Agree Realty, the net-lease REIT darling known for its disciplined approach and fortress balance sheet, has sent a curious ripple through the market. Despite boasting a billion-dollar war chest and the ability to deploy half a billion dollars on acquisitions this year without batting an eyelash, the company has remained remarkably tight-lipped about its future plans.

While analysts scramble to decipher this reticence, a deeper dive into the Q1 2024 earnings call transcript reveals a chilling possibility: Agree Realty might be anticipating a market storm, a crash even, and is strategically positioning itself to weather the tempest.

This theory hinges on a seemingly innocuous phrase uttered by CEO Joey Agree during the Q4 2023 earnings call - the "do-nothing scenario." This scenario, as outlined by Agree, projected over 3% AFFO per share growth in 2024 even without any external growth. This statement, delivered at a time when cap rates were showing their first signs of life after years of stagnation, raised eyebrows. Why emphasize stagnation when armed with such financial firepower?

Fast forward to Q1 2024, and the "do-nothing" prophecy appears to be coming to fruition. Transaction volume has plummeted, with Agree acknowledging that Q1 activity will undoubtedly be down year-over-year. Sellers, clinging to 2022's inflated expectations, are hesitant to transact in a volatile market, creating an impasse that has effectively frozen the traditional net-lease landscape.

But Agree, ever the astute strategist, isn't sitting idle. They are actively "manufacturing" deals, leveraging their deep relationships with retailers to create off-market opportunities, focusing on blend-and-extend deals and targeting high-performing stores with untapped real estate potential. This shift from "wholesale buying" to a more surgical approach is key to their "crash-proof" strategy.

By selectively targeting deals with 100+ basis point spreads, Agree can drive meaningful AFFO per share growth even in a low-volume environment. This laser-focus on risk-adjusted returns, rather than chasing volume, suggests a calculated bet on a market correction.

Here's the hypothesis: Agree believes that the current market, buoyed by lingering optimism and fueled by a "hope for a rate cut," is unsustainable. As interest rates remain stubbornly high, and the threat of a recession looms, cap rates will inevitably adjust, potentially leading to a market crash.

This is where the "do-nothing" scenario becomes a strategic masterstroke. By limiting exposure to the volatile traditional net-lease market, Agree is protecting itself from potential downside risk. When the crash comes, and sellers are forced to adjust their expectations, Agree will be perfectly positioned to pounce, deploying its massive capital reserves at deeply discounted prices.

The numbers support this hypothesis. In Q1 2024, Agree achieved a weighted average cap rate of 7.7%, a full 100 basis points higher than the previous year. Furthermore, they have visibility into over half of their $600 million acquisition guidance for the year, with cap rates remaining consistently in the high 7% range. This indicates that Agree is already finding attractive deals at higher yields, further suggesting an anticipation of further cap rate expansion.

Average Cap Rate Trend

Agree's strategic silence, therefore, isn't a sign of passivity, but a calculated maneuver. The "do-nothing" prophecy isn't about inaction, but about strategic positioning. Agree Realty, by embracing a more disciplined and surgical approach, might be signaling a market crash and preparing to emerge from the wreckage stronger than ever.

"Fun Fact: Did you know Agree Realty's portfolio boasts a higher concentration of Best Buy stores than any other publicly traded REIT? This speaks volumes about their focus on identifying resilient retailers with a strong omnichannel presence, even in the face of e-commerce disruption."