Agree Realty: An Outsized Yield With Risk Controls

NEW YORK (TheStreet) -- On Thursday, Agree Realty (ADC) announced second-quarter earnings. Funds from operations increased to $5,723,000 compared with $5,431,000 the second quarter of 2011.

Net income for the second quarter of 2012 increased to $5,090,000, or 44 cents per diluted share, compared to net income for the second quarter of 2011 of $3,823,000, or 38 cents per share. Total revenue increased to $9,236,000, compared with total revenue of $8,516,000 in the second quarter of 2011.

In the press release Joey Agree, president and chief operating officer stated:
I am extremely pleased to report positive operating results for the quarter. Our efforts to expand and improve our portfolio have begun to materialize as our total revenues and funds from operations for the quarter have both increased over the comparable quarter. During the quarter, we have improved our portfolio occupancy, disposed of non-core assets, made significant development announcements and exceeded our acquisition expectations.

In late 2010, Borders Books filed for bankruptcy. The REIT accounted for around 29% of the company's annualized base rents and thru a series of asset management initiatives the triple-net REIT has reduced its overall exposure substantially.

During the second quarter Agree sold a 30,000 square foot location in Omaha, Neb. for $2.75 million. The company has one former Border's property in Columbus, Ohio under contract for sale and has executed a letter of intent to lease another former Borders property in Monroeville, Pa. (to an industry leading home fashion retailer). The last remaining former Borders property in the portfolio is located in Lawrence, Kan. and the property is currently being marketed for sale or lease.

Throughout the recession, Agree has been able to maintain its dividend. The company has paid 73 consecutive quarterly cash dividends since its IPO (in 1994). Agree owns 87 properties (3.5 million square feet) in 23 states and the majority of the properties are single-tenant assets leased to major national and regional chains.

Agree's top three tenants are Walgreens ( WAG) (34%), CVS ( CVS) (7%), and Sears/Mart ( SHLD) (11%). The Michigan-based REIT is most active in diversifying its platform via acquisitions and development. Some of Agree's tenants include Lowe's, Advance Auto Parts, Kohl's, Chase Bank, Staples, AT&T, Big O Tires, NTB, Wal-Mart, JC Penny, Aldi, Dick's, AutoZone, Goodyear Tire and Dollar Tree.

Recently Agree closed on a strategic alliance with Wawa, a privately held convenience store operator with over 590 locations along the East Coast. Agree was named a preferred developer for Wawa (in Florida) and this strategic partnership should provide the REIT with ample development opportunities for the foreseeable future (Wawa plans to open around 100 new stores in Florida over the next five years).

The company's asset pool has grown from 17 properties since its IPO (in 1994) to 87 properties today. As a public REIT, Agree has provided its shareholders with 18 years of consistent growth in assets and revenue.

Agree's strong base of national tenants has allowed the company to maintain strong occupancy rates. Agree has a current occupancy rate of 96% (Q-12) and the company has averaged 97.8% occupancy over the last five years.

Recently Raymond James reiterated its Outperform rating on Agree by recommending its attractive valuation. As explained by Raymond James analyst, R.J. Milligan:
We acknowledge the uncertainty regarding the future of one of Agree's largest tenants (Sears Holdings) -- though given the low average rent per square foot and single-digit occupancy costs of the K-mart properties within Agree's portfolio, as well as management's proven ability to weather major tenant bankruptcies, we believe shares of ADC still offer investors an attractive opportunity (especially for income-oriented investors looking for outsized yield). In addition, the company's acquisition pace continues to increase, generating meaningful external growth at attractive yields while diversifying the portfolio with solid credit tenants.

Raymond James values Agree's shares at $28.35 and based upon the most recent price (of $23.57), the shares are trading around 20% below Raymond James valuations. Here is a snapshot of the Raymond James NAV estimate model:

Agree has a current market capitalization of $269.5 million and the current dividend yield is 6.79 percent. The dividend is the second-highest dividend yield in the triple-net peer group and the company's rapid acquisition and development pace should enhance future growth of the dividend.

During the past year Agree has produced a total return of 16.81% and based upon the discounted NAV estimate (provided by Raymond James) I consider Agree Realty to be a compelling alternative for a fixed-income portfolio. In addition the current dividend yield of 6.79% is risk-aligned and deserves consideration as you diversify your growth and income portfolio.

Source: SNL Financial and Raymond James

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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