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The Magna Steyr factory in Graz, Austria. Granite Real Estate rents office and factory properties to Magna.© Herwig Prammer / Reuters/Reuters

Granite Real Estate Inc.

Tuesday's close: $35.69, up 28 cents

52-week trading range: $30.92 - $39.39

Annual dividend: $2 a share for a yield of 5.6 per cent

Analysts' ratings: There are four buys and one sell, according to Bloomberg data.

Recent history: Granite Real Estate had a tumultuous past when it was known as MI Developments Inc., the global real estate arm of auto parts giant Magna International Inc. Its founder Frank Stronach is no longer involved, but Magna still makes up about 97 per cent of Granite's rental revenue. Activist shareholders won a victory a year ago to convert MI from a corporation into a real estate investment trust. The company's stock has moved higher since shareholders approved a name change to Granite last June, and its conversion to a REIT last week. Granite shares have gained 14.3 per cent this year, including reinvested dividends.

Outlook: On Tuesday, Granite got the final nod to become a REIT from Quebec Superior Court. The new structure takes effect Jan. 1. The annual distribution will be $2.10 a unit a 5-per-cent hike from the current dividend, and some observers suggest there is more upside. "We think it is undervalued as REIT," said David Burrows, president of Barometer Capital Management, which has owned Granite stock in private client portfolios and funds since early this year. "We think this stock [and then REIT] can continue to move higher, and the units could trade above $40 over the next 12 months."

Granite has "a low payout ratio and a very strong balance sheet," Mr. Burrows noted. "It trades at a discount to the group from a valuation standpoint, and should be able to grow its distribution faster than its peer group." The current dividend is about a 78-per-cent payout from cash flow, and about 10 per cent below its peer group that includes Pure Industrial REIT, he said.

"The leverage is [also] very low relative to its peer group so its ability to expand and acquire without selling more equity is there," he added. "Right now, they are now only using about 22 per cent leverage, whereas its peer group has between 50- and 60-per-cent leverage on their balance sheet. So they could acquire another $600-million worth of properties before it would even get to 50 per cent."

The risk is that Granite has one large tenant in Magna, but the auto maker has excellent credit, is growing and has no debt, he said. "They have 30 per cent of their properties in Europe, which is having a difficult time. But Magna is doing fine."

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