Shares of this REIT have recently taken a hit, giving it a nice entry point. The current annual dividend yield is 4.31%, paid monthly.
Agree Realty Corporation (ADC)
From Forbes Real Estate Investor
Agree Realty is a net lease REIT, which is likely the most defensive of the entire sub-sector (with regard to its portfolio composition and its focus on investment grade tenants).
ADC has been a top performer in the past, having posted strong double annualized digit total returns since its IPO in 1994 and reliable mid-single digit dividend growth over the last decade.
ADC’s portfolio is comprised of tenants from largely defensive industries. Less than 4% of ADC’s portfolio is made up of some of the more worrisome industries, such as the experiential gyms or theaters, which vastly underperformed in recent years.
ADC has clearly prioritized the most defensive cash flows, with large exposure to grocery stores, home improvement retailers, convenience stores, auto parts and service centers, and pharmacies…all segments of the retail space that should continue to perform even during an economic downturn.
Agree Realty posted industry leading rent collection throughout the 2020 pandemic, making a name for itself as one of the high-quality net lease REITs in the entire world, due to its disciplined focus on investment grade tenants. The company noted in its year-end investor presentation that it has collected at least 99% of its rent payments during each of the last 18 months.
At the end of 2021, 67% of its portfolio was made up of investment grade tenants (and frankly, when looking at its tenants that don’t carry credit ratings, it’s clear to us that this percentage would be even higher if they did because several of the companies in the un-rated category are some of the most sought-after tenants in the net lease segment).
And lastly, in terms of very reliable and predictable cash flows over the long-term, we’d be remiss not to mention that ADC offers investors unique exposure to ground leases (this is something that sets this company apart from its peers in the net lease space).
While we associate ADC with defensive holdings, that doesn’t mean that this is a slow growth company. Agree management has been quite aggressive on the investment/acquisition front in recent years. We believe that by taking advantage of record low interest rates (record low rates mean that even when prioritizing investment grade tenants, which generally have the upper hand at the negotiating table, Agree has been able to lock in attractive lease spreads) ADC has set itself up for nice growth over the medium-to-long-term with these moves.
And, looking ahead, that growth is expected to remain in place. In early January, ADC raised its 2022 investment guidance range to the $1.1b-$1.3 billion figure shown above (up from previous guidance of $0.8b-$1.0b).
And, with these continued growth prospects in mind, we wanted to highlight ADC’s recent sell-off, which we believe to be irrational, based upon both current fundamentals and future growth expectations. During the last couple of years, ADC has commanded a premium multiple, which we believe has been largely justified, due to the top-notch rent collection and AFFO growth performance that Agree has produced throughout the COVID-19 pandemic period. ADC shares have traded with a 20x+ P/AFFO ratio for the majority of the last several years. Since the start of 2018, ADC’s average P/AFFO ratio has been 20.7x.
Looking at forward AFFO estimates, we see that ADC is currently trading for just 16.6x 2022 expectations. The analyst community (which we agree with in this instance) expects to see ADC’s AFFO growth slightly accelerate over the coming years (from the 6-7% range to the 8-9%) range. With that in mind, we see an irrational disconnect between the stock’s recent negative volatility and the underlying fundamentals.
Although ADC’s share price has fallen by 12.25% during 2022 thus far, we remain very bullish on the shares. Instead of focusing on short-term share price volatility, we remain focused on fundamental growth, and ADC appears to have that in spades.
Our “Buy Up To” threshold for Agree Realty is $72.00/share. This means that after its recent double-digit dip, ADC shares offer a margin of safety of 14%.
These are exactly the types of moments in the market that we’re looking to take advantage of. It’s wonderful when an irrational market provides us with the opportunity to accumulate shares of a blue-chip REIT at a discount to fair value.
The combination of ongoing fundamental growth, mean reversion back towards our target multiple area, and the stock’s strong 4%+ dividend yield led us to believe that this defensive holding has the potential to generate annual returns of approximately 20% over the short-term.
Therefore, we’re pleased to maintain a “Buy” rating on this blue-chip REIT.
We see an attractive risk/reward scenario in place here as the stock nears strong fundamental support levels. And, while we can’t predict with an irrational market will do in the short-term, we do feel confident that ADC’s dividend is quite safe (the stock’s forward AFFO payout ratio is just 72%) and therefore, we like the proposition of collecting ADC’s dividend yield while we wait for the market to come to its senses.
Brad Thomas, Forbes Real Estate Investor, forbes.com/newsletters, brad@theintelligentreitinvestor.com, January 31, 2022