In 2022 Agree Realty's (ADC 0.75%) stock price rose to around $80 a share. Today the stock is trading for less than $65 per share. If you are an income investor, this could be a good opportunity to jump aboard a fast-growing real estate investment trust (REIT). Don't wait too long, however, because investors will eventually catch on to the potential here.
This is what you need to know.
What does Agree Realty do?
Agree Realty is a net lease REIT. Net leases require the tenant to pay for most property-level operating expenses, reducing the risk and complexity of Agree's business. Although a vast simplification of how this business operates, because Agree doesn't have to worry too much about the properties in its portfolio it can focus most of its attention on finding new properties to buy. And it has done that quite nicely over the past decade or so, going from 130 properties in 2013 to 2,135 in 2023.
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Along the way, the REIT increased its dividend at an annualized rate of around 6% a year. That's not huge, per se, but REITs are slow-and-steady income stocks. Growing the dividend at 6% a year is a fairly strong showing for a REIT and, more importantly, that rate handily beats the historical growth rate of inflation. So the buying power of Agree Realty's dividend has grown nicely over time.
For investors looking for a mix of yield and dividend growth, Agree has been a very attractive investment. But, as noted, the stock price has fallen notably from its high-water mark in 2022. This pushed the yield up toward the high end of the range over the past decade and is an opportunity for investors who place more emphasis on yield than dividend growth to buy the stock.
Why is Wall Street so pessimistic about Agree Realty?
Of course, you might be wondering what happened in 2022. The answer is that interest rates started to move higher, which increases costs for REITs, which use debt to fund property acquisitions. Higher rates will increase Agree Realty's costs, and that will be a near-term headwind to growth. There's no way around that fact.
However, it hasn't stopped Agree Realty from continuing to grow. For example, in the first quarter of 2024, the REIT bought 31 properties and completed two development projects. So the growth story here is not over. Historically, property markets have always adjusted to interest rate changes so that investing in real estate has remained profitable. It just takes time for the adjustment.
Meanwhile, Agree Realty isn't sitting still. It is cherry-picking acquisitions and building from the ground up (it has another 14 projects in the works). But it is also taking advantage of the opportunity to sell assets at attractive prices so it can put that cash to work buying new assets that are cheaper. It sold six properties in the first quarter.
Eventually, investors will appreciate that Agree Realty isn't just trying to survive higher rates, it is finding a way to thrive despite higher rates. And when that happens the stock price will again reflect the REIT's long-term growth prospects. But how big is the long-term opportunity here? As noted, Agree Realty owns 2,135 properties. Its largest peer, Realty Income, owns over 15,400. There's a huge runway for growth ahead.
Don't wait -- Agree is a well-run net lease REIT
There's nothing magical about Agree Realty's $65 price point. The real story here is that the stock is notably off its high-water mark, which has pushed its dividend yield back up toward decade highs. If you are looking for a reliable high-yield stock with a solid dividend growth story, Agree Realty looks like it will fit the bill today.
