A Small but Beautiful REIT

Agree's focus is solely on the development of additional free-standing single-tenant retail buildings. Its strategy is to work with retailers' real estate executives to target locations where they want to be. Agree identifies the site, but will not commit significant capital or commence development until it has a signed lease or letter of intent from a tenant. By doing it this way, Agree earns a development return -- more attractive than an acquisition -- while eliminating most of the inherent risk of real estate development.

Since its IPO in 1994, Agree has averaged about four new developments a year; the typical development has been a 15,000-square-foot box suitable for a Borders bookstore or a Walgreens drugstore. That may change, however, with the recent addition of two development professionals, one of whom was previously a director of real estate with Home Depot (HD - commentary - Cramer's Take). With these hires, Agree hopes to increase both the volume of its development activity and the size of the buildings it constructs, finding opportunities for super stores of more than 100,000 square feet.

Agree has one of the most conservative balance sheets in the REIT industry, with a debt-to-equity ratio of 0.3 (compared with the industry average of 0.8). Most of the debt has fixed interest rates; combined with the long-term lease structure, this makes Agree's cash flow remarkably predictable.

There is, of course, a flip side to the safety of a long-term net lease: the rents are usually pretty flat, so the cash flow looks more like a bond than a stock. Because cash flow doesn't grow very fast, the dividend doesn't either. Agree's dividend is less than 10% higher than it was when the company went public in 1994. However, a 7.3% current yield looks pretty good in an environment in which the average REIT pays 4.7%. Plus, the dividend looks pretty safe, at less than 80% of projected cash flow. Agree would have to lose about 15% of its rental income before the dividend would be threatened, an unlikely scenario given the credit on its leases.

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Wolfowitz had no positions in stocks mentioned at the time of publication. An employee of Cushman & Wakefield serves on the board of directors of Agree Realty Corporation.

Louis Wolfowitz is a managing director in Cushman & Wakefield's Capital Markets Group and leads the firm's real estate securities research business. Prior to joining Cushman & Wakefield, he was a Senior Vice President in the Business Development Group at GE Real Estate (GE Capital). Previously, Wolfowitz was an investment banker with Merrill Lynch & Co., Smith Barney, and Donaldson, Lufkin and Jenrette. He is a registered securities principal, an NASD-qualified research analyst, and a licensed real estate broker in New York.