Agree Realty's Undervalued Preferred Shares: A High-Yield Buy Opportunity Amid Strengthening Fundamentals

In the ever-evolving landscape of income investing, preferred shares often fly under the radar, yet they can offer compelling opportunities for those who dig deeper. Agree Realty Corporation's (ADC) 4.250% Series A Cumulative Preferred Stock (ticker: ADC.PRA) is a prime example of such an opportunity. Trading at a staggering 30.44% discount to its $25 liquidation preference—a price of $17.39 as of July 2025—this security delivers a 6.11% yield, far outpacing the 4.25% coupon rate and the 8.00% average yield for the "Real Estate" preferred stock category. For income-focused investors, this represents a rare confluence of undervaluation, reliable cash flow, and a strengthening corporate foundation.

The Attraction of Discounted Preferred Equity

Preferred shares are inherently unique: they sit between debt and equity in the capital structure, offering fixed dividends while retaining equity-like upside. ADC.PRA's current valuation reflects a market that has priced in significant risk or skepticism, yet the fundamentals tell a different story. The shares trade at a 29.00% discount to par, a discount far wider than the 13.11% average for real estate preferreds. This gap suggests either a mispricing or a temporary market overreaction.

The dividend structure is a key driver of appeal. ADC.PRA pays $1.0625 annually per share, or $0.08854 monthly, translating to a 6.11% yield at the current price. This yield is not only attractive in isolation but also resilient: the dividends are cumulative, meaning any unpaid amounts accrue and must be settled before common shareholders receive payouts. The last dividend was paid on July 29, 2025, with the next due on August 29, 2025, maintaining a consistent, predictable income stream.

Strengthening Fundamentals: A Credit Profile on the Rise

Agree Realty's recent A- credit rating upgrade from Fitch and BBB+ from S&P are not mere formalities—they signal a REIT with a fortress balance sheet and disciplined capital management. In Q2 2025, ADC reported $175.53 million in revenue, a 15.1% year-over-year increase, and a $1.06 EPS, doubling the prior-year figure. Its $2.3 billion in liquidity, including $1.3 billion in forward equity and $1 billion in revolving credit, provides ample flexibility for growth and debt servicing.

The company's net debt to EBITDA ratio of 3.1x is among the lowest in the REIT sector, while its 4.4x fixed charge coverage ratio underscores its ability to handle obligations even in a high-rate environment. These metrics are critical for preferred shareholders, as they reduce the risk of dividend cuts or defaults. ADC's focus on necessity retail tenants—with 68.3% of base rent from investment-grade tenants—further insulates its cash flows from economic volatility.

REIT Sector Rotation: Positioning for Defensive Growth

The REIT sector has seen a notable rotation toward defensive subsectors like multifamily and industrial in 2025, driven by macroeconomic uncertainty and rising interest rates. However, ADC's net-lease model—with an average lease term of 8.0 years and 99.6% occupancy—positions it as a hybrid of defensive and growth-oriented assets. Its development-for-tenant (DFT) strategy has raised 2025 investment guidance to $1.4–$1.6 billion, a 58% increase from 2024, signaling confidence in its ability to scale without compromising balance sheet strength.

Moreover, ADC's $400 million bond offering of 5.60% senior unsecured notes due 2035 and a forward equity raise have further optimized its capital structure. These moves reduced pro forma net debt to EBITDA to 3.1x, reinforcing its credit profile and providing a runway for continued dividend growth. With a 12-year consecutive dividend increase streak and 72% AFFO coverage in Q2 2025, the sustainability of its payout is well-supported.

Strategic Considerations for Investors

While ADC.PRA's current yield is enticing, investors must weigh the risks. The 30.44% discount to par implies a potential for price appreciation if the market revalues the shares closer to their liquidation preference. However, the call date of September 17, 2026, introduces a ceiling: if ADC redeems the shares at $25, investors would realize a capital gain but forgo future yield. This dynamic makes ADC.PRA a hybrid of income and capital appreciation potential.

For those seeking immediate income, the 6.11% yield is a compelling draw, especially in a market where Treasury yields hover near 4.24%. For those with a longer time horizon, the cumulative dividend structure and strong tenant retention (99.6% occupancy) provide downside protection.

Conclusion: A High-Yield Buy in a Strong Foundation

Agree Realty's preferred shares represent a rare intersection of undervaluation, reliable income, and improving credit fundamentals. The 6.11% yield, coupled with a fortress balance sheet and a REIT sector rotation toward defensive assets, makes ADC.PRA an attractive addition to a diversified income portfolio. While the call date in 2026 introduces some uncertainty, the current discount and dividend structure offer a compelling risk-reward profile.

For investors willing to navigate the nuances of preferred equity, ADC.PRA is a high-yield opportunity that aligns with both income generation and capital preservation goals. As the REIT sector continues to evolve, Agree Realty's disciplined approach and strategic positioning make it a standout candidate for those seeking stability and growth in a volatile market.