Q4 2023 Broadstone Net Lease Inc Earnings Call

Hello, everyone and welcome to the Brookstone net lease fourth quarter 2023 earnings conference call.

My name is Bruno and it'll be operating your call today.

Please note that today's call is being recorded.

The presentation you can register to ask a question by pressing star followed by one on your telephone keypad.

I will now turn the call over to Brent <unk> director of corporate Finance and Investor Relations at Brookstone. Please go ahead.

Thank you operator, and thank you everyone for joining us today for Bronx don't not leases fourth quarter 2023 earnings call on today's call you'll hear prepared remarks from CEO, Jon Marino, President and CFO, Brian Albano and CFO, Kevin final 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 31, 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.

In conjunction with and included within our earnings release, we provided details on our ongoing efforts to simplify our health care portfolio through the disposition of clinically oriented assets. These materials have been furnished with the SEC and may be found on the Investor Relations section of our website at brownstone dot com with that I'll turn the call over to John.

Thank you Brent good morning, everyone.

I'm proud of what our team accomplished throughout 2023, and what was a uniquely challenging year on many fronts.

Before jumping into perspectives on our fourth quarter and full year results and market conditions I.

I would like to take a few minutes to discuss our decision and ongoing efforts to simplify our portfolio composition through the sale of our clinically oriented healthcare assets.

Difficult political surgical and traditional medical office building properties commencing with our announcement of an agreement to sell 37 of these assets for $253 million that we anticipate to close in the first quarter.

The volatile macroeconomic conditions and suppressed transaction environment, we experienced in my first year as CEO provided our team with a great opportunity for internal process and portfolio evaluation.

We completed a number of internal objectives and priorities.

But perhaps the greatest clarity we obtained at our decision to simplify our portfolio Dell, our clinical surgical and traditional MLP assets.

More intently and proactively on the industrial space and our other core investment verticals of retail and restaurant assets.

And remove the complexity caused by holding healthcare assets not customarily included in the net lease wrapper.

Since going public in the fall of 2020, the composition and complexity of our health care portfolio has been a hurdle for many investors over the years and for good reason.

Political surgical in traditional medical office building assets do not always fit well within the traditional net lease framework.

While there can be high quality in nature. These types of assets generally have shorter lease durations greater landlord responsibilities lager.

Lager potential downtime upon lease maturity and in some cases greater potential challenges with tenants Green Valley being the Starkest example.

While the characteristics of these.

Sure.

We open up the line for questions.

Thanks, Kevin as.

And as you can hear from our remarks, we're quite proud of the way we navigated 2023 and are excited for what's to come in 2024.

Reflecting on 2023, and my first year as CEO I am proud of the decisions. We have made the discipline. We have shown in our commitment to long term value creation and the results of our actions produced in a volatile year.

I believe the culmination of these efforts will be demonstrated through the growth opportunities. They will present us with as we navigate 2024 with an eye for what that means in 2025 and beyond.

The last year has been challenging for real estate generally, but I believe the future is bright for P&L.

We can now open up the line for questions.

Thank you, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.

Thats Star one.

On your telephone keypad.

To withdraw your question Star followed by two.

I'm pleased to also remember too and mutual microphone when it's your turn to speak.

We do have our first question comes from Spenser alloy from Green Street Spencer. Your line is now open.

Thank you.

Are you willing to share any color on the buyer pool for the assets currently under contract and you have a sense of whether any of these assets will be repurposed or if they are intended to remain leased to clinically so good.

Thanks, Spencer buyer pool, we had a pretty robust lift that we went out to it was an active marketed process. So we were very pleased with.

The ability of the brokers that we worked with and our team to drive this down to the best optimal disposition outcome for us so robust process. These are.

A variety of.

Dedicated health care operators in the real estate space, there's some private players in there as well as some public.

Our understanding is that all these assets are going to continue to be operated as they are structured so theyre not being repurposed into something different whether there is a view towards re tenant in some of these in the future given that thats something that is more prevalent and as we talked about sort of in the prepared remarks, and the dedicated health care space.

Can't speak to that and what their plans are but theres not a view that these are going to be torn down and turn into something totally different from the health care purposes. They serve today.

Okay. Thank you and then just turning to your investment guidance for 'twenty four it suggest you would plan to be a net acquirer. This year in the event that you continue to trade at a discount to NAV.

Would that still be the case or should we expect dispositions to outpace acquisitions again for this year.

Yes, I think it depends on what we see.

We as you heard in our remarks theres little bit of price discovery still going on we're cautiously optimistic that this will start to.

So to clarify itself over the coming quarters, and you'll start to see volumes pick up there's a lot of good indicators would suggest that should we're about 18 months into this tightening on that lease volumes as we start to see hopefully some of that bid ask spread come in a little bit more from where it was particularly during 2023.

As you start to see.

Some cost of capital improve there might be some more buyers and get sellers more excited that's part of the issue that people have experienced that sellers haven't necessarily been willing to go out and market their properties or to look for transactions because we're not sure what the buyer pool looks like.

But what we have seen is even though theres been an increase in some places in the number of offers you're not seeing it everywhere.

Buyers that are well capitalized all cash buyers are in a much better position than those that are coming in with financing contingencies, which you continue to see on both deals that were bidding on and deals that we are actively selling ourselves so that positions us really well.

We also as you heard in our remarks are really keenly focused on looking at off market opportunities that might come through our network as well as unique investment structures that we can take advantage of.

With developers and others that are struggling still because of the constraints in the commercial real estate lending business. That's one of the areas that we talked about a lot last year and we're starting to see some good effort and good opportunity there.

The $97 $1 million that we've got under control.

Large transactions Thats, a repeat deal with a developer from UNFI.

So we're very excited about that repeat relationships being able to find those off market direct opportunities to invest capital and things that we get really excited about.

Are the places, where we hope to see some more so it just depends on what's going to happen for the year and as we said we will regularly update folks on both.

The sales efforts relative to the health care portfolio simplification strategy as well as our redeployment.

Kevin I would just add on the other part of your question is.

From a need for capital we are in the same spot we were last year.

Lowly levered. So we've got some leverage capacity as we think about net acquiring.

Okay. Thank you.

Our next question comes from Anthony Pallone from J P. Morgan Anthony your.

Your line is now open.

Alright, great. Thanks, I guess first just some clarifying items on the health care.

Portfolio, they intend to sell 11% of ABR is about $43 million, but there is some <unk> in there and such and it sounds like some landlord responsibilities as the NOI a different number can you or is it the $43 million.

The way, we're thinking about us before you think Tony it's kind of certainly some savings built in.

Sorry.

The NOI as the 43 million, though it sounds like.

Theres certainly some savings in there from property litigation Capex, resulting from additional landlord responsibilities.

But the way we've been thinking about it from a sales and a redeployment standpoint focused on the 43.

Okay, and then how should we think about the.

The cap rates on the stuff to be sold still outside of say great price. There is no new NOI there, but you know where this is higher cap rate stuff do you see it as or is this seven nine reflective on the first tranche like how did how should we think about that.

Yeah, I think the 79 is reflective way we've been focusing on this as sort of that mid to high sevens for where we're looking to sell these assets were not straight price takers. In this exercise. This is not something where we're looking to <unk>. We took a long time to think through this process and what we thought was going to provide the.

Best long term shareholder value and we believe this is Ed we're really excited about executing on this in 'twenty four and what that's going to mean for 2025 and the years beyond in terms of our ability to.

Grow and drive value for shareholders, including <unk> accretion and multiple expansion.

So we're not looking to sell these at really high cap rates just to move them, along if we need to hold it for a little bit longer. If that's okay. These are assets that we have a lot of conviction.

Conviction before we went public when we acquired the majority of them and so we can hold these and look to execute in that mid to high Sevens. This is not something like I said thats going to be a fire sale or at higher cap rates.

Okay, and then with that being said then if we're kind of sitting here looking at you.

Taking on this divestiture.

Like how do we get comfortable looking out to 2025.

And that being a return to growth or it may not be like I mean, how should we think about that like when when does this process kind of band and you get back to.

Driving accretive acquisitions.

Yes, I mean, 2025 is where we expect that to happen.

Although there is a chance you can see it in 24. The reason we came out at $1 41, rather than providing a range.

Is that the timing on the sales and the redeployment is as you can imagine the single greatest variable.

The range and the focus there is entirely on the health care simplification strategy, there's not anything that we were thinking about from a broad credit issues. There's no credit bad desktop that worried about you heard us during our remarks from a bad debt and from a tenant credit standpoint, there's only a handful of relatively immaterial issues that we're focused on right now.

So this is entirely based off of the strategic work that we're doing.

And the clinical health care sales and then redeploying those proceeds.

And the goal here is that at worst we wanted this to be a neutral exercise so $1 41 to $1 41.

But if things go our way a little bit on the timing standpoint, both in terms of.

Are there ways that we can lengthen out some of the sales, but still execute or if there are ways that we can accelerate some of the investment activity depending on the opportunities we see we might be able to push it but we started the year at $1 41, we're gonna regularly update this.

We believe as we get closer to the end of Q3, beginning of Q4, we will have a very clear view as to what our growth path looks like in 2025, and Thats what were gearing ourselves to a big piece of it but I don't want to get lost either is and we talked a little bit about this last year is the huge benefit that we're going to get from UNFI coming online.

So not only are we going to be going into 2025, hopefully with the majority of this health care portfolio simplification strategy sort of put to bed, but also we're gonna have UNFI coming online and both of those things plus whatever other incremental redeployment, we can do this year.

We're going to give us one heck of a 225, we think so we're excited for what that is.

So the intention is to manage this process to have growth in <unk> in 2025.

Correct.

Okay. Thank you.

Our next question comes from Michael Gorman from BT AIG, Michael Your line is now open.

Okay.

Hi, Good morning. This is fischer roads on for Mike.

With the UNFI facility coming on later this year and starting to impact cash flow can you remind us how those economics impacted back the back half of 2024 and as you near the end of the project, but <unk> seen other similar opportunities in the market right now and where could we see you execute.

Yeah.

Alright, I'll, let you do the.

Unify update.

Okay.

Sure. So in terms of UNFI, we expect it to come online and start paying rent.

In the.

In the last quarter of the year, so fourth quarter.

So within one quarter of that.

This year and then obviously a full year next year. So most impactful for 2025 in terms of additional opportunities like that we have been spending a lot of time with a host of relationships that we've built over the years from developer perspective.

I'd call it the depth of that somewhere.

Just north of 10 relationships that we've been working with them seeing opportunities from.

There certainly is as John had mentioned some dislocation in the capital markets and we do see future opportunities on a build to suit basis.

But <unk>.

To be determined as we continue forward here in terms of how meaningful that will be.

Perfect makes sense and then how does the deal flow look on the reinvestment side basically how quickly you think you can redeploy these proceeds and as you think about redeploying assets, where are you seeing the most interesting opportunities.

We feel pretty confident right now in the redeployment there as we mentioned we've got the $97 1 million that's already under contract, we're seeing more and more come along whether those transact or not it's still an open question as you heard in Brian's prepared remarks, there continues to be a lot of opportunity.

<unk> out on the market.

Whether those transact or not is really been the key thing in 2023, and what we've seen so far in 2024.

But we've sharpened our pencil theres a number of things that we're looking at in our core verticals industrial and defense of retail and restaurant sectors that we think are actionable. So we're working hard on them expect to see some of that come in for Q2 Q3.

The timing as I mentioned before on the redeployment of the healthcare sale proceeds is going to be critical.

So we're hopeful that we're going to see what we can but we're going to maintain that discipline. This is still not the market of 2022 or 2021.

This is an area, where we still need to be disciplined and focused on finding the right opportunities.

Shifting ourself to find a way to get to a yes, but still being very comfortable to say no. If it isn't going to work, but there is good opportunities right now in all three of those industrial retail and restaurants.

Great. Thank you for your time.

Our next question comes from Mitch Germain from citizens JP Morgan Mitch.

Your line is now open.

It looks like it changed companies.

The is it.

Safe to.

I assume that there is are there any other acquisition sorry dispositions planned other than health care, how should they think about that.

They would be pretty minimal Mitch there's the usual risk mitigation stuff that we'd be focused on depending on how we're looking at the individual asset from an underwriting standpoint.

With the pressure that the healthcare sales put on earnings growth for the year. That's clearly the area that will be focused on and it will only be a handful of things that we might do separately.

Gotcha, and then John you said call it around a high seven cap rate on the sales.

You were able to do some deals recently I think it was like an average low sevens or deployment.

How should we think about.

Yields that youre seeing in the market today can you replicate something close to the 79 or as you are likely to be a little bit of dilution as you go through that process.

It depends on the asset obviously, but we're focused in the sevens.

With selling off I mean, if you think about this first tranche of things that we're selling in our health care portfolio, you're talking about sub five year, Walt the individual landlord responsibilities and some of the other things that again don't work well for us as a publicly traded net lease company, but work great for dedicated health care investors a lot of the stuff that they look for in terms of where they are.

The ability to leverage their operational expertise as opposed to a more of a passive net lease environment.

That's why we believe that there's good opportunity to sell these and move them along.

Then on that redeployment side, we're solidly in the <unk>. There is still good opportunity out there, particularly in places, where we're able to find off market opportunities.

Unique investment structures with developers or others that aren't able to find the type of financing. They used to 18 months ago. So that's where our focus is on an individual deal you might be talking low to mid sevens on a blended basis, maybe we were talking to mid sevens.

But that remains to be seen as we go.

Got you you.

And you talked about a repeat deal with the UNFI relationship that brought you that transaction.

It's not a development deal right. That's the traditional acquisition is that the way to think about it.

It's not a lot.

Actually not.

There is an existing property that they are working through.

Yes solution on in terms of potentially selling some of the assets and looking for a financing solution on the other piece of it. So we're working on that now it's not a straight up development and the entirety of it does not include sort of a straight fee simple sale. So working on as I said, you need transaction structures to help.

Theres developers out there that arent finding what they need any more from commercial real estate lending.

Yeah.

Gotcha and last one Kevin.

Obviously, you mentioned the swaps are expiring and I think that's kind of start to bleed into the.

Thank you.

Your earnings over the course of the next couple of quarters or years.

Is there any desire to.

Pursues them something to replace.

What's expiring right now what are your thoughts there.

Yes, I think the first part of the answer is we've got time Alright Kid is October of this year is when they'll start to roll to $230 million by the end of this year another $125 million into next year. So that order of magnitude is not particularly significant.

I think the decision on what you do is easier to make and clear to make as you get closer and if were.

Potentially sitting on cash or whatever considerations. We have we will certainly evaluate best option and look at that alongside our maturities, which don't start until 2026.

Yeah.

Thank you.

Okay.

Our next question comes from John Kim from BMO Capital markets. Your line is now open.

Thank you.

The health care so.

John you mentioned the rationale.

Earnings assets.

We're certainly makes sense.

Lower weighted average lease term potentially.

Higher risk to the landlord.

But I just wanted to clarify the timing of the decision now and.

And whether or not there was any.

Tenant issues that were drilling or you.

You were saying on horizon.

Yeah, No obviously, we've got Green valley from a tenant issues that we've spent a lot of time talking about.

But from the rest of this portfolio. This is a strategic structural issue call. It. This is not looking at any individual tenant concerns. This is not something that we're thinking about from a tenant credit bad debt standpoint.

As I mentioned during my remarks, you know 2023 was a great year in many ways for us to be able to sit back and think about what do we want to be what is the thing that's going to help us drive long term shareholder value well get into some multiple expansion and get back to that virtuous cycle and we're now thinking of.

This sort of three year period as being critical to that 2023 was sort of a pause in the net lease market gave us time to sit and think about where we are particularly relative to where we came from four years prior with going public in.

<unk> 'twenty 'twenty four is now going to be this execution period, and then 2025 is when we get to harvest the fruits of these levers we're.

We're going to be spending a lot of time in 24, executing really well setting ourselves up the core mission of those businesses are there any publicly traded net lease REIT would be is to grow long term shareholder value to grow at Lasalle.

We're not focused on sort of the vagaries in the vicissitudes of quarterly earnings. We're looking at what is going to drive long term shareholder value and that's what we're doing this year and that was what drove this decision and we're excited as I said to sort of harvest the fruits of those labors in 'twenty five and.

And beyond.

Okay.

And then in your answer to prior questions on the cap rates that you expect on the remaining 75 assets for sale.

If it's at 79 or lower that would imply.

<unk> hundred 95 on the remaining assets.

And so that the total site.

The $5 50 or higher.

And your guidance for this year.

Yeah.

So I was just wondering if you're being conservative on that disposition.

Or is there some kind of.

They get yourself or not.

Sure.

No I don't think its either of them I think that was sort of our.

Best view as to what we've got in the pipeline right now I think another key component of this.

And I think I touched on this earlier, but the we're not wedded to selling every single last one of those 75 assets or the 38 that are under contract right now in 2024.

We're not going to be price takers on this and we can be patient with these so there may be a handful of those are more of that slip into 2025 and thats. Okay.

Again, with a long term view towards driving shareholder growth.

And value so we're not going to try to push them all through 2024. So that's for the range I think if youre seeing any disconnect. There, it's probably our view that some of these are probably going to push into 2025 as opposed to.

Just taking whatever we can to 'twenty four.

Okay, so more of a timing issue.

And my final question is on your G&A guidance.

You expect it to be down $6 million or 15% this year versus last year I realized last year, yet one 6 million of common stock or not.

That could happen again, but what is the remaining cost savings.

Uh huh.

On the SG&A side.

Hey, John It's Kevin I think the numbers.

Be combining we guide to cash G&A and the Delta that explains most of that is probably the stock based comp.

Okay got it thank you.

Yes.

Our next question comes from keeping Kim from Truest Kim Your line is now open.

Thanks. Good morning, just wanted to go back to the F. O cadence that we should expect in 2024, I think you mentioned that one point youll hit a 90% payout ratio implying.

<unk>.

Third defense.

I just wanted to confirm that and if you can comment on the cadence. Please.

Yes, I think a point of clarification on that is that it's in terms of trying to quantify where the dividend could theoretically go to we basically said if these all happened today, what would the payout ratio look like obviously, the timing impact will mitigate a lot of that and so.

Once again, we're back to the I think point of clarity here that the timing both on the disposition and the redeployment will be the driving factor in a lot of quantitative outcome each quarter here.

Okay, and just wanted to go back to the Red lobster and Shutterfly comment.

Should we expect some type of rent or.

Asset value dilution as these assets transitioned to different owners, possibly.

So the Red lobster, we're working with them as they try to find a new home for their stake Thai Union being them.

That has not come up yet that's not something that we're interested in there's good value in the real estate that we own there.

And we're not interested in taking a step back it has not been a conversation that we've had is they have explored potential opportunities and then on shutterfly.

It's been a great market and we've already had a handful of tourists coming through we feel pretty good about our prospects. There. So we're not looking to take a step back although as we mentioned in our.

Remarks, there is a.

We're thinking that.

Re leasing that is probably scheduled for the fourth quarter and then shutterfly will be vacating at the end of the second quarter. So there's a little bit of downtime, there, but immaterial overall.

Okay. Thank you.

Our next question comes from Ronald <unk> from Morgan Stanley Arnold Your line is now open.

Hey, just a couple quick ones. So I am just looking at the presentation about sort of the pro forma.

Portfolio as you were sort of going through this process was it solely focused on sort of the health care vertical or did you sort of kick the tires to some of the other verticals and I'm thinking office here as well right why not sort of do everything at once and so forth. So how did you guys think through that.

Yeah, we looked at everything honestly.

As I mentioned 23 was a great year for sort of stepping back in.

We didn't want to go into it with preconceived notions. So we were very keen on evaluating everything that was in the portfolio.

As Ron as you know and as everyone else knows we have been very industrial focused in the last five years north of $2 billion in total acquisitions, 70% of that being in industrial.

Part of the part of our hypothesis around the clinical health care assets with looking at where do we transact in that had fallen off a cliff less than 10% of total investment volume in the last five years and then all the other things that we had talked about so not only was it a place that doesn't really fit well within our rapid but it's also a place that we hadn't been able to scale it.

Meaningful way for a long period of time.

The other assets so in terms of our core verticals industrial and an extensive retail and restaurant sectors. We feel really really good about particularly after doing a deep dive in going through it ASP asset and sector by sector in terms of what works for us and what we think will drive that long term shareholder value and multiple expansion.

But office what you just touched on starting with I think it was about this time last year. We took a very clear standards that office is not going to be a part of our future on standalone basis, we will be looking to.

Slowly wind that portfolio down and we're very happy to hold onto those master leased office assets, just because we think of them more as being a part of the industrial or retail or restaurant grouping that there with.

But those Standalone office assets are better held somewhere else, but we're not going to Firestone theres. Good credits on those that consistently pay rent. We don't have any landlord obligations, it's not something that is causing any real issues for us. So we will happily hold those until we could find an optimal disposition outcome, but we will be looking for an optimal disposition outcome at some point.

Got it and then just in terms of.

People and staffing.

Does anything change there like are there people that were working on the healthcare that are either getting like go or refocusing or is it like how does that how does the team actually change from from from from these sort of events.

So we're fairly lean we staff to begin with and we haven't had a lot of growth we've been pretty much flat for the last two years to three years here.

On the healthcare in particular.

There was already some.

Attrition that we had experienced during the year and then we have one retirement, that's coming up that's our plan to separate and apart from our health care reorganization and then keep in mind, even at the end of this we're going to have seven 5% sitting in the.

Consumer centric health care space and so the folks that we have that work on that would continue to be dedicated to that space. So as I said, we're kind of flat from a personnel or a person basis for last couple of years here and we anticipate that's probably got hold true for this year as well.

Great. That's it for me thanks, so much.

We currently have no further questions. So I will like to hand, the call back to John Moran for closing remarks over to you.

Thanks Bruno.

Thanks, all for joining us today I hope you can hear the excitement that we have about this strategy.

What we're gonna be doing in 2024, particularly with that long term view of growing shareholder value in multiple expansion in 2025 and beyond.

Looking forward to seeing many or all of you in the upcoming weeks at various conferences and hope you all enjoy the rest of your day. Thank you.

Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.

Thank you.

[music] so enjoy the rest of your day. Thank you.