Janney/ADC: Why ADC remains one of our favorite REIT names
REITS
Robert Stevenson,
Agree Realty Corporation (ADC) - BUY
Why ADC remains one of our favorite REIT names
Flash Takeaways:
We believe ADC has one of the best retail-focused triple-net REIT portfolios. Today its portfolio of 341 properties is located across 43 states and accounts for over 6.7M of square feet. Importantly, 46% of revenue comes from investment grade tenants, and its average remaining lease term is just under 11 years. We continue to expect above average earnings and dividend growth over the next few years, and combined with an attractive valuation, ADC remains one of our favorite names.
Analysts Notes:
- We expect ADC to maintain its strong growth profile. Despite its strong growth over the last few years, ADC is still under $1.2B of equity market capitalization. With management expecting to acquire $250M+ of assets at cap rates in the 7.5%-8.0% range, coupled with a modest level of internal growth, we expect ADC will continue to produce one of the strongest earnings growth rates in the retail-focused triple-net REIT space.
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While still a small part of the current growth story, we expect ADC to expand its development and partner capital solutions businesses in coming years. In addition to acquiring assets, ADC also develops assets for its own balance sheet, as well as partners with private developers to provide capital and control assets long-term. While still a small part of the growth story today (3 projects totaling $14.5M were added to its pipeline in early October), we expect ADC to continue to grow this business over the next few years.
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- We expect ADC will continue to lower its Walgreens (13%) and pharmacy (18%) exposuresover the next few years. We expect greater diversification will come via both the disposition of selected Walgreens/pharmacy assets, as well as the acquisition of new assets. Overall, we view ADC's capital recycling activities favorably as the company seeks to take advantage of market inefficiencies.
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Maintaining our investment thesis. We believe that with continued strong earnings growth, a more diverse tenant base, a long history of dividend increases, and a BBB investment grade debt rating, ADC will be able to further close the valuation gap relative to industry leaders NNN and O.
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Maintaining our Buy rating and $53 Fair Value estimate. Based on a 5.3% implied cap rate, a 4.1% dividend yield (that is well-covered), and 2017 FFO and AFFO multiples of 17.0x and 17.1x, respectively, we continue to believe ADC is attractively valued at the current stock price. ADC remains one of our favorite names, not only in the retail-focused triple-net space, but within the small-cap REIT space overall.