Why I Prefer Agree Realty (Kobe) Over Realty Income (Jordan)

Introduction

Almost everyone who knows anything about basketball considers Michael Jordan to be the greatest basketball player ever. But that same argument can be made for Kobe Bryant. Michael Jordan won six championships with the Chicago Bulls. Kobe Bryant won five championships with the Los Angeles Lakers. Both played the same position, shooting guard. In the eyes of many, Realty Income (O) is considered one of the greatest REITs. After all, their name is "The Monthly Dividend Company". But in this article, I am going to make the argument why I consider Agree Realty (ADC) aka Kobe to be better than Realty Income aka Jordan.

Jordan came before Kobe. Jordan entered the NBA in 1984. Kobe entered in 1996. Realty Income came before Agree Realty. O was founded in 1969 and ADC in 1971; both listed on the NYSE in 1994.

Realty Income Synopsis

Realty Income is an S&P 500 company and a dividend aristocrat. They have been paying a growing dividend for 28 years. They also have increased that dividend 120 times since their public offering. The company is structured as a REIT, and its monthly dividends are supported by the cash flow from over 12,942 real estate properties located in all 50 states and the U.K. The majority of its properties are leased to retail and industrial clients that have a service, are non-discretionary and/or low price point component to their business. I believe these characteristics are important to successfully operate in a variety of economic environments and effectively compete within the e-commerce space. They pay a current monthly dividend of $0.2550.

Agree Realty Synopsis

In 1971, Rich Agree founded the Agree Development Company, the predecessor to the current, Agree Realty Corporation. In 1994, it went public. It is also structured as a REIT holding, and its monthly dividends are supported by the cash flow from over 1,908 real estate properties across the 48 continental United States and includes 208 ground leases. The majority of their properties are leased to stores that are considered important, no matter the state of the economy. Most of their rent comes from major grocery store chains and home improvement stores. The company has paid a dividend for 28 years and raised that dividend for 10 years in a row until 2021, when it switched from a quarterly payer to a monthly one. They pay a current monthly dividend of $0.2430.

Head-to-Head Comparison

The Michael Jordan of REITs, Realty Income

Both companies reported earnings in the month of May, with Realty Income reporting first on May 3rd. Q1 funds from operations of $1.04 beat analyst estimates by $0.03. Revenue of $944.39 million, beat by $61.31 million. For the first quarter, they reported an occupancy rate of 99%, matching Q4 for the highest rate for the company in 20 years. They also ended the quarter with 40.8% investment-grade clients. O also has an A-rated balance sheet and has delivered a 14.6% compounded annual total return since 1994. They own properties throughout all 50 states, as well as, Puerto Rico, the United Kingdom, Spain & Italy. Some of their largest tenants include the likes of Dollar General (DG) and Walmart (WMT). Talk about diversification! In 2022, Massachusetts legalized sports betting. They took advantage of that legalization and moved into the gaming space with a sale-back lease of Wynn Encore Boston Harbor resort and casino for $1.7 billion.

Little Brother, Kobe Bryant, Agree Realty

Agree Realty reported Q1 funds from operations of $0.98, beating analysts' estimates by a penny, and a revenue of $126.62 million, beat by $2.13 million. With the difference in revenue and number of properties each company owns, it's clear O is the larger company. But unless you're from Texas, bigger isn't always better. ADC also reported a very strong occupancy rate standing at 99.7% during the quarter, and their investment-grade tenants stood at 68%. They have a BBB rated balance sheet and also delivered a 12.3% compounded annual total return since 1994. They own properties in all 48 Continental states. Similarly, some of their largest tenants also include Walmart and Dollar General. Comparing size and portfolio diversification, O wins hands down. When it comes to occupancy rate and Investment-grade tenants, ADC wins.

Score tied 1-1.

Dividends and Total Return

O's current dividend yield currently stands at 5.18% which is 19% above its 5-year average of 4.35%, indicating O may be undervalued. Their dividend growth rate is slow, at 3% for the last 5 years and 5% for the last 20 years. Now, some may argue that with the current high-interest environment we're in, they could get better returns on bonds and CDs. While that may be true for the time being, I think that's a short-term mindset. Although the FED made it clear that interest rates will be higher for longer, eventually rates will come back down following economic trends of the past.

Next, we look at O's total return vs the S&P 500. Many people like to pay attention to price return. In my opinion, a stock's total return is more important. I like to look at a minimum of 5 years' worth of a stock's financials when considering them for my portfolio. One thing all the great have in common is consistency. Great stocks/players don't just have a good or great season. They have many! Just like both Jordan and Kobe. Here is the 10-year total return vs. the S&P:

O's 5-and 10-year total returns stand at 43.5% and 109% to the S&P's 65% and 205%.

Now let's look at ADC. Their current yield stands at 4.47% which is 19% above its 5-year average of 5.76%, which indicates it may also be undervalued.

Now we will look at their dividend growth rate for the last 20 years.

ADC's 5- and 10-year dividend growth rate stands at 7% and 2%. Again, slow and not great, especially with the current macro environment. One would argue, they can invest into an S&P index fund and get a 10% annual return.

Now we will look at their total return vs the S&P. Their 5- and 10-year averages are 54% and 207% to the S&P's 65% and 205%. Here is their 10-year total return vs. the S&P:

While ADC beats O in 5-year dividend growth, and O beats ADC in 20-year dividend growth, ADC wins when it comes to total return vs the S&P. Little brother is the clear winner here. O has the higher dividend yield at 5.18% to ADC's 4.47%. Winner big brother O.

Score tied 2-2.

Macro-environment Risks

Both companies have All-star balance sheets that are well-prepared to navigate through the current high interest rate environment we're in. Realty Income has one of the best in the business with an A- credit rating. According to O's CEO, the company has remained disciplined in regard to their balance sheet. He stated, "subsequent to our April bond offering, which settled on April 14, and we held approximately $5.6 billion of liquidity, including unsettled forward equity totaling $1.5 billion. As a result, our current financial position has afforded us the ability to lean into near-term investment." It's also to be noted that the company increased their 2023 investment guidance to over $6 billion from $5 billion. A key factor to its long-term outlook is that the company has very minimal debt due in 2023, 90% of their debt is fixed-rate, and they have a 5.9 weighted-average debt to maturity profile. It is to be noted though that they have almost $3 billion due in 2024. This could potentially affect the company's near-term debt due to the "higher for longer" interest rate environment promised by the FED to get inflation back down to their targeted 2%.

Agree Realty also raised their acquisition guidance in Q1 from $1 billion to $1.2 billion acquired for the year. The company has less debt maturity in 2023, zero debt maturing in 2024, and no material debt maturities until 2028. They also have a healthy fixed-coverage coverage ratio of 5.1x and a Net debt to recurring EBITDA of 4.5x/3.7x to a 5.4x Net debt to EBITDA and a fixed charge coverage ratio of 4.6x for O. They also ended the quarter with total liquidity of $1.2 billion, including approximately $804 million of availability on the revolver, $362 million of outstanding forward equity and $13 million of cash-on-hand according to their CFO.

Although O has the higher credit rating and higher liquidity, including unsettled forward equity, ADC is better prepared for the current macro environment with less debt maturity through 2030. Leaving the two companies tied going into the fourth quarter.

Score tied 3-3.

Game Winner

One thing that little brother ADC has that big brother O does not are ground leases. Furthermore, ADC acquired two additional ground leases during Q1, bringing their total to 208; this represents over 12% annualized base rent.

Ground leases provide for superior risk-adjusted returns. So, ADC not only makes money from buildings, but they collect rent from the ground as well! These ground leases typically are leased for 50 to 99 years. In my opinion, this long-term income allows ADC to pull away and secure the game winning shot.

Score 4 to 3. Winner ADC.

Conclusion

While O is a great stock and probably the most popular REIT out there, I prefer the less popular little brother ADC. In my opinion, with their higher concentration of investment-grade tenants, smaller size/room for growth & expansion, and ground leases, my All-Star pick here is ADC. O is a great investment, but someone has to be #2, just like with Jordan and Kobe. And to me, little brother scores the lay-up for the win.