Broadstone Net Lease, Inc.

Hello and welcome to the BroadStone NetLease third quarter 2024 earnings conference call. My name is Carla and I will be your operator today. Please note that today's call is being recorded. I will now turn the call over to Brent Madel, Director of Corporate Finance and Investor Relations at BroadStone to begin. Brent, please go ahead.

Thank you everyone for joining us today for BroadStone NetLease's third quarter 2024 earnings call. On today's call, we will hear prepared remarks from CEO John Marano, President and CEO Ryan Albano, and CFO Kevin Funnell. All three will be available for the Q&A portion of this call. As a reminder, the following discussion and answers to your questions contain forward-looking statements that 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, 2023, 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 date of this call. With that, I'll turn the call over to John.

Thank you, Brent, and good morning, everyone. We began 2024 with two main goals. First, to reposition our portfolio through our clinical healthcare simplification strategy. focusing our future on industrial, retail, and restaurant assets. And second, to put in place the foundation for attractive and sustainable AFFO per share growth through our differentiated strategy and core building blocks. With the progress we have made to date, particularly in this last quarter, I am proud to say that we believe we have substantially accomplished both and are now looking forward to setting a new baseline for B&L's growth and performance in 2025. Starting with our clinical healthcare simplification strategy, With the completion of the latest tranche of sales, comprising 10 clinical healthcare assets that closed on October 2nd, we successfully brought our total healthcare exposure below 10%, but most importantly, reduced our exposure to clinical assets to approximately 4% of our ABR. The 6% of our assets that include animal health services, med-tailor medical retail, and life science assets will generally continue to have a home in our broader portfolio and are not the focus of our current disposition efforts. Selling the 4% of our remaining clinical, surgical, and traditional medical office assets will remain a goal for us, but will not be as much of a front and center focus now that our total clinical exposure is relatively immaterial. In order to maximize value for the remaining clinical assets, we anticipate those dispositions will have various transaction timelines that comfortably extend into 2025 and beyond, given the need to address some combination of shorter lease duration, space utilization rates, or elevated credit risk. With a heightened focus on the clinical healthcare dispositions winding down, we have been able to devote more resources to our year-long effort to put in place the foundation for attractive and sustainable ASFO for share growth through our differentiated strategy and core building blocks, a key tenant of which is a laddered and long-term pipeline of attractive build-to-suit development projects. We saw the considerable benefits of this strategy in multiple ways this quarter. First, We reached substantial completion on our UNFI build-to-suit development in early September. This brand-new, high-quality, 1 million square foot, tri-climate food distribution asset, strategically located in Sarasota, Florida, is now operational and contributing to our earnings base with an initial cash yield of 7.2%, a 15-year lease term, and 2.5% annual rent escalations that drive a straight-line yield of 8.6%. The project was ahead of schedule and below budget thanks to solid execution by all parties. We are incredibly excited about this project and are grateful to UNFI, Sansone, our development partner, and all of the parties that made this build-to-suit a success. Second, we continued laying the necessary groundwork for sustained success in our laddered and long-term build-to-suit strategy. We currently have $405 million in committed development with attractive initial cash yields in the mid-to-high 7% range and straight-line yields exceeding 9%. Subsequent to quarter end, we closed and began initial funding on two developments with an estimated total cost of approximately $114 million and expect to close and begin funding the rest of our committed pipeline in the coming weeks. I am extremely proud of our team's ability to execute on this differentiated core building block of our growth. These build-to-suit projects are all for identified tenants with structures in place to mitigate the traditional development risk associated with construction delays and cost overruns. Maybe best of all, We are leveraging existing and direct relationships to build this pipeline and further deepening relationships that should provide ample opportunity for more. Our development partners need someone that brings surety of execution, deep experience and expertise, and a willingness to be creative and help them secure projects and grow their businesses. They have found that in B&L. With our attractive denominator, the individual size and aggregate scale of the build-to-suits comprising this strategic initiative moves the needle for our growth and does so in a differentiated way that drives long-term value. Just with this existing pipeline, we have already secured approximately 33 million of incremental ABR that will come online in Q4 2025 in the first half of 2026 and are actively seeking additional Build-A-Suite opportunities to round out our targeted ABR growth for 2026 as well as into 2027. While the traditional net lease model relies on inorganic growth from the regular way transaction market, we are seeking to drive B&L's growth through this differentiated and long-term focused core building block. No one can predict what the net lease acquisitions market will look like in Q4 2025 or 2026, but we can tell you today, without having to do anything else, that we will add a minimum of approximately 33 million of ABR during that time period through this strategy in our build-to-suit pipeline as it exists today. And with the incremental new ABR added, as each project reaches substantial completion and rent commences, we're able to maintain our leverage ratio comfortably below six times. We're doing things differently here at B&L, and we couldn't be more excited about what's to come. We also have our eye on the future operationally. Our asset management team emphasizes engaging and releasing touchpoints as early as 24 months prior to lease expiration. So we are already actively evaluating our lease rollovers through 2026. This approach not only strengthens our relationships with tenants, but also provides us with valuable insights into their needs and intentions. such as identifying potential revenue-generating funding opportunities and gives us great confidence in our ability to successfully navigate upcoming lease expirations. Recently, we secured two new leases for properties that had just vacated, achieving impressive lease terms of 13 years each and recapture rates of 100% or better. Year-to-date, we've executed six lease extensions or tenant renewals, all at or above 100% recapture, with minimal tenant improvements required. Offsetting some of these gains We now have three vacant properties, generating higher property operating expenses in the back half of the year. We are working towards optimal sale or lease outcomes for these assets to reduce these carrying costs and are cautiously optimistic about near-term resolutions. While our overall operating results remain strong and we are executing on our growth initiatives, we continue to see incremental pockets of credit risk as the broader impact from the duration of higher interest rates impacts consumer-centric industries and entities with less flexible capital structures. We remain vigilant in our tenant monitoring efforts and maintain great confidence in our portfolio due to its diversified construction, which limits the impact of any potential individual credit event and our proven ability to manage through any such situation that may arise. Leveraging our core building blocks consisting of best-in-class fixed rent escalations, revenue-generating CapEx investments in our existing tenants and assets, Development funding opportunities and traditional acquisitions gives us confidence as we ramp towards returning to growth in 2025 and 2026, much of which is already visible through our committed to build suit pipeline. For the current year, we are maintaining our AFFO guidance range of $1.41 to $1.43 per share. Starting this year with a view that a neutral AFFO per share result would be a positive outcome given our decision to strategically exit our clinical healthcare assets and redeploy the proceeds into quality investments, I am pleased that our accomplishments this year, including a reduction in cash G&A, will result in modest growth for 2024 and position us to establish a return to growth in 2025 with an ability to scale and ramp that growth in 2026 and beyond. We made decisions this year that we believe are in the best interest of B&L and its investors for the long term and are confident that those decisions will lead to attractive and sustainable AFFO per share growth in B&L's future. With that, I'll turn the call over to Ryan, who will provide additional updates on our bill-to-suit pipeline, completed transactions, and portfolio.