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REITWeek 2015 webcasts brought to you by NAREIT.
Broadstone Net Lease, Inc. (BNL) is an externally managed private REIT that focuses on acquiring and holding a diversified portfolio of net lease assets for the long term. The REIT’s core focus is on acquiring net lease assets in the following property segments: retail, industrial and medical office. As of year end 2016, BNL owned more than 400 properties in 37 states.
November 14, 2017
November 13, 2017
November 08, 2017
Amy: Okay, so it looks like it’s quiet out there now and my new Apple Watch does say 2:15, so I guess we can get started. Melissa’s keeping me prompted to stay right on time and we’re going to try to whip through this very quickly this afternoon. Thank you all for coming. I’m Amy Tait, Chairman and CEO of Broadstone Net Lease. With me is Chris Czarnecki, our President and CFO, and also out in the audience hiding is Ryan Albano who is our Vice-President of Finance. And, because this is being recorded, bear with me for a minute. We are going to include forward-looking statements in our presentation, and of course, there’s no guarantee that these expectations that we’ll talk about can be achieved.
Just as an introduction I think most of you here already know a little bit about Broadstone Net Lease. We are a private real estate investment trust. We’re not public non-traded, we’re private and all of our shares are issued through a Reg. D offering. We have 506(c) status which means that even though we’re private thanks to the JOBS Act we can speak publicly about what we do, so I believe we are being recorded today and welcome to anyone that’s listening in.
We are externally managed by Broadstone Real Estate and at this point ... We started in 2006 acquiring properties. We introduced our first outside investors at the end of 2007 and at this point we have over 1,000 shareholders. They’re from all over the country. They’ve invested over $.5 million. The math is pretty easy, our average investor has invested about $.5 million, so these are high-net-worth and ultra high-net-worth investors primarily. That’s the average. More recently, more of our investors are coming in at numbers well above $.5 million.
Our management team and insiders currently, and I’ll say currently because there’s a change coming up, own about $25 million worth of those shares. Some of the things that attract people to Broadstone Net Lease is our annual dividend yield. We pay monthly dividends now that works out to about a 6.6% annualized yield that’s paid out of our current funds from operations, and actually we target to pay out about 90% of our funds from operations. We’re even below that right now, so there’s quite a bit of room in our dividend. We have a pretty good track record. You’ll hear more about that, but we’ve increased our share price several times from an initial price of $50 to currently $73. That share price is set quarterly by our independent directors.
When we started 2015 we were feeling really bullish and really aggressive. Our initial plans that we talked to some of our bankers about this that were at our retreat in February, that we were looking to raise $200 million of equity this year. Given the fact that we target 50% leverage you would think that would mean $400 million of acquisitions this year, but in fact our leverage, we were a little bit below our leverage target. When we started the year we were looking at $575 million of acquisitions for the year. In fact, as ambitious as we thought we were when we set those goals we are on pace to well exceed our initial capital raise target. So far this year through May we raised capital every month. We’ve raised over $100 million and that’s about what we’ve raised on a full year in the past several years.
Just to compare that in the chart on the bottom of page six if you’re following along: last year during the first five months we raised about $32 million, and because our business is somewhat usually back-sided towards the end of the year we had only budgeted to raise about $55 million, so we’re doing very, very well on the equity raising cycle. Most of that is coming from wealth advisors and RIAs. I think they find us really attractive. There’s no big load, we do not pay any broker dealer fees when we raise capital. Our external manager, Broadstone Real Estate, just gets paid a half of one percent on the equity that we raise, so a pretty good deal for investors. The wealth managers are recognizing that and we’re really gaining some traction nationally.
Given that pace that we’re on we expect that we will actually exceed $575 million of acquisitions this year. So far it may look like a slow start. We’ve only closed on a $112 million of acquisitions, but if you include the things that we have under contract and executed LOI we have over $300 million or about $330 million of acquisitions already in the bag. I won’t go through all the details here. You can read along on some of these charts and maybe ask questions later if you have any on here.
Page eight summarizes, it’s a history or a splatter diagram of our acquisition track record and you’ll see the left axis is our initial going in cap rate. You can see that’s pretty much leveled off at about seven percent. That’s about the average cap rate of what we bought last year and it’s where we’re averaging so far this year as well, but you’ll see there’s a pretty big spread. We’ve been buying things anywhere from 6.5% to over 8% cap rates which really goes to show that this is not a commodity business, every deal is different.
Even though we’ve all heard it, the acquisition market is very competitive, it’s very frothy some might say. We still think it’s very rational given this bottom-line on this chart that shows where 10-year treasury bond yields have been and we added 200 basis points there as a spread just as an indication. There’s still very wide spreads between our cost of debt capital and the cap rates that we get on acquisitions, so we’re still very bullish and very aggressive on acquisitions.
The next few pages go through some examples of some deals that we’ve done so far this year and you can read the details on your own. I won’t go through each one in detail, but Applebee’s as an example of a retail tenant that we like very much and you can see we’ve done a couple of different deals. Cap rates are very different depending on the lease term and the rental rare growth in the leases. Actuant is an example of an industrial transaction that we’ve done this year. Mid Florida Eye Center is a medical deal that we’ve done so far this year. The Big Tex Trailers is also mixed industrial and retail and that relates to a big transaction portfolio sale leaseback that we did on December 31st of 2014 and already they’ve added about three more properties to their master lease which we’re very excited about.
How are we doing? How has our performance been? I think this is the real testament to the value of our platform and what we’ve accomplished for shareholders. Page 13 walks through our total returns for each year and that’s a combination of dividend yield and share price appreciation. 2008, 2009 we fixed our share price, we didn’t drop our share price, we didn’t dilute shareholders, but we also didn’t raise very much equity, so the return was really just the dividend yield. Since then we’ve seen healthy growth in dividends as well as in the value of our shares. Our average annual total return since inception including those first two tough years of 2008, 2009 has been 12.6%. I’d say that’s pretty darn good for a dull, boring asset class like triple net lease.
Page 14 just goes to show you that while we’ve been growing it’s been pretty consistent. We’ve been growing at a rapid pace, but it’s been steady and it’s been through prudent acquisitions. The testament to that also is on 15, it really for us and I’ve said this before and I guess it’s been proven out that it’s not really how big we are, it’s what our per share results are that really matter, that each investor makes money with us. Our compounded annual growth rate of OAFFO per share since inception has been just about 10%. Given the fact that our average rent increases are a little over 2% you would expect same store growth would generate about 3 to 4% compounded annual growth rate.
All that additional growth rate is coming because we’ve been making accretive acquisitions and we’ve been very disciplined with the capital that we’ve received and make sure we’re making the right acquisitions with it. 2014—we didn’t have a huge rate of growth and largely that was because we de-levered our balance sheet a little bit. As everybody painfully knows equity is more expensive than debt, so that impacted our earnings, but it positioned us very, very well going into 2015. In the first quarter we had 7.7% OAFFO per share growth and we’re looking good for the future. I’m going to let Chris talk about where we stand.
Chris: Absolutely, so I’ll take a few minutes to just walk through the portfolio. There’s a lot of friendly faces in the audience, but there’s a lot of new people as well. Maybe we’ll dwell on this for a little bit longer than we planned and we’re flattered by your presence, especially being the only private company here. Our current portfolio today is about $1.1 billion, almost $1.2 billion of assets, just about 250 assets spread across the country. As we talked about generally we have a very long lease duration on these and we’re really buying in three asset classes: retail, which for us is generally just fast food or quick service restaurants and convenience store gas stations; MOBs which is sort of unique for the REIT space and we can talk a little bit about that, or for not the REIT space, but the net lease space I should say, excuse me; and industrial which has been our most recent and probably most acquisitive group to date.
We’re buying in these spaces one, because we love the diversification, but again you have to think about our investor base of ultra high-net-worth folks who generally have one or two real estate investments, at least our pool do. They appreciate both the geographic and property diversification they get by working through Broadstone Net Lease to achieve their real estate investing objectives. That helps frame up why we are approaching the net lease space in this manner.
On the next page, 19, you just get a flavor for our tenant base. On the retail side: national names you know, predominantly franchise operators, some corporates involved as well. On the medical side you have hospital credits and large regional health systems and then you’ve also got very large doctors groups that might have 15 or 20 radiology groups in a specific market or across a specific state. Finally, the industrial side as Amy alluded to, some household names there and also some more regional firms or supply chain firms that might have PE ownership in the background as well and has been a growing segment for us.
On 20 you get a flavor for our geographic diversification, and I drew lines on my presentation around the Midwest and Southeast. We’d be very happy to own more assets in coastal markets and have a greater percentage of our properties there, but at the moment we find the best returns that match our cost of capital in places like Texas, Georgia, Florida, and then Oklahoma and other places like that. Those have been some of our strongest buying markets to date. We do have some more assets coming on in the Pacific Northwest in the next quarter which is great diversification for us, but in many situations we haven’t been able to be as competitive in those markets as we might like to be.
You just get the same flavor, but get a little bit more granularity there. For about the past year Minnesota, Florida, and Texas have moved around, but those have been our top three markets. Generally Texas is around 10 to 12% and almost everything else is well below that. On page 22 you get a flavor for where our portfolio stands today. There’s certainly a lot of granularity beneath that that we track pretty regularly on both the business functional use of the real estate and what the underlying businesses are, but we tend to aggregate up for our shareholder base, so that they understand exactly what we’re buying.
Industrial today is just a bit over 40% of our portfolio. I would say we did 60% of our acquisitions in industrial last year. The retail space has been very competitive and the MOB space has generally been consistent, but industrial is where we’ve been able to find properties from a real estate and cap rate in return perspective that have made the most sense for us. That has gotten to be a bit larger although ideally if we had a choice we’d like to be equally weighted between MOB, industrial, and retail.
On the next page it just gives you a flavor for our top 10 tenant profile. Wendy’s at the moment is our largest brand exposure, but we have three underlying tenants there. Big Tex Trailers is our single largest tenant with a single lease and then our single largest acquisition is the Rochester General Health System building which is in our backyard in Rochester, New York. You can see we think about each one of these property types in a very different way. For the retail segment as you can see on the far right we’re thinking about rent coverage ratios, four-wall coverages, however you want to look at that.
Medical either tends to be an actual credit rating with the hospital system or the strength and the track record of the physicians group we’re working with and often augmented with some credit enhancements that we can talk about. Then on the industrial side it’s very much geared towards traditional bank underwriting. We have a full-time credit analyst who does nothing but work on Broadstone Net Lease’s existing and future acquisitions and portfolio and utilizes the S&P platform as well as our own proprietary underwriting methodology to look at free cash flow from an industrial perspective.
On 24 quickly just a look at our lease structure. Fourteen years remaining average term would put us at the top of the peer group and other folks you might see here at NAREIT although certainly lease terms along with many other factors have come in a bit over the last year or so. Our acquisitions team loves to tell us that 15 is the new 20.
Amy: I thought it was 10 is the new 15. Oh, well.
Chris: Can’t give them that much credit. They’ve got to strive a little bit. Capitalization on page 25. We’ve made the migration with the help of our wonderful bank group to be principally an unsecured borrower at this point. We have some legacy mortgages and occasionally assume a mortgage or two in conjunction with an acquisition. We’re targeting 50% leverage on a market basis, but have been below that for the past year as we’ve been raising a little bit more equity faster than we’ve been putting it out for deals and keeping our leverage consistent. You can see that most of it is fixed rate for the long-term, a small portion is floating which as we’re raising equity every month we use that as our lever to put the new equity to work immediately and then re-borrow as acquisitions come along.
On 26 is just a little bit on our bank group. It’s a strong national syndicate. We have two anchor facilities. As a private company we have a seven-year term facility which has been wonderful and we’ve got a very strong revolving and term facility as well with a lot of overlap. One of the principal topics is always interest rate exposure and debt maturities. On 27 you can see most of our debt maturities come out in 2019 and 2020, but we’re always working on pushing those out further. Because we are principally borrowing from commercial banks we have LIBOR-based borrowings. The way we work towards achieving a long-term fixed rate is through the use of interest rate swaps which you see on page 28.
Our bank group which has been exceptionally creative and flexible for us will allow us to swap out for 10 years, so even though our underlying debt maturity might be a little bit shorter at five and seven years we’ve continued to refinance our debt, obviously push our spreads down when possible. We’re still keeping those swaps in place and achieving a 10-year fixed rate instead of rate protection through that same process. That’s just a little look at where the portfolio stands today and we’ve saved the end of the presentation for Amy to talk about something very exciting for our organization.
Amy: Right, so we’ve talked about our past results, our current status of our portfolio and our balance sheet and now I get to talk about the future. Last week many of you probably saw, maybe we should have brought copies of the press release that we issued. We’ve entered into a new agreement at our external manager of our management company to bring in a private equity partner called Stone Point Capital out of Greenwich, Connecticut. We were first introduced to them in December through one of our independent directors and we’ve been very, very busy the last six months. They’ve kept us busy, a) getting familiar with our company, b) negotiating a transaction, entering into a letter of intent back in March.
Then they have done extensive due diligence on our management company through Deloitte and Green Street who came in and did a review of our company. Also, I think there have been six law firms now negotiating all the documents which have been very complex dealing with a number of tax issues, employee benefit issues, employment agreements which I’ve just signed my life away. No retiring for me or Chris or many others of our management team. We’re very excited about this.
Stone Point Capital may not be that well known at this conference. They’re not known as a real estate investor so much as a financial services specialist and we think they’re going to really strengthen our bench in terms of not only helping us adapt best practices and staying on top of that, but also making introductions to us because we don’t have a pocket to pay broker dealer fees at Broadstone Net Lease. It’s all about getting introductions to other wealth managers and I think they’re going to be very, very effective at that. I think most importantly this was not a situation where our family or anybody was looking to cash out and it was more driven not by price, but by culture and we’re very, very comfortable with the folks we’ve gotten to work with as partners already over the past six months, and it will become effective June 30th when we close.
We have just a few diagrams to show how the transaction works. It’s a little bit unusual. Starting on page 31, just a review that Broadstone Real Estate, our management company, is the external manager that manages Broadstone Net Lease REIT. We also have Broadtree Homes which is a small, single family home rental fund and we also have some legacy commercial properties in the Rochester, New York market. Broadstone Real Estate up to this point has not really held any assets; it has generated fees and paid those out in compensation generally. Stone Point’s funds (or capital) will be coming into our management company, Broadstone Real Estate; and we’re not using it to buy more desks or chairs or pay ourselves anything. Our current owners are not selling anything.
The bulk of that will go into Broadstone Net Lease. You see here $36.75 million into Broadstone Net Lease, $13.5 million will go into Broadtree Homes. Then there’s about $7 million of cash going to employees, but almost all of that cash is going right to Uncle Sam because the employees in our organization, 40 some people including our receptionist and everybody that works in our Rochester office will be getting shares in Broadstone Net Lease, in Broadstone Real Estate and in Broadtree Homes. We’ve got a lot of employees that are really happy and excited and very much vested.
At the end of the day Broadstone Real Estate on page 33: our family will go from having 100% ownership in the manager to 45.6%, equal to Stone Point Capital, and employees will own 8.8% of our management company. We won’t qualify as a women-owned enterprise anymore, but I still think I’m going to make everybody wear pink at any rate. Just to make the transaction a little bit more complicated we did get the approval and endorsement from our independent directors at Broadstone Net Lease to this transaction.
At first they were a little reluctant about having another unknown party at the table, but in the end they’ve said, “Boy, you couldn’t have picked a better partner”. They’ve been really fantastic to deal with. A little bit into it, I think our independent directors were getting a little envious of Stone Point’s investment in our manager. They said, “Can we tag along, too? Can we also own some of the manager?” We said maybe not on the same terms, but it seemed like a very healthy way to continue to align interest between the management company and the REIT.
Broadstone Net Lease will be buying a $10 million convertible preferred piece in our management company and they’re paying for that with another $10 million worth of BNL shares. It’ll be less than one percent of BNL’s total assets and the yield on the preferred will be similar to what BNL would get by buying a real estate asset, but they will have conversion rights into shares down the road and they will get board representation as a board observer at our Broadstone Real Estate board meetings, so we’re excited about strengthening that tie and strengthening that relationship.
The final page is what will change and what won’t change as a result of this. There really won’t be any changes to our management team or our personnel or our processes. Stone Point will get one inside director seat on the Broadstone Net Lease board, the same at Broadtree Homes. The management of our operating company, our external manager, instead of it being at the family dinner table or at the Thanksgiving dinner table talking about how to manage the company, we’ll have a more formalized process with two representatives from Stone Point and Chris and I as the two management directors.
I think it’s going to be a very healthy situation and demonstrated by the fact that inside ownership, the very first slide I mentioned that our family and other insiders, management team, owned about four percent or $25 million, which was about four percent of Broadstone Net Lease. After this transaction, insiders will own over 10% of the company, so our interests are greatly aligned. That’s the conclusion of our presentation and there is supplemental information also in the back if you’d like to take a look at that or ask questions. You’ve got us for six more minutes if you want. Oh, okay, right here.
Speaker 1: I was just curious. Are you guys looking to expand into other retail net assets such as drugstores?
Amy: We would love to expand into more retail assets. Our favorites are fast food restaurants and convenience stores. We’ve shied away from drugstores… They’re very, very popular, you’ll see them on the top 10 list of all our public peers, but we think that maybe there are more than enough drugstores in this country. Also, most of them have … Those that have rated credit tenants tend to have very, very long leases with very, very little to no rent bumps in them. You’re paying a lot upfront for that asset, so even at the end of the lease term we’re not sure that you’ll be able to raise rents much. We haven’t found them that attractive.
Chris: I think you’d see us do more breadth within the restaurant space in different brands as well. We’ve got some additional exposure to Buffalo Wild Wings coming which is a growing brand in our mind, so I think our most immediate in the next 12 months might be to expand some of our offerings. Wendy’s and Taco Bell have been core staples, but we’ll probably look at some other retail opportunities within the restaurant space still where we think we understand the product well and can make smart decisions.
Amy: The fast food space also we think is very recession-resistant and Internet-resistant where I’m not sure the drugstores are protected as well. All right, one more and then David.
Speaker 1: Just one last question. Who are you seeing competition from for restaurant assets and MOBs, and industrial?
Chris: Yeah, it varies by product type to be honest with you. I would think if you were doing a one off retail restaurant-type asset, the biggest competition is the 1031 market. When you go up the portfolio size scale you will get into some of the more household triple net lease names, National Retail, folks like that who would buy a larger portfolio of restaurants. On the MOB side generally we’re faced with more private buyers actually. There aren’t a lot of net lease REITs active in the MOB space. It’s a little bit of a niche for us.
Then on the industrial side we see a spectrum of competition. If it’s a large enough asset we might get some sovereign wealth buyers, some pension funds on their own. There are some more private buyers such as Angelo Gordon and folks like that who we regularly run across and then occasionally some of the industrial REITs or a net lease REIT who has a flavor for warehouse or distribution. It varies by bucket to be honest with you.
Amy: Thank you. David?
David: How does Stone Point make money on this deal?
Amy: They’re investing primarily in our platform and they want to see that grow. They look at our track record and what we’ve been able to deliver and they think that this is a very appealing product, but our little company in upstate New York without a big distribution network needs more exposure. That’s what they think they can bring to the table. They think they can help us raise a lot more capital. They’re not going to charge us for raising capital, but they will benefit from it by being our partner. The larger we get, obviously, the more management fees and acquisition fees we’ll earn, so they will participate in that.
Their exit is … There are a lot of options for private equity. They have a fairly long holding period, 7 to 10 years, but there are a lot of options by then whether it’s management, internalization, by Broadstone Net Lease at that point or another private equity firm or I think they’ve even talked about us taking our platform public. They see us as a financial services company, so we’ll see. Right now we’re just focused on raising capital and prudently investing it though. Yes?
Speaker 2: I see they’ve raised $100 million, roughly 2X budget, so with that type of environment how do you remain selective about your acquisitions? Part two of my question is do you have a monthly or a quarterly cap at which you tell new investors sorry, you’re going to have to wait till the next period because (I’m going to obtusely refer to another company) where the money came in too fast?
Amy: Those are very good questions and we haven’t gotten there yet, but we talk about it all the time. We talk about: can we put that money to work. Right now because of the way our debt financing is structured, we can use it to pay down debt and we have de-levered from a target of 50% to now in the low 40% range. There’s a limit to how much we can or will de-lever. We’re not quite there yet, but we’re talking about it.
The other thing is that as we get bigger and we have de-levered we have a much bigger open to buy calculation. Whereas we previously really couldn’t even look at doing deals more than $50 million, now we can do $100 million to $200 million and even at that we’re still small, we’re still missing a lot of transactions that are $300 million, $500 million that we would love to do. Right now we’re still feeling very good that we’re saving up dry powder. We haven’t deferred any investors yet, but we do subtly decide that if we’re long on equity, maybe we won’t call so and so at the end of the month to remind them that they’re going to miss the investment date, we’ll let them go till next month. So far we’ve been able to manage it that way.
Chris: I think we saw that pattern play out last year in the third quarter when we did almost no acquisitions throughout the entire summer while we were continuing to raise capital. We de-levered to not quite as far as where we are right now, about 45%, and then ended up having a very robust fourth quarter closing about $127 million of acquisitions which set up and then flowed through to the first quarter results you saw. I think that’s a pattern we see playing out probably over and over again in different degrees. I think if we’re truly in this for the long-term we’re very happy to step back and not always be at our leverage target and wait for the right acquisitions to come.
Amy: Right. Having dry powder and being opportunistic is a really great combination. We’ve got a $48 million deal that we should be closing that we just learned about two weeks ago.
Chris: Two and half weeks ago, yeah.
Amy: It’s got that the sellers have to close by June 30th and we were in a position to say we got the cash, we’re right there. That’s where we get better than market rate deals. I see we’re past … The red light is beeping.
Chris: It’s terrifying.
Amy: Chris and Ryan and I are happy to stay around and talk to you individually if you have any more questions. Thank you.
Chris: Thank you.