Previous Thesis Panned Out, But Broadstone Net Lease Has More To Offer

seekingalpha09-17

Broadstone Net Lease's reorganization strategy aims to reduce healthcare properties and increase industrial property exposure, enhancing portfolio quality and long-term value.Despite recent industrial...

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Richard DruryThe market has undoubtedly overestimated Broadstone Net Lease's  risk factors associated with its reorganization processes. For context, the company presented its portfolio reorganization plan called 'healthcare portfolio simplification strategy' upon releasing its annual 2023 results. The strategy aims to reduce the share of healthcare properties, specifically clinical, surgical, and medical off","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"PLD":"安博","LU0106259558.USD":"SCHRODER ISF ASIAN OPPORTUNITIES \"A\" ACC","LU0588546209.SGD":"Eastspring Investments - China Equity Fund AS SGD","STAG":"STAG Industrial","EPR":"EPR不动产","BK4588":"碎股","LU0149534421.HKD":"SCHRODER ISF HONG KONG EQ \"A\" ACC","LU0315178854.USD":"EASTSPRING INVESTMENTS ASIAN EQUITY INCOME \"A\" ACC","BK4234":"特殊用途房地产信托","BK4084":"特种房地产投资信托","NNN":"NNN REIT INC","BK4231":"零售房地产信托","LU0181495838.USD":"施罗德新兴亚洲A Acc","LU0828237940.HKD":"SCHRODER ISF EMERGING ASIA \"A\" (HKD) ACC","LU0106252389.USD":"SCHRODER ISF EMERGING MARKETS \"A\" ACC","LU0865486749.SGD":"Eastspring Investments - Asian Equity Income AS SGD-H","BK4171":"工业房地产投资信托","BK4102":"食品分销商","BNL":"Broadstone Net Lease, Inc.","UNFI":"联合原生态食品","BK4224":"工业房地产信托","LU0228367735.SGD":"Eastspring Investments - Asian Equity Fund AS SGD","LU0192582467.USD":"SCHRODER ISF ASIAN EQUITY YIELD \"A\" (USD) INC MF","LU0140636845.USD":"施罗德大中华区股票A Acc","LU1981816686.USD":"EASTSPRING INV ASIAN MULTI FACTOR EQUITY \"A\" (USD) ACC","LU0588545490.SGD":"Eastspring Investments - Asian Equity Income AS SGD","LU0188438112.USD":"SCHRODER ISF ASIAN EQUITY YIELD \"A\" ACC","LU0588545904.SGD":"Eastspring Investments - Asian Equity Income ASDM SGD","BK4160":"多样化房地产投资信托v","CFA.SI":"NikkoAM-STC Asia REIT","LU0049853897.USD":"SCHRODER ISF EMERGING MARKETS \"A\" (USD) INC AV","BK4567":"ESG概念","FR":"第一工业地产","LU0048388663.USD":"SCHRODER ISF ASIAN OPPORTUNITIES \"A\" (USD) INC AV","BK4585":"ETF&股票定投概念","BK4534":"瑞士信贷持仓","EPRT":"Essential Properties Realty Trust Inc.","LU0588545730.USD":"EASTSPRING INVESTMENTS ASIAN EQUITY INCOME \"ADM\" (USD) INC","LU0607220059.USD":"SCHRODER ISF HONG KONG EQUITY \"A\" (USD) ACC","LU0211977185.USD":"EASTSPRING INVESTMENTS GREATER CHINA EQUITY \"A\" ACC","LU0163747925.USD":"EASTSPRING INVESTMENTS ASIAN EQUITY A ACC","LU0307460666.USD":"EASTSPRING INVESTMENTS CHINA EQUITY \"A\" ACC","LU0259732245.USD":"EASTSPRING INVESTMENTS DRAGON PEACOCK A","WPC":"W. P. Carey Inc","BK4080":"零售业房地产投资信托"},"translate_title":"之前的论文成功了，但Broadstone Net Lease还可以提供更多","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"WPC":1,"FR":1,"EPRT":1,"EPR":1,"BNL":1,"NNN":1,"PLD":1,"STAG":1,"UNFI":1,"CFA.SI":0.9},"content_text":"Broadstone Net Lease's reorganization strategy aims to reduce healthcare properties and increase industrial property exposure, enhancing portfolio quality and long-term value.Despite recent industrial sector challenges, including oversupply and interest rate headwinds, BNL's strategic shift is seen as a sustainable step forward.Q2 2024 data shows signs of improving industrial space demand and reduced construction starts, indicating a potential market turnaround.BNL's low valuation and successful reorganization progress make it a compelling buy, despite current market conditions.   Richard DruryThe market has undoubtedly overestimated Broadstone Net Lease's (NYSE:BNL) risk factors associated with its reorganization processes. For context, the company presented its portfolio reorganization plan called 'healthcare portfolio simplification strategy' upon releasing its annual 2023 results. The strategy aims to reduce the share of healthcare properties, specifically clinical, surgical, and medical office assets, in its portfolio. At the same time, the Company's investment activity is oriented around an attractive long-term industrial property sector facing oversupply and interest rate headwinds since ~mid-2022. As I indicated in my previous coverage of BNL, the Company has already achieved meaningful progress within its portfolio reorganization strategy, and there's even more to come. A result of that? Higher portfolio quality with more reliable tenants supported by long-term value drivers. Some investors may be discouraged, as the primary portfolio construction can be interpreted as poor capital allocation practices; however, I believe that Benjamin Graham's Mr. Market still failed to understand that sometimes taking a step back may lead to more firm and sustainable steps ahead.   BNL's Investor PresentationI consider increasing exposure to the industrial property sector a step ahead. I also consider that approach sustainable, as was evident long before BNL decided to reorganise its portfolio.   BNL's Investor PresentationWithin this article, I'll provide you with an important update for all industrial property players, as it summarises the market data for Q2 2024 and sets the expectations for the upcoming quarters and years, painting a positive picture for industrial-oriented REITs, including Broadstone Net Lease. Previous coverage I have had the pleasure of covering BNL twice since my journey in SA began. Both times, I assigned it a 'buy' rating, based primarily on its:  increasing activity within the industrial property sector successes while navigating around its portfolio reorganisation strategy low valuation, detached from its long-term potential to generate cash flows  Please refer to the links below to get a better grasp of how my views on BNL have developed.  Broadstone Net Lease: Meaningful Reorganization Progress And Strong Metrics Make It Buyable Seeking Alpha Broadstone Net Lease: Great Risk-To-Reward Ratio Accompanied By Top Business Metrics Seeking AlphaFor transparency, I haven't taken my advice, as I concentrated on other industrial REITs. I am invested in some of BNL's competitors, including Prologis (PLD) and First Industrial Realty (FR). The industrial property sector will see the light soon Let's address the negatives before getting excited about the positives For context, the industrial property sector has had a rough time since mid-2022, when many markets shifted into oversupply issues and the interest rates environment changed. The situation remains until this day, with relatively calm (by historical standards) demand and substantial new industrial space supply hitting the market each quarter. For instance, net completions in Q2 2024 amounted to 102.3m sq. ft., while net absorption amounted to just 30.3m. The above scenario manifests itself in several ways:  relatively slow decision-making across tenants lower negotiating power of landlords, resulting in a lower rent growth pace, which amounted to 'just' 4.3% yearly in Q2 2024 (the lowest level since 2014) the vacancy rate recorded another peak in recent years, amounting to 6.5%      CoStar Inc. and Wells Fargo Economics    CoStar Inc. and Wells Fargo EconomicsThere's the light in the tunnel, and we can see the first rays of the sun The data presented above doesn't paint an optimistic picture. Therefore, the question arises: Why do I consider the data to be a positive sign? Investing is not about the present. It's primarily about the future, and recent data suggests a higher probability of current market headwinds turning into future tailwinds (oversupply issues to undersupply value drivers).   net absorption - improving demand? Although I wrote above that the net absorption in Q2 2024 was low by historical standards, it's worth acknowledging that the low 30.3m sq. ft. was the first improvement recorded in seven quarters. That may suggest that the demand for industrial space has started picking up the pace and supporting my case for the upcoming turnaround in the sector.  low construction starts: what was the factor driving extensive industrial space construction finishes during the last couple of quarters? Naturally, previously commenced constructions. That metric could 'warn' investors about the upcoming substantial supply hitting the market. Now, we are approaching a similar situation but in reverse. Significant drops in the industrial space under construction will bring about low construction finishes, leading to a more favourable supply-to-demand relationship.    CoStar Inc. and Wells Fargo EconomicsBroadstone Net Lease in a nutshell While I generally prefer specialized REITs over diversified ones, I have a sweet spot for turnaround stories, especially around portfolio reorganization. That's why I consider EPR Properties (EPR) one of the best risk-to-reward opportunities in the REIT sector.   portfolio structure: through the realization of its healthcare portfolio simplification strategy, the Company achieves a more attractive portfolio structure with a higher share of attractive industrial and retail/service-oriented properties.  solid occupancy despite headwinds: as mentioned before, the industrial property sector is facing some headwinds, leading to higher vacancy rates (lower occupancy rates). That is evident when looking at some of the leading industrial REITs. Naturally, one has to be aware that BNL also has an exposition to retail/service-oriented properties, which tend to record higher occupancy. Please review the table below for details regarding occupancy rates across different entities.  Author based on BNL, WPC, FR, PLD, EGP, STAG, TRNO, ADC, EPRT, and NNN  WALT: the Company recorded a 10.4 years of weighted average lease term. That can be considered a double-edged sword, especially for industrial-oriented REITs. On the one hand, high WALT ensures cash flow stability and predictability with a well-laddered expiration schedule, ensuring negotiation effectiveness. On the other hand, market rents for industrial properties grew at a substantially higher pace compared to the growth resulting from contractual rent escalators. As a result, BNL will be able to increase its rent upon lease expiration noticeably, but a higher WALT postpones the mark-to-market effect.  balance sheet: BNL's shareholders may sleep sound, as the Company's balance sheet has a BBB credit rating, negligible debt maturities until 2026, solid 4.7x fixed charge coverage, and plenty of room above its key debt covenants.    BNL's Investor Presentation dividend: BNL is an attractive pick for income-oriented investors who seek exposure to the industrial property sector and don't mind the diversified portfolio structure. BNL is one of the highest-yielding dividend payers across the entities mentioned in this article. At the same time, its dividend coverage remains reasonable, with a forward-looking AFFO payout ratio of ~81%. Moreover, the Company recorded a ~4.5% DPS CAGR during the 2021-2023 period. Robust investment activity Please review BNL's summary of its investment activity during Q1-Q2 2024 below: Through the second quarter, we have invested $287.9 million, including $165.1 million in new property acquisitions, $52.2 million in transitional capital, $67.7 million in development fundings, and $3.0 million in revenue generating capital expenditures. The revenue generating capital expenditures had a weighted average initial cash capitalization rate of 8.0%, a lease term of 8.0 years, and annual rent increase of 2.5%. Total investments consist of $171.4 million in industrial properties, $113.5 million in retail and restaurant properties, and $3.0 million in animal health services properties. Moreover, one has to keep in mind that BNL is in the process of recycling its capital (through its healthcare portfolio simplification strategy), so the Company generates substantial disposition proceeds. For instance, during Q1-Q2 2024, BNL generated $303.7m of Retained Free Cash Flow. That facilitates its very active investment approach. Please review the table below for details.   Author based on BNLTherefore, the Company doesn't have to get much involved with external sources of financing (stock or debt issues), as it can finance solid portion of its investments internally. Another promising business update through September 8th, 2024 Last week, Broadstone Net Lease presented us with a business update summarizing some of its activities during most of Q3 2024. The Company featured:  robust investment spending of $375.6m YTD, with most of it ($248.6m) in industrial properties, followed by another $124m and $3m allocated to retail/restaurant properties, and animal health property. substantial commitments to fund developments, which amounted to $453.7 as of September 8, 2024. The commitments relate to BNL's existing tenants and will support its increasing activity in the industrial sector, as $446m is related to industrial properties. As the Company stated:  We anticipate delivery and corresponding rent commencement by the end of 2025 for approximately one-third of those commitments, with the remaining two-thirds occurring in the first half of 2026.  conclusion of its negotiations with Red Lobster, which declared bankruptcy (1.6% of BNL's ABR). All 18 of BNL's Red Lobster locations continue to operate. tightening of BNL's relationship with United Natural Foods (UNFI):  Commenced contractually scheduled rent with our build-to-suit tenant, United Natural Foods, Inc. (“UNFI”), based on the substantial completion of construction in early September 2024. On a pro forma basis, including up to approximately $25.1 million of additional development closeout expenses expected to be funded during the fourth quarter of 2024, UNFI will become our number two tenant based on annualized base rent. Valuation outlook As an M&A advisor, I usually rely on a multiple valuation method, a leading tool in transaction processes. This method allows for accessible and market-driven benchmarking. With that said, the forward-looking P/FFO ratio stood at:   12.5x for BNL  13.4x for W. P. Carey (WPC)  16.7x for STAG Industrial (STAG)  21.5x for FR  14.7x for NNN REIT (NNN)  17.3x for Essential Properties Realty Trust (EPRT)  Other industrial-oriented REITs could also be included, but their multiples are even higher. Based on the above data, BNL is cheap. It doesn't necessarily mean that BNL is undervalued. Mr. Market could be right in assigning a discount to other players, and I believe such a discount applies. However, I consider BNL's valuation multiple detached from its long-term ability to generate cash flows. The market either overestimates the risk factors accompanying BNL's portfolio reorganization strategy or sleeps. My previous coverage indicated that BNL should trade within the 12-12.5x P/FFO multiple range. However, as we get more signs indicating the upcoming market improvement regarding the interest rate environment and the industrial space oversupply issue, I consider the possibility of exceeding 13.0x multiple as a conservative scenario.   Investment Thesis and Risk Factors No stock market investment is risk-free. There are market-related and company-specific risk factors accompanying each investment. In the case of BNL, we can mention:  risk of prolonging the portfolio reorganization strategy or achieving results below expectations uncertainty regarding the interest rate environment in light of the transactional market activity and possible debt refinancing in 2026 uncertainty regarding the industrial market headwinds any other material adverse changes (e.g., some tenant issues) that could translate into a worse financial stance and/or higher stock price volatility  Nevertheless, I consider BNL a worthy addition to a well-structured portfolio. I wouldn't orient my portfolio around the Company, as there are better picks in the sector, but it can constitute an attractive replenishment of the industrial exposure with a clear path to unlocking value through the portfolio reorganization process.  I am bullish on BNL and believe that the company will capitalize on the upcoming market shifts and benefit its shareholders with double-digit total returns resulting from the multiple expansion and high, growing, and well-covered dividends. Therefore, BNL is a 'buy' for me. Thank you!","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.1","shortVersion":"4.28.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2468261335"}