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    Agree Realty Corp (ADC)

    Q4 2023 Summary

    Published Feb 18, 2025, 5:23 PM UTC
    Initial Price$55.10October 1, 2023
    Final Price$62.95December 31, 2023
    Price Change$7.85
    % Change+14.25%

    What went well

    • Agree Realty offers a compelling total return potential with a combination of 3-4% AFFO per share growth and a 5% plus and growing dividend, resulting in around 9% total returns.
    • The company has a fortified balance sheet with over $1 billion of liquidity, no material debt maturities until 2028, and pro forma net debt to recurring EBITDA of approximately 4.3x, positioning ADC for continued growth without needing additional equity capital.
    • ADC boasts the strongest retail portfolio with nearly 70% investment-grade tenants, providing highly durable cash flows in today's dynamic environment.

    What went wrong

    • Expected Decrease in Transaction Volume: The company anticipates that transaction volumes in the first quarter will be down year-over-year relative to Q1 of the previous year, indicating potential challenges in growth and acquisitions.
    • Lack of Acquisition Guidance Due to Economic Uncertainty: Agree Realty is not providing formal acquisition guidance at this time due to an extremely volatile macroeconomic environment, including interest rate volatility, making it difficult to predict future activities and potentially signaling uncertainty in growth prospects.
    • Challenging Acquisition Environment: The transactional slowdown and challenging seller expectations are impacting acquisition opportunities. The CEO mentioned that while competition is similar, the amount of competition is very minimal, and sellers' expectations are their largest competitors, which may hinder growth opportunities.

    Q&A Summary

    1. Acquisition Strategy Amid Volatile Markets
      Q: Why not provide formal acquisition guidance now?
      A: Due to the extremely volatile macroeconomic environment, including interest rate fluctuations, we are not providing formal acquisition guidance at this time. Our focus remains on deploying capital at 100-plus basis point spreads into the country's leading retailers. With only 70 days of visibility in the net lease space, it's challenging to predict beyond that timeframe.

    2. Cap Rate Expansion in Q1
      Q: How have cap rates moved recently, and what are you seeing near term?
      A: Cap rates are fluctuating due to market volatility. We anticipate a material jump in cap rates in Q1, likely 30 to 40 basis points over Q4 levels. This increase aligns with our goal to deploy capital with a 100 basis point spread over our cost of capital.

    3. Capital Deployment Discipline
      Q: Will you maintain your 100 basis point spread target despite market conditions?
      A: Yes, we will not deploy capital below a 100 basis point spread unless it's a unique, compelling opportunity. We're focused on deploying capital that drives per-share value and growth. If we can't achieve the desired spread, we're comfortable slowing down the acquisition pace.

    4. Big Lots Exposure and Credit Risk
      Q: What's your exposure to Big Lots and related credit risks?
      A: Our exposure to Big Lots is sub-50 basis points of our annual base rent. It's included in our approximately 1% watch list, which also covers other tenants. We've re-leased a former Big Lots location to a national auto parts retailer with a 5% NOI increase on a new 15-year lease.

    5. Opportunistic Dispositions
      Q: Are you planning any property dispositions this year?
      A: Yes, we're considering opportunistic dispositions in markets with strong demand. We'll look to sell assets at around a 6% cap rate and redeploy the capital with spreads of at least 150 basis points. This includes categories like auto service, farm and rural supply, and car wash spaces.

    6. G&A Expense Trends
      Q: How will G&A expenses change as a percentage of revenue?
      A: We anticipate that G&A expenses as a percentage of revenue will continue to decline. Although absolute G&A expenses may increase due to rising costs, the ratio to revenue is expected to decrease. Historically, we've seen a 40 to 50 basis point annual decline in this metric.

    7. Development Pipeline Outlook
      Q: Will development activities increase in 2024?
      A: The pace of our development pipeline depends on achieving appropriate returns. Retailers want to grow, but factors like construction costs and achievable rents play a role. While demand exists, we'll only expand the pipeline if it meets our return criteria.

    8. Lease Terms Amid Inflation
      Q: Are you adjusting lease terms due to higher inflation?
      A: Yes, tenants recognize the inflationary environment, and we're seeing a willingness to revisit lease terms. This includes adjustments to the frequency and size of rent bumps. However, national retailers generally prefer fixed increases over CPI-based adjustments.

    9. Retailer Expansion Demand
      Q: Are retailers still looking to expand despite the macro backdrop?
      A: Yes, many retailers are eager to expand aggressively. This includes major players like Home Depot, Walmart, Lowe's, and discount retailers. The main challenges are construction costs and rent affordability, but demand for new stores remains strong.

    10. Acquisition Market Competition
      Q: Have you seen changes in the buyer pool or competition?
      A: Competition in our market is inconsistent. While the types of competitors are similar, the amount of competition has decreased due to the transactional slowdown. Sellers' expectations remain a significant factor in acquisitions.

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