Agree Realty's Q3 2025: Contradictions Emerge on Credit Loss Assumptions, Acquisition Cap Rates, and Liquidity Management

The above is the analysis of the conflicting points in this earnings call

Guidance:

• Full-year 2025 investment guidance increased to $1.5B–$1.65B (midpoint >65% above last year's investment volume)
• AFFO per share guidance raised to $4.31–$4.33 (midpoint ≈+4.4% YOY)
• Guidance assumes ~25 bps of credit loss for 2025 and minimal treasury-stock dilution (~$0.01 for full year)
• Pro forma liquidity expected ~ $2.2B after closing $350M delayed-draw term loan; pro forma net debt to recurring EBITDA ≈3.5x
• Expect >$100M of development/DFP starts in H2 and medium-term goal of ~$250M commenced annually

Business Commentary:

• Record Investment Activity:
• Agree Realty reported investing over $450 million across all three platforms in Q3, the largest quarterly investment volume since the onset of COVID in 2019.

• The increase was driven by strong acquisition opportunities and disciplined underwriting processes.

• Credit Rating Upgrade and Financial Strength:

• The company achieved an A- issuer rating from Fitch Ratings, enhancing its balance sheet and reflecting disciplined growth.

• This upgrade was due to the company's strong portfolio construction, conservative financial management, and demonstrated ability to access capital markets.

• Growing Investment Pipelines:

• Agree Realty committed approximately $190 million across 30 projects in DFP, representing a significant increase compared to prior years, with plans to exceed $250 million annually by 2025.

• The expansion in development and developer funding platforms is driven by strategic partnerships with major retailers and the opportunity to work with leading brands like 7-Eleven.

• Rising AFFO Guidance:

• The company raised its full-year AFFO per share guidance to a new range of $4.31 to $4.33, reflecting a year-over-year growth of approximately 4.4%.
• This increase is attributed to strong performance year-to-date and the strategic acquisition of high-quality properties across various sectors.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly described the quarter as "another very strong quarter," raised investment guidance to $1.5B–$1.65B and AFFO guidance to $4.31–$4.33, cited an A- issuer rating, called the balance sheet "fortress" with over $1.9B liquidity, and highlighted record quarterly investment volume (~$450M).

Q&A:

• Question from Nicholas Joseph (Citigroup): Can you walk through timing and settlement expectations for the outstanding forward equity and any near-term expirations?
  Response: About 14M shares outstanding; ~6M mature and expected to settle in Q4, remainder anticipated to settle in 2026.

• Question from Nicholas Joseph (Citigroup): Anything on the horizon that could slow the current pace of acquisitions?
  Response: No material near-term headwinds seen; pace expected to continue in 2025 despite lower 10-year Treasury yields.

• Question from Michael Goldsmith (UBS): Are you seeing increased competition pushing cap rates higher and how have you navigated that?
  Response: No material cap-rate change year-to-date; quarter-to-quarter 10 bps move driven by transaction mix — ADC sources bespoke, one-off deals which preserve spread.

• Question from Michael Goldsmith (UBS): Why is Q4 implied AFFO per share roughly flat to Q3; any one-time items in Q3?
  Response: Q3 included lease termination fees (~$0.01 AFFO) that likely won't repeat in Q4, which largely explains the sequential flatness.

• Question from Jana Galan (BofA): How much of the growing pipeline is existing tenants vs. new-to-portfolio, and where do you see cap rates heading into 4Q/2026?
  Response: Pipeline consists of tenants already in ADC's 2,600-asset sandbox (no material new tenant cohorts); no anticipated cap-rate deviation in Q4 2025—will monitor macro for 2026.

• Question from Jana Galan (BofA): You assumed ~25 bps of credit loss in guidance — how are you tracking YTD?
  Response: Third quarter credit loss ~21 bps; guidance assumes ~25 bps for the year and most near-term impacts are already known.

• Question from James Kammert (Evercore): Did you confirm the 104% recapture rate and what's the use/intended timing for the new term loan proceeds?
  Response: Yes, YTD recapture ~104%; $350M delayed-draw term loan (matures 2031) will likely pay down short-term commercial paper (~$390M outstanding) and fund incremental investments as needed.

• Question from Linda Yu Tsai (Jefferies): With ground leases being a larger portion of 4Q acquisitions and ~10% of ABR, how aggressively will you grow this bucket?
  Response: Opportunistically — ADC will grow ground-leases where qualitative/quantitative hurdles are met; Q4 pipeline currently contains a higher share of ground leases.

• Question from Linda Yu Tsai (Jefferies): Who generated the term fees in 3Q?
  Response: The term fees related to two Advanced Auto Parts stores; ADC is re-tenanting those assets.

• Question from Omotayo Okusanya (Deutsche Bank): How has the A- Fitch rating impacted cost of debt and future pricing?
  Response: Immediate modest pricing benefits observed (≈5 bps on 2029 term loan and commercial paper); A- should facilitate tighter spreads on future unsecured issuance over time.

• Question from Omotayo Okusanya (Deutsche Bank): What's driving the ramp in development/DFP activity despite construction challenges?
  Response: DFP provides flexible bridge/financial structures and ADC is executing both true development (site selection to delivery) and developer-funding projects; pipelines are deep but timing can shift due to entitlements.

• Question from William John Kilichowski (Wells Fargo): Any tenant health concerns in auto-related exposure given industry distress?
  Response: No immediate watchlist concerns; ADC's auto-parts exposure benefits from durable, aging-car trends and strong operators (O'Reilly/AutoZone), not new-car dealerships.

• Question from Robert Stevenson (Janney): What's limiting growth of the development platform beyond ~$250M target?
  Response: Not staffing or capability — limits are opportunity-driven and underwriting thresholds; ADC won't pursue speculative projects and focuses on guaranteed pricing/GMPs and tenants.

• Question from Spenser Allaway (Green Street): Do tenants show appetite to expand beyond initial projects and does that support achieving your DFP goals?
  Response: Yes — major retail clients remain in expansion mode; management cites retailer demand plus ADC's integrated capabilities as the basis for confidence in DFP targets.

• Question from Eric Borden (BMO): Can forward equity contracts be rolled or must they be settled at expiry?
  Response: Extensions are possible with counterparties, but ADC plans to settle upcoming forwards at maturity to deploy proceeds (pay down CP and fund investments) and because of rating/leverage considerations.

• Question from Eric Borden (BMO): Early thoughts on Series A preferred (redeemable Sept next year)?
  Response: Management views the Series A preferred as attractively priced and does not expect it to be called in the near term given the coupon.

• Question from Brad Heffern (RBC): When might ADC resume issuing equity given current liquidity?
  Response: ADC is on a self-imposed hiatus; with ~$1.9B–$2.2B liquidity and pro forma ~3.5x leverage, there's no immediate need to raise equity though management will remain opportunistic.

• Question from Upal Rana (KeyBanc): Any consumer weakness creeping into tenant categories beyond auto parts?
  Response: Most ADC tenant categories are beneficiaries of 'trade down' dynamics (Walmart, TJX, off-price), so ADC has not seen broad negative impact; consumer shift favors ADC's tenant mix.

• Question from Ronald Kamdem (Morgan Stanley): Why did credit-loss assumption tighten to 25 bps from prior assumptions and any color on large portfolio cap rates?
  Response: Performance has been better than earlier conservative assumptions (initial guide used 50 bps); ADC has passed on some larger sale-leaseback portfolios that were not attractively priced.