Agree Realty Corporation is a US$2.0b mid-cap, real estate investment trust (REIT) based in Bloomfield Hills, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of ADC is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess ADC.
Funds from Operations (FFO) is a higher quality measure of ADC’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For ADC, its FFO of US$82m makes up 79% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether ADC has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take ADC to pay off its debt using its income from its main business activities, and gives us an insight into ADC’s ability to service its borrowings. With a ratio of 16%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take ADC 6.32 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
I also look at ADC’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 4.53x, it’s safe to say ADC is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at ADC’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. ADC’s price-to-FFO is 24.38x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Agree Realty can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I’ve only covered one metric in this article, the FFO, which is by no means comprehensive. I’d strongly recommend continuing your research on the following areas I believe are key fundamentals for ADC:
- Future Outlook: What are well-informed industry analysts predicting for ADC’s future growth? Take a look at our free research report of analyst consensus for ADC’s outlook.
- Valuation: What is ADC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ADC is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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