Executive Summary / Key Takeaways

• Broadstone Net Lease is strategically transforming into an industrial-focused, diversified net lease REIT, leveraging a differentiated growth model centered on build-to-suit developments to provide visible, de-risked future revenue growth.
• The company has substantially completed its clinical healthcare portfolio simplification, pruning risk and freeing up capital for reinvestment into higher-quality, core industrial and retail assets.
• A robust pipeline of committed build-to-suit projects, totaling over $300 million, offers attractive yields (mid-7s cash, mid-8s to low-9s straight-line) and is expected to add approximately 5.6% to current ABR by mid-2026, funded primarily through internal liquidity and dispositions.
• BNL maintains a strong, investment-grade balance sheet with ample liquidity ($825.9M Revolver capacity as of Q1 2025) and no material debt maturities until 2027, positioning it to capitalize on investment opportunities without relying on equity raises at current valuations.
• While facing macroeconomic uncertainties, including potential tariff impacts and tenant-specific credit risks (reflected in a 125 bps bad debt reserve for 2025 guidance), the diversified portfolio and proactive asset management are designed for resilience.

Setting the Stage: A REIT in Transition

Broadstone Net Lease, Inc. (BNL), established in 2007 and operating as an UPREIT since 2008, has evolved into an industrial-focused, diversified net lease REIT. Listed on the NYSE, the company specializes in acquiring, owning, and managing single-tenant commercial properties under long-term net leases, primarily across the United States. With a seasoned management team averaging a decade with the company, BNL has built a portfolio comprising 769 properties across 44 U.S. states and four Canadian provinces as of March 31, 2025.

The company's strategic direction is currently defined by a significant transformation initiated in 2024: a deliberate shift away from clinical healthcare assets towards a core focus on industrial, retail (including restaurants and medtail), and other properties. This portfolio simplification strategy, largely completed by the end of 2024, aimed to reduce exposure to specific tenant credit and lease rollover risks inherent in the divested assets, while strategically redeploying capital into investments aligned with BNL's long-term vision.

This strategic pivot is underpinned by a differentiated growth model built upon four core pillars: maximizing embedded same-store net operating income growth, investing in revenue-generating capital expenditures with existing tenants, cultivating a laddered pipeline of build-to-suit development projects, and selectively pursuing traditional acquisitions. This approach seeks to provide more predictable, de-risked growth compared to relying solely on the often volatile traditional acquisition market.

The broader commercial real estate landscape has been shaped by challenging macroeconomic conditions, including rising interest rates since late 2022, which have increased the cost of capital and created a disconnect between buyer and seller pricing expectations. These dynamics have constrained transaction volumes across the net lease sector. However, certain trends, such as the potential for onshoring manufacturing and distribution capabilities, are creating specific opportunities, particularly within the industrial sector.

In this competitive environment, BNL operates alongside larger, more established net lease REITs like Realty Income (O) and W. P. Carey (WPC), as well as growth-oriented players like NetSTREIT (NTST) and Spirit Realty Capital (SRC). While BNL holds a moderate market share, its strategic emphasis on industrial assets and a diversified tenant base differentiates it. Competitors like Realty Income boast greater scale and a heavier retail focus, while W. P. Carey offers broader global diversification but carries exposure to the office sector. NetSTREIT has demonstrated faster growth rates, and Spirit Realty Capital, while similar in focus, has faced tenant concentration risks. BNL's competitive positioning is strengthened by its disciplined underwriting and proactive asset management, which can lead to better tenant retention and risk mitigation compared to some peers. The company's "technology" in this context is less about physical product innovation and more about the sophisticated analytical processes and data utilization in its underwriting, tenant monitoring, and asset management functions, which contribute to its ability to identify and manage risk effectively across its diverse portfolio.

Portfolio Evolution and Strategic Execution

BNL's portfolio composition reflects its ongoing strategic shift. As of March 31, 2025, the portfolio comprised 59.8% industrial, 31.3% retail, and 8.9% other properties based on ABR. This represents a notable increase in industrial weighting following the clinical healthcare simplification strategy, which reduced clinical and surgical assets to just 3.2% of ABR by the end of 2023. The remaining clinical assets, along with office properties, will be managed through a more traditional asset management approach, with dispositions occurring opportunistically to maximize value rather than adhering to a strict timeline.

The portfolio remains highly diversified, with 204 tenants across 55 industries, and no single tenant accounting for more than 4.0% of ABR. This diversification, coupled with a high occupancy rate of 99.1% and a weighted average remaining lease term of 10.0 years (excluding renewals), provides a stable income base. A key operational strength is the embedded growth from contractual rent escalations, present in 97.5% of leases and averaging 2.0% annually. This provides a measure of organic revenue growth and inflation protection, a feature that compares favorably to some peers with lower average escalation rates.

The build-to-suit development strategy is central to BNL's future growth narrative. Management views this as a way to create high-quality, mission-critical assets for creditworthy tenants, often sourced through direct, relationship-based channels that bypass the intense competition of the open market. As of Q1 2025, BNL had six in-process build-to-suit projects under construction, representing an estimated total investment of $305.9 million. These projects are expected to deliver attractive initial cash yields averaging 7.4% and weighted average straight-line yields of 8.9%, significantly higher than typical yields observed in the current traditional acquisition market. This pipeline is projected to contribute approximately $22.6 million in incremental ABR as projects reach stabilization through 2026, representing a visible 5.6% growth on the current ABR base. The recent $78.2 million build-to-suit project with Prologis (PLD) for Stellantis's (STLA) subsidiary FCA U.S. LLC in the Atlanta MSA exemplifies the strategy's focus on large-scale, high-quality industrial assets for strong credits. BNL structures these deals with mechanisms like GMP contracts and budget contingencies to mitigate traditional development risks, including potential cost volatility from factors like tariffs on construction materials.

Revenue-generating capital expenditures with existing tenants and selective traditional acquisitions complement the build-to-suit program. In Q1 2025, BNL invested $61.8 million in completed acquisitions and revenue-generating CapEx at a weighted average cash cap rate of 7.2%, demonstrating continued opportunistic deployment of capital.

Financial Performance and Capital Strength

BNL's financial performance in Q1 2025 reflects the ongoing portfolio evolution and strategic investments. Lease revenues, net, increased by 3.2% to $108.69 million compared to Q1 2024, primarily driven by portfolio growth from investments made subsequent to that period. However, net income decreased significantly to $17.49 million from $68.17 million in Q1 2024, largely due to a lower gain on sale of real estate ($0.41 million in Q1 2025 vs. $59.13 million in Q1 2024), highlighting the impact of disposition timing on GAAP results.

Adjusted Funds From Operations (AFFO), a key non-GAAP metric for REITs, provides a clearer picture of operational performance. BNL reported AFFO of $71.8 million or $0.36 per share for Q1 2025, a modest increase from $70.9 million or $0.35 per share in Q1 2024. This result benefited from recent investments and lower operating expenses, offsetting rent loss from Q4 2024 dispositions. Core G&A remained controlled at $7.4 million for the quarter. Bad debt expense was 86 basis points in Q1 2025, primarily due to non-payment from Stanislaus Surgical.

The company maintains a strong balance sheet, crucial for funding its growth strategy. As of March 31, 2025, total debt outstanding was $2.0 billion. BNL operates with an investment-grade credit rating (BBB/Baa2) and targets a Net Debt to Annualized Adjusted EBITDAre ratio generally below 6.0x on a sustained basis. As of Q1 2025, this ratio stood at 5.1x (5.0x on a pro forma basis), providing significant financial flexibility. Recent capital markets activity includes the amendment and restatement of the Revolving Credit Facility, extending its maturity to March 2029 and increasing the accordion feature to $2.5 billion. A new $400 million term loan maturing in March 2028 was also secured, with proceeds used to repay a maturing loan. These actions enhance liquidity and extend the debt maturity profile, with no material debt maturities until 2027.

Liquidity is robust, with $825.9 million available under the Revolving Credit Facility as of March 31, 2025. Additionally, BNL has $360.0 million of capacity remaining under its ATM program and expects approximately $38.1 million in net proceeds from unsettled forward sale agreements by Q3 2025. This strong liquidity position supports the company's plan to fund its build-to-suit pipeline and other investments using a combination of the Revolver, retained earnings, and opportunistic dispositions, explicitly stating no current plans for equity issuance unless its share price sees a significant rerating.

Risks and Outlook

Despite a clear strategic path, BNL faces several risks. Macroeconomic uncertainty, particularly regarding interest rates and potential tariff impacts on tenants' businesses, remains a key concern. While structures are in place to mitigate build-to-suit construction cost overruns, broader economic slowdowns could affect tenant performance and demand for new facilities. Tenant credit risk, though mitigated by diversification, persists, with specific tenants in consumer-centric industries and healthcare (like Stanislaus Surgical, At Home, and Claire's (CLRS)) requiring close monitoring. The 125 basis point bad debt reserve included in the 2025 guidance reflects this known near-term risk. Foreign currency exchange rate fluctuations impact Canadian investments and borrowings, though the CAD Revolving Credit Facility acts as a natural hedge.

BNL's outlook is framed by its 2025 guidance and the visibility provided by its committed build-to-suit pipeline. The company initiated 2025 AFFO guidance at $1.45 to $1.49 per share, representing approximately 3% growth at the midpoint. This guidance assumes investment volume between $400 million and $600 million (mix of acquisitions and build-to-suit funding), disposition volume between $50 million and $100 million, core G&A between $30 million and $31 million, and a 125 basis point bad debt reserve. Management noted that while positive developments in Q1 2025 (investment momentum, Zips resolution, lower expenses) could have supported raising the guidance range, macroeconomic uncertainty warranted maintaining it for now, with a potential revisit later in the year.

A significant forward-looking target is the goal to add at least $500 million in new build-to-suit development commitments in 2025, aiming for stabilization and rent commencement in 2026 and 2027. This ambition underscores the company's commitment to its differentiated growth strategy and its potential to scale the build-to-suit program, further enhancing future ABR visibility and reducing reliance on external market conditions for growth.

Conclusion

Broadstone Net Lease is executing a deliberate transformation, shifting its focus towards a more resilient, industrial-weighted portfolio and anchoring its future growth in a differentiated build-to-suit development strategy. By substantially completing the clinical healthcare exit, BNL has pruned specific risks and positioned itself to reinvest in higher-quality assets. The visible pipeline of committed developments, offering attractive yields and de-risked future ABR growth, stands as a key differentiator in the current competitive landscape, where traditional acquisition opportunities are often constrained by pricing and quality concerns.

Supported by a strong balance sheet, ample liquidity, and a proactive approach to asset and risk management, BNL is well-equipped to fund its strategic initiatives and navigate ongoing macroeconomic uncertainties and tenant-specific challenges. While the 2025 guidance reflects known near-term risks, the foundation laid in 2024 and the momentum in the build-to-suit pipeline provide a clear path for a return to more attractive growth in 2025 and the potential to scale that growth in 2026 and beyond. Investors should monitor the execution of the build-to-suit pipeline, the impact of the macroeconomic environment on tenant health, and the company's ability to achieve its target for new development commitments in 2025 as key indicators of future performance.