Market conditions for retail landlords were truly apocalyptic earlier this year. Governments forced many nonessential retailers to close their doors to help slow the spread of COVID-19, which impacted their ability to pay rent.
However, one retail real estate investment trust (REIT) has been thriving during this challenging time: Agree Realty (NYSE: ADC). It was one of the few REITs that increased its dividend this year when most of its peers reduced or suspended their payouts. Here's a look at why it's prospering during this perilous time.
A mighty fortress amid the storm
Agree Realty ended the third quarter with 1,027 freestanding retail properties consisting of 21 million square feet of leasable area. The company had leased 99.8% of its portfolio under long-term triple net leases. Two things are noteworthy about the makeup of its portfolio. First, roughly two-thirds of its tenants have investment-grade credit ratings. That's important because it means they have greater financial resources and flexibility. Second, it primarily owns properties leased to retailers less exposed to headwinds from economic downturns and e-commerce (e.g., home improvement stores, drug stores, and convenience stores).
Because of the makeup of its portfolio and tenant base, Agree Realty collected 97% of the rent it billed during the third quarter and signed deferral agreements covering another 2%. That was a higher collection rate than its freestanding-focused peers and shopping center REITs.
Thanks to its strong collection rate and recent acquisitions, Agree Realty's AFFO per share grew by 4% during the third quarter. That allowed the REIT to increase its dividend by 5.3%.
Another reason Agree Realty has been thriving this year is that it entered the period with a strong balance sheet, which it further bolstered by raising new capital. Because of that, it has been able to go on an acquisition binge.
The company invested a record $470.7 million into 97 retail net lease properties during the third quarter, including purchasing 91 locations for $458.3 million. That brought its year-to-date acquisition total to $957.8 million across 217 properties. These new additions helped drive a 33.9% increase in AFFO before accounting for the impact of dilution from newly issued shares to help fund its buying binge.
Agree Realty expects its shopping spree to continue in the fourth quarter as it anticipates buying between $1.25 billion and $1.35 billion of properties this year. That's up from its initial view that it would make $700 million to $800 million of retail real estate acquisitions.
While the company is ramping up its purchasing activity, it hasn't watered down its standards. The REIT continues to focus on buying freestanding properties secured by long-term triple net leases with financially strong retailers in sectors less exposed to the headwinds from e-commerce and economic downturns. Because of that, the REIT should be able to continue growing its AFFO per share, which is the key to future dividend growth.
The makeup to thrive amid the turbulence
Agree Realty has strategically built a portfolio of retail properties designed to withstand the headwinds facing the sector. Because of that, it's collecting nearly all the rent it's billing. Meanwhile, it also has a fortress-like balance sheet, which has given it a war chest to go on a shopping spree. That's giving it the power to continue increasing its dividend, making it stand out in this beleaguered sector.