In a research report titled Start Buying this Global Industrial Behemoth, iA Capital Markets’ Gaurav Mathur initiated coverage of Granite Real Estate Investment Trust with a “strong buy” recommendation on Monday.
The analyst sees the industrial and logistics sector, both in North America and Europe, “moving into a higher gear than ever witnessed,” noting rental rates continue to rise, supply pipelines are tightening, and cap rates are stabilizing.
“We note that the stock gets a pass on most investors’ desks, especially those with a North American and global focus,” said Mr. Mathur. “We firmly believe that the process of price discovery continues to occur for the Canadian industrial REITs in our coverage. In our view, segments of the CRE market that have witnessed acquisition activity support our belief that private real estate values have been more than stable and are moving higher in many instances. ... Given recent market conditions, we still expect above-average demand for space to persist, as compared to past peak.”
Mr. Mathur called Granite a “consistent cash flow compounder,” noting: “The REIT has built a stable and strong portfolio of assets in the U.S. (49 per cent of Q1/22 net operating income), Europe (35 per cent of Q1/22 NOI), and Canada (16 per cent of Q1/22 NOI). In the recent past, we have discussed the strength of the industrial CRE sector in each of these countries, and remain bullish on the underlying strength of the market, in spite of the equity market volatility. Adding the Company’s strong acquisition and development pipeline to the mix, as well asthe stringent focus on capital allocation, we note the rise of stable cash flows the REIT has posted. We understand that the correlation between excess stock returns and NAV is the strongest. However, amid the new normal, we strongly believe that investors should begin to think about cash flow payers that can continue to grow amid the volatility.”
He also sees investor worries about tenant concentration as “overblown,” noting the REIT has been penalized for its exposure to Magna International Inc. and Amazon.com Inc.
“There is no indication of either tenant vacating existing square footage, nor do the longer-term themes work against the business models,” said Mr. Mathur. “Our channel checks indicate strong thematic upsides for both tenants thereby allaying any fears of tenant risk.”
“While most of the REIT’s NOI is derived from the U.S. and Europe, we find it interesting that the Street continues to compare Granite REIT to its Canadian industrial peers. In our view, with most of the portfolio domiciled in the U.S., we think it’s high time that we start comparing Granite REIT to its U.S. peers. We believe that to compare apples to apples, the comparative set needs to reflect that view.”
Anticipating above-average demand for space that “rivals past peak cycles” and expecting the REIT to post “strong” rent growth due to “low availability, rising construction costs, and strong tenant demand,” Mr. Mathur set a target of $100 per unit of Granite. The current average on the Street is $102.70.
“Add low leverage and attractive FFO, AFFO and NAV growth to the mix, and the units currently provide a very attractive entry point,” he concluded.