Hello, and welcome to the Broadstone Net Lease Fourth Quarter 2021 Earnings Conference Call. My name is Tania, and I will be your operator today. Please note that today's call is being recorded. I would now like to 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 Fourth 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 our Chief Operating Officer, John Moragne, who will be available for 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, 2021, 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.

Good afternoon. I'm pleased to report a strong fourth quarter of results, which represents the successful culmination of our first full calendar year as a publicly traded company. I'm incredibly proud of all that my colleagues accomplished in 2021 and most importantly, the results we were able to deliver for our shareholders. Execution across all facets of our business translated into 9.2% growth in AFFO per share over our annualized Q4 2020 results, which we view as an accurate proxy for full year 2020 performance, following our IPO in late September 2020. This outstanding result was driven by strong same-store portfolio performance, robust and accretive external growth, as well as prudent capital markets execution and balance sheet management. During 2021, we collected 100% of contractual rents owed and average occupancy for the year was 99.8%. These near-perfect operating results, coupled with our best-in-class annual rent escalations of 2%, helped generate strong same-store portfolio growth year-over-year. On an external growth front, our diversified investment strategy provided the flexibility to navigate what was a record-setting year in the Net Lease transaction market. Despite heightened levels of demand and competition, we were able to close over $650 million of accretive acquisition opportunities, diversified across all of our core property types, at a weighted average initial cash cap rate of 6.3%, a 15.9 year weighted average lease term and 1.5% weighted average annual rent escalations. The BNL story truly shone through in all of our 2021 accomplishments. We delivered on our defensive growth strategy during the year and continue to remain laser-focused on best-in-class diversification across all facets of the business. Industrial assets led the way in 2021, comprising 47% of our transaction volume. Retail assets were second at 26%, followed by health care at 23% and restaurants at 4%. Our top tenant exposures declined by 40 basis points to 2.1%, and our top 10 and top 20 tenant exposures declined by 120 and 140 basis points, respectively. All of these statistics demonstrate that we can continue to meaningfully grow earnings per share while not feeling pressure to overly concentrate with any one tenant or in any single sector. Growth in 2021 was supported by outstanding execution in the capital markets, including an inaugural follow-on equity offering, a debut 10-year public bond offering and routine equity issuance through our newly established ATM Program. These actions have positioned us to continue to execute on our defensive growth strategy in 2022 as we look to deliver another year of solid results for our shareholders. Now turning to BNL's recent performance. During the fourth quarter, we invested $147.5 million in 36 properties at a weighted average initial cash cap rate of 6%. Q4 marks the first quarter since our IPO in which we acquired properties across all of our core property types, including industrial, health care, investment-grade retail and restaurants. The leases include 1.5% annual rent escalations and 14.2 years of remaining lease term, translating into a weighted average GAAP cap rate of 6.6%. I'd now like to provide additional detail regarding a few key transactions completed during the fourth quarter. During the quarter, we acquired five industrial facilities in four separate transactions for a total of $60 million at a weighted average cash cap rate of 5.9%. The leases include a weighted average 1.9% annual rent escalations and a weighted 15.3 year lease term. Included in these acquisitions are two additional investments in the food processing space that are critical to the tenant's operations, as evidenced by the significant renovations undertaken in the past two years by these tenants. We are thrilled to continue to add additional food manufacturing and associated cold storage exposure to our industrial segment of the portfolio. We have historically found strong risk-adjusted returns in this space that are highly complementary to our overall portfolio construction. We also added five casual dining restaurants in a sale and leaseback transaction with a well-established and growing regional casual dining operator located in Houston, Texas. These five restaurant locations were purchased in addition to the company's small corporate headquarters for $28.5 million. All of the properties are master leased and include 1.5% annual rent escalations over a new 20-year lease term. This transaction represents our first investment in the casual dining space since the onset of the COVID pandemic. We have meticulously watched the space over the past two years, closely monitoring how different concepts within our existing restaurant portfolio performed during and recovered from a period of temporary distress. We have grown increasingly more comfortable with the space as operating and financial trends continue to recover to pre-pandemic levels. Each of the five restaurant locations purchased during the fourth quarter currently exhibit strong rent-to-sales and rent-to-coverage ratios. We're excited to make a return to investing in the casual dining space with this attractive risk-adjusted opportunity. Finally, we acquired $42 million of investment-grade retail assets during the quarter comprised of 22 properties at a weighted average cash cap rate of 5.8%. The investments include three existing BNL tenants and the properties are located in geographically diverse markets across Michigan, Georgia, Kentucky and Tennessee. The leases have a weighted average remaining lease term of 10.3 years and include 50 basis points of weighted average annual rent escalations. Many of the properties were built in the last five years and include upgraded construction, consistent with their respective concepts, and modern redesigns. We have generally focused on growing our investment-grade retail exposure over the past year. This quarter's activity includes a mix of single-site acquisitions and a larger portfolio that helped bolster the results with long weighted average lease terms and annual rent escalations. An average asset size of approximately $2 million, coupled with tenant and geographic diversification, makes this a highly attractive opportunity to add significant investment-grade exposure without taking on outsized concentration risk. Acquisitions completed during the fourth quarter bring total volume for 2021 to $654.7 million at a weighted average cash cap rate of 6.3%, consistent with the midpoint of our last guidance update for the year. 2022 is off to an exciting start and is currently on pace to be one of the strongest beginnings to a year with respect to acquisition volumes in our nearly 15-year history of investing in Net Lease real estate. Since quarter end, we've closed $32.9 million of transactions and currently have over $200 million of opportunities under our control, which we define as under contract or executed. I'm pleased to announce our initial 2022 acquisition guidance range of $700 million to $800 million, which reflects approximately 16% growth over our year ending gross asset value at the midpoint of the range. Our asset base relative to many of our larger peers allows us to generate meaningful growth and results at highly achievable levels of acquisitions. Our diversified investment strategy will continue to provide flexibility to source accretive opportunities without sacrificing our underwriting standards in 2022. Ryan will provide additional detail regarding further guidance updates in just a few moments. During the fourth quarter, we sold six properties for $15.8 million. These sales continue to reflect our disposition strategy, primarily focused on risk mitigation and included three vacant property sales and the disposal of three lower-performing automotive retail sites at a 7.5% cap rate. We continue to monitor the portfolio closely with a heightened level of focus placed on the current macroeconomic outlook and how that could impact our tenants. Best-in-class diversification by property type, industry, tenant and geography act as a natural hedge amid expectations of both rising inflation and interest rates. Our portfolio has been deliberately constructed and is uniquely positioned to weather any singular tenant credit event. Diversification has proven beneficial throughout many challenging economic environments, including most recently the COVID pandemic. In addition, our best-in-class portfolio weighted average minimum rent escalation of 2% helps generate better same-store growth during a period of higher inflation relative to many others in the Net Lease space. As of December 31, 2021, all but two of our properties were subject to a lease, and our properties were occupied by 204 different commercial tenants with no single tenant accounting for more than 2.1% of ABR. I'll now turn the call over to Ryan to provide additional detail on our Q4 and fiscal 2021 results, recent capital markets activity and our initial guidance for 2022.

Thanks Chris. During the fourth quarter, we generated AFFO of $58.7 million or $0.34 per share, which represents 3% growth on a per share basis quarter-over-quarter. Our fourth quarter results were largely driven by revenue generated from late Q3 acquisitions as well as acquisitions completed within the quarter. Please note that $134.6 million of acquisitions were closed during the month of December, many of which were closed in the final weeks of 2021. We expect these acquisitions to act as a tailwind for our Q1 2022 results. During the quarter, we incurred total G&A expense of $8.5 million, which includes $7.5 million of cash expenses. Now turning to our full year 2021 results. We generated AFFO of $216 million or $1.31 per share, which, as Chris mentioned, represents growth of 9.2% over our annualized Q4 2020 results landing at the midpoint of our last guidance update. During the year, we incurred $36.4 million of total G&A expenses, which includes $4.7 million of stock-based compensation and $1.3 million of one-time severance costs, resulting in $30.4 million of cash expenses. Full year cash G&A came in just above the low end of our last guidance update. As for capital markets activities, during the fourth quarter, we sold approximately 1.1 million shares of common stock at a weighted average share price of $26.26 for total net proceeds of $27.3 million through our ATM Program, which was established in the third quarter of 2021. We view the ATM as an important component of our overall capital market strategy and expect to continue to utilize the program to match fund acquisitions and control our leverage profile in an efficient manner. Subsequent to year-end, we also amended and restated our revolving credit facility, upsizing the capacity to $1 billion, extending its maturity date to March 2026, and reducing the applicable margin to 85 basis points based on our BBB or Baa2 ratings. The amendment also provided for a $500 million supplement for Canadian dollar and other foreign currency borrowings, which we expect to utilize to primarily fund potential future acquisition opportunities in Canada. As of year-end, our net debt was approximately $1.7 billion, resulting in a net debt to annualized adjusted EBITDAre of 5.1x. We continue to target a conservative leverage profile of less than 6x on a net debt to annualized adjusted EBITDAre basis. Our liquidity profile remains highly robust with only approximately 10% of our $1 billion revolver utilized as of year-end. Subsequent to year-end, S&P Global Ratings reaffirmed our BBB rating with a stable outlook. Now turning to our initial full year guidance for 2022. We expect to report AFFO per diluted share between $1.38 and $1.42, which represents an implied growth rate of 6.9% at the midpoint of our guidance range when compared to our 2021 full year results of $1.31 per share. Our initial 2022 guidance range is based on the following key assumptions: acquisition volume between $700 million and $800 million, representing growth of 14.6% over our 2021 gross acquisition volume at the midpoint of the range; disposition volume between $75 million and $100 million, consistent with our 2021 disposition volume; and total cash G&A between $31 million and $33 million, representing growth of approximately 5% over our 2021 cash G&A at the midpoint of the range. As a reminder, our per share results for the year are sensitive to both the timing and amount of acquisition, disposition and capital markets activities that occur throughout the year. Finally, at our Board meeting held on February 17, our directors declared a $0.2650 dividend per common share in OP Unit to holders of record as of March 31, payable on or before April 15. 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. I want to reiterate how pleased I am with all we accomplished in 2021 and how we are currently positioned to continue to deliver strong results for our shareholders in 2022. I’m confident that our robust pipeline of diverse and accretive acquisition opportunities and our expanded access to multiple capital sources will only help propel our momentum in 2022 further. This concludes our prepared remarks. Operator, you can now open the line for questions. It's Chris here. Our operator has dropped. We're trying hard to open up the line for questions. Unfortunately, it's outside of our control. We definitely can see there are a few analysts who want to ask questions, and we're in communication with the conference folks, but just give us one more second. I apologize. We'll get it open as quickly as we can.

The first question is from the line of John Kim.

Has there been any impact on pricing or certainly either for your guidance or for the market overall on what's happened in the market so far as far as interest rates and lead share prices for net lease companies?

I will probably sound like a little bit of a broken record on what you heard from some of the other net lease folks in the last couple of weeks. But where we sit today, just sort of being 45 or 50 days into some of the New Year's adjustments that we've seen to share prices and to rising debt costs, we haven't seen a meaningful change, I'd say, from our perspective. Cap rates stabilized a little bit towards the end of the fourth quarter and into this year. So there wasn't that persistent downward march. But at the same time, we haven't seen any widening out of pricing at this point. Again, things you've probably heard before, but I think are very true for us today: the lag in which we're negotiating transactions is a real thing and takes a while for the market to catch up. And logically, it seems like there should be some widening out to account for the changes in cost of capital that the space has experienced. But things that we're closing now, we were actively working on in the October and November timeframe. So some of that is just going to take a little while to work its way through the system. And certainly, the competition on the private side still remains pretty robust. So for us, at the moment, we haven't seen any meaningful change in pricing, but we continue to monitor it and focus on our spreads on a daily basis to make sure we're in a good spot.

Chris, can you quantify what the portfolio premiums are today for industrial? And whether or not you see the same impact in health care and retail?

I'll actually let John jump in on there, and he can talk a little bit about that. Sorry, John, can you repeat that? I'm having an audio problem, too?

No worries. Portfolio premiums. We're seeing it in industrial, but I'm wondering if you're also seeing it in health care and retail and other asset classes that you look at? And if you can quantify what those portfolio premiums are?

We are certainly seeing portfolio premiums, something that we've been talking about the last few weeks at our Investment Committee in terms of our strategy for the year looking for opportunities where we can focus on one-off deals, both in the retail investment-grade and other places where we aren't going to be seeing that premium. In terms of quantifying, that's a little hard. It depends on which asset class you're talking about, but anything from 20 to 25 basis points, even up to 50 basis points of premium on a portfolio could be out of the question on some of these things. So that’s why we continue to think that the diversified investment strategy, focusing on granular assets and having the opportunity to be able to go after both the small retail IG strategy as well as some of the smaller health care and industrial assets that don't fit within some of our peers' strategies given the volumes that they're looking to do, is a real differentiator for us and our ability to hit our goals for the year.

And on your cold storage investments, are there any aspects of the lease structures where you would take on additional operational or CapEx risks versus your standard industrial lease?

No, they fall right in line with the standard industrial lease. Our cold storage assets are pretty different from some of the pure-play cold storage folks; they're really more owner-operated, the type of assets that Chris talked about in his remarks relative to the food production and distribution space.

In a lot of times, just to build on that, the cold storage space is a portion of the building where food processing might be happening; 50% of the space might be cold storage as well for longer-term storage. So it’s a little bit of a different mix but an incredibly important part of the industrial chain.

The next question is from the line of Caitlin Burrows with Goldman Sachs.

Maybe just on acquisition volumes, the $700 million to $800 million of assumed acquisition volumes for 2022 is up about 15% from last year. So can you go through what you expect the team will do differently this year in order to achieve that and speak to your confidence? For example, have you hired people, plan to focus on larger deals, less competition or what could help drive that increased activity?

Yes, Caitlin, I think a lot of it has to do with the team settling into roles. We went through some changes last year and how we were focusing on new opportunities. The team itself has had over a year now of getting back into the swing of things. As you recall from leading up to the IPO, we were out of the acquisitions market for about a year before then. So there was a little bit of getting back into the flow of things in Q4 2020 and Q1 and Q2 of 2021. And so now we feel like we're hitting on all cylinders. The sort of average quarter for us over the last four quarters is in that $190 million range. So we feel very comfortable about what this team can do. We think the team can easily do up to $1 billion in a year. So we think we're a little short of that in terms of our overall goal, but we certainly could expand from there. And so I think it's just really the team gelling a little bit better as we've had more opportunities. If you look at the individual strategies, we continue to be looking at portfolios, but we like the ability to add some scale through portfolios while being mindful of the portfolio premiums that are out there. So as much as we're chasing the larger portfolios and those opportunities, we really like some of the larger single-site assets that are out on the market and continue to be right in our wheelhouse in the industrial and health care space. We also really like the opportunity to go really granular and focus on individual retail investment-grade assets, and I think all of that culminates into what you see as that strong pipeline heading into Q1. Then looking at roughly $175 million per quarter for Q2 through Q4 from there.

And then just in terms of timing, I know a single year doesn't necessarily matter so much, but I know peers in the past have pointed out that a given year's earnings can be heavily impacted by the pace of acquisitions and that Q4 ends up often being the most active. But looking at your 2021 activity, it doesn't look like acquisitions necessarily built over the course of the year. And I think you guys even just said that Q1 was off to kind of a start that you may not normally think for Q1. So just wondering what your experience has been with seasonality of acquisitions and pace or not, and what kind of pace is assumed for this year?

I think the seasonality is something that we're actually trying to combat a little bit. We certainly in our past saw that a lot where a huge portion of our acquisition volume happened in the fourth quarter, and as you just pointed out, that wasn't the case this year. We started focusing on Q1 acquisitions in about the November timeframe with the intention of trying to smooth that out. So we didn't have the same type of seasonality that you would traditionally see with a big, huge fourth quarter and then a very light first quarter. And that's something that we're starting to do now. The first quarter for us is pretty well baked in terms of how we think it's going to shake out. And so we already have and started a couple of weeks ago shifting our focus with our acquisition folks and with our Investment Committee to think about what are those things that we can hit early in Q2 and throughout Q2, and we'll continue that cadence throughout the entire year, looking to make sure that we're constantly taking that 90 to 120-day outlook, carrying it through and trying to smooth that process out a little bit and avoid what has historically been some of that seasonality.

And maybe just the last one. I know that office hasn't historically been part of your core target acquisition types. But in the quarter, you did do the small restaurant portfolio with their office. So just wondering if you could talk about that a little and to what extent you think that office property being part of the portfolio limited potential other competition and how that does end up working out well for Broadstone? And to what extent do you think there are other opportunities like that out there in restaurants or otherwise when office might be lumped in?

It's interesting. I continually gave the example that we might do an industrial portfolio with a good day small office mix, or do a restaurant deal that has their corporate office on the same parcel. So I guess you should never predict too much what will happen. But I think from our view on the office front, there is still the opportunity to have certain examples like we had in the fourth quarter where on a mixed sale-leaseback you might pick up an office that you underwrite as part of the entire group. It hasn't happened quite as much as we expected during the year, but it was a differentiator for us in that transaction with the restaurant operator and clearly everybody was focused on that piece of it and our willingness to be creative and wrap it into the master lease and have that exposure was important for us. So I think here and there, it can continue to be part of transactions. If there were a larger diversified portfolio, that would also be fine. In general, we did take a hard look at the office space, in leading up to our Board meeting and in our Real Estate Investment Committee, and haven’t really seen anything that was particularly attractive relative to the broader opportunity set in some of the other property types, and we obviously are continuing to be cautious. So we didn't want to miss anything, but didn't find anything that was a particularly good fit there. As we continue to look at our own portfolio, we would expect one office sale later in the year, and we'll talk about that when we get there. But otherwise, we'll continue to monitor utilization levels and the tenants. So that's where we are in office at the moment.

The next question comes from the line of Ki Bin Kim with Truist.

So Chris, coming out of IPO over a year ago, you guys hit your stride and the cost of capital only moved in one direction, improving. And lately, obviously, that has reversed. So as a new public CEO, I was wondering if you had any high-level observations or lessons learned? And how do you think about funding your business in the reality where your cost of capital isn't quite as attractive?

Absolutely. I sort of talked about it a little bit earlier. From our view, there is always a very intense focus on the risk-adjusted spreads that we're investing in. And clearly, that changes each and every day depending on what's going on with share price and whether we're issuing equity or where the debt markets are and whatnot, and we've seen some spread compression there. I think where we sit today, we feel like some of the choices we made—to maintain a low leverage profile and have a lot of flexibility, being around 5.1x this quarter while still having the ability to go to our target in the mid-5s—gives us that cost of capital flexibility and capital on hand to continue to invest. As we move forward, we need to continue to make sure that the spreads we're putting on the board for Q1 and Q2 make sense, both from a risk-adjusted perspective and from a capital markets perspective. It's really about using all those tools that we gained by coming public and adjusting in real time. That's a big part of what our acquisition team and what John and the Investment Committee are always focusing on: not only where our capital was priced when we raised recent blocks of it, but where we are going to be investing in that 90 to 120 days out. It's a dynamic process and one that we continue to adjust to. We feel good that where we are today and where our acquisition opportunity set lies that we can hit those acquisition goals based on what we see in the market without taking on outsized risk, and that gives us good confidence going into the year.

And Chris, in your guidance, are you assuming leverage stays relatively flat?

I'd say we're assuming that leverage is in about the mid-5s.

Your coverage ratio for your restaurant segment declined a little bit. Just wondering if you can provide some details around that.

I had a conversation with our credit team on that. Really, what we saw just during the quarter—and the numbers you're seeing printed there are because there's a lag in reporting our Q3 numbers from the tenants—was a little bit of a reversion from the fast-food or casual or quick-service side. Those groups were running in aggregate more of like a 4x coverage, which is an exceptionally strong level. I think with a little bit of a slowdown in drive-through business they came back to the high-3x zone and that saw a portfolio adjustment of about the 0.3x that you referenced. From our perspective, 3.2x coverage is still exceptionally strong, and we'd be even comfortable below that. But that was just a little bit of a change that we heard from tenants during the quarter.

The next question is from the line of Ronald Kamdem with Morgan Stanley.

Just going back to the pipeline and focusing on industrials a little bit. If you talk about light manufacturing and what the cap rate trends are there, because I know you've talked a little bit about cap rate compression. I just want to zoom in on the industrial space specifically.

Ron, I would say we continue to see, at least in terms of the type of industrial that we traditionally have gone after, we're looking at mid-5s overall in terms of the industrial space. There still continues to be some opportunities in the high 5s, low 6s. We also look at some things in the low 5s. But overall, I'd say the average we're looking at for the types of things that we go after and like for our portfolio is probably more in that mid-5 range.

And then the other question was, you've talked about looking at different asset classes outside of the four that you're doing. But would you also look at ground leases? Is that something that you guys have looked at in the past that you would consider? Just curious what your thoughts on ground leases are.

We've done a deep dive on ground leases. It actually was a topic at our Board meetings and Investment Committee recently. It's something that we think is really interesting. But it's one for us right now that we are really only looking at on an opportunistic basis. We have a handful in the portfolio already, but nothing significant or material to talk about there. As we come across potential opportunities, we certainly are looking at them, but it's not something that we're currently thinking about as something more programmatic.

We have a follow-up question from the line of Caitlin Burrows.

Could you just go through, you mentioned the split of property types for acquisitions in 2021 was over 50% industrial, maybe mid-20s for retail and health care, with just a little for restaurants. Can you go through how you expect that to change this year and what will drive it? Is it just where the opportunities are, cap rate differences or something else?

We were about 50% industrial last year. I would expect that to be reasonably in line. Some of the industrial assets are chunkier on a per-asset basis, which shows through. Restaurants were pretty low at 4% and that probably moves up a bit with some of the things we've been thinking about in the pipeline. As we continue to focus on our small one-off retail investment-grade program, that could also show a little movement. At the moment, John referenced that we're definitely focused and looking for more health care opportunities, but we don't have any specific ones in the pipeline right now. That could lag — I think that's more a supply issue given our unique focus on a few different verticals there. So I would expect industrial to be consistent, health care perhaps a little low, and restaurant and retail maybe climbing a little.

And then just on the dispositions, I know you mentioned earlier that you could dispose of an office property this year. Could you go through the other potential dispositions that are anticipated in guidance? Would you say that it's more a function of portfolio management rather than necessarily funding acquisitions?

That's correct. It is more of a portfolio management exercise. Embedded in our thinking and disposition plan for the year is that one office asset and then, consistent with 2021, a few restaurant assets that are in master leases that might be on the weaker side and an opportunity to tighten those up and bring our coverage ratios up a little bit. We're also looking at selling two of our vacant assets as well. Those would sort of round out the disposition plan as the team sits today. We continue to think about others, but I think that encompasses the guidance range we gave you.

There are no additional questions waiting in the queue. I will now pass the conference back to Chris Czarnecki for closing remarks.

Wonderful. Thank you so much. Appreciate everybody taking some time to hear what was a very exciting and fulfilling year here at Broadstone Net Lease. We're very excited about where 2022 is going and look forward to seeing you all soon, either in person at some of the conferences or on the Q1 earnings call in May. We'll talk to you soon. Thank you.

Ladies and gentlemen, that concludes the Broadstone Net Lease fourth quarter conference call. Enjoy the rest of your day.