Three Ideas: Senior Lien (Bond Like) Infrastructure Investments

Keith Smith of Bonhoeffer Fund presented his in-depth investment theses on Broadstone Net Lease, Brookfield Infrastructure Partners (US: BIP), and MPLX, LP (US: MPLX) at Best Ideas 2020.

Thesis summary:

A common characteristic amongst these firms are recurring revenues with large addressable growing markets and modest valuations. Two of these firms also have disciplined and repeatable underwriting processes to weed out the best opportunities in each of their opportunity sets and have historically generated above average returns on capital. The third firm has a “core” customer and is investing in infrastructure to support new customers in growing basins such as the Permian and also generates above average returns on capital.

Broadstone Net Lease is an internally managed triple net-lease real estate investment trust, or REIT. Broadstone is one of the mid-sized net-lease REITs and owns a large, well-diversified portfolio that consists of investments in 662 property locations, substantially all of which are profit centers, in 42 states. The addressable market for BNL is very large as BNL only has a 0.2% market share and is one of the larger triple-net lessors in the business. In my opinion, NNN firms have a better model than traditional REITs in that the tenant is responsible for maintenance of the property. This leads to higher profit margins that similar non NNN firms. BNL has increased NAV and dividends per share by 13.3% per year and dividends per share by 3.8% per year over the past 5 years. The management team has great underwriting with few credit losses since inception (2007). BNL has an low expense ratio of about 1.7% of equity or 13.5% of revenue. The focus is also on growing segments of the real estate market including services, experiential retail and mission critical manufacturing in growing regions of the country. The average remaining lease term is 12 years. The common shares recently traded at an adjusted funds from operations (adjusted to include internalization savings and shares issued for internalization) multiple of 14.2 and dividend yield of 6.2%. The TTM gross cap rate interest margin is 4.9%. BNL is modestly levered with a debt/equity ratio of 0.65 and has an investment grade credit rating. The AFFO multiple is cheap compared to other NNN real estate firms with similar expense ratios and growth prospects.

Brookfield Infrastructure Partners is an infrastructure investment firms. BIP’s owns and operates utilities (32% of cash flow), transport (30%), energy (25%), and data infrastructure (13%) businesses located in North America (30% of cash flow), South America (25%), Europe (20%) and Asia (25%). BIP includes a cross section of infrastructure firms that Brookfield owns and operates for its third-party institutional investors. BIP has increased BV and dividend per share by 11.1% per year and had an average AFFO return on equity of 14% over the past five years. The return on equity has been increasing as more mature properties are being sold and reinvested into newer higher return projects. BIP has a scale advantage with low expenses (2.2% of equity and 27% of DCF) and has obtain operational synergies by purchasing assets in the same industry. The shares recently traded at an AFFO multiple of 16.9x, and dividend yield of 4.0%. BIP is modestly levered with a debt/equity ratio of 0.82 and has an investment grade credit rating. BIP’s returns on equity should continue increase as sale proceeds are being re-invested in data infrastructure assets and in places like Asia.

MPLX, LP owns and operates midstream energy infrastructure and logistics assets primarily in the United States. The company also provides fuels distribution services. MPLX provides the core mission critical infrastructure asset to Marathon Petroleum’s refinery and gas stations. Assets that support downstream operations are about 60% of MPLX’s assets. The remaining 40% of assets provide upstream connectivity to production assets in the Marcellus, Rockies and Permian basins. MPLX has a DCF return on equity of 21%. MPLX has internally financed growth projects outside the maintenance of Marathon’s core assets and expects DCF to grow by 3 to 5% per year over the next few years. MPLX is levered with a debt/equity ratio of 0.81, a Debt/EBITDA ratio of 4.0x and has an investment grade credit rating. The shares recently traded at an DCF multiple of 6.8x and a dividend yield of 10.7%.

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About the instructor:

Keith Smith, the fund manager, brings over 20 years of valuation experience to the Bonhoeffer Fund. He is a CFA charterholder and received his MBA from UCLA. Keith currently serves as a Portfolio Manager at Bonhoeffer Capital and was previously a Managing Director of a valuation firm and his expertise includes corporate transactions, distressed loans, derivatives, and intangible assets. Warren Buffett and Benjamin Graham’s value-oriented approach of pursuing the “fifty-cents on the dollar” opportunities, underpins Keith’s investment strategy. The combination of his experience and track record led Keith to commit most of his investable net worth to the Bonhoeffer Fund model.