Broadstone Net Lease, Inc. (BNL) Earnings Call Transcript

Hello, and welcome to Broadstone Net Lease's Third Quarter 2026 Earnings Conference Call. My name is Matthew, 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 Maedl, Director of Corporate Finance and Business Analytics at Broadstone. Please go ahead.

Thank you, everyone, for joining us today for Broadstone Net Lease's Third Quarter 2026 Earnings Call. On today's call, you will hear prepared remarks from Chief Executive Officer, John Moragne; President and Chief Operating Officer, Ryan Albano; and Chief Financial Officer, Kevin Fennell. All 3 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, which 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. For a more detailed discussion of risk factors that may cause such differences, please refer to our SEC filings, including our Form 10-K for the year ended December 31, 2025, and note that such risk factors may be updated in our quarterly SEC filings. Any forward-looking statements provided during this conference call are only made as of the date of this call. With that, I'll turn the call over to John.

Thank you, Brent, and good morning, everyone. Before turning to our quarterly results, I would like to quickly address the stark change in the capital markets and macroeconomic environment that we have all experienced recently. While the moves have been materially negative over the last quarter, since this management team took over in 2023, our team has consistently demonstrated our ability to operate this business through broader market volatility of all kinds. We will continue to operate the playbook that has worked since we started on this journey: disciplined execution, creative thinking and controlling our own destiny. As many of you have heard from us over the last couple of years, our degree of selectivity has remained elevated for some time and recent market moves serve more as a validation of our position than as disruption to our plans. In fact, this is exactly the kind of environment we built our strategy for in the first place. Strong same-store growth and prudent balance sheet management, combined with a differentiated growth strategy that provides long-term visibility into attractive growth without reliance on the usual heavily marketed net lease acquisition channels works in any environment, but particularly one suffering from the type of volatility and uncertainty that we are seeing today. On to the results. The third quarter was a continuation of the progress we have been driving toward all year and really over the last 3 years. We generated AFFO of $0.39 per diluted share, a 5.4% increase over the third quarter of last year. We returned to the public equity markets for the first time in 4 years, completing a $259 million forward equity offering. We started 3 new build-to-suit developments totaling $326 million and 6 others reaching stabilization during the quarter. With our capital already at work and our path forward clearly defined, we believe we enter the fourth quarter well positioned to deliver on our full year guidance and to carry our momentum into 2027. During the third quarter, we invested $236.6 million, comprised of $63.8 million in a single industrial acquisition, $137.1 million in build-to-suit developments, $35.1 million in transitional capital and $0.6 million in redevelopment. The acquisition, an approximately 544,000 square foot industrial property was completed at an initial cash capitalization rate of 7.7% with a 15-year lease term and 2% annual rent increases, resulting in a straight-line yield of 8.8%. The 3 build-to-suit developments we started this quarter totaled $325.8 million of estimated project cost at a weighted average initial cash capitalization rate of 8.4% and a straight-line yield of 11.3%. In addition to our Colorado project, we started 2 retail projects in Manor, Texas for Hobby Lobby and Academy Sports. As noted earlier, we stabilized 6 build-to-suit developments during the quarter, totaling $95.3 million of estimated total project investment at a weighted average cash capitalization rate of 7.3%. Additionally, subsequent to quarter end, our $115 million Southwire project reached stabilization with a first year cash capitalization rate of 7.8%, adding to the success of the quarter. Today, our in-process build-to-suit pipeline now stands at approximately $456 million, of which approximately $150 million has been invested, leaving approximately $306 million of remaining estimated investment. From that in-process pipeline, we expect approximately $36 million of incremental annualized base rent to come online between the fourth quarter of this year and the end of 2027. Approximately $2 million of that arrives in the fourth quarter, approximately $31 million arrives in the first half of 2027 as Colorado and other projects reach rent commencement and the balance follows in the back half of 2027. That equates to over 8% growth on our current ABR of $449.5 million from projects that are already committed, under construction and capitalized, providing a degree of forward visibility into growth that is rare in our space. Our in-place portfolio continues to perform as designed. We ended the quarter approximately 100% occupied on a square footage basis with all but one of our 767 properties subject to a lease. And as of the date of our release, we had collected 99.9% of base rents due for the quarter. We also remained active with dispositions, selling 3 properties during the quarter for gross proceeds of $12.5 million at a 6.6% capitalization rate. That brings our year-to-date total to 13 properties sold for gross proceeds of $86.7 million at a weighted average capitalization rate of 6.3% on tenanted properties. Project Triboro remains a key priority for us, and we remain cautiously optimistic that we will achieve the 2026 goals we set out for this project at the beginning of the year. Ryan will provide a more detailed update shortly, including our progress towards this year's major milestones. On the capital front, we took a significant step this quarter, completing our first public equity offering in 4 years, selling 12.65 million shares at $20.50 per share for estimated gross proceeds of approximately $259 million in connection with forward sale agreements. Together with approximately $167 million of forward sales under our ATM program at a weighted average gross price of $20 per share, we now have approximately $409 million of expected net proceeds from unsettled forward equity. That capital positions us to fund our committed pipeline regardless of the ongoing volatility in the capital markets. Our approach has not changed. We will remain disciplined and opportunistic across all of our capital sources, and we will continue to match fund our investments. Kevin will take you through the details of our balance sheet and funding plan in a moment. Based on our year to-date performance and the visibility our build-to-suit pipeline provides, we are reaffirming our full year 2026 AFFO per share guidance of $1.55 to $1.57 with a midpoint of $1.56, representing nearly 5% earnings growth over 2025, and we are raising the ranges for both investments and dispositions. The momentum we are carrying into the fourth quarter and 2027 is the product of years of disciplined execution, deliberate portfolio construction and a build-to-suit platform and differentiated growth strategy that is delivering at scale. I am excited about what we have in front of us and happy to hand the call over to Ryan and Kevin, who will each walk you through more of what is driving our confidence.

Thank you, John, and good morning, everyone. This quarter showed our platform working at scale. We started $326 million of new build-to-suit developments, stabilized another $96 million and continue to advance our redevelopment projects in Project Triboro. Let me walk you through where the pipeline stands today, how our in-place portfolio is performing, our redevelopment activity and then provide an update on Project Triboro. Starting with the pipeline. As of today, our in-process build-to-suit investments now total approximately $456 million across 7 projects, roughly 83% of which are industrial. The pipeline carries a weighted average estimated cash yield of 8%, a weighted average straight-line yield of 10.4%, supported by a weighted average lease term of 14.8 years and annual rent escalations of 2.7%. These are tenant-driven, mission-critical developments structured from the outset to mitigate the risks that typically accompany ground-up development. The 6 projects we stabilized this quarter, 2 industrial and 4 retail, are now contributing to ABR and several more are expected to follow close behind. Our Southwire facility in Bremen, Georgia, a $115 million, 1.2 million square foot project, also reached stabilization this month, and our Academy Sports project in Magnolia, Texas is targeted for November. Turning to our in-place portfolio. Occupancy was approximately 100% on a square footage basis at quarter end. Third quarter same-store rental revenue grew 0.7% year-over-year. Contractual rent increases contributed 1.9% of growth across our same-store portfolio, including 2.1% for industrial. The headline number was held back by approximately $1.2 million of prior year rent from 2 industrial properties that are now under redevelopment. Excluding those 2 properties, same-store growth would have been approximately 1.9%, in line with our year-to-date growth. We have had strong execution year-to-date on both 2026 and 2027 lease renewals, achieving a 111% recapture rate. As we look ahead to 2027, our track record gives us confidence in both managing upcoming expirations and finding opportunities to create value through our redevelopment efforts. Redevelopment continues to be a differentiated source of value creation. Our first project, the conversion of a functionally obsolete office asset in the Chicago MSA into approximately 156,000 square feet of industrial space is progressing. Total estimated project investment is approximately $17.9 million, of which approximately $3.7 million has been invested to date. The property carried original ABR of approximately $1.4 million, and we expect stabilized ABR of approximately $2.7 million with substantial completion targeted during Q2 of 2027. We are in active conversations with multiple prospective tenants who are potentially interested in this property. Our second project is our Hoffman Estates, Illinois property, which we moved into redevelopment at the start of the third quarter after evaluating re-leasing the property, a vacant sale and several redevelopment scenarios prior to the lease term ending. We estimate a total investment of approximately $28.4 million, including the property's remaining basis and plan to repurpose the existing structure. Target stabilization is anticipated for Q3 2028 with estimated stabilized ABR of approximately $3.3 million, in line with the original property ABR while significantly reducing the office component of the building square footage and meaningfully improving the quality of the building and overall value. Now turning to Project Triboro. As a reminder, this is a large site in Northeastern Pennsylvania, more than 550 acres of land with a committed 1 gigawatt power supply. We have approximately $154 million invested in the project as of September 30. As you all have heard many times before, we do not underwrite Project Triboro as a single outcome investment and each of the 3 distinct paths create real value for shareholders, monetizing the land in the near term, building a hyperscale data center campus or building 4 large box industrial buildings. We have continued to invest in this opportunity while creating value and maintaining optionality for all paths forward. On site work, we continue to progress horizontal activity that is common to both an industrial and a data center development. and the first of 4 building pads is nearly ready for vertical construction. Various stages of horizontal work continue across the remaining land. On power, we continue coordination efforts with PPL and are in the process of finalizing our ESA and CSA. Our on-site substation design and engineering continues to progress and time lines remain intact for the initial power delivery anticipated during the first half of 2028. On zoning, we have continued to engage in constructive dialogue with the borough to advance the project under consideration and address the concerns of the borough's residents. In all cases, we expect clarity on zoning, power and tenant demand this year, which supports our target of deciding among our 3 paths by year-end. We remain very excited about the value creation opportunity that Triboro represents and look forward to communicating our progress in the near term. With that, I'll turn the call over to Kevin.

Thank you, Ryan. During the quarter, we generated adjusted funds from operations of $77.8 million or $0.39 per share, representing a 5.4% increase over the third quarter of 2025. Results benefited from same-store rent growth, recent investment activity and from build-to-suits reaching stabilization. General and administrative expenses were in line with expectations with core G&A of $7.4 million, trending towards the low end of our full year guidance of $30 million to $31 million. With respect to the balance sheet, we ended the quarter with total debt of $2.9 billion and pro forma net leverage of 5.4x, down from 5.9x last quarter, reflecting the forward equity we raised that we intend to settle alongside rent commencements in future quarters. Between the August offering that John already highlighted and our ATM activity, our total outstanding expected net proceeds from unsettled forward sale agreements were approximately $409 million as of September 30. On our last call, we also discussed our new $300 million senior unsecured delayed draw term loan, and we have drawn $100 million to date. Additionally, with $428.8 million available on our revolving credit facility at quarter end, we have over $1 billion of in-place liquidity available to fund the $337 million of remaining estimated investment in our build-to-suit projects as well as additional opportunities. Looking ahead, we will continue to assess all potential sources of funding, managing around a pro forma leverage target of 6x. Last week, our Board of Directors increased our quarterly dividend by 1% to $0.295 per share, payable to holders of record as of December 31, 2026, on or before January 15, 2027. Now turning to guidance. Given our year-to-date performance and the visibility from our build-to-suit pipeline, we are reaffirming our full year 2026 AFFO guidance range of $1.55 to $1.57 per diluted share. This guidance is based on investments of $700 million to $800 million, revised higher from $600 million to $800 million; dispositions of $150 million to $200 million, revised higher from $100 million to $150 million; and no change to total core G&A expenses of between $30 million and $31 million. Given our portfolio performance to date, we are also reducing our bad debt assumption to 25 basis points. As always, it is worth reminding everyone that our per-share results for the year are sensitive to the timing, amount and mix of investment and disposition activity as well as any capital markets activities that may occur during the year. Our guidance now includes less than $0.005 per share of estimated dilution from approximately 350,000 to 600,000 weighted average shares related to our outstanding forward equity under the treasury stock method. Please reference last night's earnings release and supplemental for additional details. And we will now open the call up for questions.

[Operator Instructions] Your first question comes from the line of Eric Borden with BMO Capital Markets.

The first question is just on Triboro. It's encouraging that you're still working towards a decision by year-end. But as you sit here today, which of the remaining items is most important to determining that path forward, whether it be zoning, the power agreements or getting a tenant commitment?

Thanks, Eric. It continues to move forward. We've had really good, as Ryan said, constructive dialogue with the borough, trying to make sure that we're going about this the right way and responding to local resident concerns and providing sort of the best possible sort of mutually beneficial answer for this moving forward. I think we've heard us say all year that there's 3 things here. There's zoning, there's power and there's the tenant. And I think in terms of order of priority, they fall in that order. We can't have the conversation around power or the conversation around the tenant unless we know for sure that we've got the data center zoning squared away. So that's where a lot of our attention has been. That's not to say that we haven't continued to work constructively with PPL as they think about their transmission distribution lines, the construction of the substation that's going to be on the property, the ESA and CSA, as Ryan had said, and that we have not continued to have good sort of preliminary dialogue with potential tenants. But of course, the tenants are waiting for that zoning to be taken care of. So the most important thing for us is to have that tenant -- excuse me, the zoning squared away. And our expectation is that, that should happen by the end of the year, and then we can move forward with the other 2 pieces in short order thereafter.

Great. And then maybe just switching gears a little bit to looking ahead to 2027. I understand that you're not providing guidance, but the rent commencement schedule gives us a helpful starting point. But how should we think about the main offsets between your embedded rent growth and the AFFO per share growth? I understand that interest expense and G&A are large contributors, but curious if there's any other offsetting factors there.

Eric, it's Kevin. I think you've got them pretty well targeted. A variable that seemingly changes every day, certainly every week, is the interest rate environment. And so that's one we'll get sharper on as we move across the calendar year, but you've got the right ones to be focused on.

Your next question comes from the line of Anthony Paolone with JPMorgan.

I'd probably just start with just cap rates and yields, both for your pipeline of developments and what you're seeing on the acquisition side and whether you can comment as to what the adjustments so far have looked like or where you think things need to be for you to greenlight a new project?

Yes. So obviously, with everything that's changed in the last 90 days in terms of interest rates and overall market and transaction activity, we're seeing what everyone would expect. There's a bit of a slowdown. There's a flight to quality. We, as you know, are not participating in a meaningful way in the heavily marketed deal flow that's out there. What we are seeing is sort of expectations for good solid deals are probably up 25 to 50 basis points, deals that may have priced and executed previously that are more highly levered PE-backed. In a lot of cases, there's no bids. They're not trading. So that's why, for us, as I said during my remarks, our strategy is specifically designed for an environment like this. As sort of the volatility that the transactional market is experiencing, we're still looking down at an in-place build-to-suit pipeline of more than $400 million that has really attractive yields on it, both upfront initial cash yields as well as straight-line yields. We continue to see good opportunity in the build-to-suit space, and we're working towards executing on a handful of new ones that we hope to be able to do in the next couple of quarters to continue filling out that ladder of build-to-suits going into the end of '27 and through 2028. So we think our strategy is well designed for this. We're still seeing good opportunities for value, and we think the way that we have built this strategy with the focus on the long-term accretive growth of those build-to-suits and then filling it in with relationship-based direct off-market opportunities on the acquisition side, the more traditional acquisition side, is going to be a winning formula going into 2027.

Got it. And then you've talked about in the past just leaning more towards a bit more self-funding through dispositions of the things you develop over time. And I was just wondering if you think that's been impacted by the change in the rate environment. And in particular, I think you're now in the clear-to-sell zone on UNFI. And I think that's been one in the past you've talked about that could be a potential large source of capital at an attractive price. And so any implications there to the thinking with the change in the environment?

Yes. So I may actually just start with sort of how we're thinking about what we have in place right now from a dry powder standpoint. We've got $500 million or more of dry powder in hand right now that we can deploy into good, attractive accretive investments with an in-place cost of capital based off of the work that Kevin has done this year in the equity and debt capital markets in the low to mid-6s. So we've got dry powder that we can deploy and have it be accretive to earnings. And we don't have to be thinking too strongly about the dispositions like we did in 2023, 2024 when we were working through our portfolio repositioning. That being said, we are doing more. I mean, as you saw, we increased our disposition guidance for the year. That is both a combination of incremental assets that Mike Caruso and his team have been working on, thinking about selling, finding good opportunities to move them along, and then also sort of the traditional risk mitigation-type stuff that we would do. Built into that is a bit more of a chunkier one. We are contemplating a sale of our transitional capital investment in our Sunset Hills Retail Center. So that is a big piece of why we increased the guidance for the year. If we execute on that, we'll be able to redeploy that into the existing pipeline as well as sort of pair that up with the capital that we've got from a dry powder standpoint. So I just want to emphasize, first and foremost, that we've got plenty of dry powder that's at a great cost of capital for us to redeploy accretively into the investments that we're seeing, particularly our build-to-suit pipeline. And then we have the flexibility to go out and drive more through our disposition strategy, which -- it was real nice when the sun was shining on us for a couple of months there over the summer, but we've been controlling our own destiny through sales and other activities to provide our funding for the last 4 years. So this isn't -- nothing new for us.

Your next question comes from the line of Jay Kornreich with Cantor Fitzgerald.

I wanted to ask about the Colorado development. Has there been -- or within that about the potential for the second building on the site there. I guess, have there been discussions with the tenants that have progressed since the original announcement or any visibility into that potential second building materializing?

Yes. So we've continued to have conversations with that tenant about sort of Colorado 2.0 and doing the next one. No decision has been made. As I've said to investors for a while now, I think they continue to be in a place where they want to make sure that, that project is going to go well. We are providing the vertical construction, the powered shell construction. We're not doing the MEP work. That's going to be on the tenant. And so the tenant also has substantial work that they need to be focusing on and thinking about. So it's a combination not only of making sure that our side of the project executes well. And I can tell you it is right now. We actually started going vertical last week. The site photos are pretty interesting to see that project move along at a much faster clip, given the prefabricated construction that's at play there versus some of the other tilt-wall construction that we've been seeing in some of our other build-to-suits. So it's been super interesting for us. But I think that's probably a 2027 decision at some point for that tenant, and we're cautiously optimistic that they'll move forward with it.

Okay. I appreciate that. And then just in terms of the amount of unsettled forward equity and thinking about the timing of when you settle that, should we expect that to be more of a match funding approach with the completion of developments or a more ratable approach as you're providing capital along the process of developments?

Match funding along completion is a more reasonable assumption. I'd say sort of mid-quarter convention around that is probably pretty reasonable.

Your next question comes from the line of Caitlin Burrows with Goldman Sachs.

Maybe just on the build-to-suit pipeline of future deals. I realize that the cadence of those announcements can be lumpy, but I guess the last 2 now were in August. So I was just wondering if the interest rate volatility has impacted that in-process discussion. And when you think of the customer and why they're working with you, I imagine it's because they want to grow their business. So have their own plans changed? And how sensitive are they to shifts in your required returns?

It's a little bit of both. I think we are seeing some situations where the tenants are taking a little bit more time to think through their decisions. So that's not a surprise, given the shift change in interest rates and how they're thinking about financing alternatives relative to the build-to-suit and the cost and all those things. So it's not surprising. The conversion time line on build-to-suits is always long. So we're never banking on those things moving at a very fast clip. And then on the flip side, our financing equation changed as well dramatically in the last 90 days. And so we went back and had some difficult conversations with some potential deals to make sure that we were getting the appropriate pricing relative to the way that we're thinking about our in-place cost of capital and opportunity costs and all those things. And so there are a handful of deals that we decided not to pursue any further because it just wasn't going to work and we couldn't get to a place where it made sense. All that being said, the pipeline is still robust. We are still seeing good opportunities. There's lots of things that we're excited about and hope to have some announcements in the near term to put out there as long as we can find a way for both sides to get comfortable with making sure that the economics continue to work in a fairly changing volatile world.

Got it. Okay. And then just I saw, it looked like a couple of developments actually stabilized earlier in the third quarter. So congrats on that. I guess I'm wondering if there's anything specific to call out on what drove it and if it could be repeatable. But also as we think of the full year guidance, you also mentioned that you lowered bad debt. So wondering if there was any offsetting factors that we should consider in terms of why the AFFO guidance was not moved.

I think on the timing piece, Caitlin, it's sort of project specific. You've seen us be more or less plus or minus 45 to 60 days from our original estimates. We do our best to tune those in as we get closer to completion. I don't know if there's anything thematic to call out on that piece. And on the guide, the treasury stock piece of this equation was less than $0.005, but when we're talking about a guidance range of $0.01 to $0.03, that's certainly a contributor to sort of holding the line on the range.

Your next question comes from the line of Upal Rana with [ Key ].

Kevin, you have some debt maturities approaching and some existing swaps rolling off. How are you weighing refinancing early, extending hedges or retaining floating rate exposure there? And what kind of increase in the all-in borrowing cost should we anticipate to underwrite in our models?

Yes. Look, I think the name of the game on that front has been be opportunistic. You saw us last year go in September, we're always evaluating longer and fixed. Naturally, in this environment, we're staying shorter. I think our floating rate exposure is probably bouncing between 20% to 30% of total debt, and that's probably not a long-term target. And so with the swaps rolling as well, there's definitely incremental exposure [indiscernible] as it relates to sort of total headwinds, that's sort of a future decision. I think the maturities we have, we have control of. We have the delayed draw term loan to handle them. We have a very supportive bank group on the back end of the year if we needed to think about that one differently. But the opportunistic piece for us is still in play, thinking about longer and fixed, so 7- to 10-year options at, call it, 110 over to 125 over as the marginal debt cost. It's not an unreasonable assumption. But in the very near term, I would say staying shorter and floating is probably a clear answer.

Okay. All right. That's helpful. And then maybe on Triboro, I'm sure you've had plenty of conversations with potential tenants. Is there anything you can share on some of the conversations you are having? Is there anything particular they're looking for or asking for as it relates to the property or lease or anything that they're concerned about from the executive order that it's requiring?

Conversations have been constructive. I would continue to characterize them as very preliminary. People don't want to spend a huge amount of time digging into all the details and negotiating a lease until they know that it actually can be a data center. So that's why we're focused on getting the zoning done first and foremost. And as I said, we continue to be cautiously optimistic about that for this year. But the thing that we have heard and we continue to see is that demand is not dropping. We are continuing to hear from tenants that they have real demand for these types of projects, and they're looking for these types of assets. One of the things that has positioned us, we think, and we hope to be in a much better position than others, is that we have continued to pursue the horizontal site level work on this. So in terms of being able to sort of hit the gear a little bit harder to shift it from the work that we've done today to starting construction on the substations, the initial buildings that would be a part of Phase 1, and getting to delivered power sometime in 2028, we think, positions this asset incredibly well, relative to the demand that we are hearing continue to exist and the interest that we're seeing from tenants on a preliminary basis.

Your next question comes from the line of Linda Tsai with Truist Securities.

Versus 90 days ago, has the general line of thinking with respect to the ideal outcome for Project Triboro changed, given the shift in your cost of capital?