"Volatile" would seem to be an apt word to describe the stock market this year. Uncertainty about the macroeconomic climate mixed with decades-high inflation has traders looking for safe havens and their actions resulted in a bear market, sending many retail investors running.
The S&P 500 remains down about 15.5% for the year, with some individual stocks down 50% or more. Agree Realty (ADC 1.18%) is one of a select group of stocks that has withstood this year's volatility pressures and is trading down just over 1% year to date.
This net lease real estate investment trust (REIT) invests in retail properties and is admittedly rather boring in terms of its operations. But maybe that's part of the secret of its success this year. Why is this rather boring dividend stock able to outperform the S&P 500?
One big reason: Reliability.
The retail net lease business is extremely reliable
Agree Realty develops, acquires, owns, and then leases around 1,700 retail properties using long-term triple net leases. These commercial real estate agreements call for the tenant to be responsible for taxes, maintenance costs, and insurance on the property, and they usually last for seven to 10 years or longer. The leases also account for rent escalations over the term of the lease and those escalation rates are tied to rising costs and inflation. All this ends up creating super stable long-term revenue for Agree Realty from rental income.
While the net lease industry isn't immune to recessions, it historically has fared better than other industries, remaining stable through economic volatility. Agree Realty has an added layer of reliability because the majority of its income, around 63% of its collected annual base rents (ABR), comes from investment-grade tenants.
Agree Realty maintains a diversified portfolio of properties ranging from essential services like grocery, home improvement, tire and auto services, auto parts, and convenience stores, as well as nonessential services like dollar stores, general merchandise and retail, fast food restaurants, and consumer electronics. Its occupancy is incredibly strong right now with roughly 99.7% of its portfolio being leased, which is the highest occupancy level out of its retail-focused net lease REIT peers.
It also has a growing ground lease business where it leases the land underneath retail properties to existing investment-grade tenants. Some of its largest ground lease tenants are big-name retailers like Wawa, Walmart, Lowe's, and Home Depot. Ground leases are one of the most dependable and secure lease types because they carry seniority over other leases or mortgages providing additional coverage for Agree Realty's investment. As of the third quarter of 2022, ground leases made up around 12% of its ABR.
Dividend reliability with a strong balance sheet
On top of its reliable business model, the company has a long-standing track record of dividend growth. In its nearly 30-year tenure as a company, its only cut its dividend once, back in 2010 in the wake of the Great Recession.
The Great Recession was brutal for retailers. Retail vacancy was over 10% and Borders bookstores, Agree Realty's largest tenant at the time, filed for bankruptcy. Agree Realty was still rather small back then, with just 81 retail properties in its portfolio. A tenant default on top of a struggling market had a huge impact on its earnings.
The company is in a much stronger (and more diversified) position now, having grown its assets by nearly 2,000 and having a low debt ratio of around 4 times its earnings before interest, taxes, depreciation, and amortization (EBITDA). Its more diverse income streams and lower debt can help it withstand pressures even if the retail economy deteriorates further in the coming years.
Since that 2010 dividend cut, Agree Realty has increased its dividend payouts 18 times over the last 10 years without compromising its dividend payout ratios. Today its dividend payments account for roughly 74% of its funds from operations (FFO), which is a metric that works similarly to earnings for a REIT. Plus the company now pays its dividends monthly, offering a yield of around 3.6%, which is more than double the S&P 500.
The company's strong performance as of late, attested business model, and track record of dividend growth is what makes it such an attractive stock for investors today. And it's precisely why its stock gained so much traction this year. If you're looking for more reliability in your portfolio, Agree Realty is a top pick for stocks even at today's slightly higher pricing.
