Expanding Build-To-Suit Pipeline Will Improve Portfolio Quality Despite Potential Governance Challenges

Key Takeaways

• Focusing on high-quality industrial build-to-suit developments could drive future growth and de-risk the company's revenue profile.
  
• Expanding developer partnerships and mission-critical projects aims to enhance EBITDA margins and elevate portfolio quality.
  
• Recent board departures and strategic uncertainties could impact governance, strategic outcomes, and pose challenges to net margins amid sector instability and capital access limitations.

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 has a differentiated investment strategy, increasingly focusing on industrial build-to-suit developments which provide high-quality assets with straight-line yields in the mid to high 8% range. This strategy is expected to drive future AFFO per share growth by enhancing revenue and de-risking the growth profile.
  
• The company is leveraging existing relationships and expanding its network of developer partners, which is expected to generate a significant pipeline of build-to-suit projects, potentially adding $500 million in new developments. The focus on mission-critical industrial assets should enhance the EBITDA margins and overall portfolio quality.
  
• Broadstone has a robust development pipeline, with $227.3 million already scheduled for stabilization in 2025 and 2026. This pipeline is anticipated to add approximately $17.6 million of incremental annualized base rent, impacting revenue positively.
  
• The company’s strategic emphasis on more substantial industrial and retail properties is supported by weighted average annual rent escalations of 2%, which could lead to consistent long-term revenue growth and margin stability.
  
• Broadstone Net Lease's policy of not raising equity in 2025, unless there’s a significant re-rating of its multiple, and instead funding growth through build-to-suit projects and accretive dispositions could enhance earnings per share by effectively managing the cost of capital and limiting equity dilution.

Broadstone Net Lease Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Broadstone Net Lease's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.3% today to 22.3% in 3 years time.
• Analysts expect earnings to reach $112.8 million (and earnings per share of $0.59) by about April 2028, down from $161.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $171.7 million in earnings, and the most bearish expecting $51.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 41.0x on those 2028 earnings, up from 20.0x today. This future PE is greater than the current PE for the US REITs industry at 27.3x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

Broadstone Net Lease Future Earnings Per Share Growth

Risks

• The departure of two board members who contributed to Broadstone Net Lease's repositioning strategy could impact governance decisions, potentially affecting strategic outcomes and net margins.
  
• Continued instability in some consumer-centric sectors and clinical-oriented healthcare properties, as evidenced by recent watchlist additions, could lead to increased bad debt expenses and pressure overall earnings.
  
• The bankruptcy of Zips Car Wash and potential property rejections could result in property revenue losses, impacting total revenue and cash flow projections for 2025.
  
• The decision not to raise additional equity due to an undervalued share price may limit access to capital markets, potentially affecting growth financing options and leading to increased leverage, affecting net earnings.
  
• Reliance on build-to-suit projects with longer lead times may delay revenue recognition, potentially impacting near-term earnings growth and causing volatility in revenue projections.

Valuation

• The analysts have a consensus price target of $18.889 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 $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $505.1 million, earnings will come to $112.8 million, and it would be trading on a PE ratio of 41.0x, assuming you use a discount rate of 7.3%.
• Given the current share price of $17.1, the analyst price target of $18.89 is 9.5% 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.