Granite’s dissidents get new boost

It’s not the report an issuer that is the subject of a proxy contest likes to receive, but for the second time in the past few days a proxy advisory firm has recommended unitholders at Granite REIT support a three-member dissident slate and withhold votes for three incumbents.

Granite, with a market cap of almost $2.5 billion, is facing a showdown with its owners next week.

FrontFour Capital and the Sandpiper Group lead the dissident slate. Those two shareholders own 6.2 per cent of the company — some of which is held in options.

On Tuesday, Glass Lewis issued a 24-page report on the upcoming proxy battle, which is expected to be decided next week at a special meeting. Earlier, proxy advisory firm ISS issued a report recommending unitholders support the three dissident nominees. Such a recommendation is considered key given that some institutional shareholders are required to follow what ISS says.

The ISS report drew a sharp rebuke from Granite REIT. “ISS supports its recommendation with flawed analysis and unquestioned acceptance of the dissidents’ views, and deviates from its own policies while disregarding the opinions and analysis of recognized industry experts,” it said.

Glass Lewis, which uses a different methodology to reach its conclusions — for instance it doesn’t meet with both sides but relies on assessing publicly available information — came to a similar recommendation.

“We believe the dissidents have established a sufficient case to support incremental board changes at Granite,” it said after noting that as “a general rule” it is reticent to recommend the removal of incumbent trustees and directors or the election of dissident nominees “unless certain critical issues are evident.”

In another section of the report, it says the three dissident nominees seem wellsuited “to serve as catalysts for positive changes at Granite and to disrupt the status quo in a manner which would benefit all unitholders.”

In its report, Glass Lewis noted the “positive progress” that Granite REIT has made following its restructuring (from the former MI Developments) and REIT conversion. Even so, Granite has “persistently failed to achieve self-imposed strategic objectives on balance sheet utilization, tenant diversification, and expense reduction — which appears to have prohibited Granite from achieving its full value potential, as asserted by the Dissidents.”

But Glass Lewis was also critical of governance (with too many trustees being linked to Brookfield Asset Management), compensation and overall G&A expenses. For instance it claims Granite has approved the “highest board compensation,” and operates with “among the highest relative G&A expenses in the Canadian REIT sector.” (The dissidents, who want Granite REIT to take on more leverage and reduce tenant concentration away from its large reliance on Magna, believe a further $10 million can be cut from those two expense buckets this year.)

One of the more controversial parts of both reports is the yardstick by which Granite’s performance is measured. Unlike many of its REIT compatriots, Granite has a large non-Canadian pool of assets, deriving 26 per cent of its revenue from Canada, 29 per cent from the U.S and 45 per cent from Europe.

Against its peers, it is “one of the best performing REITs in Canada” — a point noted by management and Glass Lewis.

Against other benchmarks — say a group of U.S. listed REITs, a measure used by the dissidents, where the yardstick is in U.S. dollars — the result is different. (Granite is listed in the U.S.) Glass Lewis notes that the dissidents’ “performance critique has merit.”

A ... CASE TO SUPPORT INCREMENTAL BOARD CHANGES.