Agree Realty: A Resilient Retail REIT Forging Growth Through Diversified Real Estate Expertise ($ADC) - ADC Stock Research Report

## Executive Summary / Key Takeaways * Differentiated Growth Engine: Agree Realty Corporation ($ADC) stands as a unique net lease REIT, transcending traditional "spread investing" through its robust, three-pronged external growth strategy encompassing acquisitions, organic development, and a specialized Developer Funding Platform (DFP). This integrated approach allows for superior risk-adjusted returns and deep retailer partnerships. * Fortress Balance Sheet & Ample Liquidity: With over $1.9 billion in liquidity as of June 30, 2025, and no material debt maturities until 2028, Agree Realty possesses a prefunded "war chest" that enables aggressive yet disciplined investment. Strategic use of forward equity and interest rate swaps has locked in an attractive cost of capital, providing significant financial flexibility. * Technology-Driven Efficiency: Agree Realty leverages AI and machine learning for operational efficiencies, including lease abstraction and underwriting, significantly reducing costs and enhancing decision-making. The upcoming ARC 3.0 platform in 2026 aims to further integrate AI for dynamic reporting and investment committee support, solidifying a technological moat. * Resilient, High-Quality Portfolio: The company's portfolio of over 2,600 properties, predominantly leased to investment-grade, necessity-based, and omnichannel retailers, is designed to be recession-resistant, pandemic-proof, and tariff-resistant. High occupancy (99.7% in Q3 2025) and a sector-leading investment-grade exposure (67% in Q3 2025) underscore its stability. * Accelerating Outlook: Agree Realty has raised its full-year 2025 investment guidance to $1.5 billion to $1.65 billion, representing a 65% increase over 2024, and increased its AFFO per share guidance to $4.31 to $4.33, implying approximately 4.4% year-over-year growth. This outlook is supported by strong pipelines across all growth platforms and a conservative credit loss assumption of 25 basis points. ## A Real Estate Company, Not Just a Spread Investor Agree Realty Corporation (NYSE: ADC) has meticulously cultivated a distinct identity within the net-leased retail REIT sector. Founded in 1971 and listed on the NYSE in 1994, the company's strategic evolution, particularly since a pivotal vision outlined in 2009, has transformed it into a fully integrated real estate enterprise. This vision, which predated the launch of its acquisition platform in 2010, aimed to build a "real estate company that happens to be in the retail net lease space," a stark contrast to what management often refers to as "simple spread investors." This foundational strategy emphasizes deep, holistic partnerships with industry-leading retailers, offering a comprehensive suite of solutions that span property acquisitions, organic development, and a specialized Developer Funding Platform (DFP). The company's approach is particularly compelling in the current market, where the "biggest and best retailers" are actively expanding their physical footprints. This trend is driven by the realization that brick-and-mortar stores are not merely "spokes" but rather the "hub" of successful omnichannel operations, essential for managing the economic realities of free delivery and returns. Agree Realty's focus on necessity-based and recession-resistant tenants, such as those in grocery, auto parts, off-price, and tire & auto service sectors, positions its portfolio to benefit from the "trade down effect" during tougher economic times. These large retailers also possess the balance sheet strength and negotiating leverage to mitigate economic headwinds, including the adverse impacts of tariffs, which are expected to disproportionately affect smaller, less capitalized businesses. Agree Realty's competitive positioning is further fortified by its unique operational capabilities and technological edge. The company has invested significantly in its internal systems, including the deployment of AI and machine learning tools since 2022. These technologies are not merely buzzwords but deliver tangible, quantifiable benefits. For instance, an AI tool for lease underwriting checklists has reduced the time an attorney spends on this task from approximately four hours to mere seconds, translating into hundreds of thousands of dollars in annual savings and hundreds of hours of time savings for the team. This technological integration extends to lease abstraction, where AI has been utilized since 2022 to process hundreds of leases annually with increasing accuracy and significant time savings. The upcoming ARC 3.0 platform, slated for 2026, aims to build on this foundation, enabling more self-service, dynamic reporting, and enhanced decision-making across the organization. A test of AI's ability to predict Investment Committee approvals achieved 90% accuracy, highlighting its potential for future strategic applications. This technological moat enhances efficiency, reduces costs, and provides a scalable platform for growth, differentiating Agree Realty from competitors who may lack such integrated capabilities. The competitive landscape for Agree Realty includes other prominent net-leased retail REITs such such as Realty Income Corporation (TICKER:O), National Retail Properties (TICKER:NNN), Spirit Realty Capital (TICKER:SRC), and Essential Properties Realty Trust (TICKER:EPRT). While these peers also focus on net-leased properties, Agree Realty distinguishes itself through its multifaceted growth strategy and deep operational expertise. Realty Income, for example, boasts a larger national footprint and a highly diversified tenant base, often seen as a benchmark for stability. However, Agree Realty's emphasis on organic development and DFP allows it to create value at superior yields, often 50 to 150 basis points wider than comparable acquisitions, depending on project duration and scope. This contrasts with NNN's more acquisition-heavy model and SRC's broader mix of retail and industrial assets. Agree Realty's specialized retail expertise and ability to customize spaces for tenants through its development platforms provide a unique value proposition, potentially leading to stronger tenant retention and more efficient operational execution for new builds compared to EPRT's growth-oriented acquisition model. The company's robust balance sheet and access to capital also provide a significant advantage over private peers who often face liquidity constraints and volatile financing costs. ## Financial Performance and Operational Excellence Agree Realty's financial performance in the first half of 2025 reflects the successful execution of its growth strategy. The real estate investment portfolio expanded significantly, growing from approximately $6.95 billion (2,202 properties) as of June 30, 2024, to $7.96 billion (2,513 properties) at June 30, 2025. This expansion was a primary driver of increased rental income. For the six months ended June 30, 2025, rental income reached $344.51 million, up from $301.85 million in the same period of 2024. However, net income attributable to common stockholders saw a slight decrease, falling 4% to $92.50 million for the six months ended June 30, 2025, compared to $95.90 million in the prior year. This was primarily influenced by higher interest expense, which increased by $12.10 million (24%) to $63.04 million, and increased impairment provisions of $7.30 million. General and administrative expenses also rose by 15% to $22.10 million, mainly due to compensation growth and higher stock-based compensation as the company scaled its team.

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The company's asset management efforts continue to yield strong results. As of June 30, 2025, the portfolio was 99.60% leased with a weighted average remaining lease term of approximately 8 years. Re-leasing activity has been particularly strong, with a recapture rate of approximately 104% on 2.4 million square feet of gross leasable area through the first nine months of 2025. Notable re-leasing successes include a former Big Lots (TICKER:BIG) in Cedar Park, Texas, re-leased to Aldi with a net effective rental lift of nearly 50%, and another in Manassas, Virginia, with a net effective recapture rate of almost 170%. These examples underscore the quality and fungibility of Agree Realty's real estate in dominant retail corridors. Agree Realty's balance sheet is a cornerstone of its investment thesis, characterized by exceptional liquidity and conservative leverage. As of June 30, 2025, the company commanded over $2.30 billion in total liquidity, comprising cash and cash equivalents, $1.29 billion in unsettled forward equity, and $1 billion of availability under its Revolving Credit Facility. Total gross indebtedness stood at $3.25 billion, with a pro forma net debt to recurring EBITDA of approximately 3.1x (assuming settlement of all outstanding forward equity), marking its lowest level in two years. Critically, Agree Realty faces no material debt maturities until 2028, providing substantial flexibility in a volatile interest rate environment.

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The company has proactively managed its capital structure through strategic financing activities. In May 2025, it completed a public offering of $400 million in 5.60% Senior Unsecured Public Notes due 2035, with an all-in interest rate of 5.35% after hedging. This was complemented by the establishment of a $625 million Commercial Paper Program in March 2025, offering short-term borrowing costs approximately 40 basis points inside its Revolving Credit Facility. Interest rate risk is actively mitigated through swaps, with $350 million of SOFR-indexed debt hedged to a fixed weighted average rate of 3.57% until January 2029. Subsequent to Q3 2025, Agree Realty secured commitments for a $350 million five-and-a-half-year delayed draw term loan maturing in 2031, with forward-starting swaps fixing the interest rate at approximately 4%, further enhancing liquidity to $2.2 billion and prefunding growth well into 2026.

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## Outlook and Strategic Initiatives Agree Realty's outlook for 2025 is one of accelerated growth, underpinned by its robust pipelines and strategic advantages. The company has consistently raised its full-year investment guidance, reaching a new range of $1.5 billion to $1.65 billion, representing an increase of over 65% from 2024's volume. This ambitious target is supported by strong activity across all three external growth platforms. The acquisition platform continues to source high-quality assets, with Q3 2025 acquisitions achieving a weighted average cap rate of 7.2% and 70% of annualized base rent from investment-grade retailers. The development and DFP platforms are also ramping up significantly, with a medium-term goal of commencing $250 million in projects annually. In Q3 2025 alone, $51 million in new projects commenced, including two 7-Eleven developments, one of which is the company's first commercial fueling site for the retailer. This increased investment activity is expected to translate into strong earnings growth. Agree Realty has raised its full-year 2025 AFFO per share guidance to a range of $4.31 to $4.33, implying approximately 4.4% year-over-year growth at the midpoint. This guidance includes an assumption for approximately 25 basis points of "fully loaded" credit loss, a conservative measure that accounts for all economic impacts of vacancies and non-payments. It also factors in an estimated $0.01 of dilution from the treasury stock method related to outstanding forward equity, which management views as a minor accounting impact compared to the significant balance sheet flexibility provided by these prefunded capital sources. The company anticipates generating over $120 million in free cash flow after dividends in 2025, further bolstering its capacity for growth without external equity.

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Agree Realty's dividend policy remains a key attraction for investors. The company has a consistent track record of dividend growth, with monthly cash dividends increasing to $0.262 per common share for October 2025, reflecting a 3.6% increase over the annualized dividend from Q4 2024. This dividend is well-covered, with a conservative payout ratio of 70% of Core FFO per share and AFFO per share in Q3 2025. ## Risks and Competitive Dynamics While Agree Realty's investment thesis is compelling, investors should consider several risks. The company is exposed to interest rate risk, primarily through its variable-rate debt, though this is actively managed through interest rate swaps. Hedging strategies, while beneficial, carry counterparty risk and the potential for ineffectiveness. The company must also adhere to various restrictive loan covenants, though it has consistently demonstrated compliance. The retail sector, despite its current strength for necessity-based tenants, remains susceptible to macroeconomic shifts and evolving consumer behavior. While Agree Realty's portfolio is designed for resilience, unforeseen disruptions could impact tenant performance. The company actively monitors a "de minimis" watch list, which has historically included tenants like At Home (TICKER:HOME) and Big Lots. The At Home disposition in Q3 2025, for instance, was an opportunistic sale of a "pure real estate play" acquired in 2016, with management anticipating the tenant's eventual liquidation. Similarly, the company has proactively reduced its exposure to dollar stores and pharmacies since 2023, anticipating headwinds in those sectors. In the competitive landscape, Agree Realty's "one-stop shop" value proposition differentiates it from peers. Private competitors often lack the necessary liquidity and access to capital, while public peers may not possess the same depth of real estate development and operational capabilities. This unique blend allows Agree Realty to capitalize on opportunities arising from the dwindling competition, particularly from 1031 buyers and other private capital sources impacted by elevated rates and transactional slowdowns. The company's ability to provide bridge financing through its DFP to struggling developers further highlights its strategic advantage in a liquidity-constrained market. ## Conclusion Agree Realty Corporation presents a compelling investment narrative, firmly rooted in its evolution into a differentiated, full-service real estate company within the net-leased retail sector. Its strategic emphasis on high-quality, necessity-based, and omnichannel retailers, coupled with a robust three-pronged external growth strategy, positions it for sustained expansion and resilient cash flow generation. The company's fortress balance sheet, characterized by ample liquidity and a proactive approach to capital management, provides a significant competitive advantage, enabling disciplined investment even amidst market volatility. Technological leadership, particularly through the strategic deployment of AI for operational efficiencies and the development of ARC 3.0, further enhances Agree Realty's competitive moat, driving cost savings and scalability. This blend of real estate acumen, financial strength, and technological innovation allows Agree Realty to forge deep, lasting partnerships with retailers seeking growth solutions. With a strong outlook for increased investment volume and AFFO per share growth in 2025, supported by a well-covered dividend, Agree Realty is poised to continue its trajectory as a premier retail REIT, offering investors a unique blend of stability, growth, and operational excellence in a dynamic market.