Agree Realty Corporation (ADC): A High-Conviction Long-Term REIT Play in a Rising-Rate Environment

Agree Realty Corporation (ADC) has long been a cornerstone of the net-lease REIT sector, offering a compelling blend of defensive positioning and sustainable dividend growth. As interest rates climb and economic uncertainty looms, ADC's strategic capital management, robust liquidity, and disciplined approach to risk make it a high-conviction long-term investment. This analysis delves into the company's financial metrics, operational resilience, and hedging strategies to underscore its appeal in a rising-rate environment.

Dividend Growth: A Track Record of Consistency

ADC has demonstrated an unwavering commitment to shareholder returns, with its annualized dividend increasing by an average of 5.7% over the past three years, according to the Agree Realty Q1 2025 slides. As of June 2025, the company's annualized payout of $3.072 per share reflects a 2.4% increase from prior periods, per a Panabee analysis, translating to a current yield of approximately 4.22%, according to the company's Q4 2024 press release. While the trailing earnings-based payout ratio appears elevated at 181.1%, the Q4 2024 press release notes this metric is misleading for REITs, which rely on non-cash accounting adjustments like depreciation. A more accurate gauge is the adjusted funds from operations (AFFO) payout ratio, which the Panabee analysis reports at 72%, a level consistent with industry best practices and indicative of sustainable growth.

The company's ability to fund dividends is further supported by its operating cash flow. In 2024, ADC generated $432 million in operating cash flow, a 10.31% year-over-year increase, per the Q1 slides. For the first half of 2025, operating cash flow reached $246.3 million, though this was partially offset by $734 million in capital expenditures tied to real estate acquisitions. Crucially, ADC has mitigated this gap through disciplined financing, including $224.2 million in common stock offerings and $273 million in net borrowings, as noted by the Panabee analysis, ensuring dividend continuity without compromising liquidity.

Debt Metrics: A Fortress Balance Sheet

ADC's defensive positioning is anchored by its $2.3 billion liquidity buffer, comprising $1 billion in its undrawn revolving credit facility and $1.29 billion in unsettled forward equity proceeds, according to the Panabee analysis. This liquidity provides a critical cushion against interest rate volatility and economic downturns. The company's debt structure is equally prudent: as of June 2025, its debt-to-EBITDA ratio stood at 6.23, but this metric improves to 3.1x pro forma when accounting for forward equity proceeds, according to the Agree Realty Q2 2025 results. Additionally, ADC's debt-to-equity ratio of 0.61, per Macrotrends, reflects a conservative capital structure, with no material debt maturities until 2028, as noted in the Q1 slides.

Interest Rate Risk Management: Proactive Hedging and Flexibility

ADC's resilience in a rising-rate environment is underpinned by its proactive risk management strategies. The company employs forward-starting interest rate swaps to hedge future borrowing costs, and its weighted average cost of capital (WACC) of 5.5% helps ensure investment spreads remain attractive even as rates rise. Furthermore, ADC's $625 million commercial paper program and expanded $1.25 billion revolving credit facility provide immediate access to low-cost capital, reducing reliance on volatile markets.

Historical performance reinforces this strategy. During the 2020–2024 period of rate hikes, ADC maintained a 4.8% annual EPS growth and increased dividends by 2.8% year-over-year, while expanding its portfolio by 282 properties, as reported in the company's Q4 2024 disclosure. Analysts attribute this success to its focus on high-credit retail tenants and a geographically diversified portfolio of 2,513 properties, which insulate it from sector-specific downturns.

Risks and Mitigants

While ADC's dividend appears well-supported, its reliance on external financing for capital expenditures raises concerns about shareholder dilution. The company raised $1.1 billion via equity offerings in 2024, and its 2025 investment guidance of $1.4–$1.6 billion suggests continued aggressive growth. However, the pro forma net debt-to-EBITDA ratio of 3.4x and $1.9 billion in liquidity provide ample flexibility to manage this risk. Additionally, ADC's Developer Funding Platform (DFP) allows it to monetize development opportunities without upfront capital, further enhancing efficiency.

Conclusion: A Conviction-Building Case

Agree Realty Corporation stands out as a rare combination of high-yield dividends, defensive balance sheet strength, and proactive interest rate management. Its ability to navigate past rate hikes while expanding its portfolio and rewarding shareholders positions it as a compelling long-term play. For investors seeking stability in a volatile market, ADC's disciplined approach to capital allocation and risk mitigation offers a blueprint for sustainable growth.