The Company in a Nutshell
- GRT shows an occupancy rate of 98.4% and grew its FFO on a consistent basis since 2012.
- This REIT shows a cautious management who has never shared all its cash flow with its shareholders.
- This prudent approach that leaves enough room to manage through challenging periods.
Business Model
Granite REIT owns and manages industrial properties in North America (Canada + USA) and Europe (7 countries). It owns 92 properties ($2.7 billion in value) for a total of 30 million square feet. While the company shows a total of 37 well-known tenants (Cardinal Health, Siemens, DHL, Mercedes-Benz, Samsung, Sears (oops!)), 77% of GRT revenue comes from a single tenant: Magna International (MG.TO / MGA). While Magna is a solid company and is part of our DSR portfolio, we don’t think a business model so dependent on the success of another single business is a strong strategy.
Potential Risks
One word: Magna. If the car part maker hit a slow down and is forced to close some of its plants, GRT would be one of the first victims. Management is aware of this risk and made efforts to diversify its portfolio through further acquisitions. As interest rates rise, this strategy of growth by acquisitions will be more challenging.
Dividend Growth Perspective
GRT has maintained a solid dividend growth policy over the past 5 years (+29.71% or 5.34% CAGR). With its FFO payout ratio of 79%, shareholders should expect a mid single-digit dividend growth rate going into the future. In fact, if Magna International business is doing well, GRT will perform and keep increasing its dividend. At a 5% yield, this looks like a strong holding for any income seeking investors.
Final Thoughts
If you believe that concentration is the best business model, GRT is your pick. With a single tenant responsible for three quarter of its business, Granite REIT is basically an extension of Magna International. Nonetheless, GRT has shown improvement in its business model as 98% of revenues were generated by Magna in 2011. With a low FFO payout ratio, shareholders can enjoy a 5% payment that should grow and match/beat the inflation.
