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Granite REIT's New CEO Has Eye on Canada

Kevan Gorrie Concedes Cap Rates Low, but Rental Growth Could Justify Investment, Especially in Calgary and Edmonton
August 2, 2018
Kevan Gorrie, CEO of Granite REIT.

Just a few hours into his new job as chief executive of one of the country's largest remaining publicly traded industrial firms, Kevan Gorrie offered some clues about where he would take Granite Real Estate Investment Trust.

Gorrie, who headed up Pure Industrial Real Estate Trust before it was taken over by Blackstone Property Partners in a $3.8 billion deal first announced in January, told Bay St. analysts during a conference call that record-low cap rates would not scare him off the Canadian market where Granite already owns 5.6 million square feet of space in 30 properties.

"I hope to be more active in Canada in the coming years," said Gorrie, whose PIRET is said to have traded at a 4.8 percent capitalization rate and ultimately helped compress rates in the sector. Ivanhoé Cambridge later teamed up with Blackstone in the venture, taking a 38 per cent stake in PIRET. "I would call [prices] expensive now, but I did see very strong rental growth in the industrial markets even when I was at Pure Industrial in Toronto and Vancouver," added Gorrie.

The newly minted CEO likes Calgary and Edmonton over the next five years and said they could lead the country in rental growth.

"Even though cap rates may appear to be low, and they are, there is growth potential," he said, adding growth in Granite's estimated $2.8 billion portfolio will also come from development on the REIT's existing holdings. "It's going to continue as Amazon and Wayfair expand their presence, and then the other retailers are catching up and improving their supply chains because of demand from their customers."

South of the border, where the REIT has 27 properties and 11 million square feet, Gorrie still sees room for expansion. "I don't see us halting our growth in the U.S.," he said.

Gorrie said he's not "looking to break the bank" and doesn't see any urgency to deploy some of Granite's firepower but is looking at some opportunities in what he called key markets without naming them.

"We expect to be active over the next 90 days despite the fact we haven't formalized a strategy, and that will include balance sheet deployment," said Gorrie, who said industrial has strengthened across all markets in North America.

Gorrie praised outgoing chief executive Michael Forsayeth and his team for their work -- in particular, efforts in reducing the REIT's exposure to auto parts giant Magna International to under 49 per cent of Granite's gross leasable area.

"I'd like to think I'm leaving Granite in pretty good shape with lots of dry powder and well-positioned for continued success under Kevan," said Forsayeth, who is retiring.

Magna originally spun out its real estate into Granite predecessor MI developments, but the REIT has gradually been reducing that exposure since the auto parts company exited the investment.

"It is certainly a good problem to have when a lot of your income is being delivered by such a creditworthy tenant," said Gorrie about Magna, adding the REIT will continue to rebalance the portfolio and plans to focus on modern logistics heavily.

He said e-commerce can only go so far when it comes to industrial entities. "Light manufacturing and manufacturing have a place in my mind in any good industrial portfolio," Gorrie said. "There is not a portfolio that does not have some of it."

Michael Markidis, an analyst with Desjardins, said more details from Gorrie would be vital to broadening the REIT's investor base.

"Our sense is that Gorrie believes Granite is generally on the right path given the recent progress that has been made in reducing the Magna/special-purpose exposure and allocating additional capital to modern logistics/distribution and warehousing properties," said Markidis in a note to investors.

Editor’s Note: This story was updated to reflect Ivanhoé Cambridge’s 38 per cent stake in Blackstone Property Partners’ takeover of Pure Industrial Real Estate Trust.

Garry Marr, Toronto Market Reporter  CoStar Group   
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