Thursday, January 31, 2013

Gramercy Sells CDO Management Business

Gramercy Capital has been on quite a run lately (22% YTD) as it continues its transformation into a net-lease equity REIT.  After the close today, Gramercy announced they sold the CDO management business to CWCapital for $9.9 million plus freeing capital that was tied up in the CDOs:

Gramercy will continue to hold the equity tranche of each CDO, which are probably worthless but potentially have some optionality value if the commercial real estate continues to improve.  While retaining the equity tranches is likely the right thing to do long term (free option), it means the CDOs will still be consolidated on the balance sheet creating negative shareholder's equity.  I'd probably trade the CDO equity for a clean balance sheet that more investors are able to understand.

Even with an additional $56 million in liquidity, Gramercy will still need to raise additional equity to fully becoming a performing REIT again and reinstate the dividend, but at least with the recent runup, they won't be issuing equity quite as cheap.

Disclosure: I own shares of GKK and GKK-A

UPDATE (2/6/13): I heard back from Investor Relations that "at settlement, we expect to deconsolidate."  Great news, Gramercy will have a clean balance sheet making the company easier to understand for investors and get to retain the potential upside of the CDO equity, however small that might be.


  1. Hi Clark Street, good information. I find it interesting that they held onto the CDO equity; look forward to hearing management's explanation for why. Would love to know the real reason.

    My understanding is that since GKK doesn't control the CDO's, they'll not be consolidating them on their balance sheet. Would be interested in others' thoughts on this.


  2. Clint,

    I posed the consolidation question to Investor Relations and I'll report back what they say, but below is an excerpt from page 108 of 2011 10-K:

    "Principles of Consolidation
    The consolidated financial statements include the Company’s accounts and those of the Company’s subsidiaries which are wholly-owned or controlled by the Company, or entities which are variable interest entities, or VIE, in which the Company is the primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a
    majority of the expected returns. The Company has evaluated its investments for potential classification as variable interests by evaluating the sufficiency of each entity’s equity investment at risk to absorb losses, and determined that the Company is the primary beneficiary for three VIE and has included the accounts of this entity in the consolidated financial statements.

    Entities which the Company does not control and entities which are VIEs, but where the Company is not the primary beneficiary, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated."

    I'm not an accountant, but I believe they would still be the primary beneficiary of the CDOs anticipated losses and/or majorty of the expected returns? Maybe since they're so far gone on the OC test, they no longer are the primary beneficiary, or I could be overlooking another aspect.

    As for the reason in keeping the equity, they likely only got extreme low ball bids, even under the best scenarios the equity won't get paid for many years.

  3. I would think the more senior tranches would be the primary beneficiaries, and they certainly are no longer in control....But I'm not positive. I've been "de-consolidating" their balance sheet myself since this summer, so it makes no difference to me. I suppose I'll wait to see how it shows up on the quarterly reports!

    I'll be interested in hearing if IR clarifies at all, thanks!


  4. Per conference call yesterday the CDOs will be deconsolidated. This will make things much more straightforward.