IPO Launch: Broadstone Net Lease Sets Terms For $603 Million IPO

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Broadstone Net Lease (BNL) intends to raise $603 million from the sale of its Class A stock in an IPO, according to an amended registration statement.

The company will operate as a REIT and will own over 630 U.S. properties that are primarily single-tenant net lease assets.

Rochester, New York-based Broadstone was founded in 2007 to acquire and manage a portfolio of single tenant net lease properties.

Management is headed by president and Chief Executive Officer Christopher Czarnecki, who has been with the firm since 2009 as Chief Financial Officer and was previously a commercial real estate lender and credit analyst for Branch Banking & Trust.

BNL has created a portfolio of 633 properties with 27.4 million rentable square feet producing an annualized base rent [ABR] of $288 million.

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 graphic showing the firm’s property types by industry:

broadstoneproperty

(Source: S-11 registration statement)

According to a market research report conducted by Rosen Consulting Group, the U.S single-tenant net lease market grew steadily over the five years ending 2018 as investor demand continues to rise.

For the year ended June 30th, 2019, US employers created a total of 2.2 million new jobs for the year ended June 30th, 2019, and 2.7 million new jobs for the year ended December 31st, 2018.

Data from the US Census Bureau shows that the US population has reached 327 million in July 2018, which represents an increase of 11.1 million increase over the five years ended July 1st, 2018 and an average year-over-year growth of about two million people.

The Rosen Consulting Group anticipates that due to population growth and household formation, as well as job creation and wage growth, the US economy will keep growing and thus will demand for commercial real estate rentals.

Unlike a gross lease that places responsibility for many expenses with the owner of the property, the net lease model ‘shifts the majority or entirety of expenses’ for property-related taxes, insurance, maintenance as well as utilities and capital expenditures, to the lessee, in addition to rent payments.

BNL’s recent financial results can be summarized as follows:

  • Growing topline revenue but at a decelerating rate
  • Increased adjusted FFO

Below are the company’s operational results for the past two and ½ years (Audited GAAP for full years):

broadstonepl

Source: Company prospectus

As of June 30, 2020, the company had $9.2 million in cash and $2.3 million in total liabilities.

Broadstone intends to sell 33.5 million shares of Class A common stock at a midpoint price of $18.00 per share for gross proceeds of approximately $603 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $4.9 billion.

BNL says it will use the net proceeds from the IPO to purchase the underlying operating entity units and to pay off a revolver and unsecured term loan that it used to partially fund the purchase of an Industrial portfolio of properties.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are J.P. Morgan, Goldman Sachs, BMO Capital Markets, Morgan Stanley, Capital One Securities, Truist Securities, Regions Securities, BTIG, KeyBanc Capital Markets, and Ramirez & Co.

Commentary

Broadstone is seeking public capital to purchase the underlying LLC’s operating units and to pay down some debt.

The firm’s financials indicate decelerating revenue growth but increased funds from operations.

However, the firm expects to pay an annualized $1.00 per share distribution, or a 5.6% yield based on the IPO’s midpoint price of $18.00 per share.

The market opportunity for single-tenant retail is highly uncertain due to the lingering effects of the Covid-19 pandemic on retail operations, at least over the next 12 - 18 months.

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.

At a 5.6% projected forward yield, the REIT should look enticing to dividend-oriented investors.

In an ultra low-yield investing environment, 5.6% is nothing to dismiss, with the added value of a hedge from its real estate holdings in case inflation returns after all the central bank money printing.

The question is whether BNL can maintain that expected 5.6% yield. For investors who are interested in the IPO, I would assume as the worst case that BNL will have to reduce the distribution yield to 4% as it works its way through the remainder of the Covid-19 pandemic.

If you can tolerate 4% for a year or 18 months, then the IPO is a BUY at up to $18.00 per share.

How I would play this is to watch the stock in the open market and see if there is a lower entry point than $18.00.

In any event, for investors who want a real estate hedge and a potential 5.6% yield, my opinion on the IPO is a BUY at up to $18.00 per share.

Expected IPO Pricing Date: September 16, 2020.

Glossary Of Terms

(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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