WHY GRANITE REIT SHOULD THINK ABOUT BUYING WPT INDUSTRIAL REIT

The strategic review initiated at WPT Industrial REIT a couple of weeks ago creates an interesting acquisition opportunity for Granite REIT.

Desjardins Capital Markets analyst Michael Markidis noted that purchasing WPT would increase Granite’s asset base, as well as improve the overall quality of its portfolio and substantially reduce its exposure to Magna International Inc. He also thinks a deal could be done without Granite having to issue equity.

WPT owns 48 properties totalling roughly 15 million square feet in 13 U.S. states, and has an assumed takeover price of US$13 to US$14 per share, so Markidis estimates Granite would boost its total asset value by as much as 40 per cent to approximately $3.5 billion by buying WPT.

“It would also materially boost Granite’s exposure to modern logistics, distribution and warehousing properties — a growing, albeit still comparatively small segment of Granite’s overall business,” he told clients.

In the process, Granite’s income coming from the U.S. would climb to 42 per cent from 25 per cent in the first quarter, while reducing its exposure to Magna (the REIT’s largest tenant) to about 63 per cent from 82 per cent.

Since Granite had $113 million of cash and more than $1 billion in debt capacity, buying WPT would boost its leverage ratio to about 45 per cent, which is the midpoint of management’s target range. Based on a debt financing in the four-to-4.5-per-cent range, Markidis estimates that such a deal could generate accretion of 10 per cent or higher.

“Granite’s disciplined investment philosophy strives to achieve the highest and most sustainable long-term value per unit,” the analyst said. “While a potential acquisition of WPT would not be a ‘value investment’, we believe the strategic merits of a combination warrant a closer look by management.”