Q3 2021 Broadstone Net Lease Inc Earnings Call
Okay.
Hello, and welcome to broad stone net leases third quarter 2021 earnings conference call. My name is Alex and I will be your operator today. Please note that today's call is being recorded.
And Mike <unk> Senior Vice President of corporate Finance and Investor Relations at Bernstein. Please go ahead.
Okay.
Thank you operator, and thank you everyone for joining us today for broad stone net leases third quarter 2021 earnings call.
On today's call you will hear from our Chief Executive Officer, Chris <unk>, Our Chief Financial Officer, Ryan Albano, and John Moran, Our Chief operating officer, who will participate in Q&A.
Before we begin I would 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.
Remember 31 2020 for 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 Q3 2021 earnings call I'm pleased to report another exceptional quarter as we head into the final months of 2020 one.
During Q3 robust investment activity totaling over $225 million and outstanding portfolio operating performance with 100% rent collections has positioned us for a strong close to our first full calendar year as a publicly traded company.
In addition, we continued to strengthen our balance sheet by successfully executing on a $375 million inaugural 10 year public bond offering and establishing a $400 million ATM program.
These actions continue to expand our access to capital and will further support our efforts to maximize financial flexibility and support our defensive growth profile as we close out a strong 2021 and prepare for an act of 2022.
During the quarter, we closed 11 transactions comprising 18 properties for a total investment of $225 million at a weighted average cash cap rate of six 5%.
Leases included one 8% weighted average rent escalations and a 19.4 year weighted average lease term.
Acquisitions completed during the quarter were most heavily weighted towards industrial and health care at 59, and 31% respectively.
A smaller concentration in investment grade retail properties at 10%.
These transactions demonstrate our ability to selectively acquire across the spectrum of opportunities without significantly influencing the overall risk return profile of our highly diversified portfolio.
Initial cash cap rates for Q3 acquisitions ranged from five 7% to seven 5% and blend to an attractive 6.5% weighted average.
Our diversified approach to investing allows us to selectively navigate todays highly competitive acquisition environment without compromising our underwriting standards.
We also closed approximately $13 million of additional acquisitions since quarter end.
I'll now give a brief overview of several of the key transactions completed during the third quarter.
We acquired nine industrial properties in five distinct transactions for a total investment of $142 $7 million at an initial cash cap rate of six 1%.
The leases, including the initial 18.4 year term and 1.9% annual rent escalations translating into a weighted average GAAP cap rate of six 9% over the life of the leases.
Four of the five industrial transactions completed during the quarter were sale and leaseback transactions.
I'd like to take a moment to briefly highlight one of these industrial acquisitions.
Two property sale leaseback.
Refrigerated food processing facilities located in Wisconsin.
Did your properties were acquired for a total purchase price of $48 $7 million with an initial 20 year lease term.
These state of the art food grade facilities are critical to the tenants operations.
As evidenced by substantial tenant investments already made in the facilities.
In addition, a significant expansion of one of the locations is currently underway and is expected to be completed by the tenant in 2022.
Industrial transactions completed during the quarter demonstrate our ability to continue to source accretive and compelling investments that complement our existing portfolio. Despite heightened levels of competition within the industrial market.
We also acquired a general acute care hospital in Arizona and a C.
Sell and lease back transaction with a tenant for a total investment of $60 million.
Lease includes 2% annual rent escalations over an initial 25 year term.
The hospitals located in the Tucson, MSA and an area with highly favorable demographics supporting the need for the services provided by the hospital.
In addition, there are no competing hospitals within 25 miles of the property.
The hospital serves a growing retirement community of nearly 100000 residents and offers a wide range of health care services, including a full service lab in blood Bank cardiac catheterization lab at N E R.
Given the proven leadership team and business plan supporting demographics high barrier century, and attractive investment risk return profile. We are excited to add this property to our already differentiated health care segment of the portfolio.
Finally, we added eight investment grade retail properties as part of five transactions during the quarter, all of which will be used to existing P&L tenants.
The properties were acquired for a total investment of $23 $2 million at a weighted initial cash cap rate of six 5% and have weighted average lease terms and annual rent escalations of 8.4 years and 50 basis points respectively.
Retail acquisitions completed during the quarter continue to substantiate our ability to efficiently transact on one off highly granular investment grade retail properties that help.
And enhance our larger sourcing efforts in other segments of the pipeline.
Acquisitions completed during the third quarter and in October, bringing total volume on a year to date basis to approximately $520 million.
We currently have approximately $102 million of additional assets under our control, which we defined as under contract or excuse me butter of intent.
These opportunities continue to be well diversified primarily across industrial and retail assets and bring our year to date closed and under control to $622 million.
The current market environment remains highly competitive with a substantial amount of capital from both public and private buyers chasing opportunities to close before year end.
Despite heightened levels of competition across all property types. We remain focused on closing out 2021 with a strong Q4 of investment activity.
Will serve as a tailwind to 2022 earnings.
We are revising our full year acquisition guidance higher to a range of $600 million to $700 million.
Ryan will provide additional detail regarding further guidance updates in a few moments.
During the quarter, we also sold six properties for $26 $6 million. These.
These sales continued to reflect our disposition strategy focused on risk mitigation and included four vacant property sales and the disposal of two casual dining concepts.
During the third quarter, we executed an early termination of a long term master lease with an investment grade office tenant in exchange for a termination fee of $35 million.
The early lease termination fee represented approximately a 117% of the remaining contractual rent owed to us under the lease which was set to mature in 2020 eight.
Simultaneously, we sold the underlying vacant properties for net proceeds of $15 $3 million.
Together with the early lease termination fee received total net cash proceeds of $50 3 million.
We originally acquired the two properties from the tenant by a sale and leaseback transaction in 2016 for $54 6 million and if since collected $21 8 billion in triple net rents.
Following this transaction our office portfolio exposure was reduced to seven 9% of our ABR as of quarter end.
I'm thrilled to announce the outcome as it demonstrates our patient and methodical approach to portfolio management and ability to protect shareholder value due to the quality of our tenants and the combined strength of our underlying leases and corresponding real estate.
As always we continue to monitor the portfolio closely and feel confident in the current operating profile and health of our tenants across all segments of the portfolio.
We collected 100% of base rents during the quarter and occupancy improved 10 basis points to 99, 8%, leaving only four of our 696 properties Bacon at quarter end.
I'll now turn the call over to Ryan to provide additional detail on our Q3 results recent capital markets activity and our final guidance update for 2021.
Thanks, Chris and thank you all for joining us today.
I'm excited to share additional details on another solid quarter of capital markets execution discuss our third quarter results and provide an update to our full year 2021 guidance and dividend rate.
I'll begin with our third quarter capital markets activity, where we continue to focus on maintaining a strong and flexible balance sheet.
Most of our follow on equity offering in June.
<unk> $400 million ATM program this quarter inclusive of a forward equity issuance capabilities.
We view the ATM as an important component of our overall capital markets framework as we believe it to be an effective mechanism to match fund future acquisitions and control our leverage profile and efficient manner.
No shares were sold during the quarter, but we look forward to using this new tool in the future.
In addition to establishing our ATM this quarter, we completed our inaugural public bond offering of $375 million of senior unsecured notes due in 2031 at a rate of two 6%.
Proceeds from the offering were used to pay down outstanding borrowings on our revolving credit facility as well as refinance a.
$265 million unsecured term loan, which was set to mature in 2020 three.
This milestone transaction further expands our access to capital and lengthens our debt maturity profile.
We remain focused on aligning our liability profile with our long weighted average remaining lease term of 10 six years and look forward to returning to the public bond market in the future.
As of quarter end, our net debt was approximately $1 6 billion, resulting in a net debt to annualized adjusted EBITDA of five point O six times.
We also received an upgraded credit rating a beta of only two with a stable outlook from Moody's in September.
Which aligns with the Triple B rating, we received during Q1 from S&P.
Our liquidity profile remains highly robust with no outstanding balance on our $900 million revolver as of quarter end.
We remain committed to maintaining a conservative balance sheet that aligns with and supports our defensive growth strategy.
Now turning to our third quarter financial results, we generated <unk> $55 8 million during the quarter or 33 cents per diluted share <unk>.
<unk> per share results were flat quarter over quarter, primarily due to our late Q2 follow on equity offering and a corresponding impact on our Q3 weighted average share count.
During the quarter, we incurred total G&A expense of $8 6 million, which includes $7 6 million of cash G&A.
I would like to take a moment to highlight the various financial impacts of the early lease termination transaction and sale of the underlying properties Chris mentioned.
Due to the nature of the separate transactions on a gross basis, we recorded $33 8 million of revenue $4 1 million of depreciation and amortization and $25 7 million of impairment.
Pacification resulted in a $33 8 million dollar increase to F O, but no impact to <unk>, where net debt to annualized adjusted EBITDA Ari.
For fiscal year 'twenty, one we are now narrowing our <unk> guidance range to one dollar and 30 cents to $1 32 per diluted share, which represents an implied growth rate of nine 2% at the midpoint over our annualized Q4 2020 results of $1 20.
This revision to our full year <unk> guidance is driven primarily by the early lease termination transaction.
Spawning sale of underlying properties.
As well as the incremental interest expense anticipated from accelerating the timing of our inaugural public bond offering both of which we view as very positive long term outcomes for our shareholders.
Our final guidance range for 2020, one is based on the following key assumptions.
Acquisition volume between 600, and 700 million, which we revised higher disc.
Disposition volume between 101 hundred $30 million, which has been revised higher to include the early lease termination and property sales.
And total cash G&A between 31, and $33 million, which has been revised lower.
As a reminder, our per share results for the year are sensitive to both the timing and amount of acquisition disposition and capital markets activities that occur throughout the year.
Finally, I am pleased to announce that at our board meeting held on October 28, our directors declared a 26 and a half cent dividend per common share and O P unit to holders of record as of December 31 payable on or before January 15th.
The one cent increase represents approximately a 4% increase over the previous dividend rate.
We will continue to evaluate future increases to our dividend with our board on a quarterly basis with that I will turn it back over to Chris for closing remarks.
Thank you Ryan.
Concluding today's prepared remarks, I want to take a moment to reiterate how pleased I am all that we've accomplished thus far in our first calendar year as a publicly traded company I'm, especially proud of the Q3 results and believe it is one of our strongest quarters that I've seen over the course of my nearly 13. Your 10 year at broad stone, we have successfully positioned ourselves as a leading net lease REIT.
Consistent execution across all facets of our business. This.
This concludes our prepared remarks, operator, you can now open the line for questions.
Thank you we will now proceed the Q&A if you wish to ask a question you can press star one on your telephone keypad. If you wish to withdraw your question you can press star two please and show you on muted lately when asking a question.
Thank you for your patience as we register your questions.
Okay. Our first question today comes from Caitlin Burrows from Goldman Sachs. Caitlin Your line is now open.
Hi, good morning, everyone.
Maybe just a question on acquisition volume you increased your guidance for the year to 600 to 700 million, which is great to see I was wondering if there are certain things going on right now to support a higher level of acquisition or to what extent you think this pace could be sustainable going forward.
Sure take it when it's Chris I'll, let John talk a little bit more about that.
And just start thinking around the pipeline and where we're spending time, but generally I think we feel like our team is definitely capable of supporting that level of volume than again, we continue to source across a pretty broad range of property types are bolt on smaller transactions and larger transactions and so you know that was really the driving.
Force behind where we are in the quarter and what we think we can accomplish by the end of the year, but it would be John will talk a little bit more granularly about the pipeline sure I Caitlin.
<unk> remains exceptionally competitive as I'm sure you're aware.
But we think that that affords us a strategic opportunity given our defensive growth strategy and diversified portfolio and acquisition strategy as well.
We're able to pivot between asset classes in ways that other Reits that are singularly focused aren't necessarily able to so I definitely think that the acquisition pace that we've been experiencing the last couple of quarters.
Give or take a little bit here and there is certainly sustainable for US you know as we announced it was $102 million under control as of our earnings release last night.
That does not include additional deals that we've locked up since then and we expect to continue to do so in the next week or two you know Q4, it looks like it's shaping up to be just as robust as we would hope it to be and that puts us in a great position to start thinking about Q1 as well.
Got it and I guess that makes me think just a little of that seasonality I know we've heard some on that lease rates in the Paas talk about how the fourth quarter I can end up being higher and do you expect to see that sort of seasonality or do you think it could kind.
And it just continued through the first half of 'twenty to ASO.
We've definitely experienced seasonality in the past one of the things that we've been trying to work on this year in particular is trying to smooth that out a little bit and have a little bit more consistency quarter to quarter. So we're hopeful that we'll continue to see that consistency here.
Well its out of Q4 going into Q1.
Where we sit today Caitlin this is Chris again I think.
We're starting to see transactions get ready for Q1 as well as his ended the year. So it seems like we have an opportunity for some nice balance.
Great and then.
Sorry, maybe just considering funding the business going forward and it seems like you have many options now which is great can you give a sense for target leverage range and when you would consider using your ATM versus an overnight offering going forward.
Sure Ryan your edge up there.
Sure Hi, Kaitlin.
I'd say that we remain kind of consistent and our thoughts around funding and sources of funding we have we've obviously increased.
The different funding sources that we have with the follow on activity at least at the end of Q2, and then putting our ATM in place. Shortly thereafter, I would say that you know as we progress through the fourth quarter and think about the first quarter will be looking to fund off of.
Our revolver as well as thinking about our ATM and then as we think about the balance between the ATM and follow ons going forward I'd say you know we look to have a healthy mix of both I think both are useful tools for different reasons I think are.
Day to day acquisition activity and our average purchase price in average asset size is really conducive to using the ATM. However, you know I think there are certain places for larger portfolio transactions and whatnot, where the overnight makes sense from a target leverage perspective, continuing to look clearly.
Inside six times.
And you know I think were fairly comfortable operating where we do in that kind of low to mid five zone on a net debt to adjusted EBITDA basis.
Great. Thanks.
Yeah.
Thank you Caitlin I'm just another reminder, that if he would like to ask a question you can press star one on your telephone keypad.
Our next question comes from Rosemary Rivera from Morgan Stanley Rosemarie. Your line is now open.
Hello. Good morning, everyone. This is Rosemary Ribeiro on Ron Camden's line.
I had a question in terms of can you just elaborate a little bit more on the early lease terminations driving down.
Slow growth.
If you can please elaborate on that that would be great. Thank you.
Sure absolutely so at least termination with this specific office tenant was somewhere in the neighborhood of a $4 million of ABR. So ultimately by taking the assets are.
And terminate the lease and then ultimately selling that we wont have that a b or a flowing through for the fourth quarter. So that puts a little bit of a drag on an F. Boe per share results as a result of sort of those transactions coming together and then the incremental cash that will redeploy into our future asset at some point so that's really.
What the impact there is more of a timing issue than anything else. We had previously thought that it might be a Q1 activity but with.
The opportunity to sell it and then finalizing our transaction with the tenant that's that's really what's creating the timing difference here more than anything.
Thank you.
No problem.
Thank you Rosemarie.
Your next question comes from Michael Goldman from B T. I G. Michael Your line is now open.
Yeah. Thanks, Good morning, Chris could you just spend a minute talking a bit more on the office transaction side obviously.
The credit quality of the tenant and the underwriting there led to it.
Pretty good financial outcome for you all but maybe can you give us some context too.
What the change was for the tenant if theres any read through in terms of how youre thinking about the rest of your office exposure just given some of the trends nationally in the wake of the Covid pandemic in terms of work for home is there is there any kind of read through there or was this a specific one off situation.
Sure.
The specific one off maybe I'll, let John since he's close to the a M. P. M side of the house give you the context around it and I'm happy to jump back in on the read through to the rest of the office portfolio and how we're thinking about it.
Maybe to start with that as a leader and I think it's important that we.
We need to be careful not to paint with too broad a brush here. If this wasn't a discrete one off transaction.
And when Chris said earlier in his remarks, we were patient methodical with respect to this one you know this was something that was brewing for about 18 months now.
The tenant made a strategic decision relative to its workforce and its you know sort of leveraging real estate and its overall business operations and communicated that to us about a year and a half ago and so the our asset and property management teams have been in continual contact with them working through this to find a mutually beneficial resolution to their need.
One of the great things along the way they were very very good to work with they paid their rent on time, the entire time and if we weren't able to come to a conclusion they were.
A locked into paying rent through the rest of their lease terms. So there was never a moment, where we were concerned that we weren't going to get the full benefit of our initial bargained for this deal so.
Relates primarily to how they're thinking about their workforce and where they are planning to put them, but the tenant is you know as as all of our tenants are unique in how they think about these things.
And I don't think there's any concern individually that we have elsewhere that we're not sort of specifically addressing that I'll turn it back to Chris Yeah, and the bigger office portfolio question.
You know I think our R. R.
Thought process remains very consistent from previous quarters, and you know just taking this matter is sort of a discrete one.
You know, we're continuing to follow how the return to work progression is happening and we have a little bit more clarity than last quarter, but I wouldn't call. It a completely completely clear yet and with just 15 assets here in the 8% of the portfolio.
Very granular very.
So a substantial amount of contact I should say with each of the tenants and you don't have a spectrum of of utilization from 100 per cent to folks who are still thinking about when they're bringing their employees back in.
From a credit perspective from a collections perspective.
Continue to see strength in and don't have any concerns with the broader office portfolio and so for the time being I'm not looking to deploy further capital into the office space unless there's some portfolio that might come with a specific office.
Asset or two in it and really just continuing to hold and taking each one of these is as they come in and monitor them and the same granular way that we did with.
This specific situation and that.
That's really where we are with office for the moment.
Great. That's helpful and then I apologize if I missed it I know you talked about the pipeline and obviously the benefits being flexible across property types I'm wondering if you're seeing any kind of shifts and risk return.
Benefits on a geographic basis, obviously, a pretty good exposure in the southeast Sunbelt or are you seeing a shift where maybe theres advantageous risk returns from from certain markets in the country that you're leaning towards.
I'll, let John jump in there.
We're continuing to see a lot of robust pipeline activity in the places we have sort of consistently.
Southeast southwest a little bit on the Midwest here you know, we certainly have not always been a big player on the coastal markets.
Because of the way that we think about our defensive growth strategy and getting.
Really granular in how we think about each individual asset and I think we also are starting to see more and think more about risk adjusted return.
Even just on an individual market basis as to where you're seeing sort of coastal primaries places. We traditionally have always invested in secondary tertiary markets and that's where we think we start to see some real opportunities from a risk adjusted return basis.
But we also with our.
Diversified nature have the ability to flex between what we call our verticals to find opportunities there that aren't as heavily dependent necessarily on geography, but can also tied to the underlying nature of the asset and the asset class that we're that we're looking to play in.
Great. Thanks for your time.
Thanks, Michael.
Thank you Michael we have a final question a follow up question from Caitlin Burrows.
From Goldman Sachs. Caitlin Your line is now open.
Yes.
Hi, Good morning, again I was wondering maybe I know you guys in the past when you talk about sourcing I mean, you talked about doing deals based on past relationships with developers.
Some more widely marketed deal. So wondering if you could give some detail on how the transactions in the quarter came to be.
Sure actually I'll, let John jump in on that one as well, but yeah.
I think this was a great quarter to sort of evidenced the strength of our sourcing capabilities. We over the course of the year and this goes back historically as well you know what.
The majority of our deals are what we consider to be repeat business, whether that's with our existing sellers or existing brokers or a P relationships things like that one of the acquisitions. This quarter that you know we're sort of most proud of is in the health care space, where it was.
A very low.
Low marketed deal it was only an outreach to a handful of people and we were included in that outreach based off of our relationships with the folks that were involved and I think that was a great opportunity because it was one where you know I don't know that a whole lot of folks all that deal we were a part of that and able to execute on it and provide a great return over a long term lease for our shareholders.
And I'd say, we have some of that going on in the current pipeline as well where a few tenants have reached out to us.
Looking to execute by year end and a fairly efficient manner to continue to build on our relationship that we've had.
On the restaurant retail side, and so that seems like a very productive Avenue for us to continue to close out Q4 as well.
Hi, great thanks for that detail.
No problem.
Okay. Thank you Caitlin we currently have no further questions. So I will hand back over to the management team for any closing remarks.
Wonderful. Thank you all for your attention and appreciate another great quarter with broad so net lease we wish you all a great holiday season, and we'll look forward to talking to many of you at NAREIT in the coming weeks on the institutional side and have a great afternoon.
Thank you for joining today's call you may now disconnect.
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