Broadstone Net Lease: High Dividend And Good Upside (Rating Upgrade) (NYSE:BNL)

I wrote an article on Broadstone Net Lease REIT (NYSE:BNL) back in May and issued a HOLD rating for the stock, because of its very short track record. The stock seemed solid on most fundamental levels, but with only a couple of quarters of data since their IPO, I didn’t have the necessary confidence to pull the trigger.

That has changed now. I’ve done a lot of further analysis, I decided to write an updated article and upgrade the stock to a BUY. I now believe BNL to be one of the best-positioned net lease REITs out there.

Net lease REITs overall are a great choice in the current macroeconomic environment because they provide safety with long-term lease contracts and very reputable tenants. The thing that some investors fail to realize though, is that beyond safety, they also provide potential for growth. This is because with long-term leases, every time the company rolls over the lease, it’s able to raise rents significantly, in some cases by 20-30% which provides a nice bump to revenues and consequently also FFO. This is what I especially like about the sector because these rent increases are very predictable.

BNL is fairly similar to well-known net lease REITs such as Realty Income (O) or NNN REIT (NNN) and despite its smaller size and younger age it already rivals more established peers in most operational metrics such as occupancy, tenant diversification and especially FFO growth prospects.

BNL is a new REIT, having IPOed just three years in 2020, but there is some history beyond the IPO that’s worth mentioning. This is because the company actually started operations back in 2007 so it’s not entirely new. The REIT is relatively small with just over 800 properties located across the US. The word diversified comes to mind as it owns properties in every corner of the country. Some see it as a benefit, some as an issue as they inevitably don’t achieve scale and deep know-how in any given market. Personally, I don’t think it matters too much and am happy to see that their California exposure is extremely low at just a couple of percentage points.

The REIT’s diversification doesn’t end with its geographical presence. This is because of their presence in a number of sub-sectors including industrial real estate which accounts for half of all revenues, followed by restaurants, retail and office with about a 10% allocation towards each. The company even owns some healthcare-oriented real estate. This tenant mix should make the REIT very resistant to threats such as e-commerce, work from home and even a recession as it will not be affected overall.

In Q2 2023, BNL has achieved near-perfect occupancy, as well as collections, which is a true testament to the way this company is run. Going back to the concept of rolling over leases, the company has about 7-10% of leases that will expire in each of the following three years. If we consider that they will raise rents on those by about 20%, we get a 2% portfolio-wide increase without even accounting for general rent escalation clauses. But the thing is that the REIT actually has some of the best rent escalators out there. They average 2% and are present in nearly all lease agreements. Combined these two should deliver FFO growth of at least 4% per year, without accounting for any new acquisitions.

Management has, however, stated clearly in their earnings call that they plan to acquire $300-500 Million worth of additional real estate this year. And though that’s down from about $900 Million last year, it should still fuel additional growth beyond the internal one. I like the fact that the company is going shopping now that cap rates have increased because it adds significant value to the business. Over the last two quarters, their acquisitions have averaged a 7.4% cap rate, which is considerably above their cost of capital.

The growth going forward will be supported by a strong BBB rated balance sheet, with no maturities until 2026 (which is when the credit line and $400 million term loan matures) and 97.6% of their debt hedged against interest rate risk. The company doesn’t have much cash (only $20 million) but does have over $850 million available on its credit line which should provide sufficient liquidity. This will likely mean few surprises so the company should be able to stay on track and continue to grow its dividend as it has with two increases last year alone. The dividend is amongst the highest in net lease REITs and stands at nearly 8% which makes the REIT really interesting, especially in light of all its quality attributes which I’ve mentioned already.

Some might be tempted to invest in the company for the dividend alone, but that ignores the significant upside that the stock could deliver. It currently trades at just 10x FFO which is cheaper than W. P. Carey (WPC) which trades at 12x FFO when adjusted for the spinoff. The spread to WPC’s valuation could be due to BNL’s smaller size and shorter history, but given the quality of all of their operational metrics, I see no reason why the stock couldn’t trade on par with WPC, especially as it’s expected to grow faster. Normalizing to WPC’s valuation would produce upside of roughly 20% in addition to an already high dividend and solid internal as well as external growth which I expect at 4-6% as described above. This REIT ticks all the boxes for me, which leads me to a BUY rating here at $14 per share.