Summary
- With us likely bound for a prolonged recession, investment grade triple net lease REITs seem like a logical investment choice.
- Perhaps the two safest bets in the sector are ADC and O.
- We compare them side by side and offer our take on which one is the more attractive option right now.
Realty Income ( O ) and Agree Realty ( ADC ) are both triple net lease REITs with very stable cash-flowing business models and strong balance sheets. This makes them ideal investment choices when the broader economy appears headed for a prolonged recession.
In this article, we will compare the business models, balance sheets, growth potential, track records, and valuation of these two REITs side-by-side to determine which is the better buy today.
Agree Realty vs. Realty Income: Business Models
As previously mentioned, both ADC and O have recession resistant business models with broadly diversified portfolios of high quality real estate and a significant portion of their rent coming from investment grade tenants.
O benefits from its sector-leading scale that dwarf's ADC's. It boasts a portfolio that includes over 11,400 properties and 1,125 different tenants from 72 different industries. Last, but not least, 43% of its rental revenue comes from investment grade tenants.
ADC - though smaller in scale - has some very impressive qualities of its own. For starters, 67.5% of its rental revenue comes from investment grade tenants, putting it well above O's level in this regard. Furthermore, its top tenants are very strong businesses with largely recession-resistant and ecommerce resistant business models. These include Walmart ( WMT ), Tractor Supply ( TSCO ), Dollar General ( DG ), Lowe's ( LOW ), Chick-fil-A, Home Depot ( HD ), and Kroger ( KR ). A substantial 14.3% of its ABR comes from ground leases, which are arguably the most conservative real estate lease structure possible.
Overall, due to the impressive quality of ADC's tenants and its ground lease portfolio (which O lacks), we give ADC the edge here, though O also obviously has a high quality portfolio.
Agree Realty vs. Realty Income: Balance Sheets
Both businesses score well on this front once again, but this time O is the clear winner with its A- (stable outlook) credit rating from S&P in contrast to ADC's less impressive BBB (stable outlook) credit rating from S&P.
O's balance sheet boasts a notes and bonds 7.6 year weighted average debt term to maturity. Meanwhile, 93% of its debt has fixed interest rates, making it pretty resistant to cost increases from rising interest rates. Moreover, its 5.5x fixed charge coverage ratio, well staggered debt maturity profile, and multi-year liquidity runway mean that it is at very little risk of financial distress for the foreseeable future.
Meanwhile, ADC's balance sheet is also in excellent shape. It has hardly any debt due prior to 2028, giving it an exceptional liquidity runway. Moreover, its fixed charge coverage ratio of 5.1x is similarly conservative to O's. Neither business should have to worry about financial distress for years to come, though O likely will have a slight cost of debt advantage due to its meaningfully superior credit rating, thereby earning it the edge here.
Agree Realty vs. Realty Income: Growth Potential
O's massive size makes achieving needle-moving growth without compromising underwriting increasingly challenging. Nevertheless, it has been able to reignite the growth engine by landing a massive acquisition of VEREIT that was over 10% accretive to AFFO per share immediately after closure and ongoing G&A synergies expected to further boost growth. It is also pursuing building a portfolio presence in Europe, particularly in the U.K., which could wind up being a real growth driver for the company for years to come. Given its superior credit rating, O will also likely enjoy a cost of debt advantage that makes more investments potentially attractive to it than for ADC.
Meanwhile, ADC's relatively small size gives it a much easier time of growing its portfolio in a meaningful manner. In particular, it has two major growth avenues: its traditional retail triple net lease business and its ground lease business, which is a high growth opportunity due to a lack of penetration and consolidation.
Consensus analyst estimates through 2026 put ADC's AFFO per share CAGR at 5.8% and O's slightly behind them at 5.0%. Meanwhile, ADC is expected to grow its dividend per share at a 4.5% CAGR over that span, slightly behind O's expected 5.6% dividend per share CAGR through 2026.
Overall, we consider this area to be a draw between these two REITs as both are well positioned to generate solid mid-single digit growth for years to come.
Agree Realty vs. Realty Income: Track Record
O's track record is virtually impossible to beat, with 27 years of consecutive annual dividend growth and total returns that have crushed the S&P 500 ( SPY ) for decades:
While ADC has also done pretty well for itself, O has still significantly outperformed it over the long-term:
While both REITs enjoy strong track records, O's is second to none.
Agree Realty vs. Realty Income: Stock Valuation
When comparing these REITs side-by-side, we see that O is cheaper than ADC - albeit barely on a P/NAV basis - across every metric. As a result it wins the valuation competition hands-down.
Metric | P/AFFO | Dividend Yield | EV/EBITDA | P/NAV |
ADC | 19.56x | 3.8% | 19.98x | 1.24x |
O | 17.46x | 4.4% | 18.40x | 1.18x |
Investor Takeaway
Both ADC and O look are true sleep well at night (i.e., SWAN) triple net lease REITs that have phenomenal track records of generating wealth and dividend growth for shareholders. Both have well-positioned portfolios, stellar balance sheets, solid growth prospects, and proven alpha-generating businesses models and management teams at a time when investors should be placing a premium on these factors. That said, neither is particularly cheap at the moment, especially ADC. As a result, we rate both as Holds, but slightly favor O given that it is clearly cheaper and its track record and balance sheet are second-to-none in the sector.
That said, if ADC can fully exploit its foothold in the ground lease sector while continuing to drive solid growth in its core triple net lease retail business without compromising its underwriting and tenant quality, it could possibly outperform its growth estimates and wind up justifying its valuation premium relative to O. While we are not willing to make that bet at this point, it is something investors might want to keep an eye on.
If you are looking for bond proxies that grow their payouts consistently, regardless of the macro environment, ADC and O are among the best places to look. However, if you are looking for continued market-crushing returns, it is probably best to look elsewhere at ADC's and O's current share prices.
For further details see:
Better NNN SWAN: Realty Income's 4.4% Yield Or Agree Realty's 3.8%