One of the emerging stories of 2023 has been the crisis brewing in the commercial real estate sector. The problems in the office real estate sector are well-known, driven by the adoption of work-from-home.
We are also seeing emerging problems in retail commercial real estate space. Lower-quality locations are seeing stress, and rising borrowing rates are making things worse. Does this pain extend to Agree Realty (ADC 1.51%)?
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Agree Realty is a top triple-net lease REIT
Agree Realty is a net lease real estate investment trust (REIT). Net lease REITs develop properties and then lease them out under long-term leases called triple-net leases. These leases are different than gross leases, which are the type most people encounter. Under gross leases, the tenant is responsible for rent, while the landlord assumes the other operating costs. If you rent an apartment, you probably entered a gross lease.
The triple-net lease requires the tenant to cover additional costs such as insurance, maintenance, and taxes. These leases generally have a long duration and are expensive to break.
Agree Realty's tenant base is highly defensive
Triple-net lease companies need to ensure that their tenants are highly stable and able to perform well in just about any economic environment. This means that defensive companies are the best choice. Agree Realty's top tenants are certainly in that category, including Walmart, Dollar General, and Tractor Supply. The biggest industries are grocery stores, hardware stores, and tire/auto services. Regardless of the GDP growth rate, people will still need hardware and consumables, and oil changes.
Agree focuses on tenants that have an omni-channel presence, which means they sell both online and in physical stores. Agree looks for companies that are recession-resistant (another word for defensive) and avoids tenants that are owned by private equity companies. This is because private equity portfolio companies generally have a lot of debt, which makes them susceptible to downturns.
As of Dec. 31, 2022, Agree owned 1,839 properties with 38.1 million square feet in gross leasable area. At the end of the June 30 quarter, Agree Realty's portfolio was 99.7% leased, and these leases had a weighted average maturity of 8.6 years.
Agree Realty has very little debt coming due
As of the end of June, Agree Realty had no variable rate debt outstanding (which means that rising interest rates won't raise the interest on that debt) and no material debt maturities until 2028. While many commercial real estate companies are struggling to roll over maturing debt, this will not be an issue for Agree. Agree's balance sheet and tenant base separate it from a lot of the troubled retail REITs out there.
Last year, Agree Realty earned $3.83 in adjusted funds from operations per share. REITs generally report funds from operations (FFO) in addition to net income because it gives a better picture of the company's cash flow potential. FFO excluded non-cash charges like depreciation and amortization, which is a big expense under generally accepted accounting principles (GAAP).
At current levels, Agree is trading on a price-to-FFO ratio of 16.2 times, which is reasonable for a high-quality REIT. Agree pays a monthly dividend of $0.243, which works out to an annual dividend of $2.916 per share. The payout ratio, which measures what percentage of income the dividend consumes, is 76%, which is about right for a REIT since they are required to pay out most of their income in dividends. This gives the company a dividend yield of 4.8%.
Agree Realty continues to invest in the business, so it should exhibit both growth and income. It is a good candidate for an income investor.
