Hello, and welcome to Broadstone Net Lease's Third Quarter 2021 Earnings Conference Call. My name is Alex, 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 Finance and Investor Relations at Broadstone. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us today for Broadstone Net Lease's Third Quarter 2021 Earnings Call. On today's call, you will hear from our Chief Executive Officer, Chris Czarnecki; our Chief Financial Officer, Ryan Albano; and John Moragne, our Chief Operating Officer, who will participate in Q&A. 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 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, 2020, 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 our Chief Executive Officer, Chris Czarnecki.

Thank you, Mike, and welcome to everyone joining our Q3 2021 earnings call. I'm pleased to report another exceptional quarter as we head into the final months of 2021. During Q3, robust investment activity totaling over $225 million and outstanding portfolio operating performance with 100% rent collections has positioned us for a strong close to our first full calendar year as a publicly traded company. In addition, we continue to strengthen our balance sheet by successfully executing on a $375 million inaugural 10-year public bond offering and establishing a $400 million ATM program. These actions continue to expand our access to capital and will further support our efforts to maximize financial flexibility and support our defensive growth profile as we close out a strong 2021 and prepare for an active 2022. During the quarter, we closed 11 transactions comprising 18 properties for a total investment of $225.9 million at a weighted average cash cap rate of 6.5%. The leases included 1.8% weighted average rent escalation and a 19.4-year weighted average lease term. Acquisitions completed during the quarter were most heavily weighted towards industrial and health care at 59% and 31%, respectively, with a smaller concentration in investment-grade retail properties at 10%. These transactions demonstrate our ability to selectively acquire across the spectrum of opportunities without significantly influencing the overall risk return profile of our highly diversified portfolio. Initial cash cap rates for Q3 acquisitions ranged from 5.7% to 7.5% and blend to an attractive 6.5% weighted average. Our diversified approach to investing allows us to selectively navigate today's highly competitive acquisition environment without compromising our underwriting standards. We also closed approximately $13 million of additional acquisitions since quarter end. I'll now give a brief overview of several of the key transactions completed during the third quarter. We acquired 9 industrial properties in 5 distinct transactions for a total investment of $142.7 million at an initial cash cap rate of 6.1%. The leases include an initial 18.4-year term and 1.9% annual rent escalations, translating into a weighted average GAAP cap rate of 6.9% over the life of the leases. Four of the five industrial transactions completed during the quarter were sale and leaseback transactions. I'd like to take a moment to briefly highlight one of these industrial acquisitions, a 2-property sale-leaseback of refrigerated food processing facilities located in Wisconsin. The 2 properties were acquired for a total purchase price of $48.7 million with an initial 20-year lease term. These state-of-the-art food-grade facilities are critical to the tenant's operations, as evidenced by substantial tenant investments already made in the facilities. In addition, a significant expansion of one of the locations is currently underway and is expected to be completed by the tenant in 2022. Industrial transactions completed during the quarter demonstrate our ability to continue to source accretive and compelling investments that complement our existing portfolio despite heightened levels of competition within the industrial market. We also acquired a general acute care hospital in Arizona in a sale and leaseback transaction with the tenant for a total investment of $60 million. The lease includes 2% annual rent escalations over an initial 25-year term. The hospital is located in the Tucson MSA in an area with highly favorable demographics supporting the need for the services provided by the hospital. In addition, there are no competing hospitals within 25 miles of the property. The hospital serves a growing retirement community of nearly 100,000 residents and offers a wide range of health care services, including a full-service lab and blood bank, cardiac catheterization lab and an ER. Given the proven leadership team and business plan, supporting demographics, high barrier to entry and attractive investment risk return profile, we are excited to add this property to our already-differentiated health care segment of the BNL portfolio. Finally, we added 8 investment-grade retail properties as part of 5 transactions during the quarter, all of which were leased to existing BNL tenants. The properties were acquired for a total investment of $23.2 million at a weighted initial cash cap rate of 6.5% and have weighted average lease terms and annual rent escalations of 8.4 years and 50 basis points, respectively. Retail acquisitions completed during the quarter continued to substantiate our ability to efficiently transact on one-off highly granular investment-grade retail properties that help enhance our larger sourcing efforts in other segments in the pipeline. Acquisitions completed during the third quarter and in October bring total volume on a year-to-date basis to approximately $520 million. We currently have approximately $102 million of additional assets under our control, which we define as under contract or executed letter of intent. These opportunities continue to be well diversified, primarily across industrial and retail assets and bring our year-to-date closed and under control to $622 million. The current market environment remains highly competitive with a substantial amount of capital from both public and private buyers using opportunities to close before year-end. Despite heightened levels of competition across all property types, we remain focused on closing out 2021 with a strong Q4 of investment activity that will serve as a tailwind to 2022 earnings. We are revising our full year acquisitions guidance higher to a range of $600 million to $700 million. Ryan will provide additional detail regarding further guidance updates in a few moments. During the quarter, we also sold 6 properties for $26.6 million. These sales continue to reflect our disposition strategy focused on risk mitigation and included 4 vacant property sales and the disposal of 2 casual dining assets. During the third quarter, we executed on an early termination of a long-term master lease with an investment-grade office tenant in exchange for a termination fee of $35 million. The early lease termination fee represented approximately 117% of the remaining contractual rents owed to us under the lease, which was set to mature in 2028. Simultaneously, we sold the underlying vacant properties for net proceeds of $15.3 million. Together with the early lease termination fee, we received total net cash proceeds of $50.3 million. We originally acquired the 2 properties from the tenant via a sale and leaseback transaction in 2016 for $54.6 million and have since collected $21.8 million in triple net rents. Following this transaction, our office portfolio exposure was reduced to 7.9% of our ABR as of quarter end. I'm thrilled to announce this outcome as it demonstrates our patient and methodical approach to portfolio management and ability to protect shareholder value due to the quality of our tenants and the combined strength of our underlying leases and corresponding real estate. As always, we continue to monitor the portfolio closely and feel confident in the current operating profile and health of our tenants across all segments of the portfolio. We collected 100% of base rents during the quarter, and occupancy improved 10 basis points to 99.8%, leaving only 4 of our 696 properties vacant at quarter end. I'll now turn the call over to Ryan to provide additional detail on our Q3 results, recent capital markets activity and our final guidance update for 2021.

Thanks, Chris, and thank you all for joining us today. I'm excited to share additional details on another solid quarter of capital markets execution, discuss our third quarter results and provide an update to our full year 2021 guidance and dividend rate. I'll begin with our third quarter capital markets activity, where we continue to focus on maintaining a strong and flexible balance sheet. On the heels of our follow-on equity offering in June, we established a $400 million ATM program this quarter, inclusive of forward equity issuance capabilities. We view the ATM as an important component of our overall capital markets framework as we believe it to be an effective mechanism to match fund future acquisitions and control our leverage profile in an efficient manner. No shares were sold during the quarter, but we look forward to using this new tool in the future. In addition to establishing our ATM this quarter, we completed our inaugural public bond offering of $375 million of senior unsecured notes due in 2031 at a rate of 2.6%. Proceeds from the offering were used to pay down outstanding borrowings on our revolving credit facility as well as refinance a $265 million unsecured term loan, which was set to mature in 2023. This milestone transaction further expands our access to capital and lengthens our debt maturity profile. We remain focused on aligning our liability profile with our long weighted average remaining lease term of 10.6 years and look forward to returning to the public bond market in the future. As of quarter end, our net debt was approximately $1.6 billion, resulting in a net debt to annualized adjusted EBITDAre of 5.06x. We also received an upgraded credit rating of Baa2 with a stable outlook from Moody's in September, which aligns with the BBB rating we received during Q1 from S&P. Our liquidity profile remains highly robust with no outstanding balance on our $900 million revolver as of quarter end. We remain committed to maintaining a conservative balance sheet that aligns with and supports our defensive growth strategy. Now turning to our third quarter financial results. We generated AFFO of $55.8 million during the quarter or $0.33 per diluted share. AFFO per share results were flat quarter-over-quarter, primarily due to our late Q2 follow-on equity offering and the corresponding impact on our Q3 weighted average share count. During the quarter, we incurred total G&A expense of $8.6 million, which includes $7.6 million of cash G&A. I would like to take a moment to highlight the various financial impacts of the early lease termination transaction and sale of the underlying properties that Chris mentioned. Due to the nature of the separate transactions, on a gross basis, we recorded $33.8 million of revenue, $4.1 million of depreciation and amortization and $25.7 million of impairment. The classifications resulted in a $33.8 million increase to FFO but no impact to AFFO or net debt to annualized adjusted EBITDAre. For fiscal year '21, we are now narrowing our AFFO guidance range to $1.30 to $1.32 per diluted share, which represents an implied growth rate of 9.2% at the midpoint over our annualized Q4 2020 results of $1.20. This revision to our full year AFFO guidance is driven primarily by the early lease termination transaction and corresponding sale of underlying properties as well as the incremental interest expense anticipated from accelerating the timing of our inaugural public bond offering, both of which we view as very positive long-term outcomes for our shareholders. Our final guidance range for 2021 is based on the following key assumptions: acquisition volume between $600 million and $700 million, which we revised higher; disposition volume between $100 million and $130 million, which has been revised higher to include the early lease termination in property sales; and total cash G&A between $31 million and $33 million, which has been revised lower. As a reminder, our per share results for the year are sensitive to both the timing and amount of acquisitions, dispositions and capital markets activities that occur throughout the year. Finally, I am pleased to announce that at our Board meeting held on October 28, our directors declared a $0.265 dividend per common share and OP unit to holders of record as of December 31, payable on or before January 15. The $0.01 increase represents approximately a 4% increase over the previous dividend rate. We will continue to evaluate future increases to our dividend with our Board on a quarterly basis. With that, I will turn it back over to Chris for closing remarks.

Thank you, Ryan. Concluding today's prepared remarks, I want to take a moment to reiterate how pleased I am with all that we've accomplished thus far in our first calendar year as a publicly traded company. I'm especially proud of the Q3 results and believe it is one of our strongest quarters that I have seen over the course of my nearly 13-year tenure at Broadstone. We've successfully positioned ourselves as a leading net lease REIT through consistent execution across all facets of our business. This concludes our prepared remarks. Operator, you can now open the line for questions.

Our first question today comes from Caitlin Burrows from Goldman Sachs. I am so pleased with all that we've accomplished thus far in our first calendar year as a publicly traded company. I'm especially proud of the Q3 results and believe it is one of our strongest quarters that I have seen over the course of my nearly 13-year tenure at Broadstone. We've successfully positioned ourselves as a leading net lease REIT through consistent execution across all facets of our business. This concludes our prepared remarks. Operator, you can now open the line for questions.

Maybe just a question on acquisition volume. You increased your guidance for the year to $600 million to $700 million, which is great to see. I was wondering if there are certain things going on right now to support a higher level of acquisition or to what extent you think this pace could be sustainable going forward?

Sure. Caitlin, it's Chris. I'll let John talk a little bit more about that in terms of our pipeline and where we're spending time. But generally, I think we feel like our team is definitely capable of supporting that level of volume. And again, we continue to source across a pretty broad range of property types, both on smaller transactions and larger transactions. And so that was really the driving force behind where we are in the quarter and what we think we can accomplish by the end of the year. But maybe John will talk a little bit more granularly about the pipeline.

Sure. The environment remains exceptionally competitive, as I'm sure you're aware. But we think that affords us a strategic opportunity given our defensive growth strategy and diversified portfolio and acquisition strategy as well. We're able to pivot between asset classes in ways that other REITs that are singularly focused aren't necessarily able to. So I definitely think that the acquisition pace that we've been experiencing the last couple of quarters, give or take a little bit here and there, is certainly sustainable for us. As we announced, it was $102 million under control as of our earnings release last night. That does not include additional deals that we've locked up since then, and we expect to continue to do so in the next week or two. Q4 looks like it's shaping up to be just as robust as we would hope it to be, and that puts us in a great position to start thinking about Q1 as well.

Got it. And I guess that makes me think just a little about seasonality. I know we've heard some net lease REITs in the past talk about how the fourth quarter can end up being higher. Do you expect to see that sort of seasonality? Or do you think it could kind of just continue through the first half of '22 also?

We've definitely experienced seasonality in the past. One of the things that we've been trying to work on this year in particular is trying to smooth that out a little bit and have a little bit more consistency quarter-to-quarter. So we're hopeful that we'll continue to see that consistency here as well as out of Q4 going into Q1.

And where we sit today, Caitlin, this is Chris again, I think we're starting to see transactions get ready for Q1 as well as end of the year. So it seems like we have an opportunity for some nice balance.

Great. And then maybe just considering funding the business going forward, and it seems like you have many options now, which is great, can you give us a sense for target leverage range and when you'd consider using your ATM versus an overnight offering going forward?

Sure. Ryan, do you want to jump there?

Sure. I'd say that we remain consistent in our thoughts around funding and sources of funding. We've obviously increased the different funding sources that we have with the follow-on activity at the end of Q2 and then putting our ATM in place shortly thereafter. I would say that as we progress through the fourth quarter and think about the first quarter, we'll be looking to fund off of our revolver as well as thinking about our ATM. And then as we think about the balance between the ATM and follow-ons going forward, I'd say we look to have a healthy mix of both. I think both are useful tools for different reasons. I think our day-to-day acquisition activity and our average purchase price and average asset size is really conducive to using the ATM. However, I think there are certain places for larger portfolio transactions and whatnot where the overnight makes sense. From a target leverage perspective, continuing to look clearly inside 6x, and I think we're fairly comfortable operating where we do in that kind of low to mid-5 zone on a net debt to adjusted EBITDAre basis.

Our next question comes from Rosemary Rivero from Morgan Stanley.

This is Rosemary Rivero on Ron Kamdem's line. I had a question: can you elaborate a little more on how early terminations are driving down your AFFO growth? If you could please elaborate, that would be great.

Sure. Absolutely. So the lease termination with this specific office tenant was somewhere in the neighborhood of $4 million of ABR. So ultimately by taking the assets and terminating the lease and then ultimately selling it, we won't have that ABR flowing through for the fourth quarter. So that puts a little bit of a drag on FFO per share results as a result of those transactions coming together and then the incremental cash that we'll redeploy into a future asset at some point. So that's really what the impact there is, more of a timing issue than anything else. We had previously thought that it might be a Q1 activity, but with the opportunity to sell and finalizing our transaction with the tenant, that's really what's creating the timing difference here more than anything.

Your next question comes from Michael Gorman from BTIG.

Chris, can you just spend a minute talking a bit more on the office transaction side? Obviously, the credit quality of the tenant and the underwriting there led to a pretty good financial outcome for you all. But maybe, can you give some context to what the change was for the tenants? If there's any read-through in terms of how you're thinking about the rest of your office exposure, just given some of the trends nationally in the wake of the COVID pandemic in terms of work from home? Is there any kind of read-through there? Or was this a specific one-off situation?

Sure. It was a specific one-off. Maybe I'll let John, since he's close to the asset and property management side of the house, give you the read-through to the rest of the office portfolio and how we're thinking about it.

Yes, maybe to start with that as a lead, and I think it's important that we need to be careful not to paint with too broad a brush here. This was a discrete one-off transaction. And when Chris said earlier in his remarks, we were patient and methodical with respect to this one; this was something that was brewing for about 18 months. The tenant made a strategic decision relative to its workforce and its leveraging of real estate and its overall business operations and communicated that to us about 1.5 years ago. Our asset and property management teams have been in continual contact with them, working through this to find a mutually beneficial resolution to their need. One of the great things was, along the way, they were very good to work with. They paid the rent on time the entire time. And if we weren't able to come to a conclusion, they were locked into paying rent through the rest of their lease terms. So there was never a moment where we were concerned that we weren't going to get the full benefit of our initial bargain for this deal. So it relates primarily to how they're thinking about their workforce and where they're planning to put them. But the tenant is, as all of our tenants are, unique in how they think about these things. And I don't think there's any concern individually that we have elsewhere that we're not specifically addressing. I'll turn it back to Chris.

Yes. On the bigger office portfolio question, I think our thought process remains very consistent from previous quarters. And just taking this matter as a discrete one, we're continuing to follow how the return to work progression is happening. We have a little bit more clarity than last quarter, but I wouldn't call it completely clear yet. And with just 15 assets here and 8% of the portfolio, it's very granular. We have a spectrum of utilization from 100% to folks who are still thinking about when they're bringing their employees back, and from a credit perspective and from a collections perspective, we continue to see strength and have no concerns with the broader office portfolio. For the time being, we're not looking to deploy further capital into the office space unless there's some portfolio that might come with a specific office asset or two in it; we're really just continuing to hold and take each one of these as they come and monitor them in the same granular way that we did with the specific situation, and that's really where we are with office for the moment.

Great. That's helpful. And then I apologize if I missed it. I know you talked about the pipeline and obviously, the benefits of being flexible across property types. I'm wondering if you're seeing any kind of shifts in risk return benefits on a geographic basis. Obviously, pretty good exposure in the Southeast Sunbelt. Are you seeing a shift where maybe there's advantageous risk returns from certain markets in the country that you're leaning towards?

I'll let John jump in there.

Yes. I think we're continuing to see a lot of robust pipeline activity in the places we have consistently focused: the Southeast, the Southwest, and a little bit in the Midwest here. We certainly have not always been a big player in coastal primary markets, because of the way that we think about our defensive growth strategy and getting really granular in how we think about each individual asset. I think we also are starting to see more and think more about risk-adjusted return even just on an individual market basis as to where you're seeing sort of coastal primary places. We traditionally have always invested in secondary and tertiary markets, and that's where we start to see some real opportunities from a risk-adjusted return basis. But we also, with our diversified nature, have the ability to flex between what we call our verticals to find opportunities there that aren't as heavily dependent necessarily on geography, but can also tie to the underlying nature of the asset and the asset class that we're looking to play in.

We have a final question, a follow-up question from Caitlin Burrows from Goldman Sachs.

I was wondering, I know that in the past when you talked about sourcing you mentioned doing deals based on past relationships with developers as well as more widely marketed deals. Could you give some detail on how the transactions in the quarter came about?

Sure. Actually, I'll let John jump in on that one as well. But...

I think this was a great quarter to evidence the strength of our sourcing capabilities. We, over the course of the year, and this goes back historically as well, a good majority of our deals are what we consider to be repeat business, whether that's with existing sellers or existing brokers or private equity relationships, things like that. One of the acquisitions this quarter that we're most proud of is in the health care space, where it was a very low-marketed deal. It was only an outreach to a handful of people, and we were included in that outreach based off of our relationships with the folks that were involved. And I think that was a great opportunity because it was one where I don't know that a whole lot of folks saw that deal. We were a part of that and able to execute on it and provide a great return over a long-term lease for our shareholders.

And I'd say we have some of that going on in the current pipeline as well where a few tenants have reached out to us looking to execute by year-end in a fairly efficient manner to continue to build on a relationship that we've had on the restaurant and retail side. And so that seems like a very productive avenue for us to continue to close out Q4 as well.

We currently have no further questions. So I will hand back over to the management team for any closing remarks.

Wonderful. Thank you all for your attention and appreciate another great quarter with Broadstone Net Lease. We wish you all a great holiday season. We look forward to talking to many of you at NAREIT in the coming weeks on the institutional side, and have a great afternoon. Bye.

Thank you for joining today's call. You may now disconnect.