Granite Real Estate Investment Trust (NYSE:GRP.U) is dual-listed (TSX & NYSE). All figures in the article are in CAD unless noted otherwise.

The last time we wrote on Granite REIT, we highlighted that the REIT had a lot of strengths. We were still uncertain of shorter-term gyrations as the market was in the throws of the lockdown. We left with the specific message.

“Investors buying here will be very happy 10 years down the line, although we cannot guarantee that they will be happy in 10 days.”

Source: Granite REIT: Rock Solid

Since then, the stock has moved up significantly. The REIT also did another equity offering recently. That offering took the price down a tad. We analyze where the company stands post the equity issuance and whether it makes a buy for your portfolio.

The Company

Granite is an industrial REIT which has properties across the world in 8 different countries.

Source: Granite Investor Presentation

On last update, it had 108 properties making up a 45 million square feet portfolio. North America makes up more than half of the properties when fair values are taken into account.

Source: Granite Investor Presentation

Tenants

Granite had one major problem when it went public as a REIT. The vast majority of its revenue was coming from a single tenant, Magna International Inc. (NYSE:MGA) and its subsidiaries. In fact, in December 2011, MGA was occupying an eye-popping 94% of its leasable area. We have seen that REITs with a big concentration of tenant risk can turn out to be difficult investments. We saw that with both CorEnergy Infrastructure Trust Inc. (CORR) and Uniti Group Inc. (UNIT).

ChartData by YCharts

But Granite had one thing going for it that neither UNIT nor CORR did. Its primary tenant was about as good as you can get. MGA continued paying its rent on time month after month and Granite continued diversifying. It sold a few MGA properties and purchased a few quality assets year after year. The net result is that MGA has now been whittled down to 30% of its leasable area.

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Source: Granite Investor Presentation

What is also notable here is that a good portion of its top 10 have strong credit ratings. While MGA has been reduced to about a third of its former presence, it is still a vital portion. We recently examined MGA’s financials and we were extremely impressed. Needless to say, we don’t see any fallout risk, despite one of the worst years for car sales.

Valuation

Granite is the best performing REIT on the TSX and has demolished its counterparts.

Source: Canadian REITs

That list just shows you the top 8. The bottom 8 looks like this.

Source: Canadian REITs

So, Granite has absolutely dominated the industry however you look at it. Behind this is Granite’s sector choice. Investors must have noticed that the top include all defensive sectors like Industrial Property REITs, Apartment REITs or Medical Office Building REITs. Industrial assets have actually benefitted from the pandemic as e-commerce has skyrocketed. This has increased property values and rents.

This performance, though, leaves Granite at a rather expensive valuation. Granite reported adjusted funds from operations (AFFO) of $52.7 million or $0.91 per unit, in the third quarter of 2020. That puts it at more than 20X AFFO multiples.

On a price to book value, Granite is moderately expensive and trades at a 20% premium to the fair value of its properties.

ChartData by YCharts

One point we want to note here is that investors can only use price to book values as comparatives among the Canadian REITs. That is because Canada uses IFRS and properties are marked to fair values. Investors should never compare price to book values between Canadian and US REITs. US GAAP makes book values next to useless for REITs.

Getting back to Granite, the REIT is at a minimum fairly priced and perhaps a tad expensive, even for its recession resilient properties.

Weighted Average Lease Expiration, or WALT

Granite has a WALT of 5.9 years with just 1.7% coming for renewal in 2021. In the current climate, this is more than adequate for industrial properties.

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Source: Granite Investor Presentation

Interest Coverage

While most REITs are happy with a 3X interest coverage, Granite boasts a 7.5X coverage.

Source: Granite Investor Presentation

Granite uses less debt than all other Canadian REITs and there is in general no comparison. Granite’s leverage has creeped up a bit over the last few years as it has seen the value in issuing accretive equity along with low cost debt. Back in early 2018, its interest coverage ratio bordered on 10X.

Source: Granite Investor Presentation-2018

This is not a concern in general for this REIT, as the biggest complaint investors had about Granite was that it was not using sufficient leverage. Current numbers are stellar and about right for Granite.

Distributions

Granite’s sub-4% yield is one of the lowest on the TSX.

Source: Canadian REITs

Outside of Apartment REITs, most REITs generally pay a higher distribution. But Granite’s steady growth means that it can continue to hike its payout.

“On November 4, 2020, the Trust increased its targeted annualized distribution by 3.4% to $3.00 ($0.25 cents per month) per stapled unit from $2.90 per stapled unit to be effective upon the declaration of the distribution in respect of the month of December 2020 and payable in mid-January 2021.”

Source: Granite Q3-2020 press release

Based on all the information, Granite thus enjoys the highest dividend safety rating on our proprietary Kenny Loggins Scale, even in this climate.

A low rating implies a less than 15% probability of a cut in the next 12 months.

Conclusion

Granite has delivered and delivered in spades. Even south of the border it had demolished all REITs that are considered extremely reliable like Realty Income (O) and W.P. Carey (WPC). It is fighting a heated battle with Prologis, Inc. (PLD) for top spot currently.

ChartData by YCharts

While the past has been fantastic, the REIT is quite expensive. That is a function of its sector (industrial) and its relative lack of leverage. We think the company can return 6-7% a year from here. Key risk would be an increase in cap rates of industrial properties as things normalize. If fair values fall a tiny amount and Granite trades back near NAV, the REIT could drop 30%. Based on the facts, we give this a neutral rating.

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Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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