Granite Real Estate Investment Trust T.GRT.UN

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Raise their target by 3 bucks to $92.00. GLTA

Granite REIT

(GRT.UN-T, GRP.U-N) C$81.50 | US$67.27

$316mm Equity Offering Funds Increased Development Activity Event

Resuming coverage following completion of a $316mm equity offering (3,979,000 units, $79.50/unit), including the over-allotment option.

Impact: SLIGHTLY POSITIVE

• Granite announced $368mm of new acquisitions, including six income-producing properties for $170mm ($131/sf). The remaining $198mm is for four development assets, including forward-purchases of two projects (completions H2/22) where Granite is responsible for lease-up and expects above-market returns, and two GTA West land parcels (1.8mmsf of potential development). We believe most of these acquisitions were off-market and resulted from existing Granite relationships (including the GTA land, estimated to cost <$1mm/acre or <$55/sf buildable).

• Including estimated future costs to develop the GTA lands, we estimate these acquisitions represent well over $600mm of incremental portfolio growth concentrated in state-of-the-art quality assets with potential for above-market yields. These investments also represent the opportunity for Granite to ultimately grow its portfolio in the strong GTA market by 40% (Q1/21: 19% of fair value).

• Development Pipeline Enhanced (Exhibit 2): The new GTA land parcels and two U.S. forward-funding development investments together increase the REIT's total development pipeline to 5.4mmsf, versus 2.2mmsf at Q1/21. Most projects are scheduled for completion during 2022, except projects on the GTA lands in 2023 at the earliest. We see this increased development focus supporting continued strong future NAV/unit growth (12% CAGR over the past five years).

• Forecast Revision: We forecast a two-year AFFO/unit CAGR of 8%, despite 2021 F/X headwinds. Our 2021/2022 AFFO/unit estimates slipped 3.0%/1.5%, on temporary higher cash balances and increased investment in development projects not yet cash-flowing (e.g. Q4/21E $275mm vs. $115mm previously). We include $600mm of future unannounced acquisitions (pipeline remains robust at $1bln).

  TD Investment Conclusion

  We continue to recommend Granite as a high-quality industrial REIT with a solid track record and diversified exposure across several strong markets. We see attractive relative value currently, with Granite's trading valuation (at 23.0x/19.9x 2021E/2022E P/AFFO and 105% P/NAV) being near the bottom of the global peer group range despite our favourable fundamental outlook.