Agree Realty: Waiting For Rate Cuts With The Commons And Preferreds (NYSE:ADC)

I’ve been buying more of Agree Realty’s (NYSE:ADC) common and preferred shares since the start of the year in response to the continued weakness of these securities. The commons are down 9% over the last 1 year with the 4.25% Series A preferreds (NYSE:ADC.PR.A) trading at a material 32% discount to their $25 per share liquidation value. The commons last declared a monthly cash dividend of $0.250 per share, kept unchanged from the prior month and $3 per share annualized for a 5.1% dividend yield. This yield sits close to a historical 10-year high with ADC trading hands for a 14.4x multiple to the midpoint of its full-year 2024 adjusted funds from operations (“AFFO”) guidance of $4.10 to $4.13 per share. This multiple was roughly 19x through 2022, just as the Fed ramped up base interest rates to a more than two-decade high. Hence, a retrenchment of rates remains the core catalyst for positive total returns for both the commons and preferreds.

ADC owned 2,161 properties with a total gross leasable area of 44.9 million square feet as of the end of its fiscal 2024 first quarter. This portfolio was 99.6% leased with a weighted average remaining lease term of 8.2 years and with 68.8% of annualized base rent constituted from investment grade-rated national tenants. Critically, my investment in ADC is based on the outlook for AFFO growth, its ramping dividend, and its fortress balance sheet. The REIT’s guidance to grow AFFO per share by 4.2% year-over-year at the midpoint will mean the most recent dividend annualized is 137% covered, a roughly 73% payout ratio. The commons are up with the preferreds dipping since I last covered the REIT.

AFFO Growth, Investments, And Free Cash Flow

ADC generated first-quarter revenue of $149.45 million, up 18% over its year-ago comp and also beating consensus. AFFO per share at $1.03 was up 4.6% year-over-year on the back of continued investment momentum from the net lease REIT. ADC invested $140 million in 50 retail net lease properties during the first quarter against 2024 acquisition volume guidance of $600 million. The REIT also sold six properties for gross proceeds of $22.3 million and at a weighted average capitalization rate of 6.2%. Disposition volume for the full year is guided to come in between $50 million to $100 million.

ADC’s weighted average cap rate moved higher sequentially by 50 basis to 7.7% during the first quarter with management targeting investment spreads that offer at least 100 basis points over their cost of capital. The REIT’s free cash flow has been steadily rising, providing an internal engine for growth even as acquisitions dip from 2022 highs due to higher base interest rates. AFFO growth in aggregate with the dividend yield implies a near-term total return for ADC of at least 9%, a rate of return that could be boosted if the Fed cuts rates sometime in the second half of the year.

The Preferreds Opportunity, Debt Maturities, And The Fed

ADC’s preferreds offer an asymmetric investment profile. The security was rated investment grade at “Baa2” by Moody’s at the time of its issue in the summer of 2021. Their $1.0625 annual coupon has a monthly distribution schedule and when set against the preferreds trading for 68 cents on the dollar at $17.01 per share offers a 6.2% yield on cost. These face duration risk with the discount to liquidation privy to movements of the Fed funds rate as they were issued at a competitively low headline coupon rate of 4.25%. ADC’s recent May 2024 offering of senior unsecured notes due in 2034 was completed at 5.625%, 138 basis points higher than the headline on the preferreds.

ADC’s debt maturities are also extremely back loaded with just $52 million of debt maturing through to the end of 2026. The REIT held total aggregate liquidity of $920 million at the end of the first quarter with $620 million of this from its revolver. The lack of maturing debt means ADC does not face the same refinancing risk as some equity REIT peers, providing the REIT with the enhanced capacity to chase acquisition volume and grow AFFO.

Hence, ADC offers a near-record dividend yield from a growing portfolio of net lease retail properties with preferreds trading at a material discount to their liquidation value despite the safety of the underlying REIT and pending Fed rate cuts. I’ve bought both securities for strong total return potential wrapped within the safety of scale and an investment-grade rated balance sheet. Short-term returns for both securities will be mixed with inflation set to remain above the Fed’s target, the CME FedWatch Tool has at least 25 basis points of cuts as base expectations to exit 2024. I’ll collect the monthly dividends while waiting.