Yahoo Finance Broadstone Net Lease, Inc. (NYSE:BNL) Q1 2024 Earnings Call Transcript
Broadstone Net Lease, Inc. (NYSE:BNL) Q1 2024 Earnings Call Transcript May 2, 2024
Broadstone Net Lease, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello everyone and welcome to the Broadstone Net Lease's First Quarter 2024 Earnings Conference Call. My name is Bailey 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 Maedl, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead.
Brent Maedl: Thank you operator and thank you everyone for joining us today for Broadstone Net Lease's first quarter 2024 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. 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-K for the year ended December 31st, 2023 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. And with that I'll turn the call over to John.
John Moragne: Thank you, Brent. Good morning everyone. As we discussed during our call last quarter, the largest variable in establishing guidance this year was the timing of our healthcare dispositions and the subsequent redeployment of proceeds generated from the portfolio sales. With our team's ability to execute in scale on both fronts early in the year, I am pleased to announce that we are increasing our per-share AFFO guidance and establishing a range of $1.41 to $1.43. Before opening the line for questions, we'd like to provide context for this update and our perspectives on the overall operating environment. As we have been emphasizing since February of last year, the macroeconomic backdrop and interest-rate environment has had a considerable impact on commercial real estate markets and in particular, the net lease transaction market.
While the net effect has resulted in historically significant declines in transaction levels, this environment has also presented opportunities to think creatively and differently, while continuing to lean heavily on our existing relationships, disciplined underwriting, and operational expertise. Our actions over the last 18 to 24 months have provided us the flexibility to continue making decisions we want to make in this environment, not decisions we were forced to make. With the capital, talent, and experience we have at BNL, we are primed to drive long-term value creation and earnings growth. I am extremely proud of what our team has accomplished so far this year, including the sale of 37 clinically-oriented healthcare assets in connection with our healthcare portfolio simplification strategy, generating gross proceeds of $251.7 million.
The closing of these 37 assets along with an additional disposition completed after quarter end, accounts for approximately 50% of the assets we have identified as part of our healthcare simplification strategy and we remain in various stages of marketing and negotiation on an additional 20% of our clinical assets that we anticipate concluding later in 2024. The remainder will likely take additional time to achieve optimal disposition outcomes. As part of this effort, we continue to work through a final resolution for Green Valley Medical Center. Completed dispositions have successfully reduced our health care exposure to approximately 13% of our ABR as of March 31st. Our near-term goal is to reduce our health care exposure below 10% of our ABR, at which point, it will naturally become a less emphasized portion of our portfolio similar to office.
Turning to our investment activity, first quarter transaction market represented the lowest single-tenant net lease transaction volume in at least 15 years, highlighting the continued misalignment between buyers and sellers with a recently reignited rate environment further exacerbating the disconnect. We still believe a higher degree of selectivity is required as we navigate this environment and we are focused on sourcing off-market investments and unique capital allocation opportunities where we can partner with developers and tenants seeking capital solutions as the constraints on traditional commercial real estate lending process. Despite the challenging environment, our team was able to invest $202 million year to date with an additional $122 million of investments currently under control.
We navigated the transaction environment by leveraging existing relationships, sourcing nearly $150 million of our year-to-date investments through direct off-market deals that closed shortly after quarter end, including an 84.5 million investment in retail assets, located in one of the most highly trafficked trade areas in St. Louis. This unique opportunity stems from an existing relationship that resulted from our ongoing UNFI build to suit. It includes a $32.5 million investment in seven individual triple-net outparcel assets, leased to strong national and regional concepts, including Bass Pro Shops, Chick-fil-A, LongHorn Steakhouse, and Burger King to name a few. The remaining $52 million is transitional capital with portions designed to convert to a long-term ground lease subject to tenant consents.
The $52 million covers the online portion of the retail center that is currently more than 95% leased. This was a unique opportunity in which we were able to step in as a holistic capital provider for the entire center and acquire seven triple net retail assets with a strong real estate fundamentals and tenants at above market cap rates. The other significant direct transaction we closed after quarter end was a $65 million single-tenant industrial campus in California occupied by leading candy manufacturer. While we would normally wait until Q2 earnings to provide additional details on transactions closing in the quarter, we wanted to provide investors a sense of what we are working on in this environment, particularly given the proximity of these investments closing to Q1.
We look forward to discussing these and other Q2 investments in more detail during second quarter earnings. As we execute on our healthcare portfolio simplification strategy, our overall portfolio composition is increasingly weighted to industrial and defensive retail and restaurant tenants and it continued to perform well in the first quarter, as evidenced by 99.9% rent collections excluding Green Valley and 99.2% occupancy as of March 31st 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. We remain vigilant in our tenant monitoring efforts and maintain great in our portfolio due to its highly 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.
In this higher for longer environment where financial conditions are less conducive to the type of interest rate fueled growth that the net lease sector had grown accustomed to in the post GFC world, net lease rates will need to focus on operational expertise and finding creative ways to generate deal flow and accretive growth. In a historically low transaction environment like this, we could choose to run up the risk spectrum in exchange for yield. But I don't believe that would be prudent due to potential credit risk and our view of the continuing risk reward and balance on higher cap rate deals. Now is the time to be creative and opportunistic, while maintaining underwriting discipline, to position B&L as an alternative capital provider, to take advantage of the commercial real estate lending pullback and to double down on the things that have made B&L successful over the last 16 years.
Solid portfolio and balance sheet fundamentals operational expertise and a growth focused mindset. With our industrial focused but diversified investment strategy, I believe B&L presents investors with a differentiated approach to net lease investing in growth. The increased role we can play in development and build-to-suit transactions adds a compelling additional building block to our growth strategy. We view these types of opportunities as part of our core building blocks to sustainable long-term growth which include best-in-class fixed rent escalations, investments in our existing tenants and assets, traditional external growth and development funding opportunities. While the combination of these building blocks will vary based on market conditions they provide a compelling path to near and medium-term value creation and earnings growth.
With 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.
Ryan Albano: Thanks, John, and thank you all for joining us today. As John mentioned, during the first quarter we were able to execute on a key piece of our healthcare portfolio simplification strategy through the completion of a portfolio sale comprised of 37 assets for $251.7 million at a cap rate of 7.9%. These dispositions reduced our medium term lease maturities and improved our overall portfolio WALT to 10.6 years. Additionally, the incremental proceeds from this sale add to our existing dry powder, placing us in a position of strength as we actively pursue high-quality investment opportunities. As we step through this disposition effort and begin focusing on the remaining properties identified, we anticipate various transaction time lines that comfortably extend into 2025, given the need to address some combination of shorter lease duration space utilization rates and elevated credit risks.
As John and I have communicated in the past, we are intently focused on the tactical execution of our healthcare property sales and maximizing value for our shareholders. Alongside our disposition efforts, we once again demonstrated our high degree of selectivity during the first quarter for funding revenue generating capital expenditures of $3 million and incremental UNFI development fundings of $36.9 million. In total, we have funded approximately $130.7 million towards the UNFI build-to-suit development through March 31st. And the project remains on track for delivery and rent commencement no later than October of this year. Now turning our attention to new investment activity. While our standards remain very high for allocating capital to new investments, our sourcing efforts have yielded several positive outcomes as John highlighted in his comments.
We favor opportunities that support growth for stable and healthy companies for situations, where we can provide solutions to transactions that are disrupted by the current market environment. This has resulted in our evaluation of more opportunities for build-to-suit transactions, forward commitments of completed developments and other directly sourced opportunities in addition to selective regular way marketed transactions. These transaction formats allow us to access high-quality opportunities today through a differentiated sourcing model and create embedded AFFO growth for future periods, which when coupled with our in-place portfolio rent escalations, produce a compelling run rate growth profile before even considering contributions from external growth opportunities.
While facing historically difficult transaction environment, our pipeline remains robust given an influx of these types of opportunities. Our focus on achieving appropriate risk-adjusted returns and creating long-term value for our business and its shareholders is resolute and the balance of real estate fundamentals and underlying credit support against prevailing market pricing on investments remains front and center. In an environment, where the traditional net-lease growth model and transaction environment is constrained, we feel confident in our ability to drive meaningful near and medium-term growth through our capacity to leverage opportunities arising from our other core building blocks, investments in our existing assets and development funding opportunities, in addition to our best-in-class fixed rent escalations.
Moving to our in-place portfolio. As we highlighted last quarter, we remain cautious on and continue to pay extra attention to industries that are sensitive to discretionary consumer spending including some tenants that have been included in the recent headlines. The room place, a home furnishings operator occupying one asset and accounting for 0.2% of ABR remains in Chapter 11 bankruptcy, during which time, we continue receiving rents. At the end of the bankruptcy proceedings, which we anticipate occurring later this summer, the tenant will vacate the property. In the meantime, our team is focused on determining the optimal next step for this asset. Red Lobster, representing 1.6% of ABR has notably been in recent headlines. Our 18 master leased assets maintain relatively healthy site-level performance and we continue to monitor the situation as it unfolds.
We are comfortable with our exposure, which we have reduced over the last several years, remain cautiously optimistic about Red Lobster's future and know the quality of the underlying real estate, represents a compelling value proposition to both Red Lobster and other potential users. Lastly, we only have three vacant properties as of March 31, including one that went vacant during the quarter upon the conclusion of our tenant's lease term. This property received significant interest and we have executed an LOI with a new tenant and are in the process of negotiating a lease anticipating the tenant taking possession in late Q3 or early Q4. Beyond these properties, there is one additional tenant Shutterfly, that will be vacating its space when their lease expires on June 30.
We have already executed an LOI and are in the process of negotiating a lease with a new tenant for this location. Our new tenant is currently targeting lease commencement during the fourth quarter resulting in minimal downtime at the property. In summary, the broader market environment for new investments is certainly challenging and higher interest rates and sustained uncertainty are increasingly adding risk to the macroeconomic equation. Despite the difficult backdrop, we continue to demonstrate a differentiated ability to allocate capital to investments that enhance the value of our highly diversified portfolio and execute on assets and portfolio management objectives that drive strong operating performance. With that, I'll turn the call over to Kevin to provide an update on our financial results for the quarter.
Kevin Fennell: Thank you, Ryan. During the quarter, we generated AFFO of $71 million or $0.36 per share, an increase of 5.9% in per-share results year-over-year. Results were largely driven by lower interest and G&A expenses. Bad debt in the quarter excluding Green Valley was 15 basis points, driven by a small gap in rent from the in-place. We incurred $7.8 million of cash G&A during the quarter, which tracks in line to slightly better than guidance. We once again, ended the quarter in a strong and flexible financial position, despite not engaging in any capital markets activity. From a leverage perspective, we ended the quarter in a position of strength at 4.8 times net debt, down slightly from five times at the end of 2023, driven largely by disposition proceeds from progress, on our healthcare portfolio simplification strategy.
We are retaining mostly fixed rate debt capital structure, with 30 million existing swaps rolling into fourth quarter and we routinely evaluate alternatives as we approach incremental floating rate exposure into 2025. At our quarterly meeting, our Board of Directors approved a $0.29 dividend per common share and OP unit. This is a 1.8% increase from last quarter, and a 3.6% increase over the dividend declared in the first quarter of 2023. This quarter's increase marks our seventh consecutive semi-annual dividend increase, since our IPO and is payable to holders as of June 28th 2024, on or before July 15th. Our dividend remains well covered and represents a highly attractive yield in this market environment. Finally, as John previously mentioned, we are raising our per share guidance from $1.41 to a range of $1.41 to $1.43, as our team's ability to execute on both our healthcare portfolio simplification strategy and growth objectives, provides additional clarity on estimated per-share results for 2024.
Our revised per-share guidance reflects the following key assumptions, which remain unchanged. Investment volume between $350 million and $700 million, disposition volume between $300 million and $500 million, with ongoing healthcare sales accounting for the substantial majority. And finally, cash G&A between $32 million and $34 million. With that, we will now open the call for questions.
Operator: Thank you. [Operator Instructions] Our first question today comes from the line of Michael Gorman from BTIG. Please go ahead. Your line is now open.
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