Real Estate Consent: Awaiting a rate cut from Commons and Preferreds (NYSE:ADC).
I am Agree Realty’s (New York Stock Exchange: ADC) In response to the continued weakness of these securities, we have listed common and preferred stocks since the beginning of the year. Commons fell 9% together for the past year 4.25% Series A preference (New York Stock Exchange: ADC.PR.A) is trading at a significant 32% discount from its liquidation value of $25 per share. The Commons last declared monthly cash dividends. $0.250 per share, remained the same as the previous month, and the annual dividend yield is 5.1%, or $3 per share. This return is close to historical 10-year highs, with ADC trading hands at a 14.4x multiple to the midpoint of its full-year adjusted funds from operations (“AFFO”) guidance for 2024. $4.10 to $4.13 per share. This multiple is approximately A 19-fold increase by 2022, just as the Federal Reserve raised its base interest rate to a 20-year high. Therefore, interest rate cuts remain a key catalyst for positive total returns for both commons and preferreds.
As of the end of the first quarter of fiscal year 2024, ADC owned 2,161 properties with a total leasable area of 44.9 million square feet. The portfolio is 99.6% leased with a weighted average remaining lease term of 8.2 years and 68.8% of the annual base rent comprised of investment grade rated national tenants. Critically, my investment in ADC is based on AFFO growth prospects, growing dividends, and a strong balance sheet. The REIT’s guidance to increase AFFO per share by 4.2% year-over-year at the midpoint implies a guaranteed payout ratio of 137% for the most recent annual dividend, or roughly 73%. Since I last covered REITs, commons have fallen out of favor.
AFFO Growth, Investments and Free Cash Flow
ADC generated $149.45 million in revenue in the first quarter, up 18% year-over-year and beating consensus. AFFO per share was $1.03, up 4.6% year over year, driven by the net rental REIT’s continued investment momentum. ADC invested $140 million in 50 retail net leased properties during the first quarter against its 2024 acquisition size guidance of $600 million. The REIT also sold six properties for gross proceeds of $22.3 million and a weighted average capitalization rate of 6.2%. Annual throughput is expected to be between $50 million and $100 million.
ADC’s weighted average capital ratio rose 50 basis points sequentially to 7.7% during the first quarter, with management targeting investment spreads that provide at least 100 basis points above the cost of capital. The REIT’s free cash flow has been growing steadily, providing an internal engine for growth even as acquisitions fall from their 2022 highs due to rising base rates. AFFO growth along with the dividend yield means the ADC has a near-term total return of at least 9%, a return that could rise if the Federal Reserve cuts interest rates in the second half of the year.
Priority Opportunities, Debt Maturity, and the Federal Reserve
ADC’s preferred products offer asymmetric investment profiles. The securities were rated investment grade “Baa2” by Moody’s at the time of issuance in summer 2021. The $1.0625 annual coupon has a monthly distribution schedule and would trade at $17.01 per share or 68 cents on the dollar when set compared to the preferred stock trading. It offers a 6.2% return on cost. Because the bonds were issued with a competitively low coupon rate of 4.25%, they are subject to duration risk, subject to liquidation discounts based on changes in the federal funds rate. ADC’s recent May 2024 offering of senior unsecured notes due 2034 closed at 5.625%, 138 basis points above the preferred stock headline.
ADC’s debt maturities are extremely backloaded, with only $52 million of debt maturing by the end of 2026. The REIT had a total of $920 million in liquidity at the end of the first quarter, $620 million of which was in revolver. The absence of maturing debt means ADCs do not face the same refinancing risk as some of their equity REIT peers, giving the REIT an improved ability to track the size of acquisitions and grow AFFO.
As such, ADC offers a near-record dividend yield on a growing net-leased retail real estate portfolio with the safety of the underlying REIT and preferred trading at a steep discount to liquidation value despite the Federal Reserve’s interest rate cuts. I purchased both securities for the safety of scale and strong total return potential protected by an investment grade balance sheet. Short-term returns on both securities will mix with inflation, which is set to remain above the Fed’s target. The CME FedWatch tool has a minimum cut of 25 basis points as its baseline expectation for the end of 2024. We’ll collect your monthly dividends while you wait.