O - Agree Realty: Putting Their Money Where Their Mouth Is

2023-08-08 09:35:00 ET

Summary

• Agree Realty recently reported Q2 FFO and AFFO of $0.98 and revenue of $129.90 million, in-line with analysts estimates.
• ADC further fortified their balance sheet and has no debt maturities until 2028 and I wouldn't be surprised of a credit upgrade over the next couple of years.
• Their conservative payout ratio allows the REIT to grow internally as witnessed by their portfolio recently surpassing 2,000 properties adding Alaska to its geographic reach.
• Agree Realty has a 49.7% total return to shareholders over the last 5 years compared to its larger peer Realty Income.

Introduction

I've been a fan of Agree Realty ( ADC ) for a long time. I guess you could say I've taken a special liking to this REIT but for good reason. What's not to like about this company? They're well-managed, pays a monthly, growing dividend, has an investment grade rating, and is simply one of the best REITs out there today! I think the main reason I like ADC is because compared to Realty Income ( O ), they just always seem to get pushed to the side. I've always enjoyed the underdog story and Agree Realty comes to mind, especially since O has a huge following compared to the smaller ADC. Underdogs always seem to have a chip on their shoulder, like they have something to prove. And often times they do. When no one thinks they can achieve something, they just continue to prove the doubters wrong. And to me ADC continues to do this very well.

Investment Thesis

Here is a look at ADC's portfolio. The REIT has been making major moves over these last few quarters. They surpassed the 2k milestone in properties owned and added Alaska to their geographic reach. ADC's FFO and revenue both were in-line with analysts' estimates at $0.98 and $129.9 million respectively. Although FFO and AFFO were unchanged from Q1, revenue did grow by about 2.5% over the same period. A SA reader made a comment stating that they didn't understand what drove the business since core FFO was basically unchanged year-over-year. Joey Agree stated this was just timing of equity issuance and deployment. It is nice to see AFFO and FFO growth year-over-year. It reassures us investors that the companies we invest our hard earned money in are rewarding us, and it allows us to sleep well at night. But just because FFO was in-line all year, that doesn't mean the company has been stagnant as seen by the 2,004 properties that now occupy the portfolio.

Internal Growth

Another thing I enjoy about ADC is their smaller size compared to O. Investors might think that because it has a larger market cap that this equates to being higher quality, and that is simply not always true. I am in no way putting O down as I think they are a great REIT as well. But with their market cap and size of their portfolio, this means that Realty Income has to deploy much more capital to move the needle even slightly. ADC has a market cap $6.32 billion at the time of writing. ADC has doubled the size of its portfolio in less than 3 years. At the end of Q4 2020 the REIT had 1,129 properties in their portfolio across 46 states. It's obvious the REIT has been putting their money where their mouth is. One reason I believe for this rapid growth is their conservative payout ratio. Although REITs are income vehicles and typically pay out a high percentage of their earnings, ADC likes to keep their payout ratio in the 74-75% range. This allows the company to retain more cash to fund its growth such as purchasing properties. O has a slightly higher payout ratio at 76%. I believe this is one of the many reasons ADC has had a higher total return over the last 5 years at 49.7% compared to Realty Income's 31.0%.

Putting Their Money Where Their Mouth Is

ADC doesn't just make acquisitions to show shareholders that they are growing, their management team is very consistent and efficient when making these decisions. This is evident by the percentage of quality , investment grade tenants in their portfolio. During the quarter they acquired 92 high-quality net lease retail assets for over $305 million at a weighted average cap rate of 6.8%. These properties were dollar, auto parts, auto & tire service, and farm & rural supply stores, which are considered recession resistant. Additionally, they had 31 ongoing projects at the end of June, commenced two new projects, continued construction on 20 prior projects totaling over $87 million. They also executed new leases, extensions, or options on almost 800k square feet of gross leasable area, all while maintaining an occupancy rate of 99.7%. That's putting your money where your mouth is!

Agree Realty's cost of capital is roughly 5.5% using a 75/25 equity to debt split. This is important as it earns the REIT over a 100 basis point spread which will lead to FFO and dividend per share growth. One of my favorite sayings is "Quality over quantity." Furthermore, the REIT has raised it's acquisition guidance over the last two quarters, first from $1 billion to $1.2 billion in Q1, and from $1.2 to $1.3 in Q2.

Their CEO has also been very vocal on earnings about actively reducing their portfolio exposure to Walgreens ( WBA ) as you can see below. Realty Income on the other hand has much more exposure at 3.8%. The retailer turned healthcare giant has had their fair share of problems recently and has seen its share price decline tremendously over the last several years. As mentioned in my article here, WBA has been beaten to the punch by CVS Health ( CVS ) in their healthcare transition. Additionally, the company has had several lawsuits, a recent downgrade by Deutsche Bank, and the lowering of its guidance during recent earnings. He expects WBA to lose its IG rating in the next in the next 18 months.

Heavy Duty Balance Sheet

Recently ADC closed on a $350 million, 5.5 year term loan at a 4.52% fixed rate. They drew the full $350 million and used it to pay down all outstanding debt. As a result the REIT has no debt maturing until year 2028. They also ended the quarter with $1.3 billion in total liquidity. Interest rates are expected to come down soon, but even if the FED decided against lowering rates, it wouldn't even matter as ADC doesn't have to worry about maturing debt for the next 5 years! With that balance sheet, how can they not have an A credit rating? At this rate the S&P can only deny them for so long and I predict an upgrade in the next few years if not sooner.

Undervalued?

The stock recently hit a new 52-week low just a few days ago. And I sure took advantage adding more shares. But it has recently bounced back almost $3 since then. Quality stocks normally don't stay down too long as experienced investors almost always take advantage of the price dips. In my observation the stock's common price range is $63-$66. Seeking Alpha gives them a valuation grade of D which I don't Realty Agree with (LOL). The stock is trading at a 20% discount from its 52-week high of $80.44. Analysts have an average price target of $76 with a high of $80. This price gives investors double digit upside.

Bottom Line

Investors who are looking for a safe, reliable, monthly paying dividend company, it doesn't get any better than Agree Realty. Although not as popular as O, their smaller size, superior total shareholder return, and slightly more conservative payout ratio is what investors should seek during this economic uncertainty. Touching a new 52-wk low recently, the current price also allows for potential double digit upside in the near-term.

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