Updated on March 29th, 2019 by Josh Arnold
International REITs could be a valuable option for investors interested in diversifying their portfolios.
There are many international Real Estate Investment Trusts based outside the U.S. with quality business models and high dividend yields.
One example is Granite Real Estate Investment Trust (GRP.U) (GRT-UN.TO), a REIT based in Canada. Not only does Granite have a strong business model, but it also pays a robust 4.4% dividend yield.
Granite generally trades with a yield of 5% or more, but a sharp recent rally in the stock has sent the yield lower.
Granite also pays its dividend monthly; a more attractive dividend schedule than REITs which pay dividends quarterly.
Granite is one of only 41 stocks that pay monthly dividends. You can access the full database of monthly dividend stocks below:
Granite is listed in both Toronto and New York.
This article will outline Granite’s business model, and discuss its merits as a dividend stock.
Granite owns and manages predominantly industrial real estate properties, in North America and Europe.
It converted to a REIT on January 3, 2013, and has transformed itself into a leaner, more efficient company, with higher-quality assets.
The trust’s income-producing portfolio consist of Multi-purpose, Logistics and Distribution Warehouses, and Special-purpose facilities. It owns a total of 32 million square feet spread across 92 properties in Europe, Canada, and the U.S.
The trust focuses on properties that support e-commerce development, and are located strategically to support such businesses in the best markets.
Source: Investor presentation, page 8
Granite seeks areas that have proximity to major cities and have favorable demographics. In addition, it buys properties that are already modern, meaning capex needs are low.
Finally, it focuses on the enormous shift to e-commerce from physical retailing, with a particular focus on food and pharmaceuticals.
In short, Granite is betting big that these characteristics will fuel its future growth, and results have certainly supported that notion.
Next up, we’ll take a look at the trust’s growth prospects.
Granite’s outlook is positive from a fundamental perspective with the trust in the midst of a transformation.
Source: Investor presentation, page 5
The trust went through a period of significant transition in recent years, switching out its CEO, board, and leadership team.
Today, the trust is focused on transforming its portfolio through the sale of non-core assets, and by enhancing its presence in the U.S.
In the coming years, the trust is working to focus on growth, including increasing its portfolio concentration in Canada.
Source: Investor presentation, page 3
Today, the trust has a 50% concentration in Europe, which it wants to have down to 40% by next year. That concentration will move slightly towards Canada and more so to the U.S.
Further, the trust is looking to boost its ~32 million square feet and $3.2 billion in book value to more than 40 million square feet and in excess of $4 billion in book value (in Canadian currency).
Future growth will be comprised mainly of rental increases, and selective acquisitions that are accretive to FFO. The boost for 2020 will be comprised almost entirely of acquisitions, which will be part of the trust’s transformation plans.
Source: Investor presentation, page 7
Looking further out, Granite believes it can grow all of its market types significantly by 2023, adding between 15 million and 26 million additional square feet to its portfolio.
In addition, it plans to be focused heavily on the best Tier 1 properties, while allocating to Tier 2 and e-commerce hubs as well to support its long-term growth strategy surrounding that type of property.
Source: Investor presentation, page 12
The above slide gives investors an idea of why Granite is choosing to focus on the markets it is for 2019 and beyond.
Trends for e-commerce are overwhelmingly positive and given this wave of growth, Granite believes space to fulfill and support these growing orders will become more valuable. It is therefore buying up assets that fit its investment criteria to capitalize.
Granite’s growth outlook is quite favorable, given that it should continue to see higher rent prices, as well as a significantly larger investment book through acquisitions.
Granite currently pays a monthly dividend of $0.233 per share in Canadian dollars. The most recent dividend increase came in December of 2018, in the amount of 2.6%. In addition, the trust paid a special distribution of $1.20 per share on 12/31/18, something it had never done before.
On an annualized basis, the current regular dividend payment is $2.80 per share in Canadian currency. In U.S. dollars, this works out to roughly $2.10 per share. This equates to a 4.4% yield.
It should be noted that if investors own the U.S. listing, the dividend will be subject to currency risk as it is translated from Canadian dollars to U.S. dollars.
How much dividend income U.S. investors will receive each month will vary based on prevailing exchange rates.
Another important consideration for investing in international stocks is withholding taxes. Dividends received in Canadian dollars are typically subject to a 25% withholding tax.
One way to avoid this is by holding shares in a 401(k) or IRA—there is an agreement between the two countries that allows U.S. investors to be spared the tax, if the shares are held in a qualified retirement account.
Granite’s 4.4% dividend yield is supported with underlying cash flow. Based on adjusted FFO for 2018, Granite’s payout ratio is 93%.
That is certainly high, but keep in mind that Granite is in the midst of transforming its portfolio, and near-term earnings will suffer as a result. We believe Granite is going to grow FFO in the coming years and reduce the payout ratio, so we see the distribution as safe.
Further, if the management team had been concerned about dividend safety, it is likely they would not have issued a very large special distribution at the end of 2018, and would have instead elected to save that cash.
Investors can earn high levels of income and diversification benefits by considering REITs based outside the U.S.
Granite REIT is a good example of an international REIT with a high-quality business model and an attractive dividend yield of 4.4%.
The trust is in the midst of a transformation that should see its growth accelerate in the coming years, which should lead to a safer dividend and room for further payout growth.
As a result, Granite remains an attractive option for investors looking for monthly dividends and a 4%+ dividend yield.