Agree Realty Stock: Buy, Sell, Or Hold?

In 2022 and 2023, rising interest rates drove up the yields of low-risk fixed income investments like Treasury bills, bonds, and CDs, which made them more appealing than dividend stocks. But as interest rates decline, those fixed income yields are shrinking and driving more investors back toward higher-yielding dividend stocks.

One of those stocks is Agree Realty (NYSE: ADC), which has gained about 14% during the past 12 months but still pays an attractive forward yield of 4.3%. Let's see if it's the right time to buy, sell, or hold this real estate investment trust (REIT).

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What does Agree Realty do?

Agree Realty is a retail REIT that buys properties, rents them out to retailers, and splits the rental income with its investors. All REITs are required to distribute at least 90% of their taxable income as dividends to maintain a favorable tax rate.

At of the end of the third quarter of 2024, Agree owned and operated 2,271 properties in 49 states. More than two-thirds of those were investment-grade. The REIT uses triple net leases, which means its tenants need to cover their own property taxes, insurance, and maintenance fees.

Its top tenants in 2023 were Walmart, Tractor Supply, Dollar General, and Best Buy, which together accounted for 19.5% of its annualized rent. Its other major tenants include CVS, TJX Companies, Dollar Tree, and Kroger.

The reasons to buy and hold Agree Realty

The REIT ended its latest quarter with an occupancy rate of 99.6% and a weighted-average lease term of 7.9 years. By comparison, its larger competitor, Realty Income (NYSE: O), ended its latest quarter with an occupancy rate of 98.7%.

Agree's high occupancy rate indicates its focus on large recession-resistant retailers is paying off. It also tells us it can offset the recent store closures at some of its top tenants (like CVS and Dollar Tree) with the growth of stronger retailers like Walmart.

It has also consistently grown its adjusted funds from operations (AFFO) per share even as macro headwinds rattled the broader market. From 2018 to 2023, its AFFO -- a key measure of REIT performance -- had a compound annual growth rate (CAGR) of 7%. During those five years, Realty Income -- which also leases a lot of its properties to Dollar General, Dollar Tree, and Walmart -- only had a CAGR of 5%. Those growth rates indicate these are good evergreen investments for anyone seeking long-term income.

The reasons to sell or avoid Agree Realty

Agree's fundamentals look sound, but it's still a lot smaller and less diversified than Realty Income, which owns 15,450 properties in the U.S. and abroad. Agree's smaller size could give it less room to negotiate lower rates for funding its real estate purchases.

Agree and Realty Income both pay monthly dividends, but the former's forward yield of 4.3% is lower than the latter's forward yield of 6%. Moreover, Agree reduced its dividend in 2011 while Realty Income has consistently raised its dividend since its initial public offering in 1994.

Agree also looks pricier than Realty Income. At $71, Agree trades at about 19 times last year's AFFO per share. At $53, Realty Income trades at only 14 times last year's AFFO per share. Agree might deserve its higher valuation because it's growing at a slightly faster rate, but Realty Income's higher yield at a lower valuation might make it more appealing.

Is it the right time to buy, sell, or hold?

Agree Realty is a reliable stock to buy and hold for conservative income investors, and you shouldn't sell it if you expect interest rates to keep declining. That said, it also isn't the best, cheapest, or highest-yielding REIT you can buy right now. Therefore, it's probably still smart to shop around in the REIT sector instead of going all-in on Agree Realty.

Should you invest $1,000 in Agree Realty right now?

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Leo Sun has positions in Realty Income. The Motley Fool has positions in and recommends Best Buy, Realty Income, TJX Companies, Tractor Supply, and Walmart. The Motley Fool recommends CVS Health and Kroger. The Motley Fool has a disclosure policy.