Gramercy Capital Corp. Reports Third Quarter 2012 Financial Results
Gramercy Capital Corp. Reports Third Quarter 2012 Financial Results
NEW YORK--(BUSINESS WIRE)-- Gramercy Capital Corp. (NYS: GKK) :
THIRD QUARTER HIGHLIGHTS
For the quarter, the Company generated funds from operations, or FFO, of $1.3 million for the third quarter of 2012, an increase of $19.9 million from FFO of negative $(18.6) million generated in the prior quarter. On a fully diluted per common share basis, FFO was $0.03 for the third quarter of 2012 as compared to FFO of negative $(0.37) in the prior quarter. For the quarter, net loss to common stockholders was $(4.7) million, or $(0.09) per diluted common share, as compared to the net loss of $(21.5) million, or $(0.42) per diluted common share, for the prior quarter. The increase in FFO for the quarter was primarily attributable to the reversal of $16.4 million of provisions for loan losses in the Gramercy Finance segment and a $2.1 million reduction in provision for taxes which were partially offset by a $5.4 million litigation reserve related to the Gramercy Finance segment.
Held an investor call on September 28, 2012 to present the operational review of the Company's existing assets and operations and to highlight the Company's implementation of its new investment strategy of investing in net lease office and industrial properties.
Announced the acquisition of a 115-property office portfolio, or the Bank of America Portfolio, from an affiliate of KBS Real Estate Investment Trust, Inc., or KBS, in a joint venture with an affiliate of Garrison Investment Group, for a purchase price of $470.0 million in cash plus the issuance of six million shares of the Company's common stock, valued at $15.0 million at the execution date of the purchase agreement. The acquisition is expected to close at the end of November 2012.
Entered into a contract to acquire two Class A industrial properties located near Indianapolis, Indiana totaling approximately 540,000 square feet for a purchase price of approximately $27.2 million.
Entered into a letter of intent to buy a portfolio of industrial buildings totaling approximately 1,000,000 square feet. The initial cap rate is expected to be in excess of 8.5%. However, there is no assurance that the transaction will be consummated on the terms described or at all.
Engaged Wells Fargo Securities LLC to assist in the potential sale of CDO management contracts, CDO securities and CDO equity.
Invested $19.0 million in the origination of the KBS mezzanine loan which KBS will pay off with the proceeds of the Bank of America Portfolio acquisition. The KBS mezzanine loan accounted for the decrease in unrestricted corporate cash of $175.2 million at quarter end, as compared to approximately $192.6 million reported in the prior quarter. In addition, as of September 30, 2012, the Company holds an aggregate of $45.4 million of par value Class A-1, A-2 and B securities previously issued by the Company's collateralized debt obligations, or CDOs, that are available for re-issuance. The fair value of the repurchased CDO bonds was approximately $36.2 million and the amount owed from the CDOs to the Company for servicing advances is approximately $10.2 million as of September 30, 2012.
SUMMARY
Gramercy Capital Corp. (NYS: GKK) today reported FFO of $1.3 million, or $0.03 per diluted common share, and net loss available to common stockholders of $(4.7) million, or $(0.09) per diluted common share for the quarter ended September 30, 2012. The Company generated total revenues of $29.5 million during the third quarter, an increase of $0.6 million from $28.9 million generated during the prior quarter. At September 30, 2012, the Company owned approximately $919.0 million of loan investments, $891.7 million of commercial mortgage-backed real estate securities, or CMBS, $175.2 million of unrestricted cash, $85.7 million of commercial real estate and $164.7 million in other assets. As of September 30, 2012, approximately 41.1% of the Company's assets were comprised of debt investments, 39.9% of CMBS, 7.8% of unrestricted cash, 3.8% of commercial real estate and 7.4% of other assets.
The Company's businesses are organized into two business segments supported by a corporate balance sheet with a strong liquidity position and no recourse debt obligations.
The Company's commercial real estate finance business, which operates under the name Gramercy Finance, currently manages approximately $1.8 billion of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity, CMBS, and other real estate related securities which are financed primarily through three non-recourse CDOs. The Company has announced that it is pursuing the sale of this business line in order to focus on the business of net lease investment, to increase its liquidity and capital availability and to decrease its cost structure.
The Company's property management and investment business, which operates under the name Gramercy Realty, currently manages approximately $1.9 billion of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States for KBS.
A summary of the Company's financial position and operations by business segment and on a consolidated basis as of and for the three months ended September 30, 2012 is as follows: | |||||||||||||||||
Corporate | Finance | Realty | Interco | Consolidated | |||||||||||||
Total real estate investments, net | $ | - | $ | 38,255 | $ | 28,606 | $ | - | $ | 66,861 | |||||||
Cash and cash equivalents | 173,644 | - | 1,573 | - | 175,217 | ||||||||||||
Loans and other lending investments and commercial mortgage-backed securities | - | 1,837,841 | - | (27,226) | 1,810,615 | ||||||||||||
Repurchased collateralized debt obligation bonds | 45,367 | - | - | (45,367) | - | ||||||||||||
Other assets | - | 175,966 | 7,737 | (83) | 183,620 | ||||||||||||
Total assets | $ | 219,011 | $ | 2,052,062 | $ | 37,916 | $ | (72,676) | $ | 2,236,313 | |||||||
Collateralized debt obligations | $ | - | $ | 2,333,973 | $ | 27,226 | $ | (72,593) | $ | 2,288,606 | |||||||
Derivative instruments | - | 183,742 | - | - | 183,742 | ||||||||||||
Dividends payable | 28,647 | - | - | - | 28,647 | ||||||||||||
Other liabilities | - | 23,004 | 5,535 | (83) | 28,456 | ||||||||||||
Total liabilities | 28,647 | 2,540,719 | 32,761 | (72,676) | 2,529,451 | ||||||||||||
Total equity (deficit) | 190,364 | (488,657) | 5,155 | - | (293,138) | ||||||||||||
Total liabilities and equity (deficit) | $ | 219,011 | $ | 2,052,062 | $ | 37,916 | $ | (72,676) | $ | 2,236,313 | |||||||
Revenues: | |||||||||||||||||
Net interest income | $ | - | $ | 15,948 | $ | - | $ | - | $ | 15,948 | |||||||
Net rental revenues | - | 789 | 953 | - | 1,742 | ||||||||||||
Management fees | - | - | 8,833 | - | 8,833 | ||||||||||||
Other revenue (1) | - | 2,962 | 8 | - | 2,970 | ||||||||||||
Total revenues | - | 19,699 | 9,794 | - | 29,493 | ||||||||||||
Expenses: | |||||||||||||||||
Property operating expenses | - | 7,305 | 6,338 | - | 13,643 | ||||||||||||
Impairment and loan losses | - | (1,000) | - | - | (1,000) | ||||||||||||
Management, general and administrative | 17,106 | - | - | - | 17,106 | ||||||||||||
Depreciation | - | 150 | 187 | - | 337 | ||||||||||||
Total expenses | 17,106 | 6,455 | 6,525 | - | 30,086 | ||||||||||||
Loss from continuing operations before provision for taxes | $ | (17,106) | $ | 13,244 | $ | 3,269 | $ | - | $ | (593) | |||||||
(1) Includes equity in net income from joint venture. | |||||||||||||||||
The Company's GAAP book value per common share is negative $(7.25) per share, or $(379.3) million at September 30, 2012. Of the negative book value, approximately negative $(488.7) million, or $(9.27) per common share, is attributable to the Company's commercial real estate finance business, substantially all of which is financed by the Company's CDOs. While the assets and liabilities in the CDOs are consolidated on the Company's books for GAAP purposes, the Company's exposure to loss is limited to its investment in each CDO. The negative book value of the commercial real estate finance business is primarily attributable to impairments and mark-to-market adjustments made to the loan and CMBS investments financed in the CDOs in excess of the Company's equity investment in each CDO. Due to the non-recourse nature of the CDOs, ultimately, any loss in excess of the CDO liabilities outstanding will not be realized by the Company.
NEW BUSINESS STRATEGY
Following a strategic review process which was completed in the second quarter of 2012, the Company's Board of Directors concluded that the most attractive alternative available to the Company is to remain independent and to focus on building value by deploying the Company's capital into income-producing net leased real estate focused on office and industrial properties. On July 1, 2012, Gordon F. DuGan became the Company's Chief Executive Officer to lead the new business effort. An operational review of the Company's existing assets commenced with the goal of reducing the current cost structure, further strengthening the balance sheet and determining which legacy assets and operations complement the new investment strategy. On September 28, 2012, the Company held an investor call presenting the findings of the operational review and highlighting the new go-forward business strategy for the Company. Presentation materials for the September 28, 2012 investor presentation can be found on the Company's website (www.gkk.com) in the investor relations section under "Supplemental Reports". The Company underlined its main operational goal, which is to develop recurring cash flows from the investment of the Company's cash into a portfolio of net lease investments, which are expected to be primarily office and industrial properties, simplifying and streamlining the business, reducing management, general and administrative costs, managing liquidity for investment and ultimately growing the equity base of the Company.
Commencing with the Bank of America Portfolio, which is expected to close at the end of November 2012 and is more fully described below, investments initially will be funded from existing financial resources. Subject to market conditions, the Company expects to seek to raise additional debt and/or equity capital to support further growth.
The Company also announced a plan to potentially market for sale its CDO Management contracts, CDO securities and CDO equity, in whole, part or in joint venture, and has engaged Wells Fargo Securities LLC to assist in the process. The Company is pursuing a sale of the business line as a means to: 1) focus the business on net lease investments; 2) increase its liquidity and capital availability; and 3) decrease its cost structure.
BANK OF AMERICA PORTFOLIO ACQUISITION
In August, the Company formed a joint venture with an affiliate of Garrison Investment Group, to acquire a 115-property office portfolio, or the Bank of America Portfolio, from KBS, for $485.0 million ($87 per SF) including $470.0 million in cash consideration and the issuance of six million shares of the Company's common stock, valued at $15.0 million at the execution date of the purchase agreement. The purchase price reflects an 8.5% cap rate. The portfolio was previously part of the Company's Gramercy Realty division, beneficial ownership of which was transferred to KBS pursuant to a collateral transfer and settlement agreement dated September 1, 2011. The portfolio totals approximately 5.6 million rentable square feet with a total portfolio occupancy of 88%. Approximately 81% of the portfolio is leased to Bank of America, N.A., under an 11-year master lease. The Company's asset strategy for this portfolio acquisition is to sell non-core, multi-tenant assets and retain a core net-lease portfolio of high quality assets in primary and strong secondary markets, primarily leased to Bank of America. The purchase agreement with KBS allowed the joint venture to market for sale non-core assets prior to the closing of the portfolio acquisition. Currently, under contracts for sale to third parties are a 1,000,000 square foot multi-tenant property in Chicago, IL and a 400,000 square foot multi-tenant property in Charlotte, NC, both of which the Company believes are expected to close simultaneously with the portfolio acquisition. The joint venture is expected to finance the acquisition of the portfolio with a non-recourse first mortgage loan of up to $200.0 million provided by a large institutional lender. The loan will be secured primarily by the core portfolio of assets expected to be retained by the joint venture. In addition to the Company's share of income from the portfolio pursuant to the joint venture agreement, the Company will receive an asset management fee for the portfolio management as well as a performance based fee for management of the portfolio. Assuming the execution of the asset sales and financing, the Company expects to have approximately $75.0 million of equity invested into the joint venture, comprised of approximately $60.0 million in cash and $15.0 million in shares of the Company's common stock.
Simultaneously with the execution of the purchase agreement for the Bank of America Portfolio, one of our affiliates and an affiliate of Garrison Investment Group, funded 50% as co-lenders, an approximately $39.0 million mezzanine loan to certain affiliates of KBS and is guaranteed by KBS. The mezzanine loan had a 1% origination fee, bears interest at 10% per annum and has a stated maturity of April 1, 2013. The loan is deemed matured upon the joint venture's completion of the purchase of the Bank of America portfolio, and any outstanding loan balance will be applied as a credit against the purchase price at closing. As of September 30, 2012, the Company's portion of the mezzanine loan had an outstanding balance of $19.3 million. In October 2012, at the request of the borrower, the $6.0 million was applied in reduction of the principal balance of the loan.
We have also agreed that, effective upon the acquisition of the Bank of America Portfolio by the joint venture, the base management fee paid by KBS to our affiliate to manage the former Gramercy Realty portfolio will be reduced from $12.0 million to $9.0 million per year. Approximately $1.0 million of fee revenues are expected to be generated from the joint venture, offsetting in part, the decline in fee revenue from the management agreement with KBS.
INDIANAPOLIS INDUSTRIAL ACQUISITION
The Company has executed a $27.1 million ($50 per SF) purchase and sale agreement to acquire two recently constructed Class A industrial properties totaling 539,588 square feet located in the Indianapolis metropolitan area. The portfolio is 100% leased to three credit tenants with a 10.2-year weighted average lease term.
The acquisition represents an 8.4% cap rate (GAAP basis). The transaction is subject to the Company's due diligence and other closing conditions, and is expected to close in the fourth quarter of 2012.
INDUSTRIAL PORTFOLIO SALE-LEASEBACK
The Company entered into a letter of intent to buy a portfolio of industrial buildings totaling approximately 1,000,000 square feet. The initial cap rate is expected to be in excess of 8.5%. However, there is no assurance that the transaction will be consummated on the terms described or at all.
CORPORATE
As of September 30, 2012, the Company maintained $175.2 million of unrestricted cash as compared to approximately $192.6 million reported as of June 30, 2012. In addition, as of September 30, 2012, the Company held an aggregate of $41.4 million of par value Class A-1, A-2 and B CDO securities previously issued by the Company's CDOs that were available for re-issuance. The aggregate fair value of the repurchased CDO bonds was $32.9 million as of September 30, 2012.
A substantial portion of the Company's cash flow has been historically generated by distributions from its CDOs within the Gramercy Finance segment. The Company's CDOs contain minimum interest coverage and asset overcollateralization covenants that must be satisfied for the Company to receive cash flow on the interests in its CDOs retained by the Company and to receive the subordinate collateral management fees. During periods when these covenants are not satisfied for a particular CDO, cash flows from that CDO that would otherwise be paid to the Company as a subordinate bondholder, holder of the preferred shares and in respect of the subordinate collateral management fee are diverted from the Company to repay principal and interest on the senior-most outstanding CDO bonds. The Company's 2005 CDO failed its overcollateralization test in October 2012, the most recent distribution date, and previously failed it overcollateralization tests at the July 2012, October 2011, April 2011 and January 2011 distribution dates. The Company's 2006 CDO failed its overcollateralization test at the October 2012 distribution date. The Company's 2007 CDO failed its overcollateralization test beginning with the November 2009 distribution date. It is unlikely that the Company's 2005, 2006 and 2007 CDO's overcollateralization tests will be satisfied in the foreseeable future. During periods when the overcollateralization tests for the Company's CDOs are not met, cash flows that the Company would otherwise receive are significantly curtailed. The following chart summarizes the CDO compliance tests as of the most recent distribution dates (October 25, 2012 for the Company's 2005 and 2006 CDOs and August 15, 2012 for the Company's 2007 CDO):
Cash Flow Triggers | CDO 2005-1 | CDO 2006-1 | CDO 2007-1 | |||||
Overcollateralization (1) | ||||||||
Current | 104.44% | 95.17% | 81.55% | |||||
Limit | 117.85% | 105.15% | 102.05% | |||||
Compliance margin | -13.41% | -9.98% | -20.50% | |||||
Pass/Fail | Fail | Fail | Fail | |||||
Interest Coverage (2) | ||||||||
Current | 369.49% | 479.91% | N/A | |||||
Limit | 132.85% | 105.15% | N/A | |||||
Compliance margin | 236.64% | 374.76% | N/A | |||||
Pass/Fail | Pass | Pass | N/A | |||||
(1) | The overcollateralization ratio divides the total principal balance of all collateral in the CDO by the total bonds outstanding for the classes senior to those retained by the Company. To the extent an asset is considered a defaulted security, the asset's principal balance is multiplied by the asset's recovery rate which is determined by the rating agencies. For a defaulted security with a CUSIP that is actively traded, the lower of market value or the product of the security's principal balance multiplied by the asset's recovery rate, as determined by the rating agencies, is used for the overcollateralization ratio. | |||||||
(2) | The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by the Company. | |||||||
Cash flows generated from the Company's CDOs with respect to its ownership of non-investment grade bonds, preferred equity and collateral management agreements for the 2011 and year to date 2012 are summarized as follows: | |||||||||||||||||||||
Collateral Manager Fees and CDO Distributions | |||||||||||||||||||||
CDO 2005-1 | CDO 2006-1 | CDO 2007-1 | |||||||||||||||||||
Fees | Distributions | Fees | Distributions | Fees | Distributions | Total | |||||||||||||||
Total 2011 | $ | 1,676 | $ | 5,477 | $ | 4,452 | $ | 29,528 | $ | 711 | $ | - | $ | 41,844 | |||||||
1Q 2012 | $ | 2,399 | $ | 3,495 | $ | 1,027 | $ | 9,160 | $ | 172 | $ | - | $ | 16,253 | |||||||
2Q 2012 | 3,134 | 1,907 | 965 | 6,311 | 169 | - | 12,486 | ||||||||||||||
3Q 2012 | 332 | - | 933 | 8,238 | 169 | - | 9,672 | ||||||||||||||
4Q 2012 | 300 | - | 380 | - | 165 | (1) | 845 | ||||||||||||||
Total 2012 | $ | 6,165 | $ | 5,402 | $ | 3,305 | $ | 23,709 | $ | 675 | $ | - | $ | 39,256 | |||||||
(1) Estimated. Distribution date for CDO 2007-1 is November 15, 2012 | |||||||||||||||||||||
Interest expense includes costs related to $2.3 billion of non-recourse long-term notes issued by the three CDOs that are consolidated on the Company's balance sheet. Interest expense was $19.7 million for the three months ended September 30, 2012, compared to $20.2 million for the three months ended June 30, 2012.
Management, general and administrative expenses were $17.1 million for the three months ended September 30, 2012, as compared to $11.9 million in the prior quarter. The increase in management, general and administrative expenses is primarily attributable a $5.4 million reserve recorded for estimated litigation contingencies. Management, general and administrative expenses also includes one-time increases in salaries and benefits expense of approximately $1.3 million which include payments to former executives pursuant to the expiration of employment contracts and the payment of signing bonuses for a new management team effective July 1, 2012. In addition, management, general and administrative expense includes approximately $1.9 million of protective advances related to loan and other lending investments within our CDOs, and additional professional fees and other loan enforcement costs for the pending foreclosure of the LVH Hotel and Casino by the Company's CDOs. Loan enforcement costs for assets financed in our CDOs are typically advanced by the Company and reimbursed as servicing advances once the loan is resolved. The amount owed from the CDOs to the Company for such advances is approximately $10.2 million as of September 30, 2012.
GRAMERCY FINANCE
Interest income is generated on the Company's whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS within the Company's Gramercy Finance division. For the three m
