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.
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%.