Granite REIT

GRT.UN-T

A REIT for a TFSA? He likes multi-family residentials and industrials REITs. So, he likes IIP.UN-T and Granite REIT.

You're buying this for the new CEO, not its assets. It was an industrial REIT and was the real estate entity of Magna. It's since diversified out of it. Granite doesn't have much leverage to expand into other industrial assets. It brought in the CEO of Pure Industrial REIT who is the right person in place. Are you too far along in the industrial real estate cycle for him to go out and find value? He thinks the industrial story has legs. He likes Granite. But it when it sells off a bit. Makes sense long term.

There was a strategic review by management for potentially selling the company, but nothing came of that. There was some turnover with the CEO. The big issue is when it initially came to the market, it had very significant exposure to Magna (MG-T), which was their largest tenant. However, it had a pristine balance sheet. When you think of the Debt to Growth Book Value, it had approximately 25%, and the theory was that if they increased the leverage and took that Debt to Growth Book Value to 40%, they would have $1 billion to play with, diversify tenant exposure, make acquisitions. However they haven’t done any of that. That is unfortunate, because real estate prices have gone up significantly. It pays a decent dividend of 5%. His concern is that you really do need the leadership in there.

This has gone through a transition. It had significant exposure to Magna (MG-T) being a dominant tenant, accounting for about 80% of its NOI, which is still the case. Since 2011-2012, they’ve only done a couple of acquisitions, totaling about $100 million, which is unfortunate, because they have a very well capitalized balance sheet. That urged a couple of activist shareholders to suggest a new board and new management was needed, which pushed the stock price up significantly. If they use their balance sheet, it is debatable what their NAV will be, because you aren’t sure what they are going to buy. He would prefer other industrial REITs at this time.

Return of capital reduces your cost base. There is potentially an opportunity for them to utilize an under levered balance sheet. They have a lot of exposure to MG-T as a tenant. There was some turnover in management.

(Market Call Minute.) High Magna (MG-T) exposure, but they are working through the leases. There may be some possible property sells to limit that exposure. He is waiting to see what happens.

One of the more frustrating stories in that it has gone through management changes and now has a new CEO. 80% of its buildings are Magna (MG-T) with a third being special-purpose large car factories globally, so it has to deal with a very complex leasing structure. However, it also has the best balance sheet. Management, which is as yet unproven, will have to walk this minefield. He just wants to see how the new management handles the leases that are coming up in the next 2 years, and also if they are willing to use their balance sheet to acquire more real estate at a more aggressive pace.

Undertook a strategic review not too long ago, trying to figure out what to do given that the CEO had departed. The decision was to try to get somebody else in to grow the business. They have missed a lot of appreciation in commercial real estate values, and this is being reflected in the share price. Trading at about a 20% discount to NAV. Feels the dividend is sustainable. 6.5% dividend yield is secure.

When this IPO’d, it was primarily dependent on Magna (MG-T) accounting for well over 90% of its net operating income. Management’s objective was to reduce Magna’s exposure to less than 50% NOI within 3 years by making additional acquisitions by using their under leveraged balance sheet. Management has not done that in a very aggressive way, so debt to growth BV, it is still very under leveraged, less than 30%. They have a lot of balance sheet capacity to facilitate additional acquisitions. They haven’t done anything, which is unfortunate because in the interim the value of industrial properties has gone up and interest rates have fallen. They missed out, which is why you are seeing the stock languish. They did undertake a strategic review. The CEO left, so there is new management. Feels the dividend is sustainable.