Agree Realty (ADC 1.41%) defied the odds last year. Shares of the real estate investment trust (REIT) fell less than 1%, which was massive outperformance considering the average REIT lost a quarter of its value. A big driver was the company's ability to invest a record $1.71 billion in expanding its real estate portfolio last year. Agree Realty could go on the offensive in a tough year in the real estate market because it pre-funded its capital needs.
The company appears poised for another big year. One green flag driving that view: It has already fully funded its balance sheet for its 2023 investment activity, meaning it can capitalize on current market conditions to keep expanding its portfolio. That positions the REIT to continue growing its monthly dividend, which yields 4%.
A record year
Agree Realty spent $1.59 billion to acquire 434 retail properties net leased to tenants for a weighted average remaining term of 10.2 years. That's about $200 million more than the prior record of $1.39 billion of acquisitions in 2021. Roughly 69.4% of the acquired properties' annual base rent (ABR) will come from tenants with investment-grade credit ratings. That pushed its portfolio total to 67.8% of ABR from investment-grade tenants.
The REIT also invested $118.5 million across developments and partner capital solutions (PCS) projects. That's nearly triple the $40 million it invested in development and PCS projects in 2021 and well above the prior record of $74.4 million in 2018.
Overall, the company made $1.71 billion in investments last year. That easily topped the record $1.43 billion of investments it made in 2021. The company's investments also exceeded its initial guidance that it would spend $1.1 billion to $1.3 billion last year. A big factor driving its record investment spending was that it entered 2022 with a fortress-like balance sheet and significant liquidity because of capital raised toward the end of 2021. That gave it the financial flexibility to capitalize on investment opportunities throughout the year.
These investments helped drive 7.8% growth in the REIT's adjusted funds from operations (FFO) per share in the third quarter. That has allowed Agree Realty to grow its monthly dividend by 5.7% over the past year.
Primed for another big year
Despite record investment spending, Agree Realty enters 2023 with a robust liquidity profile. It has enough financial flexibility to match last year's investment level if it finds enough opportunities.
The company has maintained its financial flexibility and liquidity by getting ahead of its capital needs. It entered the year with $1.5 billion of liquidity, including $900 million of capacity on its credit facility and $557.4 million of outstanding forward equity to go along with cash on hand. The company has proactively raised equity capital through forward equity offerings in September and the fourth quarter. As a result of last year's sales, it doesn't need to raise any more equity capital this year to match 2022's record investment spending while maintaining leverage within its targeted range. It's following the same blueprint that led to 2022's success when it raised more than $500 million in forward equity the prior year to bolster its ability to make deals.
However, the company made it clear it won't grow for the sake of expanding. CEO Joey Agree stated in the update press release, "As the macro-economic environment remains uncertain, we will be opportunistic and disciplined while investing capital and remain averse to moving up the risk spectrum."
The company's recent investments have seen it move down the risk spectrum slightly. Deals closed during the fourth quarter had a higher cap rate (6.4% vs. 6.2%), a longer weighted average remaining term (10.6 years), a greater emphasis on investment-grade tenants (73.2%), and a higher proportion of lower-risk ground leases (6.2% vs. 5.4%) than its 2022 average. These investments show that the company can still find attractive deals in the current environment.
Future investments will allow the company to continue increasing its dividend. Agree Realty has grown its payout at a 5.8% compound annual rate over the past decade.
The payout should keep heading higher
With funding already lined up, Agree Realty can focus on finding accretive investments. Those deals will help grow its rental income, enabling the REIT to continue increasing its dividend. It's a great stock to buy for those seeking a steadily rising passive income stream this year.
