Gramercy Capital Corp. (GKK) Has Major Catalysts For 2013: Bank of America Corp (BAC), W.P. Carey Inc. REIT (WPC)

Gramercy Capital Corp. (NYSE:GKK) 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 Capital Corp. (NYSE:GKK) 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.

Gramercy Capital Corp. (NYSE:GKK)

In early July 2012, the new management team started at Gramercy Capital Corp. (NYSE:GKK) 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 Capital Corp. (NYSE:GKK) 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 Inc. REIT (NYSE:WPC) is a competitor in the net lease market and the former firm of Gramercy Capital Corp. (NYSE:GKK)’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 Inc. REIT (NYSE:WPC) 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 Capital Corp. (NYSE:GKK) 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 Capital Corp. (NYSE:GKK) 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 Capital Corp. (NYSE:GKK) agreed to purchase for $485 million a Bank of America Corp (NYSE:BAC) 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.

The article This REIT Has Major Catalysts For 2013 originally appeared on Fool.com and is written by Mike Thiessen.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!