Net lease real estate investment trust (REIT) Agree Realty (ADC -0.72%) has a 4.1% dividend yield. That yield is a little higher than the 3.7% average for the REIT sector, using the Vanguard Real Estate Index ETF as an industry proxy, but below the 5.6% you could get from buying industry leading net lease REIT Realty Income. Is Agree Realty worth the premium price for investors looking to build seven-figure portfolios? Maybe.
What is a net lease REIT?
A net lease requires tenants to pay most property-level operating costs. Net lease assets are usually leased to a single tenant, so any single property is high risk. However, there are some easy ways to reduce the risk. The first is to have a lot of properties. Agree Realty has over 2,200 assets in its portfolio, which provides a fair amount of diversification. The second way to mitigate risk is to choose good properties.
Image source: Getty Images.
Agree starts off with a focus on retail assets. Retail properties are very similar, making them easy to buy, sell, and release if necessary. The sector is also very large, with Realty Income estimating the U.S. retail net lease market at about $1.5 trillion in size. That's an ample pond for Agree to fish in, with the REIT focused on working with strong tenants.
The third way to keep risk at a minimum is to closely monitor lessees and actively manage the portfolio. In short, the goal is to bring in more strong tenants and shift away from weak ones. To this end, Agree has been selling Walgreens Boots Alliance properties while buying properties from stronger retailers, like Tractor Supply and TJX Companies. After being forced to cut its dividend when bookseller Borders went bankrupt, Agree has clearly learned a valuable long-term lesson. To be fair, Agree was a much smaller REIT back in 2011 than it is today, but taking an active approach with troubled tenants is still a good plan.
One last fact that's important here is that Agree has a strong balance sheet, with an investment grade credit rating. That not only allows the REIT to issue debt at attractive prices, but it means that Agree can withstand some financial adversity before the dividend, which has now been increased annually for a decade, would likely be at risk.
Why Agree Realty is worth buying
All in, Agree Realty appears to have an attractive net lease business with ample room to grow. That's backed up by the fact that industry giant Realty Income owns over 15,400 properties. Which is where the long-term value offered by owning Agree Realty comes into play because it is still just a fraction of the size of Realty Income.
That means that Agree can grow its business more easily because it doesn't require as much investment volume to move the needle on the top and bottom lines. This fact shows up clearly in the dividend. Over the past decade Agree's dividend has grown at a compound annual rate of roughly 6% versus about half that rate for Realty Income. That may not sound like a big difference on an absolute basis, but Agree's dividend has grown twice as fast as Realty Income's. That's a huge difference.
No wonder fast growing Agree's share price is nearly back to pre-pandemic levels while slow and steady Realty Income's stock price is still well below what it was in early 2020. That said, investors are clearly paying a premium price for Agree, noting the vastly different dividend yields. Agree is not the best option for maximizing income, it is, basically, a growth and income stock or a dividend growth stock. But the growth opportunity gives it a greater likelihood of helping turn you into a millionaire than Realty Income.
Agree Realty: Steady and slightly faster
Agree Realty is probably best included in a diversified portfolio for those looking to build long-term wealth. And it isn't about to mint overnight millionaires. It is still a bit of a tortoise when you compare it to, say, a hot technology stock. But it is growing faster than many of its peers and that may be worth paying a premium for, assuming your goal isn't focused on generating current income. If you are looking to add some real estate exposure to your portfolio, relatively fast-growing net lease REIT Agree Realty could be a great choice for you.
