Monday, November 25, 2013

Taking Some Profits in Gramercy

One benefit of writing down your investment thesis is it helps keep you rational, especially with your selling discipline, which I find much more difficult than buying.  Gramercy Property Trust (GPT) has been my largest and highest conviction position for almost two years and my investment thesis has mostly played out as anticipated.  I'm grateful to the Board of Directors for bringing in such a talented and transparent management team in Gordon Dugan and Benjamin Harris who breathed some much needed fresh air into a commercial mortgage REIT that was near death several times following the financial crisis.

While I believe in their business plan, the recent jump in the stock price is pricing in the future equity/asset growth over the current asset base, so today I decided to sell a little less than half my position at $5.31 to take some profits.

Running the same quick balance sheet valuation that I ran after the 2nd quarter results were announced, I actually come up with a lower per share value after the equity raise.  I think the issue is two fold, Gramercy has been purchasing assets at lower capitalization rates in the past quarter or two, and the equity raise was probably timed a little early (it would be great if they could do one at today's prices).

Going back towards a AFFO forecast valuation, I actually come up with an even lower amount than I did with the balance sheet method as MG&A is too high for the current asset base (nothing new here, management knows this).

+ $45MM in current & pipeline real estate NOI
+ $5.5MM in acquisition capacity real estate NOI
+ $3.5MM in asset management net contribution
- $12.8MM MG&A
- $12.2MM interest expense ($304 million @ 4%)
- $7.2MM preferred dividend
$21.80MM AFFO / 75.24MM shares = $0.29 AFFO/share

You can put your own multiple on AFFO, but at 15 times you get $4.35 per share.  Of course Gramercy won't look like this in 3-6 months as there will be another large equity raise and more acquisitions.  The operational leverage will start to take effect as management has previously mentioned that they could double the asset base while only increasing expenses by 10%.  That math (or buyout speculation) is the only explanation for the recent rise in the stock price that I could come up with, so I came to the conclusion that the prudent thing to do was to reduce my position from an outsized one to a more standard size core position for me (which is still concentrated).

I intend to hold my remaining position for the long-term as I'm reasonably confident in management's ability to add value through accretive asset purchases going forward and take advantage of the operational leverage by keeping the MG&A expenses relatively flat.  It's less of a Benjamin Graham stock now, more of an appealing growth story with significantly less margin of safety.

Disclosure: I own shares of GPT