It's been a rough year for real estate investment trusts (REITs), which own and lease property. Many REITs stocks are down by double-digit percentages this year, with some lower by as much as 50%, as interest rates have gone up and demand has fallen.
The two REITs that we'll discuss here, Equity Residential (EQR 0.15%) and Agree Realty (ADC -0.38%), have both performed well. But which is the better buy?
Don't let the share price fool you
Mike Price (Equity Residential): You wouldn't know that billionaire investor Sam Zell's multifamily residential REIT was having a good year if you just looked at the stock's performance. It's down 12% year to date.
The REIT's actual performance has been far better. Same-store revenue (rents at the properties it has owned for more than a year) is up 13.6% over last year, while expenses rose just 3.1%. Normalized funds from operations (FFO) for the first six months of 2022 are up 18.6% from the same period in 2021 and powered a dividend yield of 3.05%. And the REIT is successfully continuing its strategy of unloading properties in expensive coastal cities (it sold a 354-unit New York property in April and a 455-unit property in July) and moving to more growth-oriented geographies.
So why is the stock down? Mostly because the market is skeptical that Equity Residential (and just about every other REIT) will be able to obtain cheap financing to keep growing. Fears of a potential recession (and vacancies that would accompany one) might also have had an impact.
Equity Residential is addressing the first issue by using sales of properties it no longer wants to fund new purchases and development. And 94% of its debt has a fixed rate and weighted average maturity of 8.4 years, so it won't have to worry about interest rates anytime soon.
As far as recession worries go, Equity Residential is uniquely set up to benefit from a recession. It leases to affluent individuals whose rent is only 18% of their income. It is unlikely that many of the REIT's tenants will vacate because of a recession, and in fact, demand for units could increase as people wait for interest rates to drop.
A portfolio that just keeps growing
Marc Rapport (Agree Realty): Agree Realty is really on a roll. Along with easily doubling the S&P 500 in total return since the retail REIT went public in 1994, the suburban Detroit operation is now up about 11% so far this year while the big index is down about 12%.
There are good reasons the market continues to like Agree so much. For one, the portfolio just keeps growing, including by 228 properties in the first half of 2022 alone, pushing its holdings to 1,607 ground leases and net-leased buildings in 48 states.
A ground lease is where the tenant does the development while leasing only the land itself, while a net lease requires the tenant to pay for such expenses as taxes, insurance, and maintenance along with the rent itself.
Chief Executive Officer Joey Agree says the company has spent $860 million on new properties so far this year and expects to finish the year at a total of $1.5 billion to $1.7 billion in new acquisitions. (Agree's father, Richard Agree, founded the company in 1971 and is still its executive chairman.)
There has been equally impressive growth in FFO and net operating income that's helped fuel dividend growth averaging 5.5% over the past 10 years, including a recent boost of nearly 8% to $0.234 per share per month that has the current yield at about 3.5%.
Agree's properties are currently 99.6% leased, with investment-grade tenants responsible for two-thirds of the rent, led by Walmart, Tractor Supply, Dollar General, Best Buy, and The TJX Companies.
There's also sector diversity, with tire and auto-service businesses and grocery stores accounting for 9.4% each of Agree's business, followed closely by home improvement, convenience, and general merchandise stores.
As for geography, Texas accounts for 6.9% of the rent, followed closely by North Carolina, Florida, Ohio, Illinois, and its home state of Michigan.
How do I know all this? The just-released second-quarter earnings announcement is a great example of Agree's transparency. There you can find lists of its largest clients by name and sector, largest markets by state, lease-expirations history (including their percentage of its rent roll), current development projects, and more.
That degree of disclosure is not typical and is refreshing. Why not share details of why you've done so well? That helps inspire confidence that there's more to come.
Agree Realty is one of my largest holdings, and even with the recent run-up in price, I plan to buy more shares at the next opportunity.
Which REIT is the better buy?
Both REITs have had a surprisingly good year and you can expect both to keep performing over the long run. The question for investors is which type of tenant are you more comfortable with your REIT having: affluent consumers leasing their residence or investment grade big-box retailers? Both are likely great tenants, so it may come down to personal preference.
