Broadstone Net Lease, Inc.

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 4/5

Broadstone Net Lease, Inc. (BNL) is a real estate investment trust (REIT) that acquires and manages single-tenant, net-leased commercial properties primarily across the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

BNL’s “moat” is non-existent, it’s just a property owner / landlord, which has no advantage compared to its many competitors. However, it’s interesting to see, that its portfolio is very diversified, geographically, in property types, and tenants.

Business Overview

Broadstone Net Lease (BNL) operates as a Real Estate Investment Trust (REIT), focusing on acquiring and managing a diversified portfolio of single-tenant, net-leased commercial properties. Their business model centers on acquiring properties with strong tenants under long-term leases, where tenants are responsible for most operating expenses, insurance, and taxes. Here’s a breakdown:

  • Revenue Distribution: BNL’s revenue primarily comes from the rental income generated by its vast portfolio of net lease properties. The portfolio is diversified across multiple sectors including, retail, healthcare, industrial, and office properties across the United States.
    • Their latest reports show that the most significant portfolio is Industrial (about 51%), which is followed by Retail (14.6%), and then healthcare (14.1%)
  • Industry Trends: The net-lease REIT sector is characterized by steady, predictable cash flows due to long-term leases and minimal landlord responsibility for operating expenses. However, rising interest rates and inflation create challenges, as it becomes more expensive to borrow money for new acquisitions, and operating expenses of the tenants do get passed along to the landlord in some cases. The real estate market has also been heavily impacted by high interest rates as well.
  • Margins: * BNL has an average annual base rental escalators of 1.2% to 1.5% which helps it to grow its revenue in line with inflation. * BNL has a well-positioned capital structure, with a weighted average interest rate of 4.2% which helps the company keep a larger margin.
  • Competitive Landscape: The REIT sector is intensely competitive with many players, both public and private, vying for acquisitions and tenant relationships. BNL competes with other diversified REITs, as well as specialized REITs that focus on a particular sector or geographic area. The market also has many private real estate companies that are looking for similar investments. However, BNL has been able to keep a positive and growing operating margin.
  • What Makes BNL Different?: BNL has a diverse portfolio that is difficult to replicate. BNL’s focus on a diversified portfolio, both by property type, geography, and tenant, has been part of its strategy for several years now. In this case, BNL can spread the risk between these factors, and be more resilient to local economic changes or industry specific problems. Also, a large part of BNL’s management strategy seems to be to acquire off-market, single properties. This shows they are able to make deals at favorable prices with more motivated sellers. BNL is also one of the few REITs that has no investment grade rating from the large rating agencies like Moody’s and S&P and does not target this type of rating either, this makes it more attractive for non-institutional investors.

Financial Analysis

The financial data provided is from the Q1 and Q2 2024 earnings reports and a 10-K form from 2023, all are from the SEC’s Edgar Database.

  • Income Statement Overview:
    • BNL has consistent revenue growth over time.
    • Revenues have grown from $159 million in 2020 to over $230 million in 2022 and 2023 and are projected to further grow in 2024.
    • Operating expenses are relatively stable, indicating that costs are well-managed.
      • For the three months ended June 30, 2024, BNL reported Total Revenues of $102.8 million, an operating income of $32.3 million, interest expense of $35.5 million, net income of $19.7 million.
    • In the same three-month period the total revenue of $102.8 million came from $96.5 million in rental revenue and $6.3 million from other revenue which is mainly related to real estate.
    • Net income, while showing positive results, is heavily influenced by interest rate changes and write-downs.
    • Net income attributable to Broadstone Net Lease, Inc., (after dilution) was $0.12 a share in Q2 of 2024, compared to $0.23 in Q2 2023, reflecting some challenges, even though revenue is growing.
    • BNL is a high margin company and its revenue growth means more cash for the company.

  • Balance Sheet Health:

    • BNL’s debt to equity ratio hovers above 1. This is typical for a real estate company where debt is a large factor of the business model. However, a debt to equity ratio above 2 would be more of a warning sign.
    • Cash and cash equivalents are consistently above 50 million, which can be used for acquisitions. They also seem to have the liquidity they need to keep operating and not be at risk of running out of cash.
    • BNL seems to be using a lot of preferred stock to increase its capital base, and has almost $170 million worth of preferred equity. This form of funding is more expensive than normal debt.
    • BNL has long-term obligations (from debt) of more than $1.4 billion, however, at a weighted average interest of 4.2% which will be hard for any competitor to beat.
      • From a historical perspective, BNL has been very stable in terms of its debt and the payments it needs to make for that debt. It is not clear if BNL’s strategy of using more debt and less equity will be successful, but it has not significantly affected their financial health yet.

  • Cash Flow:

    • They generally produce positive cash flow from operations, in the three-month period from June 2024, operating activities provided $66 million in cash, whereas investing activities used $148 million of cash and finance activities provided $99 million of cash.
    • In general, this shows that the business is profitable and generating cash, but heavily relies on financial activities to expand their business through acquisitions. However, they do not need extra funding to stay afloat because of the business cash-flow from operations.

Moat and Business Resilience

Given the current information and the analysis above, I would give BNL a moat rating of 1/5. A 1/5 rating indicates they have no tangible moat and are essentially a landlord / property owner.

  • Legitimate risks:
    • Interest Rate Risk: Interest rate hikes by central banks could impact BNL’s cost of capital. These increased costs can reduce profits and reduce their ability to compete with other real estate investment companies, or buy properties at the same price.
    • Inflation: Inflation erodes the value of their future earnings, because their rental prices are tied to present-day values and they are only able to slightly grow that price over time.
    • Economic Downturn: If a recession hits, it is possible that their clients would have problems paying their rents, which would directly influence BNL’s profits and value, with a high likelihood of creating long-term financial damage.
    • Credit Risk: A downgrade in BNL’s credit rating would lead to higher rates on new debt, and therefore making it harder for the company to generate profits, acquire properties, and grow.
    • Concentration: Despite having a portfolio that is well diversified from sector to sector, they seem to be highly concentrated to the U.S markets. Given that the U.S is undergoing large geopolitical pressures such as the trade war, economic downturn, rising interest rates, it is a big risk to put all eggs in the U.S market.
  • Business Resilience:
    • BNL’s business strategy of focusing on a diverse portfolio and long-term leases, gives them some protection against industry-specific issues and the fluctuations in the market.
    • BNL has a good balance sheet as of right now, and has the ability to pivot with new strategies if their current ones stop working.
    • They have a wide range of clients which means that they are not fully dependent on the success of any single company.

Understandability

I would give BNL an understandability rating of 3 out of 5. It’s not too complicated to understand BNL, but it is a little bit difficult to understand the long-term implications of the current economic scenario.

  • Simple concept: BNL buys commercial properties and leases them out to other companies. This is very easy to grasp by any person.
  • Complex financials: BNL’s financials, which include various accounting terms and complex valuations metrics, can be difficult for new investors to fully grasp. There is also some risk involved in the reliance of interest rates on their future profits.

Balance Sheet Health

I would rate BNL a 4 out of 5, it’s a healthy balance sheet, but they are increasing the use of debt, which could cause some issues in the future. They also have a huge reliance on the success of the U.S economy.

  • Debt to equity ratio: BNL’s debt to equity ratio is over 1, which would be deemed as medium risk for most companies but not for real estate companies. This means that a larger portion of BNL’s assets are being funded by debt. However, given that they seem to be able to manage it well, it doesn’t appear to be a big risk for them.
  • Liquidity and cash: BNL has enough cash reserves to meet its short term obligations, and its low cash turnover means that most of the cash is being used for investments. This is the strategy of most large real estate investment companies, and seems to work well for them, and has provided them a strong growth.
  • Debt: The debt they use is mainly term loans, which means they are fixed and their payments will also be somewhat constant. This is more stable than most debt financing models.
  • Strong management: The management team seems to be very experienced in the Real Estate industry.

Recent Concerns

  • In the latest earnings reports and press releases, it was noted that the Fed rate hikes are impacting the business significantly. Management says that the higher rates have forced the company to lower the price of acquisitions as the yield on investment needs to be greater.
  • In the same earnings call, management noted that they will continue to be affected by the increasing interest rates, they also noted the high reliance on the U.S economy, and how that can have a negative affect on their company’s operations.
  • They had previously noted that they have a strong pipeline of properties to buy, and these properties will help the company sustain their growth. However, given the current interest rate issues and a general economic slowdown, it’s hard to see how this would be the case.