Agree Realty Stock: Who Else Is Backing Up The Truck With Me? (NYSE:ADC)

This article was coproduced with Wolf Report.

I don’t mind sounding like a broken record.

In fact, I rather like it.

It implies that I’m of a high conviction in the companies where my stakes are the highest.

So, when I am updating here on Agree Realty Corporation (NYSE:ADC), a company I wrote about not that long ago, I do so because the short term has changed in terms of valuation, but the long-term outlook certainly has not.

Agree is an overweight position (for Wolf and Brad).

Realty Income (O) is Brad’s largest stake (~10% exposure).

Both Realty Income and Agree Realty represent superb investments here at their respective valuations.

I am of a firm stance here that anyone not investing here, and whose investment goals and portfolio strategies actually line up with this company, will regret not investing here in 5-10 years.

This was especially true when both of these companies dropped during fall, and short term this has proven to be the case, but the recent surge upward has been halted, and we’ve seen some softness in the valuation, which has moved Agree Realty back to a near-5% yield, which makes it of great interest to me.

Agree Realty – Back to near 5% yield

With the case for interest rates being uncertain, some may ask why you should be investing in a 5% yield when many bonds and money market funds provide a similar sort of return.

This is one of the easier questions for me to address.

The yield is only a small part of ADC’s appeal – the combination of capital appreciation and yield, coupled with what I argue to be one of the most qualitative management teams in triple-net.

Remember, and look at the second article that I published this week.

I took a victory lap with some of my better investments in the last 6-9 months and gave you updated price targets for them.

Agree Realty does have the potential to go down the same road, but I consider it a stretch to where this real estate investment trust, or REIT, actually reaches a share price where I would consider selling my shares.

I own the REIT shares for qualitative exposure to appealing triple-net properties, coupled with what I view as an attractive price for ownership in this environment and considering the REIT’s profitability, along with the company’s well-covered and attractive 5%+ yield.

I do not consider it unlikely for my monthly positions, which include ADC, to start providing me this year with over $2,000 in cash every month – and those are just the monthly positions.

While monthly money isn’t an argument in and of itself to me – you also need to make sure it’s sustainable and makes valuational sense – ADC has to me all the signs of a qualitative investment.

Its market cap of over $5B, its TSR of 25.9%, and its compounding of 11.3% since IPO, all of those signs are of a qualitative management and working business model.

What I like about ADC is that the company does not skimp on quality and does not expand at any cost.

It’s something that I believe the giant Realty Income could learn from.

I believe that this is something ADC does a lot better – but it is hard to compare the two despite their sector, because there are investment and business strategies that work excellently for companies with sub-$10B market caps but that might work very differently for a $100B market cap business. It’s the scale question.

But Agree Realty is a company that should be and deserves to be at the top of your watchlist.

Its issuing of an increased 2023E guidance which is likely to see funds from operations, or FFO, growing at 3-4% for the next few years should put much of the fears and criticism of potential negative growth to rest.

While ADC is not expected to provide outsized, double-digit growth, this was never an expectation I had for the company.

The main argument here is tenant quality.

Unlike O, we don’t have much Walgreens (WBA) here.

In fact, not only do we not have Walgreens in the top 15, I would say that we don’t have any sort of risky tenants in that list at all.

Oh, sure, you can argue that CVS (CVS) is a pharmacy as well, but I would argue that recent historicals prove it more well-managed than Walgreens in every way. Also, the tenant concentration is far lower here, with only Walmart at over 5%.

Almost 70% investment-graded and even the unrated companies being businesses like Aldi, you get an overall snapshot of safety that’s fairly unparalleled in this field. The company focuses on e-commerce-resistant national and super-regional retailers and companies, with less than 2% franchise-focused businesses.

In addition to all of the properties it owns, the company is also a very prolific ground lease company, with a significant portion of these sorts of contracts.

How ground leases are structured means that tenants have significantly more interest in maintaining the lease given their investment into that parcel, in turn offering the landlord, ADC, some additional safety – and you can see the caliber of companies that hold the ground leases.

Even in the cases where these expire, ADC has a superb history of capturing embedded value at a 159% rate.

There are examples where the prior lease, to Chase Bank, was re-leased at a new rate increase from under $30/sqft to over $46/sqft at a 15-year rate with a 10% rental escalator every 5 years – nearly doubling the ABR.

ADC is one of the best-of-breed companies you find in Triple-net.

Its disciplined acquisition strategy, its portfolio management, and it’s “lean and mean” sort of character despite a $5B+ market cap, which means it cannot be called small, makes it easy to sing the company’s praises. It means that I as an analyst need to be careful so that I do not come across as any sort of “fanboy” – I always want to be very aware of risks and downsides here.

But the simple fact is that I see very few downsides with Agree Realty.

Why is that?

1. The company has been focusing on investing in omnichannel critical real estate, recession-resistant properties, and complete avoidance of JV’s or PE ownership or stakes. While I do invest in PE, I also know the dangers that PE brings. This is a world I’m actually getting deeper into – and I encourage novices, if interested, to read the book “The Private Equity Toolkit” By Tamara Sakovska, that provides an entry into the thinking and “how the sausage is made” for these sectors. But while I like this for some sectors and businesses, I want ADC to stay clear of this – and they do.

2. The growth potential, and by that I mean explosive 10-20% annualized base rent (“ABR”) or FFO growth for this company is near non-existent. That does not mean there is no potential for slow and steady growth.

Slow and steady growth does mean that the company is likely to see a higher degree of valuation and share price punishment during times when money, and, therefore, interest rates and risk-free rates, are higher/more expensive.

This does not bother me, because I mean to own ADC for a very long time, so I know that in times of lower interest rates, they will go back up.

3. The company has proven, time and time again, that it will continue to invest no matter the market climate, as long as the deal makes sense. It will also continue to sell off and divest properties. And management has proven apt at spotting “bad apples,” with one particular one justifiably highlighted.

Not even Realty Income went this active.

I also want to repeat again, as I have in previous articles, that any who argues safety needs to understand that the company has no maturities over $50M until 2028. That’s 4 years of essentially no maturities.

Debt to EV?

Below 28.5%.

Fixed charges?

Covered at 5.1x, with net debt below 4.6x.

This is one of the most conservative REITs in existence, and it was awarded BBB for it – and rightly so.

Capital markets remain wide open for Agree, and ADC has proven, even during frothy periods, that it will not allow itself to be tempted to “bad practices,” such as overleverage. The company has been below 4.5x since 2018, during the entire COVID-19 and “frothy” period when other REITs and companies dialed up their leverage due to, among other things, FOMO.

How did that work out for many of them?

Joey!

Joey Agree, CEO at Agree, is a regular commenter on Seeking Alpha, and who knows, he may drop in and say “hi” in the comments below.

We really like Joey’s transparency, something that we would like to see with more CEOs in the REIT sector. Brad has interviewed Joey on many occasions, and he plans to do so again after earnings (expected on February 13th).

Brad also met with Joey a few weeks ago at Agree’s new corporate HQ.

Joey has also been a regular buyer of Agree shares, another indication of strong shareholder alignment.

Joey owns around 554,000 shares (as of December 10, 2023), which translates into a value of just under $33 million.

Finally, Joey and the Agree Realty board opted to begin paying monthly dividends in 2021. This is a huge vote of confidence for retail investors, as these monthly payments serve as reminders that the business is generating very stable and consistent income.

Joey Agree has done a great job and deserves the credit for his strong alignment of interest with the Average Joe and Jane.

Valuation for Agree Realty

One of the core questions of any article or thesis I make is to ask if the valuation for a company makes sense to me.

You could argue that ADC is in fact only worth 15x P/FFO with a growth rate estimated between 3-4% FFO in an environment like this. That’s fine, but you’d still get over 8% per year including dividends.

That might not beat most indices consistently, but you’re not losing money, and given the monthly well-covered dividends based on the sort of portfolio we have here, that makes even that bearish scenario an income investor “dream.”

Why a dream?

Because I don’t view anyone that promises 7-19% yields, monthly or otherwise, sustainable over the long term. There’s usually some “catch” with that. With ADC, I don’t think there is a catch.

But back to valuation.

If you believe that, you’re also ignoring completely the entire history of premiumization of this company, and you’re calling this company worth $60/share.

The problem with that is that this only makes sense in this very limited snapshot of the market. Outside of this market, and outside of this rate environment, and considering that ADC never has missed estimates – only beaten them or hit them – you should question such a 15x valuation.

At 16x P/FFO, this company, even at 3-4% FFO growth, annualized at double digits of 10.2%.

At 18x P/FFO, it annualized at close to 15%.

So what do the historical averages say?

That it’s worth 17.6x on a 10-year, and 20x on a 5-year average.

Granted, we’ve seen this company drop-down for extensive periods of time.

Years in fact.

Again, would it bother me if it did?

Not really – I’d still get my yield, and the lower exposure means I could justify more shares.

I believe the “truth” in the company’s long term comes somewhere between 16-19x P/FFO.

That means I consider anywhere from 11-19% annualized to be likely even at this valuation, and that does not include dividend growth, which is currently estimated to reach $4.34 by 2026E, which would mean a 2026E investment yield at sub-$60 of 5.3%, which is where we were in October – again, valuation matters.

S&P Global still has a price target range of $61 on the low side to $80/share on the high side. This is higher than we’ve seen in the last year. Out of 14 analysts, 13 are at “BUY” or a similar positive rating here, giving us a very high degree of conviction – and I agree with this.

Here is my updated thesis for Agree, and why I still view this as one of my go-to-investments.

Thesis

• Agree Realty is, next to O, one of the most qualitative investments around in the entire REIT space. While many opportunities do provide a higher, realistic upside, there are very few that offer risk-free-beating dividend yields with the potential for a reversal at such safety. ADC is a monthly dividend payer with a great future – and I keep pushing cash to work here.
• ADC makes up a substantial amount of my conservative investment portfolio – both the private and the corporate one I run. It’s also one of my highest “ratings” out there when it becomes cheap.
• Agree Realty has a PT of at least $75/share, giving it an upside of at least 18% here, and potentially more.
• Agree Realty is a “BUY,” and I still consider it to be “cheap” below $60/share.

Remember, I’m all about:

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

This company fulfills every single one of my investment criteria barring cheapness – I’m at a “BUY.”