Hello. And welcome to Broadstone Net Lease’s Second Quarter 2023 Earnings Conference Call. My name is Jordan, and I will be your operator today. Please note that today’s call is being recorded. I will now turn the call over to Mike Caruso, Senior Vice President of Corporate Strategy and Investor Relations at Broadstone. Please go ahead.

Thank you, Operator. And thank you everyone for joining us today for Broadstone Net Lease’s second quarter 2023 earnings call. On today’s call, you will hear prepared remarks from CEO, John Moragne; President and COO, Ryan Albano; and CFO, Kevin Fennell. All three will be available for the Q&A portion of this call. Before we begin, I would like to remind everyone that the following presentation contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially due to a variety of factors. We caution you not to place undue reliance on these forward-looking statements and refer you to our SEC filings including our Form 10-K for the year ended December 31, 2022, for a more detailed discussion of the risk factors that may cause such differences. Any forward-looking statements provided during this conference call are only made as of the date of this call. I will now turn the call over to John.

Thank you, Mike, and good morning, everyone. Thank you all for joining today’s call. As we detailed in last night’s earnings release, I am pleased to report another strong quarter of results and thoughtful capital allocation as we turn the page on the first half of 2023. Our mission is to deliver sustainable long-term growth and value creation for BNL shareholders and we believe that the prudent and selective approach we have chosen to employ this year has laid the foundation for that. Our second quarter results were driven by solid same-store portfolio performance and accretive capital recycling efforts. BNL is positioned to continue to provide predictable results for our shareholders in the second half of the year and beyond, because of our solid and diversified portfolio, our patient and disciplined execution strategy, our growing pipeline of accretive opportunities to invest capital and our flexible and fortified balance sheet. Starting with our existing portfolio of 221 unique tenants, who operate across 54 different industries. Our best-in-class diversification has defensively positioned us to provide durable and consistent cash flow across all market cycles. We continue to view our tenant and industry diversification as a key differentiator for Broadstone, which when combined with top tier annual rent escalations of 2%, provide significant downside risk mitigation benefits, especially in difficult or uncertain markets. Our real estate portfolio, which is predominantly leased to industrial and defensive retail and restaurant tenant continues to perform exceptionally well, as evidenced by 99.9% rent collections during the second quarter and 99.4% occupancy as of June 30th. As of quarter end, only two of our 801 properties were vacant and not subject to a lease. As always, we are closely monitoring the health of all our tenants, but especially those who may be more susceptible to the evolving challenges…

Thanks, John, and thank you to all of our listeners who have joined us today. Beginning with the status of our existing portfolio. Our tenant base remains highly resilient despite many of the challenging macroeconomic headwinds they have faced year-to-date. While we closely monitor our entire tenant roster on a routine basis, there are no overarching thematic trends of note at this time. From an individual tenant standpoint, I am pleased to provide an update regarding a few tenants on our watchlist that we have been closely monitoring for several quarters. First, Red Lobster’s turnaround continues to gain momentum as the company returned to profitability during the first quarter of the year as a result of Red Lobster’s concerted effort to grow same-store sales, invigorate customer interest, cut unnecessary overhead and lower labor cost. Thai Union remains fully committed to Red Lobster and has publicly communicated its support of the business. We will look to confirm these trends over the next several quarters beginning with Thai Union’s second quarter results, which will be released in the coming days. As for our individual sites, we continue to monitor site level performance and are encouraged by what we are seeing at the property level. As we have discussed on previous calls, we remain confident in our investment and in the underlying value of the real estate, capturing low double-digit unlevered IRRs on properties sold to-date. We have recouped over 75% of our initial investment, even with 19 remaining locations that are currently earning cash yield north of 7.5% on invested capital. Our remaining sites represent 1.6% of total ABR as of quarter end. Second, we are encouraged by the recent steps taken by Carvana to increase the company’s financial flexibility as it pursues profitability and return to growth. Carvana’s second quarter results…

Thank you. Ryan, and good morning, everyone. Turning to our financial results. During the quarter, we generated AFFO of $69 million or $0.35 per share, an increase of 2.9% in per share results quarter-over-quarter. Results were largely driven by same-store portfolio growth and performance. During Q2, we incurred $7.9 million of cash G&A, which tracks in line with our guidance for the year. We are always focused on maintaining financial flexibility to support our ability to be opportunistic when appropriate. We ended the quarter at 5.0 times leverage on a net-debt-to-annualized adjusted EBITDA basis that decreased quarter-over-quarter. As of quarter end, our revolving line of credit was largely unutilized at just over 10% with over $875 million of remaining capacity. As a reminder, our substantially fixed rate debt capital structure has insulated us from many of the upward pressures associated with the string of rate hikes and higher for longer interest rate expectations. Moving forward in the near-term, we will evaluate the potential opportunity to swap portions of our outstanding revolver balance to fixed rates as we gain additional visibility into our acquisition and disposition pipelines in the second half of the year. Our ATM remains a core component of our overall capital market strategies that allows us to opportunistically consider raising equity alongside investment volume. Given no activity in the quarter, we maintained approximately $145 million of capacity on the current program. At our quarterly meeting, our Board of Directors approved a dividend of $0.28 per common share in OP unit, consistent with the prior quarter and is payable on or before October 13, 2023. The dividend is well covered, aligns with our targeted AFFO payout ratio in the mid-to-high 70% range and represents an attractive dividend yield relative to many of our peers. Finally, we are maintaining our 2023 per share guidance today with an AFFO range of $1.40 per share to $1.42 per share. We are also maintaining our acquisition, disposition and G&A guidance ranges that we previously communicated. Please reference last night’s earnings release for additional detail and we will evaluate guidance revisions as we progress further into the second half of the year. With that, we will now open the call up for questions.

[Operator Instructions] Our first question comes from Ki Bin Kim of Truist Securities. Ki, please go ahead.

Thanks, John. Good morning. Can you -- given where your equity price is priced today, can you just talk about your capital sources and what’s in your thinking for how to grow the company over the next year?

Yeah. Sure. Ki Bin, I think, it’s been consistent this year so far. I’d point you to our dispositions and the success we have had there as our source of capital and you marry that with where our leverage has been sitting around that 5 times leverage. There’s a lot of capacity to meet and/or exceed our investment targets for this year to get us into next year pretty comfortably.

And for your dispositions, what is like an approximate cap rate that we can assume in our models going forward?

I think as you continue to assume high 5s, lower 6s. I mean we have had a lot of success so far this year as you heard in our remarks and in the release last night, $168 million and 5.9% on tenanted properties. The focus we have had throughout this year and going into next year is going to be continuing to control our destiny and providing ourselves with the type of spread that we want for the investments that we are executing on, even though we are being selective and disciplined about where we are deploying capital. So we will be focused on trying to make sure that on the opportunistic dispositions, we do pursue that we can maintain that spread.

Okay. And if I could squeeze a third one here. The Green Valley Medical Center, can you just talk about what were some of the milestones that weren’t met, and from a financial impact standpoint, let’s say that milestone isn’t met in this year, what is the downside impact to, from a financial standpoint?

Yeah. So financial standpoint for this year isn’t huge, I mean we have been collecting rent on that property for the entirety of the year. The difficulty with getting into some of the specifics is this as a private tenant. This is information that’s not publicly available in the same way as a public bankruptcy or things like that. But the types of operational hurdles that you can expect from trying to open up a new hospital, particularly opening up a new hospital that had to shut its doors and so not only do you have all of the hurdles you would expect to have there, but working through trying to purchase assets and worked through the Medicare reimbursement process with the prior operator, as well as looking at current financing conditions, it takes a lot of money to open up a new hospital and with financing conditions changing over the course of last 12 months to 18 months it’s been incrementally more difficult for them.

Okay. Thank you.

Our next question comes from Michael Gorman of BTIG. Michael. Please go ahead.

Yeah. Thanks. Good morning. Maybe you could spend a little bit more time talking about the revenue generating CapEx side of the opportunity set and just give a sense for as you are seeing these new opportunities come in, maybe what’s the scale of the opportunity and how do you approach the underwriting, understanding these are already tenants that exist in the portfolio, but how do you approach underwriting adding new CapEx here and is there a potential in terms of changing some of the in-place lease terms to make them more favorable and then also kind of the duration of the average project?

Yeah. Great question and it’s something that we are spending a lot of time focused on. We think that that’s a clear differentiator for us in this space as an industrial focus diversified net lease REIT with 52% of our ABR tied to our industrial assets. We think we have a unique opportunity to use revenue generating CapEx, tenant improvement projects, building expansions as a way to add additional return for our shareholders and differentiate ourselves from the rest of the net lease space, because there are more opportunities to do this in industrial than you would see in retail and restaurant, for example. The length of these projects is, it varies. There are some of these that are a few months, depending on what they are trying to do. And then if you look at some of the build-to-suits or some of the larger expansions, they can last up to 12 months to 18 months or so. We look at that from an underwriting standpoint similar to anytime that we are going to be deploying new capital. There is a whole process that we have internally that we have to work through to make sure that we still feel comfortable with the overall tenant credit, that we feel comfortable with the real estate, where we sit relative to rents on a mark-to-market basis. All of those things still have to check the box. The nice thing with these that you then are not only deploying capital in a place where we feel good about the overall risk reward trade-off, but you are now improving the quality of assets already in our portfolio, which in the net lease business sometimes with the long nature of our leases is difficult to do. But you are also strengthening the relationship with that tenant for future potential business opportunities and you are strengthening the relationship that the tenant has with that site. So the likelihood that they are going to stay for the long-term and renew and be a long-term partner with us goes up. So it’s an area that we like a lot and we are pretty excited about for the future.

Yeah. I agree. That’s great. And one follow-up, John, maybe on the acquisition side. I think you mentioned the $17 billion of opportunities that you reviewed. Can you just give us a little bit of flavor in terms of kind of where the disconnect is in the marketplace? Is it still predominantly the bid-ask spread on the pricing, is it that some of these assets that are coming through don’t fit the quality, where is the disconnect there in most of the opportunities that you are underwriting?

It can always be for us. I think depending on which company you are speaking to today, the views are different, but I think everything you just said and more. As we said in our prepared remarks, we still are struggling with a number of the opportunities that are out in the market today and sort of our view of the sort of triangulation among cap rates, risk reward trade-off, underwriting, views on the overall financing market and how we should be thinking about spread investing and how we should be thinking about where our cost of capital is. And for that reason and just the general overall uncertainty in the real estate market. The economy overall appears to be doing well, relatively speaking, but real estate is experiencing its own sort of focused issues relative to rising interest rates and whatever else, where we have taken that selective disciplined approach this year, we intend to continue with that. Now all that being said, we have issued guidance at the beginning of the year and we remain absolutely confident in our ability to hit it. Our pipeline is bigger than it was in the first half of the year. There are a number of larger advanced stage opportunities that are in the pipeline that we are pretty excited about and we hope will come to fruition as we work through the rest of it. And as we came into this year, we always plan to be back half weighted and that’s what we are seeing. As Ryan said in his remarks, cap rates feel like they have plateaued a bit into that high 6, low 7 range in terms of the places where we feel most comfortable deploying capital, but just because we came into the year planning to be back half weighted and that’s what we are seeing doesn’t mean we are going start chasing deals, we have been patient and disciplined the whole year and that’s what we will continue to do.

Great. Thanks for the time.

Thank you.

Our next question comes from John Kim of BMO Capital Markets. John, the line is yours.

Good morning. On your disposition to achieve the 5.6% cap rate this quarter driven by industrial, should we expect your sales to be weighted towards industrial in the back half of the year just given the expected deals and within your disposition pool how many Red Lobsters are in there?

Yeah. There’s a handful of Red Lobsters in there. We talked about this a number of times and Ryan mentioned it again. We started with 25 of those, we are down to 19. We will continue to look to decrease that exposure for a host of reasons, but we are very comfortable with where Red Lobster sits today. I mean on a rent coverage ratio they are a full turn higher than they were at this point last year. So if we need to hold those assets for the long-term, we feel very comfortable with that. Overall, wait for the back half of the year. We will certainly continue to look for those opportunities that are a little chunkier, that are going to give us the spread we are looking for. Look to continue to do some risk mitigation, either on sort of where we think rents are at a mark-to-market basis or where we have some credit concerns. Certainly some of those sit in the industrial bucket, but I mean that would be natural, because more than half of our portfolio is industrial. But we are absolutely looking at where we can find opportunities in the healthcare space, retail and restaurant is not a spot other than sort of Red Lobster and a handful of things that we are particularly interested in with those cap rates aren’t that attractive to us from a disposition standpoint, particularly the 1031 buyers sort of pulling back a little bit, but you will see it in industrial, you will see some healthcare. So I think that’s where the balance would be for the rest of the year.

Do you expect the mix of your assets type to shift meaningfully over the next 12 months?

Not necessarily in the trend other than what you have seen in the last five years. When we look at how we have adjusted since 2018, we were 31% industrial five years ago. Since then we have acquired about $2 billion worth of assets, a little bit north of 70% of that has been on the industrial side, for all the reasons that we talked about with respect to the opportunity and revenue generating CapEx. The way that we are thinking about broader macroeconomic trends, the success of recent industrial policy in the U.S. with a massive amount of new investment on the private side, which is something north of $450 billion throughout -- spread throughout the country in the last two years, you have got new industrial construction and the way people are thinking about near-shoring and onshoring with close to $200 million this year in new construction. This is an area that we will continue to leg into. We think it’s a great differentiator for us and it’s also the place where we feel most comfortable with those tenant relationships and the opportunity to really grab value for the long-term for our shareholders. So nothing altogether that different from the trend line that you have seen. We are continuing to put the focus on industrial.

Okay. On the build-to-suit, appreciate the additional disclosure you provided. How long will it take to get the stabilized yield of 7.3%. I realize it’s 1 million square foot project? I am not sure if it takes a while to get to that level?

Ryan?

Yeah. That should -- it comes online with rent commencement date in October of next year.

So that 7.3%, the year one yield?

Yeah. Correct.

Got it.

With tenant in-place rent commencing at that time, the rent level translates into an effective stabilized yield of 7.3%, day one.

Got it. Thanks.

Thank you.

Our next question comes from Ronald Kamdem of Morgan Stanley. Ronald, please go ahead.

Hey. Just staying on that build-to-suit, maybe can you talk about maybe a little bit more color on if there’s more of those deals down the pipe even with this tenant or any other tenants, right, as you are thinking about the pipeline away from acquisitions, seems like you are leaning a little bit more towards this construction, maybe just trying to get a sense of if this one-off or is there a couple tens or hundreds more million dollars to be had here?

Yeah. Thanks, Ron. Absolutely. We think there’s a great opportunity here. This was a big jump in for us to start with in terms of the size of this deal. But I think that’s been paying off and paying dividends for us in terms of getting us comfortable with the space overall, trying to find what the right balance is between the longer term nature of the development side of this, taking on the capitalized yield over the next 18 months before it comes online at 7.3% initial year one cash yield as Ryan was just talking about. But with the comfort level that we have here, with the building set of expertise and experience that we have in it, we think there’s a real opportunity to do more, whether it’s with this tenant or others, remains to be same, whether it’s with the developer or others, remains to be same. But we are having a lot of good discussions with people and there’s a handful of things in the pipeline right now, advanced stage opportunities that would fit a similar build in terms of a build-to-suit opportunities. So we feel pretty good about it and we hope that we are going to be able to see more and working hard towards it.

Great. I guess my second question was just, if I think about, you started to take a little bit of a bigger step back on the business, obviously, you are doing -- I saw the dispositions come in through the quarter and so forth. Maybe can you talk about your willingness to maybe do more on that front as funding until the equity comes back and so forth?

Yeah. I mean that’s the plan. We are not happy with where the stock is currently trading in terms of where we would be comfortable raising equity. The short answer is higher and so we will be looking to control our destiny for as long as we need to and we think we have built up a portfolio and an internal process and ability to do that for as long as we need to. And so at this point, we came into this year with where we were trading and where we believe the markets were going to go with the belief that we weren’t be raising $1 of equity throughout 2023. We still believe that and we are going to be looking that the first time will hopefully be in a place where we will be comfortable with where the stock price is and we will be looking to do that sometime in 2024 and we will be using additional dispositions and strategic work around that to fund the rest of our growth until that point.

Great. And then if I could just sneak one more, just on the bad debt, maybe you can you remind us how much are you budgeting this year, how much have you have you sort of gone through already, obviously, I appreciate the opening comments about Red Lobster and so forth, but just on a holistic basis, how do I think about that?

Yeah. We are still holding the call at 75 basis points against revenue for bad debt and year-to-date. We are in something, I think, on single-digit basis points that we have experienced just recently.

Awesome. Thanks so much.

We have no further questions on the phone line. So I will hand back to John for closing remarks.

Thank you, Jordan. And thank you everyone for joining us today and for your continued interest and support of BNL. Enjoyed seeing many of you the past several months and look forward to connecting in the second half of the year. Thanks all. Have a great day.

This concludes today’s call. Thank you for joining. You may now disconnect your lines.