ADC (Agree Realty Corp.): Do We Agree on
Agree?
By: Dylan Harkness, student at
Marquette University
Disclosure: The AIM Equity Fund
currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
•
Agree Realty Corp. (ADC) is a real estate investment trust, which focuses on
the ownership, development, acquisition and management of retail properties net
leased to national tenants. It specializes in acquiring and developing net
leased retail properties for industry leading retail tenants.
• ADC’s
reduced shopping center exposure should be seen as a positive.
•
The record setting acquisition pace seen in 2015 should continue throughout
2016.
•
Their small team organization results in a hands on approach to sourcing deals.
•
Occupancies in the net-lease sector are now above prior peak levels – and are
close to 100%.
Agree Realty Corp. (NYSE:ADC) should still be considered a winner in
this rising interest rate environment. The company has successfully transformed
itself from a conventional shopping center REIT into one of the market’s top
performing triple-net lease players. Recently the company announced two
shopping center divestitures, North Lakeland Plaza (171k sq ft) for $13.2
million and Ferris Commons (170k sq ft) for $5.8 million. Throughout 2015, the
company acquired 73 retail net lease properties for a total purchase price of
$220 million. The weighted average cap rate of the acquisitions was 8% and the
properties have remaining leave terms of 12.2 years. The company has provided
2016 acquisition guidance of $175-$200 million of retail net lease properties
with similar yields. The company’s small team and expertise in single tenant
net lease developments allows for the company to source unique acquisition
opportunities that may have some extra work to do (lease restructuring,
entitlement issues, environment, build to suit, etc.). By doing this the
company is able to generate higher initial yields. Currently, the company is
basically the only player that integrates added value by a development arm to
coincide with growth by acquisition. Across the net lease sector, fundamentals
are above prior peak levels with occupancies close to 100%. Even in the event
of an economic downturn, the long term lease durations should allow the sector
to remain profitable throughout various economic cycles.
What has the stock done lately?
Since
the Federal Reserve decided to raise interest rates in December of 2015, ADC
has seen a 5.8% increase in stock price ($34.8). This is a positive indicator
that the rising interest rate environment will not have such a dramatic effect
on REITs - as many individuals believe.
Past Year Performance: ADC has increased 19.5% in value over
the past year, but the stock is still a deal. During the past 52
weeks, ADC’s shares have traded in a range of $27.74-$36.15. The dips can be
attributed to the slump in August and the uncertainty leading up to the Fed’s
decision to raise interest rates.
Source: FactSet
My Takeaway
With
the young management team’s hands on approach, along with ADC’s expected
pipeline for 2016, it should be expected the company will continue to grow into
a REIT giant. The management has successfully transformed the portfolio into a
high quality, investment grade net lease portfolio with little to none near
term lease expirations and an above par balance sheet. If you need convincing
about the management, look at the way they handled the Borders’ bankruptcy and
the divestiture of a struggling tenant, Kmart. In short, we agree that Agree should be held throughout 2016!
