Tuesday, August 6, 2013

Gramercy's Business Plan is Moving Along

Gramercy's quarter again looked mostly as expected, and as management stressed on the call there's a noticeable lag in what the financials look like and the future state of the business.  Gramercy made significant progress towards investing their available cash in net leased assets, completing 11 discrete transactions for $111.2 million (mostly towards the end of the quarter).  During the question and answer session of the conference call, management indicated that this level of activity would be a good base case run rate for Gramercy through the end of the year.  I found this comment particularly interesting based on their capacity analysis slide below showing $96.9 million in remaining capacity.

So this leads me to believe that most of Gramercy's available cash and borrowing capacity will be exhausted by the end of the 3rd quarter or early 4th quarter, setting up for the dividend to be caught up on the preferred by year end as that would likely need to occur before any major capital raise.

As for the what the common is worth, I'm going to take a slightly different approach than my previous quarterly recaps (here and here) and instead take a balance sheet look at the valuation based on a slide that Gramercy provided in their presentation.  The one thing I noticed initially, is the plug "Intangibles" line item on the asset side is negative, meaning the market is valuing Gramercy above its current NAV.

Given Gramercy's acquisition pace and their capacity analysis slide, I made a few adjustments below to back into a new NAV based on full cash/capacity utilization before a capital raise.  I took the $96.9 million in net equity capacity and assumed Gramercy would make new acquisitions at a 9% cap rate (average of the 2nd quarter), and then those assets would be revalued by the market at a 7% cap rate ("widest arbitrage in our experience") to come up with $124.59 million in additional real estate owned (on top of the $10.6 million in the pipeline).  Making those asset purchases zeroes out both the cash and CDO advances and asset sales line items, but keeps the KBS Promote and CDO Bonds line items.  In Gramercy's slide they leave out the value of the asset management contracts, but these clearly have value.  Given that they're generating $4 million in after tax contribution annually, and have about a 3 year lifecycle, I discounted that back a bit to a round $10 million to come up with a total asset value of $631.8 million.

On the liabilities side, I removed the preferred dividend as its paid in the capacity analysis calculation and then added the pipeline and current portfolio borrowing capacity numbers given in Gramercy's guidance, making the total debt $237.9 million, or roughly 40% of the real estate value, inline with management's comments today.

Removing the preferred par value, and the common is worth $305.8 million, or $5.14 per share, which is pretty much the same as I've come up with before, and is only ~15% above what it's trading at now.  But I think the dividend is finally on the horizon, and then Gramercy can start raising capital and further exploiting the private/public net lease arbitrage.  Gramercy remains my largest position, although I might be tempted to sell a bit if it trades above $5.20 again without paying the dividend.  

Disclosure: I own shares of GPT


  1. Two good pieces of recent Gramercy news:



    I'm slightly disappointed the cap rate on the recent transactions has fallen slightly, but it doesn't change the overall thesis. There's about $75 million remaining to invest, and I still think they'll exhaust that by early in the 4th quarter and pay a dividend before year end (at least the preferred).

  2. MDC,

    How does the new credit facility affect the company's acquisition capacity?

  3. MDC,

    Followup - Couldnt' they use more leverage now? They have stated a short term number of 50%.

    How did you arrive at the $71mm in debt capacity?

    thanks for the analysis and great blog.

    1. I think management has described their intended use of the credit facility as a bridge loan, versus permanent financing, for acquisitions. The latest press release mentioned that they were all for cash, I would expect once the cash is used up that they'll use the credit facility more as an acquisition tool before putting on lower cost mortgage financing at the individual asset level.

      The leverage question is a good one, I think Gordon DuGan has also said that he believes the net leased space can handle more debt than other REIT sectors, and I would tend to agree with him based on the long lease structure.

      The $71 million number is from Gramercy's slide, the Capacity analysis on top.

      Thanks for kind words.

    2. MDC,

      Thanks for the quick reply. Yea I understand that the credit facility won't be permanent - but in the short term, since they have capacity, do you think they will now acquire much more property than $97mm within the next few quarters? I'm trying to get my head around how much property they will have in the next 6 months.

    3. Maybe? Good question. The credit facility gives them the ability to move quickly on any transactions, but I don't think it really gives them additional capacity in the long term?

      I could see Gramercy purchasing more than $97MM, but then they'd have to raise equity shortly after which would likely also mean paying the dividend. Page 36 of the latest Business Plan update has grow the equity and pay the dividends as the last two goals, I think both happen within 2013.

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