Agree Real Estate (NYSE:ADC) is a fairly attractive net-lease real estate investment trust (REIT). But it’s not the only net-lease REIT you can buy, nor is it the largest. If you’re a conservative investor who focuses on dividend consistency, you might be better off buying a net leasing giant Real estate income (NYSE:O) instead of. Here’s a look at why.
Agree has a great track record, but not long
Agree Realty has increased its dividend annually for the past nine years. The compound annual dividend growth over the past ten years is approximately 6%. Those aren’t bad statistics in an industry known for its turtle-like performance. If we dig a little deeper into the story, the REIT has expanded its portfolio over the past ten years from 109 retail properties in 2013 to 2,135 in 2023. So the growth story of the past ten years is really about portfolio expansion.
But it is important to understand the change that has taken place. Agreed, has gone from a pipsqueak to a major player in the net lease industry (net leases require tenants to pay most of the operating expenses at the property level). In fact, when it became public, it was so small that the bankruptcy of a single tenant was enough to force a dividend cut in 2011. It’s a very different business today and no single tenant or vacancy of a building would have a comparable impact. And there’s probably plenty of growth ahead of the REIT. After all, the largest player in net leasing, Realty Income, owns more than 15,400 properties.
Slow and steady isn’t so bad
That said, it may make sense for more conservative investors to buy a company like Realty Income because it has the scale to compete on a different level. For example, Realty Income’s consecutive streak of annual dividend increases is up to 30 years. Sure, dividend growth over that period was about 4% per year, which is slower than Agree’s historical dividend growth. But if you’re retired and focused on creating a reliable income stream, Realty Income’s dividend record is much better.
Then there are the economies of scale that Realty Income offers. Because it is so large, it has easier access to capital markets, which lowers the cost of capital. It also has exposure to Europe, where it can sometimes sell bonds with favorable yields. That’s not to say that Agree is somehow capital constrained, which doesn’t appear to be true, just that industry giant Realty Income is better positioned in terms of capital raising. That makes it possible to be aggressive in pursuing acquisitions.
Realty Income’s size also makes it possible to purchase properties, or portfolios of properties, that Agree could never consider due to its small size. That includes Realty Income acting as an industry consolidator, buying smaller companies like Agree with little to no hassle. While Agree’s ability to pick and choose trades has obvious advantages, Realty Income’s size opens up a whole new level of investment opportunities. A good example of this comes from Europe, where the net-lease approach is quite new. Companies usually want to sell entire portfolios there, and not one-off properties. Large REITs like Realty Income have an advantage over smaller players in the region.
Are yield and history more important to you than growth?
Ultimately, the choice between Agree Realty and Realty Income is about nuances, not shocking variations. For example, the faster-growing Agree’s dividend yield is 4.9%, while Realty Income’s yield is 5.9%. Sure, Realty Income’s yield is significantly higher, but they’re both high-yield stocks. And Agree’s lower yield is a function of its faster dividend growth and future growth prospects. That will be attractive to many investors, but probably not to all investors. Realty Income’s role as a market leader and impressive long-term track record will likely make it a better choice for conservative investors trying to maximize their current income.
Should You Invest $1,000 in Agree Realty Now?
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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool holds positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
Forget Agree Realty, Buy These Beautiful REIT Stocks Instead was originally published by The Motley Fool
