Agree Realty (ADC 0.56%) has been on a huge buying spree in recent years, more than doubling its pace of acquisitions since the COVID-19 pandemic began. Peer National Retail Properties (NNN 0.34%) is growing at a slower clip.
Should dividend investors focus on growth or go with a slow and steady tortoise and its higher yield? Here's what you need to know.
The dividend
Real estate investment trusts (REITs) are designed to pass income on to shareholders in a tax-efficient manner, so the dividend is a good place to start a REIT comparison discussion. Agree Realty's dividend yield is roughly 4.1% today, while National Retail Properties' is 4.8% or so. While the absolute difference between these two figures is modest, National Retail Properties' dividend yield is about 17% higher. That's a notable difference for investors looking to maximize the income they generate from their portfolios.
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National Retail's dividend has been increased annually for 33 consecutive years. Agree's dividend has been increased annually for a decade. In fairness, Agree hasn't been a public company as long as National Retail; however, it did cut its dividend in 2011. The company is in a strong financial position today, but it clearly falls behind National Retail on both yield and dividend history.
Agree's adjusted funds from operations (FFO) payout ratio in the third quarter was roughly 73%. National Retail's adjusted FFO payout ratio was 68%. That's another win for National Retail, though neither payout ratio is particularly troubling.
ADC Dividend Per Share (Annual) data by YCharts
Over the past decade, however, Agree's dividend has grown at an annualized rate of about 5.5%, with a slightly higher rate over the past few years. National Retail Property's dividend growth was a touch over 3%. That's a win for Agree and speaks to another important factor.
What about growth?
National Retail Properties isn't a particularly exciting company. Notably, since the pandemic hit in 2020, it has reduced its acquisition activity, with acquisitions dropping from $752 million in 2019 to just $180 million in 2020, as it dealt with troubled customers. The rate of activity has increased since that point, hitting $555 million in 2021 and $588 million through the first nine months of 2022, but the pandemic clearly set the company back a pace or two.
Agree went down a vastly different path. Its acquisitions rose from around $700 million in 2019 to $1.3 billion in 2020. The pace went up again in 2021, hitting nearly $1.4 billion, and management expects to meaningfully top that number in 2022 with a goal of $1.6 billion to $1.7 billion in asset acquisitions. That level of portfolio growth supports the REIT's higher dividend growth rate.
There are some interesting things to consider here. First off, National Retail has a long history of growing along with its customers. Since 2007, roughly 70% of its acquisitions have been relationship tenants and, interestingly, those deals offer slightly higher returns than its other transactions. For a conservative dividend investor, that type of dealmaking, given the deep insight the REIT has into the finances of its lessees, might be quite attractive.
Second, both Agree and National Retail have noted that the real estate market is in a state of flux right now, with some sellers not willing to adjust their asking prices even as interest rates have materially risen. So near-term acquisition volume could be lower than it has been over the past couple of years. If an acquisition slowdown comes to pass, Agree Realty's more rapid dividend growth may not be sustainable given its higher payout ratio.
That said, Agree's portfolio contains 1,700 properties compared with the 3,350 or so in National Retail's portfolio. It takes fewer acquisitions to grow a smaller portfolio, so even if there is a near-term period of market adjustment that curtails Agree's current acquisition pace, it still has an edge on the growth front. For investors with a longer time horizon, that's probably going to be more appealing.
Neither REIT is perfect
Neither Agree nor National Retail is going to tick all of the boxes for every investor. If you are looking to maximize the income you generate today and have a conservative investment bent, National Retail will probably be the better option for you. However, if you are focused more on growth, Agree has the clear edge given its more aggressive pace of acquisitions, smaller size, and larger dividend increases.
