I try not to look at my brokerage account too often, as is advised by far wiser folks than me, but I just did. Of the 21 real estate investment trusts (REITs) that I own, only four are showing green (in this case, based on what I paid for shares in the past year or so.) The other 17 are in the red, some quite dramatically.
The greenest of the green is Agree Realty (ADC 0.26%), my single largest holding in that pack of passive income producers. At this writing, Agree stock is up about 6.7% year to date while the S&P 500 and the CRSP US REIT Index are down about 18% and 20%, respectively. This retail trust is also yielding a respectable 3.7%, more than twice that of the S&P 500, and has raised its monthly payout by an annualized 6.5% over the past three years.
I've only owned this real estate investment trust for a couple of years, but those who have owned it since its 1994 initial public offering (IPO) have enjoyed a total return of 3,000%, more than doubling that of the 1,430% racked up over that span by the Dow Jones Industrial Average. And since its IPO, the suburban Detroit operation has provided a compound average annual return of 12.5%.
ADC Total Return Level data by YCharts
As the chart above shows, Agree's outperformance really got legs in about 2016, and this dividend machine has the strategies in place to keep that momentum going. So what's going on here that makes this company such a market beater?
Well, for starters there's rapid growth in recent years that now has the portfolio at 1,607 properties in 48 states. Agree has added 228 of them in the first half of 2022, spending about half of the $1.5 billion to $1.7 billion it plans to invest in net-leased buildings and ground leases by the end of the year.
And there's more.
Diverse, recession-resistant tenants and geographic spread
Investment-grade tenants make up two-thirds of the rent roll, led in order by Walmart at 7.2% followed by Tractor Supply at 4.3%, Dollar General and Best Buy at 3.9% each, and TJX Companies at 3.1%.
A similar spread is found in Agree's geographic dispersion. Texas locations provide 6.9% of the income, with North Carolina, Florida, Ohio, Illinois, and Michigan following in order close behind at 5.7% to 5.2% of the rental flow.
NYSE: ADC
Key Data Points
As for retail sectors, grocery stores, and auto service businesses represented 9.4% each of Agree's business in the second quarter, with home improvement, convenience, and general merchandise stores also making significant contributions.
More positive financial metrics help bolster confidence
Then there's the balance sheet. The company had a ratio of net debt to recurring earnings before interest, taxes, depreciation, and amortization (EBITDA) of a very healthy 3.8 in the second quarter of 2022 and strong debt ratings of Baa1 from Moody's and BBB from S&P Global, pointing to its continued ability to profitably add to its portfolio that now covers 34 million square feet and includes every state but Hawaii and Alaska.
Core funds from operations (FFO) is another point of strength here. Agree grew that key measure by 12.5% in the first half of 2022 to $1.95 per share. That's good for a payout ratio of about 78% based on cash flow, a very sustainable level that should keep this Dow-beating dividend machine in good stead with income investors now and going forward.
Trusting this trust for retirement income
I'm a recent retiree who has shifted much of my investing to REITs to take advantage of their income streams and records of relative stability through recessions and other market turmoil. That's why so many of the 21 I own are in the red right now based on the relatively short time I've held them.
Agree stands out as one that has done well recently, which many haven't, as well as in the long run, which many REITs have. But not many have that kind of long-term record and the prospects going forward as Agree Realty and that's why I remain so confident in this part of my portfolio.
