FrontFour & Sandpiper Reiterate Significant Value Creation Opportunity at Granite

  • Significant unsolicited unitholder support for change
  • Analyst community renews focus on underlying value, materially move price targets higher
  • Clear actionable path to a $60+ unit price with proper capital allocation and G&A cost reduction

TORONTO, May 15, 2017 /CNW/ - FrontFour Capital Group LLC (FrontFour") and Sandpiper Group ("Sandpiper"), owners of approximately 6.2% of the outstanding stapled units of Granite Real Estate Investment Trust ("Granite") (GRT.UN:TSX, GRP.U: NYSE), reiterated today a path forward to enduring and significant value creation for all unitholders.

We view Granite as a unique, high-quality global portfolio of industrial assets with tremendous long term potential to become a Canadian real estate champion.  FrontFour and Sandpiper are long term investors committed to value creation on behalf of all unitholders.  We have invested over $100 million in Granite along side some of Canada's most successful institutional real estate investors, not based on the past, but based on the tremendous future opportunity that we see with this platform going forward.  We see Granite as a rare multi-billion-dollar capital deployment opportunity that can drive meaningful compounded returns over the long term.   

The core fundamental question that all unitholders have to ask is whether we have the right Board of Trustees (the "Board") and management structure in-place to take advantage of this unique opportunity and deploy billions of dollars over the next several years. To date, the current Board and management team has unfortunately shown limited ability to allocate capital or manage costs – we believe that change and a refreshed Board are required.


We are pleased by the renewed focus on Granite's valuation and operations by investors, analysts, and other market participants since our public involvement. Despite Granite missing analysts estimates for Q1/2017, which followed their earnings miss for Q4/2016, the entire analyst community applied material increases to their price targets for Granite, in some cases implying portfolio values that are ~$200 million higher than their previous analysis would suggest.  The following are some excerpts from analyst commentary:  

"Raised our valuation of the 12 'Special Purpose' properties by lowering the cap rate to 7.6% from ~9% previously. We use a 7.25% discount rate (compared with 7.83% under Granite's IFRS)."
TD Securities, May 11, 2017

"The opportunity cost of inaction should not be overlooked. Leverage is significantly below most peers (~2.5x net debt/EBITDA) and liquidity is strong (~C$190m of cash). We are not suggesting that GRT should be indiscriminate in deploying its ~C$1b of firepower…we advocate a patient but continuous investment program that effectively dollar cost averages through market cycles."
Desjardins Capital Markets, May 14, 2017

"The light has been shone upon Granite", "…we also acknowledge that their [FrontFour and Sandpiper] involvement may also cause a "sharpening of the pencils" throughout the organization, with the result being a re-energized attentiveness to both performance as well as cost containment."
RBC Capital Markets, May 11, 2017

"…we believe parts of the plan have merit and may prompt GRT's management and board to revisit its pace of execution…With GRT's G&A costs at the upper end of our universe, we believe savings are possible…"
Scotiabank, May 11, 2017

"…the pace of portfolio growth has been slow thus far and there were no new investments completed or announced during the quarter… We would agree with FrontFour/Sandpiper that a faster pace of growth would be of benefit to unitholders."
Canaccord Genuity, May 11, 2017

While several research analysts and even long-time unitholders have struggled to arrive at the potential values that we have highlighted in our report, we do not blame them.  Given Granite's execution track record over the last five years, we can sympathize with analysts and unitholders who would rather see concrete change and fundamental action to justify higher equity valuations.  We welcome fundamental action and find management's own views on Granite's IFRS methodology very interesting:

"The other thing I'd like to point out is, likely the appraisals out there, are probably little behind in their view of the – their view of the market. They are always, I don't know 6 months to 12 months behind where the market [is]…".  
Michael Forsayeth, CEO, May 10, 2017

The first quarter conference call held on May 10, 2017, was the first time in years that analyst and investor questions became hyper-focused on IFRS valuations and valuation methodology.  We view this as a positive dynamic and absolutely critical to truly understanding Granite's underlying intrinsic value. 


Subsequent to our May 8th press release, Magna International ("Magna") reported extremely strong Q1 earnings and hosted their AGM.  Q1/17 adjusted EBIT/EPS came in >15% above consensus. The strength was broad-based with Magna generating record Q1 margins (and results) across all major regions (i.e., North America, Europe, and Asia). Magna also increased its 2017 sales margin expectations.  We stand by our view that the Magna credit is misunderstood and believe that Granite provides a rare opportunity to gain exposure to a high-quality industrial tenant.

Highlights from the Magna AGM re: EuropeMay 11, 2017

  • Magna will play a role in 67% of 300 global platform launches over the next 3 years
  • Magna is extremely busy with BMW at Graz (commenced 5 Series in 2017, Z5 in 2018)
  • Produced 20,000 MB G-Class vehicles in one year at Graz
  • 2017 will mark 3 million lifetime units produced in Graz across diverse customer base
  • Graz to hit ~200,000 annual unit production rate later this decade – running out of capacity

We believe that hosting an investor tour in Europe and specifically at Graz (~$500MM of IFRS value) would provide insight to market participants as to the highly strategic nature of Granite's European based assets. 


We have outlined, and Granite has acknowledged, a path to $60+ per unit simply through prudent capital deployment and cost control.  Simple definitive action both on the cost side and the acquisition front would be substantially accretive to AFFO and drive positive unit price performance.   We believe that this is the most unique, actionable opportunity in the Canadian real estate space over the last 15 years.

Effective Capital Allocation*



Unit Price

Last Trade – April 26, 2017 (unaffected price)


  G&A Savings - $10 million




  Accretive Acquisitions - $1Billion, 100% Financed




Proforma Unit Price


* Assumes $10MM of G&A Savings, $1B of acquisitions at 6.5% Cap Rate & 3.0% Cost of Debt



Granite's track record on costs, compensation, and capital allocation are documented facts.  It is troubling that the same leadership group that has misled investors by claiming that they could achieve targets for cost reduction, acquisitions, leverage, and diversification, and then consistently failed to do so over five years, would call our work misleading. On May 11th, Granite issued a news release regarding its intention to repurchase units using an automatic securities purchase plan.  Given Granite's repeated, emphatic statements about the benefits of repurchasing stapled units with no follow-through despite large cash balances and materially NAV accretive trading levels, we find ourselves braced for further disappointment.

Further, we believe that Granite's leadership has privately acknowledged that Board compensation needs to be reduced, costs need to be brought in-line and Board refreshment is required – we agree on all points and await action.  

We understand that Granite's leadership is now claiming that a conservative approach to acquisitions and balance sheet optimization was required until the Magna lease extensions were completed in October 2016.  This is yet another changed narrative designed to fit the facts, and is a direct contradiction to public statements made over the last five years.  We look forward to reviewing Granite's circular in the coming days, which we believe will reiterate a commitment to its existing strategy with a renewed focus on putting the balance sheet to work, tenant diversity and cost-control.  After half a decade of falling short of stated strategic objectives, we will be focused on hints of true action that go beyond hollow statements.  We believe that the best future results for unitholders require a Board that will hold management and themselves accountable.


Granite's own targets on G&A have been restated and missed for years.  This is not hyperbole but fact.  Granite has consistently targeted a G&A spend of 8%-10% of ALP but ran at 13% of ALP in 2016.   

Fact #1 – Granite' Board compensation is the highest in the CAD REIT universe
Fact #2 – It is widely known the Granite has the most opulent office space in the entire REIT universe
Fact #3 – 2 heads of global real estate with no assets under contract or signed LOIs as of May 10th
Fact #4 – 3 VPs of construction with limited development activity to date ($0 PUD currently)
Fact #5 – Salary / unit comp was $325k / employee vs. a $203k / employee average at Granite's peers* 
                                                                                                       * PIRET REIT & Choice Properties REIT

Q1/17 G&A was at the lowest level of the last 2.5 years, yet still well above Granite's lowest quarterly G&A over the last five years. Importantly, Q1/17 G&A is still materially above Granite's stated long term target on a run-rate basis. 

We understand that Granite's leadership is now telling investors that the issue is not G&A, but rather investor education, arguing that its peers allocate G&A costs above the NOI line and to development while Granite does not.  While we are very supportive of improved disclosure standards at Granite, we find it difficult to take this comment seriously given a cost structure that includes the most expensive Board in the Canadian REIT sector, duplicative executive titles and some of the most expensive office space in the country.  We firmly believe that material improvement is achievable.  This belief is grounded by our own analysis as well as detailed classification adjusted analysis of comparable real estate businesses and has been confirmed by former senior officers at Granite.

The following is a comparison of the G&A (unallocated and allocated) plus third-party property management fees incurred by both Granite and PIRET REIT ("PIRET"), Granite's closest industrial peer by both size and asset type.  We encourage fact based debate on this topic and invite Granite management to provide its own targets, if the goals that have been publicly communicated are misleading or inaccurate.  The fundamental question is whether it is appropriate for Granite, with a similar portfolio size to PIRET, to incur $11MM of additional G&A, especially when you account for PIRET's allocated G&A costs and fees paid to third-party managers?

2016 G&A Breakdown (C$000's)



G&A as Presented on F/S's



G&A Allocated Above the NOI Line


Property Management Fees


Management Fees


Full Costs



Total Assets (Net of Cash)



% of Total Assets



We do not believe that Granite's European business justifies the quantum of this additional fee load.  PIRET operates across multiple jurisdictions both internationally and domestically and requires region-specific knowledge and regional offices as well.   PIRET also has a number of properties that require hands on management, while Granite's portfolio is primarily triple-net lease with little to no requirement for active management.


It is widely known that other large unitholders of Granite have attempted to engage with the Board over the past 24 months regarding its compensation, G&A load, balance sheet utilization, and the continuous failure to achieve its stated own goals and objectives to no avail.   We understand that at every turn, the current Board's approach has been to "entertain" but effectively ignore unitholders concerns and continue with the status quo – it continues to be disappointing to us and many other unitholders that a Board with a number of self-proclaimed governance experts (with minimal ownership) has consistently refused to engage with unitholders in any meaningful way


We are appreciative of the significant unsolicited support and commentary that we have received from institutional and individual unitholders to date.  A number of unitholders have indicated that they are supportive of a refreshed Board focused on cost-control and definitive action.   FrontFour and Sandpiper believe that Granite is capable of becoming a true Canadian industrial real estate champion. We are committed long term investors with a track record of alignment and value creation in Canada.  We believe that the best is yet to come for Granite unitholders. We intend to continue applying ongoing constructive pressure to hold the future Board and management accountable for the execution of their strategy.   For further thoughts on Granite and the opportunity for significant value creation please visit the following link:


Prior to our involvement late last year, Granite's units were trading closer to $40 per unit, the exact same level they were trading at the beginning of 2013 upon the REIT conversion.  There were numerous references to unit price performance on Granite's Q1/2017 conference call this past Tuesday with management detailing all they have accomplished over the last five years.  While unit price performance has recently been strong and heavily influenced by our involvement and the involvement of a number of more active investors, we view lease renewals and a couple of bond deals over a five-year period as being necessary and normal course, but not sufficient enough to push Granite to reach its full potential.  We believe that there is significant upside in unit price performance from here.


FrontFour and Sandpiper intend to publish an information circular with full details on our independent trustee and director nominees for election to the Board of Granite and the Board of Directors of Granite REIT Inc. at the upcoming joint Annual General Meetings of Granite unitholders and Granite REIT Inc. shareholders to be held on June 15, 2017 (the "Meeting").


FrontFour Capital Group LLC, located in the United States at 35 Mason Street, Greenwich, CT 06830, was formed in December 2006. FrontFour Capital Group LLC is registered with the Securities & Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended.


Sandpiper is a Vancouver-based private equity firm focused on investing in real estate through direct property investments and securities. For more information about Sandpiper, visit

The information contained in this news release does not and is not meant to constitute a solicitation of a proxy within the meaning of applicable securities laws.  Unitholders are not being asked at this time to execute a proxy in favour of any matter in connection with the Meeting.  Notwithstanding the foregoing, FrontFour and Sandpiper (together, the "Concerned Unitholder Group") are voluntarily providing the disclosure required under section 9.2(4) of National Instrument 51-102 – Continuous Disclosure Obligations in accordance with securities laws applicable to public broadcast solicitations.  Any solicitation made by the Concerned Unitholder Group in advance of the Meeting is, or will be, as applicable, made by the Concerned Unitholder Group, and not by or on behalf of the management of Granite. All costs incurred for any solicitation will be borne by the Concerned Unitholder Group, provided that, subject to applicable law, the Concerned Unitholder Group may seek reimbursement from Granite of the Concerned Unitholder Group's out-of-pocket expenses, including proxy solicitation expenses and legal fees, incurred in connection with a successful reconstitution of the board of trustees of Granite and the board of directors of Granite REIT Inc.  Proxies may be solicited by the Concerned Unitholder Group pursuant to an information circular sent to unitholders after which solicitations may be made by or on behalf of the Concerned Unitholder Group, by mail, telephone, fax, email or other electronic means as well as by newspaper or other media advertising, and in person by directors, officers and employees of the Concerned Unitholder Group, who will not be specifically remunerated therefor. The Concerned Unitholder Group may also solicit proxies in reliance upon the public broadcast exemption to the solicitation requirements under applicable Canadian corporate and securities laws, including through press releases, speeches or publications, and by any other manner permitted under applicable Canadian laws. The Concerned Unitholder Group may engage the services of one or more agents and authorize other persons to assist in soliciting proxies on behalf of the Concerned Unitholder Group.  The Concerned Unitholder Group has retained Kingsdale Advisors ("Kingsdale") to assist the Concerned Unitholder Group in soliciting unitholders should the Concerned Unitholder Group commence a formal solicitation of proxies. Kingsdale's responsibilities will principally include advising the Concerned Unitholder Group on governance best practices, where applicable, liaising with proxy advisory firms, developing and implementing unitholder communication and engagement strategies, and advising with respect to meeting and proxy protocol. Kingsdale would receive a fee in the range of $150,000, plus disbursements and a telephone call fee.  Once the Concerned Unitholder Group has commenced a formal solicitation of proxies in connection with the Meeting, proxies may be revoked by instrument in writing by the unitholder giving the proxy or by its duly authorized officer or attorney, or in any other manner permitted by law, the declaration of trust of Granite and the articles of Granite REIT Inc. None of the Concerned Unitholder Group or, to its knowledge, any of its associates or affiliates, has any material interest, direct or indirect, (i) in any transaction since the beginning of Granite's most recently completed financial year or in any proposed transaction that has materially affected or would materially affect Granite, Granite REIT Inc. or any of its subsidiaries; or (ii) by way of beneficial ownership of securities or otherwise, in any matter proposed to be acted on at the Meeting, other than the election of trustees and directors to the board of Granite and the board of Granite REIT Inc., respectively.  Granite and Granite REIT Inc.'s principal office address is 77 King Street West, Suite 4010, P.O. Box 159, Toronto-Dominion Centre, Toronto, Ontario M5K 1H1.

SOURCE FrontFour Capital Group LLC

For further information: Zachary George at FrontFour Capital Group LLC - (203) 274-9053 or Samir Manji at Sandpiper Group - (604) 558-4885.

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