Shift To Industrial And Retail Assets Will Lower Risk But Higher Interest Rates May Pressure Earnings

Key Takeaways

• Portfolio diversification towards industrial, retail, and restaurant assets aims to lower risk and stabilize or boost revenue growth.
  
• Strategic focus on build-to-suit projects and efficient asset management practices are set to enhance earnings and maximize revenue retention.
  
• Higher interest rates, vacant assets, and market unpredictability are pressuring margins and leasing revenues, presenting risks to earnings growth and reliable rent collections.

Catalysts

Broadstone Net Lease, Inc. (the “Corporation”) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2008.

• Broadstone Net Lease is repositioning its portfolio towards industrial, retail, and restaurant assets, away from clinical healthcare. This diversification is expected to lower portfolio risk and stabilize or boost future revenue growth.
  
• The company's robust build-to-suit pipeline with an estimated $405 million in committed development projects is set to deliver initial cash yields in the mid
• to high 7% range and straight-line yields exceeding 9%, which is likely to enhance future earnings.
  
• With strategic focus on long-term build-to-suit projects, Broadstone Net Lease plans to secure approximately $33 million of incremental Annual Base Rent (ABR) by the first half of 2026, positively impacting future revenue and earnings.
  
• Efficient asset management practices, such as engaging re-leasing activities 24 months prior to lease expiration, are expected to minimize rollover risk and maximize revenue retention, potentially bolstering net margins.
  
• Sustained reductions in General and Administrative (G&A) expenses and interest costs are positioning Broadstone for modest current growth while paving the way for higher growth in 2025 and 2026, thereby supporting better net margins and earnings growth.

Broadstone Net Lease Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Broadstone Net Lease's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.3% today to 28.3% in 3 years time.
• Analysts expect earnings to reach $137.2 million (and earnings per share of $0.71) by about January 2028, down from $141.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $172.5 million in earnings, and the most bearish expecting $97.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.2x on those 2028 earnings, up from 20.8x today. This future PE is greater than the current PE for the US REITs industry at 26.0x.
• Analysts expect the number of shares outstanding to decline by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.1%, as per the Simply Wall St company report.

Broadstone Net Lease Future Earnings Per Share Growth

Risks

• The incremental pockets of credit risk due to the prolonged higher interest rate environment can impact entities with less flexible capital structures, leading to potential revenue and earnings fluctuations.
  
• The presence of higher property operating expenses due to vacant assets and increased expenses is putting pressure on margins, potentially impacting net earnings.
  
• The reduction in lease revenue caused by the health care simplification strategy indicates a temporary decline in earnings and revenues as clinical health care assets are being sold off.
  
• The inherent unpredictability of the traditional net lease acquisitions market adds uncertainty to revenue forecasts, which could negatively impact future earnings growth if regular way transactions do not materialize due to unfavorable market conditions.
  
• Watchlist tenants, including those in the consumer-centric and healthcare sectors, present possible risks to revenue and earnings due to potential credit events and their impacts on reliable rent collections.

Valuation

• The analysts have a consensus price target of $18.62 for Broadstone Net Lease based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $22.0, and the most bearish reporting a price target of just $16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $485.1 million, earnings will come to $137.2 million, and it would be trading on a PE ratio of 32.2x, assuming you use a discount rate of 7.1%.
• Given the current share price of $15.59, the analyst's price target of $18.62 is 16.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.