaining 35%, are those the one offs that you had mentioned in prior calls that will take some time to kind of get off your portfolio? Speaker 200:23:25Yes. Those are all the onesie twosies that we'll work through in a traditional asset management approach. There are some in there that have great value that we're just making sure that we're getting the right value out of, and there's a handful that will require maybe a lease extension, some tenant improvement, some work on our end to make sure that we can get the right value out of those. So the timeline on those will comfortably extend into 2025. Speaker 600:23:46Okay, got it. And then lastly on maybe cap rates here, it seems like maybe where do you think 3Q kind of trends from here and any early indication on where maybe 4Q might be headed? Speaker 200:24:05Yes. I mean, we've seen cap rates sort of plateau this year. If you look at like sort of mid market industrial, that's been really hot this year, as hot as we saw it in 2022. You're getting 20 bids on any particular acquisition that's out there. You're starting to see those creep down past the low 7s into the high 6s. Speaker 200:24:24We're still solidly in the sevens as we think about capital allocation. So we're looking for the right opportunity. As you heard Ryan say in his remarks, we're continuing to be very disciplined and focused on where we're looking to allocate capital. And if we're not seeing it in regular way deals, we're very fortunate to have multiple channels that we can allocate capital to with the build to suits where we're getting those mid-seven upfront cash rates and those cash cap rates and then the straight line yields in the mid-8s to low-9s. So our expectation is back half of the year, you're going to start to see some more product come online as there's a little bit more certainty around the interest rates. Speaker 200:24:57And hopefully, we'll see a more constructive environment in terms of pricing on a risk adjusted basis. Speaker 600:25:03All right. Great. That was helpful. Thank you. Operator00:25:08Thank you. The next question is from Caitlin Burrows from Goldman Sachs. Your line is now open. Please go ahead. Speaker 700:25:24Hi, good morning. Maybe just on the acquisition pipeline, I think you said it was about $70,000,000 Could you go through if to what extent that's a mix of like a lot of QSR type small deals versus just a couple of larger industrial or yet what that mix might be as we try to get a sense for what could ultimately close? Speaker 200:25:44Yes. So a portion of it is a retail acquisition, large single site sporty goods. And then the other is a fairly large industrial acquisition. So there's 2 deals in that pipeline. Speaker 700:25:57Got it. Okay. And then back to the build to suit topic, I think I've kind of asked this in the past, but we've heard build to suit can be difficult because it's tough to get the land. So can you just talk through again how you would do that if there's been any change in thinking? And I think you mentioned in the past that you'd be working or buying from somebody who already has the land, so you wouldn't need to like go, I guess, get approvals and source it yourself. Speaker 700:26:20But yes, is that still the case? And how do you kind of get past that hurdle of getting the land that's attractive for this user that they want? Speaker 200:26:31Yes. So that's a great question. The build to suit strategy is very different than your regular way net lease, sale leaseback and assumption process where the land is already in hand with someone else. The way that we've been thinking about our commitments to fund developments is to have the certainty around that to be able to report it out to you all. The land needs to be in hand. Speaker 200:26:50It's not necessarily in our hand yet, but we'll have an opportunity to acquire it across the over the course of the process. But the land is under control by the developer or by the tenant depending on the situation. We're in a place where we feel very comfortable that the business deals have been agreed to between the developer and their client and the relationship between us as the funding partner here. You're still in the process of negotiating final documentation, but our ability to have surety around that development pipeline starts with is the land under control because that's going to be critical to whether or not the client decides to move forward with the project. And for the $7,000,000 that we have and the $307,000,000 in that pipeline, that is the case. Speaker 700:27:29Got it. Okay. Thanks. Operator00:27:34Thank you. As we currently have no further questions, I'd like to hand over to John Morina for closing remarks. Speaker 200:27:43Thank you, Kiki, and thank you everyone for joining us today. We are incredibly excited and proud of all that we've accomplished so far this year, but we're just getting started. So we'll have more to come with our Q3 earnings call come October, November. Thank you all for joining us, and enjoy the rest of your day.Read morePowered by