Broadstone Net Lease, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EX-32.2 - Broadstone Net Lease, Inc.	ck0001424182-ex322_9.htm
EX-32.1 - EX-32.1 - Broadstone Net Lease, Inc.	ck0001424182-ex321_6.htm
EX-31.2 - EX-31.2 - Broadstone Net Lease, Inc.	ck0001424182-ex312_7.htm
EX-31.1 - EX-31.1 - Broadstone Net Lease, Inc.	ck0001424182-ex311_8.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2018, or

☐	Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-55774

BROADSTONE NET LEASE, INC.

(Exact name of registrant as specified in its charter)

Maryland	26-1516177
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

800 Clinton Square

Rochester, New York

14604

(Address of principal executive offices)

(Zip Code)

(585) 287-6500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were 20,524,162.468 shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of August 10, 2018.

BROADSTONE NET LEASE, INC.

TABLE OF CONTENTS

		Page
Part I - FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets (Unaudited)	1
	Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)	2
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows (Unaudited)	4
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Cautionary Note Regarding Forward-Looking Statements	26
	Overview	26
	Liquidity and Capital Resources	36
	Impact of Inflation	40
	Off-Balance Sheet Arrangements	40
	Contractual Obligations	40
	Results of Operations	41
	Net Income and Non-GAAP Measures (FFO and AFFO)	45
	Critical Accounting Policies	48
	Impact of Recent Accounting Pronouncements	48
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	50
Part II - OTHER INFORMATION		51
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	53

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)

	June 30, 2018			December 31, 2017
Assets
Accounted for using the operating method, net of accumulated depreciation	$	2,373,376		$	2,186,141
Accounted for using the direct financing method		42,023			41,617
Investment in rental property, net		2,415,399			2,227,758
Cash and cash equivalents		13,765			9,355
Restricted cash		7,057			744
Accrued rental income		60,857			52,018
Tenant and other receivables, net		95			897
Tenant and capital reserves		1,041			943
Prepaid expenses and other assets		1,837			267
Notes receivable		—			6,527
Investment in related party		10,000			10,000
Interest rate swap, assets		30,169			11,008
Intangible lease assets, net		258,294			242,659
Debt issuance costs – unsecured revolver, net		2,644			3,026
Leasing fees, net		14,100			13,554
Total assets	$	2,815,258		$	2,578,756

Liabilities and equity
Unsecured revolver	$	272,500		$	273,000
Mortgages and notes payable, net		86,242			67,832
Unsecured term notes, net		927,364			836,912
Interest rate swap, liabilities		184			5,020
Accounts payable and other liabilities		22,492			20,345
Due to related parties		915			722
Tenant improvement allowances		4,292			5,669
Accrued interest payable		3,008			3,311
Intangible lease liabilities, net		85,442			81,744
Total liabilities		1,402,439			1,294,555

Commitments and contingencies (See Note 16)

Equity
Broadstone Net Lease, Inc. stockholders' equity:
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $0.001 par value; 80,000 shares authorized, 20,239 and 18,909 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		20			19
Additional paid-in capital		1,409,541			1,301,979
Subscriptions receivable		(500	)		(15	)
Cumulative distributions in excess of retained earnings		(135,829	)		(120,280	)
Accumulated other comprehensive income		27,310			5,122
Total Broadstone Net Lease, Inc. stockholders’ equity		1,300,542			1,186,825
Non-controlling interests		112,277			97,376
Total equity		1,412,819			1,284,201
Total liabilities and equity	$	2,815,258		$	2,578,756

The accompanying notes are an integral part of these condensed consolidated financial statements.

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(Unaudited)

(in thousands, except per share amounts)

	For the three months ended June 30,						For the six months ended June 30,
	2018			2017			2018			2017
Revenues
Rental income from operating leases	$	53,590		$	41,256		$	105,422		$	80,657
Earned income from direct financing leases		953			1,074			1,919			2,207
Operating expenses reimbursed from tenants		2,486			1,296			5,235			2,913
Other income from real estate transactions		3			45			45			78
Total revenues		57,032			43,671			112,621			85,855

Operating expenses
Depreciation and amortization		20,232			14,733			39,434			29,326
Asset management fees		4,313			3,629			8,456			6,822
Property management fees		1,595			1,218			3,112			2,386
Property and operating expense		2,530			1,124			5,149			2,701
General and administrative		1,456			1,162			2,787			2,125
State and franchise tax		510			160			753			210
Total operating expenses		30,636			22,026			59,691			43,570
Operating income		26,396			21,645			52,930			42,285
Other income (expenses)
Preferred distribution income		187			182			375			363
Interest income		52			115			162			227
Interest expense		(12,454	)		(7,860	)		(23,631	)		(15,802	)
Cost of debt extinguishment		(51	)		(3,567	)		(51	)		(3,615	)
Gain on sale of real estate		4,256			5,477			7,595			6,280
Net income		18,386			15,992			37,380			29,738
Net income attributable to non-controlling interests		(1,412	)		(1,265	)		(2,834	)		(2,418	)
Net income attributable to Broadstone Net Lease, Inc.	$	16,974		$	14,727		$	34,546		$	27,320

Weighted average number of common shares outstanding
Basic		19,829			16,623			19,498			16,102
Diluted		21,478			18,051			21,098			17,530
Net earnings per common share
Basic and diluted	$	0.86		$	0.89		$	1.77		$	1.70

Comprehensive income
Net income	$	18,386		$	15,992		$	37,380		$	29,738
Other comprehensive income
Change in fair value of interest rate swaps		7,042			(4,291	)		23,997			(1,731	)
Realized loss on interest rate swaps		—			(873	)		—			(873	)
Comprehensive income		25,428			10,828			61,377			27,134
Comprehensive income attributable to non-controlling interests		(1,951	)		(857	)		(4,643	)		(2,224	)
Comprehensive income attributable to Broadstone Net Lease, Inc.	$	23,477		$	9,971		$	56,734		$	24,910

The accompanying notes are an integral part of these condensed consolidated financial statements.

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except per share amounts)

	Common Stock		Additional Paid-in Capital			Subscriptions Receivable			Cumulative Distributions in Excess of Retained Earnings			Accumulated Other Comprehensive Income			Non-controlling Interests			Total
Balance, January 1, 2017	$	15	$	1,009,431		$	(9,790	)	$	(89,960	)	$	2,092		$	86,749		$	998,537
Net income		—		—			—			27,320			—			2,418			29,738
Issuance of 2,169 shares of common stock, net		2		170,679			9,790			—			—			—			180,471
Other offering costs		—		(802	)		—			—			—			—			(802	)
Issuance of 103 membership units		—		—			—			—			—			8,278			8,278
Distributions declared ($0.410 per share January 2017, $0.415 per share February through June 2017)		—		—			—			(40,071	)		—			(3,733	)		(43,804	)
Change in fair value of interest rate swap agreements		—		—			—			—			(1,606	)		(125	)		(1,731	)
Realized loss on interest rate swap agreements		—		—			—			—			(804	)		(69	)		(873	)
Conversion of one membership unit to one share of common stock		—		27			—			—			—			(27	)		—
Redemption of 39 shares of common stock		—		(3,016	)		—			—			—			—			(3,016	)
Balance, June 30, 2017	$	17	$	1,176,319		$	—		$	(102,711	)	$	(318	)	$	93,491		$	1,166,798

	Common Stock		Additional Paid-in Capital			Subscriptions Receivable			Cumulative Distributions in Excess of Retained Earnings			Accumulated Other Comprehensive Income		Non-controlling Interests			Total
Balance, January 1, 2018	$	19	$	1,301,979		$	(15	)	$	(120,280	)	$	5,122	$	97,376		$	1,284,201
Net income		—		—			—			34,546			—		2,834			37,380
Issuance of 1,405 shares of common stock, net		1		114,040			(485	)		—			—		—			113,556
Other offering costs		—		(525	)		—			—			—		—			(525	)
Issuance of 194 membership units		—		—			—			—			—		15,797			15,797
Distributions declared ($0.415 per share January 2018, $0.43 per share February through June 2018)		—		—			—			(50,095	)		—		(4,855	)		(54,950	)
Change in fair value of interest rate swap agreements		—					—			—			22,188		1,809			23,997
Conversion of eight membership units to eight shares of common stock		—		684			—			—			—		(684	)		—
Redemption of 74 shares of common stock		—		(5,889	)		—			—			—		—			(5,889	)
Cancellation of nine shares of common stock		—		(748	)		—			—			—		—			(748	)
Balance, June 30, 2018	$	20	$	1,409,541		$	(500	)	$	(135,829	)	$	27,310	$	112,277		$	1,412,819

The accompanying notes are an integral part of these condensed consolidated financial statements.

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	For the six months ended June 30,
	2018			2017
Operating activities
Net income	$	37,380		$	29,738
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities:
Depreciation and amortization including intangibles associated with investment in rental property		39,901			29,714
Amortization of debt issuance costs charged to interest expense		862			787
Straight-line rent and financing lease adjustments		(10,303	)		(8,068	)
Cost of debt extinguishment		51			3,615
Gain on sale of real estate		(7,595	)		(6,280	)
Settlement of interest rate swap, liability		—			(1,965	)
Leasing fees paid		(1,177	)		(1,796	)
Non-cash interest		—			(1,349	)
Other non-cash items		329			237
Changes in assets and liabilities:
Tenant and other receivables		54			(18	)
Prepaid expenses and other assets		(1,570	)		(941	)
Accounts payable and other liabilities		1,046			797
Accrued interest payable		(303	)		837
Net cash provided by operating activities		58,675			45,308

Investing activities
Acquisition of rental property accounted for using the operating method, net of mortgage assumed of $20,845 and $0 in 2018 and 2017, respectively		(216,036	)		(185,179	)
Acquisition of rental property accounted for using the direct financing method		(430	)		(3,546	)
Capital expenditures and improvements		(1,445	)		(3,871	)
Proceeds from disposition of rental property, net		30,289			28,929
Increase in tenant and capital reserves		(98	)		(81	)
Net cash used in investing activities		(187,720	)		(163,748	)

Financing activities
Proceeds from issuance of common stock, net		88,701			161,435
Redemptions of common stock		(5,889	)		(3,016	)
Borrowings on mortgages, notes payable and unsecured term notes, net of mortgages assumed of $20,845 and $0 in 2018 and 2017, respectively		90,000			400,000
Principal payments on mortgages and notes payable		(2,442	)		(374,023	)
Borrowings on unsecured revolver		115,000			175,000
Repayments on unsecured revolver		(115,500	)		(187,000	)
Cash distributions paid to stockholders		(25,245	)		(21,091	)
Cash distributions paid to non-controlling interests		(4,785	)		(3,727	)
Debt issuance costs paid		(72	)		(8,470	)
Net cash provided by financing activities		139,768			139,108
Net increase in cash and cash equivalents and restricted cash		10,723			20,668
Cash and cash equivalents and restricted cash at beginning of period		10,099			23,103
Cash and cash equivalents and restricted cash at end of period	$	20,822		$	43,771

Reconciliation of cash and cash equivalents and restricted cash
Cash and cash equivalents at beginning of period	$	9,355		$	21,635
Restricted cash at beginning of period		744			1,468
Cash and cash equivalents and restricted cash at beginning of period	$	10,099		$	23,103

Cash and cash equivalents at end of period	$	13,765		$	35,752
Restricted cash at end of period		7,057			8,019
Cash and cash equivalents and restricted cash at end of period	$	20,822		$	43,771

The accompanying notes are an integral part of these condensed consolidated financial statements.

Broadstone Net Lease, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands)

1. Business Description

Broadstone Net Lease, Inc. (the “Corporation”) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2008. The Corporation focuses on investing in income-producing, net leased commercial properties. The Corporation leases properties to retail, healthcare, industrial, office, and other commercial businesses under long-term lease agreements. Properties are generally leased on a triple-net basis such that tenants pay all operating expenses relating to the property, including, but not limited to, property taxes, insurance, maintenance, repairs, and capital costs, during the lease term. As of June 30, 2018, the Corporation owned a diversified portfolio of 558 individual net leased commercial properties located in 42 states throughout the continental United States.

Broadstone Net Lease, LLC (the “Operating Company”), is the entity through which the Corporation conducts its business and owns (either directly or through subsidiaries) all of the Corporation’s properties. The Corporation is the sole managing member and primary owner of the economic interest of the Operating Company. The remaining interests in the Operating Company, which are referred to as non-controlling interests, are held by members who acquired their interest by contributing property to the Operating Company in exchange for membership units of the Operating Company. As the Corporation conducts substantially all of its operations through the Operating Company, it is structured as what is referred to as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”). The following table summarizes the economic ownership interest in the Operating Company as of June 30, 2018 and December 31, 2017:

Percentage of shares owned by	June 30, 2018			December 31, 2017
Corporation		92.1	%		92.4	%
Non-controlling interests		7.9	%		7.6	%
		100.0	%		100.0	%

The Corporation operates under the direction of its board of directors (the “Board of Directors”), which is responsible for the management and control of the Company’s (as defined below) affairs. The Corporation is externally managed and its board of directors has retained the Corporation’s sponsor, Broadstone Real Estate, LLC (the “Manager”) and Broadstone Asset Management, LLC (the “Asset Manager”) to manage the Corporation’s day-to-day affairs, to implement the Corporation’s investment strategy, and to provide certain property management services for the Corporation’s properties, subject to the Board of Directors’ direction, oversight, and approval. The Asset Manager is a wholly-owned subsidiary of the Manager and all of the Corporation’s officers are employees of the Manager. Accordingly, both the Manager and the Asset Manager are related parties of the Company. Refer to Note 3 for further discussion over related parties and related party transactions.

2. Summary of Significant Accounting Policies

Interim Information

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and Article 10 of the Securities and Exchange Commission’s (“SEC”) Regulation S-X. Accordingly, the Corporation has omitted certain footnote disclosures which would substantially duplicate those contained within the audited consolidated financial statements for the year ended December 31, 2017, included in the Company’s 2017 Annual Report on Form 10-K, filed with the SEC on March 15, 2018. Therefore, the readers of this quarterly report should refer to those audited consolidated financial statements, specifically Note 2, Summary of Significant Accounting Policies, for further discussion of significant accounting policies and estimates. The Corporation believes all adjustments necessary for a fair presenta

Broadstone Net Lease, Inc. - FORM 10-Q - August 10, 2018

Attached files