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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.
January 12, 2018
January 12, 2018
December 22, 2017
Amy: I'm getting the nod that it is time to start. Thanks Meredith. Welcome everyone, if this wasn't being recorded, I'd stand up and go walk to the middle of the room since everyone's sitting in the back, but hopefully you can hear me, and we'll fill in as we go.
Thank you all for coming, I'm Amy Tait, and with me is our CFO and President Chris Czarnecki of Broadstone Real Estate. We’re here to talk today primarily about Broadstone Net Lease, and we'd like to keep it pretty informal today. I think I will start with talking about the updates, the things that are moving and grooving at our company, and the growth that we have had since we were here last year. Then Chris will walk through a little more detail about where this leaves us, our current point and time. And all along the way if there are any questions that anyone wants to jump in and interrupt, that's totally fine.
Has everybody gotten a copy of our handouts? Do we have enough for everyone? Okay, I'm going to start, there's a one page handout, you don't need it, I don't really need it, but I'll try to stick to it. To talk about what's been going on since we last met here last year. We are now at a point that Broadstone Net Lease is a little private REIT. We have nearly two billion dollars of assets today. We've been buying at a pace of ... during calendar year 2015, we bought 552 million dollars of assets, we raised 387 million dollars of equity, it was a banner year for us. Some of the big things that we've accomplished also in March, I see Juan from Moody's is here. Done a great a job. And we have also achieved an investment grade credit rating from Moody's that went effective April 1 and immediately cut our borrowing costs with all our lenders which was fantastic.
The other thing that has been growing is our number of shareholders. We bring in ... last year we had some unusual one-time events, but at this point, we have been bringing in new equity at twenty to thirty million dollars a month. So an average of about twenty-five million dollars monthly. We now have over 1,700 shareholders.
Later this year, the exciting thing is, our reward for success we're going to pass 2,000 shareholders. We will be filing with the SEC to register Broadstone Net Lease as a publicly registered company. We'll be filing an S10 does this mean were going to go public? No. Does this mean were going to be public non-traded? Hopefully not, like the others. We’re going to be the exact same company that we always were. We're just going to be filing K's and Q's because we're looking so forward to doing that. Also, we'll be going through Sarbanes Oxley compliance. We're already prepared to do that. We've already hired our Counsel and our advisors to do that. So, we should be filing probably next April.
So, those are some of the exciting things going on in our company. As a result of the investment grade rating, we're committed to keep our leverage low, in the low 40% range which for us equates to about a 7 times EBITDA coverage on our debt. Our debt to EBITDA ratio although Juan tells me that he understands that we're planning to grow, and that there may be quarters or maybe or a few quarters along the way where may exceed that, because growth can be lumpy. But for right now, we're right still in the cross-hairs of meeting all of Moody's expectations for low leverage.
So, the other thing we've done to get ready for growth is we've always looked to having really great outside advisors and directors. Actually Alan Gosule here, he was actually one of our great directors at Home Properties a company that our families started and founded. We always do listen to our directors, and we keep inviting more directors. So, at Broadstone Net Lease and in our other fund, a residential fund, Broadtree Homes, we just brought in two new Independent Directors that we're really excited about. Tom Lydon who I have known for years, and was an excellent director at Home Properties. Also, Laurie Hawkes who just joined us, who has expertise in both single family residential and in net lease transactions. Perfect! Perfect bio, and a fabulous woman who just sold her company American Residential to American Homes for Rent. That transaction just closed at the end of February, so she was ready to take on a new initiative, and we're happy that she chose to come onto our board.
The other big thing that happened since we last met a year ago was June 30th of last year, we brought in a private equity partner, Stone Point Capital, into our external management fund Broadstone Real Estate, which is the manager of all of our funds, that until June 30th of last year was 100% family owned. We weren't looking to sell any of our interests, and we didn't. We weren't looking to take cash out, and we didn't. The whole point was to broaden our ability to open doors to meet new prospective investors. We do all our own equity raising as a Reg D offering.
In Stone Point has brought lot of credibility and a lot of relationships to us, and they've absolutely been fabulous partners. So, all of the money that they ... they put about fifty-eight million dollars of capital into our management company, and except for issuing bonuses to employees, and paying taxes on their bonuses where we issued shares to employees. Most all of that capital was used to buy more shares of Broadstone Net Lease and Broadtree Homes. So, our management company as well as our other insiders continue to double down and make more and more of an investment in what we do.
For those of you who have seen this page, there's a little side box also about our other REIT Broadtree Homes which is a residential REIT. We started at a very small scale a few years ago just to get our toes in the water on the single family home rental space. We felt for a while that we couldn't get the kinds of yields we were looking for. We were not targeting home price appreciation, we were looking at buying single homes for rental, much like we would underwrite an apartment community, and if we couldn't get the income yields that we wanted, we wouldn't do that.
Here we are in 2016, we are finding better opportunities than we ever saw or hoped for, when we got into this business a few years ago because the other buyers have not been as active. So, we are back to buying portfolios of stabilized single family homes, and on top of that, once Home Properties announced last year that it was selling to Lone Star, we felt it was a great opportunity for us to get back into the multifamily business.
Many of you in this room know that our family spent a good part of our time growing Home Properties which started with a few thousand apartment units in upstate New York, and had forty-four thousand units, and sold for 7.6 billion to Lone Star in October. So, this was an opportunity we thought to broaden our Broadtree Homes residential fund into a diversified fund that will own single family and multifamily. We’ve started hiring and cherry picking some of the former Home Properties employees that were working in our building. We will continue to hire more from Home Properties. Also we brought on the General Counsel, the CFO, and the former head of acquisitions, the Chief Investment Officer, from Home Properties to join an advisory board for us. So, we're getting quite a bit of expertise to help us do that as well, and after all that effort, we do have one apartment community under contract that should be closing next month, and as part of that, our sponsors, our management company has committed another twenty-five million dollars of equity to help us get that scaled and seated.
So, those are the two main ... I mean the big picture things that are going on with us. Chris will outline some of the other, where that leaves us.
Chris: Sounds good, thanks Amy. For everybody who has the full Broadstone Net Lease book, I'm looking at page six right now to get us started. Lots of familiar friends and great people in the audience, but there's also a pretty good mix. So, I think it's appropriate to spend a minute or two just walking through what Broadstone Net Lease focuses on, and who we are as a company and where that focus is. Since, that is where most of you know us best from excluding obviously the Home Properties days that Amy is well known for.
On page six to look at the portfolio really quickly, and I'll try to move through this at a relatively rapid pace, so we can leave some time for questions and answers. We've got the ominous timer in front of us to keep me honest.
Our portfolio today is just about 1.8 to 1.9 billion dollars. Obviously all of this data was cut as of the end of Q1. Our acquisitions volume as we alluded to is often quite lumpy. I think during April and May we had something like 150 million dollars of transactions close. Some of which probably should have closed before the end of Q1, but nothing moves as fast as we would like to. So, those sort of bled into the next quarter. So those aren't really reflected in these numbers here yet that you're seeing.
But really what I would focus on out of this, is our core focus, and because of our investor base which is a mix of high net worth individuals and small institutions. Our mandate is to have a very broad focus on the Net Lease space. So, we are actively buying in retail, health care, and industrial assets. And, we've grown into each one of those spaces over time. We'll talk a little more about those, but it's really a wonderful opportunity as we can be responsive to market conditions in some regards as well. So if retail becomes unattractive or overly priced, aggressive through 1031 buyers, other folks like that, we can take a step back and focus our efforts on other places where we can achieve better yields. And that's really one of the wonderful aspects of being able to be a private company, and not having some of the forces on you to drive into one or two very specific spaces.
On page seven, you see our NASCAR logo page to some degree or another on the left. Heavy concentration in retail. Mostly QSR's and restaurants on the casual side. It's a mix now between corporations, corporate stores, and franchise owned stores. We're fairly agnostic it's certainly is nice to have corporate backing, but in many of those there's also private equity firm involved. So, we're very driven and focused on the slant level results. Portfolio wide coverage ratios in there are generally in the two and a half to three times range, and heavy focus on master leases.
In the middle, healthcare, is also a hybrid of hospital credits, and large regional physicians groups. We'll talk a little bit more about what those large groups actually look like when we get some examples. Hospital credits are not on campus hospital, but off campus facilities that are leased by the hospital for some of their non-critical services that don't need to be on the campus.
On the industrial side, as I was looking at some of the names I was thinking to myself, Bob Evans, Shutterfly, Hess, Academy… gosh those are retail names, but for us it's really more of an approach to distribution, warehouse, light manufacturing kind of things.
Bob Evans for example was a deal we did late last fall that got some press. We did not acquire any of the restaurant sites. We actually acquired their two food production facilities in Ohio and Texas. About 51 million dollars twenty year lease back for their side dishes that end up in Midwest grocery stores all across the country. If you're familiar with Bob Evans at all, that is where a substantial amount of their profits were made. The restaurant operations have their variability and their challenges, but we really wanted to be on that side of the business, and feel great about having BEF as our tenant there. Then having the Bob Evans corporate guarantee.
Just jumping ahead, our diversification in a geographic perspective hasn’t changed dramatically as we creep towards 400 properties. We have been pretty heavily concentrated in the Southeast all the way through Texas. That tends to be the most favorable climate for net lease properties. I don't see that changing dramatically over the next couple years. Florida and Texas continue to be nice, strong, business friendly climate states where we seek out opportunities.
Our industrial assets do tend to bleed up into the Midwest, which is fine where there is still legacy manufacturing and good solid companies there. We would love more West Coast exposure, but for our private cost of capital, it just doesn't make sense very often. We're often not a bidder for most West Coast assets. There are special situations where we've been able to achieve some great yields, but those are differentiated and not everyday type situations.
You can see here on page ten and eleven just a little bit more work on our diversification, and how we are broken up. We have also segmented out office. We have a very small component of office, and this book captures a little bit of it. We also did one significant office transaction in April that I'll talk about. We did a twelve year sale leaseback with Nationwide, the insurance company, for two of their office sites in Pennsylvania. About 54 million dollars in proceeds set up in plus cap rate. Something we got very comfortable with. Principally because of the high level of tenant outfit that Nationwide had placed into the buildings. They'd invested half as much into the buildings as we did before they sold them to us. We felt very comfortable that they were going to be there well beyond the twelve years. The rates they were proposing for rent and the purchase price per square foot were so far below market that we feel very comfortable that was a long term investment we could make.
Generally I don't see office growing dramatically in anyway. It's more of an opportunistic opportunity for us if there's something special that pops up. Or the ability to grow with a tenant that we really love.
Down below, on eleven, quick look at our top ten holdings. Fairly conservative at 40% of our total rent revenue. I suspect that will continue to go down as well over time. Generally we feel pretty comfortable with a top holding being in the five to six to seven percent range. Again there might be opportunistic situations that would change, but that's really where were looking at single tenant exposure is maybe 100 million dollars or less for any specific tenant.
You get a flavor then just breaking it down a little bit more on the next page as well. Our lease duration on page thirteen I am proud to say remain industry best. We are just at fourteen years on a weighted average basis. Last year at the 550 million dollars of acquisitions that Amy referenced came in at a 17.8 weighted average remaining lease term. I think that has been one factor that has come back to landlords in the past twelve to eighteen months is lease term. Some other less quantifiable lease terms and things like that have also come to the landlord favor. Certainly pricing is very competitive still, and that's probably not lost on anybody in this room, but there are other factors that have made acquisitions more attractive as compared to '13 or late '14.
Some examples of properties really quickly. One we have to highlight on page fourteen, a big upstate New York pride for us. We acquired one of the few Wegmans sites that are not corporately owned. This was a transaction where we were able to use our currency our up-rate currency to acquire the site. It came from a family that Amy has worked with through many many years at Home Properties. It was a site just outside of Dulles Airport. Second busiest site within their footprint, and the sellers had a very low basis in the real estate, and were very happy to contribute it to us. We believe that it's worth several million dollars more than what we were able to pay, but because of the tax protection and thoughtful structure that we did around it we were able to achieve a really wonderful asset that we're pretty excited about. We would love to do more with the Wegmans folks we certainly know them, but I don't think that's going to be a possibility given how tightly they control their real estate.
Down below is Bob Evans which we have already talked about, and then on sixteen just a quick flavor on the large medical practices that I referenced earlier. Arkansas Surgical Hospital was a facility we acquired last fall. Another UPREIT acquisition which was wonderful. The sellers there were a group of thirty-five different physicians who rolled all their equity into the property which was pretty exciting, and the group does hip and joint replacement. It's a twenty-three and half hour facility, so folks are out within a day. Largest group in Arkansas, and pulling from 100 miles around in that specific area. The company is half owned by the doctors and half owned by a corporation out of Canada that focuses on healthcare investing. Great sort of regional economics and regional focus, but strong national backing and more credit than you'd get with just a doctors group. In addition the doctors also pledged a portion of their units to support the lease for the long term, so that was a big plus as well.
Amy: And if they don't renew their lease, or something happens to their lease they lose all their tax protection on their 35 million dollars of equity. So that's pretty motivating too.
Chris: Yes, that is a good motivation to keep paying your rent. Jumping ahead to to eighteen and nineteen, you just get a quick flavor for our acquisitions volume. It is very lumpy as we referenced. Fourth quarter of last year, we did more in that quarter than we did in any given year before that, but again we continue to be willing and able to sit on our hands if things are not appealing. At the same time things often take longer to close than they anticipated, so for first quarter of this year it was a relatively quiet quarter. Second quarter will be substantially up again in that 180 million dollar range depending on how things shake out for this month. Then we'll be a bit busy loading the pipeline for the third quarter.
On page nineteen you get a flavor for pricing and how the assets are trading in our world at least. I would say cap rates have been pretty consistent for the last year. Our weighted average last year on the 550 million dollar acquisition bogey was just about 6.8%. I would say today we are looking deals anywhere from 6.75 to 7.25 and then special situations like Wegmans that might warrant a better cap rate, but has NAV at accretion value for us on that front is something were willing to look at. Generally we've been pretty tightly bound on that high 6% range for the last year.
As Amy alluded to as well: equity raising when it’s done on an individual basis with ultra-high net worth folks can also be very lumpy and very interesting to manage. We do do all of our own capital raising in-house. We have a team of seven people who work for our management company, and do nothing but work with investors to source capital from across the country. Last year 80% of our equity came from folks outside of Rochester, New York. Very big pockets of folks in wealth manger relationships and trust companies in Southern California, Seattle, New York, D. C, and Boston are all big markets for us, and so it is certainly at times hard work. But it has been a great source of friction-less equity coming into the firm, and we have been able to raise capital and continue to keep a pipeline going.
Year to date, today we've raised about 125 million dollars, our budget is twenty million a month, so we are well exceeding that to date. Which is pretty exciting as well, and we think that will accelerate as the year goes on as well.
Twenty-one is just a quick look at our capitalization structure as it sat as of 3/31. As we alluded to this is very much within the Moody's guide rails that we've been provided. About 40% leverage. You can see we've been about 10% of our equity has come in the form of OP units. That also continues to accelerate. We obviously talked about two UPREIT deals we've done so far. It's fascinating to us that even as a private company, we have plenty of people who are really willing to engage in UPREIT transactions with us, and we continue to see that be a very fruitful opportunity. Folks are regularly coming to us, and are juggling three to four different UPREIT transactions at any given time I'd say.
A little bit of love for our bank group here since many of you are in the room. On page twenty-two, we've had tremendous support from the REIT banking community. Raised just about a billion dollars in unsecured capital across these three facilities in three different years. A great host of eleven banks. It's incredibly flexible capital, incredibly easy to manage and work with the banks, because they understand our business and have been very supportive of us. Obviously at a billion dollars it's a fairly large commitment block from folks in the space, and it's been instrumental in our growth. Now that we do have the rating, we are obviously still thinking about other debt alternatives to help ladder out our maturities over time. We still have plenty of capacity on these facilities. I would say right now we have more than 300 million availability between our line and our delayed draw turn note that's in place. So, we have a lot of access to liquidity in addition to funds on hand and new equity coming in.
With that, maybe the only last unique thing I'd point out is on page twenty-four. The other great thing our banks have done for us is this is a very long term business, and long term fixed rates are very important to us. Being an entirely unsecured borrower, almost entirely unsecured borrower, the best way for us to date to achieve long term fixed rate has been through swaps. To fix our commercial borrowings out for as long as possible. Our banks even though they only lend to us in a five or seven year basis are very willing to enter in swap agreements up to ten years.
Even starting just at the early part of this year, we engaged in eighty million dollars in ten year swaps, and so it's very flexible. We can add those on in sizable chunks of twenty-five or fifty million dollars when the timing is right, and we have the right acquisition volume. That's given us a very conservative capital structure and held us generally in the 95% hedged bucket at any given point. That varies a little bit and we budget a little bit differently, but it's important to keep that fairly tightly bound and our directors are very focused on it as well.
So, with that, that's a pretty good overview I think on where we stand, and we've got about seven minutes for questions. So, dive in and ask Amy something hard, because I'm out of speaking capacity.
Amy: Hey, I've been talking all day, so it's been a real relief to let Chris talk for a change. If there aren't any questions yet, one other thing I'll comment on that I missed was we have continued as a private company we don't have the market to value our shares. Which is in some cases a blessing. We're never trading at a premium to our net asset value, but we’re also never trading at a discount to our net asset value. So, the primary job of our Independent Directors has always been to set our share price every quarter based on their best estimate of net asset value, and we've always had a process that was we thought really great.
We dreamed this up process back at the end of 2007 when we founded Broadstone Net Lease, and sure enough when the IPA guidelines came out for the public non-traded's we were pretty much right there. The only thing we've changed in our process is that we're doing appraisals on every property every two years instead of every three years, and while we had had some outside consultants before now we have Cushman and Wakefield overseeing the entire process. They've been totally supportive of what we've done. They feel that our evaluations are consistent, and maybe even a little conservative. Our current share price at seventy-four dollars works out to an implied cap rate of 6.8%.
So, we feel that's pretty attractive, and allows us to pay a 6.65% dividend yield with coverage. So that was the only other kind of big thing that we've gone through this year.
Maybe our presentation was so complete that we've answered every possible question already. Anything else?
Well with that the weather in Rochester, New York is great now. The snow has melted. Anyone that wants to come visit please come see us, and Chris and I will stick around for a few more minutes. If you have any questions
Chris: Thanks so much everyone.
Amy: Thank you.