Thursday, January 28, 2016

29th AIM student update by Dylan Harkness: Agree Reality Corp. (ADC, $35.15) This REIT should still be a winner in 2016 - even with rising rates.


ADC (Agree Realty Corp.): Do We Agree on Agree?

By: Dylan Harkness, student at Marquette University

 Image result for agree adc logo

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.


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!

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