In 2014, Broadstone Net Lease (BNL) closed over $245 million of acquisitions. Currently, the REIT owns 248 properties across 32 states. BNL’s strong history of successful acquisitions has been possible due to an availability of debt and equity capital when attractive triple net lease properties come to market. Broadstone’s Capital Markets team raises equity throughout the year and the Acquisitions team seeks to deploy that capital in a timely manner so that shareholders can achieve attractive returns. BNL typically buys properties (or portfolios of properties) valued from $5 million to $100 million and targets a 50% leverage ratio, portfolio-wide.
Back in 2006 and 2007, when the nascent company was making its first acquisitions, BNL’s brief operating history limited the types of debt financing available to the REIT, so it implemented individual property-level mortgages.
In 2008, BNL secured its first revolving credit facility, and its capital stack began the evolution towards its current structure. A revolving line of credit is the most practical way for an offering like BNL to leverage intermittent acquisitions without having to engage a lender to close each transaction. The REIT is able to draw down the line of credit when necessary and repay it with available funds at a later date.
BNL’s first revolver was used primarily as a bridge to more permanent financing. The REIT shifted from mortgaging individual properties to using multi-asset mortgages under a master loan agreement. Unlike the earliest mortgages, which placed burdensome restrictions on BNL’s ability to amend or modify any of the underlying tenant leases without permission from the lender, the master loan agreement allowed for limited substitution of collateral and the release of real estate parcels subject to certain conditions. However, even with enhanced rights, Broadstone still found multi-asset financing to be restrictive and encountered many of the same issues as with individual mortgages, making the master loan agreement only a temporary solution.
Over time, as the Broadstone Net Lease portfolio grew and management demonstrated its ability to successfully execute its investment strategy, BNL’s creditors expanded its line of credit and BNL entered into its first term loan facility. This facility (as well as subsequent ones) was unsecured and used a borrowing base to determine the loan amounts and availability and reflect compliance with covenants. A borrowing base allows for flexibility in adding, substituting, and releasing properties, so that the borrower is able to make changes to the makeup of its portfolio without substantial negotiation with the lender. With this flexible borrowing base, BNL can sell portfolio properties to realize gains for investors as well as add newly acquired properties upon closing. Additionally, as BNL purchases new properties and contractual rent increases go into effect, BNL revalues its portfolio and recalculates the borrowing base each quarter.
The transition from mortgaging individual properties to unsecured loans has been beneficial for BNL for several reasons. One benefit is the presence of an “accordion feature,” which allows BNL to increase the facility amount as the borrowing base increases. It is an easy way for the REIT to expand the existing loan facilities to meet its current capital needs without entering into a new debt instrument. BNL recently exercised the full accordion feature on its multibank unsecured credit facility which first closed in October 2012 and was recast in June 2014. The latest funding was completed in less than 30 days and positions BNL for robust acquisition activity in 2015. BNL’s six existing banks increased their commitment to the REIT by $185 million.
The covenant structure of unsecured loans is preferable to that of individual property mortgages. With mortgages, each property is subject to its own set of covenants. If a particular tenant has trouble paying its lease, it could negatively impact the covenants for that specific asset. The covenants on unsecured loans apply to the entire borrowing base. While BNL has had a very good track record with tenant performance and tenant defaults have not been a problem, the presence of covenants on a portfolio basis rather than a specific asset basis helps de-risk the REIT’s capital structure. In addition, this structure benefits the banks, too, as they are afforded better diversification of collateral because they have exposure to the entire portfolio at a low loan-to-value, rather than one-off assets.
Another advantageous element of BNL’s current capital structure is the lack of prepayment penalties in the revolving credit facility and the term loans. Because the timing of acquisitions does not perfectly align with the inflow of equity capital, BNL can draw down on the revolver to make acquisitions and subsequently replenish it with equity and cash flows. If prudent, additional cash flows can be used to pay down the term loan without penalty, which serves to reduce overall leverage levels. This allows the REIT to manage its leverage and reduce borrowing and carry costs while preserving flexibility.
To further improve its capital structure, the REIT swaps the unsecured debt’s floating interest rates to fixed rates to mitigate interest rate risk and capture longer term fixed rates. BNL’s Acquisitions team executes deals at carefully diligenced and negotiated cap rates, based on the attributes of property and market conditions. Layering swaps with various maturities on the debt allows BNL to lock in desired spreads and to balance the overall portfolio’s average spread as rates change over time. It also mitigates the amount of interest rate exposure that BNL faces in any one year.
BNL’s capital structure is constantly evolving to meet the fund’s current needs in an efficient manner. BNL has recently crossed the $1 billion in assets under management mark, and an investment grade credit rating may not be far off, which would open up a whole new set of possibilities in terms of capital pricing and structure optimization.