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 March 31, 2024, 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.)
207 High Point Drive
Suite 300
Victor, New York
14564
(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 188,430,015 shares of the Registrants’ Common Stock, $0.00025 par value per share, outstanding as of April 29, 2024.
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 Equity (Unaudited)
3
Condensed Consolidated Statements of Cash Flows (Unaudited)
4
Notes to the Condensed Consolidated Financial Statements (Unaudited)
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Cautionary Note Regarding Forward-Looking Statements
Regulation FD Disclosures
Explanatory Note and Certain Defined Terms
20
Overview
Real Estate Portfolio Information
21
Results of Operations
27
Liquidity and Capital Resources
31
Derivative Instruments and Hedging Activities
34
Cash Flows
Non-GAAP Measures
35
Critical Accounting Policies and Estimates
39
Impact of Recent Accounting Pronouncements
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
40
Item 4.
Controls and Procedures
Part II - OTHER INFORMATION
41
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
42
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)
March 31,2024
December 31,2023
Assets
Accounted for using the operating method:
Land
$
724,199
748,529
Land improvements
316,170
328,746
Buildings and improvements
3,591,260
3,803,156
Equipment
8,247
8,265
Total accounted for using the operating method
4,639,876
4,888,696
Less accumulated depreciation
(606,225
)
(626,597
Accounted for using the operating method, net
4,033,651
4,262,099
Accounted for using the direct financing method
26,522
26,643
Accounted for using the sales-type method
571
572
Property under development
133,064
94,964
Investment in rental property, net
4,193,808
4,384,278
Cash and cash equivalents
221,740
19,494
Accrued rental income
149,203
152,724
Tenant and other receivables, net
836
1,487
Prepaid expenses and other assets
33,149
36,661
Interest rate swap, assets
57,900
46,096
Goodwill
339,769
Intangible lease assets, net
273,250
288,226
Total assets
5,269,655
5,268,735
Liabilities and equity
Unsecured revolving credit facility
73,820
90,434
Mortgages, net
78,517
79,068
Unsecured term loans, net
896,260
895,947
Senior unsecured notes, net
845,498
845,309
Accounts payable and other liabilities
40,655
47,534
Dividends payable
56,871
56,869
Accrued interest payable
9,377
5,702
Intangible lease liabilities, net
50,953
53,531
Total liabilities
2,051,951
2,074,394
Commitments and contingencies (Note 16)
Equity
Broadstone Net Lease, Inc. 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, 188,435 and 187,614 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively
47
Additional paid-in capital
3,446,910
3,440,639
Cumulative distributions in excess of retained earnings
(430,169
(440,731
Accumulated other comprehensive income
56,834
49,286
Total Broadstone Net Lease, Inc. equity
3,073,622
3,049,241
Non-controlling interests
144,082
145,100
Total equity
3,217,704
3,194,341
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 March 31,
2024
2023
Revenues
Lease revenues, net
105,366
118,992
Operating expenses
Depreciation and amortization
37,772
41,784
Property and operating expense
5,660
5,886
General and administrative
9,432
10,416
Provision for impairment of investment in rental properties
26,400
1,473
Total operating expenses
79,264
59,559
Other income (expenses)
Interest income
233
162
Interest expense
(18,578
(21,139
Gain on sale of real estate
59,132
3,415
Income taxes
(408
(479
1,696
(18
Net income
68,177
41,374
Net income attributable to non-controlling interests
(3,063
(2,070
Net income attributable to Broadstone Net Lease, Inc.
65,114
39,304
Weighted average number of common shares outstanding
Basic
187,290
186,130
Diluted
196,417
196,176
Net earnings per share attributable to common stockholders
Basic and Diluted
0.35
0.21
Comprehensive income
Other comprehensive income
Change in fair value of interest rate swaps
11,804
(17,899
Realized loss on interest rate swaps
159
522
80,140
23,997
Comprehensive income attributable to non-controlling interests
(3,600
(1,200
Comprehensive income attributable to Broadstone Net Lease, Inc.
76,540
22,797
Condensed Consolidated Statements of Equity
CommonStock
AdditionalPaid-inCapital
CumulativeDistributionsin Excess ofRetained Earnings
AccumulatedOtherComprehensiveIncome
Non-controllingInterests
TotalEquity
Balance, January 1, 2024
3,063
Issuance of 822 shares of common stock under equity incentive plan
116
Offering costs, discounts, and commissions
(36
Stock-based compensation, net of 25 shares of restricted stock forfeited
1,475
Retirement of 71 shares of common stock under equity incentive plan
(1,040
Conversion of 95 OP units to 95 shares of common stock
1,536
(1,536
Distributions declared ($0.285 per share and OP Unit)
(54,552
(2,740
(57,292
Change in fair value of interest rate swap agreements
11,274
530
Realized loss on interest rate swap agreements
152
7
Adjustment to non-controlling interests
4,220
(3,878
(342
Balance, March 31, 2024
AccumulatedOtherComprehensive Income
Balance, January 1, 2023
3,419,395
(386,049
59,525
169,587
3,262,505
2,070
Issuance of 259 shares of common stock under equity incentive plan
(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
(17,003
(896
496
26
(460
498
(38
Balance, March 31, 2023
3,434,534
(398,890
43,516
153,110
3,232,317
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
36,754
39,093
Amortization of debt issuance costs and original issuance discount charged to interest expense
983
960
Stock-based compensation expense
Straight-line rent, direct financing and sales-type lease adjustments
(2,424
(6,980
(59,132
(3,415
Other non-cash items
(1,508
350
Changes in assets and liabilities:
Tenant and other receivables
704
262
2,841
215
(7,078
(3,418
3,675
2,583
Net cash provided by operating activities
70,867
74,376
Investing activities
Acquisition of rental property
(497
(5,319
Investment in property under development including capitalized interest of $1,241 and $0 in 2024 and 2023, respectively
(38,100
Capital expenditures and improvements
(3,132
(15,583
Proceeds from disposition of rental property, net
247,064
50,410
Change in deposits on investments in rental property
(1,050
125
Net cash provided by investing activities
204,285
29,633
Financing activities
(231
(170
Principal payments on mortgages and unsecured term loans
(560
(736
Borrowings on unsecured revolving credit facility
65,500
29,000
Repayments on unsecured revolving credit facility
(80,500
(118,000
Cash distributions paid to stockholders
(54,448
(51,844
Cash distributions paid to non-controlling interests
(2,767
(2,989
Net cash used in financing activities
(73,006
(144,739
Net increase (decrease) in cash and cash equivalents and restricted cash
202,146
(40,730
Cash and cash equivalents and restricted cash at beginning of period
20,632
60,040
Cash and cash equivalents and restricted cash at end of period
222,778
19,310
Reconciliation of cash and cash equivalents and restricted cash
Cash and cash equivalents at beginning of period
21,789
Restricted cash at beginning of period
1,138
38,251
Cash and cash equivalents at end of period
15,412
Restricted cash at end of period
1,038
3,898
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’s common stock is listed on the New York Stock Exchange under the symbol “BNL.” The Corporation, the OP, and its consolidated subsidiaries are collectively referred to as the “Company.”
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, restaurant, healthcare, retail, and office commercial properties under long-term lease agreements. At March 31, 2024, the Company owned a diversified portfolio of 759 individual commercial properties with 752 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:
March 31, 2024
December 31, 2023
Shares of Common Stock
OP Units
Total DilutedShares
Ownership interest
188,435
8,833
197,268
187,614
8,928
196,542
Percent ownership of OP
95.5
%
4.5
100.0
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, 2023, included in the Company’s 2023 Annual Report on Form 10-K, filed with the SEC on February 22, 2024. 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. 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 in 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 completed, the property under development is placed in service and depreciation commences. For the three months ended March 31, 2024 and 2023, the Company invested $36.9 million and $0.0 million, respectively, in properties under development, excluding capitalized costs. At March 31, 2024 and December 31, 2023, the Company had $133.1 million and $95.0 million, respectively, classified as Property under development in the Condensed Consolidated Balance Sheets, inclusive of $2.7 million and $1.5 million of capitalized interest, respectively.
6
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 March 31, 2024 and 2023 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 and information obtained from brokers and other third party sources. 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 charges:
(in thousands, except number of properties)
Number of properties
12
Impairment charge
During the three months ended March 31, 2024, the Company recognized impairment of $26.4 million, resulting from changes in the Company’s long-term hold strategy with respect to the individual properties. The impairments were based on actual and expected sales prices of the individual properties and include a $15.2 million impairment charge on a healthcare property and an $11.2 million impairment charge on 11 healthcare properties sold as part of a portfolio with a gain of $59.1 million, excluding any impairment.
Restricted Cash
Restricted cash generally includes escrow funds the Company maintains pursuant to the terms of certain mortgages, lease agreements, and undistributed 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 in the Condensed Consolidated Balance Sheets. Restricted cash consisted of the following:
March 31,
December 31,
Escrow funds and other
1031 exchange proceeds
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 in the Condensed Consolidated Balance Sheets. Rent received in advance consisted of the following:
Rent received in advance
15,200
14,776
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 comparable financing transactions, recent market risk premiums for loans of comparable quality, applicable 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 in 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
1,902,432
1,919,607
Fair value
1,741,050
1,761,177
Non-recurring Fair Value Measurements
The Company’s non-recurring fair value measurements at March 31, 2024 and December 31, 2023 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.
Right-of-Use Assets and Lease Liabilities
The Company is a lessee under non-cancelable operating leases associated with its corporate headquarters and other office spaces as well as with leases of land (“ground leases”). The Company records right-of-use assets and lease liabilities associated with these leases. The lease liability is equal to the net present value of the future payments to be made under the lease, discounted using estimates based on observable market factors. The right-of-use asset is generally equal to the lease liability plus initial direct costs associated with the leases. The Company includes in the recognition of the right-of-use asset and lease liability those renewal periods that are reasonably certain to be exercised, based on the facts and circumstances that exist at lease inception. Amounts associated with percentage rent provisions are considered variable lease costs and are not included in the initial measurement of the right-of-use asset or lease liability. The Company has made an accounting policy election, applicable to all asset types, not to separate lease from nonlease components when allocating contract consideration related to operating leases.
Right-of-use assets and lease liabilities associated with operating leases were included in the accompanying Condensed Consolidated Balance Sheets as follows:
Financial Statement Presentation
Right-of-use assets
7,528
8,476
Lease liabilities
7,905
8,256
The Company’s right-of-use assets and lease liabilities primarily consist of a ten year lease for the Company’s corporate office space. The lease contains two five-year extension options, exercisable at the Company’s discretion, that are not reasonably certain to be exercised, and are therefore excluded from our calculation of the lease liability.
8
3. Acquisitions of Rental Property
The Company did not close on any acquisitions during the three months ended March 31, 2024.
The Company closed on the following acquisitions during the three months ended March 31, 2023:
Number of
Real Estate
Date
Property Type
Properties
Acquisition Price
March 14, 2023
Retail
5,221
(a)
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:
781
360
3,890
Acquired in-place leases (b)
501
Acquired below-market leases (c)
(166
5,366
The above acquisition was funded using a combination of available cash on hand and unsecured revolving credit facility borrowings and qualified as an asset acquisition. As such, acquisition costs were capitalized.
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
37
Aggregate sale price
251,752
51,874
Aggregate carrying value
(189,373
(46,995
Additional sales expenses
(3,247
(1,464
9
5. Investment in Rental Property and Lease Arrangements
The Company generally leases its investment rental property to established tenants in the industrial, restaurant, healthcare, retail, and office property types. At March 31, 2024, the Company had 759 real estate properties, 746 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 three 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
29,994
31,157
Estimated lease payments to be received under non-cancelable operating leases with tenants at March 31, 2024 are as follows:
Remainder of 2024
280,799
2025
387,464
2026
385,811
2027
370,847
2028
355,398
Thereafter
2,964,754
4,745,073
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.
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
34,362
35,155
Estimated unguaranteed residual values
14,547
Unearned revenue
(22,272
(22,944
Reserve for credit losses
(115
Net investment in direct financing leases
Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at March 31, 2024 are as follows:
2,379
3,285
3,357
3,426
3,496
18,419
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.
10
The following table summarizes amounts reported as Lease revenues, net in the Condensed Consolidated Statements of Income and Comprehensive Income:
Contractual rental amounts billed for operating leases
97,549
98,102
Adjustment to recognize contractual operating lease billings on a straight-line basis
5,104
7,370
Net write-offs of accrued rental income
(2,556
(105
Variable rental amounts earned
598
341
Earned income from direct financing leases
682
691
Interest income from sales-type leases
14
Operating expenses billed to tenants
5,105
5,075
Other income from real estate transactions (a)
66
7,392
Adjustment to revenue recognized for uncollectible rental amounts billed, net
(1,196
112
Total lease revenues, net
6. Intangible Assets and Liabilities, and Leasing Fees
The following is a summary of intangible assets and liabilities, and leasing fees, and related accumulated amortization:
Lease intangibles:
Acquired above-market leases
42,636
44,711
Less accumulated amortization
(19,635
(20,312
Acquired above-market leases, net
23,001
24,399
Acquired in-place leases
400,956
416,206
(150,707
(152,379
Acquired in-place leases, net
250,249
263,827
Total intangible lease assets, net
Acquired below-market leases
96,245
98,535
(45,292
(45,004
Leasing fees
17,520
18,117
(6,174
(6,426
Leasing fees, net
11,346
11,691
Amortization of intangible lease assets and liabilities, and leasing fees was as follows:
Intangible
Acquired in-place leases and leasing fees
7,696
10,588
Above-market and below-market leases
1,021
2,694
There was no accelerated amortization for the three months ended March 31, 2024. For the three months ended March 31, 2023, amortization expense includes $0.9 million of accelerated amortization, resulting from early lease terminations.
Estimated future amortization of intangible assets and liabilities, and leasing fees at March 31, 2024 is as follows:
18,640
24,201
23,246
21,677
19,853
126,026
233,643
11
7. Unsecured Credit Agreements
The following table summarizes the Company’s unsecured credit agreements:
Outstanding Balance
(in thousands, except interest rates)
Interest Rate
Maturity Date
Applicable reference rate + 0.85% (a)
Mar. 2026 (c)
Unsecured term loans:
2026 Unsecured Term Loan
400,000
one-month adjusted SOFR + 1.00% (b)
Feb. 2026
2027 Unsecured Term Loan
200,000
one-month adjusted SOFR + 0.95% (b)
Aug. 2027
2029 Unsecured Term Loan
300,000
one-month adjusted SOFR + 1.25% (b)
Aug. 2029
Total unsecured term loans
900,000
Unamortized debt issuance costs, net
(3,740
(4,053
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
(4,502
(4,691
Total senior unsecured notes, net
Total unsecured debt, net
1,815,578
1,831,690
At March 31, 2024, the weighted average interest rate on all outstanding borrowings was 5.30% exclusive of interest rate swap agreements. At March 31, 2024, the weighted average interest rate on all outstanding borrowings was 3.71% inclusive 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. As of March 31, 2024, 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 effect on the Company.
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
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%
43,868
44,207
(a) (b) (c) (d)
Jun-18
Aug-25
4.36%
18,615
18,725
PNC Bank
Oct-16
Nov-26
3.62%
16,129
16,241
(b) (c)
Total mortgages
78,612
79,173
Debt issuance costs, net
(95
At March 31, 2024, investment in rental property of $119.8 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 March 31, 2024 are as follows:
1,700
20,195
490,663
351,596
263,278
775,000
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.
13
9. Interest Rate Swaps
The following is a summary of the Company’s outstanding interest rate swap agreements:
Counterparty
FixedRate
Variable Rate Index
NotionalAmount
Fair Value
Wells Fargo Bank, N.A.
October 2024
2.72
daily compounded SOFR
15,000
194
255
Capital One, National Association
December 2024
1.58
363
445
Bank of Montreal
January 2025
1.91
25,000
612
713
Truist Financial Corporation
April 2025
2.20
701
734
July 2025
2.32
793
768
1.99
894
888
December 2025
2.30
1,007
887
January 2026
1.92
1,171
1,071
2.05
40,000
1,787
1,615
2.08
35,000
1,547
1,389
1.93
1,168
1,067
April 2026
2.68
554
439
July 2026
1.32
2,396
2,186
December 2026
2.33
10,000
528
423
1,540
1,299
Toronto-Dominion Bank
March 2027
2.46
one-month CDOR
14,764
694
15,087
April 2027
1,118
806
December 2027
2.37
1,568
1,215
1,563
1,197
January 2028
75,000
4,697
3,632
May 2029
2.09
2,254
1,835
Regions Bank
2.11
2,223
1,801
June 2029
2.03
2,319
1,900
U.S. Bank National Association
2,324
1,908
August 2029
2.58
one-month SOFR
6,265
4,392
45,000
2,860
2,021
2.65
900
618
6,294
4,427
1.35
3,211
2,828
March 2032
2.69
1,043
677
2.70
678
March 2034
2.81
29,528
(b)
2,269
30,174
1,410
973,820
975,435
At March 31, 2024, the weighted average fixed rate on all outstanding interest rate swaps was 2.28%. At March 31, 2024, the weighted average interest rate on all outstanding borrowings was 3.71% inclusive of unsecured credit agreements.
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 (Loss)
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
7,548
18,578
4,997
21,139
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 $25.6 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
95
896
Value of units exchanged
11. Credit Risk Concentrations
The Company maintained bank balances that, at times, exceeded the federally insured limit during the three months ended March 31, 2024. 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 three months ended March 31, 2024 and 2023, 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 through June 2024. 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 March 31, 2024, the Company has $145.4 million of available capacity under the ATM Program. During the three months ended March 31, 2024 and 2023, no shares were issued under the ATM Program.
Share Repurchase Program
The Company has a stock repurchase program (the “Repurchase Program”), which authorizes the Company to repurchase up to $150.0 million of the Company’s common stock. On March 12, 2024, the Company’s Board of Directors re-authorized the Repurchase Program for a 12-month period beginning on March 14, 2024. Under the Repurchase Program, purchases of the Company’s stock can be made in the open market or through private transactions from time to time over the 12-month period, 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 three months ended March 31, 2024 and 2023, no shares of the Company’s common stock were repurchased under the Repurchase Program.
15
13. Stock-Based Compensation
Restricted Stock Awards
During the three months ended March 31, 2024 and 2023, the Company awarded 777,943 and 259,099 shares of restricted stock awards (“RSAs”), respectively, to officers, employees and non-employee directors under the Company's equity incentive plan. 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-, four-, or five-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 value of awards granted during the three months ended March 31, 2024 and 2023, were $14.74 and $17.75, respectively, which were based on the market price per share of the Company’s common stock on the grant dates.
The following table presents information about the Company’s RSAs:
Compensation cost
1,728
Dividends declared on unvested RSAs
295
136
Fair value of shares vested during the period
3,207
2,864
As of March 31, 2024, there was $15.0 million of unrecognized compensation costs related to the unvested restricted shares, which is expected to be recognized over a weighted average period of 3.9 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
492
18.63
396
20.36
Granted
778
14.74
259
17.75
Vested
(209
19.26
(160
Forfeited
(25
19.02
Unvested at end of period
1,036
15.57
495
19.00
Performance-based Restricted Stock Units
During the three months ended March 31, 2024 and 2023, the Company issued target grants of 202,308 and 186,481 of performance-based restricted stock units (“PRSUs”), respectively, under the Company's equity incentive plan to the officers of the Company. 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. For PRSUs issued during the three months ended March 31, 2024 that achieve a percentile rank of at least the 55th percentile, and the absolute rTSR of the Company is negative for the performance period, the awards will be reduced by 25%, not to result in a reduction less than target. Dividends accrue during the measurement period and will be paid on the PRSUs ultimately earned at the end of the measurement period in either cash or common stock, at the discretion of the Compensation Committee of the Board of Directors. The grant date fair value of the PRSUs was measured using a Monte Carlo simulation model based on assumptions including share price volatility.
The following table presents compensation cost recognized on the Company’s performance-based restricted stock units:
432
151
16
As of March 31, 2024, there was $6.1 million of unrecognized compensation costs related to the unvested PRSUs, which is expected to be recognized over a weighted average period of 2.3 years.
The following table presents information about the Company’s performance-based restricted stock unit activity:
351
24.90
26.27
202
15.84
186
23.78
(88
24.40
(19
25.09
(61
26.80
446
20.89
358
25.01
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
(358
(136
Net earnings used to compute basic earnings per common share
64,756
39,168
Diluted earnings:
Add: net earnings attributable to non-controlling interests
Add: undistributed earnings allocated to unvested restricted shares
63
Less: undistributed earnings reallocated to unvested restricted shares
(60
Net earnings used to compute diluted earnings per common share
67,822
41,238
187,953
186,561
Less: weighted average unvested restricted shares (a)
(663
(431
Weighted average number of common shares outstanding used in basic earnings per common share
Add: effects of restricted stock units (b)
285
220
Add: effects of convertible membership units (c)
8,842
9,826
Weighted average number of common shares outstanding used in diluted earnings per common share
Basic earnings per share
Diluted earnings per share
17
15. Supplemental Cash Flow Disclosures
Cash paid for interest was $15.0 million and $17.1 million for the three months ended March 31, 2024 and 2023, respectively. Cash paid for income taxes was $0.02 million and $0.4 million for the three months ended March 31, 2024 and 2023, respectively.
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 costs 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 March 31, 2024, the Company has a commitment to fund one build-to-suit transaction with a remaining obligation of $74.1 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 15, 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 entered into 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 are not probable. Therefore, there is no impact to the Condensed Consolidated Financial Statements. Based on values as of March 31, 2024, 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.
17. Subsequent Events
On April 15, 2024, the Company paid distributions totaling $56.2 million.
On April 25, 2024, the Board of Directors declared a quarterly distribution of $0.29 per share on the Company’s common stock and OP Units for the second quarter of 2024, which will be payable on or before July 15, 2024 to stockholders and OP unitholders of record as of June 28, 2024.
Subsequent to March 31, 2024, the Company continued to expand its operations through the acquisition of approximately $149.5 million of additional rental property and associated intangible assets and liabilities.
Subsequent to March 31, 2024, the Company sold two properties with an aggregate carrying value of approximately $18.4 million for total proceeds of $22.3 million. The Company incurred additional expenses related to the sales of approximately $0.4 million, resulting in a gain on sale of real estate of approximately $3.5 million.
18
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 2023 Annual Report on Form 10-K, as filed with the SEC on February 22, 2024. The “Risk Factors” of our 2023 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 industrial-focused, diversified net lease real estate investment trust (“REIT”) that invests in primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. As of March 31, 2024, our portfolio includes 759 properties, with 752 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 which 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.
Our Real Estate Investment Portfolio
The following charts summarize our portfolio diversification by property type, tenant, brand, industry, and geographic location as of March 31, 2024. The percentages below are calculated based on our ABR of $374.1 million as of March 31, 2024.
Diversification by Property Type
# Properties
ABR (’000s)
ABR as a % of Total Portfolio
Square Feet (’000s)
SF as a % of Total Portfolio
Industrial
Manufacturing
79
65,478
17.5
12,103
32.2
Distribution & Warehouse
45
52,448
14.0
9,212
24.5
Food Processing
33
46,789
12.5
5,501
14.6
Flex and R&D
16,199
4.3
1,157
3.1
Industrial Services
23
11,918
3.2
607
1.6
Cold Storage
9,977
2.7
723
1.9
Untenanted
197
0.5
Industrial Total
192
202,809
54.2
29,500
78.4
Restaurant
Casual Dining
100
27,204
7.3
662
1.8
Quick Service Restaurants
148
25,996
6.9
502
1.3
Restaurant Total
248
53,200
14.2
1,164
Healthcare
Healthcare Services
28
11,811
462
1.2
Animal Health Services
11,113
3.0
405
1.1
Clinical
10,572
474
Surgical
8,466
2.3
256
0.7
Life Science
8,045
2.2
549
1.5
Healthcare Total
92
50,007
13.4
2,146
5.6
General Merchandise
132
24,860
6.6
1,865
5.0
Automotive
64
11,829
757
2.0
Home Furnishings
7,265
797
2.1
Child Care
725
0.2
0.1
Retail Total
211
44,679
11.9
3,439
9.2
Office
Strategic Operations
10,754
2.9
632
1.7
Corporate Headquarters
8,553
409
Call Center
4,049
287
0.8
46
Office Total
23,356
6.3
1,374
3.7
759
374,051
37,623
22
Diversification by Tenant
Tenant
ABR(’000s)
Square Feet(’000s)
Roskam Baking Company, LLC*
15,917
2,250
6.0
AHF, LLC*
Distribution & Warehouse/Manufacturing
9,378
2.5
2,284
6.1
Joseph T. Ryerson & Son, Inc
7,780
1,599
4.2
Jack’s Family Restaurants LP*
43
7,456
147
0.4
Axcelis Technologies, Inc.
6,263
417
J. Alexander’s, LLC*
6,207
131
0.3
Hensley & Company*
6,109
577
Salm Partners, LLC*
6,062
426
Red Lobster Hospitality & Red Lobster Restaurants LLC*
6,060
Dollar General Corporation
60
5,980
562
Total Top 10 Tenants
169
77,212
20.6
8,540
22.7
BluePearl Holdings, LLC**
5,742
165
Krispy Kreme Doughnut Corporation
Quick Service Restaurants/Food Processing
5,538
156
Outback Steakhouse of Florida LLC*1
5,454
140
Tractor Supply Company
5,389
1.4
Big Tex Trailer Manufacturing Inc.*
Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters
5,157
1,302
3.5
Nestle’ Dreyer's Ice Cream Company2
4,611
309
Carvana, LLC*
4,590
230
0.6
Arkansas Surgical Hospital
4,588
129
Klosterman Bakery*
4,568
Chiquita Holdings Limited
4,418
336
0.9
Total Top 20 Tenants
127,267
34.0
12,273
32.6
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 Industry
Tenant Industry
Restaurants
251
54,041
14.4
1,207
Packaged Foods & Meats
29
41,172
11.0
4,771
12.7
Healthcare Facilities
67
35,731
9.6
1,356
3.6
Distributors
17,518
4.7
2,757
Auto Parts & Equipment
44
15,791
2,710
7.2
Food Distributors
14,404
3.9
1,712
4.6
Specialty Stores
14,113
3.8
1,338
Home Furnishing Retail
12,914
1,858
4.9
Specialized Consumer Services
11,867
709
Metal & Glass Containers
10,578
2.8
2,206
5.9
General Merchandise Stores
96
9,807
2.6
880
Industrial Machinery
9,749
1,949
5.2
9,722
515
Forest Products
Electronic Components
7,112
466
Other (38 industries)
84
100,154
26.7
10,607
28.1
Untenanted properties
298
Diversification by Geographic Location
State/Province
TX
65
34,925
9.3
3,505
LA
3,414
MI
54
33,000
8.9
3,799
10.0
MS
3,370
430
IL
22,556
2,364
NE
3,286
509
WI
20,187
5.4
2,132
5.7
SC
3,014
308
CA
19,673
5.3
1,718
IA
2,869
622
OH
16,356
4.4
1,582
NM
2,779
107
MN
15,755
2,500
CO
2,545
126
FL
38
15,067
4.0
789
UT
2,492
280
TN
48
14,974
1,084
WA
2,332
103
IN
14,756
1,832
MD
2,226
205
AL
52
12,212
3.3
863
CT
1,837
55
AZ
12,053
895
2.4
ND
1,726
GA
11,962
1,576
MT
1,602
NC
10,430
DE
1,180
133
KY
24
9,843
962
VT
PA
9,824
1,836
WY
307
OK
8,535
990
NV
273
0.0
AR
7,899
283
OR
MA
6,686
444
SD
81
NY
25
6,630
560
Total U.S.
752
365,931
97.8
37,193
98.9
MO
6,231
BC
4,804
253
KS
5,544
643
ON
2,024
101
VA
5,019
178
AB
952
51
WV
5,006
884
MB
340
NJ
4,913
366
1.0
Total Canada
8,120
Grand Total
Our Leases
The following chart sets forth our lease expirations based upon the terms of the leases in place as of March 31, 2024.
The following table presents certain information based on lease expirations by year. Amounts are in thousands, except for number of properties.
Year
# Leases
2,915
278
5,931
13,966
1,017
25,377
6.8
2,178
5.8
19,828
1,799
2029
19,327
2,592
2030
90
48,899
13.1
4,802
12.8
2031
8,058
783
2032
62
32,527
8.7
3,469
2033
50
19,721
1,593
2034
9,174
780
2035
13,983
2036
87
27,302
2,781
7.4
2037
16,493
1,110
2038
13,868
1,226
2039
8,181
928
2040
5,917
312
2041
16,556
1,363
2042
58
44,073
11.8
4,803
2043
12,440
853
9,515
2,286
761
Substantially all of our leases provide for periodic contractual rent escalations. As of March 31, 2024, leases contributing 97.4% 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 March 31, 2024 is displayed below:
Lease Escalation Frequency
% of ABR
Weighted Average Annual Minimum Increase (a)
Annually
79.3
Every 2 years
Every 3 years
Every 4 years
Every 5 years
7.6
Every 6 years
Other escalation frequencies
Flat (b)
Total/ABR Weighted Average
The escalation provisions of our leases (by percentage of ABR) as of March 31, 2024, are displayed in the following chart:
The following discussion includes the results of our operations for the periods presented.
Three Months Ended March 31, 2024 Compared to Three Months Ended December 31, 2023
Lease Revenues, net
For the Three Months Ended
Increase/(Decrease)
97,182
367
5,512
(7.4
Write off of accrued rental income
(4,161
1,605
38.6
Variable rental amount earned
972
(374
(38.5
685
(3
(0.4
5,513
Other income from real estate transactions
> 100.0
(719
(477
(66.3
Total Lease revenues, net
104,999
The increase in Lease revenues, net, was primarily attributable to a decrease in the write off of accrued rental income of $1.6 million. Write offs are discrete charges in a quarter related to collection probabilities, and fluctuate quarter to quarter. The increase was partially offset by an increase in bad debt associated with a healthcare tenant on cash-basis.
Operating Expenses
39,278
(1,506
(3.8
5,996
(336
(5.6
9,381
29,801
(3,401
(11.4
84,456
(5,192
(6.1
The decrease in depreciation and amortization for the three months ended March 31, 2024 was primarily due to net dispositions during the quarter.
The amount of impairment recognized varies quarter-to-quarter based on individual facts and circumstances during the quarter. The following table presents the impairment charges for the respective periods:
Carrying value prior to impairment charge
83,924
58,484
57,524
28,683
The $26.4 million impairment charges during the first quarter of 2024 resulted from changes in the Company’s long-term hold strategy with respect to the individual properties and were based on actual and expected sales prices. The impairments included an additional $15.2 million charge on a healthcare property that was previously impaired during the fourth quarter of 2023. Additionally, we sold a portfolio of 37 clinically-oriented healthcare properties as part of our healthcare portfolio simplification strategy. As these properties were not classified as held-for-sale at our last reporting date, we evaluated the portfolio on an individual property basis, recognizing an $11.2 million impairment on 11 properties sold below carrying value, and a $59.1 million gain on 26 properties sold above carrying value.
141
65.2
(18,971
(393
(2.1
6,269
52,863
267
675
(1,453
3,149
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 March 31, 2024, we recognized a gain of $59.1 million on the sale of 37 properties, compared to a gain of $6.3 million on the sale of five properties during the three months ended December 31, 2023, excluding the impact of impairments recognized with these sales.
The increase in other income (expense) is due to the fluctuation of realized and unrealized foreign exchange gains/losses. For the three months ended March 31, 2024, there was a $1.7 million foreign exchange gain compared to a $1.5 million foreign exchange loss during the three months ended December 31, 2023.
Net income and Net earnings per diluted share
(in thousands, except per share data)
6,797
61,380
Net earnings per diluted share
0.03
0.32
The increase in net income is primarily attributable to a $52.9 million increase in gain on the sale of real estate, a $3.4 million decrease in impairment, and a $3.1 million increase in other income (expenses).
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.
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
(553
(0.6
(2,266
(30.7
(2,451
< (100.0)
257
75.4
(9
(1.3
30
(7,326
(99.1
(1,308
(13,626
(11.5
The decrease in Lease revenues, net was primarily attributable to a decrease in lease termination income (Other income from real estate transactions). Lease termination income for the three months ended March 31, 2023 was $7.5 million. There was no lease termination income for the three months ended March 31, 2024. Additionally, the decrease was due to a $2.3 million decrease in the amount of GAAP revenues recorded on a straight-line basis due to net disposition activity in 2023, an increase in write-off of accrued rental income of $2.5 million, and an increase in adjustment to revenue recognized for uncollectible rental amounts of $1.3 million.
(4,012
(9.6
(226
(984
(9.4
24,927
19,705
33.1
The following table presents the impairment charges for the respective periods:
4,236
2,763
The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.
71
43.8
(2,561
(12.1
55,717
(71
(14.8
1,714
The decrease in interest expense reflects a decrease in average outstanding borrowings. Since March 31, 2023, we decreased total outstanding borrowings by $41.9 million. This was offset by an increase in our weighted average cost of borrowings, relating to our variable-rate USD Revolving Credit Facility borrowings. At March 31, 2024, the one-month SOFR rate was 5.33%, compared with 4.80% at March 31, 2023.
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 March 31, 2024, we recognized a gain of $59.1 million on the sale of 37 properties, compared to a gain of $3.4 million on the sale of three properties during the three months ended March 31, 2023.
The increase in other income (expenses) during the three months ended March 31, 2024 was primarily due to a $1.7 million foreign exchange gain recognized on the quarterly remeasurement of our $100 million Canadian Dollars ("CAD") Revolving Credit Facility borrowings, compared to a $0.02 million unrealized foreign exchange loss recognized during the three months ended March 31, 2023.
26,803
64.8
0.14
66.7
The increase in net income is primarily due to an increase on gain on sale of real estate of $55.8 million, a $4.0 million decrease in depreciation and amortization, a $2.6 million decrease in interest expense, and a $1.7 million increase in other income (expenses). These factors were partially offset by a $24.9 million increase in provision for impairment of investment in rental properties, and a $13.6 million decrease in lease revenue.
General
We acquire real estate using a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders, and proceeds from dispositions 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 and ‘Baa2’ from Moody’s. We seek to maintain on a sustained basis a Leverage Ratio that is generally less than 6.0x. As of March 31, 2024, we had total debt outstanding of $1.9 billion, Net Debt of $1.7 billion, a Net Debt to Annualized Adjusted EBITDAre ratio of 4.8x, and a Pro Forma Net Debt to Annualized Adjusted EBITDAre ratio of 4.6x.
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 and proceeds from selective property dispositions.
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 as well as 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 and capital recycled through selective property dispositions. 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 $392.3 million of expected obligations due throughout the remainder of 2024, primarily consisting of $280.1 million of commitments to fund investments, $55.9 million of dividends declared, $54.5 million of interest expense due, and $1.7 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 and our dividends declared using our proceeds from dispositions and Revolving Credit Facility. As of March 31, 2024, we have $926.2 million of available capacity under 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. We have no material debt maturities until 2026, as detailed in the table below.
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.
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 three months ended March 31, 2024, and have approximately $145.4 million of capacity remaining on the ATM Program as of March 31, 2024.
Our public offerings have been used to repay debt, fund acquisitions, and for other general corporate purposes.
Unsecured Indebtedness as of March 31, 2024
The following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and senior unsecured notes at March 31, 2024.
InterestRate
MaturityDate
Revolving Credit Facility
Total unsecured debt
32
Debt Covenants
We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As of March 31, 2024, 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.
Contractual Obligations
The following table provides information with respect to our contractual commitments and obligations as of March 31, 2024 (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 (a)
Mortgages
Term Loans
Senior Notes
InterestExpense (b)
Dividends (c)
Commitments to Fund Investments (d)
54,497
55,941
280,119
392,257
75,363
2,000
97,558
16,843
81,593
1,500
573,756
1,596
51,545
403,141
38,278
33,677
296,955
475,000
47,252
822,252
343,927
283,619
2,585,919
At March 31, 2024 investment in rental property of $119.8 million was pledged as collateral against our mortgages.
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 March 31, 2024, we had 32 interest rate swaps outstanding with an aggregate notional amount of $973.8 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 Credit Facility 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 $222.8 million and $19.3 million at March 31, 2024 and March 31, 2023, respectively. The table below shows information concerning cash flows for the three months ended March 31, 2024 and 2023:
(In thousands)
Increase (decrease) in cash and cash equivalents and restricted cash
The decrease in net cash provided by operating activities was mainly due to the increase in disposition volume during the three months ended March 31, 2024.
The increase in cash provided by investing activities was mainly due to decreased investment volume and increased disposition volume during the three months ended March 31, 2024.
The decrease in net cash used in financing activities mainly reflects a decrease in net repayments on the Revolving Credit Facility.
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, 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, 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 revenues and expenses that are non-cash or unique in nature, including straight-line rents, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, non-capitalized transaction costs such as acquisition costs related to deals that failed to transact, (gain) loss on interest rate swaps and other non-cash interest expense, deferred taxes, 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
Real property depreciation and amortization
37,690
39,115
41,745
(6,270
Provision for impairment on investment in rental properties
FFO
73,135
69,443
81,177
2,556
4,161
297
Lease termination fees
(7,500
Severance and executive transition costs
77
218
481
Other (income) expenses (a)
(1,696
1,453
Core FFO
74,072
75,275
74,473
Straight-line rent adjustment
(4,980
(5,404
(7,271
Amortization of debt issuance costs
Amortization of net mortgage premiums
(26
Non-capitalized transaction costs
182
Loss on interest rate swaps and other non-cash interest expense
319
Amortization of lease intangibles (b)
(1,018
(1,014
(2,691
Stock-based compensation
1,401
1,492
Deferred taxes
(282
AFFO
70,873
71,278
67,485
36
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 investment 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 investments using our unsecured Revolving Credit Facility, our leverage profile and Net Debt will be immediately impacted by current quarter investments. However, the full benefit of EBITDAre from new investments 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 investments 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 investments 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. While investments in property developments have an immediate impact to Net Debt, we do not make an adjustment to EBITDAre until the quarter in which the lease commences. 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:
18,972
408
(268
479
EBITDA
124,935
64,779
104,776
EBITDAre
92,203
88,310
102,834
Adjustment for current quarter investment activity (a)
153
406
Adjustment for current quarter disposition activity (b)
(4,712
(156
(365
Adjustment to exclude non-recurring and other expenses (c)
(125
128
(1,023
Adjustment to exclude net write-offs of accrued rental income
Adjustment to exclude realized / unrealized foreign exchange (gain) loss
Adjustment to exclude lease termination fees
Adjusted EBITDAre
88,226
94,049
94,667
Estimated revenues from developments (d)
2,771
Pro Forma Adjusted EBITDAre
90,997
Annualized EBITDAre
368,812
353,240
411,336
Annualized Adjusted EBITDAre
352,904
376,196
378,668
Pro Forma Annualized Adjusted EBITDAre
363,988
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
895,006
844,744
85,853
Debt issuance costs
8,337
8,848
10,390
Gross Debt
1,919,606
1,944,323
(221,740
(19,494
(15,412
Restricted cash
(1,038
(1,138
(3,898
Net Debt
1,679,654
1,898,974
1,925,013
Leverage Ratios:
Net Debt to Annualized EBITDAre
4.6x
5.4x
4.7x
Net Debt to Annualized Adjusted EBITDAre
4.8x
5.0x
5.1x
Pro Forma Net Debt to Annualized Adjusted EBITDAre
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 three months ended March 31, 2024 to the items that we disclosed as our critical accounting policies and estimates in our 2023 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 and interest rate swaps mature. 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 March 31, 2024. Changes in market interest rates impact the fair value of our fixed-rate debt and interest rate swaps, but they have no impact on interest incurred or on cash flows. For instance, if interest rates were to increase 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 $61.8 million as of March 31, 2024.
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 March 31, 2024. At March 31, 2024, all variable-rate debt was 100% fixed via interest rate swaps. Therefore, considering the effect of our interest rate swaps, a 1% increase or decrease in interest rates would have no effect 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. The Canadian dollar Revolving Credit Facility borrowings are remeasured each reporting period, with the unrealized foreign currency gains and losses flowing through earnings. A 10% increase or decrease in the exchange rate between the Canadian dollar and USD would have a corresponding $7.4 million increase or decrease in unrealized foreign currency gain or loss. 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 March 31, 2024, 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 March 31, 2024 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 a 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 2023 Annual Report on Form 10-K for the year ended December 31, 2023.
Item 1B. Unresolved Staff Comments.
There are no unresolved staff comments.
Item 1C. Cybersecurity.
There have been no material changes for cybersecurity set forth in our 2023 Annual Report on Form 10-K for the year ended December 31, 2023.
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)
3.4
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)
4.1
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)
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
Inline XBRL Instance Document – the instance document does not appear in Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document
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
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* 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: May 2, 2024
/s/ John D. Moragne
John D. Moragne
Chief Executive Officer
/s/ Kevin M. Fennell
Kevin M. Fennell
Executive Vice President and Chief Financial Officer