Agree Realty (ADC +1.15%) is a prominent net-lease real estate investment trust (REIT). It has a solid history of dividend increases behind it, but most notable is the fairly rapid rate of dividend growth over the past decade. The roughly 17% rise in its stock price over the past three months is a positive in many ways, but for investors looking at the stock today, it could materially change their buying calculations.
What does Agree Realty do?
As noted above, Agree is a net-lease REIT. That means that it owns single-tenant properties for which the tenants are responsible for most property-level operating costs. While any single property is high risk given that there's only one tenant, across a large enough portfolio the risk is pretty low. Agree is a great example of both sides of the risk equation here. In 2011, when it owned less than 100 properties, the bankruptcy of a single tenant resulted in a dividend cut. Today, with over 2,200 properties, the risk any single property or tenant poses to the dividend is pretty low.
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But there's more about the net-lease approach that needs to be examined. Normally, Agree Realty provides property sellers access to growth capital when it buys their assets. Essentially, sellers are freeing up cash that is locked in a building so they can go out and buy another building to expand their footprint. This is a pretty specific example, too, because Agree's target sector is retail. Opening new locations is one of the main drivers of growth in the retail sector.
Agree has been pretty astute at partnering with fast-growing retailers while managing to limit its exposure to retailers that face challenges. For example, Agree increasingly buys rapidly expanding Tractor Supply and TJX locations while moving away from struggling Walgreens stores.
NYSE: ADC
Key Data Points
Is Agree Realty worth buying?
Agree's share prices got hammered by rising interest rates, which was par for the course in the REIT sector. However, the worst seems to be over; the stock price is up some 17% over the past three months. That rise outpaced the increase of the average REIT. Investors seem to realize that Agree remains an attractive dividend growth stock.
Agree's dividend growth over the past decade has been around 6% or so. The bellwether net-lease REITs, like Realty Income (O +1.27%), have only boosted their dividends at around half that pace. So there is a lot to like here for dividend growth investors. However, as the stock moves higher, the dividend yield becomes less attractive to income investors. Notably, Agree's 4.4% yield is well below Realty Income's 5.5%. If you are looking to maximize the income you generate, you may want to look elsewhere.
But the story is more complicated than that. Remember that net-lease REITs provide capital to property sellers. The way net-lease REITs like Agree come up with the cash to buy assets is by selling stock and issuing debt. Thus, a higher stock price is a positive because it makes it easier to raise equity capital for future investments, allowing Agree to buy more properties. Dividend growth investors will appreciate that.
Agree is not as attractive as it was
When you step back and look at Agree, the story is a bit mixed. As the stock has risen, it has become a less attractive income investment relative to other net-lease options. But at the same time, that price increase gives Agree an advantaged position on the growth front, because selling stock will bring in more cash for property acquisitions. If you are a dividend growth investor, you'll probably still find Agree Realty an attractive investment even after a fairly swift stock price advance.
