Better Buy: Realty Income or Agree Realty?

Two of the most popular publicly traded real estate investment trusts (REITs) are Realty Income (O 1.94%) and Agree Realty (ADC 1.31%). Both stocks have a long-standing history of raising their dividends, paying dividends monthly, and offering attractive yields that are more than double the average of the S&P 500.

I own shares in both companies, which use a net-lease model in which tenants bear most property operating costs, and personally feel they are both great investments for long-term income investors. However, if I could only invest in one of these stocks today, which would be the better buy: Realty Income or Agree Realty? Let's take a closer look and see.

The case for Realty Income

With more than 11,700 properties in its portfolio across the U.S. and Europe, Realty Income holds the title of the fourth-largest global REIT. Its portfolio is primarily made up of retail properties such as grocery stores, convenience stores, dollar stores, and quick service restaurants. It also has a growing number of industrial properties, which make up about 14% of its annual rents. 

Realty Income size brings certain benefits. The biggest is its access to low-cost capital. The company used historically low interest rates to its advantage over the past few years by going on a shopping spree. In total, it has spent $13 billion since 2020 to expand its portfolio. Unsurprisingly, this has led to a healthy bump in its key metrics, like funds from operations (FFO) and net income year over year. And the REIT remains flush with cash ($2.5 billion to be exact) ready for spending. 

Even with its record level of spending over the past three years, the company is still expanding. It recently completed the sale-leaseback purchase of the Encore Boston Harbor Resort and Casino with Wynn Resorts and will acquire 185 new properties from CIM Real Estate Finance Trust in the first quarter of 2023. The company's portfolio is staggeringly 99% occupied, and 85% of contractual rents were paid in its latest reported earnings period in the third quarter of 2022. The 15% not paying are largely in the theater and entertainment industry, which are either on active deferment plans or working toward repaying past due amounts.

The company, which bills itself as "The Monthly Dividend Company," has a stellar dividend history. The REIT has raised its dividend 119 times since its initial public offering (IPO) in 1994. That equates to 25 years of steady dividend growth. Realty Income has fared better than most of its REIT peers over the past year, down only 1.7%. Interest rate concerns weighed on the company, but its reliable dividend history helped it retain appeal among investors. Today it's trading at about 16 times its projected full-year 2022 FFO and paying a dividend yield of about 4.6%.

The case for Agree Realty

Agree Realty is a much smaller REIT owning almost 1,900 properties in 48 states. The majority of its portfolio consists of high-quality retail properties such as grocery stores, home improvement stores, tire and auto stores, and convenience stores, which mainly are leased to institutional-quality tenants. It also has a growing portfolio of ground leases, in which it rents out undeveloped land for the future development of retail properties for periods ranging from 20 to 50 years.

Like Realty Income, Agree Realty took advantage of cheap capital over the past few years and has rapidly expanded its portfolio, spending $5.2 billion from 2020 to 2022 on acquisitions and developments. As of Q3 2022, it's sitting on $1.5 billion in cash, which will undoubtedly help it take advantage of more opportunistic pricing for retail properties in 2023. It also doesn't have major debt maturities coming due until 2025.

The REIT also went public in 1994, although its dividend track record isn't quite as impressive as Realty Income's. The stock had steadily increased its payouts before cutting its dividend during the Great Recession. While this could be seen as a negative when comparing the two, Agree Realty is a much better company than it was before the Great Recession. Since 2012, it's improved its financial position, expanded its portfolio, and maintained 10 years of consistent dividend increases.

Unlike most other REITs, which are down 25% or more since last year, Agree Realty is up 18%. Investor interest in the stock grew during the bear market, which helped its share price soar. The stock trades at about 19 times its trailing four quarter's FFO and has a yield of 3.9%.

Which is the better buy?

I want to reemphasize that I think both stocks are worthy buys for passive-income investors. But if I had to choose only one today, my pick would be Realty Income. Agree Realty has a better financial profile, with slightly lower debt ratios and nearly as much cash as its much larger counterpart. However, Realty Income offers investors a higher dividend yield and more favorable pricing.

It also has the advantage of having a much larger, more diversified portfolio of properties, which can help it withstand hardships or higher defaults in the event the economy weakens. Both companies are growing at an impressive clip, but Realty Income offers investors better value today.