Most investors have probably never heard of Agree Realty (ADC 1.04%). However, you might have spent some time in one of the real estate investment trust's (REIT) properties before. It owns over 2,500 properties across all 50 states, leased to prominent retailers such as Walmart, Tractor Supply, and Dollar General.
These retailers pay rent to the REIT each month, giving it the stable cash flow to pay a monthly dividend that currently yields 4.2%. The company's straightforward investment strategy, which involves investing in high-quality retail properties, has consistently enriched its investors over the years.
Here's a closer look at this little-known REIT.
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Built to deliver resilient results
Agree Realty has a simple investment strategy: It invests in retail properties, either net leased or ground leased, to financially strong retailers with businesses that are resistant to e-commerce. It puts a greater emphasis on the credit quality of its tenants than other REITs.
Nearly 68% of its rent comes from tenants with investment-grade bond ratings (and another 16% comes from unrated private companies). That's the highest concentration of investment-grade tenants among net lease REITs (its closest peer is at 54%). Companies with investment-grade ratings are at a low credit default risk, meaning they are unlikely to default on their financial obligations, such as being unable to pay their rent.
The REIT owns properties secured by long-term net leases (89.7% of its annual base rent) and ground leases (10.3%). Under a net lease, the tenant is responsible for all property operating costs, such as routine maintenance, real estate taxes, and building insurance; therefore, rental income is highly stable and predictable. In a ground lease, the REIT owns the land beneath a tenant's building, while the tenant usually owns and maintains the actual building. This type of lease provides a secure, bond-like income stream.
Agree Realty focuses on owning properties leased to retailers in strong industries. It has avoided or sold properties leased to companies that operate theaters, pharmacies, car washes, and other sectors of the retail industry that are struggling. Instead, it has concentrated on owning grocery stores, home improvement centers, and tire and auto service locations, among other more resilient property types.
The REIT's focus on owning retail properties net or ground leased to financially strong tenants in durable industries enables it to collect very resilient rental income to back its monthly dividend.
Steadily growing shareholder value
Agree Realty's conservative investment strategy has paid off for patient investors over the decades. The REIT has produced a 13.9% average annual total return since its IPO three decades ago. That would have grown a hypothetical investment made at that time into over $60,000 today (assuming dividend reinvestment).
Driving these enriching returns has been the company's ability to steadily expand its portfolio, which has increased its rental income and enabled it to steadily raise its dividend. Agree Realty has grown its payout at a 6% compound annual rate over the past 10 years.
The REIT remains in a strong position to continue growing shareholder value in the future. It complements its durable real estate portfolio with a fortress-like financial profile.
Agree Realty pays out a conservative percentage of its stable rental income in dividends (less than 75% of its adjusted funds from operations). That enables it to retain cash to invest in new income-generating retail properties. It also boasts one of the strongest investment-grade balance sheets in the REIT sector, providing it with additional financial flexibility to invest in new properties.
Agree Realty partners with high-quality retailers to support their real estate financing needs. It will acquire properties from retailers through sale-leaseback transactions, providing them with capital to recycle into expanding their footprints. Additionally, it will develop new properties for its clients and provide funding to retail property developers.
The company has a long growth runway ahead, as its current tenants own over 170,000 properties suitable for net leases, providing it with a rich opportunity set for future acquisitions. Meanwhile, most of its tenants are actively expanding their retail footprints. The company currently plans to invest between $1.4 billion and $1.6 billion in new properties this year and has committed to funding $140 million across 25 development projects that it expects to complete by the end of next year. These and future investments position Agree Realty to continue increasing its high-yielding monthly dividend.
A very enriching REIT
Agree Realty's durable real estate portfolio provides it with a solid foundation for enriching patient investors via its high-yielding monthly dividend. The company's strong financial profile enables it to steadily expand its portfolio, allowing it to increase its dividend. With more growth ahead, now is an opportune time to consider adding this underappreciated REIT to your income-focused portfolio.
