Agree with real estate (NYSE:ADC) is a large net lease real estate investment trust (REIT) with a dividend yield of 4.9%. For reference, that’s well above the 1.3% you’d get from S&P500 index and the 4.1% of the average REIT, using the Vanguard Real Estate Index ETF (NYSEMKT:VNQ) as an industry proxy. There’s a good reason for Agree’s high yield, but there’s also a long-term growth story here with plenty of room to run.
Okay, Realty likes simple black boxes
Agree Realty focuses on single-tenant commercial properties located throughout the United States. These assets are generally quite similar to each other, making them relatively easy to buy and sell. This also makes it relatively easy to replace a tenant in the event of a vacancy. And there is a large market for commercial properties in the United States, so this type of property is also quite liquid. While it is true that a given location is high risk because it is occupied by a single tenant, Agree owns more than 2,100 properties. This is enough diversification to offset the risk posed by individual properties.
Adding the net lease structure to the picture makes Agree’s business model even more attractive. This is because the REITs tenants are responsible for most operating costs at the property level. While this is a huge simplification, Agree simply has to sit back and collect rent while focusing the majority of its efforts on finding new properties to purchase. Of course, Agree isn’t the only company using this model, but it has grown relatively quickly over the past decade.
To put a number on that, Agree’s dividend has increased every year for about a decade. That said, it was removed in 2011, following the great recession, due to the bankruptcy of a key tenant. But, at that time, Agree owned fewer than 100 properties, and as such, it was a very different company. More important on the dividend front is the growth achieved by Agree, with an annualized dividend increase over the past decade of almost 6%. That may not seem like a huge number, but for a net lease REIT, it’s pretty attractive.
Why are investors pessimistic about Agree Realty?
Agree’s story is quite good. So why is the REIT’s stock price down about 20% from its 2022 highs? Before we move on to an explanation, it’s worth pointing out that falling prices have pushed Agree’s dividend yield up to 4.9%, which represents the high side of its yield range over the past decade . It appears the stock is on sale.
The good news here is that the problem doesn’t really come to an agreement. The problem is that interest rates have increased dramatically. This increases costs for REITs, which tend to rely heavily on debt to finance their real estate acquisitions. Don’t follow the crowd on Wall Street and don’t get upset: real estate markets adapt to changes in interest rates. It just takes time. If you’re thinking in decades and not days or weeks, OK should probably be enabled…
