Broadstone Net Lease: A Great 7% Yield Flying Under The Radar (NYSE:BNL)

There are plenty of REITs that remain at or near their 52-week lows. This is especially true among under the radar net lease REITs that many income investors may simply have forgotten about or just aren’t paying attention to. This brings me to Broadstone Net Lease (NYSE:BNL), which now yields an attractive 6.7%. In this article, I highlight what makes BNL an ideal underfollowed pick for dividend growth investors, so let’s get started.

Why BNL?

Broadstone Net Lease is an internally-managed REIT that owns single-tenant commercial properties. At present, its portfolio consists of 790 properties across 44 U.S. states, and 4 Canadian provinces.

One of the advantages of being a relative newcomer to the REIT space is that it’s able to craft a portfolio that meets the evolving needs of today’s economy. This is reflected by BNL’s strong focus on the fast-growing industrial properties segment, which represents nearly half (49%) of its annual base rent. The remainder of the portfolio is mostly healthcare (18%), restaurant (14%) and retail (12%). The last segment, office, represents just 7% of the portfolio ABR.

Like other high quality net lease players such as Realty Income (O), BNL comes with a very high leased rate of 99.3%, and a long weighted average lease term of 10.7 years. Reminiscent of the recently bought out STORE Capital (STOR), BNL gets financial reporting from the vast majority (94%) of its tenants. This enables management to consistently gauge the health of its tenant base and resolve potential tenant issues before they become bigger problems.

BNL recently announced strong third quarter results, with 100% rent collection, and generating $0.35 AFFO per share. This more than covers its recently raised $0.275 quarterly dividend at a 78.6% payout ratio, leaving plenty of retained capital as an internal funding source for growth.

Also encouraging, BNL invested $205 million across 27 properties during the past quarter at an attractive 6.5% initial cap rate. The properties come with a long weighted average initial lease term of 21 years, and come with minimum annual rent escalators of 2.0%. Notably, the majority of the new properties (86%) were industrial properties, with the remainder being restaurant, healthcare, and retail.

BNL’s robust acquisition activity continued since the start of October, closing an additional $283 million of transactions, and currently have $22 million of acquisitions under control. This puts BNL well on pace to achieve its acquisition guidance in the $900 million to $1 billion range.

Potential headwinds to BNL could be due to its lower share price, which raises its cost of equity. However, this affects all real estate buyers and sellers, and is reflected by cap rates trending higher. This was noted by the CEO during the recent conference call:

Changes in cost of capital for all public REITs without a commensurate adjustment in private asset values has forced many to take a more measured approach in the near term. We, like many of our peers, will continue to focus on prudent capital allocation during this period of public and private market dislocation.

However, we believe our broadly diversified buy box provides us the unique opportunity to allocate capital to property types where cap rates have or will continue to expand at a more accelerated pace due to sector-specific supply and demand characteristics.

I’m encouraged by the cap rate expansion we are currently seeing in our pipeline and expect to see further movement in the near term as seller pricing expectations reset in the wake of changes in buyer cost of capital.

Meanwhile, BNL maintains a strong BBB rated balance sheet with a safe net debt to EBITDA ratio of 5.5x (4.8x on a proforma basis for the settlement of BNL’s outstanding forward equity offerings as of the end of September).

I also find BNL to be rather cheap at the current price of $16.52 with a forward P/FFO of 11.2. By comparison, W. P. Carey (WPC) is a bigger net lease REIT that’s also tilted towards industrial properties, and comes with a much higher P/FFO of 15.2.

Plus, while WPC is now trading at around the middle of its 52-week range, it appears the market has not yet awakened to BNL, as it’s still trading down in the dumps, as shown below.

Sell side analysts have a consensus Buy rating on the stock with an average price target of $21.92, implying potential for strong double digit gains including the dividend.

Investor Takeaway

Broadstone Net Lease is executing well on its growth strategy and exhibits strong portfolio fundamentals. It appears however, that the market has not yet appreciated its quality, giving value investors an opportunity to pick up a well-covered 6.7% dividend yield on the cheap. BNL is a solid value buy at present for potentially strong total returns.