Agree Realty: Patience Is Key To Unlocking Its Recovery (NYSE:ADC)

martin-dm/E+ via Getty Images Agree Realty Corporation (NYSE:ADC) investors have had a year to forget, as ADC posted a 1Y total return of -17.4%, a significant deviation from its 10Y total return CAGR of 12.19%. As a result, ADC bulls could point to the potential for a significant mean-reversion opportunity for the leading net lease retail REIT as we emerge from the Fed’s hiking regime. I last updated ADC investors in October 2022, as I upgraded the stock. That thesis worked for three months, but ADC topped out in January 2023. Unfortunately, ADC buyers could not find sufficient momentum to bolster its buying sentiments before experiencing a significant tumble between July and October 2023. With ADC taking out lows last seen in May 2020, I assessed it likely flushed out investors who didn’t anticipate such a remarkable three-year round trip, even when adjusted for dividends. However, ADC bottomed out in October 2023, in line with the broad market bottom. While the S&P 500 (SPX) (SPY) has continued to surge to new highs, ADC found resistance at the $64 level in January 2024, before the recent pullback. As a result, I assessed it’s an opportune moment for me to update investors considering whether to add more shares, given a more constructive environment for retail REITs this year. Agree Realty recently provided a fourth-quarter investment update, indicating a highly challenging investment environment. Accordingly, the company’s total investment activity declined 21% YoY, down to $1.34B. Despite that, the company indicated an ATM program to raise $235.6M in equity proceeds at an average of $61.5 per share. Given the recent decline, I assessed that the move was timely, as ADC fell to the $58 level in February. Notably, it has bolstered the company’s liquidity, which was about $1B as of Q4, including the anticipated proceeds from the ATM program. Management is confident of ADC’s ability to drive earnings growth in 2024 while “maintaining discipline and not increasing risk exposure.” Analysts’ estimates suggest that Agree Realty is projected to drive an AFFO per share growth of 3.4% in FY24, slightly below FY23’s estimated 3.5%. As a result, I believe it provides income investors with clarity over the safety of their dividends, implying an AFFO payout ratio of about 75%. Consequently, I find it interesting that the market has de-rated ADC markedly, notwithstanding Agree Realty’s robust balance sheet with a recurring EBITDA leverage ratio of 4.5x. In addition, the company also doesn’t have significant debt maturities until 2028 ($103M is expected to be due between 2024 and 2027). Furthermore, with the Fed expected to cut rates this year (although not anticipated to be in March), it should help drive more robust investment activity this year. Hence, there seems to be a bifurcation between the market’s expectations and ADC’s earnings growth profile for FY24. ADC is valued at a forward AFFO per share multiple of 14.3x, markedly below its 10Y average of 17.6x. In addition, its forward dividend yield of 5.2% is also markedly above its 10Y average of 4.4%. However, considering the 2Y (US2Y) still printing at 4.4% recently, does it make sense for ADC’s forward yield to mean-revert to the “risk-free” rate in the near term? I believe it’s not reasonable to expect that. As a result, the significant battering in ADC is justified, given the surge in the bond yields. Notwithstanding the caution, I believe we can all agree that the bond yields have likely peaked, considering the Fed’s possible rate cuts. The critical question is whether the market assessed that ADC could re-test its October 2023 lows, before re-rating higher? ADC price chart (weekly) (TradingView) As seen above, ADC formed a robust bottom in October 2023 ($52 level), attracting strong buying sentiments. However, the recovery has faced a snag, as it topped out in January 2024. ADC dip-buyers must return to defend the $58 to $60 level and help it consolidate constructively. I assessed that the pullback likely reflects caution over the timing of the Fed’s rate cuts. As a result, investors buying at the current levels must anticipate a more constructive Fed over the next six to nine months, anticipating the Fed to initiate and maintain its more dovish posture. More risk-averse investors can consider waiting for consolidation before reassessing the buy levels, as the current pullback could extend further. Despite that, I see ADC as attractively priced for a potential mean-reversion opportunity for patient income investors. Rating: Maintained Buy. Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified. I Want To Hear From You Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!

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