Executive Summary / Key Takeaways

• Capital Rotation Creates Asymmetric Opportunity: Granite is executing a $370 million disposition program to exit secondary markets (Indianapolis, Columbus) and redeploy capital into Tier 1 logistics hubs (Miami, UK, France), targeting 75-100 basis points of initial yield spread that management expects to compress as cap rates fall in 2026, creating embedded value creation for patient investors.

• Leasing Power Validates Portfolio Quality: Q3 2025 leasing spreads of 88% on 1.85 million square feet and 47% average spreads on 2025 renewals demonstrate that Granite's modern, functional properties command significant premiums over market rates, though management prudently guides 2026 spreads to normalize around 20% as the Samsung non-renewal creates a temporary headwind.

• Conservative Leverage Enables Offensive Positioning: With 35% net leverage, 7x net debt/EBITDA, $1 billion in liquidity, and a 2.7% weighted average cost of debt, Granite possesses the balance sheet flexibility to fund $240 million in new acquisitions and a $145 million unit buyback program while competitors retreat, positioning it to capture market share during the capital cycle trough.

• Distribution Growth Reflects Management Confidence: The 15th consecutive annual distribution increase to $0.15 per unit—marking the first time exceeding $0.10—signals management's conviction in sustainable cash flow growth, supported by a mid-60s AFFO payout ratio and 44% cash NOI per unit growth over the past three years (12.9% CAGR).

• Execution Risk Is the Critical Variable: The investment thesis hinges on successfully completing the capital rotation by end-2026 while maintaining occupancy above 96% and managing the Samsung vacancy re-leasing process; failure to deploy proceeds into accretive acquisitions or prolonged downtime on the 2026 expiries would compress the anticipated 2026 FFO/AFFO growth of 7-9% and 4-5% respectively.

Setting the Scene: The Industrial REIT Quality Premium

Granite Real Estate Investment Trust, founded in 2011 and headquartered in Toronto, has evolved from a diversified property owner into a pure-play industrial logistics specialist with a clear conviction: quality properties in supply-constrained markets will consistently outperform generic industrial assets. This isn't a passive portfolio strategy—it's an active capital rotation play that defines the entire investment case.

The company owns approximately 60.9 million square feet across 140 investment properties in five countries, generating revenue through long-term net leases to investment-grade tenants in the manufacturing, e-commerce, and third-party logistics sectors. Granite's business model is straightforward: acquire modern logistics facilities in Tier 1 markets, lease them to creditworthy tenants with contractual rent escalations, and capture value through strategic dispositions when assets reach peak pricing. What distinguishes Granite from the 100+ industrial REITs globally is its disciplined execution of this quality-over-scale philosophy.

The industrial real estate market is undergoing a critical inflection. After the pandemic-driven e-commerce boom created oversupply in secondary markets, a "flight to quality" has emerged where tenants prioritize functional, well-located facilities over cheap, obsolete space. CBRE (CBRE) data shows that while overall net absorption remains below the 10-year average, modern logistics assets command 20-30% rent premiums and maintain occupancy rates above 96%. Granite's portfolio—characterized by 40-foot clear heights, excess trailer parking, and proximity to major transportation corridors—sits squarely in this premium segment.

Granite's competitive positioning reflects this quality focus. Against Prologis (PLD), the 1.2 billion square foot global leader, Granite's 60.9 million square foot portfolio appears diminutive. However, this scale disadvantage becomes a strategic asset: Granite can be selective, acquiring only the most functional assets while Prologis must deploy capital across broader markets to move the needle. Compared to Rexford Industrial (REXR), which dominates supply-constrained Southern California infill markets, Granite offers geographic diversification across North America and Europe, reducing regional concentration risk. EastGroup Properties (EGP) focuses on shallow-bay Sunbelt distribution, while Granite's larger-format facilities cater to manufacturing and e-commerce fulfillment—higher-barrier tenants with longer lease terms. STAG Industrial (STAG) mirrors Granite's single-tenant focus but lacks the international diversification and development expertise that enables Granite to convert properties like its GTA asset into data centers.

The industry structure favors incumbents with capital access and tenant relationships. Development timelines exceed 18-24 months in Tier 1 markets due to zoning, environmental, and infrastructure constraints, creating barriers to new supply. Meanwhile, reshoring trends—80% of U.S. manufacturing construction spending concentrated in the Midwest through Southeast—directly benefit Granite's existing footprint. This supply-demand imbalance in quality assets underpins management's conviction that cap rates will fall in 2026, making today's acquisition targets in the low-to-mid-5% yield range appear increasingly attractive.

Technology, Products, and Strategic Differentiation: The Modern Logistics Moat

Granite's "technology" isn't software—it's the physical and locational characteristics of its properties that create a durable competitive advantage. The company's portfolio strategy centers on owning assets that cannot be easily replicated: facilities with 40-foot clear heights, excess trailer parking, cross-dock configurations, and immediate access to major highways, ports, and labor pools. These features aren't cosmetic; they translate directly into tenant productivity gains that justify rent premiums and drive renewal rates above 80%.

The Wayfair (W) renewal in the Greater Toronto Area exemplifies this moat. The facility features 40-foot clear heights, excess trailer parking, and is located "literally across the street from the GTA" with access to a large labor pool—attributes that make it "one of the top 3 assets in the country." When tenants occupy such functionally superior spaces, relocating to save 10-15% on rent would cost them far more in operational inefficiency. This creates switching costs that underpin Granite's pricing power.

Management's capital recycling strategy—disposing of $370 million in assets by end-2026 while acquiring $240 million in Tier 1 markets—represents a deliberate concentration play. The disposed assets, primarily in Indianapolis and Columbus where Granite has "relatively high concentration," are being sold at cap rates that likely exceed acquisition yields by 75-100 basis points. The reinvestment targets (Miami, UK, France) offer not just higher growth potential but also scarcity value: Miami serves as the gateway to Latin American trade, while UK and French logistics hubs benefit from post-Brexit supply chain realignment. This rotation isn't diversification for its own sake; it's a calculated upgrade of the portfolio's quality and growth trajectory.

Environmental, social, and governance factors reinforce this differentiation. Granite's top GRESB ranking for two consecutive years signals to institutional investors and credit tenants that its assets meet highest sustainability standards—a growing requirement for corporate occupiers. This ESG leadership translates into lower cap rates on acquisitions (better pricing) and higher rents from tenants seeking to meet carbon reduction commitments.

The company's adaptability further strengthens its moat. The conversion of a GTA asset to a data center demonstrates management's willingness to repurpose properties to highest-and-best use, capturing value that static warehouse owners cannot. While management notes that purpose-built data centers are "extremely capital intensive" and not on the "immediate radar," the ability to pivot existing assets provides optionality that pure-play warehouse REITs lack.

Financial Performance & Segment Dynamics: Evidence of Strategy Working

Granite's Q3 2025 results serve as compelling evidence that the quality strategy is delivering tangible financial outcomes. Funds from operations (FFO) per unit reached $1.48, up 9.6% year-over-year and 6.5% sequentially, while adjusted funds from operations (AFFO) per unit hit $1.26, up 4 cents from Q3 2024. These aren't just growth numbers—they validate that the portfolio's embedded rent growth and leasing spreads are converting to distributable cash flow.

The three-year cash NOI per unit growth of 44% (12.9% CAGR) is particularly significant because it occurred during a period management characterizes as "challenging for our sector." This outperformance stems from three drivers: contractual rent escalations embedded in leases, positive leasing spreads on renewals, and the lease-up of previously vacant units. The latter point is crucial—Granite isn't just raising rents on existing tenants; it's actively creating value by filling empty space, with over 500,000 square feet currently under lease negotiation representing entirely new leasing.

Same-property NOI growth of 5.2% on a constant currency basis (8.4% with FX) demonstrates the portfolio's organic growth engine. This isn't acquisition-driven growth; it's rent bumps, spread capture, and occupancy gains from existing assets. Management's decision to raise and narrow 2025 guidance to 5.4-6.2% reflects confidence that this momentum will continue, driven by CPI-linked escalations and the strong leasing pipeline.

The capital allocation picture reveals a management team thinking like owners, not just asset gatherers. The $145 million year-to-date unit buyback through the NCIB is accretive at current valuations, reducing unit count while the portfolio grows.

The $240 million acquisition pipeline, funded through a combination of dispositions and the $1 billion liquidity pool, shows discipline—Granite isn't issuing dilutive equity to grow; it's recycling capital at a spread. As CEO Kevan Gorrie noted, funding over $200 million in acquisitions while finishing the quarter with only $79 million drawn on the credit line and $128 million in cash "shows the power of our low payout ratio and free cash flow."

Balance sheet metrics support this offensive posture. The 35% net leverage ratio, while elevated due to excluding $370 million of held-for-sale assets from the denominator, remains conservative for an industrial REIT. Net debt to EBITDA of 7x is consistent with prior periods and will normalize as disposition proceeds repay credit facility borrowings. The 2.7% weighted average cost of debt with 3.6 years to maturity provides certainty in a rising rate environment, while the $1 billion liquidity pool ($109 million cash + $918 million undrawn facility) offers firepower for opportunistic acquisitions when competitors face financing constraints.

Outlook, Guidance, and Execution Risk

Management's 2025 guidance increase and narrowing of ranges signals unusual confidence in a volatile market. The same-property NOI guidance lift to 5.4-6.2% from 5-6.5% reflects not just Q3 outperformance but visibility into Q4 lease commencements and 2026 renewals. FFO per unit guidance of $5.83-5.90 (7-9% growth) and AFFO per unit of $5.03-5.10 (4-5% growth) embeds the Florida acquisitions but excludes disposition proceeds, suggesting potential upside as the $370 million sales close.

The 2026 outlook introduces critical execution variables. Management expects renewal rates to normalize to 70-75% (versus 81% in 2025) partly due to Samsung's non-renewal, and leasing spreads to moderate to the 20% range—still robust but well below 2025's exceptional 47%. This guidance matters because it frames realistic expectations: 2025 benefited from catch-up leasing after tenant delays, while 2026 represents a more normalized but still above-market environment. The Samsung space, with in-place rents at just 25% of market rate, creates both risk (downtime during re-leasing) and opportunity (massive rent uplift potential).

The acquisition pipeline's composition is strategically significant. The $240 million of agreed terms focuses on "modern, functional logistics type of assets" rather than "small bay older generation assets," reinforcing the quality thesis. With closings expected in late Q4 2025 or early Q1 2026, these assets should contribute to 2026 results. Management's expectation that cap rates will fall in 2026, based on "increased activity and competition for acquisitions," suggests they're buying at the cyclical trough—a classic contrarian move enabled by their balance sheet strength.

The leasing pipeline, with "well over 500,000 square feet currently under lease negotiation, all of which is new leasing," provides forward visibility. This represents not renewals but incremental occupancy gains, which carry higher marginal value since they require no tenant improvement allowances and generate pure NOI growth. The fact that tenants "have put off their leasing decisions for a long time" and are now "reaching a point where they have to make a decision" indicates Granite is capturing pent-up demand, suggesting 2026 occupancy gains could exceed historical norms.

Risks and Asymmetries: What Can Break the Thesis

The capital rotation strategy, while compelling, introduces execution risk that could meaningfully impact 2026 results. If the $370 million in dispositions fail to close by end-2026, leverage ratios remain elevated and acquisition funding becomes constrained. More concerning, if disposition cap rates compress faster than acquisition cap rates, the 75-100 basis point spread could narrow or invert, destroying the economic rationale for the rotation. Management's reluctance to provide market-specific updates—"I don't want to do anything that will compromise our efforts on the leasing front, acquisition front or disposition front"—suggests competitive intensity that could pressure pricing.

The Samsung non-renewal represents a tangible 2026 headwind. With in-place rents at just 25% of market rate, re-leasing will generate substantial NOI uplift, but downtime could create a 2-3 quarter drag on same-property NOI growth. Analyst concerns about downtime are "fair," according to management, meaning investors should model a temporary occupancy dip in early 2026. If re-leasing takes longer than expected or requires significant tenant improvements, the 20% spread guidance could prove optimistic.

Scale disadvantages create competitive vulnerabilities. Prologis's 1.2 billion square foot footprint and development pipeline exceeding 100 million square feet allow it to serve global tenants' entire supply chain needs, while Granite's 60.9 million square feet limits its relevance for the largest logistics users. This could pressure Granite's market share in its target markets if Prologis uses its scale to pre-emptively lease available land or offer package deals across multiple markets. Granite's slower development pace—relying on acquisitions rather than build-to-suit—means it cannot capture the full development profit margin, forcing it to pay market prices for stabilized assets while competitors create value through development.

Interest rate sensitivity remains a structural risk despite the conservative debt profile. With 3.6 years to maturity and the next major refinancing in September 2026, Granite faces potential cost of capital increases just as acquisition activity peaks. If rates remain elevated or rise further, the low-to-mid-5% acquisition yields may prove insufficient to maintain AFFO per unit growth, pressuring the distribution sustainability that underpins the investment case.

Geographic concentration, while improved through European diversification, still exposes Granite to North American industrial market cycles. The Greater Toronto Area's 5.5% year-over-year asking rent decline shows that even Tier 1 markets face supply-demand imbalances. If reshoring momentum slows or e-commerce growth decelerates more than expected, occupancy could fall below the 96% threshold that supports Granite's pricing power and FFO growth.

Valuation Context: Quality at a Discount

At $55.00 per unit, Granite trades at an enterprise value of $5.66 billion, representing 17.04x EV/EBITDA and 9.3x P/FFO based on 2025 guidance midpoint ($5.87). This valuation matters because it positions Granite at a meaningful discount to higher-growth peers despite superior portfolio quality and balance sheet strength.

Comparative multiples reveal the discount: Prologis trades at 23.81x EV/EBITDA with 3.4% FFO growth, Rexford at 19.54x with 10.3% core FFO growth, EastGroup at 24.52x with 11.6% revenue growth, and STAG at 17.44x with 10% core FFO growth. Granite's 7-9% FFO growth guidance, combined with its 4.42% dividend yield (versus 3.16% for PLD, 4.22% for REXR, 3.20% for EGP, and 3.84% for STAG), suggests the market is pricing Granite as a lower-growth alternative when its leasing spreads and capital rotation strategy indicate potential for upside surprises.

The balance sheet metrics support a premium valuation that isn't yet reflected in the price. Granite's 0.61 debt-to-equity ratio is lower than PLD (0.63), STAG (0.90), and comparable to REXR (0.36) and EGP (0.43). Its 73.68% operating margin exceeds all peers except PLD's 42.72% (which benefits from scale) and reflects the high-quality, low-capex nature of Granite's assets. The 1.82 current ratio demonstrates superior liquidity versus PLD (0.77) and EGP (0.46), providing flexibility that should command a valuation premium in a capital-constrained environment.

Cash flow metrics further highlight the disconnect. Granite's 12.82x price-to-operating-cash-flow ratio compares favorably to PLD (22.92x), REXR (18.24x), EGP (20.43x), and STAG (15.95x), despite Granite's international diversification providing a natural hedge against U.S.-specific risks. The 4.42% dividend yield, combined with a 71.54% payout ratio that leaves substantial retained cash for reinvestment, offers income-oriented investors a compelling total return proposition.

The valuation asymmetry lies in the capital rotation's embedded optionality. If Granite successfully executes the $370 million disposition program and deploys proceeds into the $240 million acquisition pipeline at a 75-100 basis point spread, the resulting NOI uplift isn't reflected in current guidance. Each 10 basis point spread improvement on $240 million of acquisitions adds approximately $240,000 of annual NOI, or $0.01 per unit—small in isolation but meaningful when combined with lease-up of vacant space and contractual rent escalations.

Conclusion: Quality, Execution, and Asymmetric Risk/Reward

Granite REIT's investment thesis centers on a simple but powerful combination: a high-quality, modern logistics portfolio that commands rent premiums, a conservative balance sheet that enables opportunistic growth when competitors are constrained, and a management team executing a capital rotation strategy that should create value through both yield spread compression and market timing.

The 15-year track record of distribution increases, the 44% cash NOI per unit growth over three challenging years, and the 88% Q3 leasing spreads provide tangible evidence that Granite's "flight to quality" positioning isn't marketing rhetoric—it's a measurable competitive advantage. The decision to increase the distribution to $0.15 while simultaneously repurchasing $145 million of units and funding $240 million of acquisitions demonstrates capital allocation discipline that aligns management with unitholders.

The critical variables that will determine success are execution velocity on the $370 million disposition program and the re-leasing of the Samsung space in 2026. If Granite closes the asset sales on schedule and deploys proceeds into the acquisition pipeline before cap rates fall, the 75-100 basis point spread will translate directly to AFFO per unit accretion. If the Samsung space re-leases at market rates (a 300% potential uplift) with minimal downtime, 2026 same-property NOI growth could exceed the 5.4-6.2% guidance range.

The risk/reward profile is asymmetric. Downside is cushioned by the 4.42% dividend yield, 35% leverage, and $1 billion liquidity pool. Upside comes from successful execution of the capital rotation, continued leasing spreads above 20%, and cap rate compression that makes Granite's acquisition targets appreciate in value. At 17x EV/EBITDA, the market isn't pricing in the full value of the portfolio transformation, creating an entry point for investors who believe that in industrial real estate, quality compounds faster than scale.

The story isn't about navigating market volatility—it's about exploiting it. While peers pull back due to financing constraints or overleveraged balance sheets, Granite is leaning into the cycle, using its conservative capital structure to upgrade the portfolio and capture long-term growth in Tier 1 logistics markets. That combination of quality, yield, and strategic execution defines the investment case for Granite REIT.