Broadstone Net Lease, Inc. (NYSE:BNL) Q4 2023 Earnings Call Transcript
Broadstone Net Lease, Inc. (NYSE:BNL) Q4 2023 Earnings Call Transcript February 22, 2024
Broadstone Net Lease, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, everyone. And welcome to the Broadstone Net Lease Fourth Quarter 2023 Earnings Conference Call. My name is Bruno, and I'll be operating your call today. Please note that today's call is being recorded [Operator Instructions]. I will now turn the call over to Brent Maedl, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead.
Brent Maedl: Thank you, operator. And thank you everyone for joining us today for Broadstone Net Lease’s fourth quarter 2023 earnings call. On today's call, you will hear prepared remarks from CEO, John Moragne; President and COO, Ryan Albano; and CFO, Kevin Fennell. All three will be available for the Q&A portion of this call. As a reminder, the following discussion and answers to your questions contain forward looking statements, which are subject to risk and uncertainties that can cause actual results to differ materially due to a variety of factors. We caution you not to place undue reliance on these forward-looking statements and refer you to our SEC filings, including our Form 10-K for the year ended December 31, 2023, for a more detailed discussion of the risk factors that may cause such differences.
Any forward-looking statements provided during this conference call are only made as of the date of this call. In conjunction with and included within our earnings release, we provided details on our ongoing efforts to simplify our healthcare portfolio to the disposition of clinically oriented assets. These materials have been furnished with the SEC and may be found on the Investor Relations section of our Web site at broadstone.com. With that, I'll turn the call over to John.
John Moragne: Thank you, Brent. Good morning, everyone. I'm proud of what our team accomplished throughout 2023 and what was a uniquely challenging year on many fronts. But before jumping into perspectives on our fourth quarter and full year results and market conditions, I would like to take a few minutes to discuss our decision and ongoing efforts to simplify our portfolio composition through the sale of our clinically oriented healthcare assets, specifically clinical, surgical and traditional medical office building properties, commencing with our announcement of an agreement to sell 37 of these assets for $253 million that we anticipate to close in the first quarter. The volatile macroeconomic conditions and suppressed transaction environment we experienced in my first year as CEO provided our team with a great opportunity for internal process and portfolio evaluation.
We completed a number of internal objectives and priorities. But perhaps the greatest was the clarity we obtained and our decision to simplify our portfolio, sell our clinical, surgical and traditional MOB assets, focus more intently and proactively on the industrial space and our other core investment verticals of retail and restaurant assets and remove the complexity caused by holding healthcare assets not customarily included in the net lease wrapper. Since going public in the fall of 2020, the composition and complexity of our healthcare portfolio has been a hurdle for many investors over the years, and for good reason. Clinical, surgical and traditional, medical office building assets do not always fit well within the traditional net lease framework.
While they can be high quality in nature, these types of assets generally have shorter lease durations, greater landlord responsibilities, longer potential downtime upon lease maturity, and in some cases, greater potential challenges with tenants. Green Valley being the starkest example. While the characteristics of these assets can make them attractive for a dedicated healthcare property and investor and manager, those same characteristics can make them onerous for a net lease read operator. At one time, our diversified healthcare portfolio may have served as a positive differentiator, but it has since become a negative distraction as a publicly traded net lease REIT and a challenge to our growth and performance. With this important strategic step, I believe we are positioning Broadstone Net Lease for long term value creation and multiple expansion.
After a detailed review, we identified 75 clinical, surgical and traditional medical office building assets for sale. On a pro forma basis, after completion of these sales, our healthcare exposure would be reduced by approximately 57% from approximately 17.6% of our AVR as of year end to approximately 7.5%. Following the sales, the remaining assets in our healthcare portfolio will primarily consist of consumer centric medical properties that are customary for many publicly traded net lease REITs, examples of which include plasma, dialysis and veterinary services. Assets with real estate fundamentals critical to the tenant's business and little to no regulatory risk. In addition to the 37 assets expected to close in March, we are in varying stages of negotiations on another 38 assets that we intend to provide an update on with first quarter earnings.
We expect that some portion of the remaining assets may have a longer hold period as we determine best paths forward for optimal disposition outcomes. I'm highly confident in our decision to sell these assets and focus on redeploying proceeds into industrial, retail and restaurant properties. Our pro forma portfolio statistics, as measured by asset mix, occupancy, WALT, fixed rent increases and tenant diversification remain top of class. With prudent redeployment, we expect those key metrics will improve even further. We intend to regularly communicate progress on both the disposition and redeployment efforts as they take place and are excited for what is to come for BNL in 2024 and the years that follow. Turning to our 2023 results. I'm happy to report a strong fourth quarter to close out the year.
We consistently demonstrated our agility and prudence in a highly dynamic macro environment, characterized by significant fluctuations in interest rates and muted transaction activity across our investment sectors. As we navigated the challenging disconnect between interest rates and cap rates, we maintained our focus on long term value creation and adaptability, demonstrated by a high degree of discipline and selectivity. As rates retreated from their highs at the end of the fourth quarter, we started to see sellers re-enter the market at the beginning of this year with a somewhat refreshed set of expectations as compared to what we had seen during much of 2023. Despite the relative improvement and incremental optimism, we remained mostly on the sidelines, investing $64 million during the fourth quarter of which $16 million was revenue generating CapEx. As an example of our continued discipline as well as the challenging transaction market, late in the fourth quarter, we walked away from a roughly $70 million investment opportunity.
As the unfortunately increasing challenges in the insurance market proved insurmountable in this instance, resulting in an investment that would've exceeded our risk tolerance. Despite the lower than expected investment volume, we are pleased to report a full year AFFO of $1.41 per share in line with our guidance as we realized operational efficiencies across G&A and bad debt. In our efforts to prudently redeploy disposition proceeds, we have secured $97.1 million of investments under control, which we expect to close during the first and second quarters. While our pipeline of opportunities has improved compared to 2023, we continue to believe a higher degree of selectivity is required as we navigate the macro backdrop. We also continue to focus on sourcing off market investments and unique capital allocation opportunities where we can partner with developers and tenants seeking capital solutions as the constraints on traditional commercial real estate lending persist.
Our objectives for 2024 include redeploying substantially all of our anticipated disposition proceeds during the year, which is embedded within our 2024 guidance. Shifting to our overall portfolio, which remains predominantly leased to industrial and defensive retail and restaurant tenants, it continued to perform exceptionally well, as evidenced by 99.2% rent collections during the fourth quarter and 99.4% occupancy as of December 31, 2023. Green Valley Medical Center was the only rent outstanding as of December 31st, and we began marketing the asset for sale during the quarter. This decision resulted in us recognizing an approximately $26 million impairment. While early in the process, we have seen indications of interest from multiple parties for various uses and we remain focused on putting this distraction behind us by the middle of the year.
With that, I'll turn the call over to Ryan, who will provide an update on our portfolio.
Ryan Albano: Thanks, John, and thank you all for joining us today. We continued to execute on selective dispositions during the fourth quarter, selling five properties for gross proceeds of $16.5 million at an average cash cap rate of 6.7%, bringing our full year disposition proceeds to $200 million at an attractive weighted average cash cap rate of 6%. I'm extremely pleased with the outcome of our full year disposition efforts, which exceeded our initial guidance for the year as we were able to capture opportunistic pricing for what I would consider a risk mitigation exercise. Given the environment, we were able to take advantage of market dislocation to sell assets with outsized credit and/or real estate risk at a weighted average cash cap rate of 6% for the year.
On the external growth front, we remain highly selective and disciplined during the fourth quarter, which aligns with our consistent messaging throughout 2023. Given an [indiscernible] net lease transaction market in the back half of the year, we consciously chose to selectively allocate capital to investments that align with our growth strategy and mission to deliver long term shareholder value rather than target short term accretion. This resulted in fourth quarter investment volume of $64.1 million inclusive of $47.9 million in development fundings and $16.2 million in revenue generating CapEx at a weighted average initial cap rate of 7.5%. Fourth quarter investment activity brought our full year investment volume to $166 million at a weighted average cash cap rate of 7.2%.
Looking forward into 2024, price discovery in the transaction market persists. Interest rate volatility continues to influence the capital allocation decisions of buyers at a more accelerated pace than the price expectations of sellers, leading to a persistent gap in bid-ask spreads and an overall muted level of completed transactions in the broader market. As John highlighted, we remain focused in our efforts to source attractive investments and highly selective in the pursuit of opportunities as the market continues price discovery. Our investment activity during the quarter consisted entirely of fundings related to UNFI and incremental revenue generating CapEx. UNFI, our previously announced $204.8 million build to suit transaction, remains on track to be completed and delivered to our tenant in the third quarter of 2024 with rent commencing no later than October, and we have funded approximately $93.9 million through December 31st.
We will continue to look at accretive opportunities to partner with developers in this capital constrained environment, while remaining selective and cautious as the macro environment evolves. Moving to our existing portfolio. 2023 credit performance was in line with prior years, which exceeded expectations given the interest rate and macroeconomic backdrop. Heading into 2024, we remain cautious on and continue to pay extra attention to industries that are sensitive to discretionary consumer spending. Of note, we have seen some operational performance decline in the furniture sector and as recently as this month have one tenant within the industry representing one asset or 0.2% of ABR file for Chapter 11 bankruptcy. As part of the company's reorganization efforts, we anticipate that the tenant will vacate the site, which is predominantly a distribution center that also has a small retail showroom.
We will begin working to backfill the space upon receipt of the property and expect to receive rent in the interim. Red Lobster site level performance remains healthy. And we will continue to look to opportunistically sell these assets as we did during the fourth quarter for a single site at a 6.45% cash cap rate. Thai Union recently announced its intention to sell its stake in Red Lobster and we are working with them as they navigate that process. Given the strength of our site level performance, the quality of our real estate, the strength of the brand and early interest in Thai Union stake, we remain cautiously optimistic about Red Lobster's future. As John noted earlier, we will finalize the resolution for Green Valley Medical Center through a near term sale of the asset.
The tenant has been unable to pay rent since October of 2023 and still has not commenced operations given the ongoing challenges in the financing markets. Lastly, re-leasing efforts for our previously tenanted Shutterfly location has increasingly improved as we have received significant interest in the property. We are in late stages of negotiations with multiple parties and now expect a new tenant to take possession in the fourth quarter of 2024. Shutterfly will continue to pay rent and operate at the site through the second quarter of 2024, so we are expecting minimal downtime at the property. With that, I'll turn the call over to Kevin for commentary on our financial results for the quarter.
Kevin Fennell: Thank you, Ryan. During the quarter, we generated AFFO of $71 million or $0.36 per share, an increase of 1.6% in per share results year-over-year. For the full year, we generated AFFO of $278 million or $1.41 per share, an increase of 1.1% year-over-year and in line with the midpoint of our guidance. Quarterly and full year results were largely driven by same store portfolio growth and incremental asset recycling throughout the year. We incurred $8 million of cash G&A during the quarter and $32.1 million for the full year or 1% increase year-over-year. We once again ended the quarter in a strong and flexible financial position despite no capital markets activity. From a leverage perspective, we ended the quarter in a position of strength at 5 times net debt, up slightly from 4.9 times at the end of last quarter.
Our mostly fixed rate debt capital structure keeps us insulated from interest rate volatility with no material near term maturities, though our exposure to floating rates will start increasing later this year as our existing swaps start to roll in the fourth quarter. At our quarterly meeting, our Board of Directors maintained our $0.285 dividend per common share in OP Unit, payable to holders of record as of March 29, 2024 on or before April 15, 2024. This represents an increase of 3.6% over the dividend declared in the first quarter of 2023. Our dividend remains well covered and represents an attractive dividend yield relative to many of our peers. Given likely timing differences between asset sales and capital redeployment throughout 2024, our payout ratio could increase into the low 90% range in the middle of the year.
However, we anticipate returning to our targeted payout ratio of mid to high 70% range in the relative near term as we redeploy the sale proceeds. Finally, details of our 2024 guidance and key assumptions were included in our earnings release last night. They include; AFFO of $1.41 per share, reflecting the timing of our ongoing dispositions and redeployment efforts; investment volume between $350 million and $700 million; disposition volume between $300 million and $500 million with ongoing healthcare sales accounting for the substantial majority; and finally, cash G&A between $32 million and $34 million, which is the same cash G&A guidance as last year. I will now turn the call back over to John before we open up the line for questions.
John Moragne: Thanks, Kevin. As you can hear from our remarks, we are quite proud of the way we navigated 2023 and are excited for what's to come in 2024. Reflecting on 2023 and my first year as CEO, I'm proud of the decisions we have made, the discipline we have shown in our commitment to long term value creation, and the results our actions produced in a volatile year. I believe the culmination of these efforts will be demonstrated through the growth opportunities they will present us with as we navigate 2024 with an eye for what that means in 2025 and beyond. The last year has been challenging for real estate generally, but I believe the future is bright for BNL. We can now open up the line for questions.
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