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Better Buy: Realty Income vs. Agree Realty

[Updated: Mar 03, 2021 ] Feb 08, 2021 by Matthew DiLallo
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Last year was a brutal one for most retail REITs, or real estate investment trusts, due to the impact the COVID-19 outbreak had on their tenants' ability to pay rent. The average retail REIT produced a -25.2% total return in 2020, which badly underperformed the roughly -5% total return of the average REIT, according to Nareit.

However, some retail REITs fared a bit better, including Agree Realty (NYSE: ADC) and Realty Income (NYSE: O), which delivered total returns of -1.4% and -11.6%, respectively, last year. Driving their relative outperformance was their focus on single-tenant properties triple net leased to essential retailers. Because of that, this duo could continue outperforming their retail peers in 2021 and beyond.

With that in mind, here's a look at which one looks like the better buy right now.

The case for buying Agree Realty

Agree Realty Company Snapshot
Property count 1,129
Tenant concentration (top 3) 15.9% of its ABR
Leverage ratio 4.7 times debt-to-EBITDA
% of tenants investment grade 67.5%

Data source: Agree Realty

Agree Realty owns more than 1,000 retail locations across the U.S., leased primarily to investment-grade tenants. Its largest customers are Walmart (NYSE: WMT) at 7.4% of its ABR, Dollar General (NYSE: DG) at 4.6%, and TJX Companies (NYSE: TJX) at 3.9%. Overall, the company has a high concentration of essential retailers like home improvement (10.2% of ABR), grocery stores (8%), general merchandise (7.4%), tire and auto services (7.4%), and off-price retail (7.1%).

The company's focus on owning single-tenant properties leased primarily to investment-grade essential retailers paid big dividends in 2020, as the REIT routinely collected a significant portion of the rent it billed, including 99% over the last four months of the year.

Thanks to its portfolio's durability and strong balance sheet, Agree Realty was able to continue growing its dividend last year and expand its portfolio. The REIT recently switched to a monthly payout and currently yields 3.8% after boosting it by 6.2% over the past year. Driving that dividend growth was the acquisition of $1.31 billion of properties last year, adding 317 locations to its portfolio.

Backed by a strong balance sheet and well-covered dividend, Agree Realty expects to invest between $800 million to $1 billion in acquiring additional retail properties in 2021.That should enable the REIT to continue growing its dividend. In addition to that, the company recently launched a bold "rethink retail" initiative showcasing how it can capitalize on the sector's evolution to omnichannel.

The case for buying Realty Income

Realty Income Company Snapshot
Property count 6,588
Tenant concentration (top 3) 15.1% of its ABR
Balance sheet One of only eight REITs with A-rated credit
% of tenants investment grade 49%

Data source: Realty Income

Realty Income is a much larger REIT, with roughly six times as many properties. Further, it has more diversification, as retail supplies 85% of its rent, and it owns properties in the U.S. and Europe. However, it has a similar concentration at the top -- its three largest tenants, Walgreens (NYSE: WBA), 7-Eleven, and Dollar General (NYSE: DG), supply more than 15% of its rent.

Further, while it also primarily focuses on investment-grade essential retailers like convenience stores (12% of rent), grocery stores (8.4%), drugstores (8.4%), and dollar stores (7.8%), it does have some exposure to economically sensitive properties like health and fitness (7.1%) and theaters (5.7%). This means its rental collection rate -- while above the retail REIT sector average -- was a bit below Agree's, at 93.6% in December and 93.7% in November.

Realty Income compliments its relatively stable rental collection rate with a reasonable dividend payout ratio and top-tier balance sheet. Those factors gave it the flexibility to continue increasing its 4.6%-yielding dividend last year -- extending its growth streak to 93 straight quarters -- and buy additional properties, with it expecting to purchase $2 billion of retail locations in 2020. Given its strong financial profile, the REIT should be able to continue buying properties in 2021, which would allow it to keep its dividend growth streak intact.

Two of the best in retail

Agree Realty and Realty Income have excellent track records of creating shareholder value. Agree and Realty Income have produced compound average annual total returns of 13.3% and 15.3%, respectively, since their public listings in 1994. Both appear poised to continue generating strong total returns in the future, thanks to their top-notch portfolios and balance sheets.

However, Realty Income seems to have slightly more upside potential due to its relative underperformance last year, which gives it a somewhat lower valuation and higher dividend yield. Because of that, it stands out as the better buy between the two in a tight race.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends The TJX Companies. The Motley Fool has a disclosure policy.