Agree Realty Corporation is a US$1.66B small-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. In this commentary, I’ll take you through some of the things I look at when assessing ADC.See our latest analysis for Agree Realty
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of ADC’s daily operations. For ADC, its FFO of US$82.20M makes up 78.97% of its gross profit, which means the majority of its earnings are high-quality and recurring.
ADC’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky ADC is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 15.81%, 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.
In terms of valuing ADC, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In ADC’s case its P/FFO is 20.22x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Next Steps:As a REIT, Agree Realty offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in ADC, I highly recommend taking a look at other aspects of the stock to consider:
- 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.