Chris Czarnecki - Chief Executive Officer Ryan Albano - Chief Financial Officer Mike Caruso - Senior Vice President of Corporate Finance and Investor Relations.

Hello! And welcome to Broadstone Net Lease’s, First Quarter 2021 Earnings Conference Call. My name is Andrew and I will be your operator today. Please note that today’s call is being recorded. [Operator Instructions]. I will now turn the call over to Mike Caruso, Senior Vice President of Corporate Finance and Investor Relations at Broadstone.

Please go ahead. Please go ahead..

Thank you for joining us today for Broadstone Net Lease’s first quarter 2021 earnings call. On today’s call, you will hear from our CEO, Chris Czarnecki and our CFO, Ryan Albano.

Before we begin, we want to remind everyone that the following presentation contains forward-looking statements which are subject to risks and uncertainties, including but not limited to those related to the ongoing COVID-19 pandemic. Should one or more of these risks or uncertainties materialize, actual results may differ materially.

We caution you not to place undue reliance on these forward-looking statements and refer you to our SEC filings, including our Form 10-K for the year ended December 31, 2020, for a more detailed discussion of the risk factors that may cause such differences.

Any forward-looking statements provided during this conference call are only made as of the date of this call. I will now turn the call over to our CEO, Chris Czarnecki..

Thank you, Mike, and welcome to everyone joining our Q1, 2021 earnings call. As always, I would first like to wish our listeners continued good health and safety. In reflecting on the time since our IPO, I’m incredibly proud of our team, how they’ve executed our strategy, managed the portfolio and the results they’ve delivered.

Our diversified strategy has produced predictable results and provided significant downside protection during this rapidly changing economic environment.

Our best-in-class geographic, property type and tenant diversification has yielded rent collections among the best in the net lease space over the past year and the first quarter of 2021 was no exception. Our portfolio operating metrics continued to reflect pre-pandemic levels, a trend that has continued for several quarters.

During the first quarter, we collected 99.8% of rent and the portfolio was 99.7% leased as of quarter end. All deferral and abatement periods have concluded, and we are currently scheduled to receive less than $500,000 of remaining deferred rent, which is immaterial in comparison to our annualized base rent of more than $302 million.

With widespread vaccine distribution efforts well under way, significant reductions in case counts across the country and all of our tenants currently open for business, we believe our normalized, pre-pandemic operating profile exhibited during Q1 should continue throughout 2021.

While most of our tenants have seen limited disruption over the past 12 months, we expect macroeconomic tailwinds to continue to strengthen for certain property types more directly impacted by the pandemic, namely casual dining.

In areas of the country that may experience a slower recovery, we believe that our granular diversification will continue to provide downside protection and position us for continued success.

What we love about our diversified strategy is that it not only provides for a differentiated advantage during challenging economic environments, but it also positions us to excel and be nimble during periods of growth.

It is no surprise that the net lease space has returned to external growth, following a temporary pandemic-induced pause during 2020. An increase in capital pursuing net lease opportunities, coupled with the pandemics creation of have and have not asset types, has resulted in the competitive acquisition environment in 2021.

Despite heightened levels of competition, our flexible capital allocation strategy continues to translate into a robust pipeline of attractive acquisition opportunities.

Our diversified approach to investing gives us flexibility and allows to selectively pursue attractive risk adjusted opportunities across a variety of asset types, despite changes in sector specific dynamics.

We’ve embraced the strategic flexibility throughout our 15 years of operating history and our investment activity during Q1, 2021 was no different. During the first quarter, we closed five transactions, comprising 28 properties for a total investment of $87.3 million.

The weighted average going in cash cap rate for acquisitions completed during the quarter was 6.4%. The leases include 1.4% weighted average rent escalations and a 15.3 year weighted average remaining lease term.

Although we’ve seen heightened competition in some of our core property types, such as industrial and quick-service restaurants, we were able to source and close acquisitions that possess risk-adjusted profiles complementary to our existing portfolio.

Acquisitions completed during the quarter were more [inaudible] towards select retail and healthcare property types, which we believe is a testament to the benefits of our diversified acquisition strategy. During the quarter, we acquired 24 select retail properties in two transactions for a total investment of $68.2 million.

The properties primarily include car washes and dollar store sites located in geographically diverse markets. The leases are subject to a weighted average rent escalation of 1.1% and have a weighted average lease term of approximately 16.3 years.

Acquiring strong performing sites under long term leases with experienced operators, is an exciting addition to the retail segment of our portfolio. We have also added four healthcare properties as part of two transactions for a total investment of $19 million during the quarter.

The properties include several plasma collection centers and a newly constructed eye care facility leased to an existing tenant. The leases are subject to a weighted average rent escalation of 2% and have weighted average lease terms of approximately 11.5 years.

We continue to view healthcare as a unique differentiator for us, and we intend to remain focused on adding attractive assets leased to tenants affiliated with large health systems or significant regional physicians groups.

Expanding on the healthcare transactions completed during the quarter, the acquisition of the newly constructed eye care facility demonstrates our ability to work with our existing tenant base to drive new growth opportunities.

Additionally, through our work on the property management side of the business, we also successfully identified and released a previously vacant healthcare property during Q1 under a new 15 year lease with the same tenant, building strong relationships that lead to new acquisition opportunities with existing tenants has been and will continue to be a key strategic focus.

Although the acquisitions we completed during the first quarter were more heavily weighted towards select retail and healthcare properties, we continue to source and evaluate opportunities across all of our core property types.

Despite some minor seasonality in volume, typical of the first quarter of the year, we are very pleased with our current pipeline and have $206.5 million of additional transactions under our control, which we define as either under contract or executed letter of intent.

These opportunities are well diversified across industrial, healthcare and select retail assets.

With nearly $300 million of acquisitions either closed during the first quarter or currently under our control, and a robust underwriting pipeline of Q2 and second half of 2021 opportunities, I would reiterate our confidence in our initial full year acquisitions guidance range of $450 million to $550 million.

Ryan will provide a more complete update on our 2021 full year guidance in just a few moments. During the quarter, we sold eight properties for $23 million at a weighted average cap rate of 7%, representing a $3.5 million gain over original purchase price.

These sales continued to reflect our disposition strategy focused on risk mitigation and included several noncore healthcare assets and weaker performing casual dining locations.

We continue to closely monitor and assess the long term impacts to segments of the portfolio that have been more directly impacted by the COVID-19 pandemic, namely casual dining and office properties.

Granular tenant diversification, long term leases, and strong tenant credit affords us the opportunity to patiently assess all available options to preserve and enhance long term shareholder value. As of March 31, our portfolio included 660 net leased properties located across 41 U.S. states and one property in Canada.

The portfolio had a weighted average remaining lease term of 10.6 years, with 2.1% in place contractual annual rent escalators. Occupancy increased 50 basis points, quarter over quarter to 99.7% as we successfully re-tenanted in three properties during the first quarter, leaving only six of our 661 total properties vacant at quarter end.

Our forward lease maturities continue to be negligible and represent just 0.3% of ABR in 2021 and a total of 2.7% of ABR through 2023. Lastly, I’d like to highlight some exciting governance related news that was announced earlier in the quarter.

During Q1, our Board of Directors nominated Denise Brooks-Williams and Michael Coke for election to the Board at our annual meeting, which will be held this month. I look forward to welcoming both nominees to the Board of Directors as each brings a wealth of experience in their respective industries. Ms.

Brooks-Williams currently serves as the Senior Vice President and CEO of the North Market, for Henry Ford Health System, a leading not-for-profit healthcare and medical services provider in Michigan. Denise has more than 30 years of experience in the healthcare industry and will contribute immensely as we seek to expand our healthcare portfolio. Mr.

Coke is the Co-Founder and current President of Terreno Realty Corporation, a publicly traded REIT focusing on infill industrial properties in six major coastal markets, and has over thirty years’ experience in the industrial real estate sector, as well as significant experience as a director and executive of publicly traded REITs.

With that, I’ll now turn the call over to Ryan, to provide additional detail on our Q1 results and our full-year 2021 outlook..

And total cash G&A between $32 million and $35 million. As we discussed during our Q4 earnings call, our per share results for the year are sensitive to both the timing and amount of acquisition, disposition and capital markets activity that occur throughout the year.

Finally, based on our performance to-date and strong acquisition pipeline, we are pleased to announce that our board meeting held on April 30, our board declared a $0.255 distribution per common share and OP Unit to holders of record as of June 30, payable on or before July 15.

The $0.005 increase represents 2% growth in the quarterly distribution rate per share. We will continue to evaluate future increases to our dividend with our board as we continue to grow our earnings base and intend to target a long term AFFO payout ratio of approximately 80%. With that, I will turn it back over to Chris for closing remarks..

Thanks, Ryan. Our teams excited to continue to demonstrate the strategic advantages of our diversified strategy, not only as it relates to risk mitigation, but also in our ability to grow through accretive acquisitions. Q1 was another excellent example of the benefits of our approach to net lease investing and portfolio construction.

I’m encouraged by our normalized operating profile exhibited during the first quarter and feel confident that we have positioned ourselves to create meaningful shareholder value in both the near and long term. This concludes our prepared remarks. Thank you for your time and attention this afternoon. Operator, you can now open the line for questions..

[Operator Instructions] The first question comes from John Kim with BMO Capital Markets. Please go ahead..

Thanks, good afternoon. There was an announced M&A transaction which indicated in the industrial sector, sub-5, cap rate for net lease industrial assets.

Can you just describe what you're seeing as far as assets that you're looking at in industrial where cap rates are today versus where they were maybe a few months ago?.

Sure. Thanks John. Yeah, we definitely saw that transaction and understood where pricing was for that. I would say you know for us, we are working on a number of industrial transactions and frankly with our diversified approach we're looking at a spectrum of cap rates and so probably just going more broadly for the second.

Definitely are seeing and working on industrial acquisitions in the low 6% cap rate range. We’re still seeing some good opportunities with the prospective term there, maybe the 10 to 15 year range and annual bumps being north of 1.5%.

Certainly things have traded past that range as well for certain instances and we were not as inclined to follow that just given the risk-reward trade off there and whatnot, and then maybe just to carry that through since pricing is always a popular discussion point.

You know on the healthcare side seeing our opportunity set probably in the mid 6% cap rate zone, there having maybe a little bit of a shorter lease term, say seven to 10, 11 years in that zone.

Still strong annual rent escalations in that 1.5% to 2% or greater zone, and then on the select retail side maybe mid to upper 6’s, more term, longer term and correspondingly potentially lower annual rent increases as well.

So that's sort of the broad spectrum of what we're seeing, but for sure the industrial segment would be in the lower end of the going in cap rate range..

So when you heard about the transaction last night or this morning and then also discussions that in the market they are seeing cap rates in the mid-4’s, does that surprise you?.

I would say there are certain transactions that we've seen go that low as well. I think it just depends on facts and circumstances and tenant credit profile and a whole host of other factors and the lease term as well.

So I would probably characterize more of the transactions going in the 5% zone, but the mid-4 I guess doesn't strike me as completely off the mark.

At the same time, I think it depends on whether you're talking about investment grade tenants or non-investment grade tenants as well, and to my knowledge the FedEx component of that portfolio is heavily investment grade, which could drive that, you know when there's a pretty diversified mix of tenants underneath of the FedEx piece as well.

So there's probably facts and circumstances that drove some of that pricing as well..

Okay, and Chris on the $206.5 million of assets you have under control, can you provide some more color on your typical closing rate when you have something under letters of intent or under contract, the timing of closing, as well as the asset mix?.

Sure. Maybe I'll start backwards going forward. I'd say the asset mix in that $206 million is a pretty nicely balanced mix between industrial, a couple of healthcare transactions and then a couple of select retail transactions as well.

Probably the only thing that isn't in there is QSR assets right now, so you know a pretty healthy balance across the board there and obviously evolving by the day. I would characterize from a timing perspective, I'd say the vast majority of it or the bulk of it at least we would expect to be Q2 closings, subject of course to ongoing diligence.

There are certain things that will be acute Q3 acquisitions within that number as well. But at the same time we're also working on transactions and that could be Q2 closes that haven't been awarded yet as well, so – but the bulk of it would still be anticipated for Q2, subject to our diligent efforts ramping up.

And then on the closing front John, one of the things we talked a lot about in the early days of the IPO and I think still holds true today is we tend to overload our front-end efforts on diligence and you know really wanting to stand behind all the LOIs and contracts we signed.

So that doesn't mean we're shortchanging this process, but it probably means we have a pretty elevated closure rate around what we actually report out there, and I think that's why we were feeling confident in being able to talk to you about those numbers today..

Thank you and I just have one more question. During the quarter you eliminated the CIO role at the company.

How does that impact your investment decision process, and is there any impact to G&A because of this?.

Sure. So it hasn't really changed our investment process at all. The only thing that is a little bit different is we've expanded our investment committee to include some of our Senior Vice Presidents who are sector lead experts on the AM and PM side and whatnot. We haven't made any corresponding adjustments to G&A.

We would anticipate continuing to look at adding some personnel to the investments team over the course of the year and so didn't really make any adjustments on the G&A guidance there. At the same time I'd also point out that our acquisitions team today is larger than when we did the IPO. We have added a few folks in the subsequent quarters.

So we feel really good about where they are performing, and I think it shows through in the forward pipeline that I just talked about..

Great! Thank you..

The next question comes from Anthony Paolone of J.P. Morgan. Please go ahead..

Great! Thank you. I may have missed this, but did you comment on the yields on your pipeline overall in terms of the $206 million, and also just contractual rent bumps given the first quarter I think was a little on the lighter side versus your portfolio average..

I'm sorry, would you repeat the second piece? And Tony, I just couldn't hear you for one second..

Yeah, the contractual bumps, because I think in the first quarter they were a little bit inside of where your portfolio average generally is..

Yeah, I'm sorry, thank you. So in terms of the yields for the under control assets is kind of exactly what I said from an underwriting perspective. So that's – probably that 6% to 7% – well not probably. It was the 6% to 7% cap rate range and you know having a weight or an individual property type drive where some of those yields fall.

I didn't – we didn't talk about the specific weightings there. In terms of the annual rent bumps, I would say that there's a range that's fairly characteristic of the property types we're underwriting, but a number of the medical and industrial still being in the 2% zone, 1.5% to 2% zone depending on each individual transaction..

Okay, and as you're out in the market looking at transactions, are there any particular types of bidders that you're going up against more frequently or not that are cutting you out of certain areas or any trends on that side in terms of who's showing up to transact?.

Not dramatically different than prior quarters. I'd say it again, because we are so diversified in the spectrum of opportunities, really it varies by asset class.

Some of the more retail oriented peers in this space would certainly be interested in some of the select retail assets we're doing and we have seen them in the last six months or so being competitors. On the medical side or the healthcare side, it varies.

Again, having a more niche focus there, we tend to see more private buyers and a little bit more of private equity oriented buyer there, and then on the industrial side, again you see certain net lease REITs being active there and they've stayed fairly consistent and a few more institutional buyers as well.

So I don't think the competition landscape has changed. I think it just varies by product type and we've seen that hang pretty consistently over the last quarter..

Okay, and a last question, just on the Art Van boxes, I think you mentioned a vacant or the occupancy pickup related to maybe healthcare in the quarter.

So does that lead you still with some Art Van to backfill or what's the update there?.

Sort of yes, and no. So we highlighted the healthcare box acquisition, because it was a really nice tie together with both continuing to grow with that tenant as they look at build-to-suit opportunities, plus them leasing some of our space.

We did lease two Art Van boxes during the quarter as well, which accounted for a good – which accounted for other two sites releasing this quarter and so then that leaves us with just fairly, with two very small assets left.

I think it's around 10% of the original ABR portfolio – ABR of the Art Van portfolio, and we're even looking at selling or leasing those. So more progress on that front, so eight of 10 have been released at this point..

Great! Thank you..

No problem. Thank you..

Our next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead..

Hi! Good afternoon. I was wondering maybe if you could just go through, you had talked about the expected cap rates for the different categories going forward, but even without industrial, the cap rate in 1Q was relatively lower.

So just wondering if you could go through kind of what contributed to the cap rates of acquisitions in the first quarter and just the expectation for that to pick up going forward..

Sure. Yes, so I think again fairly – you know it's always facts and circumstances relative to any acquisition we do, and so trying to give some degree of general framework is what I was searching for there Caitlin. You know during the quarter there was a pretty good band of cap rates as well.

I think one of the lower cap rate transactions we did was, the trade-off was having a new 20 year master lease with the leading carwash operator and so that maybe took that cap rate a little bit lower than you might have expected for a select retail asset and so that was a component of it.

But otherwise, I think mostly the entire quarter was fairly well boxed in the mid-6’s zone, so….

Got it, okay. And then for the transactions in the quarter, I think you said that they were four or five. Just wondering if you could go through how those were sourced mix of existing tenants or otherwise..

Yes, absolutely. So the healthcare deal I highlighted, which had the releasing and the acquisition during the quarter was obviously an existing tenant that we've known and have done repeat transactions with.

One of the retail opportunities was through regular way brokerage, and then one of the other select retailers that had a good chunk of dollar stores in it was with a developer that we have worked with on multiple transactions over the years as well, so that was a repeat develop of the relationship there..

Got it, okay. And then maybe on – yeah….

No, I was going to say just the take away is, you know the way I think about it is that our existing tenant base, our existing portfolio, the relationships on either the developer or direct side we have, plus the brokerage network are all important to us, and we're trying to pull from each one of those and it certainly ebbs and flows at different times, but that's the principal set of deal sourcing we're looking at..

Yeah, that makes sense. And then maybe moving on to the dividend increase, it was a little sooner than we were expecting.

So just wondering if you could go through the decision to increase the dividend now versus waiting a little bit, and what factors were taken into consideration?.

Sure. So absolutely – you know I think – and Ryan is welcome to jump in here with me as well. We're obviously looking to be in the 80% zone for a payout ratio component.

Considerations that we took through at the board discussion were obviously the performance of the portfolio and being fairly or completely back to normal at this point in pretty much every circumstance and seeing good collections trends and not having any tenant issues to speak of.

Certainly, the acquisition pace increasing and the confidence we had in where the pipeline was going and hopefully you saw that through the discussions we've had today so far.

Also factoring in the term loan savings that Ryan highlighted, that wasn't in our initial guidance, and so wanted to – you now we’re enjoying some significant benefits from that, and so all those factors together were you know one that gave us the confidence and felt like it was the right time to make a first adjustment upward..

The next question comes from Chris Lucas with Capital One. Please go ahead..

Hey! Just a quick one for me. Ryan, on the guidance you provided for us and some of the assumptions in the fourth quarter earnings call, you had noted that G&A would be between $32 million and $35 million.

I guess I'm just trying to make sure that I understand how that number relates to the first quarter result, which included severance and then you had some accelerated investing as well, so it came in a bit hot.

I’m just curious with those two, should be thinking about the aggregate number or should we be adjusting that for the sort of one-time items in the first quarter to get to that sort of $32 million to $35 million number?.

Sure. The way that I'm thinking about it right now as I look at that $32 million to $34 million, you know I'd say that – I think I've also stated before, say – call it about $8 million give or take of cash G&A on a run rate basis.

On a comparable basis I'd call this quarter about $7.6 million, and the way that I'm thinking about that is the $10.1 million of total G&A adjusting out for some of the one-time related items on severance and then some acceleration on stock based comp associated with that same departure and then as well as our regular routine stock based comp being adjusted out.

It brings you basically from the $10.6 million down to the $7.6 million, which is really the comparable number to our guidance..

Great! That's all I have, thank you..

The next question comes from Michael Gorman with BTIG. Please go ahead..

Yeah, thanks. Good afternoon. Chris, sorry if I missed it, but could you just talk a little bit about the office portfolio and how you're thinking about it strategically, and what kind of deal flow and competition you're seeing in the marketplace.

Obviously with the announced transaction activity last week, there's going to be a strategic spin off dedicated to the office space. We've seen one or two peers talk about disposing of their office portfolio. So I'm interested how you're thinking about it and what kind of investment opportunities you're seeing in the market right now..

Sure. I think you know first and foremost we've been pretty hard on a – on a hard pause with respect to office.

We continue to monitor the existing portfolio, which performance wise has been strong and we've seen a diversity of utilization among the tenants as they continue to think through their return to work component, and it's a pretty active dialogue with the tenant base there.

And I've said on a couple of different calls before, the term and the credit and the duration of the term we have, gives us a lot of opportunity to be patient and thoughtful, so you know not actively pursuing any new office acquisitions at this moment.

It's certainly possible that we could you know see one in a diversified portfolio or something, so I don't want to draw a completely bright line there for you.

You know for us, there hasn't been – at least from a pipeline perspective, a huge amount of new office opportunities that have – would have fit our traditional box, but I've certainly followed the spin off and I think we're just in a wait and see and continue to engage with our tenant base before making any further pronouncements one way or the other there, and that probably persists for another quarter or so would be my guess..

Okay, great, thanks. That's helpful..

The next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead..

Hey! Just – the first one I had was just when you're taking a step back and looking at the – having the benefit of being involved in different asset classes.

Where are sort of the best risk adjusted returns for the incremental dollar in your mind today, and maybe how has that changed for versus six to 12 months ago? So said another way, you know is there a subsector or an industry or anywhere that you really see an opportunity today versus call it six to 12 months ago? Thanks..

Yeah, absolutely! I think the spectrum I walked through, to me has some interesting puts and takes to it, so while you might be giving up or having a slightly lower going in industrial cap rate, you are still able to acquire some assets that are long term and strategic in nature, have a good long term lease and have good annual bumps associated with them.

And just maybe to contrast it on the spectrum, you know feel good about the investments we're making on the select retail side with a little bit of a higher cap rate and again, a long term, but maybe giving up a little bit on the annual bumps, so it's just weighing those things against each other and thinking about where we're most effective.

So to us, we're honestly balancing each one of those and then against individual tenant financial considerations and how strong of a tenant they are and you know what's their profile on the background.

So I think you've seen the – what we're trying to communicate here is that we have the benefit to move among these asset classes as the conditions change, and so we've been doing a little bit of that during the first quarter with healthcare, with a little bit more healthcare and a little bit more select retail, even though the portfolio is – excuse me, the pipeline is diversified going into Q2, we you know are still continuing to look at healthcare and some of those select retail opportunities, because we are seeing a nice complement to what's going on in the industrial side and to us that’s sort of the bigger picture as being able to flex between those situations and be thoughtful on all of them..

Great! And if I could just follow up on sort of the healthcare space, given sort of it's an asset class where a lot of your competitors don't have a lot of exposure to, maybe can you just talk about – when you take a step back and looking at sort of the healthcare opportunity, why do you think that most of your competitors have not looked at it? Is it just you guys are niche; you guys have built the platform? You know what's the opportunity there that you think others may be missing?.

Yeah. No, it's an interesting question, thank you. I think it's been something that we've been in for – Goodness! 15 years now. It's even before I got to the company and to me it's a spot where we’ve been able to carve out a niche that has been really differentiated and we’ve been following it for a long time.

For us, I think it's such a significant part of the economy that it only continues to grow and has continued to provide new products, and frankly the interplay between the hospital systems and some of the larger regional physicians, the groups have also been pretty dynamic and we've been able to acquire on both of those.

I think it does require some expertise and some getting up the learning curve, and you know that's a never ending process for us as we continue to think about growing our team and using our experience there. You know frankly, we took a step – another step forward to continue to expand our views on that by asking Denise to join the board.

She has a great background with 30 years in the Henry Ford Health System, and her views on real estate healthcare has been aligned with what we've thought of in this space and its fascinating to think about where it could be going as well.

So I think it's been a really good differentiator for us and the triple net lease model works, as well as it does in other components there. So we continue to favor it and want to do more there..

Great! That's all are my questions, thank you..

Thank you, Ron..

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Czarnecki for any closing remarks..

Thank you all for joining us today. We are again, continuing to be very grateful for all of your support and are appreciative for all of our investors. We wish you an excellent summer. We're very excited about our pipeline and we'll be excited to be back in front of you come August with the Q2 call and to just give you the next update along the way.

Have a great afternoon!.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..