Broadstone Net Lease, Inc. Q3 FY2025 earnings call

Key Points

• Strong quarter results with $204 million invested in accretive acquisitions and development projects, 100% rent collection, resolved At Home and Claire’s situations with no bad debt, 1.2% sequential growth in contractual rental obligations, and 5.7% increase in AFFO per share.
• Raised 2025 AFFO per share guidance to $1.49-$1.50. Year-to-date investment totaled $552.6 million.
• Build-to-suit pipeline with strong yields, including weighted average initial cash capitalization rate of 7.5% and straight-line yield of 8.9%.
• Return to investment-grade bond market with $350 million of 5% senior unsecured notes offering, nearly 7x oversubscribed.
• Ryan Albano discussed build-to-suit pipeline growth, $41 million investment in transitional capital for industrial development in Northeastern Pennsylvania, and regular way acquisitions activity.
• Kevin Fennell provided details on adjusted funds from operations, G&A costs, leverage, dividend approval, and expected little bad debt for the year.

Build-to-suit pipeline: Started 10 new projects with aggregate estimated investment of $374.6 million. Active committed build-to-suit pipeline will deliver approximately $28 million of additional ABR between Q4 2025 and end 2026, representing 6.7% growth in current ABR. 8 in-process developments with estimated total project investment of $370.9 million have a weighted average initial yield of 7.5% and a straight-line yield of 8.9%. Regular way acquisitions: Closed $253.2 million in new property acquisitions and $8.3 million in revenue-generating CapEx in Q3, with a weighted average initial cash cap rate of 7.1%, lease term of 12.3 years, and annual rent increase of 2.5%, and an attractive weighted average straight-line yield of 8.2%.

• Raised 2025 AFFO per share guidance to $1.49-$1.50, representing 4.2%-4.9% growth for the year.
• Investment volume is expected to be between $650 million and $750 million, an increase of $100 million at the midpoint.
• Disposition volume is expected to be between $75 million and $100 million, reflecting identified transactions.
• Expected little to no bad debt to close out the year.

Forward-looking statements are subject to risks and uncertainties. For a detailed discussion of risk factors, refer to the company's SEC filings, including Form 10-K for the year ended December 31, 2024, and Form 10-Q for the quarter ended March 31, 2025.

Q: A couple of questions on the build-to-suits. John, you mentioned the value creation that you are set to realize and some of these build-to-suits may be capital recycling opportunities for you. Is that currently your preferred outcome for some of these developments? Or are you just using that -- or you just mentioned as a potential source of income?

A: It's certainly not preferred. I'd like to joke that these are our babies. We're growing them up. We'd love to hold on to them for the long term. But given where cost of equity sits today, particularly after the last couple of days, it's something that we'll spend a lot of time thinking about. Our plan is to make sure that we can control our destiny. And if we need to sell off some of these assets and capture the upside, not only is that going to be a great source of capital for us to be able to continue to grow this business, but it also helps prove out the concept. It's one thing for us to continue to emphasize the value creation, and it's certainly something that we can point to market statistics and BOVs and all sorts of things, but there's a proof of concept there that may be useful one day in the future. So not the preferred outcome, but it's certainly something we're willing to do to continue to fund the business.

Q: Upal Rana with KeyBanc asked about issuing equity, asking if it's based on share price or opportunity set. John Moragne responded that it's a bit of both, leaning more towards the opportunity set and incremental cost of capital relative to the investment pipeline.

Q: Anthony Paolone with JPMorgan asked about lease expiration schedule. John Moragne responded there's nothing material, with executions at 108% and underwriting teams looking ahead to 2028.

Q: Caitlin Burrows with Goldman Sachs asked about transitional capital properties. John Moragne discussed retail and industrial transitional capital investments, with industrial expected to convert to build-to-suit and retail holding with potential monetization.

Q: Ronald Kamdem with Morgan Stanley asked about cap rates and construction costs. The unknown executive responded on cap rate considerations and construction costs being up but manageable for economics.

Q: Jay Kornreich with Cantor Fitzgerald asked about regular way acquisitions guideposts. The unknown executive responded on baselining growth with build-to-suits and upsizing with regular way acquisitions.

Q: Jay Kornreich also asked about tenant credit side. The unknown executive responded no specific names on watch list, focusing on sectors like furniture and casual dining.

Q: Ryan Caviola with Green Street asked about average deal size. The unknown executive responded it's opportunistic, based on retail vs industrial makeup.

Q: Eric Borden with BMO Capital Markets asked about At Home and Claire’s and build-to-suit competition. The unknown executive responded on evaluating At Home and Claire’s for future use and build-to-suit competition being client-specific.

Q: Caitlin Burrows with Goldman Sachs followed up on build-to-suit pipeline timing. The unknown executive responded confident in reaching $500 million announcements by year-end with a robust pipeline.