A Strategic Expansion In Retail Property Drives Robust Revenue Growth And Earnings Potential

Key Takeaways

• Improved cost of capital and strategic acquisitions drive expansion, supporting future earnings and revenue growth.
  
• Enhanced credit rating lowers borrowing costs, boosting net margins and future profitability.
  
• Rising interest rates, tenant risks, and construction costs threaten Agree Realty's revenue growth and net margins, alongside geographic risks and competitive market pressures.

Catalysts

Agree Realty Corporation (the “Company”), a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants.

• The company has improved its cost of capital significantly, allowing for expansion into a growing acquisition pipeline into 2025 without additional equity needs, potentially boosting future earnings.
  
• There is a strong liquidity position with nearly $2 billion available, supporting an increased acquisition guidance, which could drive revenue growth as new properties are acquired.
  
• The strategic acquisition of 93 high-quality retail net lease properties with strong tenants is expected to bolster revenue and maintain high occupancy levels.
  
• Revised AFFO guidance suggests operational improvements and acquisition efficiency, leading to an expected growth in AFFO per share by approximately 4.6%, impacting earnings positively.
  
• Enhanced credit rating to BBB+ by S&P could lead to lower borrowing costs, improving net margins and enhancing future profitability.

Agree Realty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Agree Realty's revenue will grow by 13.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.3% today to 26.8% in 3 years time.
• Analysts expect earnings to reach $237.2 million (and earnings per share of $1.89) by about November 2027, up from $182.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $266.0 million in earnings, and the most bearish expecting $182.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 51.7x on those 2027 earnings, up from 44.0x today. This future PE is greater than the current PE for the US Retail REITs industry at 34.7x.
• Analysts expect the number of shares outstanding to grow by 6.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.37%, as per the Simply Wall St company report.

Agree Realty Future Earnings Per Share Growth

Risks

• Rising interest rates and rate volatility could erode cap rates, reducing the attractiveness of future acquisitions and impacting revenue growth.
  
• Economic uncertainty and potential tenant bankruptcies, such as Big Lots and Bed Bath & Beyond, pose risks to occupancy rates and rental income, affecting net margins.
  
• Increased construction costs and a constrained supply chain may elevate development expenses, reducing net margins and impacting returns on investment.
  
• Geographic risks, particularly in areas prone to natural disasters like Florida and California, could lead to higher insurance costs or property damage, affecting net earnings.
  
• Market conditions and competition may pressure acquisition yields, limiting Agree Realty's ability to secure high-quality properties at favorable prices, impacting long-term revenue growth.
  

Valuation

• The analysts have a consensus price target of $79.25 for Agree Realty based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $89.0, and the most bearish reporting a price target of just $71.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $883.8 million, earnings will come to $237.2 million, and it would be trading on a PE ratio of 51.7x, assuming you use a discount rate of 7.4%.
• Given the current share price of $77.52, the analyst's price target of $79.25 is 2.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.