IPO Preview: Broadstone Net Lease Starts U.S. IPO Effort
Broadstone Net Lease (BNL) aims to raise $100 million in an IPO of its Class A common stock, per an S-11 registration statement.
The firm acquires and operates primarily single tenant net lease properties in the U.S. and Canada.
BNL is seeking public capital in the midst of the Covid-19 pandemic, following a particularly bad performance period for REITs.
When we learn more from management about the IPO, I'll give a final opinion.
Rochester, New York-based Broadstone was founded in 2007 to acquire and manage a portfolio of single tenant net lease properties.
Management is led by president and chief executive Christopher Czarnecki, who has been with the firm as Chief Financial Officer since 2009 and previously served as a commercial real estate lender and credit analyst for the Banking & Trust branch.
BNL has created a portfolio of 633 properties with a rentable 27.4 million square feet producing $288 million in annualized base rent [ABR].
The properties are located in 41 states and 1 Canadian province, with ‘no single geographic concentration exceeding 10.4% of our ABR.’
Below is a graph showing the types of property by industry at the company:
(Source: S-11 registration statement)
According to a Rosen Consulting Group market research report, the U.S. single-tenant net lease market grew steadily over the five-year period ending 2018 as demand from investors continued to increase.
US employers created a total of 2.2 million new jobs for the year ended June 30 , 2019 and 2.7 million new jobs for the year ended December 31 , 2018, for the year ended June 30 , 2019.
Data from the U.S. Census Bureau shows that in July 2018 the U.S. population reached 327 million, representing an increase of 11.1 million over the five years ended July 1st, 2018 and an average year-over-year growth of around two million people.
The Rosen Consulting Group anticipates that the US economy will continue to grow as a result of population growth and household formation, as well as job creation and wage growth, and so demand for commercial real estate rentals.
However, the Covid-19 pandemic has substantially affected these projections for the near term.
Unlike a gross lease that places responsibility for many expenses with the property owner, the net lease model 'shifts most or all of the expenses' to the lessee for property-related taxes, insurance, maintenance, utilities and capital expenses, in addition to the rent payments.
BNL's recent financial results can be summarized as follows:
- Growing topline revenue but at a decelerating rate
- Increased adjusted FFO
- 0.52 leverage ratio
The operating results of the company for the past two and 1⁄2 years (Audited GAAP for full years) are as follows:
Source: Company prospectus
The firm had $9.2 million in cash and $2.3 million in total liabilities as of June 30 , 2020.
Broadstone intends to raise gross proceeds of $100 million from an IPO of its Class A stock, though the final figure may differ.
BNL says it will use the IPO 's net proceeds to purchase the underlying operating entity units and pay off a revolver and unsecured term loan it used to partly fund the purchase of an Industrial property portfolio.
Listed managers of the IPO are J.P. Morgan, Goldman Sachs, BMO Capital Markets, Capital One Securities, Morgan Stanley and Truist Securities.
BNL wants to go public to pay off some debt and have the currency to make more acquisitions and expand its portfolio of net lease properties for single tenants.
The company's pro forma financials demonstrate the effects of a recent acquisition of an industrial property portfolio.
Given the unknown future effects of the Covid-19 pandemic on the firm's portfolio and acquisition options, the market opportunity for single tenant net lease properties is intriguing one.
The base rent collection for the second quarter of 2020 and July was 93 per cent and 96.5 per cent of the amounts due, as shown in the following chart:
Source: S-11 Filing
Note that this is only collections of the base rent. In the near future, the firm may be exposed to reduced rent increases or renewals of lease options as tenants renegotiate rent bumps or other aspects of their terms of tenancy.
BNL has a large number of restaurant tenants hit particularly hard by the pandemic, so I'm not optimistic that their past financial performance will necessarily be indicative of future outcomes.
As of 30 April 2020, the REIT retail sector had produced among the worst performances of the major equity REIT categories, as shown in the chart below:
However, the firm's acquisition of industrial properties, which have been less affected by the pandemic, may offset the exposure to restaurants and other retail.
J.P. Morgan is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 68.9% since their IPO. This is a top-tier performance for all major underwriters during the period.
When we learn more details about the IPO’s pricing and valuation assumptions, I’ll provide an update.
Expected IPO Pricing Date: To be announced.
(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)
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