Is Agree Realty a Millionaire Maker?
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Net lease real estate investment trust (REIT) Agree Realty (NYSE: ADC) has a 4.1% dividend yield. That yield is a little higher than the 3.7% average for the REIT sector, but below the 5.6% you could get from buying industry leading net lease REIT Realty Income. Is Agree Realty worth the premium price for investors looking to build seven-figure portfolios? Maybe.
What is a net lease REIT?
A net lease requires tenants to pay most property-level operating costs. Net lease assets are usually leased to a single tenant, so any single property is high risk because it is either 100% leased or 0% leased. However, there are some easy ways to reduce the risk. The first is to have a lot of properties. Agree Realty has over 2,200 assets in its portfolio, which provides a fair amount of diversification. The second way to mitigate risk is to choose good properties.
Agree starts off with a focus on retail assets. Retail properties are very similar, making them easy to buy, sell, and release if necessary. The sector is also very large, with Realty Income estimating the U.S. retail net lease market at about $1.5 trillion in size. That's an ample pond for Agree to fish in, with the REIT focused on working with strong tenants.
The third way to keep risk at a minimum is to closely monitor lessees and actively manage the portfolio. In short, the goal is to bring in more strong tenants and shift away from weak ones. To this end, Agree has been selling Walgreens Boots Alliance properties while buying properties from stronger retailers, like Tractor Supply and TJX Companies. After being forced to cut its dividend when bookseller Borders went bankrupt, Agree has clearly learned a valuable long-term lesson. To be fair, Agree was a much smaller REIT back in 2011 than it is today, but taking an active approach with troubled tenants is still a good plan.
One last fact that's important here is that Agree has a strong balance sheet, with an investment grade credit rating. That not only allows the REIT to issue debt at attractive prices, but it means that Agree can withstand some financial adversity before the dividend, which has now been increased annually for a decade, would likely be at risk.
Why Agree Realty is worth buying
All in, Agree Realty appears to have an attractive net lease business with ample room to grow. That's backed up by the fact that industry giant Realty Income owns over 15,400 properties. Which is where the long-term value offered by owning Agree Realty comes into play because it is still just a fraction of the size of Realty Income.