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GPT > SEC Filings for GPT > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for GRAMERCY PROPERTY TRUST INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for GRAMERCY PROPERTY TRUST INC.


8-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Dollar amounts in thousands, except for Overview section, share and per share data)

Overview

Gramercy Property Trust Inc. is a fully-integrated, self-managed commercial real estate investment company focused on acquiring and managing income-producing office and industrial properties net leased to high quality tenants in major markets throughout the United States. We also operate an asset management business that manages for third-parties, including our joint venture partners, commercial real estate assets throughout the United States primarily leased to financial institutions and affiliated users.

We were founded in 2004 as a specialty finance REIT focused on originating and acquiring loans and securities related to commercial and multifamily properties. In July 2012, following a strategic review, our board of directors announced a repositioning of the Company as an equity REIT focused on acquiring and managing income producing net leased real estate. To reflect this transformation, in April 2013 we changed our name from Gramercy Capital Corp. to Gramercy Property Trust Inc. and began trading on the New York Stock Exchange under the new symbol GPT.

We seek to acquire high quality net leased properties and construct a diversified portfolio that generates stable, predictable cash flows and protects investor capital over a long investment horizon. We approach the net lease market as a value investor, looking to identify and acquire net leased properties that we believe offer the most attractive risk adjusted returns throughout market cycles. We focus primarily on office and industrial properties in target markets with strong demographic and economic growth potential. Our goal is to grow our existing portfolio through the selective acquisition and become the pre-eminent owner of net leased commercial office and industrial properties.

As of June 30, 2013, we own, either directly or in joint venture, a portfolio of 105 income producing net leased office and industrial properties with 96% occupancy. Tenants include Bank of America, N.A., Nestlé Waters, Federal Express, Con-Way Freight, Phillips Electronics, Five Below, Inc. and others. As of that date, our asset management business, which operates under the name Gramercy Asset Management, manages for third-parties approximately $1.5 billion of commercial properties.

During the three months ended June 30, 2013, we acquired 11 properties aggregating approximately 650,000 square feet for a total purchase price of approximately $111.2 million. During the six months ended June 30, 2013, we acquired 14 properties aggregating approximately 1,600,000 square feet for a total purchase price of approximately $158.2 million.

On March 15, 2013, we disposed of our Gramercy Finance segment and exited the commercial real estate finance business. The disposal was completed pursuant a purchase and sale agreement to transfer the collateral management and sub-special servicing agreements for our three Collateralized Debt Obligations, CDO 2005-1, CDO 2006-1 and CDO 2007-1, or the CDOs, to CWCapital Investments LLC or CWCapital for approximately $6.3 million, in cash after expenses. We retained our non-investment grade subordinate bonds, preferred shares and ordinary shares, or the Retained CDO Bonds, which may provide us with the potential to recoup additional proceeds over the remaining life of the CDOs based upon resolution of underlying assets within the CDOs. However, there is no guarantee that we will realize any proceeds from the Retained CDO Bonds, or what the timing of these proceeds may be. The carrying value of the Retained CDO Bonds as of June 30, 2013 is approximately $7.6 million. In February 2013, we also sold a portfolio of repurchased notes previously issued by two of our three CDOs, generating cash proceeds of approximately $34.4 million. In addition, we expect to receive additional cash proceeds for past CDO servicing advances of approximately $14.6 million, including accrued interest at the prime rate of 3.25%, when specific assets within the CDOs are liquidated. We believe that the sale of the collateral management and sub-special servicing agreements and sale of repurchased notes of our CDOs achieved a number of important objectives, including (i) maximizing the value of the servicing business through the sale to a large servicing operation; (ii) simplifying our going-forward business and significantly reducing our ongoing management, general and administrative expenses through elimination of CDO related personnel costs and servicing advance requirements; (iii) generating in excess of $50.0 million in liquidity previously invested in the CDO business; and (iv) providing for potential future proceeds through Retained CDO Bonds. On March 15, 2013, subsequent to the transfer of the collateral management and sub-special serving agreements, the assets and liabilities of Gramercy Finance were deconsolidated from our Condensed Consolidated Financial Statements.

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and generally will not be subject to U.S. federal income taxes to the extent we distribute our taxable income, if any, to our stockholders. We have in the past established, and may in the future establish taxable REIT subsidiaries, or TRSs, to effect various taxable transactions. Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities. Our Asset Management business is conducted in a TRS and substantially all of the provision for taxes is related to this business.

We conduct substantially all of our operations through our operating partnership, GPT Property Trust LP, or our Operating Partnership. We are the sole general partner of our Operating Partnership. Our Operating Partnership conducts our commercial real estate investment business through various wholly-owned entities and our realty management business through a wholly-owned TRS.

Unless the context requires otherwise, all references to "Gramercy," "our Company," "we," "our" and "us" mean Gramercy Property Trust Inc., a Maryland corporation, and one or more of its subsidiaries, including our Operating Partnership.

Our principal business strategy is to acquire real estate assets that generate stable, recurring cash flows with minimal outgoing capital expenditures. We also general cash flows from management fees related to the management of commercial real estate for third-parties. For the near-term, these cash flows are used to fund our continuing operations and we intend to retain any excess cash flow to grow our investment portfolio.

Property Investment



Property acquisitions during the six months ended June 30, 2013 are summarized
in the table below:



                                            Metropolitan
                                             Statistical    Acquisition   Number of      Square                                         Lease
      Property Type            Location         Area           Date       Buildings       Feet         Acres      Purchase Price     Expiration

Q1 2013 acquisitions
                             Olive
                             Branch,        Memphis,
Warehouse                    Mississippi    Tennessee        3/11/2013             1       605,000          43   $         24,650   December 2022
                             Garland,
Industrial                   Texas          Dallas, Texas    3/19/2013             1       342,000          20             10,700   October 2032
                             East
                             Brunswick,     New York, New
Cross-Dock Truck Terminal    New Jersey     York             3/28/2013             1        34,000          16             11,650   January 2019
Total Q1 2013 acquisitions                                                         3       981,000          79             47,000

Q2 2013 acquisitions

                             Atlanta,       Atlanta,
Cross-Dock Truck Terminal    Georgia        Georgia          5/6/2013              1       130,000          38              7,850     May 2020
                             Bellmawr,      Philadelphia,
Industrial                   New Jersey     Pennsylvania     5/30/2013             1        62,000           4              4,175   October 2020
                             Hialeah
                             Gardens,       Miami,
Build-to-Suit (1)            Florida        Florida          5/30/2013             -             -           9              5,000        N/A
                             Emmaus,        Allentown,
Bank Branch                  Pennsylvania   Pennsylvania     6/6/2013              1         4,800           -              1,610   February 2019
                             Calabash,      Wilmington,
                             North          North
Bank Branch                  Carolina       Carolina         6/6/2013              1         2,000           -                610   December 2018
                             Deer Park,     New York, New
Cross-Dock Truck Terminal    New York       York             6/18/2013             1        18,000           5              3,900   December 2019
                             Elkridge,      Baltimore,
Cross-Dock Truck Terminal    Maryland       Maryland         6/19/2013             1        34,000          11              5,900     May 2019
                             Houston,       Houston,
Cross-Dock Truck Terminal    Texas          Texas            6/26/2013             3       102,000          33              6,914     May 2019
                             Orlando,       Orlando,
Cross-Dock Truck Terminal    Florida        Florida          6/26/2013             1        46,000          15              5,036   January 2019
                             Hutchins,
Specialty Asset Type (2)     Texas          Dallas, Texas    6/27/2013             3       196,000         175             58,500     July 2029
                             Swedesboro,    Philadelphia,
Warehouse                    New Jersey     Pennsylvania     6/28/2013             1        70,000          11             11,725     May 2028

Total Q2 2013 acquisitions 14 664,800 301 111,220

Total 2013 acquisitions 17 1,645,800 380 $ 158,220

(1) The build-to-suit property located in Hialeah Gardens, Florida is a commitment to construct a 120,000 square foot cold storage facility which will be 100% leased for an initial term of 25 years when completed in the second quarter of 2014. We acquired the land for the property with a $4,990 zero-coupon mortgage note payable to the seller. Total costs are expected to be approximately $25,000, of which the unfunded amounts were estimated to be $23,158 at June 30, 2013.

(2) The Specialty Asset located in Hutchins, Texas is encumbered with a mortgage of $26,322, with a fair value of $29,385, and capitalized loan assumption costs of $263.

Subsequent to June 30, 2013, we acquired a 42,000 square foot, multi-tenanted bank branch property for a total purchase price of approximately $4.9 million. The property was acquired from an unrelated third party using existing cash on hand, summarized in the table below:

                                                                  Number of
      Property Type            Location      Acquisition Date     Buildings         Square Feet       Purchase Price
       Bank branch           Morristown,
                              New Jersey         8/1/2013                    1            42,000     $          4,900

Asset and Property Management

Our asset and property management business, which operates under the name Gramercy Asset Management, currently manages for third-parties, approximately $1.5 billion of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States.

We provide asset and property management business services to KBS Acquisition Sub, LLC, or KBSAS with respect to a portfolio of 451 office buildings and bank branches. Our Asset Management Services Agreement, or the Management Agreement, provides a base management fee of $9.0 million per year, payable monthly, plus the reimbursement of all property related expenses paid, and an incentive fee, or the Threshold Value Profits Participation, in an amount ranging from $3.5 million to $12.0 million and payable 60 days after the earlier to occur of June 30, 2014 (or March 31, 2015 upon satisfaction of certain extension conditions and payment of a $750 thousand extension fee) and the date on which KBSAS, directly or indirectly transfers at least 90% of the managed portfolio. The Management Agreement may be terminated by KBSAS without cause but with an effective termination date of March 31 or September 30 of any year after September 30, 2013, or after April 1, 2013 for cause. In the event of a termination of the Management Agreement by KBSAS after April 1, 2013 but prior to December 31, 2015, we will be entitled to receive a declining balance termination fee, ranging from $5.0 million to $2.0 million.

We also provide asset and management business services for three other clients, including for our Bank of America Portfolio Joint Venture.

Results of Operations

Comparison of the three months ended June 30, 2013 to the three months ended June 30, 2012

Revenues



                                                      2013        2012        Change
    Management fees                                 $ 13,617     $ 9,616        4,001
    Rental revenue                                     1,804           -        1,804
    Investment income                                    617           -          617
    Operating expense reimbursements                     196           -          196
    Other income                                          70          24           46
    Total revenue                                   $ 16,304     $ 9,640     $  6,664
    Equity in net income (loss) of joint ventures   $ (2,603 )   $    29     $ (2,632 )

Management fees for the three months ended June 30, 2013 are $13,617 and $9,616 for the three months ended June 30, 2012. Management fees are comprised primarily of asset management, property management, incentive and administration fees earned pursuant to the Management Agreement with KBS and the Bank of America Portfolio Joint Venture. For the three months ended June 30, 2013, we earned $11,004 from our contract with KBS, $1,790 from our contract with the Bank of America Portfolio Joint Venture, and $823 from other management contracts. For the three months ended June 30, 2012, there was $9,616 earned from our contract with KBS. The increase in the fees earned from the KBS contract relate to a $5,372 increase in incentive fees which we recognized in the second quarter of 2013 after consideration of the termination provisions of the agreement and the impact of the sales of real estate made to date. The increase is partially offset by a $750 decrease in the base asset management fees, an $899 reduction in engineering fees due to expiration of the agreements and a $2,335 reduction in property management and administrative fees primarily related to property dispositions.

Rental revenue was $1,804 and $0 for the three months ended June 30, 2013 and 2012, respectively. The increase of $1,804 is due to the acquisition of 16 properties subsequent to June 30, 2012.

Investment income for the three months ended June 30, 2013 was $617. The investment income consisted of $558 of income accretion on the Retained CDO Bonds and $59 of income from a residual finance asset.

Operating expense reimbursements were $196 for the three months ended June 30, 2013 and are for reimbursement of property operating expenses for six properties that we fully or partially manage the expenditures. Operating expense reimbursements were $0 for the six months ended June 30, 2012.

Other income of $70 for the three months ended June 30, 2013 is primarily comprised of $58 of interest earned on outstanding servicing advances and remaining amount is primarily interest earned on cash balances. Other income of $24 for the three months ended June 30, 2012 is primarily interest earned on cash balances.

The equity in net income (loss) of joint ventures was a loss of $2,603 for the three months ended June 30, 2013 and represents our proportionate share of the loss generated by two joint venture interests, including our Joint Venture which contains the Bank of America Portfolio acquired in December 2012. The equity in net income of joint ventures of $29 for the three months ended June 30, 2012 represents our proportionate share of the income generated by our joint venture interests. Our proportionate share of the income (loss) generated by our joint venture interests including $2,266 and $67 of real estate-related depreciation and amortization, which when added back, results in a net reduction to Funds from Operations, or FFO, of $337 for the three months ended June 30, 2013, and a net contribution to FFO, of $96 for the three months ended June 30, 2012. The Bank of America Portfolio net loss for the three months ended June 30, 2013 includes our pro-rata share of net loss of $3,642, including a loss on the sale of $2,267, from the defeased mortgage acquired as part of the joint venture's acquisition. The pool of government securities which served collateral for the mortgage loan, generated sufficient cash flows to cover the debt service requirements, but did not generate income to offset the corresponding interest expense.

Expenses



                                                  2013         2012        Change
       Property management expenses             $  5,016     $  5,631     $   (615 )
       Property operating expenses                   308            -          308
       Other-than-temporary impairment             1,682            -        1,682
       Depreciation and amortization                 919           45          874
       Interest expense                               85            -           85
       Management, general and administrative      4,272        9,319       (5,047 )
       Acquisition expenses                          698            -          698
       Provision for taxes                         4,441        2,107        2,334
       Total expenses                           $ 17,421     $ 17,102     $    319

Property management expenses decreased by $615 to $5,016 for the three months ended June 30, 2013 from $5,631 for the three months ended June 30, 2012. The decrease is primarily related to $678 reduction in salaries and benefits for engineers due to the termination of the engineering agreement and reallocations of staff.

Property operating expenses increased by $308 from $0 recorded for the three months ended June 30, 2012 to $308 recorded for the three months ended June 30, 2013. The increase is attributable to the acquisition of 16 properties subsequent to June 30, 2012.

During the three months ended June 30, 2013, we recorded an other-than-temporary impairment charge of $1,682 due to adverse changes in expected cash flows related to our Retained CDO Bonds. During the three months ended June 30, 2012, we did not record any other-than-temporary impairment charges.

We recorded depreciation and amortization expenses of $919 for the three months ended June 30, 2013, compared to $45 for the three months ended June 30, 2012. The increase of $874 is primarily due to the acquisition of 16 properties subsequent to June 30, 2012.

We recorded interest expenses of $85 for the three months ended June 30, 2013, compared to $0 for the three months ended June 30, 2012. The increase of $85 is due to the financing we secured on our Indianapolis Industrial Portfolio, the loan assumed on the acquisition of the specialty asset located in Hutchins, Texas and a note payable to the seller of our build-to-suit property in Hialeah Gardens, Florida.

Management, general and administrative expenses were $4,272 for the three months ended June 30, 2013, compared to $9,319 for the same period in 2012. The decrease of $5,047 is primarily related to reduced salary and employee benefit costs of $811, audit and tax fees of $711, legal fees of $837, rent allocation of $117, and the write-off of $2,317 related to our strategic review process in 2012.

Real estate acquisition costs were $698 for the three months ended June 30, 2013 and were comprised of costs incurred to complete the acquisition of 13 properties since the fourth quarter of 2012, which accounted for as business combinations.

The provision for taxes was $4,441 for the three months ended June 30, 2013, versus $2,107 for the three months ended June 30, 2012. The increase of $2,334 is primarily related to taxes on our realty asset management business which is conducted in a TRS and is primarily attributable to additional incentive fees recognized during the period.

Comparison of the six months ended June 30, 2013 to the six months ended June 30, 2012

Revenues



                                                      2013         2012        Change
    Management fees                                 $ 21,932     $ 17,929        4,003
    Rental revenue                                     2,460            -        2,460
    Investment income                                    769            -          769
    Operating expense reimbursements                     304            -          304
    Other income                                         106           66           40
    Total revenue                                   $ 25,571     $ 17,995     $  7,576
    Equity in net income (loss) of joint ventures   $ (3,791 )   $     57     $ (3,848 )

Management fees for the six months ended June 30, 2013 are $21,932 and $17,929 for the six months ended June 30, 2012. Management fees are comprised primarily of asset management, property management, incentive and administration fees earned pursuant to the Management Agreement with KBS and the Bank of America Portfolio Joint Venture. For the six months ended June 30, 2013, we earned $16,627 from our contract with KBS, $4,315 from our contract with the Bank of America Portfolio Joint Venture, and $990 from other management contracts. For the six months ended June 30, 2012, there was $17,929 earned from our contract with KBS. The decrease in the fees earned from the KBS contract relate to a $1,000 decrease in the base asset management fee, $931 reduction in engineering fees due to expiration of the agreements and $4,655 reduction in property management and administrative fees primarily property dispositions. The decrease in management fees is partially offset by an increase of $5,284 in incentive fees, a substantial portion of which we recognized in the second quarter of 2013 after consideration of the impact of the termination provisions of the agreement and the sales of real estate made to date.

Rental revenue was $2,460 and $0 for the six months ended June 30, 2013 and 2012, respectively. The increase of $2,460 is due to the acquisition of the 16 properties subsequent to June 30, 2012.

Investment income for the six months ended June 30, 2013 was $769. The investment income consisted of $652 of income accretion on the Retained CDO Bonds and $117 of income from a residual finance asset.

Operating expense reimbursements were $304 for the six months ended June 30, 2013 and are for reimbursement of property operating expenses for six properties that we fully or partially manage the expenditures. Operating expense reimbursements were $0 for the six months ended June 30, 2012.

Other income of $106 for the six months ended June 30, 2013 is primarily comprised of $78 of interest earned on outstanding servicing advances and remaining amount is primarily interest earned on cash balances. Other income of $66 for the six months ended June 30, 2012 is primarily comprised of primarily interest earned on cash balances.

The equity in net income (loss) of joint ventures was a loss of $3,791 for the six months ended June 30, 2013 and represents our proportionate share of the loss generated by two joint venture interests, including our Joint Venture which contains the Bank of America Portfolio acquired in December 2012. The equity in net income of joint ventures of $57 for the six months ended June 30, 2012 represents our proportionate share of the income generated by our joint venture interests. Our proportionate share of the income (loss) generated by our joint venture interests including $4,647 and $134 of real estate-related depreciation and amortization, which when added back, results in a contribution to Funds from Operations, or FFO, of $856 and $191 for the six months ended June 30, 2013 and 2012. The Bank of America Portfolio net loss six months ended June 30, 2013 includes our pro-rata share of net loss of $5,690, including a loss on the sale of $2,267, from the defeased mortgage acquired as part of the joint venture's acquisition. The pool of government securities which served as collateral for the mortgage loan, generated sufficient cash flows to cover the debt service requirements, but did not generate income to offset the corresponding interest expense.

Expenses



                                                  2013         2012        Change
       Property management expenses             $ 11,173     $ 11,799         (626 )
       Property operating expenses                   425            -          425
       Other-than-temporary impairment             1,682            -        1,682
       Depreciation and amortization               1,256           86        1,170
       Interest expense                               85            -           85
       Management, general and administrative      8,694       14,446       (5,752 )
       Acquisition expenses                        1,249            -        1,249
       Provision for taxes                         4,846        3,419        1,427
       Total expenses                           $ 29,410     $ 29,750     $   (340 )

Property management expenses decreased by $626 to $11,173 for the six months ended June 30, 2013 from $11,799 for the six months ended June 30, 2012. The decrease is primarily related to $1,289 reduction in salaries and benefits for engineers due to the termination of the engineering agreement and reallocations of staff. The decrease is partially offset by $405 additional professional fees.

Property operating expenses increased by $425 from $0 recorded for the six months ended June 30, 2012 to $425 recorded for the six months ended June 30, 2013. The increase is attributable to the acquisition of 16 properties subsequent to June 30, 2012.

During the six months ended June 30, 2013, we recorded an other-than-temporary impairment charge of $1,682 due to adverse changes in expected cash flows related to the retained CDO bonds. During the six months ended June 30, 2012, we did not record any other-than-temporary impairment charges.

We recorded depreciation and amortization expenses of $1,256 for the six months ended June 30, 2013, compared to $86 for the six months ended June 30, 2012. The increase of $1,170 is primarily due to the acquisition of 16 properties subsequent to June 30, 2012.

We recorded interest expenses of $85 for the six months ended June 30, 2013, compared to $0 for the six months ended June 30, 2012. The increase of $85 is due to the financing we secured on our Indianapolis Industrial Portfolio, the loan assumed on the acquisition of the specialty asset located in Hutchins, Texas and a note payable to the seller of our build-to-suit property in Hialeah Gardens, Florida

Management, general and administrative expenses were $8,694 for the six months ended June 30, 2013, compared to $14,446 for the same period in 2012. The decrease of $5,752 is primarily related to reduced salary and employee benefit costs of $1,231, audit and tax fees of $902, legal fees of $613, rent allocation of $257, and the write-off of $2,317 related to our strategic review process in 2012.

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