ADC - Agree Realty: I Agree It's Now A Good Deal

2023-04-12 08:25:00 ET

Summary

• Agree Realty is a leading net lease REIT with one of the highest exposures to investment-grade rated tenants.
• It has a development platform that adds to the long-term growth story.
• The drop in price since the start of the year presents an attractive buying opportunity for long-term dividend growth investors.

One of the things I don't like to do is to overpay for goods and services, and the same goes for stocks. This includes Agree Realty ( ADC ) back in December of last year, which I covered here . At the time, I remarked on the quality of the enterprise, but that it was outside of my buy range.

It appears that the market agreed with me, as ADC stock has fallen by 6.1% over this timeframe. Part of the reason may have to do with the market now going back to risk mode, with speculative assets like Bitcoin now jumping past $30,000.

Rather than chasing such high risk assets that pay you literally nothing, income investors may be better served layering into well-regarded REITs that pay a meaningful dividend. Let's explore why ADC is now looking attractive on the dip.

Why ADC?

Agree Realty is a net lease REIT that's been around the block for quite some time. It was founded in 1971 by Chairman Richard Agree and has been publicly traded since 1994. At present, ADC has an enterprise value of $8.5 billion comprising 1,839 retail properties in all 48 continental states of the U.S.

What some may not know is that ADC also has meaningful exposure to ground leases, which make up 12% of its annual base rent. Ground leases are generally regarded as being an even safer asset class than physical properties due to ownership of the underlying land and long lease durations.

ADC also derives its moat worthy attributes from a carefully selected set of quality properties with a strong tenant base. This includes notable names such as Walmart ( WMT ), Dollar General ( DG ), Tractor Supply ( TSCO ), TJX ( TJX ), CVS ( CVS ), Kroger ( KR ), and Lowe's ( LOW ), which make up most of ADC's top 10 tenants. As shown below, most of ADC's tenant industries are comprised of necessity and service-related retailers that are e-commerce and generally e-commerce resistant.

Plus, ADC has one of the highest exposures to investment grade rated tenants among its peers, with 68% of its portfolio ABR stemming from IG-rated tenants. Plus an additional 16% of tenant ABR that's not rated come from strong names such as Publix, which is privately held.

Meanwhile, ADC is executing well, and doesn't seem to find a shortage of investment opportunities. This is reflected by the $421 million worth of capital that was deployed during the fourth quarter across 157 retail net lease properties. This was partially funded by taking advantage of a higher share price towards the end of last year through equity sales, which netted ADC $283 million. ADC's external and organic growth contributed to an impressive 9.2% AFFO per share growth and 5.7% dividend growth last year.

ADC's capital raise also puts ADC on solid financial footing with a very low proforma net debt to EBITDA ratio of 3.1x and $1.5 billion in total liquidity comprised of cash on hand and availability on credit facilities. Moreover, ADC has no material debt maturities until 2028, making it very well-prepared for the current high interest rate environment.

Admittedly, ADC's lower share price raises its cost of equity, which currently sits at 5.9% (based on forward P/FFO of 17). This sits just slightly below the weighted average cap rate of 6.4% on newly acquired properties in the last reported quarter, suggesting that equity raises (if any) at current prices would not be as accretive as before.

However, what differentiates ADC from its net lease peers is its development platform, which serves as a good alternative to simply acquiring pre-built properties. This is exemplified by management's highlights on developments during the recent conference call :

Moving on to our development and PCS platforms. We again had a record year with 31 projects, either completed or under construction, representing over $118 million of committed capital. This includes 28 projects commenced during the year with the total anticipated costs of $110 million. During the fourth quarter, we commenced six new development and PCS projects with total anticipated costs of approximately $37 million.

Importantly, ADC pays a well covered 4.3% dividend yield that's protected by a 75% AFFO payout ratio. It also comes with a 10-year dividend growth track record and a 5-year CAGR of 7%. Should ADC be able to continue this track record, it could potentially deliver 10%+ annual total returns over the long run from here.

This compares favorably to the long-term returns of the S&P 500 ( SPY ), with more certainty associated with net leases and the quality of the enterprise. While ADC isn't cheap at the current price of $67.10 with forward P/FFO of 17.1, it isn't expensive either. Analysts have a consensus Buy rating on ADC with an average price target of $77.73 , implying potential for a 20% total return from here.

Investor Takeaway

Agree Realty is a leading net lease REIT with one of the highest exposures to investment grade rated tenants and a very low proforma net debt to EBITDA ratio. Plus, its development platform provides an alternative to simple acquisitions and could be a meaningful contributor to top and bottom line growth in a low acquisition environment. Lastly, while ADC isn't cheap, it's not expensive either, all while paying a respectable dividend yield. As such, income investors may want to consider layering in at current levels for potentially rewarding long-term returns.

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