International REITs could be a valuable option for investors interested in diversifying their portfolios. And, investors do not have to settle for lower-quality assets or lower dividend yields from REITs based outside the U.S.

One example is Granite Real Estate Investment Trust (GRP-U), a REIT based in Canada. Not only does Granite have a strong business model, but it also pays a hefty 5.0% dividend yield. It is one of 416 stocks with a 5%+ dividend yield.

Furthermore, Granite pays its dividend monthly, which is a more attractive dividend schedule than most U.S. REITs, which typically pay quarterly dividends. Granite is one of only 29 stocks with a monthly dividend. Granite is in the middle of a contested battle with activist investors, which could alter the company’s growth strategy moving forward.

This article will discuss Granite’s business model, and its merits as a dividend stock.

Business Overview

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 company’s income-producing portfolio consist of Multi-purpose, Logistics and Distribution Warehouses, and Special-purpose facilities.

Source: May 2017 Investor Presentation, page 16

This is a tumultuous time for Granite, but not because of any deterioration in the fundamentals of the business. Rather, activist investors have purchased a significant stake in Granite, and are pushing for a major shake-up that management believes to be dangerous for the company.

Activist investor FrontFour Capital Group, along with private-equity firm Sandpiper Asset Management, combined own 6% of Granite, and have pushed for changes to the company’s Board of Directors. In addition, the investors believe there is significant potential for Granite to unlock shareholder value by leveraging its balance sheet to pursue an acquisition or increase share buybacks. Existing management does not view the investors’ proposals favorably. Granite management believes the investors want the company to make acquisitions of lower-quality assets, which will ultimately lead to destruction of value over time.

This is something investors should monitor closely, as the makeup of the company could change drastically going forward, if FrontFour and Sandpiper get their way.

Growth Prospects

Activist investor troubles aside, the outlook for Granite is positive, from a fundamental standpoint.

In the five-year period from 2012-2016, Granite increased FFO by 22%. Its dividend payout ratio has fallen considerably in that time, which has helped make the dividend payout more sustainable.

Source: May 2017 Investor Presentation, page 10

In 2016, adjusted Funds from Operations, or FFO, rose 2% from 2016.

FFO is a non-GAAP term that is defined as net income, adjusted for non-cash items like depreciation, gains or losses on sales of investment properties, acquisition costs, deferred income taxes, and other similar items. FFO is a more useful metric for evaluating the financial performance of REITs than GAAP measures such as net income or earnings-per-share. On a per-share basis, Granite’s FFO increased 2% in 2016, to $3.43. The major driver of this growth was a 3.3% increase in rental revenue for the year, primarily the result of new property acquisitions.

Conditions dipped somewhat in the first quarter of 2017. Rental revenue and adjusted-FFO-per-share fell 2.1% and 3.3%, respectively, versus the same quarter last year. One key factor behind Granite’s strong FFO is its high margins. The company enjoys the ability to raise rents over time, and it also maintains a low expense structure.

Source: May 2017 Investor Presentation, page 19

Granite has significantly cut costs in recent years to help boost margins. For example, general and administrative expenses fell by 11% in the first quarter of 2017, year over year. Including the impact of stock-based compensation adjustments, G&A expenses were cut by 16% last quarter.

Lease renewals should help Granite stay on a path of growth. In 2016, the company entered into new leases, renewals, or extensions for 28 properties. This was a significant round of renewal activity. The properties renewed, extended, or given new leases, collectively represented roughly 33% of Granite’s income-producing property portfolio. These actions also had the effect of improving Granite’s portfolio, by extending lease terms. In 2016, Granite increased the weighted average lease term for its entire income-producing property portfolio to 7 years, up from 4.7 years at the beginning of 2016.

Future growth will be comprised mainly of rental increases, and selective acquisitions that are accretive to FFO. One example of Granite’s acquisition strategy was the January 31st, 2017, purchase of two special-purpose property expansions in Kentucky and South Carolina, for $70.8 million.

Granite expects the acquired properties will generate approximately $4.4 million of annual rental revenue growth, with a lease not expiring until January 2032.

Dividend Analysis

Granite currently pays a monthly dividend of $0.217 per share in Canadian dollars. The most recent dividend increase came in February 2017, in the amount of 6.9%.

On an annualized basis, the current dividend payment is $2.60 per share in Canadian currency. However, investors should translate the dividend into U.S. dollars. Since Granite is based in Canada, the dividend is exposed to currency risk. How much dividend income U.S. investors will receive each month will wary, based on prevailing exchange rates. Based on the current exchange rate between Canadian dollars and U.S. dollars, Granite’s annual dividend payment is approximately $1.97 per share. Using Granite’s recent stock price of $39.06 per share, the current dividend yield is approximately 5.0%.

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 5.0% dividend yield is supported with underlying cash flow. Based on FFO, last quarter the company maintained a 78% payout ratio.

A payout ratio below 80% indicates the company has sufficient room to continue paying the dividend, and modestly raising the dividend on occasion.

Final Thoughts

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 5% dividend yield. However, the conflict taking place between Granite management and FrontFour/Sandpiper is a challenge that investors should keep in mind before buying the stock.

If the investor groups successfully claim board seats, they could push the company to change its acquisition strategy, which could threaten Granite’s best-in-class margins.

That said, Granite remains an attractive option for investors looking for monthly dividends and a 5% dividend yield.