Q2 2021 Broadstone Net Lease Inc Earnings Call

Yeah.

Hello, and welcome to Rob Stone net lease in second quarter 2021 earnings conference call.

My name is day and true and I will be your operator today. Please note that today's call is being recorded if you require operator assistance. Please press Star then zero.

Now I'll turn the call over to Mike Caruso, Senior Vice President of corporate Finance and Investor Relations at broad stone. Please.

Please go ahead.

Thank you operator, and thank you everyone for joining us today for broad stones, and second quarter, 2020.1 earnings call on today's call you will hear from our Chief Executive Officer, Chris <unk>, Our Chief Financial Officer, Ryan and they'll bile and John Moran, Our Chief operating officer, who will participate and Q&A.

Before we begin I'd like to remind everyone that the following presentation contains 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 31, 2020 for a more detailed discussion of the risk factors that may cause such differences any forward looking statements provided during this conference call are only made as of the date of this call.

I will now turn the call over to our Chief Executive Officer, Chris Donaghey.

Thank you, Mike and welcome to everyone, joining our Q2.2021earnings call I hope there and listeners are having a safe healthy and enjoyable summer.

Hard to believe we are quickly approaching the 1 year anniversary of our initial public offering.

And not be prouder of all with the P and L team has accomplished since entering the public markets and where we are currently positioned as we move toward the second half of the year.

During Q2, we continued to execute on our growth objectives, while simultaneously strengthening our balance sheet to position P&L for a strong second half of the year.

Our defensive growth profile remains exceptionally attractive.

Predictability and consistency of our portfolio's operating profile as evidenced by the collection of 100 per cent of base rents due during the quarter.

Affords us the ability to focus intently on external growth.

I'm pleased to see our stock continue to season, and the public market, which further enhances our liquidity and access to capital and allows us to continue to grow earnings through accretive acquisitions.

During the quarter, we successfully executed on our first follow on offering which has positioned the balance sheet to continue to support growth and the second half for the year Ryan.

Brian will provide additional detail on capital raise activity and a few moments, but I would first like to provide and update on Q2 investment activity.

Yeah.

During the quarter, we closed 7 transactions comprising 34 properties for a total investment of $194 million at a weighted average cash cap rate of $6.2 per cent for lease.

It does include 1.4% weighted average rent escalations and a 13.2 year weighted average lease term.

Acquisitions completed during the quarter were more heavily weighted towards industrial and 57% with a smaller concentration of health care and retail properties at 24 per cent and 19% respectively.

When compared to a more retail dominated first quarter of the year the change and property type mix for acquisitions completed during Q2 demonstrates the strategic benefits of our diversified strategy on.

Our approach to net lease investing allows us to pivot quarter over quarter, depending on the opportunity set available without dramatically altering portfolio concentration levels.

This affords us the opportunity to be patient and selective ensuring we are acquiring the best investments on a risk adjusted basis within each of our core property segments.

In July we also acquired an additional 7 assets for $34.2 million and the industrial and retail spaces by a for transactions.

I would now like to give a brief overview on several of the key transactions completed during the second quarter.

First we acquired 11 mission critical industrial properties, and the sale and leaseback transaction for a total of $106.6 million at an initial cash cap rate of 6 per cent.

The properties are leased Ryerson.

And leading metal processing and distribution company.

Properties are and geographically diverse markets that are strategic to the tenants operations across 10 different states.

The leases include a 15 year initial term and a 1.5 per cent annual rent escalator translated into an average annual yield on investment of 6.7% over the term.

This transaction demonstrates our ability to continue to source accretive and industrial acquisitions.

Complement our existing portfolio, despite heightened levels of competition and the industrial space.

While I slightly larger transaction Ryerson represents only 2 per cent of our ABR as of quarter and and our tenant diversification as measured by our top 20 tenants remains amongst the best and the net lease space.

We also added 11 health care properties for 2 transactions for a total investment of $46 million and a weighted average initial cash cap rate of 6.3 per cent during the quarter.

The properties included a diversified portfolio of 7 and veterinary clinics as well as for properties leased to a strong regional health care provider operating ambulatory surgery.

Ignostic imaging urgent care and rehabilitation services.

Our properties are subject to a weighted average annual rent escalations of 1.7 per cent and have a weighted average lease term of approximately 10 minutes and half years.

Both health care transactions completed during the quarter highlight the granular diversity diversification within our portfolio, especially within the health care vertical.

The veterinary space is 1 which we've invested and for many years and view it as an attractive adjacency to our core health care and investing on.

Core health care investing and given its strong business fundamentals and the growth profile of our national tenants. We continue to view healthcare as a unique differentiator for BMO and remain focused on sourcing and additional opportunities in this for property segments.

Finally, we added $9 for locations that were sourced by our small transaction investment grade retail process for a total investment of $13.4 million and.

A weighted average initial cap rate of 6.6 per cent.

The properties are located in the South east and have a weighted average lease term of Eaton half years, and a weighted average annual rent escalation of zero point for per cent.

Given our size and knowledge of these tenants and streamline acquisitions process, we have the unique ability to quickly and efficiently transact on a 1 off investment grade retail acquisitions that helped bolster on a routine sourcing efforts.

And our growing small trend small transaction investment grade pipeline ensures consistency and deal flow throughout the year that supplements our larger sourcing efforts.

Acquisitions during the second quarter, and and July bringing total volume for the first 7 months of the year, 2 and $315.5 million.

We currently have an additional $211 million of assets under our control, which we defined as under contract or executed letter of intent.

These opportunities are well diversified across industrial health care and retail assets and bring our year to date for volume closed and currently under control to $526 million.

The substantial majority of under control acquisitions are expected to close and the second half of the year. But also includes a forward commitment currently scheduled to fund in 2020.2.

With solid momentum and increased visibility into the pipeline for the second half of the year, we are raising our full year 2021 acquisition guidance by $100 million to a range of $550 million for $650 million.

Brian will provide additional detail regarding further guidance revisions and a few moments.

As of June 30th we own and 684 net lease properties located across 42 U S States and 1 property in Canada.

And portfolio occupancy and remained steady quarter over quarter at $99.7 per cent.

Only 6 of our 684 total properties were making at quarter end.

The portfolio had a weighted average remaining lease term of 10 point for years with 2% weighted average annual rent increases.

Our forward lease maturities continue to be negligible and represent just 0.1 per cent ABR in 2020, 1 and a total of 2.4 per cent of ABR through 2020.3.

I'll now turn the call over to Ryan for write additional detail on our Q2 results the execution of our most recent follow on offering and our full year 2021outlook right.

And.

Thanks, Chris and thank you all for joining us today.

And I'm excited to share additional detail on our recent capital raise activity and a corresponding balance sheet positioning discuss our second quarter results as well as provide an update to our full year guidance.

During Q2 shares of being I'll continue to season, and the public market due to a variety of factors, including most notably index inclusion and continued market acceptance of our defensive growth profile.

I'm very pleased to see the momentum as it further validates our differentiated strategy and enhances our access to capital, allowing for continued execution of our external growth objectives.

On June 28, we successfully executed on our first follow on offering issuing 11.5 million common shares and the price of $23 per share less underwriting discounts and commissions for net proceeds of $253.5 million.

We used the proceeds to immediately pay down all outstanding borrowings under our 900 million dollar unsecured revolving credit facility and intend to use the remaining proceeds to fund future acquisition opportunities.

Following the completion of the offering our net debt was approximately 1 point for a billion.

Resulting any net debt to annualized adjusted EBITDA of $4, 7 and 6 times at quarter and.

As a reminder, we currently hold a triple b rating from S&P as well as the B double a 3 rating from Moody's and intend to maintain a leverage target of Boston and 6 times net debt to annualized adjusted EBITDA argue basis.

Limited near term debt maturities, a robust liquidity profile and ample.

Leverage capacity positions us to continue to pursue accretive acquisition opportunities and the second half of the year.

We remain committed to maintaining and conservative balance sheet and maximum financial flexibility to support our defensive growth mentality.

Now turning to our second quarter financial results.

We reported a F O a $52 million during the quarter or 33 cents per diluted share.

These results represent an increase of 2 cents per diluted share were 6.5% when compared to Q1 'twenty 'twenty 1.

The increase quarter over quarter was primarily driven by acquisitions that closed late in the first quarter second quarter acquisition activity and a full quarter of interest savings from the repricing of our unsecured term loans during the first quarter of the year.

During the quarter, we incurred total G&A expenses of $8.7 million inclusive on $7.7 million of cash G&A.

In addition to the acquisition guidance revision that Chris referenced a few moments ago I would like to provide an update to our full year guidance that reflects our confidence and the strength of the acquisition pipeline and the corresponding impact to our current and your outlook.

For fiscal year, 2020..1 we currently expect to report total F O per diluted share.

And $1.30, and $1.34.

Which represents an implied growth rate of 10% at the midpoint over our annualized Q4, 2020 results of $1.20.

This guidance is based on the following key assumptions.

Acquisition volume between 550, and $650 million disposition volume between 50, and $100 million and total cash G&A between 32 and $34 million.

As a reminder, our per share results for the year are sensitive to both the timing and amount of acquisition disposition and capital markets activity that occurs throughout the year.

Finally at the Board meeting held on July 29, the board declared a <unk> 25, and a half cent distribution per common share and O P unit to holders of record as of September 30th.

And on or before October 15th.

We will continue to evaluate potential future increases to our dividend with our board on a quarterly basis and intend to target a long term <unk> payout ratio of approximately 80%.

With that I will turn it back over to Chris for closing remarks.

I'd like to conclude today's prepared remarks by reiterating my confidence and excitement and where we are positioned today heading into the second half of the year.

Our defensive growth focus grounded and industry, leading diversification has proven to resolve and a predictable operating profile, which allows us to focus on executing on our external growth objectives.

And conservative balance sheet and robust liquidity profile, resulting from our inaugural follow on offering has positioned us to execute on and exciting pipeline of acquisition opportunities I hope all of our listeners have relaxing and safe conclusion on your summer and we look forward to connecting again with you and the fall.

This concludes our prepared remarks, operator, we can now take questions.

Yeah.

We will now begin the question and answer session.

To ask a question you May press Star then 1 on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then 2.

Please limit yourself to 2 questions.

At this time, we will pause momentarily to assemble our roster.

The first question comes from John Kim with BMO capital markets. Please go ahead.

Thank you and good afternoon and.

And I had a question on on the Rice and portfolio that you made during the quarter can.

Can you comment on the salary and whether or not it was a sale lease back transaction.

And regardless, if theres, an opportunity to do more transactions with with the seller.

Hey, John sure. It was a sale lease back transaction that was done with Ryerson corporate and and their team.

So obviously worked on our lease for them, which was a positive.

And our view and and started a very good relationship with them and to your question as to whether there's an opportunity for future business I think that's a reasonable expectation.

Expectation, if I'm not mistaken reierson loans somewhere in the neighborhood or has somewhere in the neighborhood of 200 facilities on it.

And Nashville, and international basis, and you know I think they've had a good execution with us and and would expect that they might do some future sale leaseback activity. So 1 that as.

It's an important relationship for us to continue to cultivate.

Okay and my second question is on the earn out and you you earned the first 2 tranches of it it looks like given your share price performance you're on pace to obtain the final 2 tranches.

Fourth quarter this year.

Can you remind us what is your expectation and what's contemplated in guidance for the year.

Sure Ryan do you on Japan, and cover that 1 sure and and.

In terms of guidance, we have factored in a triggering those 2 tranches.

Now and the end of the year.

And as you said you know I think where we're trading today and where those trigger points are or certainly north of that.

And it's based on a 40 day V Wap and Theyre not open for triggering until September so.

The next question comes from Ronald Camden.

Morgan Stanley. Please go ahead.

Hey, I, just thought going back to sort of the industrial assets and portfolio of just general commentary on what you're seeing and the market in terms of cap rate movement. Some of your peers have noted that cap rate compression and.

And maybe it's still compress them and maybe it flow just sort of curious.

And what you guys are seeing out there.

Sure. Thanks, Ryan and I think from and industrial perspective, certainly saw some compression on earlier in the year and and that has persist.

Persisted a little bit as well so for us on the industrial side.

And we're looking at transactions call. It a 575 to 6 and a quarter range just on a very general basis and again you know.

For our industrial is a fairly broad and segment other property types. So we do have a little bit of and ability to continue to think differently than just pure play investment grade warehousing distribution work, so continuing to do some work and the food processing space on the flex space and manufacturing space, which you see a little bit with some of the transactions we talked about today and so those are.

For all are contributing factors.

Pricing for us is but.

You'll see that that general bad news and sort of where we're transacting and talking about a neutral on new opportunities and the industrial space.

Great and then just the last thing was just on <unk>.

Can you just give us an update on on just your watch list if anything's changed there.

And how much of how much bad debt is baked into the guidance I assume it's sort of given how long the portfolios done during COVID-19 I assume it's pretty similar to historical levels, but just some commentary there would be helpful.

Yeah, I think you phrased it well, it's pretty de Minimis I'm, just just ordinary course things that were falling from a credit perspective, given the 100% collection of base rents and that's that's 1 that and <unk> as well in hand, and well a well managed at the moment I think the 1 thing that has changed from our perspective.

And just over the last quarter its worth 3 highlight reemphasize and as we have started to think a little bit more constructively about casual dining and the opportunities we had that on our <unk>.

Wap West Slash sort of no fly list for a period of time during the height of the pandemic and the last quarter, we've and more open to looking at some opportunities within that space and a few transactions are out there that we were considering and so nothing imminent, but 1 that sort of has moved off that.

No fly list from our perspective, so that's probably the key change I'd highlight.

Again, if you have a question. Please press Star then 1 on a touchtone phone.

This concludes our question and answer session I would like to turn the conference back over to Chris Saranac eat for any closing remarks.

Thank you so much I just would like to thank all of our shareholders and analysts that joined US today I appreciate the ability to share some very positive news on what we've done and the second quarter and look forward to.

Concluding the third quarter, and a position of strength and given and update you everybody at the end of October and enjoy the rest of the summer and stay well. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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