Tactical Exit And Risky Investments Spell Troubled Waters Ahead

Key Takeaways

• Exiting clinical healthcare and shifting investments towards specialized industrial and QSR assets could lead to earnings volatility and capital requirement issues.
  
• Heavy investment in build-to-suit and forward commitment opportunities carries significant development and leasing risks, affecting future net margins.
  
• Broadstone Net Lease's strategic shifts and active management indicate potential for increased earnings, revenue growth, and margin improvement through efficient capital allocation and focused investment in growth sectors.

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.

• The company is undergoing a strategic exit from clinical healthcare, which might affect near-term revenue as these assets are divested and proceeds are redeployed, potentially impacting earnings until new investments fully compensate for the lost income.
  
• Broadstone Net Lease is heavily investing in build-to-suit and forward commitment opportunities, which, while offering higher potential returns, carry development and leasing risks that could affect future net margins if projects do not proceed as planned or face delays.
  
• The mention of adjusting investment disposition and cash G&A ranges hints at operational adjustments that might affect the company’s expense structure and profitability ratios, possibly impacting net margins negatively if cost savings are not as significant as anticipated.
  
• Focusing on specialized industrial and QSR build-to-suit assets to capture higher going-in cash cap rates shifts investment strategy towards sectors with different risk profiles, potentially influencing revenue volatility and earnings depending on market demand and tenant performance.
  
• The strategy to reduce healthcare exposure and invest in development opportunities might lead to temporary earnings dilution or require additional capital, affecting return on investment and earnings per share until these projects generate stable cash flows.
  

Assumptions

• Analysts are assuming Broadstone Net Lease's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 36.6% today to 29.8% in 3 years time.
• Analysts expect earnings to reach $142.1 million (and earnings per share of $0.71) by about September 2027, down from $155.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.1x on those 2027 earnings, up from 22.1x today. This future PE is greater than the current PE for the US REITs industry at 29.4x.
• Analysts expect the number of shares outstanding to grow by 0.39% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Risks

• The company's transition strategy, including the successful sale of clinical healthcare assets and redeployment into strategic growth areas like specialized industrial and QSR build-to-suit assets, indicates efficient capital allocation and portfolio optimization, which could lead to improved revenue and net margins.
  
• Broadstone Net Lease's active management and creation of a diversified investment pipeline, especially in build-to-suit and closed/committed investments, showcase potential for increased earnings through higher going-in cash cap rates and straight-line yields than traditional acquisitions.
  
• The company's reported ability to maintain a strong AFFO guidance despite strategic exits from certain investments signifies stable earnings potential, which could counter a decline in share price with solid financial performance indicators.
  
• The significant emphasis on build-to-suit transactions within key growth sectors, expected to generate attractive returns and contribute positively to net asset value accretion, highlights potential for long-term growth in revenue and earnings.
  
• Broadstone's strategic focus on sectors less impacted by economic downturns, combined with their ongoing efforts to manage and mitigate tenant credit risks, may support continued strong occupancy and rent collection rates, underpinning stable revenue and potentially enhancing net margins.

Valuation

• The analysts have a consensus price target of $18.79 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 $14.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $476.5 million, earnings will come to $142.1 million, and it would be trading on a PE ratio of 32.1x, assuming you use a discount rate of 6.9%.
• Given the current share price of $18.25, the analyst's price target of $18.79 is 2.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.