In September 2020, Broadstone Net Lease (BNL -0.14%) became a public company, selling shares at $17 each. That was right in the middle of the coronavirus pandemic, but a heavy industrial focus was the probable attraction for investors, as shares climbed to around $28 in 2021 as homebound shoppers bought more things online. The stock has since started a long downtrend, as interest have rates moved higher and life has returned to a more normal pace. Today, the stock is back to roughly $17, but after a number of dividend increases, the yield is a very attractive 6.6%. Here's why it looks sustainable.
The business model
Broadstone is a net-lease real estate investment trust (REIT). That means it owns single-tenant properties for which the tenant is responsible for most property-level expenses. While any single property is a high-risk investment (it's either 100% occupied or 0% occupied), across the REIT's roughly 800 properties the risk is fairly minimal.
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Net lease properties also tend to come with long lease terms, with Broadstone's average remaining lease length at just over 10 years. That's long enough to last through a typical business cycle, providing important consistency should the economy falter. Adding to the allure is an investment grade-rated balance sheet, which speaks to a strong financial foundation. Again, should the REIT face economic adversity, it will be doing so from a good position.
And in the first quarter of 2023, the adjusted funds from operations (FFO) per share of $0.34 more than handily covered the $0.28-per-share dividend. That's an adjusted FFO payout ratio of roughly 82%. For a net lease REIT, that's completely reasonable. Given 99.4% occupancy and a 100% rental collection rate, it's likely that Broadstone can maintain the dividend with relative ease. Dividend increases are likely to come along with portfolio growth, noting that the $3.3 billion market cap REIT is still small enough that a few acquisitions can move the needle on the top and bottom line.
Treading water
All, however, is not perfect here. Specifically, the REIT has been in something of a holding pattern. Through the first six months of 2023, for example, it has sold $121.3 million worth of properties but purchased only $80.1 million. So the REIT is basically shrinking right now, which isn't great. And it helps explain the penny-per-share drop in first-quarter adjusted FFO compared to the same stanza of 2022.
Broadstone isn't making these buy/sell decisions lightly. The average selling capitalization rate in the first half was 5.7% while the average buying capitalization rate was 7.1%. The lower the cap rate, the higher the valuation of a property, so management is basically selling high and buying low. That's exactly what you'd like to see happen.
This method is often called capital recycling in the REIT sector, with the company looking to accumulate "dry powder" for well-priced acquisitions. Given that acquisitions are unpredictable and often lumpy, it's hard to match up sales and purchases with precision. Investors should probably view the current approach as prudent given the rising rate environment, which is causing some uncertainty in the property market.
Meanwhile, Broadstone has a fairly well-diversified portfolio. About 52% of rents are industrial (with 13 percentage points of that from warehouse space), 17% healthcare, 13% restaurants, 12% retail, and 6% office. There's some overlap across some of these groups, so what would typically fall into "retail" at other net lease REITs is probably somewhere between 25% and 30% of rents here, but the big takeaway is that Broadstone has multiple levers to pull as it looks to put its dry powder to work... when the time is right.
Going nowhere in an exciting way
Rising interest rates have not been kind to REITs, with Broadstone's stock price decline all the way back to where it IPOed as an example. But this REIT's business hasn't exactly gone nowhere. The portfolio is bigger than it was at the IPO, the adequately covered dividend has been increased multiple times, and management is working to ensure that it puts cash to work where it will have the most impact, even if it has to hold some dry powder while it looks for attractive acquisitions.
This relatively small and young REIT probably won't be a good fit for conservative dividend investors, which would probably be better off with larger net lease REITs such as Realty Income and W.P. Carey. But they both have lower yields. If you can handle a little near-term uncertainty, Broadstone's generous 6.6% yield might just be worth the risk.
