It is every investor’s dream to replace employment income with passive income: earned money through little or no ongoing effort and, preferably, with little worry.
REITs are a good way to achieve this, as they can provide holders with regular, stable income that is backed by income-producing real estate that the REIT owns and often operates.
There are many attractive REITs to choose from, but today I will focus on a little-known one: Granite Real Estate Investment Trust (TSX:GRT.UN).
This is a $3.1 billion Canadian-based REIT, which has 85 investment properties comprised of industrial and logistics properties, a global presence, with properties located in nine countries, and a yield of 4.48% — a healthy yield, for sure, but that’s not all.
If you invest $100,000 into Granite, that gives you annual passive income of $4,480. That’s monthly income of approximately $375. And that’s not a bad start. But we also have the opportunity for strong capital gains, as this REIT remains undervalued.
Granite has an enviable balance sheet, with a net leverage ratio of only 16% and a healthy cash flow profile, with a 79% of funds from operations payout ratio.
Adjusted cash flow has grown at a compound annual growth rate (CAGR) of more than 6.4%, distributions have grown at a CAGR of more than 5%, and the company is in the midst of radically diversifying its client base.
In 2011, Magna and its subsidiaries accounted for 94% of gross leasable area (GLA), and today it accounts for 42% of GLA.
All of this represents a big opportunity for Granite, as the REIT de-risks its business through further diversification and as it uses its financial might and flexibility to further grow its portfolio of properties.
Granite has little leverage, an investment-grade rating, and liquidity in excess of $1.1 billion, all of which will provide the fuel for future growth and expansion.
So, why invest in Granite?
It is clear to me that this REIT is armed with a list of creditworthy tenants that span different industries from e-commerce to the auto industry to the hardware industry.
This list of tenants is becoming increasingly diversified, and as this continues, the REIT will trade at higher multiples to reflect a less-risky proposition.
As it stands today, Granite is pretty undervalued, trading at valuation ratios that are not reflective of the REIT’s changing risk profile, healthy balance sheet, and growth opportunities, and it is well below its peers.
A six times price-to-earnings ratio, a 6.5 times price-to-cash flow ratio, and a 1.1 times price-to-book ratio make it a very attractively valued REIT and a great pick to ramp up your passive income.
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Fool contributor Karen Thomas has no position in any of the stocks mentioned. Magna is a recommendation of Stock Advisor Canada.