Real estate investment trust (REIT) Agree Realty (ADC 0.98%) has a generous track record of dividend increases. Over the past 10 years, the retail-focused REIT has bumped its dividend 18 times and now pays its dividends monthly.
But with the retail landscape quickly changing, some investors are growing concerned the stock won't be able to maintain its juicy 4.1% yield. After all, the last time the stock cut its dividend was in 2010 after buckling from the weight of the Great Recession.
While there are signs of distress in the market today, here are three reasons Agree Realty should be able to keep raising its dividend.
NYSE: ADC
Key Data Points
1. It's rapidly expanding
Agree Realty owns and leases retail properties primarily to investment-grade tenants like Walmart, Dollar General, Tractor Supply, and Best Buy, along with many others. As of the third quarter of 2022, it had roughly 1,700 retail properties in its portfolio on long-term triple net leases (NNN) within a wide range of industries. The boring but reliable net lease is contracted anywhere from eight to 10 years, providing the company with reliable income over the long term through rental income. In net leases, tenants pick up most of the property's operating costs such as maintenance, insurance and taxes.
While most net leases have built-in rent escalators, it's not typically enough to make up for today's inflationary environment. That's where expansion comes into play. Agree Realty has been rapidly expanding its portfolio during the past few years. It spent more than $5 billion on development and acquisitions, more than doubling its portfolio from the start of 2020 through 2022 year to date.
As a result, its revenue has grown by 81% over the past three years. The REIT also has a small but growing ground lease business. Ground leases rent the land beneath a property over a multidecade lease. The nature of the lease is very reliable because it supersedes all other leases and even traditional financing like a mortgage. If a borrower defaults on the lease, they would lose the property located on the leased land, giving Agree Realty maximum security.
Its ground lease business has almost tripled over the past two years, growing from 73 properties to 201 today. This income accounts for about 12% of its annualized rents, and properties are leased to existing investment-grade tenants.
2. Its performance remains strong
Retail spending has slowed notably this past year. Big box retailers, including Agree Realty's largest tenant, Walmart, have felt the pinch as they battle high levels of inventory. The changing climate within the retail industry could put Agree Realty's earnings in jeopardy in the future, but for the time being it's performing admirably.
The REIT's portfolio is 99.7% leased, which is higher than its closest retail-focused peers, and it has executed new leases on 657,000 square feet of property this year. As of the third quarter, its core funds from operations (FFO) per share (a metric for REITs that works similarly to earnings per share) grew by 5.6%. Its net income per share was down compared to the same quarter last year but is still up for the first nine months of 2022.
Agree Realty also has sold properties that no longer fit its parameters, using the capital to fund new acquisitions for more recession-resilient and e-commerce companies. This year it sold nearly $45 million worth of properties, further reducing its risk exposure in the event the retail outlook worsens.
3. Its balance sheet is healthy
On top of its rapid expansion and healthy performance, Agree Realty also boasts an outstanding balance sheet. Its debt is 4 times EBITDA (earnings before interest, taxes, depreciation, and amortization), which is lower than the REIT average of 5 and lower than its closest retail REIT peers.
It has no major debt maturities coming due until 2025 and has $250 million of cash and cash equivalents on hand to continue funding its dividends and new acquisitions. The company recently raised its monthly dividend by 2.6%, which was its second increase this year.
Dividend payout ratios are one of the first things I look for when considering the health of a dividend stock. A payout ratio that's too high could put the dividend at risk of a cut in the future. But Agree Realty's dividend payout ratio is stable at 74%.
The REIT is one of the few stocks in the broader market that's gained during the past year, up about 1.5%. Investors have flocked to the stock in search of dependable dividend income in a time of extreme volatility. But even despite its slightly higher price today, it's still trading at an attractive valuation of about 18 times its FFO.
This retail REIT should continue to deliver tremendous value for dividend investors in the coming years without sacrificing reliability.
