Broadstone Net Lease, Inc.

Hello and welcome to Broadstone Net Lease's third quarter 2022 earnings conference call. My name is Drew and I'll be coordinating your call today. Please note that today's call is also being recorded. I will now turn the call over to Mike Caruso, Senior Vice President of Corporate Finance and Investor Relations at Broadstone. Please go ahead.

Thank you, Operator, and thank you everyone for joining us today for Broadstone Net Lease's third quarter 2022 earnings call. On today's call, you will hear from our Chief Executive Officer, Chris Czarnecki, our Chief Financial Officer, Ryan Albano, and our Chief Operating Officer, John Moreno, will be available for Q&A. Before we begin, I would like to remind everyone that the following presentation contains forward-looking statements, which are subject to risks and uncertainties that can cause actual results to differ materially due to a variety of factors. We caution you not to place undue reliance on these forward-looking statements and refer you to our SEC filings, including our Form 10-K, for the year ended December 31st, 2021, for a more detailed discussion of the risk factors that may cause such differences. Any forward-looking statements provided during this conference call are only made as of the date of this call. I will now turn the call over to our Chief Executive Officer, Chris Zarnacki.

Thank you, Mike, and good morning, everyone. During the third quarter, we continued to carefully navigate the current economic backdrop and dynamic capital markets environment with a keen focus on prudent capital allocation and discipline selectivity. As we announced in our business update following the completion of the quarter, the B&L portfolio continues to perform well with 100% of base rents collected during Q3 and minimal vacancies. In addition, we continue to source opportunities to accretively invest capital during the quarter despite a challenging market backdrop. Proactive execution in the capital markets during the first three quarters of the year has positioned us to close out 2022 on a strong footing delivering another year of consistent same-store portfolio performance and accretive external growth, both of which have translated into strong earnings growth. Given heightened levels of economic uncertainty as we approach a new calendar year, we remain focused on prudent capital allocation during this period of public and private net lease market dislocation. Conservative balance sheet management, disciplined underwriting, and proactive portfolio management our core B&L competencies, and they will continue to serve as key pillars to our success as we navigate current and future economic uncertainty. As of September 30, 2022, all but three of our 790 properties were subject to a lease, and our properties were occupied by 218 different commercial tenants across 56 industries, with no single tenant accounting for more than 2.4% of ABR. As of quarter end, the portfolio's weighted average annual rent escalation sits at 2%, and the weighted average remaining lease term was 10.7 years. As I've mentioned many times in the past, diversification serves as a defensive hedge against any singular tenant credit event. With some of the lowest levels of tenant concentrations in the net lease space, our highly diversified operating model provides us the flexibility to patiently work through any one-off tenant matters as we look to preserve and protect long-term shareholder value. For example, Following the completion of the third quarter, we successfully released a healthcare property located in Arizona to an experienced hospital operator under a new 21-year lease with an effective gap yield of 7.5% over the course of the term. At only 1.2% of ABR, we were afforded the ability to patiently pursue a positive long-term solution without feeling pressure to backfill the asset as quickly as possible. We appreciate that net lease investing is not a zero-loss business, and when occasionally taking calculated risks, situations can arise that require a carefully crafted solution. Our industry-leading diversification continues to provide risk-medicating benefits and allows us to patiently pursue the best outcome for our shareholders during these one-off situations. On an external growth fund, we invested approximately $205 million in 28 properties at a weighted average initial cash cap rate of 6.5% during the third quarter. The leases for new acquisitions include a strong weighted average lease term of approximately 21 years, and solid 2% annual rent escalations, translating into a weighted average gap rate of 7.9%. These investments were predominantly weighted towards industrial opportunities at 86% of the quarter's volume, with the remaining investment activity spanning restaurants at 6%, healthcare at 5%, and retail at 3%. Proactive capital markets execution year-to-date has allowed us to lock in the cost of capital that supports accretive spread investing in the current environment, We remain focused on selectively deploying our dry powder on accretive investment opportunities in our pipeline. Since quarter end, we've closed an additional $283 million of transactions and currently have $22 million of acquisitions under control, which we define as having an executed contract or letter of intent. With approximately $902 million of acquisitions either closed or under control year to date, we are reaffirming our 2022 full year acquisition guidance range of $900 million to $1 billion. which we previously revised upward in our business update in early October. This revised acquisition guidance range reflects our cautious external growth outlook for the remainder of the fourth quarter, given the volatility in the capital markets and resulting pressure on investment spreads given prevailing market cap rates. While we recognize that the current capital market environment requires us to be highly selective in the near term, I'm proud of all that we've accomplished thus far in 2022 and where we are tracking to end the year from an external growth perspective. changes in cost of capital for all public REITs without a commensurate adjustment in private asset values has forced many to take a more measured approach in the near term. We, like many of our peers, will continue to focus on prudent capital allocation during this period of public and private market dislocation. However, we believe our broadly diversified buy box provides us the unique opportunity to allocate capital to property types where cap rates have or will continue to expand at a more accelerated pace due to sector-specific supply and demand characteristics. I'm encouraged by the cap rate expansion we are currently seeing in our pipeline and expect to see further movement in the near term as seller pricing expectations reset in the wake of changes in buyer cost of capital. Before passing the call to Ryan, I want to take a few moments to provide additional detail on several transactions completed during and subsequent to the third quarter. During Q3, we acquired 19 industrial properties and three separate transactions for $175 million. The leases include weighted average annual rent escalations of 2.1% and a weighted average 22-year lease term. In addition, we invested revenue-generating capex in one existing industrial property during the quarter at an initial yield of 8.1%. The largest acquisition completed during Q3 was an 11-property sale and lease transaction with a well-established tenant in the food production and distribution space. We continue to remain bullish on the space, given its resiliency during challenging economic environments and we're pleased to grow our exposure with the acquisition of this high-quality portfolio. In addition, following the completion of the quarter, we successfully closed the largest sale and leaseback transaction in B&L's history. We acquired seven assets as part of a directly sourced transaction with a food manufacturer that has a very strong operating history. We continue to see compelling opportunities in the industrial space as many leveraged buyers remain on the sideline in light of rising debt costs. Finally, during the quarter, we continue to apply our granular investments across both non-discretionary retail and restaurant spaces. These transactions account for approximately $19.4 million, with an average asset size of $2.8 million. We continue to view these smaller, often one-off investments as an effective complement to our larger sourcing efforts.