Agree Realty (ADC 0.32%) has transformed its business since a single lessee's bankruptcy forced it to cut its dividend in 2011. The real estate investment trust's (REIT's) growth over just the past decade or so has been pivotal in its effort to become a leading name in the net lease niche.
Agree Realty is likely to see more of the same growth over the next decade, but there are some things to consider here before you buy the stock.
What happened to Agree's dividend in 2011?
To understand just how much Agree has changed over the past decade requires going a little further back, to the 2011 dividend cut. At the start of 2011, Agree owned just 81 properties. Book retailer Borders occupied 13 retail assets and one office property, accounting for a huge 20% of Agree's rent roll. Borders filed for bankruptcy in early 2011. There was no way that Agree could withstand a hit like that without cutting its dividend.
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So the dividend was reduced from $0.51 per share per quarter to $0.40, which was a cut of just a touch over 20%. Management worked through the issue and kept the dividend static throughout 2011 and 2012. But by 2013 the dividend was heading higher again. At the start of 2013, meanwhile, the company owned 109 properties. In other words, it continued to grow despite the headwinds it faced from a material tenant bankruptcy. The 28 properties it added to the portfolio represented an increase of nearly 35%. That's a lot of growth, though it is important to note that it was from a relatively small base.
The pace of growth was rapid over the decade, as well, with the REIT expanding its portfolio from 109 locations to roughly 2,150. There's no point in putting percentages on that because they would be so large that it would render them somewhat meaningless. It is enough to say that the company bought more than 2,000 properties. Growth has been the big story for Agree for a very long time.
What does the future hold for Agree Realty?
Given that REITs grow by adding new properties to their portfolios, the easy answer here is that Agree will be larger a decade from now than it is today.
But how much larger?
Long gone are the days when adding 28 properties would lead to an increase of 38% in the portfolio. If the company only bought 28 properties from its current total of 2,150 or so, the portfolio would only expand by a little more than 1%. In fact, Agree bought 31 properties in the first quarter of 2024 alone. And the Q1 acquisitions came during a period when rising interest rates have made it more difficult to find attractively priced acquisitions. Basically, as a larger company, Agree's acquisition activity is probably going to be higher no matter what is going on in the world.
But Wall Street and the economy are cyclical and go through good periods and bad ones. It seems reasonable to assume that Agree can buy at least as many properties over the next decade as it did over the last 10 years or so. That would amount to the company doubling in size, which would be a pretty attractive outcome. However, given the increasing scale of the company, doubling the size of the portfolio is probably a reasonable low-end estimate. Growth will likely be higher than that. Or, to put it another way, Agree Realty remains a growth-oriented REIT.
How much runway is there for growth? If you look at Realty Income (O 0.28%), the largest net lease REIT, it seems likely that Agree hasn't come anywhere near running out of room. While Agree owns around 2,150 properties, Realty Income owns more than 15,400. There's plenty of room for Agree to more than double the size of its portfolio without hitting that upper limit, if that is even an upper limit (Realty Income continues to find new properties to buy, too).
Wall Street recognizes the opportunity
Rising interest rates have led investors to push down the value of REITs in general, and Agree has followed along for the ride. But that's pushed Agree's yield up toward the high end of its 10-year yield range, suggesting that the stock is attractively priced.
To be fair, Agree's yield is around 4.9%, which is lower than the 5.9% yield you could get from Realty Income. Basically, investors are pricing in Agree's more attractive growth prospects. If that sounds reasonable to you, it could be a good addition to your portfolio today.
