Broadstone Net Lease Stock: A REIT To Consider For Post Rate Hikes

Introduction

Count me as one of the people who also think interest rates will be cut sometime soon. When to be exact? No one knows, but I do think we’ll get one sometime this year. There’s also a chance we can get another increase before cuts as seen by the latest CPI report.

So, which one is it? A raise or decrease? Either way rates will eventually decline and when they do, I think investors should be invested in REITs to benefit from their share price appreciation potential. One REIT to consider is Broadstone Net Lease (NYSE:BNL). In this article I’ll discuss what I like about BNL and why they are a quality REIT you should consider in your portfolio.

Who is Broadstone?

Broadstone Net Lease is an internally-managed REIT that was founded in 2007 and IPO’d 13 years later in 2020. So, as far as a publicly traded company, their track record is pretty short all things considered. But there are things I really like about the company. For starters, they enjoy an internally-managed structure.

Similar to Business Development Companies or BDCs for short, REITs can be either externally or internally-managed. This is important for some investors as most prefer an internally-managed structure as they typically are more shareholder-friendly in nature. Additionally, they usually retain more capital as they don’t have to pay managers outside of the company to manage the business, hence the name externally-managed.

Some of these fees can be quite expensive as some managers get paid a substantial amount for their managerial skills. Furthermore, being internally-managed usually allows the company to retain more cash to either grow the business organically, or pass on to shareholders in the form of dividends. So, although they have a shorter track record, I like the fact that they are internally-managed, a plus for the REIT.

Portfolio Diversification

Besides being internally-managed, I also like that they are diversified with 796 properties across 44 states. They also have properties in 4 Canadian provinces which is great for investors looking to diversify outside of the U.S. Additionally, BNL has 51% of their portfolio in the industrial segment which accounts for 52% of annualized base rent.

Aside from industrial properties, their portfolio is also wide-ranging across the retail, restaurant, and healthcare segments. These account for 18%, 13%, and 11% annualized base rent respectively. And some of these tenants include MedVet, Outback Steakhouse, and Dollar General (DG).

Something else I like about Broadstone is their leases are typically longer than some peers at 10.5 years on average. This is in comparison to larger, and more popular peer, Realty Income (O) whose average initial lease term is 10 years. And smaller peer, Global Net Lease (GNL) whose WALT is 7.6 years.

For a REIT of their size, 10.5 years is a good benchmark because it locks in stable income for a substantial amount of time. So, investors looking to invest in REITs, longer weighted-average lease terms are a positive and something to pay attention to when deciding to invest or not. Near or around 10 year lease terms is something I usually like to see from my investments.

Besides attractive lease terms, their average rent escalators also are slightly higher at an average of 2% vs 1% – 1.5% for peers like Agree Realty (ADC) and NNN REIT (NNN).

Furthermore, they only have a small amount of their leases expiring in the next two years at 1.2% and 1.8% respectively. After 2025, it rises quite a bit to 4.3% and an average of 6.2% for the next 3 years. But most of their leases expiring occur much later in 2030. So, their income and revenue are likely to be stable the next few years with minimal lease expirations.

Solid Dividend Coverage

The REIT’s current dividend of $0.285 is also well-covered by their AFFO. For the full-year BNL’s AFFO was solid giving them a dividend coverage ratio of roughly 1.25x. BNL increased the regular dividend twice in 2023, first from $0.27 to $0.28 then from $0.28 to $0.285.

AFFO for the full-year averaged $0.3525. I would have liked to see some growth over the last three quarters where this remained relatively flat, but creeped up $0.02 from Q1.

And it did increase slightly year-over-year from $67.5 million in Q1 to roughly $71.3 million in the latest quarter. To close out the year, BNL’s current AFFO payout ratio is roughly 81% considering the 196,373 shares outstanding. This is higher than management’s targeted range of mid to high 70’s but seeing how REITs are required to pay out more in the form of dividends by law, this is something that doesn’t concern me.

I do however like to see my REITs with a lower payout ratio. Going forward though this is something investors should be keeping an eye on as REITs typically issue more shares to raise capital. A higher payout ratio also allows less room to retain capital to deploy into the business to continue growth.

Well-Laddered Debt

I prefer REITs to have a payout ratio of less than 80%, more so in the 70% – 75% range. But a higher one like BNL’s is not alarming, at least for now as I previously mentioned. But throw in a huge debt load, and you can see why this could potentially become a problem in the future if it indeed becomes too high.

Good thing is BNL’s balance sheet remains strong with a net-debt-to-EBITDA ratio of 5x. This also decreased from 5.2x at the end of 2022. Their fixed-charge coverage ratio was also healthy at 4.5x and they currently have a BBB credit rating. Furthermore, the company has little debt maturities to worry about for the next two years. As you can see in the chart below and stated previously, most of their debt maturities come in 2026.

By then I suspect interest rates will be much lower than current levels. Their liquidity also remains strong with nearly $1 billion available. This gives them ample capital and flexibility to deploy it, taking advantage of investment opportunities in the future.

Valuation

At the current price at the time of writing, BNL’s P/AFFO ratio of 11.1x is lower than the average 14.3x for retail peers. It’s also lower than the sector median’s 13.52x. The REIT also trades lower than its book value giving them a P/B ratio less than 1x, signaling they may be undervalued at the moment.

Wall Street currently rates the stock a buy with an average price target of $19.17 and a high of $22. Using the Discounted Cash Flow Method I have a similar price target at roughly $22. This gives investors double-digit upside from the current share price. And seeing as rates are expected to decline sometime in the near future, Broadstone may be a REIT treat for some capital appreciation.

Risks

Although BNL enjoys longer leases and has essentially no debt to worry about paying or refinancing in the short term, due to their lower exposure to investment-grade tenants, they are more susceptible to economic downturns. At the end of their Q4 their investment-grade exposure was just 15.3%, much lower than peers like Agree Realty and Realty Income.

Furthermore, their occupancy rating dropped slightly quarter-over-quarter from 100% to 99.4%. If the economy experiences a sudden downturn such as a recession, BNL’s occupancy could see a significant drop, likely affecting the company’s financials. Again, their current exposure is not an end all be all for myself, but some investors may prefer a higher exposure due to the susceptibility.

Bottom Line

Investors looking to jump into the REIT sector in anticipation of interest rates declining should consider Broadstone Net Lease. The REIT, despite their short track record, sports a diversified portfolio with a high occupancy of 99.4%. This is impressive considering the challenging macro environment and their lower exposure to investment-rated tenants.

Furthermore, the company’s balance sheet strength is impressive considering they have no substantial amount of debt maturing for the next two years. Their dividend coverage also remains solid and looks sustainable for the foreseeable future. Most importantly, their upside potential is probably the most attractive criteria as they trade below their current book value. Although they are considered more risky with a shorter track record and lesser known tenants than some peers, I rate BNL a speculative buy currently.