This REIT Has Major Catalysts For 2013

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Gramercy Capital Corporation (NYSE: GPT) is a commercial REIT in the midst of changing and evolving into a net leasing firm.   The changes at the firm have potential to create significant value for shareholders.  Gramercy has significant CDO liabilities and has yet to reinstate the dividend, which have both acted as an overhang on the stock.  The CDOs are non-recourse debt so concern here is overstated.  Also, the company is transforming itself, and possibly could reinstate its dividend in 2013.

In early July 2012, the new management team started at Gramercy with a background in the net lease industry. The firm was troubled over recent years and almost went under in 2008 after the financial collapse.  The investment focus is now on industrial and office properties, as well as opportunistic specialty retail real estate in the top 50 markets.  Management is looking for an average lease term of over ten years and contract versus market rents.  The new management team has set target leverage at 50% using fixed rate, non-recourse debt with staggered maturities.  Current borrowing rates are 3.0%-4.75%.  Management targets a return on equity in the 12%-15% range for these new investments.   Gramercy manages $1.8 billion of commercial real estate in the Gramercy Realty.   The senior management team at Gramercy has overseen $8 billion in net lease transactions. W.P. Carey (NYSE: WPC) is a competitor in the net lease market and the former firm of Gramercy’s CEO Gordon DuGan.  He grew W.P. Carey’s assets from $2.5 billion to $10 billion during his 10 year tenure.  DuGan established the European division for W.P. Carey as well.

Recent Transactions Transforming Gramercy’s Profile

Management plans to acquire long term, net lease office and industrial properties.  In October 2012, the firm engaged Wells Fargo to sell the $1.9 billion Gramercy Finance business as part of the refocusing.  The Gramercy Investments business had liquidity of $175 million at the end of CY3Q12.

On November 20, 2012, Gramercy acquired two Indianapolis Class A buildings for $27.13 million that fits their target profile.  The credits tenants are strong, Nestle SA – 50% of space, Black & Decker (BDK) with 34% and the remainder with a private company.  The average lease term is 10.2 years and the estimated ROE is 13%.

Gramercy agreed to purchase for $485 million a Bank of America Portfolio in a 50/50 joint venture with Garrison Investment Group in early December.  Gramercy receives a 10% promoted return over 10%.   The portfolio has an 89% occupancy and an 8.9% cap rate.  Gramercy expects an ROE of over 15% associate with the transaction.  Concurrent with closing, Gramercy sold two multi-tenant buildings for $144 million ($50 million total proceeds) and plans to sell 46 additional multi-tenant assets over the next 12-18 months.  After selling off the non-core portfolio, Gramercy expects 67 assets that are 98% occupied, of which 96% are leased to Bank of America with a 10.5 lease term.

Conclusion

At the end of 2012, Gramercy had 116 properties with a 10.2 year average lease term at 90% occupancy with 80% of tenants being investment grade.  Management is well on the way to generating better returns for equity holders through these transactions.  It has deployed close to $100 million in cash and has another $200 million it can investment.   Additional transactions, reinstatement of the dividend and sales from its portfolio could each act as positive catalysts throughout 2013.

 


mthiessen has no position in any stocks mentioned. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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