Hello and welcome to the Broadstone Net Lease's Second Quarter 2024 Earnings Conference Call. My name is Kiki and I will be your operator today. Please note that today's call is being recorded. I will now turn the call over to Brent Maedl, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead.

Thank you everyone for joining us today for Broadstone Net Lease's second quarter 2024 earnings call. On today's call you will hear prepared remarks from Chief Executive Officer, John Moragne; President and Chief Operating Officer, Ryan Albano; and Chief Financial Officer, Kevin Fennell. All three will be available for the Q&A portion of this call. As a reminder, the following discussion and answers to your questions contain forward-looking statements, which are subject to risks and uncertainties that can 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, 2023 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. With that, I'll turn the call over to John.

Thank you, Brent, and good morning everyone. I am pleased to report another strong quarter of results. We are on the cusp of substantially completing our health care portfolio simplification strategy, having fully redeployed those proceeds into closed and committed investments, and are continuing to build a strong pipeline focused on our core building blocks of growth, seeing incremental revenue generating capital expenditures with our existing tenants and build-to-suit funding opportunities with our development partners that supplement our traditional net lease acquisition pipeline. I'm exceptionally proud that we were able to successfully navigate that process. At the same time we redeployed the proceeds into attractive investment opportunities. We are incredibly proud of the progress we've made on our strategic objectives for 2024. While we recognize that the current outlook for interest rates has provided a tailwind for the broader net lease space, we believe investors are beginning to reward our consistent and successful execution on our strategic initiatives. Our shares are now trading at/or around an 18-month high, and we believe there is still plenty of room for continued multiple expansion as we fulfill our growth objectives. As we've previously reported and discussed on last quarter's call, the majority of the $217.3 million of cash flowing investments we made in Q2 were closed early in the quarter and sourced through direct relationships. Throughout the quarter, we continued to creatively source investment opportunities that fit within our buy box, notably including build-to-suit and forward commitments through existing relationships. We believe these opportunities are an important part of our core building blocks and a key differentiator in our mission to drive long-term sustainable growth. As we move into the back half of the year, we are maintaining our AFFO guidance range of $1.41 to $1.43 per share and slightly adjusting our investment,…

Thanks, John, and thank you all for joining us today. Before turning to routine portfolio updates, we wanted to expand on our growing pipeline of build-to-suit opportunities. As John mentioned, we’ve currently committed to fund seven opportunities for a total estimated cost to build of approximately $307 million. While still subject to final structuring and relevant permitting approvals, we anticipate funding of these developments will have varying construction start dates through the end of 2024 and anticipate rent commencement dates that will be phased in over the period of Q1 2025 and Q2 of 2026. Outside of these seven opportunities, there are more than $400 million of additional build-to-suit investments that we are actively evaluating as we balance this robust pipeline alongside other traditional acquisition activity. These opportunities typically represent initial cash yields in the mid 7s to low 8s, and taken together with long lease terms and rent escalations between 2% and 4% translate into straight line yields north of 9%. We believe these build-to-suit investment opportunities are highly compelling with newly constructed buildings, typically well located assets, and strong tenant credit with yields that are superior to most of the regular way transactions that we have evaluated since the interest rate hiking cycle began. Now, turning our attention back to routine updates. As John mentioned, during the first half of the year, we were able to execute on key pieces of our health care portfolio simplification strategy through the completion of a portfolio sale during the first quarter comprised of 37 assets for $251.7 million at a 7.9% cap rate. Further, shortly after the quarter, we sold the first tranche of a two-phased 15 properties health care portfolio for just inside an 8% cap rate. And the next tranche is scheduled to close in early October. As we…

Thank you, Ryan. During the quarter, we generated AFFO of $70 million or $0.36 per share, an increase of 2.9% in per share results year-over-year. Results were largely driven by lower interest expense and partially offset by lower lease revenues, both as a result of our health care simplification strategy. As John and Ryan mentioned, our portfolio continues to show resiliency, realizing 33 basis points of bad debt year-to-date, excluding Green Valley. Cash G&A continues to be well-controlled, incurring $7.8 million during the quarter, or a 1.4% decrease year-over-year. As a result, we are lowering our G&A guidance from $32 million to $34 million to $31.5 million to $33.5 million. Once again, we ended the quarter in a strong and flexible financial position with leverage of 5.1x net debt, up slightly from 4.8x at the end of the first quarter. Our net debt on a pro forma basis for our UNFI build-to-suit was 4.9x, which combined with approximately $920 million of revolver availability gives us ample capacity as we evaluate incremental investment opportunities. To reduce rate uncertainty through 2025 and mitigate some of our near-term rolling swap maturities, we executed $460 million in forward-starting SOFR swaps during the quarter. These new swaps are scheduled and are supplemental and begin in March of next year with maturity spread across 2030, locking in a weighted average SOFR rate of 3.7%. At our quarterly meeting, our Board of Directors maintained a $0.29 dividend for common share and OP unit, payable to holders of record as of September 30, 2024, on or before October 15, 2024. Given our successful redeployment efforts, our dividend remains well covered and still represents an attractive relative yield in this market environment. Lastly, we are reaffirming our AFFO guidance range of $1.41 to $1.43 per share. In addition to the cash G&A reduction I previously mentioned, we are raising the low end of investment guidance from $350 million to $400 million and tightening our dispositions range to $350 million to $450 million. Please reference last night's earnings release for additional details. And with that, we will now open the call for questions.

[Operator Instructions] The first question is from Eric Borden from BMO Capital Markets. The line is now open. Please go ahead.

Hey, good morning out there. John, you've certainly made some solid progress sourcing a number of investments, through multiple investment verticals. Just curious, not asking for guidance here, but how does the next 12 months play out for you in terms of the mix of development opportunities, peer play acquisitions and any other things that may be developing in the pipeline?

Yes, thanks, Eric. So, it's a balance here. With the $307 million and the 7 development deals that we have in the active pipeline, plus another $400 million or so in that active prospect bucket, we've got a lot of really great opportunities in the development build-to-suit that we're very excited about. As one of the core building blocks that we have for providing sustainable growth, we're very excited that we're laddering into this development process and the way that we had planned and have talked about with investors, starting earlier this year. So the strategy is playing out well, but there's still a balance. We've got 69.3 million of regular way acquisitions in the pipeline today. We still continue to be a little disappointed in the volumes that are out there, as well as what we're seeing in terms of the quality of the product and where pricing is landing. But if you've got a view towards having a little bit of relief on the interest rate side, depending on how the Fed meeting goes today, and of course, for the next 3 to 12 months or so, I think you start to see a little bit more regular way acquisition volume. The great thing with where we sit today from a balance sheet standpoint is that we're at 4.9% on a pro forma basis. We have evaluated where we would land over the course of that development pipeline, and we stay comfortably below six throughout it. And we've got ample liquidity as well as ample room to be able to do regular way acquisitions. So our goal is to be able to balance those things together and give the type of attractive growth that we know our shareholders are expecting.

I appreciate that. And then on the capital allocation side, just with shares up 23% over the last 3 months, has your thoughts on capital outlay changed? Are you willing to issue equity here today, or will the majority of future investments be funded via the capital recycling program and potentially on a leverage neutral basis?

Yes, so the equity is certainly more constructive today than it was 3 ago. That being said, we don't need any right now. We've got ample liquidity. Our leverage is well south of where we are looking to operate on a sustained basis. And we've got pretty great availability on our revolver today. We've also been very successful in the last 18, 24 months on capital recycling between the $200 million we did last year at a 6 cap in the clinical health care assets that we've been selling this year, as well as a handful of things that we've identified that we'd be able to sell if we needed to. We're very comfortable continuing to fund our growth through recycling and through dispositions if the cost of capital that we're looking at in the equity and debt markets isn't attractive to us. So opportunity set, of course, plays a role in this as well, and we'll balance all those things together, but certainly more constructive, but not where we want it to be. And it's something that we don't need right now either.

I appreciate that. And last one for me, just on the new development opportunities. Ryan, sorry if I missed this, but did you say the cash yields you're targeting are in the mid 7s up into the low 8s?

Yes, so if you're looking at the development opportunities, right now we've got upfront cash yields in the mid 7s, and then when you straight line it over the term of the lease that we're looking at, you're in that mid 8, sometimes low 9s. So very attractive relative to what we're seeing in the regular way space, which is still sort of settling in that low 7s on an upfront cash yield basis getting into the 8 on a straight line.

Thank you. Appreciate the time.

Thank you.

Thank you. The next question is from [indiscernible] from KeyBanc Capital Markets. The line is now open. Please go ahead.

Great. Thank you for taking my question. You mentioned the development funding commitments of $339 million. Any additional color you can provide on those commitments?

Yes, so we've got -- UNFI is part of that. We've got about maybe another $32 million on UNFI. We're very excited about the progress there. Looking for that to come online, late Q3, rent commencement no later than mid-October. We got about $32 million or so left, but the project we're expecting to come in slightly under budget and slightly ahead of schedule, so that feels really good. Of the $307 million in the build-to-suits for new ones, there's seven different opportunities that range from things as small as $2 million in the QSR space to as large as $170 million in distribution and manufacturing spaces. These are all from new and existing development relationships. So we're expanding the roster of folks that we're working with, and we feel really good about the active prospects that we have, as Ryan mentioned, with another $400 million or so that we're actively evaluating.

Great. That was helpful. And then in terms of the health care simplification strategy, so it looks like you complete about 65%, but on the remaining 35%, are those the one-offs that you had mentioned in prior calls that will take some time to kind of get off your portfolio?

Yes. Yes, those are all the onesie-twosies that we'll work through in a traditional asset management approach. There are some in there that have great value that we're just making sure that we're getting the right value out of, and there's a handful that will require maybe a lease extension, some tenant improvement, some work on our end to make sure that we can get the right value out of those. So the timeline on those will comfortably extend into 2025.

Okay, got it. And then lastly on maybe cap rates here. It seems like maybe, what do you think 3Q kind of trends from here and any early indication on where maybe 4Q might be headed.

Yes, I mean, we've seen cap rates sort of plateau this year on. If you look at like sort of mid market industrial, that's been really hot this year as hot as we saw it in 2022. You're getting 20 bids on any particular acquisition that's out there. You're starting to see those creep down past the low 7s into the high 6s. We're still solidly in the 7s as we think about capital allocation, so we're looking for the right opportunity. As you heard Ryan saying in his remarks, we're continuing to be very disciplined and focused on where we're looking to allocate the capital, and if we're not seeing it in regular way deals, we're very fortunate to have multiple channels that we can allocate capital to with the build-to-suits where we're getting those mid-7 upfront cash rates and those cash cap rates, and then the straight line yields in the mid 8s to low 9s. So our expectation is back after the year, you're going to start to see some more product come online as there's a little bit more certainty around the interest rates. And hopefully, we'll see a more constructive environment in terms of pricing on a risk-adjusted basis.

All right. Great. That was helpful. Thank you.

Thank you. [Operator Instructions] The next question is from Caitlin Burrows from Goldman Sachs. The line is now open. Please go ahead.

Hi. Good morning. Maybe just on the acquisition pipeline. I think you said it was about $70 million. Could you go through if to what extent that's a mix of like a lot of QSR type small deals versus just a couple larger industrial or what that mix might be as we try to get a sense for what could ultimately close.

Yes, so a portion of it is a retail acquisition, a large single site supported goods, and then the other is a fairly large industrial acquisition. So there's two deals in that pipeline.

Got it. Okay. And then back to the build-to-suit topic, I think I've kind of asked this in the past, but we've heard build-to-suit can be difficult because it's tough to get the land. So can you just talk through again how you would do that if there's been any change in thinking? And I think you mentioned in the past that you'd be working or buying from somebody who already has the land, so you wouldn't need to go, I guess, get approvals and source it yourself. But, yes, is that still the case? And how do you kind of get past that hurdle of getting the land that's attractive for this user that they want?

Yes, so that's a great question. The build-to-suit strategy is very different than your regular way net lease, sale lease back and assumption process where the land is already in hand with someone else. The way that we've been thinking about our commitments to fund developments is to have the certainty around that to be able to report it out to you all. The land needs to be in hand. It's not necessarily in our hand yet, but we'll have an opportunity to acquire it over the course of the process. But the land is under control by the developer or by the tenant, depending on the situation. We're in a place where we feel very comfortable that the business deals have been agreed to between the developer and their client and the relationship between us as the funding partner here. You're still in the process of negotiating final documentation, but our ability to have surety around that development pipeline starts with is the land under control, because that's going to be critical to whether or not the client decides to move forward with the project. And for the seven that we have and the $307 million in that pipeline, that is the case.

Got it. Okay, thanks.

Thank you. As we currently have no further questions, I'd like to hand over to John Moragne for closing remarks.

Thank you, Kiki, and thank you everyone for joining us today. We are incredibly excited and proud of all that we've accomplished so far this year, but we're just getting started. So we'll have more to come with our Q3 earnings call come October and November. Thank you all for joining us and enjoy the rest of your day.

This concludes today's conference call. You may now disconnect your lines. Thank you.