Granite REIT (TSX: GRT.UN) is a Canadian real estate investment trust (REIT) that acquires and develops industrial properties. “Industrial properties” is a broad category that includes warehouses, factories and data centres. Granite is one of the main REITs in this real estate sub-sector in Canada. It trades on both the TSX and the New York Stock Exchange.
Granite REIT has many things going for it. Its growth over the last 10 years has been strong, with the top line averaging about 10% growth per year. In more recent years, the REIT’s earnings declined. However, they declined with revenue growth still being strong, which points to the possibility of more profitable years ahead.
Granite REIT is also highly profitable by some metrics; for example it has a 77% EBITDA margin and a 76.7% EBIT margin. EBIT and EBITDA are earnings metrics that include certain expense categories, investors use them to gauge future bottom-line profit potential.
So, Granite REIT has a lot of things going for it. Despite this, its stock has barely budged this year despite the company’s virtues. So it’s worth looking into whether GRT.UN has potential to do better in the future than it did in the past.
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Dividend coverage
One factor that Granite REIT has in its favour is high dividend coverage. The stock has a $0.275 monthly dividend, which works out to $3.30 per year. At today’s unit price of $76.97, these dividends provide a 4.3% yield. In the last 12 months, GRT.UN had $3.66 in earnings, giving the stock a 90% payout ratio. This is quite satisfactory for a REIT (such companies are required by law to pay out most of their earnings as dividends).
Growth
Another factor that Granite REIT has going for it, which sets it apart from its sector, is growth. Its growth in revenue, profit, and free cash flow was quite solid over the last 10 years. In the last five years, the revenue growth was even faster than before (16% per year), but was offset by a steep rise in interest expenses that caused profit to decline. The Bank of Canada is cutting interest rates now, so it is likely that this expense category will decline in the coming quarters, leading to positive growth in earnings.
Profitability
Another factor that GRT.UN has going for it is profitability. In the last 12 months, it had a 77% EBITDA margin, a 76.7% EBIT margin, a 41% free cash flow margin and a 61% FFO margin. All of these metrics indicate high profitability. The 4.3% return on equity is a little underwhelming, but remember that this company’s cash flows are far greater than its reported earnings.
Valuation
Last but not least, Granite REIT is cheap by some metrics, trading at:
- 18.2 times EBITDA.
- 18.7 times EBIT.
- 0.9 times book value.
- 14.8 times FFO.
These multiples are fairly low. On the flip-side, the price/sales ratio (8.8) is rather high, implying that if GRT.UN loses its juicy margins, it will be worth less. However, the REIT is probably worth holding if present trends in its business persist.
Will the present trends persist?
Industrial properties are generally quite in demand and are not threatened by the “death of retail” phenomenon that threatens many REITs. Additionally, there are some truly lucrative niches within the industrial subsector, such as AI data centres. If Granite capitalizes on such opportunities, then it might well keep the big dividends coming for the long term.
