64th AIM Student Update by Dylan Harkness. Agree Realty (ADC). "It's agreed that retail chains will rely on ADC for the development and leasing of properties"

ADC (Agree Realty Corp) Investors Agree on Q1 2016 Performance

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

• In the first quarter of 2016, ADC had an adjusted FFO of $12.7M ($0.61 per share), this represents a ~27.2% increase from last year.

• Total rent revenue grew to $18.7M, representing a 28.2% increase YoY.

• Acquired 13 high-quality retail net lease properties located in 9 states for $33.3M. Also completed the hobby-lobby development project in Springfield, Ohio.

• Targeted 2016 acquisition volume remains at $175-$200M.  

Agree Realty Corp (NYSE: ADC) Investors clearly enjoyed what they heard on the Q1 earnings call, as shares of ADC reached an all time high of $40.60 on April 26^th. The portfolio occupancy was roughly 99.5%, with an average remaining lease term of 11.2 years. The properties acquired in Q1 are leased to 30 national and super regional tenants operating in 9 diverse retail sectors including the entertainment retail, specialty retail, quick service restaurant, discount, and auto services sectors. The properties were purchased at an average cap rate of 7.9% and an average remaining lease term of 7 years. ADC is currently conducting due diligence on a number of individual assets as well as portfolios. The company currently intends to reduce the portfolio’s exposure to Walgreens due to leases expiring and Walgreens’ properties currently being sold for cap rates in the low to mid 5s.

ADC also has the unique ability to develop properties and not just to acquire them. This gives ADC leverage to create structures on land it already owns and then rent it out – resulting in higher yields. Recently, construction has started in a developmental property that will house a Burger King. The development has a total cost of $1.6M and is the first project of ADC’s partnership with Meridian Restaurant to develop 10 Burger King locations – subject to 20 year leases. Currently, ADC is developing properties for Wawa, Chick-fil-A, and Starbucks.

Moving forward, ADC’s strong management team and conservative balance sheet should poise the company for steady growth – the company recently increased its quarterly dividend by 3.2% to $0.48. ADC’s 100% retail net-lease portfolio has been put together within the past 5 years and does not contain a significant amount of office supply, book stores, and other tenants that may be subject to the shift towards e-commerce and digitalization.

What has the stock done lately?

The FTSE NAREIT All REITs Index has gained nearly 10% in March and 5.86% over Q1 – outperforming the S&P even in this rising interest rate environment (Although Yellen gave dovish signals at last meeting).  ADC alone has outperformed the S&P YTD (17.54% vs 2.54%) and QTD (2.63% vs 1.17%).

Past Year Performance: ADC has increased 24.81% in value over the past year and has already given shareholders returns in the 20% range this year. From a 52 weeks perspective, the stock has fluctuated from $26.62-$40.22.

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My Takeaway

With a strong management team that has the ability to hand pick existing properties, as well as develop their own, ADC should grow from a standard retail REIT into one that has a significant development arm. Each quarter the company is adding new tenants which will continue to grow and lead to new development opportunities. In the future, it is my opinion that retail chains will rely on ADC for the development and leasing of properties.