UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2023, or
☐Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 001-39529
BROADSTONE NET LEASE, INC.
(Exact name of registrant as specified in its charter)
Maryland
26-1516177
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
800 Clinton Square
Rochester, New York
14604
(Address of principal executive offices)
(Zip Code)
(585) 287-6500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, $0.00025 par value
BNL
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 187,271,816 shares of the Registrants’ Common Stock, $0.00025 par value per share, outstanding as of July 31, 2023.
TABLE OF CONTENTS
Page
Part I - FINANCIAL INFORMATION
1
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
2
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
3
Condensed Consolidated Statements of Cash Flows (Unaudited)
5
Notes to the Condensed Consolidated Financial Statements (Unaudited)
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Cautionary Note Regarding Forward-Looking Statements
Regulation FD Disclosures
Explanatory Note and Certain Defined Terms
26
Overview
Real Estate Portfolio Information
27
Results of Operations
34
Liquidity and Capital Resources
39
Derivative Instruments and Hedging Activities
42
Cash Flows
Non-GAAP Measures
43
Critical Accounting Policies and Estimates
46
Impact of Recent Accounting Pronouncements
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
47
Item 4.
Controls and Procedures
Part II - OTHER INFORMATION
48
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
49
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Broadstone Net Lease, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)
June 30,2023
December 31,2022
Assets
Accounted for using the operating method:
Land
$
754,402
768,667
Land improvements
332,757
340,385
Buildings and improvements
3,857,236
3,888,756
Equipment
9,608
10,422
Total accounted for using the operating method
4,954,003
5,008,230
Less accumulated depreciation
(578,616
)
(533,965
Accounted for using the operating method, net
4,375,387
4,474,265
Accounted for using the direct financing method
26,855
27,045
Accounted for using the sales-type method
572
571
Property under development
37,449
—
Investment in rental property, net
4,440,263
4,501,881
Cash and cash equivalents
20,763
21,789
Accrued rental income
148,697
135,666
Tenant and other receivables, net
1,895
1,349
Prepaid expenses and other assets
42,322
64,180
Interest rate swap, assets
65,143
63,390
Goodwill
339,769
Intangible lease assets, net
309,298
329,585
Total assets
5,368,150
5,457,609
Liabilities and equity
Unsecured revolving credit facility
122,912
197,322
Mortgages, net
80,141
86,602
Unsecured term loans, net
895,319
894,692
Senior unsecured notes, net
844,932
844,555
Accounts payable and other liabilities
44,147
47,547
Dividends payable
55,640
54,460
Accrued interest payable
5,889
7,071
Intangible lease liabilities, net
57,573
62,855
Total liabilities
2,106,553
2,195,104
Commitments and contingencies (See Note 16)
Equity
Broadstone Net Lease, Inc. stockholders' equity:
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued or outstanding
Common stock, $0.00025 par value; 500,000 shares authorized, 187,273 and 186,114 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively
Additional paid-in capital
3,430,692
3,419,395
Cumulative distributions in excess of retained earnings
(391,631
(386,049
Accumulated other comprehensive income
68,428
59,525
Total Broadstone Net Lease, Inc. stockholders' equity
3,107,536
3,092,918
Non-controlling interests
154,061
169,587
Total equity
3,261,597
3,262,505
Total liabilities and equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Income and Comprehensive Income
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2023
2022
Revenues
Lease revenues, net
109,353
98,013
228,345
191,854
Operating expenses
Depreciation and amortization
39,031
35,511
80,815
69,801
Property and operating expense
4,988
4,696
10,874
9,740
General and administrative
9,483
9,288
19,899
18,116
Provision for impairment of investment in rental properties
1,380
1,473
Total operating expenses
53,502
50,875
113,061
99,037
Other income (expenses)
Interest income
82
244
Interest expense
(20,277
(17,888
(41,416
(34,784
Gain on sale of real estate
29,462
4,071
32,877
5,267
Income taxes
(448
(401
(927
(813
Other (expenses) income
(1,674
2,632
(1,692
1,506
Net income
62,996
35,552
104,370
63,993
Net income attributable to non-controlling interests
(2,982
(2,036
(5,052
(3,719
Net income attributable to Broadstone Net Lease, Inc.
60,014
33,516
99,318
60,274
Weighted average number of common shares outstanding
Basic
186,733
169,555
186,433
166,698
Diluted
196,228
180,256
196,148
177,346
Net earnings per share attributable to common stockholders
Basic and diluted
0.32
0.20
0.53
0.36
Comprehensive income
Other comprehensive income
Change in fair value of interest rate swaps
19,652
18,772
1,753
53,733
Realized loss on interest rate swaps
522
695
1,044
1,354
83,170
55,019
107,167
119,080
Comprehensive income attributable to non-controlling interests
(3,937
(3,151
(5,138
(6,941
Comprehensive income attributable to Broadstone Net Lease, Inc.
79,233
51,868
102,029
112,139
Condensed Consolidated Statements of Stockholders’ Equity
CommonStock
AdditionalPaid-inCapital
CumulativeDistributionsin Excess ofRetainedEarnings
AccumulatedOtherComprehensiveIncome
Non-controllingInterests
TotalStockholders'Equity
Balance, January 1, 2023
39,304
2,070
41,374
Issuance of 259 shares of common stock under equity incentive plan
Offering costs, discounts, and commissions
(2
Stock-based compensation, net of zero shares of restricted stock forfeited
1,879
Retirement of 66 shares of common stock under equity incentive plan
(1,175
Conversion of 896 OP units to 896 shares of common stock
14,897
(14,897
Distributions declared ($0.275 per share and OP Unit)
(52,145
(2,742
(54,887
Change in fair value of interest rate swap agreements
(17,003
(896
(17,899
Realized loss on interest rate swap agreements
496
Adjustment to non-controlling interests
(460
498
(38
Balance, March 31, 2023
3,434,534
(398,890
43,516
153,110
3,232,317
2,982
Issuance of 51 shares of common stock under equity incentive plan
(10
Stock-based compensation, net of 6 shares of restricted stock forfeited
1,539
Conversion of 25 OP units to 25 shares of common stock
398
(398
Distributions declared ($0.280 per share and OP Unit)
(52,755
(2,664
(55,419
18,722
930
(5,769
5,694
75
Balance, June 30, 2023
Condensed Consolidated Statements of Stockholders’ Equity - Continued
Balance, January 1, 2022
41
2,924,168
(318,476
(28,441
163,846
2,741,138
26,758
1,683
28,441
Issuance of 6,427 shares of common stock
136,825
136,826
(2,218
Stock-based compensation, net of one share of restricted stock forfeited
929
Retirement of 59 shares of common stock
(1,301
Distributions declared ($0.265 per share and OP Unit)
(45,270
(2,845
(48,115
32,893
2,068
34,961
620
659
(1,843
(45
1,888
Balance, March 31, 2022
3,056,560
(336,988
5,027
166,679
2,891,320
2,036
Issuance of 3,281 shares of common stock
69,420
69,421
(992
Stock-based compensation, net of eight shares of restricted stock forfeited
1,381
Distributions declared ($0.270 per share and OP Unit)
(46,655
(2,852
(49,507
17,697
1,075
655
40
18
974
Balance, June 30, 2022
3,125,377
(350,127
23,397
167,952
2,966,642
4
Condensed Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Adjustments to reconcile net income including non-controlling interests to net cash provided by operating activities:
Depreciation and amortization including intangibles associated with investment in rental property
77,039
67,476
Amortization of debt issuance costs and original issuance discount charged to interest expense
1,894
1,704
Stock-based compensation expense
3,418
2,310
Straight-line rent, direct financing and sales-type lease adjustments
(14,250
(8,513
(32,877
(5,267
Other non-cash items
923
628
Changes in assets and liabilities:
Tenant and other receivables
371
(326
(192
1,040
(4,383
(6,079
(1,182
(387
Net cash provided by operating activities
136,604
117,959
Investing activities
Acquisition of rental property
(25,990
(377,966
Investment in property under development including capitalized interest of $267 and $0 in 2023 and 2022, respectively
(37,449
Capital expenditures and improvements
(23,593
(18,289
Proceeds from disposition of rental property, net
118,253
16,402
Change in deposits on investments in rental property
125
(118
Net cash provided by (used in) investing activities
31,346
(379,971
Financing activities
Proceeds from issuance of common stock, net of $180 and $3,229 offering costs, discounts, and commissions in 2023 and 2022, respectively
(180
202,628
Principal payments on mortgages and unsecured term loans
(6,411
(61,389
Borrowings on unsecured revolving credit facility
125,000
380,783
Repayments on unsecured revolving credit facility
(201,000
(161,000
Cash distributions paid to stockholders
(103,521
(88,361
Cash distributions paid to non-controlling interests
(5,613
(5,647
Debt issuance and extinguishment costs paid
(3,795
Net cash (used in) provided by financing activities
(191,725
263,219
Net (decrease) increase in cash and cash equivalents and restricted cash
(23,775
1,207
Cash and cash equivalents and restricted cash at beginning of period
60,040
27,769
Cash and cash equivalents and restricted cash at end of period
36,265
28,976
Reconciliation of cash and cash equivalents and restricted cash
Cash and cash equivalents at beginning of period
21,669
Restricted cash at beginning of period
38,251
6,100
Cash and cash equivalents at end of period
16,813
Restricted cash at end of period
15,502
12,163
1. Business Description
Broadstone Net Lease, Inc. (the “Corporation”) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2008. Broadstone Net Lease, LLC (the Corporation’s operating company, or the “OP”), is the entity through which the Corporation conducts its business and owns (either directly or through subsidiaries) all of the Corporation’s properties. The Corporation is the sole managing member of the OP. The membership units not owned by the Corporation are referred to as OP Units or non-controlling interests. As the Corporation conducts substantially all of its operations through the OP, it is structured as what is referred to as an umbrella partnership real estate investment trust (“UPREIT”). The Corporation, the OP, and its consolidated subsidiaries are collectively referred to as the “Company.” The Corporation’s common stock is listed on the New York Stock Exchange under the symbol “BNL”.
The Company is an industrial-focused, diversified net lease REIT that focuses on investing in income-producing, single-tenant net leased commercial properties, primarily in the United States. The Company leases industrial, healthcare, restaurant, retail, and office commercial properties under long-term lease agreements. At June 30, 2023, the Company owned a diversified portfolio of 801 individual commercial properties with 794 properties located in 44 U.S. states and seven properties located in four Canadian provinces.
The following table summarizes the outstanding equity and economic ownership interest of the Company:
June 30, 2023
December 31, 2022
Shares of Common Stock
OP Units
Total DilutedShares
Ownership interest
187,273
9,283
196,556
186,114
10,205
196,319
Percent ownership of OP
95.3
%
4.7
100.0
94.8
5.2
Refer to Note 14 for further discussion regarding the calculation of weighted average shares outstanding.
2. Summary of Significant Accounting Policies
Interim Information
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and Article 10 of the Securities and Exchange Commission’s (“SEC”) Regulation S-X. Accordingly, the Company has omitted certain footnote disclosures which would substantially duplicate those contained within the audited consolidated financial statements for the year ended December 31, 2022, included in the Company’s 2022 Annual Report on Form 10-K, filed with the SEC on February 23, 2023. Therefore, the readers of this quarterly report should refer to those audited consolidated financial statements, specifically Note 2, Summary of Significant Accounting Policies, for further discussion of significant accounting policies and estimates. The Company believes all adjustments necessary for a fair presentation have been included in these interim Condensed Consolidated Financial Statements (which include only normal recurring adjustments).
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts and operations of the Company. All intercompany balances and transactions have been eliminated in consolidation.
To the extent the Corporation has a variable interest in entities that are not evaluated under the variable interest entity (“VIE”) model, the Corporation evaluates its interests using the voting interest entity model. The Corporation has complete responsibility for the day-to-day management of, authority to make decisions for, and control of the OP. Based on consolidation guidance, the Corporation has concluded that the OP is a VIE as the members in the OP do not possess kick-out rights or substantive participating rights. Accordingly, the Corporation consolidates its interest in the OP. However, because the Corporation holds the majority voting interest in the OP and certain other conditions are met, it qualifies for the exemption from providing certain disclosure requirements associated with investments in VIEs.
The portion of the OP not owned by the Corporation is presented as non-controlling interests as of and during the periods presented.
Basis of Accounting
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP.
Use of Estimates
The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include, but are not limited to, the allocation of purchase price between tangible and intangible assets acquired and liabilities assumed, the fair value of long-lived assets and goodwill utilized in impairment assessments, the depreciable lives of rental property, the amortizable lives of intangible assets and liabilities, the probability of collecting outstanding and future lease payments, and the fair value of the Company’s interest rate swap agreements. Accordingly, actual results may differ from those estimates.
Investment in Property Under Development
Land acquired for development and construction and improvement costs incurred in connection with the development of new properties are capitalized and recorded as Property under development on the accompanying Condensed Consolidated Balance Sheets until construction has been completed. Such capitalized costs include all direct and indirect costs related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred during the construction period. Once construction is completed the property under development is placed in service and depreciation commences.
7
Long-lived Asset Impairment
The Company reviews long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the long-lived asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the long-lived asset or asset group and its eventual disposition. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. An impairment loss is measured as the amount by which the carrying amount of the long-lived asset or asset group exceeds its fair value. Significant judgment is made to determine if and when impairment should be taken. The Company’s assessment of impairment as of June 30, 2023 and 2022 was based on the most current information available to the Company. Certain of the Company’s properties may have fair values less than their carrying amounts. However, based on the Company’s plans with respect to each of those properties, the Company believes that their carrying amounts are recoverable and therefore, no impairment charges were recognized other than those described below. If the operating conditions mentioned above deteriorate or if the Company’s expected holding period for assets changes, subsequent tests for impairments could result in additional impairment charges in the future.
Inputs used in establishing fair value for impaired real estate assets generally fall within Level 3 of the fair value hierarchy, which are characterized as requiring significant judgment as little or no current market activity may be available for validation. The main indicator used to establish the classification of the inputs is current market conditions, as derived through the use of published commercial real estate market information. The Company determines the valuation of impaired assets using generally accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations, and bona fide purchase offers received from third parties. Management may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.
The following table summarizes the Company’s impairment charge, resulting primarily from changes in the Company’s long-term hold strategy, with respect to the individual property:
(in thousands, except number of properties)
Number of properties
Impairment charge
Restricted Cash
Restricted cash generally includes escrow funds the Company maintains pursuant to the terms of certain mortgages, lease agreements, and proceeds from the sale of properties under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”), and is reported within Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets. Restricted cash consisted of the following:
June 30,
December 31,
Escrow funds and other
1,315
4,812
1031 exchange proceeds
14,187
33,439
Rent Received in Advance
Rent received in advance represents tenant rent payments received prior to the contractual due date, and is included in Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets. Rent received in advance consisted of the following:
Rent received in advance
21,387
18,783
8
Fair Value Measurements
Recurring Fair Value Measurements
The balances of financial instruments measured at fair value on a recurring basis are as follows (see Note 9):
Total
Level 1
Level 2
Level 3
Long-term Debt – The fair value of the Company’s debt was estimated using Level 1, Level 2, and Level 3 inputs based on recent secondary market trades of the Company’s 2031 Senior Unsecured Public Notes (see Note 7), recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, recent market risk premiums for loans of comparable quality, applicable London Interbank Offered Rate (“LIBOR”), Secured Overnight Financing Rate (“SOFR”), Canadian Dollar Offered Rate (“CDOR”), U.S. Treasury obligation interest rates, and discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect the Company’s judgment as to the approximate current lending rates for loans or groups of loans with similar maturities and assumes that the debt is outstanding through maturity. Market information, as available, or present value techniques were utilized to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist on specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.
The following table summarizes the carrying amount reported on the Condensed Consolidated Balance Sheets and the Company’s estimate of the fair value of the unsecured revolving credit facility, mortgages, unsecured term loans, and senior unsecured notes which reflects the fair value of interest rate swaps:
Carrying amount
1,953,176
2,034,076
Fair value
1,732,146
1,841,381
Non-recurring Fair Value Measurements
The Company’s non-recurring fair value measurements at June 30, 2023 and December 31, 2022 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.
Reclassifications
The Company reclassified Debt issuance costs – unsecured revolving credit facility, net of $6.0 million and Leasing fees, net of $8.5 million to Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets at December 31, 2022, to conform with the current period presentation. The reclassifications are changes from one acceptable presentation to another acceptable presentation.
9
3. Acquisitions of Rental Property
The Company closed on the following acquisitions during the six months ended June 30, 2023:
Number of
Real Estate
Date
Property Type
Properties
Acquisition Price
March 14, 2023
Retail
5,221
May 16, 2023
Industrial
10,432
May 22, 2023
17,300
(a)
May 25, 2023
9,952
42,905
(b)
The Company closed on the following acquisitions during the six months ended June 30, 2022:
January 7, 2022
2,573
February 10, 2022
21,733
February 15, 2022
1,341
February 28, 2022
5,678
March 4, 2022
79,061
March 31, 2022
Restaurant
16
99,587
April 12, 2022
1,680
7,522
April 13, 2022
16,250
April 19, 2022
1,780
May 16, 2022
2,264
June 7, 2022
11,510
June 13, 2022
1,638
June 15, 2022
1,884
June 21, 2022
78,500
June 29, 2022
Healthcare
12,467
June 30, 2022
29,500
374,968
(c)
10
The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation for completed real estate acquisitions:
2,461
77,088
2,694
26,002
18,647
253,500
19,648
Acquired in-place leases (d)
2,400
29,585
Acquired below-market leases (e)
(166
(76
Non-real estate liabilities assumed
(8,051
45,684
378,048
(f)
The above acquisitions were funded using a combination of available cash on hand and unsecured revolving credit facility borrowings. All real estate acquisitions closed during the six months ended June 30, 2023, and 2022, qualified as asset acquisitions and as such, acquisition costs have been capitalized.
Subsequent to June 30, 2023, the Company closed on the following acquisitions (see Note 17):
July 11, 2023
460
(g)
4. Sale of Real Estate
The Company closed on the following sales of real estate, none of which qualified as discontinued operations:
Number of properties disposed
Aggregate sale price
69,390
11,889
121,264
17,101
Aggregate carrying value
(38,381
(7,311
(85,376
(11,135
Additional sales expenses
(1,547
(507
(3,011
(699
11
5. Investment in Rental Property and Lease Arrangements
The Company generally leases its investment rental property to established tenants in the industrial, healthcare, restaurant, retail, and office property types. At June 30, 2023, the Company had 801 real estate properties, 789 of which were leased under leases that have been classified as operating leases, nine that have been classified as direct financing leases, one that has been classified as a sales-type lease, and two that were vacant. Of the nine leases classified as direct financing leases, three include land portions which are accounted for as operating leases. The sales-type lease includes a land portion which is accounted for as an operating lease. Most leases have initial terms of 10 to 20 years. The Company’s leases generally provide for limited increases in rent as a result of fixed increases, increases in the Consumer Price Index (“CPI”), or increases in the tenant’s sales volume. Generally, tenants are also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building, and maintain property and liability insurance coverage. The leases also typically provide for one or more multiple-year renewal options, at the election of the tenant, and are subject to generally the same terms and conditions as the initial lease.
Investment in Rental Property – Accounted for Using the Operating Method
Depreciation expense on investment in rental property was as follows:
Depreciation
30,989
27,730
62,146
54,388
Estimated lease payments to be received under non-cancelable operating leases with tenants at June 30, 2023 are as follows:
Remainder of 2023
194,412
2024
403,771
2025
437,777
2026
434,030
2027
418,124
Thereafter
3,795,761
5,683,875
Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future lease payments due during the initial lease terms. Such amounts exclude any potential variable rent increases that are based on changes in the CPI or future variable rents which may be received under the leases based on a percentage of the tenant’s gross sales. Additionally, certain of our leases provide tenants with the option to terminate their leases in exchange for termination penalties, or that are contingent upon the occurrence of a future event. Future lease payments within the table above have not been adjusted for these termination rights.
12
Investment in Rental Property – Direct Financing Leases
The Company’s net investment in direct financing leases was comprised of the following:
Undiscounted estimated lease payments to be received
36,712
38,268
Estimated unguaranteed residual values
14,547
Unearned revenue
(24,289
(25,645
Reserve for credit losses
(115
(125
Net investment in direct financing leases
Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at June 30, 2023 are as follows:
1,558
3,171
3,285
3,357
3,426
21,915
The above rental receipts do not include future lease payments for renewal periods, potential variable CPI rent increases, or variable percentage rent payments that may become due in future periods.
The following table summarizes amounts reported as Lease revenues, net on the Condensed Consolidated Statements of Income and Comprehensive Income:
Contractual rental amounts billed for operating leases
96,456
87,505
194,558
171,901
Adjustment to recognize contractual operating lease billings on a straight-line basis
7,380
5,090
14,750
10,111
Net write-offs of accrued rental income
(105
(1,326
Variable rental amounts earned
452
291
793
477
Earned income from direct financing leases
689
721
1,444
Interest income from sales-type leases
15
29
Operating expenses billed to tenants
4,594
4,263
9,669
8,998
Other income from real estate transactions
134
7,395
176
Adjustment to revenue recognized for uncollectible rental amounts billed, net
(236
(6
(124
44
Total lease revenues, net
13
6. Intangible Assets and Liabilities
The following is a summary of intangible assets and liabilities and related accumulated amortization:
Lease intangibles:
Acquired above-market leases
45,260
45,740
Less accumulated amortization
(19,404
(18,436
Acquired above-market leases, net
25,856
27,304
Acquired in-place leases
426,779
436,401
(143,337
(134,120
Acquired in-place leases, net
283,442
302,281
Total intangible lease assets, net
Acquired below-market leases
101,223
105,059
(43,650
(42,204
Leasing fees
16,043
14,430
(6,376
(5,924
Leasing fees, net
9,667
8,506
Amortization of intangible lease assets and liabilities was as follows:
Intangible
Financial Statement Presentation
Acquired in-place leases and leasing fees
8,001
7,749
18,589
15,350
Above-market and below-market leases
1,088
1,170
3,782
2,331
For the six months ended June 30, 2023, amortization expense includes $0.9 million of accelerated amortization, resulting from early lease terminations. There was no accelerated amortization for the three months ended June 30, 2023 and the six months ended June 30, 2022.
Estimated future amortization of intangible assets and liabilities at June 30, 2023 is as follows:
13,675
26,781
25,737
24,575
22,832
147,792
261,392
14
7. Unsecured Credit Agreements
The following table summarizes the Company’s unsecured credit agreements:
Outstanding Balance
(in thousands, except interest rates)
InterestRate
MaturityDate
Applicable reference rate + 0.85% (a)
Mar. 2026
Unsecured term loans:
2026 Unsecured Term Loan
400,000
one-month adjusted SOFR + 1.00% (b)(c)
Feb. 2026
2027 Unsecured Term Loan
200,000
one-month adjusted SOFR + 0.95% (d)
Aug. 2027
2029 Unsecured Term Loan
300,000
one-month adjusted SOFR + 1.25% (d)
Aug. 2029
Total unsecured term loans
900,000
Unamortized debt issuance costs, net
(4,681
(5,308
Total unsecured term loans, net
Senior unsecured notes:
2027 Senior Unsecured Notes - Series A
150,000
4.84%
Apr. 2027
2028 Senior Unsecured Notes - Series B
225,000
5.09%
Jul. 2028
2030 Senior Unsecured Notes - Series C
100,000
5.19%
Jul. 2030
2031 Senior Unsecured Public Notes
375,000
2.60%
Sep. 2031
Total senior unsecured notes
850,000
Unamortized debt issuance costs and original issuance discount, net
(5,068
(5,445
Total senior unsecured notes, net
Total unsecured debt, net
1,863,163
1,936,569
At June 30, 2023, the weighted average interest rate on all outstanding borrowings was 5.23% exclusive of interest rate swap agreements.
The Company is subject to various financial and operational covenants and financial reporting requirements pursuant to its unsecured credit agreements. These covenants require the Company to maintain certain financial ratios, including leverage, fixed charge coverage, debt service coverage, aggregate debt ratio, consolidated income available for debt to annual debt service charge, total unencumbered assets to total unsecured debt, and secured debt ratio, among others. As of June 30, 2023, and for all periods presented, the Company believes it was in compliance with all of its loan covenants. Failure to comply with the covenants would result in a default which, if the Company were unable to cure or obtain a waiver from the lenders, could accelerate the repayment of the obligations. Further, in the event of default, the Company may be restricted from paying dividends to its stockholders in excess of dividends required to maintain its REIT qualification. Accordingly, an event of default could have a material and adverse impact on the Company.
For the six months ended June 30, 2022, the Company incurred $3.8 million in debt issuance costs associated with the unsecured revolving credit facility. The Company did not incur debt issuance costs during the six months ended June 30, 2023.
Debt issuance costs and original issuance discounts are amortized as a component of Interest expense in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income. The following table summarizes debt issuance cost and original issuance discount amortization:
Debt issuance costs and original issuance discount amortization
986
900
1,972
1,756
8. Mortgages
The Company’s mortgages consist of the following:
Origination
Maturity
Interest
Lender
(Month/Year)
Rate
Wilmington Trust National Association
Apr-19
Feb-28
4.92%
44,866
45,516
(a) (b) (c) (d)
Jun-18
Aug-25
4.36%
18,939
19,150
(a) (b) (c) (e)
PNC Bank
Oct-16
Nov-26
3.62%
16,459
16,675
(b) (c)
Aegon
Apr-12
Oct-23
6.38%
5,413
(b) (f)
Total mortgages
80,264
86,754
Debt issuance costs, net
(123
(152
At June 30, 2023, investment in rental property of $121.9 million was pledged as collateral against the Company’s mortgages.
Estimated future principal payments to be made under the above mortgages and the Company’s unsecured credit agreements (see Note 7) at June 30, 2023 are as follows:
1,092
2,260
20,195
539,755
351,597
1,038,277
Certain of the Company’s mortgages provide for prepayment fees and can be terminated under certain events of default as defined under the related agreements. These prepayment fees are not reflected as part of the table above.
9. Interest Rate Swaps
Interest rate swaps were entered into with certain financial institutions in order to mitigate the impact of interest rate variability over the term of the related debt agreements. The interest rate swaps are considered cash flow hedges. Under these agreements, the Company receives monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, the Company pays the counterparties each month an amount equal to a fixed rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that the Company pays a fixed interest rate on its variable-rate borrowings.
In order to reduce counterparty concentration risk, the Company diversifies the institutions that serve as swap counterparties. The Company is exposed to credit risk in the event of non-performance by the counterparties of the swaps. The Company minimizes the risk exposure by limiting counterparties to only major banks who meet established credit and capital guidelines.
The following is a summary of the Company’s outstanding interest rate swap agreements:
Counterparty
Maturity Date
FixedRate
Variable Rate Index (a)
NotionalAmount
Fair Value
Wells Fargo Bank, N.A.
October 2024
2.72
one-month LIBOR
15,000
Capital One, National Association
December 2024
1.58
734
815
Bank of Montreal
January 2025
1.91
25,000
1,161
1,239
Truist Financial Corporation
April 2025
2.20
1,160
1,169
July 2025
2.32
1,196
1,162
1.99
1,358
December 2025
2.30
1,355
1,279
January 2026
1.92
1,581
1,547
2.05
40,000
2,409
2,332
2.08
35,000
2,007
1.93
1,577
1,542
April 2026
2.68
700
625
July 2026
1.32
3,004
3,042
December 2026
2.33
10,000
584
1,838
1,773
Toronto-Dominion Bank
March 2027
2.46
one-month CDOR
15,082
984
14,764
765
April 2027
1,271
1,129
December 2027
2.37
1,712
1,628
1,677
1,605
January 2028
75,000
5,105
4,854
May 2029
2.09
2,304
2,295
Regions Bank
2.11
2,262
2,244
June 2029
2.03
2,367
2,357
U.S. Bank National Association
2,381
2,377
August 2029
2.58
one-month SOFR
6,057
5,782
45,000
2,784
2,674
2.65
868
826
6,113
5,861
1.35
3,347
3,419
March 2032
2.69
1,155
2.70
1,164
1,107
March 2034
2.81
30,165
2,370
29,530
2,424
975,411
973,822
17
At June 30, 2023, the weighted average fixed rate on all outstanding interest rate swaps was 2.28%.
The total amounts recognized, and the location in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income, from converting from variable rates to fixed rates under these agreements were as follows:
Amount of Gain
Reclassification from
Total Interest Expense
Recognized in
Accumulated Other
Presented in the Condensed
Comprehensive Income
Consolidated Statements of
Comprehensive
Amount of
Income and Comprehensive
Income
Location
Gain (Loss)
6,182
20,277
(3,122
17,888
11,179
41,416
(6,987
34,784
Amounts related to the interest rate swaps expected to be reclassified out of Accumulated other comprehensive income to Interest expense during the next twelve months are estimated to be a gain of $28.1 million.
10. Non-Controlling Interests
The following table summarizes OP Units exchanged for shares of common stock:
OP Units exchanged for shares of common stock
921
Value of units exchanged
15,295
11. Credit Risk Concentrations
The Company maintained bank balances that, at times, exceeded the federally insured limit during the six months ended June 30, 2023. The Company has not experienced losses relating to these deposits and management does not believe that the Company is exposed to any significant credit risk with respect to these amounts based on the financial position and capitalization of the banks.
For the six months ended June 30, 2023 and 2022, the Company had no individual tenants or common franchises that accounted for more than 10% of Lease revenues, net, excluding lease termination fees.
12. Equity
At-the-Market Program
The Company has an at-the-market common equity offering program (“ATM Program”), through which it may, from time to time, publicly offer and sell shares of common stock having an aggregate gross sales price of up to $400.0 million. The ATM Program provides for forward sale agreements, enabling the Company to set the price of shares upon pricing the offering, while delaying the issuance of shares and the receipt of the net proceeds. As of June 30, 2023, the Company has $145.4 million of available capacity under the ATM Program.
The following table presents information about the Company’s ATM Program activity:
Number of common shares issued
3,236
9,509
Weighted average sale price per share
21.42
21.69
Net proceeds
68,321
202,647
Gross proceeds
69,313
205,857
Share Repurchase Program
On March 14, 2023, the Company’s Board of Directors approved a stock repurchase program (the “Repurchase Program”), which authorized the Company to repurchase up to $150.0 million of the Company’s common stock. These purchases can be made in the open market or through private transactions from time to time over the 12-month time period following authorization, depending on prevailing market conditions and applicable legal and regulatory requirements. The timing, manner, price and amount of any repurchases of common stock under the Repurchase Program will be determined at the Company's discretion, using available cash resources. During the six months ended June 30, 2023, no shares of the Company’s common stock were repurchased under the program.
19
13. Stock-Based Compensation
Restricted Stock Awards
During the three and six months ended June 30, 2023, the Company awarded 50,531 and 309,630 shares of restricted stock awards (“RSAs”), respectively, to officers, employees and non-employee directors under the Company's equity incentive plan. During the three and six months ended June 30, 2022, the Company issued 32,868 and 174,913 shares of RSAs, respectively. The holder of RSAs is generally entitled at all times on and after the date of issuance of the restricted common shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The RSAs vest over a one-, three-, or four-year period from the date of the grant and are subject to the holder’s continued service through the applicable vesting dates and in accordance with the terms of the individual award agreements. The weighted average per share value of awards granted during the three and six months ended June 30, 2023, were $16.33 and $17.52, respectively, which were based on the market price per share of the Company’s common stock on the grant date. The weighted average value of awards granted during the three and six months ended June 30, 2022 were $20.23 and $21.39, respectively.
The following table presents information about the Company’s RSAs:
Compensation cost
932
877
2,660
1,487
Dividends declared on unvested RSAs
142
106
278
203
Fair value of shares vested during the period
520
3,384
3,209
As of June 30, 2023, there was $7.1 million of unrecognized compensation costs related to the unvested restricted shares, which is expected to be recognized over a weighted average period of 2.7 years.
The following table presents information about the Company’s restricted stock activity:
Number of Shares
Weighted Average Grant Date Fair Value per Share
Unvested at beginning of period
495
19.00
367
20.33
Granted
51
16.33
33
20.23
Vested
(32
20.22
Forfeited
18.90
(8
19.95
Unvested at end of period
508
18.65
392
396
20.36
372
19.62
310
17.52
175
21.39
(146
19.80
(9
20.06
20
Performance-based Restricted Stock Units
During six months ended June 30, 2023, the Company issued target grants of 186,481 performance-based restricted stock units (“PRSUs”), under the Company's equity incentive plan to the officers of the Company. During the six months ended June 30, 2022, the Company issued target grants of 121,883 PRSUs. During the three months ended June 30, 2023 and 2022, there were no PRSUs issued. The awards are non-vested restricted stock units where the vesting percentages and the ultimate number of units vesting will be measured 50% based on the relative total shareholder return (“rTSR”) of the Company’s common stock as compared to the rTSR of peer companies, as identified in the grant agreements, over a three-year period, and 50% based on the rTSR of the Company’s common stock as compared to the rTSR of the MSCI US REIT Index over a three year measurement period. Vesting percentages range from 0% to 200% with a target of 100%. rTSR means the percentage appreciation in the fair market value of one share over the three-year measurement period beginning on the date of grant, assuming the reinvestment of dividends on the ex-dividend date. The target number of units is based on achieving a rTSR equal to the 55th percentile of the peer companies and MSCI US REIT Index. The grant date fair value of the PRSUs was measured using a Monte Carlo simulation model based on assumptions including share price volatility, among others.
The following table presents compensation cost recognized on the Company’s PRSUs:
607
504
758
823
As of June 30, 2023, there was $5.2 million of unrecognized compensation costs related to the unvested PRSUs, which is expected to be recognized over a weighted average period of 2.4 years.
The following table presents information about the Company’s performance-based restricted stock unit activity:
358
25.01
232
26.25
(1
27.93
231
233
26.27
110
24.40
186
23.78
122
(61
26.80
21
14. Earnings per Share
The following table summarizes the components used in the calculation of basic and diluted earnings per share (“EPS”):
Basic earnings:
Net earnings attributable to Broadstone Net Lease, Inc. common shareholders
Less: earnings allocated to unvested restricted shares
(162
(278
(202
Net earnings used to compute basic earnings per common share
59,852
33,411
99,040
60,072
Diluted earnings:
Net earnings used to compute basic earnings per share
Add: net earnings attributable to non-controlling interests
5,052
3,719
Add: undistributed earnings allocated to unvested restricted shares
Less: undistributed earnings reallocated to unvested restricted shares
(20
Net earnings used to compute diluted earnings per common share
62,835
35,447
104,092
63,791
187,237
169,933
186,901
167,072
Less: weighted average unvested restricted shares (a)
(504
(378
(468
(374
Weighted average number of common shares outstanding used in basic earnings per common share
Add: effects of restricted stock units (b)
191
378
151
325
Add: effects of convertible membership units (c)
9,304
10,323
9,564
Weighted average number of common shares outstanding used in diluted earnings per common share
Basic earnings per share
Diluted earnings per share
22
15. Supplemental Cash Flow Disclosures
Cash paid for interest was $39.7 million and $32.1 million for the six months ended June 30, 2023 and 2022, respectively. Cash paid for income taxes was $1.0 million for the six months ended June 30, 2023 and 2022.
The following are non-cash transactions and have been excluded from the accompanying Condensed Consolidated Statements of Cash Flows:
16. Commitments and Contingencies
Litigation
From time to time, the Company is a party to various litigation matters incidental to the conduct of the Company’s business. While the resolution of such matters cannot be predicted with certainty, based on currently available information, the Company does not believe that the final outcome of any of these matters will have a material effect on its consolidated financial position, results of operations, or liquidity.
Property and Acquisition Related
In connection with ownership and operation of real estate, the Company may potentially be liable for cost and damages related to environmental matters. The Company is not aware of any non-compliance, liability, claim, or other environmental condition that would have a material effect on its consolidated financial position, results of operations, or liquidity.
As of June 30, 2023, the Company has a commitment to fund a build-to-suit transaction with a remaining commitment of $167.3 million expected to fund in multiple draws through October 2024, using a combination of available cash on hand and unsecured revolving credit facility borrowings. Rent is contractually scheduled to commence at the earlier of construction completion or October 2024.
The Company is a party to two separate tax protection agreements with the contributing members of two distinct UPREIT transactions and a third tax protection agreement in connection with the Company's internalization. The tax protection agreements require the Company to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the tax protection agreement entered into in connection with the Company’s internalization, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. The Company is required to allocate an amount of nonrecourse liabilities to each beneficiary that is at least equal to the minimum liability amount, as contained in the agreements. The minimum liability amount and the associated allocation of nonrecourse liabilities are calculated in accordance with applicable tax regulations, are completed at the OP level, and do not represent GAAP accounting. Therefore, there is no impact to the Condensed Consolidated Financial Statements. Based on values as of June 30, 2023, taxable sales of the applicable properties would trigger liability under the agreements of approximately $20.4 million. Based on information available, the Company does not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future.
In the normal course of business, the Company enters into various types of commitments to purchase real estate properties. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated to purchase the properties.
Obligations Under Leases
In October 2022, the Company executed a ten year lease for its new corporate office space that commences during 2023, the timing of which depends on the satisfaction of certain conditions set forth in the lease. Upon commencement, the total expected future lease payments would be $8.9 million.
23
17. Subsequent Events
On July 14, 2023, the Company paid distributions totaling $55.0 million.
On July 27, 2023, the Board of Directors declared a quarterly distribution of $0.28 per share on the Company’s common stock and OP Units for the third quarter of 2023, which will be payable on or before October 13, 2023 to stockholders and OP unitholders of record as of September 29, 2023.
Subsequent to June 30, 2023, the Company paid down $47.0 million, and borrowed $29.5 million on the unsecured revolving credit facility, the proceeds of which were used to fund investment activity and for general corporate purposes.
Subsequent to June 30, 2023, the Company acquired approximately $0.5 million of land to be developed in connection with a $1.7 million build-to-suit transaction expected to fund in multiple draws through September 2023. (see Note 3).
Through August 3, 2023, the Company sold one property with a carrying value of approximately $37.0 million for total proceeds of $47.0 million. The Company incurred additional expenses related to the sale of approximately $0.7 million, resulting in a gain on sale of real estate of approximately $9.3 million.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except where the context suggests otherwise, as used in this Quarterly Report on Form 10-Q, the terms “BNL,” “we,” “us,” “our,” and “our company” refer to Broadstone Net Lease, Inc., a Maryland corporation incorporated on October 18, 2007, and, as required by context, Broadstone Net Lease, LLC, a New York limited liability company, which we refer to as the or our "OP,” and to their respective subsidiaries.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views regarding our business, financial performance, growth prospects and strategies, market opportunities, and market trends, that are intended to be made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of these words or other comparable words. All of the forward-looking statements included in this Quarterly Report on Form 10-Q are subject to various risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results, performance, and achievements could differ materially from those expressed in or by the forward-looking statements and may be affected by a variety of risks and other factors. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from such forward-looking statements.
Important factors that could cause results to differ materially from the forward-looking statements are described in Item 1. “Business,” Item 1A. “Risk Factors,” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K, as filed with the SEC on February 23, 2023. The “Risk Factors” of our 2022 Annual Report should not be construed as exhaustive and should be read in conjunction with other cautionary statements included elsewhere in this Quarterly Report on Form 10-Q.
You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report on Form 10-Q. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the risk that actual results, performance, and achievements will differ materially from the expectations expressed in or referenced by this Quarterly Report on Form 10-Q will increase with the passage of time. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
We use any of the following to comply with our disclosure obligations under Regulation FD: U.S. Securities and Exchange Commission (“SEC”) filings, press releases, public conference calls, or our website. We routinely post important information on our website at www.broadstone.com, including information that may be deemed material. We encourage our shareholders and others interested in our company to monitor these distribution channels for material disclosures. Our website address is included in this Quarterly Report as a textual reference only and the information on the website is not incorporated by reference in this Quarterly Report.
Unless the context otherwise requires, the following terms and phrases are used throughout this MD&A as described below:
We are an internally-managed, industrial-focused, diversified net lease real estate investment trust (“REIT”) that acquires, owns, and manages primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. As of June 30, 2023, our portfolio includes 801 properties, with 794 properties located in 44 U.S. states and seven properties located in four Canadian provinces.
We focus on investing in real estate that is operated by creditworthy single-tenants in industries characterized by positive business drivers and trends. We target properties that are an integral part of the tenants’ businesses and are therefore opportunities to secure long-term net leases. Through long-term net leases, our tenants are able to retain operational control of their strategically important locations, while allocating their debt and equity capital to fund core business operations rather than real estate ownership.
The following charts summarize our portfolio diversification by property type, tenant, brand, industry, and geographic location as of June 30, 2023. The percentages below are calculated based on our ABR of $391.0 million as of June 30, 2023.
Diversification by Property Type
# Properties
ABR($'000s)
ABR as a % ofTotal Portfolio
Square Feet('000s)
SF as a % ofTotal Portfolio
Manufacturing
81
64,908
16.6
12,266
31.8
Distribution & Warehouse
50,121
12.8
9,158
23.8
Food Processing
46,072
11.8
5,442
14.1
Flex and R&D
15,977
4.1
1,157
3.0
Cold Storage
12,849
3.3
933
2.4
Industrial Services
11,698
1.6
Untenanted
123
0.3
Industrial Total
195
201,625
51.6
29,686
77.0
Clinical
52
27,396
7.0
1,090
2.8
Healthcare Services
11,795
478
1.2
Animal Health Services
10,939
405
1.0
Surgical
10,528
2.7
330
0.9
Life Science
7,942
2.0
549
1.4
Healthcare Total
129
68,600
17.5
2,852
7.3
Casual Dining
101
27,410
673
1.7
Quick Service Restaurants
146
25,497
6.5
499
1.3
Restaurant Total
247
52,907
13.5
1,172
General Merchandise
132
24,800
6.4
1,865
4.8
Automotive
67
12,457
3.2
773
Home Furnishings
7,147
1.8
797
2.1
Child Care
730
0.2
Retail Total
214
45,134
11.6
3,455
9.1
Office
Strategic Operations
10,381
632
Corporate Headquarters
8,389
409
1.1
Call Center
3,938
287
0.7
Office Total
22,708
5.8
1,374
3.6
801
390,974
38,539
28
Diversification by Tenant
Tenant
ABR as a % of Total Portfolio
SF as a % of Total Portfolio
Roskam Baking Company, LLC*
15,605
4.0
2,250
AHF, LLC*
Distribution & Warehouse/Manufacturing
9,378
2,284
5.9
Jack's Family Restaurants LP*
7,309
1.9
147
0.4
Joseph T. Ryerson & Son, Inc
6,491
1,537
Red Lobster Hospitality & Red Lobster Restaurants LLC*
6,178
157
Axcelis Technologies, Inc.
6,126
417
J. Alexander's, LLC*
6,115
131
Salm Partners, LLC*
6,062
368
Hensley & Company*
5,989
1.5
577
Dollar General Corporation
60
5,966
562
Total Top 10 Tenants
170
75,219
19.4
8,430
21.9
BluePearl Holdings, LLC**
5,599
165
Krispy Kreme Doughnut Corporation
Quick Service Restaurants/Food Processing
5,525
156
Outback Steakhouse of Florida LLC*1
5,365
140
Tractor Supply Company
5,349
Big Tex Trailer Manufacturing Inc.*
Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters
5,056
1,302
3.4
Nestle' Dreyer's Ice Cream Company2
4,543
309
0.8
Carvana, LLC*
4,510
230
0.6
Klosterman Bakery*
4,500
Arkansas Surgical Hospital
4,476
Chiquita Holdings Limited
4,418
335
Total Top 20 Tenants
286
124,560
32.1
12,162
31.6
1 Tenant's properties include 20 Outback Steakhouse restaurants and two Carrabba's Italian Grill restaurants.
2 Nestle's ABR excludes $1.6 million of rent paid under a sub-lease for an additional property, which will convert to a prime lease no later than August 2024.
* Subject to a master lease.
** Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.
Diversification by Brand
Brand
AHF Products*
Jack's Family Restaurants*
Ryerson
Red Lobster*
Axcelis
Hensley*
Dollar General
BluePearl Veterinary Partners**
5,598
Total Top 10 Brands
167
74,702
19.2
8,464
22.0
Krispy Kreme
Bob Evans Farms*1
Casual Dining/Food Processing
5,459
281
Big Tex Trailers*
Automotive/Distribution & Warehouse/Manufacturing/Corporate Headquarters
Outback Steakhouse*
4,641
126
Nestle'
Carvana*
4,419
Total Top 20 Brands
289
123,180
31.7
12,298
31.9
1 Brand includes one BEF Foods, Inc. property and 20 Bob Evans Restaurants, LLC properties.
Diversification by Industry
Industry
Square Feet ('000s)
Healthcare Facilities
104
54,517
13.9
2,062
5.3
Restaurants
250
53,746
13.7
1,214
Packaged Foods & Meats
40,358
10.3
4,713
12.2
Auto Parts & Equipment
45
16,424
4.2
2,799
Distributors
16,042
2,695
Specialty Stores
31
14,350
3.7
1,338
3.5
Food Distributors
14,133
4.4
Home Furnishing Retail
12,684
1,858
Specialized Consumer Services
12,501
724
Metal & Glass Containers
10,114
2.6
2,206
5.7
General Merchandise Stores
96
9,644
2.5
880
2.3
Industrial Machinery
9,528
1,949
5.1
Forest Products
9,342
515
Electronic Components
6,957
466
Other (39 industries)
87
101,256
25.9
10,900
28.3
Untenanted properties
224
30
Diversification by Geographic Location
State /Province
TX
72
38,240
9.8
3,621
9.4
WA
4,362
150
MI
55
32,573
8.2
3,811
LA
3,407
194
0.5
IL
32
24,268
6.1
6.2
MS
3,322
430
WI
35
23,242
2,163
5.6
NE
3,183
509
OH
19,118
4.9
1,792
MD
3,073
293
CA
18,838
1,718
4.5
SC
2,964
308
FL
16,237
840
2.2
IA
2,804
622
IN
15,997
1,906
NM
2,767
107
MN
15,442
3.9
2,500
CO
2,501
TN
50
15,273
1,103
2.9
UT
2,432
280
NC
36
12,385
1,135
CT
1,828
0.1
AL
53
12,197
3.1
873
ND
1,700
AZ
11,876
909
MT
1,582
GA
11,581
1,576
DE
1,167
133
PA
9,700
1,836
VT
426
NY
9,337
680
WY
307
KY
8,548
NV
268
0.0
OK
8,121
987
OR
136
AR
7,728
283
SD
MA
6,543
444
Total U.S.
794
382,823
97.8
38,108
98.8
MO
6,175
1,138
BC
4,596
253
KS
5,643
648
ON
2,168
VA
5,561
204
AB
1,019
WV
4,981
884
MB
NJ
4,909
366
Total Canada
8,151
431
Grand Total
Our Leases
We typically lease our properties pursuant to long-term net leases with initial terms of 10 years or more that often have renewal options. Substantially all of our leases are net, meaning our tenants are generally obligated to pay all expenses associated with the leased property (such as real estate taxes, insurance, maintenance, repairs, and capital costs). In scenarios where we lease multiple properties to a single tenant (multi-site tenants), we seek to use master lease structures on an all-or-none basis. When we acquire properties associated with a tenant that has an existing master lease structure with us, we seek to add the new properties to the existing master lease structure to strengthen the existing lease with such tenant. As of June 30, 2023, master leases contributed to 69.3% of the ABR associated with multi-site tenants (408 of our 676 properties) and 41.5% of our overall ABR (408 of our 801 properties).
As of June 30, 2023, approximately 99.4% of our portfolio, representing all but two of our properties, was subject to a lease. Because substantially all of our properties are leased under long-term leases, we are not currently required to perform significant ongoing leasing activities on our properties. As of June 30, 2023, the ABR weighted average remaining term of our leases was approximately 10.7 years. Approximately 3% of the properties in our portfolio are subject to leases without at least one renewal option. The following chart sets forth our lease expirations based upon the terms of the leases in place as of June 30, 2023.
The following table presents certain information based on lease expirations by year. Amounts are in thousands, except for number of properties.
Expiration Year
# Leases
3,729
467
8,884
938
7,001
394
17,278
1,150
24,341
2,079
5.4
2028
37
22,876
1,930
5.0
2029
73
22,616
2,724
7.1
2030
54,800
5,110
13.3
2031
8,647
805
2032
62
63
32,001
3,469
9.0
2033
19,222
1,593
2034
6,345
2035
13,618
2,021
2036
88
27,244
2,952
7.7
2037
16,848
4.3
1,120
2038
38
10,819
848
2039
6,927
798
2040
5,864
312
2041
22,382
1,731
2042
59
43,859
11.2
4,813
12.5
15,673
3.8
2,652
6.9
806
Substantially all of our leases provide for periodic contractual rent escalations. As of June 30, 2023, leases contributing 97.3% of our ABR provided for increases in future ABR, generally ranging from 1.5% to 3.0% annually, with an ABR weighted average annual minimum increase equal to 2.0% of base rent. Generally, our rent escalators increase rent on specified dates by a fixed percentage. Our escalations provide us with a source of organic revenue growth and a measure of inflation protection. Additional information on lease escalation frequency and weighted average annual escalation rates as of June 30, 2023 is displayed below:
Lease Escalation Frequency
% of ABR
Weighted Average Annual Minimum Increase (a)
Annually
80.6
Every 2 years
Every 3 years
Every 4 years
Every 5 years
Other escalation frequencies
Flat
Total/Weighted Average (b)
The escalation provisions of our leases (by percentage of ABR) as of June 30, 2023, are displayed in the following chart:
The following discussion includes the results of our operations for the periods presented.
Three Months Ended June 30, 2023 Compared to Three Months Ended March 31, 2023
Lease Revenues, net
For the Three Months Ended
March 31,
Increase/(Decrease)
98,102
(1,646
(1.7
7,370
105
341
111
32.6
691
(0.3
5,075
(481
(9.5
7,392
(7,389
(100.0
112
(348
< (100.0)
Total Lease revenues, net
118,992
(9,639
(8.1
The decrease in Lease revenues, net was primarily attributable to $7.5 million of lease termination income recognized in the first quarter of 2023 compared to no lease termination fees recognized during the second quarter of 2023. The timing and amount of lease termination income varies from period to period. The decrease was also attributable to a decrease of $1.6 million in rental amounts collected from operating leases as a result of net dispositions during the quarter. We have strategically disposed of properties with either credit risk or lease rollover risk, at advantageous pricing relative to redeployment yields and in certain circumstances, our cost of borrowings.
Operating Expenses
41,784
(2,753
(6.6
)%
5,886
(898
(15.3
10,416
(933
(9.0
(1,473
59,559
(6,057
(10.2
The decrease in depreciation and amortization for the three months ended June 30, 2023 was primarily due to net dispositions during the quarter. The total properties owned during the second quarter of 801 remained the same from the prior quarter.
During the three months ended June 30, 2023, we recognized no impairment on our investments in rental properties. During the three months ended March 31, 2023, we recognized $1.5 million of impairment on our investments in rental properties due to a change in our long-term hold strategy for one property. The following table presents the impairment charges for the three months ended March 31, 2023:
Carrying value prior to impairment charge
4,236
2,763
The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.
162
(80
(49.4
(21,139
(862
(4.1
3,415
26,047
> 100.0
(479
(31
(6.5
Other expenses
(18
1,656
Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the three months ended June 30, 2023, we recognized a gain of $29.5 million on the sale of four properties, compared to a gain of $3.4 million on the sale of three properties during the three months ended March 31, 2023.
Net income and Net earnings per diluted share
(in thousands, except per share data)
21,622
52.3
Net earnings per diluted share
0.21
0.11
52.4
The increase in net income is primarily attributable to a $26.0 million increase in gain on the sale of real estate, a $2.8 million decrease in depreciation and amortization, a $1.5 million decrease in impairment of investment on rental properties, and a $0.9 million decrease in interest expense, partially offset by a $7.4 million decrease in other income from real estate transactions and a $0.5 million decrease in operating expenses billed to tenants.
GAAP net income includes items such as gain or loss on sale of real estate and provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons.
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
For the Six Months Ended
22,657
13.2
4,639
45.9
1,221
92.1
316
66.2
(64
(4.4
671
7.5
7,219
(168
36,491
19.0
The increase in Lease revenues, net was primarily attributable to growth in our real estate portfolio through property acquisitions closed since June 30, 2022. During the twelve months ended June 30, 2023, we invested $561.6 million, excluding capitalized acquisition costs, in 52 properties at a weighted average initial cash capitalization rate of 6.6%. The increase is also attributable to an increase in lease termination income.
11,014
15.8
1,134
1,783
93
6.7
14,024
14.2
The increase in depreciation and amortization for the six months ended June 30, 2023 was primarily due to growth in our real estate portfolio.
The increase in general and administrative expense for the six months ended June 30, 2023 was primarily due to increased stock-based compensation expense associated with an additional annual grant during the first quarter of 2023, and an increase in payroll expense related to general annual cost of living adjustments.
The increase in property and operating expense is primarily due to the growth in our real estate portfolio. The increase was partially offset by tenant reimbursements recognized as operating expenses billed to tenants in lease revenues, net above.
During the six months ended June 30, 2023, we recognized $1.5 million of impairment on our investments in rental properties. During the six months ended June 30, 2022, we recognized $1.4 million of impairment on our investments in rental properties. The following table presents the impairment charges for the respective periods:
3,674
2,294
6,632
19.1
27,610
114
14.0
(3,198
The increase in interest expense reflects an increase in our weighted average cost of borrowings combined with increased average outstanding borrowings. Since June 30, 2022, we increased total outstanding borrowings by $96.8 million to partially fund our acquisitions. Of our $2.0 billion of total outstanding indebtedness, approximately $47.4 million, or 2.4%, is variable and unhedged (United States Dollar ("USD") Revolving Credit Facility borrowings) and therefore subject to the impact of fluctuations in interest rates. At June 30, 2023, the one-month SOFR rate was 5.14%, compared with 1.69% at June 30, 2022.
Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the six months ended June 30, 2023, we recognized a gain of $32.9 million on the sale of seven properties, compared to a gain of $5.3 million on the sale of four properties during the six months ended June 30, 2022. Our proactive asset management strategy includes determining whether to sell any of our properties where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives.
The increase in other expenses during the six months ended June 30, 2023 was primarily due to a $1.7 million unrealized foreign exchange loss recognized on the quarterly remeasurement of our $100 million Canadian Dollars ("CAD") revolver borrowings, compared to a $1.5 million unrealized foreign exchange gain recognized during the six months ended June 30, 2022.
40,377
63.1
0.17
47.2
The increase in net income is primarily due to revenue growth of $36.5 million and a $27.6 million increase on gain on sale of real estate. These factors were partially offset by a $11.0 million increase in depreciation and amortization, a $6.6 million increase in interest expense, a $1.8 million increase in general and administrative expense, and a $1.1 million increase in property and operating expenses.
General
We acquire real estate using a combination of debt and equity capital, cash from operations that is not otherwise distributed to our stockholders, and proceeds from the disposition of real estate properties. Our focus is on maximizing the risk-adjusted return to our stockholders through an appropriate balance of debt and equity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of our leverage profile and overall liquidity position. We believe our leverage strategy has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by our current investment grade credit ratings of ‘BBB’ from S&P Global Ratings (“S&P”) and ‘Baa2’ from Moody’s Investors Service (“Moody’s”). We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, a non-GAAP financial measure, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with lenders and with rating agencies regarding our credit rating. We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio that is generally less than 6.0x. As of June 30, 2023, we had total debt outstanding of $2.0 billion, Net Debt of $1.9 billion, and a Net Debt to Annualized Adjusted EBITDAre ratio of 5.0x.
Net Debt and Annualized Adjusted EBITDAre are non-GAAP financial measures, and Annualized Adjusted EBITDAre is calculated based upon EBITDA, EBITDAre, and Adjusted EBITDAre, each of which is also a non-GAAP financial measure. Refer to Non-GAAP Measures below for further details concerning our calculation of non-GAAP measures and reconciliations to the comparable GAAP measure.
Liquidity/REIT Requirements
Liquidity is a measure of our ability to meet potential cash requirements, including our ongoing commitments to repay debt, fund our operations, acquire properties, make distributions to our stockholders, and other general business needs. As a REIT, we are required to distribute to our stockholders at least 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gains, on an annual basis. As a result, it is unlikely that we will be able to retain substantial cash balances to meet our long-term liquidity needs, including repayment of debt and the acquisition of additional properties, from our annual taxable income. Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of capital.
Short-term Liquidity Requirements
Our short-term liquidity requirements consist primarily of funds necessary to pay for our operating expenses, including our general and administrative expenses and interest payments on our outstanding debt, to pay distributions, to fund our acquisitions that are under control or expected to close within a short time period, and to pay for commitments to fund development opportunities, tenant improvements and revenue generating capital expenditures. Under leases where we are required to bear the cost of structural repairs and replacements, we do not currently anticipate making significant capital expenditures or incurring other significant property costs, including as a result of inflationary pressures in the current economic environment, because of the strong occupancy levels across our portfolio and the net lease nature of our leases. We expect to meet our short-term liquidity requirements primarily from cash and cash equivalents balances and net cash provided by operating activities, supplemented by borrowings under our Revolving Credit Facility. We intend to match fund our acquisitions with an appropriate mix of debt and equity capital. We use cash on hand and borrowings under our Revolving Credit Facility to initially fund acquisitions, which are subsequently repaid or replaced with proceeds from our equity and debt capital markets activities as well as proceeds from dispositions.
As detailed in the contractual obligations table below, we have approximately $123.8 million of expected obligations due throughout the remainder of 2023, primarily consisting of $84.5 million of commitments to fund investments, $38.3 million of interest expense due and $1.1 million of mortgage amortization. We expect our cash provided by operating activities, as discussed below, will be sufficient to pay for our current obligations including interest and mortgage amortization. We expect to pay for commitments to fund investments using our Revolving Credit Facility.
Long-term Liquidity Requirements
Our long-term liquidity requirements consist primarily of funds necessary to repay debt and invest in additional revenue generating properties. We expect to source debt capital from unsecured term loans from commercial banks, revolving credit facilities, private placement senior unsecured notes, and public bond offerings.
The source and mix of our debt capital in the future will be impacted by market conditions as well as our continued focus on lengthening our debt maturity profile to better align with our portfolio’s long-term leases, staggering debt maturities to reduce the risk that a significant amount of debt will mature in any single year in the future, and managing our exposure to interest rate risk. As of June 30, 2023, we have $877.1 million of available capacity under our Revolving Credit Facility.
We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and equity capitalization. We also, from time to time, obtain or assume non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property subject to limitations imposed by our Revolving Credit Facility covenants and our investment grade credit rating. We have no material debt maturities until 2026.
Equity Capital Resources
Our equity capital is primarily provided through our at-the-market common equity offering program (“ATM Program”), as well as follow-on equity offerings. Under the terms of our ATM Program we may, from time to time, publicly offer and sell shares of our common stock having an aggregate gross sales price of up to $400 million. The ATM Program provides for forward sale agreements, enabling us to set the price of shares upon pricing the offering while delaying the issuance of shares and the receipt of the net proceeds. We did not raise any equity on our ATM Program during the six months ended June 30, 2023, and have approximately $145.4 million of capacity remaining on the ATM Program as of June 30, 2023.
Our public offerings have been used to repay debt, fund acquisitions, and for other general corporate purposes.
As we continue to invest in accretive real estate properties, we expect to balance our debt and equity capitalization, while maintaining a Net Debt to Annualized Adjusted EBITDAre ratio below 6.0x on a sustained basis, through the anticipated use of follow-on equity offerings and the ATM Program.
Unsecured Indebtedness as of June 30, 2023
The following table sets forth our outstanding revolving credit facility, unsecured term loans and senior unsecured notes at June 30, 2023.
one-month adjusted SOFR + 1.00% (b)
one-month adjusted SOFR + 0.95%
one-month adjusted SOFR + 1.25%
Debt Covenants
We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As of June 30, 2023, we believe we were in compliance with all of our covenants on all outstanding borrowings. In the event of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders in excess of dividends required to maintain our REIT qualification. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification.
Covenants
Requirements
Leverage Ratio
≤ 0.60 to 1.00
Secured Indebtedness Ratio
≤ 0.40 to 1.00
Unencumbered Coverage Ratio
≥ 1.75 to 1.00
Fixed Charge Coverage Ratio
≥ 1.50 to 1.00
Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value
Dividends and Other Restricted Payments
Only applicable in case of default
Aggregate Debt Ratio
Consolidated Income Available for Debt to Annual Debt Service Charge
Total Unencumbered Assets to Total Unsecured Debt
Secured Debt Ratio
Contractual Obligations
The following table provides information with respect to our contractual commitments and obligations as of June 30, 2023 (in thousands). Refer to the discussion in the Liquidity and Capital Resources section above for further discussion over our short and long-term obligations.
Year ofMaturity
Revolving CreditFacility
Mortgages
Term Loans
Senior Notes
InterestExpense (a)
Commitments to Fund Investments (b)
38,280
84,468
123,840
76,021
98,014
176,295
78,461
98,656
16,843
56,007
595,762
1,597
41,443
393,040
38,277
700,000
61,670
1,099,947
351,882
182,482
2,487,540
At June 30, 2023 investment in rental property of $121.9 million was pledged as collateral against our mortgages.
Additionally, we are a party to two separate tax protection agreements with the contributing members of two distinct UPREIT transactions and a third tax protection agreement in connection with the internalization. The tax protection agreements require us to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the tax protection agreement entered into in connection with our internalization, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. Based on values as of June 30, 2023, taxable sales of the applicable properties would trigger liability under the three agreements of approximately $20.4 million. Based on information available, we do not believe that the events resulting in liability as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded these commitments from the contractual commitments table above.
In the normal course of business, we enter into various types of commitments to purchase real estate properties. These commitments are generally subject to our customary due diligence process and, accordingly, a number of specific conditions must be met before we are obligated to purchase the properties.
We are exposed to interest rate risk arising from changes in interest rates on the floating-rate borrowings under our unsecured credit facilities. Borrowings pursuant to our unsecured credit facilities bear interest at floating rates based on SOFR, or CDOR plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense, which will in turn, increase or decrease our net income and cash flow.
We attempt to manage the interest rate risk on variable rate borrowings by entering into interest rate swaps. As of June 30, 2023, we had 32 interest rate swaps outstanding with an aggregate notional amount of $975.4 million. Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable-rate borrowings. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes.
In addition, we own investments in Canada, and as a result are subject to risk from the effects of exchange rate movements in the Canadian dollar, which may affect future costs and cash flows. We funded a significant portion of our Canadian investments through Canadian dollar borrowings under our Revolving Credit Facility, which is intended to act as a natural hedge against our Canadian dollar investments. The Canadian dollar revolving borrowings are remeasured each reporting period, with the unrealized foreign currency gains and losses flowing through earnings. These unrealized foreign currency gains and losses do not impact our cash flows from operations until settled, and are expected to directly offset the changes in the value of our net investments as a result of changes in the Canadian dollar. Our Canadian investments are recorded at their historical exchange rates, and therefore are not impacted by changes in the value of the Canadian dollar.
Cash and cash equivalents and restricted cash totaled $36.3 million and $29.0 million at June 30, 2023 and June 30, 2022, respectively. The table below shows information concerning cash flows for the six months ended June 30, 2023 and 2022:
(In thousands)
(Decrease) increase in cash and cash equivalents and restricted cash
The increase in net cash provided by operating activities was mainly due to growth in our real estate portfolio and associated incremental net lease revenues.
The increase in cash provided by investing activities was mainly due to decreased investment volume and increased disposition volume during the six months ended June 30, 2023.
The increase in net cash used in financing activities mainly reflects net repayments on the unsecured revolving credit facility and increased distributions paid to shareholders. Additionally, there were no proceeds from the issuance of common stock during the six months ended June 30, 2023 as compared to proceeds of $202.6 million during the six months ended June 30, 2022.
FFO, Core FFO, and AFFO
We compute Funds From Operations (“FFO”) in accordance with the standards established by the Board of Governors of Nareit, the worldwide representative voice for REITs and publicly traded real estate companies with an interest in the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets. FFO is used by management, investors, and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers, primarily because it excludes the effect of real estate depreciation and amortization and net gains (losses) on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions.
We compute Core Funds From Operations (“Core FFO”) by adjusting FFO, as defined by Nareit, to exclude certain GAAP income and expense amounts that we believe are infrequently recurring, unusual in nature, or not related to its core real estate operations, including write-offs or recoveries of accrued rental income, lease termination fees, gain on insurance recoveries, cost of debt extinguishments, unrealized and realized gains or losses on foreign currency transactions, severance and executive transition costs, and other extraordinary items. Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Core FFO provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of our peers, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis.
We compute Adjusted Funds From Operations (“AFFO”), by adjusting Core FFO for certain non-cash revenues and expenses, including straight-line rents, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other non-cash interest expense, stock-based compensation, and other specified non-cash items. We believe that excluding such items assists management and investors in distinguishing whether changes in our operations are due to growth or decline of operations at our properties or from other factors. We use AFFO as a measure of our performance when we formulate corporate goals, and is a factor in determining management compensation. We believe that AFFO is a useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by non-cash revenues or expenses.
Specific to our adjustment for straight-line rents, our leases include cash rents that increase over the term of the lease to compensate us for anticipated increases in market rental rates over time. Our leases do not include significant front-loading or back-loading of payments, or significant rent-free periods. Therefore, we find it useful to evaluate rent on a contractual basis as it allows for comparison of existing rental rates to market rental rates.
FFO, Core FFO, and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO, Core FFO, and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.
Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments to FFO that we use to calculate Core FFO and AFFO. In the future, the SEC, Nareit or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our calculation and characterization of Core FFO and AFFO accordingly.
The following table reconciles net income (which is the most comparable GAAP measure) to FFO, Core FFO, and AFFO:
March 31, 2023
June 30,2022
Real property depreciation and amortization
38,990
41,745
80,735
69,738
(29,462
(3,415
Provision for impairment on investment in rental properties
FFO
72,524
81,177
153,701
129,844
297
1,326
Lease termination fees
(7,500
Cost of debt extinguishment
Severance and executive transition costs (a)
183
481
664
Other expenses (b)
1,671
1,689
(1,506
Core FFO
74,381
74,473
148,854
130,062
Straight-line rent adjustment
(7,276
(7,271
(14,547
(9,899
Adjustment to provision for credit losses
Amortization of debt issuance costs
Amortization of net mortgage premiums
(52
(26
(78
Loss (gain) on interest rate swaps and other non-cash interest expense
521
1,043
Amortization of lease intangibles
(1,085
(2,691
(3,776
(2,325
Stock-based compensation
1,492
3,031
AFFO
69,004
67,485
136,489
123,205
EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre
We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. EBITDA is a measure commonly used in our industry. We believe that this ratio provides investors and analysts with a measure of our performance that includes our operating results unaffected by the differences in capital structures, capital investment cycles and useful life of related assets compared to other companies in our industry. We compute EBITDAre in accordance with the definition adopted by Nareit, as EBITDA excluding gains (losses) from the sales of depreciable property and provisions for impairment on investment in real estate. We believe EBITDA and EBITDAre are useful to investors and analysts because they provide important supplemental information about our operating performance exclusive of certain non-cash and other costs. EBITDA and EBITDAre are not measures of financial performance under GAAP, and our EBITDA and EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA and EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.
We are focused on a disciplined and targeted acquisition strategy, together with active asset management that includes selective sales of properties. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, each discussed further below, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with our lenders and rating agencies regarding our credit rating. As we fund new acquisitions using our unsecured Revolving Credit Facility, our leverage profile and Net Debt will be immediately impacted by current quarter acquisitions. However, the full benefit of EBITDAre from newly acquired properties will not be received in the same quarter in which the properties are acquired. Additionally, EBITDAre for the quarter includes amounts generated by properties that have been sold during the quarter. Accordingly, the variability in EBITDAre caused by the timing of our acquisitions and dispositions can temporarily distort our leverage ratios. We adjust EBITDAre (“Adjusted EBITDAre”) for the most recently completed quarter (i) to recalculate as if all acquisitions and dispositions had occurred at the beginning of the quarter, (ii) to exclude certain GAAP income and expense amounts that are either non-cash, such as cost of debt extinguishments, realized or unrealized gains and losses on foreign currency transactions, or gains on insurance recoveries, or that we believe are one time, or unusual in nature because they relate to unique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the future, and (iii) to eliminate the impact of lease termination fees and other items that are not a result of normal operations. We then annualize quarterly Adjusted EBITDAre by multiplying it by four (“Annualized Adjusted EBITDAre”). You should not unduly rely on this measure as it is based on assumptions and estimates that may prove to be inaccurate. Our actual reported EBITDAre for future periods may be significantly different from our Annualized Adjusted EBITDAre. Adjusted EBITDAre and Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.
The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA, EBITDAre, and Adjusted EBITDAre. Information is also presented with respect to Annualized EBITDAre and Annualized Adjusted EBITDAre:
21,139
448
479
401
EBITDA
122,752
104,776
89,352
(4,071
EBITDAre
93,290
102,834
86,661
Adjustment for current quarter acquisition activity (a)
342
406
2,780
Adjustment for current quarter disposition activity (b)
(444
(365
(141
Adjustment to exclude non-recurring and other expenses (c)
(1,023
Adjustment excludes net write-offs of accrued rental income
Adjustment to exclude realized / unrealized foreign exchange (gain) loss
1,681
(2,632
Adjustment to exclude cost of debt extinguishments
Adjustment to exclude lease termination fees
Adjusted EBITDAre
95,055
94,667
86,668
Annualized EBITDAre
373,160
411,336
346,642
Annualized Adjusted EBITDAre
380,220
378,668
346,672
Net Debt, Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre
We define Net Debt as gross debt (total reported debt plus debt issuance costs) less cash and cash equivalents and restricted cash. We believe that the presentation of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre is useful to investors and analysts because these ratios provide information about gross debt less cash and cash equivalents, which could be used to repay debt, compared to our performance as measured using EBITDAre, and is used in communications with lenders and rating agencies regarding our credit rating. The following table reconciles total debt (which is the most comparable GAAP measure) to Net Debt, and presents the ratio of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre, respectively:
Debt
108,330
320,657
895,006
587,098
844,744
844,178
85,853
95,453
Debt issuance costs
9,872
10,390
8,991
Gross Debt
1,944,323
1,856,377
(20,763
(15,412
(16,813
Restricted cash
(15,502
(3,898
(12,163
Net Debt
1,916,911
1,925,013
1,827,401
Net Debt to Annualized EBITDAre
5.1x
4.7x
5.3x
Net Debt to Annualized Adjusted EBITDAre
5.0x
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as other disclosures in the financial statements. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, "Summary of Significant Accounting Policies," in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. We believe there have been no significant changes during the six months ended June 30, 2023, to the items that we disclosed as our critical accounting policies and estimates in our 2022 Annual Report on Form 10-K.
For information on the impact of recent accounting pronouncements on our business, see Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to certain market risks, one of the most predominant of which is a change in interest rates. Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and other variable-rate debt. Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced. We attempt to manage interest rate risk by entering into long-term fixed rate debt, entering into interest rate swaps to convert certain variable-rate debt to a fixed rate, and staggering our debt maturities. We have designated the interest rate swaps as cash flow hedges for accounting purposes and they are reported at fair value. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. Further information concerning our interest rate swaps can be found in Note 9 in our Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q.
Our fixed-rate debt includes our senior unsecured notes, mortgages, and variable-rate debt converted to a fixed rate with the use of interest rate swaps. Our fixed-rate debt had a carrying value and fair value of approximately $1.9 billion and $1.7 billion, respectively, as of June 30, 2023. Changes in market interest rates impact the fair value of our fixed-rate debt, but they have no impact on interest incurred or on cash flows. For instance, if interest rates were to increase 1%, and the fixed-rate debt balance were to remain constant, we would expect the fair value of our debt to decrease, similar to how the price of a bond decreases as interest rates rise. A 1% increase in market interest rates would have resulted in a decrease in the fair value of our fixed-rate debt of approximately $68.0 million as of June 30, 2023.
Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on the applicable reference rate plus an applicable margin, and totaled $1.0 billion as of June 30, 2023, of which $975.4 million was swapped to a fixed rate by our use of interest rate swaps. Taking into account the effect of our interest rate swaps, a 1% increase or decrease in interest rates would have a corresponding $0.5 million increase or decrease in interest expense annually.
With the exception of our interest rate swap transactions, we have not engaged in transactions in derivative financial instruments or derivative commodity instruments.
Foreign Currency Exchange Rate Risk
We own investments in Canada, and as a result are subject to risk from the effects of exchange rate movements in the Canadian dollar, which may affect future costs and cash flows. We funded a significant portion of our Canadian investments through Canadian dollar borrowings under our Revolving Credit Facility, which is intended to act as a natural hedge against our Canadian dollar investments. To the extent that currency fluctuations increase or decrease rental revenues, as translated to U.S. dollars, the change in debt service (comprised of interest payments), as translated to U.S. dollars, will partially offset the effect of fluctuations in revenue and, to some extent, mitigate the risk from changes in foreign currency exchange rates. We believe the foreign currency exchange rate risk on the remaining cash flows is immaterial.
Additionally, our Canadian dollar revolving borrowings are remeasured each reporting period, with the unrealized foreign currency gains and losses flowing through earnings. These unrealized foreign currency gains and losses do not impact our cash flows from operations until settled, and are expected to directly offset the changes in the value of our net investments as a result of changes in the Canadian dollar. Our Canadian investments are recorded at their historical exchange rates, and therefore are not impacted by changes in the value of the Canadian dollar.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of and for the quarter ended June 30, 2023, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are subject to various lawsuits, claims, and other legal proceedings that arise in the ordinary course of our business. We are not currently a party to legal proceedings that we believe would reasonably be expected to have material adverse effect on our business, financial condition, or results of operations. We are not aware of any material legal proceedings to which we or any of our subsidiaries are a party or to which any of our property is subject, nor are we aware of any such legal proceedings contemplated by government agencies.
Item 1A. Risk Factors.
There have been no material changes from the risk factors set forth in our 2022 Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None of our officers or directors adopted or terminated any contract, instruction, or written plan for the purchase or sale of our securities intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement.
Item 6. Exhibits
No.
Description
Articles of Incorporation of Broadstone Net Lease, Inc. (filed as Exhibit 3.1 to the Corporation’s Registration Statement on Form 10 filed April 24, 2017 and incorporated herein by reference)
Articles of Amendment of Broadstone Net Lease, Inc. (filed as Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)
Articles Supplementary of Broadstone Net Lease, Inc. (filed as Exhibit 3.2 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)
Articles of Amendment of Broadstone Net Lease, Inc. (filed as Exhibit 3.3 to the Corporation’s Current Report on Form 8-K filed September 18, 2020 and incorporated herein by reference)
Articles of Amendment and Restatement of Broadstone Net Lease, Inc. (filed as Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed May 8, 2023 and incorporated herein by reference)
Second Amended and Restated Bylaws of Broadstone Net Lease, Inc., adopted March 23, 2020 (filed as Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed March 25, 2020 and incorporated herein by reference)
Indenture, dated as of September 15, 2021, among the Issuer, the Company and the Trustee, including the form of the Guarantee (filed as Exhibit 4.1 to the Corporation’s Current Report on Form 8-K filed September 10, 2021 and incorporated herein by reference)
First Supplemental Indenture, dated as of September 15, 2021, among the Issuer, the Company and the Trustee, including the form of the Notes (filed as Exhibit 4.2 to the Corporation’s Current Report on Form 8-K filed September 10, 2021 and incorporated herein by reference)
10.1*
Amendment No. 5 to Term Loan Agreement, dated June 8, 2023, by and among Broadstone Net Lease, Inc., Broadstone Net Lease, LLC, Capital One, National Association and the lenders party thereto
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*†
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*†
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
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101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
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Inline XBRL Taxonomy Extension Presentation Linkbase Document
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* Filed herewith.
+ Management contract or compensatory plan or arrangement.
†In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 3, 2023
/s/ John D. Moragne
John D. Moragne
Chief Executive Officer
/s/ Kevin M. Fennell
Kevin M. Fennell
Executive Vice President and Chief Financial Officer