Broadstone Net Lease: An Industrial REIT Powerhouse With A 7.8% Yield (NYSE:BNL)

Broadstone Net Lease, Inc. (NYSE:BNL) is a well-managed and growing industrial-focused real estate investment trust that has considerable potential for FFO expansion in 2024.

Broadstone Net Lease is poised to acquire more industrial properties this year, which could fuel the trust’s FFO growth and also lead to yet another dividend hike for shareholders.

I think that Broadstone Net Lease is a solid Buy-And-Hold investment, as the trust’s valuation has improved a lot lately. The trust’s stock is far from being expensive and has a promising risk/reward.

My Rating History

Broadstone Net Lease offered passive income investors a well-leased real estate portfolio as well as a dividend yield exceeding 7% last year, which translated to a Buy recommendation on my part.

With inflation accelerating up again in March, I think that Broadstone Net Lease’s rent escalators are a valuable lever for FFO growth, as is the company’s focus on industrial property acquisitions.

With the stock also dipping in 2024, I think the stars align to buy Broadstone Net Lease at a very compelling FFO multiple.

Portfolio Review

As of December 31, 2023, Broadstone Net Lease owned 796 properties that were leased to 220 tenants in 53 different industries. The portfolio was spread out over 44 U.S. states and included 7 properties in Canada as well.

Though Broadstone Net Lease has considerable exposure to industrial properties, the real estate investment trust also owned healthcare, retail, restaurant, and office properties. Broadstone Net Lease produced annualized base rent of $392 million, with about 52% of this rent coming from the industrial sector.

Broadstone Net Lease’s industrial assets make up the core of the real estate investment trust’s asset base. The trust is mainly focused on manufacturing, distribution and warehousing facilities, which together accounted for more than half of industrial properties in BNL’s real estate portfolio.

The focus on distribution and warehousing particularly makes Broadstone Net Lease a beneficiary of growing eCommerce transactions in the economy, a theme that I recently highlighted in my review of STAG Industrial, Inc. (STAG).

The favorable growth prospects of the eCommerce industry obviously support Broadstone Net Lease’s ongoing change in the portfolio mix, which shifted greatly towards industrial properties in the last couple of years.

At the end of 2018, only 31% of assets were allocated to the industrial real estate segment, compared to 52% at the end of 2023. I anticipate this shift to continue in 2024 as industrial properties remain in high-demand and promise industrial real estate investors long-term FFO growth potential.

FFO Upside Tied To Rent Escalators

Inflation is turning out to be a real nuisance again, as the latest CPI report suggested that inflation is here to stay for a while longer. Prices, on an annualized basis, rose 3.5% in March, up from 3.2% in February. Thus, REITs that include rent escalation provisions in their leases have potential for organic FFO growth that could provide an offset to rising prices for investors.

A solid 86% of the trust’s leases contained fixed rent escalators and the average rent escalation rate, across real estate categories, is 2.0%. Combined with a 99.2% rent collection rate in 4Q-23, Broadstone Net Lease’s core portfolio fundamentals point to growing FFO in 2024, even if inflation keeps going up.

In its peer group of diversified REITs, Broadstone Net Lease has the third-largest amount of industrial investments (as percent of total portfolio investments) and the second-highest rent escalation rate of 2.0%. As such, I think BNL provides reasonable inflation protection for passive income investors that look to protect themselves against a devaluation of their incomes.

FFO Growth Through Acquisitions

Broadstone Net Lease is growing its FFO primarily through targeted acquisitions in the industrial segment. Since 2019, Broadstone Net Lease invested a total of $2.86 billion in the acquisition of new real estate, or about $572 million annually. Of this sum, $2.06 billion, or 72% went entirely to the acquisition of industrial real estate, highlighting how important this property group has become for management as a main driver of FFO growth.

Broadstone Net Lease’s AFFO rose 9% YoY in 4Q’23 to $71.3 million. As a matter of fact, BNL’s AFFO rose in every quarter in 2023, partially because of robust acquisition activity in 2022.

More growth is ahead as the trusts anticipated to grow its acquisition volume by up to 4 times compared to 2023: Broadstone Net Lease guided for $350-700 million in acquisitions in 2024.

Broadstone Net Lease’s FFO growth resulted in strong dividend coverage. BNP paid out 74% of its FFO in 2023 with the pay-out ratio moving in a range of 67-81% in the last year. The dividend, thus, is very well-covered by FFO and, importantly, is growing. STAG Industrial, which is a pure-play industrial REIT, had a 2023 core FFO pay-out ratio of 64%.

Attractive FFO Multiple

I think it is entirely possible for Broadstone Net Lease to generate mid-single digit FFO growth in 2024, particularly with a strong acquisition volume of up to $700 million anticipated this year.

BNL earned $1.52 per share in FFO in 2023 and a 5% growth rate implies $1.60 per share in FFO as a potential guidance point in 2024. This in turn implies a 9.2x FFO multiple for Broadstone Net Lease, which compares against an FFO multiple of 15.6x for STAG Industrial.

Broadstone Net Lease’s FFO multiple compressed from about 10.9x at the beginning of the year, possibly because of concerns over higher-for-longer rates. The trust’s relatively short history as a public company (it became public in 2020) may also have contributed to some profit-taking. From a risk/reward angle, I think Broadstone Net Lease makes an attractive value proposition for passive income investors, particularly because the dividend is growing.

Why BNL Might See A Contracting FFO Multiple

Broadstone Net Lease is concentrated in industrial real estate, which, on one hand, provides an opportunity for above-average FFO growth, but also comes with a certain amount of risk.

If the industrial REIT market were to consolidate or slow down, Broadstone Net Lease’s strategic shift towards industrial properties may not pay off and the trust may decide to scale back its acquisitions, which in turn would most probably lead to diminished FFO growth prospects.

My Conclusion

Broadstone Net Lease is a compelling REIT investment option for passive income investors that don’t want to be concerned with constantly having to re-balance their investment portfolios.

BNL is overweight industrial properties, which makes the trust a compelling bet on the growth of the industrial real estate market, particularly as far as the trust’s rent escalators are concerned. The pay-out metrics also look rather solid to me and I anticipate Broadstone Net Lease to grow the percentage of industrial real estate assets in 2024 as well as its dividend.

I think BNL could achieve high single digit FFO growth this year, which would most likely also tend to translate into dividend growth. Buy.