O - Realty Income Vs. Agree Realty: Battle Of The Monthly Paying REITs

2023-03-21 12:03:52 ET

Summary

• Realty Income is paying out a 4.94% dividend yield versus a yield of 4.18% from Agree Realty.
• Both went public in 1994 but Realty Income has raised its dividend every year since then which makes them a dividend aristocrat. Agree Realty cut its payout once in 2011.
• Realty Income grew FFO quicker than Agree Realty during its fiscal 2022 fourth quarter and trades on a marginally higher price to forward FFO multiple.
• Agree Realty had a 75.8% payout ratio for its last reported quarter versus 76.5% for Realty Income.

Realty Income ( O ) and Agree Realty ( ADC ) are both monthly paying equity REITs with a long history of delivering consistent income to their common shareholders. San Diego, California-based Realty Income has been paying out monthly dividends since its 1994 IPO and has consecutively increased its payouts every year for the last 25 years. This has placed Realty Income in the revered dividend aristocrat bracket with its payouts increasing during the dotcom crash, the 2008 financial crisis, the 2020 pandemic, and the 2023 banking crisis. The REIT recently declared a monthly dividend payout of $0.255 per share , a 0.2% increase from its prior payout and a 4.94% yield.

Bloomfield Hills, Michigan-based Agree Realty last declared a monthly dividend payout of $0.24 per share , in line with the prior payout and for a 4.18% yield. This is around 76 basis points lower than Realty Income's yield. Agree Realty also went public in 1994 and initially made quarterly payouts before switching to a monthly schedule at the start of 2021. The REIT cut its dividend once going into 2011 but subsequently raised payouts to its shareholders since then. The REIT has a trailing 12-month dividend growth rate of 7.07% versus growth of 6.04% for Realty Income. Both compare favourably against a peer group median growth rate of 5.37%.

Realty Income's yield has pushed higher in recent weeks as a mini-banking crisis feeds through to equity REITs as its forced selloff of a broad range of securities. Realty Income is now down around 3% year-to-date with Agree Realty down around the same level. Critically, price weakness not linked to an actual deterioration in operational fundamentals has historically returned healthy medium to longer-term returns. The market is a voting machine in the short run but a weighing machine in the long run.

Whilst Agree Realty's payouts look like they've dropped, this reflects the change from quarterly to monthly payouts. Which stock makes the better long-term buy? At a high level, Realty Income is a dividend aristocrat with a larger yield and a $40.6 billion market capitalization. However, Agree Realty's payouts have been growing quickly and the $6.15 billion market cap REIT trades at a marginally lower price to forward FFO of 3.96x versus 4.11x for Realty Income.

Revenue Growth, FFO Momentum, And Coverage

Agree Realty is a net lease REIT that owned 1,839 retail properties as of the end of its fiscal 2022 fourth quarter. These were centered in the US and spread across 48 states, 38 million square feet, and with 68% of tenants being rated investment grade. Realty Income is a broadly triple net lease REIT, a distinction that allows for a reduction in overall exposure to property taxes, maintenance, insurance, and other operating expenses. The REIT owned over 12,200 properties as of the end of the fourth quarter spread across the US, UK, and France. This is diversified across retail, industrial and agricultural assets with the portfolio holding a 99% occupancy and spread across 84 industries and over 1,240 tenants. Dollar General ( DG ), Walgreens ( WBA ), and 7-Eleven ( OTCPK:SVNDY ) formed Realty Income's largest tenants and an aggregate of 11.1% of annualized-base rent.

Agree Realty last reported revenue of $116.53 million , a 27.5% increase from the year-ago quarter and a beat by $0.89 million on consensus estimates. This drove a fourth quarter FFO per share of $0.95, a beat by $0.01 on consensus estimates and growth of 4.4% over $0.91 in the year-ago comp. This meant an FFO payout ratio of 75.8% against the 3-month aggregate of Agree Realty's monthly payouts. Walmart ( WMT ), Dollar General, and Tractor Supply Company ( TSCO ) formed its largest tenants at a combined 16.2% of annualized-base rent.

Realty Income realized fiscal 2022 fourth quarter revenue of $888.7 million , up 29.7% over the year-ago quarter and a beat by $48.13 million on consensus estimates. Fourth quarter FFO per share came in at $1.00, a growth of 6.38% versus $0.94 in the year-ago comp and a beat by $0.01 on consensus estimates. The FFO payout ratio at 76.5% against its 3-monthly dividend was marginally higher than Agree Realty but Realty Income has no outstanding preferreds whilst Agree Realty has a 4.250% Cumulative Preferred Series A Preferred Stock ( ADC.PA ) that would impact the overall health of its payout ratio. These have to be paid out before the dividend to common shareholders.

Tangible Book Value And Premiums

Realty Income's tangible book value per share as of the end of its fiscal 2022 fourth quarter stood at $30.01 and grew 10.2% from $27.23 in the year-ago quarter. The commons at $61.97 per share are currently trading at a 106.4% premium to their tangible book value and with this premium gap widening in recent years.

Agree Realty's tangible book value per share stood at $49.49 at the end of its fourth quarter which was a growth of 8.53% versus $45.60 in the year-ago comp. This means its common shares at $68.84 per share are also trading at a 39% premium versus tangible book value.

Investors will be paying more than double the tangible book value for Realty Income which could be justified on the basis of the currently higher yield and historically more consistent dividend profile. There are only two other REIT dividend aristocrats; Essex Property Trust ( ESS ) and Federal Realty ( FRT ). Hence, you're paying for a rare and lauded REIT that occupies a revered position in the income investing space.

That said, Agree Realty has outperformed over the last year with a gain of 11.92% versus a loss of 2.66% for Realty Income. However, zoom out over three years and Agree Realty is sporting a 47.7% gain versus 54.29% for Realty Income. Past performance is not indicative of future returns and both REITs still face headwinds this year on the back of continued Fed rate hikes and a possible recession. I have no position in either REIT but I'm leaning towards Realty Income with its higher yield and aristocratic status in focus.

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