Granite Real Estate Investment Trust GRP.U

TD

[retiredcf]

Have an $88.00 target. GLTA

BEST SMIDCAP IDEAS: IMPROVING FUNDAMENTALS NEXT YEAR AND 9% AFFO CAGR TO 2026

THE TD COWEN INSIGHT

With our strong forecast AFFO growth (now thru 2026), an anticipated 2025 rebound in demand/supply leasing fundamentals, and a trading valuation now at historic lows, we see GRT units poised to generate sector-leading returns. Our thesis includes sustained upper single-digits SPNOI growth driven by upside to market rents, and further improvement in GRT's already strong balance sheet metrics.

Summary of Our Thesis – We view GRT as a core holding for investors seeking high-quality industrial property exposure in strong markets across the U.S., Greater Toronto Area, and Europe. GRT's portfolio focuses on large bay distribution/e-commerce logistics properties which in our view enhances stability. Significant rental rate mark-to-market opportunities drive our expected 9% AFFO/unit CAGR to 2026, plus continued NAV/unit growth. Our forecast incorporates the 47% of GRT's debt that matures between 2025 and 2027 with an average maturing coupon of 3.4%. Beyond 2026, we see a very manageable remaining interest cost headwind, equating to just 7% of FFO and spread through 2030 (i.e. averaging <2% of FFO annually). The $6.35 in FFO/unit we are introducing today for 2026E represents a still-strong 7% pace of y/y growth.

Investor sentiment has waned for Industrial-focused REITs due to moderating rent growth and concerns that it might turn negative, as well as a shaky macro backdrop, occupancy declines along with supply pressures. As discussed herein, these concerns do not appear to consider the fact that new competing construction starts have stalled and the projects under active development have fallen sharply to just 2% of inventory from 6% in 2022 in GRT's key U.S. markets, and for the GTA has fallen to 1.5% from 2.2%.

These concerns, together with negative overall REIT sector sentiment, have put pressure on GRT's unit price resulting in negative unit price returns similar to the REIT index (-11% one-year return), despite GRT's strong relative growth profile. This has pulled the valuation down to what we see as exceptionally compelling levels. At 13.7x 2024E P/AFFO, GRT is trading at 56% of the U.S. peer group average (low-end of historical range and vs 60%-70% typical in recent years). GRT's relative P/AFFO multiple ratio vs DIR at 98% is also at the low-end of its historical range, further demonstrating GRT's compelling relative value. We also note GRT's current implied cap rate at 6.7% now matches that of NXR (which we view as having a lower quality portfolio) vs trading 40bps tighter earlier this year.

We see Granite as a compelling way to gain exposure to many strong industrial property leasing markets — including U.S. markets. Granite's portfolio of mostly high quality, large bay, logistics-focused assets provide a degree of stability to portfolio metrics such as occupancy and SPNOI growth. AFFO, FFO, and NAV per unit metric growth is supported by a significant mark-to-market opportunity, and we see the mark-to-market spread potentially widening further as market rents potentially re-accelerate in 2025. Other factors drawing us to the name include a best-in-class balance sheet along with a management team that has a tendency to meet or exceed expectations.