Broadstone Net Lease's Q3 2025: Contradictions Emerge on Build-to-Suit Announcements, Leverage Strategy, and Credit Risk

Guidance:

• Full-year 2025 AFFO raised to $1.49–$1.50 per share (4.2%–4.9% growth).
• 2025 investment volume expected $650M–$750M; disposition volume $75M–$100M.
• Board approved a $0.29 dividend per share payable to holders of record Dec 31, 2025.
• Expect little to no bad debt for remainder of 2025 and maintain discipline around ~6x sustained leverage.

Business Commentary:

• Investment Activity and Growth Strategy:
• Broadstone Net Lease invested $204 million in accretive acquisitions and development projects in Q3 2025, aiming for $552.6 million by year-end, including $353.4 million in new property acquisitions and $150.2 million in build-to-suit developments.

• The growth was driven by a strategic focus on e-commerce, reshoring, and favorable market dynamics in logistics hubs.

• Build-to-Suit Program and Value Creation:

• Broadstone Net Lease's build-to-suit pipeline will deliver approximately $28 million in additional ABR between Q4 2025 and the end of 2026, with an aggregate estimated investment of $374.6 million.

• This program provides long-term, high-quality derisked growth with initial cash capitalization rates of 7.5% and straight-line yields of 8.9%, contributing to an embedded AFFO growth profile.

• Capital Markets and Financial Flexibility:

• Broadstone successfully issued $350 million of 5% senior unsecured notes, marking a return to the investment-grade bond market after two years, with proceeds used to pay down revolver balances.

• The transaction reflects strong investor interest, supporting the company's financial flexibility and growth capital needs.

• Bad Debt and Portfolio Performance:

• Year-to-date bad debt totaled 30 basis points, with no bad debt incurred during Q3, benefiting from successful navigation through tenant credit events like At Home and Claire's without any lost rent.
• The company's proactive approach to tenant credit issues and rigorous underwriting have led to a strong portfolio performance with 99.5% lease occupancy.

Sentiment Analysis:

Overall Tone: Positive

• Management: "we are raising our full year 2025 guidance to $1.49 to $1.50 of AFFO per share." Company invested $204M in the quarter, "collected 100% of our rents," and completed a $350M, 5% note issuance that was nearly 7x oversubscribed — signaling strong execution and market demand.

Q&A:

• Question from John Kim (BMO Capital Markets): Is selling/ capital recycling of build-to-suit developments your preferred outcome or just a potential source of income?
  Response: Prefer to hold build-to-suits long-term, but will opportunistically sell to capture upside and fund growth if equity cost makes it accretive.

• Question from John Kim (BMO Capital Markets): Are you seeing more competition for build-to-suit projects, and would proceeds from sales need to be redeployed via 1031 exchanges or can they fund developments?
  Response: Seeing modestly more competition but focus on direct relationships to avoid auctions; tax-efficient redeployment (e.g., 1031-style) would be considered and redeployments will typically mirror acquisition activity.

• Question from Upal Rana (KeyBanc): When considering issuing equity via ATM, are you targeting a specific share price or is it driven by the opportunity set?
  Response: Decisions driven more by the investment opportunity set and incremental cost of capital versus pipeline returns; share price is a factor but not the primary driver.

• Question from Upal Rana (KeyBanc): Are you adding build-to-suits for 2026 or focusing on 2027?
  Response: 2026 largely covered (about $28M ABR coming online); primary focus is on building out 2027 pipeline.

• Question from Anthony Paolone (JPMorgan): With ~10% of ABR expiring through end of 2027, any material move-outs or backfill concerns?
  Response: No material concerns; proactive underwriting and leasing mitigate risk, and only ~3% of ABR in 2026 is immaterial.

• Question from Anthony Paolone (JPMorgan): What portion of the portfolio is noncore and how will disposals impact returns versus acquisitions?
  Response: Regular pruning disposals likely $50M–$100M annually; opportunistic sales pursued when they yield attractive spreads to reinvest into core pipeline—expect at-par or accretive outcomes.

• Question from Caitlin Burrows (Goldman Sachs): How do you think about transitional capital investments and their end states for industrial versus retail?
  Response: Retail transitional was small and will be held for now; the large industrial transitional investment is expected to convert to build-to-suit or be monetized—providing strong optionality and attractive preferred returns.

• Question from Caitlin Burrows (Goldman Sachs): Given recent share-price moves, will you lean on leverage longer before issuing equity?
  Response: Plan to use leverage within a disciplined ~6x target while evaluating opportunity set dynamically; equity remains opportunistic when accretive.

• Question from Ronald Kamdem (Morgan Stanley): Did regular-way acquisitions drive the guidance raise, and are you seeing cap-rate compression differences between industrial and retail?
  Response: Acquisition activity supported guidance; cap rates have plateaued, competition is strong, and they target deals in the ~7%+ initial cash cap range consistent with required returns.

• Question from Ronald Kamdem (Morgan Stanley): Any update on construction-cost trends for build-to-suits?
  Response: Construction and labor costs have risen (tariffs impact), but hard costs are a modest budget component and overall project economics remain intact.

• Question from Jay Kornreich (Cantor Fitzgerald): How do you allocate future earnings growth between regular-way acquisitions and developments?
  Response: Use build-to-suit to establish baseline growth and augment with regular-way acquisitions, prioritizing direct, relationship-sourced deals to top up growth.

• Question from Jay Kornreich (Cantor Fitzgerald): Any tenants on the watch list heading into 2026?
  Response: No specific names to call out; monitoring furniture, casual dining and tenants with near-term maturities, but overall watch list looks clean.

• Question from Ryan Caviola (Green Street): Is the shift to fewer larger deals (industrial) a strategic change or opportunistic?
  Response: Opportunistic and driven by asset mix—industrial deals naturally have larger box and ticket sizes versus retail, not a strategic pivot.

• Question from Ryan Caviola (Green Street): How are policy/tariff-driven reshoring trends affecting tenant onshoring activity and timing of tailwinds?
  Response: Reshoring is seen as a multi-year positive tailwind increasing industrial and build-to-suit demand; management is already seeing tenant interest tied to these trends.

• Question from Eric Borden (BMO Capital Markets): Given At Home and Claire's outcomes, will you keep those assets or use them for capital recycling?
  Response: Decisions are case-by-case: At Home may remain if it stabilizes; Claire's is smaller and will be evaluated in 2026 for transition, re-leasing or sale.

• Question from Eric Borden (BMO Capital Markets): Are owner-users accelerating or decelerating build-to-suit activity amid macro/labor headlines?
  Response: Client-specific pacing varies; some delays exist but the pipeline depth absorbs timing shifts—month/quarter delays are manageable given multi-year nature of projects.

• Question from Caitlin Burrows (Goldman Sachs): Can you hit $500M of build-to-suit announcements by year-end given current pacing?
  Response: Confident they will; already north of $400M including starts, LOIs and transitional capital, so completing the target is a near-term timing issue.

Contradiction Point 1

Build-to-Suit Announcements and Activity

It involves the company's expectations and timeline for announcing and completing build-to-suit projects, which are significant for future growth and operational strategy.

Aren't you seeing more competition for build-to-suit projects due to your success? - [John Kim](BMO Capital Markets)

2025Q3: We have $500 million in build-to-suit commitments as of year-end, of which $400 million is aggregate in construction. Of the remaining $100 million, we expect the majority of that to be in construction by year-end. - [John Moragne](CEO)

Will you announce $500 million in incremental developments in 2025? What is the impact of companies fortifying supply chains? - [Eric Borden](BMO)

2025Q2: We're kind of in the middle of a process where we want to be able to get some of these deals done and make sure that they do close. And so we're very confident that we're going to meet that $500 million. And I think we've said before that we believe that the deals that we're working on are going to close in Q3. - [John Moragne](CEO)

Contradiction Point 2

Leverage and Funding Strategy

It involves the company's approach to leverage and funding, which are crucial for financial management and growth.

How are you balancing leverage and equity financing at current prices? - [Caitlin Burrows](Goldman Sachs)

2025Q3: We maintain a discipline around leverage, staying within 6x leverage, and are opportunistic about equity issuance based on market conditions and the investment pipeline. - [Unknown Executive](CEO)

Are you willing to go above 6x leverage? - [Caitlin Burrows](Goldman Sachs)

2025Q2: We're comfortable operating inside 6x leverage. We can use it flexibly, but we have no intention of staying there long-term. - [John Moragne](CEO)

Contradiction Point 3

Build-to-Suit Pipeline and Announcements

It involves differing expectations and the timeline for build-to-suit pipeline announcements and funding, which are crucial for understanding the company's growth strategy and future cash flow.

Are you adding anything to the build-to-suit pipeline for 2026? - [Upal Rana](KeyBanc Capital Markets)

2025Q3: Most build-to-suit pipelines are focused on 2027, with significant developments expected to be underway by that year. - [John Moragne](CEO)

Can you clarify the pace of funding your existing build-to-suit pipeline? - [Upal Rana](KeyBanc Capital Markets)

2025Q1: We aim to fund $217 million in 2025, with the remainder in 2026, adding $22.6 million of incremental ABR. - [John Moragne](CEO)

Contradiction Point 4

Credit Risk and Provision for Loan Losses

It pertains to the company's assessment and provisioning for credit risk, which are critical factors for financial stability and investor confidence.

Are there concerns regarding lease expirations in the portfolio through 2027? - [Anthony Paolone](JPMorgan)

2025Q3: Credit quality has remained strong, and our provision for loan losses remained at 125 basis points in line with our expectation. - [Kevin Fennell](CFO)

Does this year's 125 basis points reserve rate represent the expected rate in a normal year moving forward? - [Michael Goldsmith](UBS)

2024Q4: While we expect to see an increase in the realization of losses tied to the Zips bankruptcy during 2025, we feel comfortable that our allowance will balance that increase in losses. - [Kevin Fennell](CFO)