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GPT > SEC Filings for GPT > Form 10-Q on 8-Nov-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-Nov-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 industrial and office 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 Bank of America joint venture, 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 our 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 industrial and office 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 industrial and office properties.

As of September 30, 2013, we own, either directly or in joint ventures, a portfolio of 106 income producing net leased industrial and office properties with 96% occupancy. Tenants include Bank of America, Kar Auction Services, YRC Worldwide, Five-Below, Nestle Waters 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.

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 September 30, 2013 is approximately $8.0 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 $10.0 million, including accrued interest at the prime rate of 3.25%, when specific assets within the CDOs are liquidated. For the three and nine months ended September 30, 2013, we received reimbursements of $4.7 million and $4.8 million, respectively, 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.

On September 4, 2013, we entered into a Credit and Guaranty Agreement, or the Credit Facility, with Deutsche Bank Securities, Inc., as lead arranger and bookrunner, and Deutsche Bank AG New York Branch, as administrative agent, for a $100.0 million senior secured revolving credit facility. The aggregate amount of the Credit Facility may be increased to a total of up to $150.0 million, subject to the approval of the administrative agent and the identification of lenders willing to make available additional amounts. The maturity date of the revolving credit facility is September 2015, with one 12-month extension option subject to certain requirements. The Credit Facility is guaranteed by Gramercy Property Trust Inc. and certain subsidiaries and is secured by first priority mortgages on designated properties, or the Borrowing Base. Outstanding borrowings under the Credit Facility are limited to the lesser of (i) the sum of the $100.0 million revolving commitment and the maximum $50.0 million commitment increase available or (ii) 60% of the value of the Borrowing Base. Interest on advances made on the Credit Facility, will be incurred at a floating rate based upon, at our option, either (i) LIBOR plus the applicable LIBOR margin, or (ii) the applicable base rate which is the greater of the Prime Rate, 0.50% above the Federal Funds Rate, or 30-day LIBOR plus 1.00%. The applicable LIBOR margin will range from 1.90% to 2.75%, depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross assets. The Credit Facility will have an initial borrowing rate of LIBOR plus 1.90%. The Credit Facility includes a series of financial and other covenants that we must comply with in order to borrow under the facility. We are in compliance with the covenants under the Credit Facility at September 30, 2013. As of September 30, 2013, there were no borrowings outstanding under the Credit Facility and 13 properties were in the borrowing base.

In October 2013, we issued 11,535,200 unregistered shares of common stock at a purchase price of $4.11 per share, raising gross proceeds of $47.4 million in a private placement pursuant to a common stock purchase agreement and related joinder agreements, or the Purchase Agreement. Each purchaser has agreed that it will not sell the common stock purchased until March 25, 2014, or the Lock-Up Date. Prior to the Lock-Up Date, if we issue common stock or securities convertible into common stock (except for certain permitted issuances), then the purchasers will have the ability to: (1) purchase their pro rata portion of all or any part of our new issuance, and (2) elect the benefit of any different terms provided to the new investors. We also entered into contingent value rights agreements, or the CVR Agreements, with the purchasers at the closing of the sale of common stock. We issued one Contingent Value Right, or CVR, to each purchaser per common stock purchased. The CVR entitles the purchasers to receive a one-time cash payment on April 1, 2014, not to exceed $0.46 per share, equal to the amount per share that our volume weighted average share price for the ten trading day period ending on the Lock-Up Date, is less than the per share purchase price of $4.11 per share.

In October 2013, we also announced our intention to resume timely payments of dividends on our Series A cumulative redeemable preferred stock, beginning with the dividend due for the fourth quarter of 2013. We intend to satisfy and pay all accrued but unpaid preferred stock dividends for prior periods, which as of September 30, 2013, was $35.8 million. In addition, we also intend to initiate payment of common stock dividends during 2014. The record and payment dates for all our dividend payments will be made as and when the same are determined by our board of directors.

During the three months ended September 30, 2013, we acquired four properties aggregating approximately 258,000 square feet for a total purchase price of approximately $17.7 million. During the nine months ended September 30, 2013, we acquired 18 properties aggregating approximately 1,903,800 square feet for a total purchase price of approximately $175.9 million.

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 nine months ended September 30, 2013 are
summarized in the table below:

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

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

Q2 2013 acquisitions

Cross-Dock                   Atlanta,           Atlanta,
Truck Terminal               Georgia            Georgia                  5/6/2013             1       130,000          38              7,850      May 2020
                             Bellmawr,          Philadelphia,
Warehouse/Industrial         New Jersey         Pennsylvania            5/30/2013             1        62,000           4              4,175    October 2022
                             Hialeah Gardens,   Miami,
Build-to-Suit (1)            Florida            Florida                 5/30/2013             -             -           9              5,000        N/A
                             Emmaus,            Allentown,
Banking Center               Pennsylvania       Pennsylvania             6/6/2013             1         5,000           -              1,610   February 2019
                             Calabash,          Myrtle Beach,
Banking Center               North Carolina     South Carolina           6/6/2013             1         2,000           -                610   December 2018
Cross-Dock                   Deer Park,
Truck Terminal               New York           New York/New Jersey     6/18/2013             1        18,000           5              3,900   December 2019
Cross-Dock                   Elkridge,          Baltimore/
Truck Terminal               Maryland           Washington, D.C.        6/19/2013             1        34,000          11              5,900      May 2019
Cross-Dock                   Houston,           Houston,
Truck Terminal               Texas              Texas                   6/26/2013             3       102,000          33              6,914      May 2019
Cross-Dock                   Orlando,           Orlando,
Truck Terminal               Florida            Florida                 6/26/2013             1        46,000          15              5,036    January 2019
                             Hutchins,
Specialty Asset Type (2)     Texas              Dallas/Fort Worth       6/27/2013             3       196,000         175             58,500     July 2029
                             Swedesboro,        Philadelphia,
Warehouse/Industrial         New Jersey         Pennsylvania            6/28/2013             1        70,000          11             11,725      May 2028
Total Q2 2013 acquisitions                                                                   14       665,000         301            111,220

Q3 2013 acquisitions
                             Morristown,                                                                                                        October 2013
Banking Center (3)           New Jersey         New York/New Jersey      8/1/2013             1        42,000           1   $          4,900   September 2024
                             Atlanta,           Atlanta,
Warehouse/Industrial         Georgia            Georgia                 8/22/2013             1       133,000           6              4,000     April 2023
                             Manassas Park,     Baltimore/
Warehouse/Industrial         Virginia           Washington, DC           9/5/2013             2        83,000           5              8,794   December 2024
Total Q3 2013 acquisitions                                                                    4       258,000          12             17,694

Total 2013 acquisitions                                                                      21     1,904,000         392            175,914

(1) The build-to-suit property located in Hialeah Gardens, Florida is a commitment to construct a 118,000 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 $5.0 million zero-coupon mortgage note payable to the seller. Total costs are expected to be approximately $25.0 million, of which the unfunded amounts were estimated to be $20.7 million at September 30, 2013.
(2) The Specialty Asset located in Hutchins, Texas is an auto auction facility encumbered with a mortgage of $26.3 million. The mortgage had a fair value at acquisition of $29.5 million and we capitalized loan assumption costs of $263 thousand.
(3) The original lease term for one tenant of the property located in Morristown, New Jersey expired in October 2013, however an amendment to the lease was signed and effective October 1, 2013, which extended the lease term to October 2018.

Subsequent to September 30, 2013, we acquired a 220,000 square foot, industrial property for a total purchase price of approximately $17.9 million and a 120,000 square foot, industrial property for a total purchase price of approximately $9.5 million. The properties were acquired from unrelated third parties using existing cash on hand, summarized in the table below:

                                                                                                  Purchase Price
   Property Type         Location      Acquisition Date    Number of Buildings     Square Feet    (in thousands)
Warehouse/Industrial   Yuma, Arizona      10/1/2013                      1              220,000   $        17,850
Warehouse/Industrial   Austin, Texas      10/22/2013                     1              120,000             9,490
       Total                                                             2              340,000   $        27,340

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 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. In the second quarter of 2013, after considering the termination provisions of the agreement and the sales of real estate assets made to date, we recognized incentive fees of $5.7 million related to our Management Agreement with KBS. 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 September 30, 2013 to the three months
ended September 30, 2012

Revenues

                                                        2013      2012     Change
      Management fees                                 $  8,343   $ 8,833   $ (490)
      Rental revenue                                     4,024         -     4,024
      Investment income                                    464       299       165
      Operating expense reimbursements                     460         -       460
      Other income                                         130        25       105
      Total revenue                                   $ 13,421   $ 9,157   $ 4,264
      Equity in net income (loss) of joint ventures   $    983   $    31   $   952

Management fees for the three months ended September 30, 2013 are $8,343 and $8,833 for the three months ended September 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 September 30, 2013, we earned $5,509 from our contract with KBS, $1,736 from our contract with the Bank of America Portfolio Joint Venture, and $1,098 from other management contracts. For the three months ended September 30, 2012, there was $8,833 earned from our contract with KBS. The decrease in the fees earned from the KBS contract relate to a $750 decrease in the base asset management fees, a $272 reduction in engineering fees due to expiration of the agreements and a $3,074 reduction in property management and administrative fees primarily related to property dispositions. The decrease is partially offset by a $772 increase in incentive fees recognized in the third quarter of 2013.

Rental revenue was $4,024 and $0 for the three months ended September 30, 2013 and 2012, respectively. The increase of $4,024 is due to the acquisition of 20 properties subsequent to September 30, 2012.

Investment income for the three months ended September 30, 2013 and 2012 was $464 and $299, respectively. The investment income consisted of $412 of income accretion on the Retained CDO Bonds and $52 of income from a residual finance asset during the three months ended September 30, 2013. The investment income for the three months ended September 30, 2012 consisted of $299 of income from a residual finance asset.

Operating expense reimbursements were $460 for the three months ended September 30, 2013 and are for reimbursement of property operating expenses for properties that we fully or partially manage the expenditures. Operating expense reimbursements were $0 for the three months ended September 30, 2012.

Other income of $130 for the three months ended September 30, 2013 is primarily comprised of $107 of interest earned on outstanding servicing advances and the remaining amount is primarily interest earned on cash balances. Other income of $23 for the three months ended September 30, 2012 is primarily interest earned on cash balances.

The equity in net income of joint ventures was income of $983 for the three months ended September 30, 2013 and represents our proportionate share of the income 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 $31 for the three months ended September 30, 2012 represents our proportionate share of the income generated by one joint venture interest owned. Our proportionate share of the income generated by our joint venture interests includes $2,159 and $67 of real estate-related depreciation and amortization, which when added back, results in a net contribution to Funds from Operations, or FFO, of $3,142 for the three months ended September 30, 2013, and $98 for the three months ended September 30, 2012.

Expenses

                                                   2013       2012      Change
        Property management expenses             $  4,842   $  5,666   $   (824)
        Property operating expenses                   479          -         479
        Other-than-temporary impairment                 -          -           -
        Depreciation and amortization               1,886         44       1,842
        Interest expense                              538          -         538
        Management, general and administrative      4,672      8,262     (3,590)
        Acquisition expenses                          238          -         238
        Provision for taxes                           744       (39)         783
        Total expenses                           $ 13,399   $ 13,933   $   (534)

Property management expenses decreased by $824 to $4,842 for the three months ended September 30, 2013 from $5,666 for the three months ended September 30, 2012. The decrease is primarily related to $494 reduction in salaries and benefits for engineers due to the termination of the engineering agreement and reallocations of staff and reduced professional fees of $407. These reductions are partially offset by increased rent and occupancy expense of $102.

Property operating expenses increased by $479 from $0 recorded for the three months ended September 30, 2012 to $479 recorded for the three months ended September 30, 2013. The increase is attributable to the acquisition of 20 properties subsequent to September 30, 2012.

During the three months ended September 30, 2013 and the three months ended September 30, 2012, we did not record any other-than-temporary impairment related to our Retained CDO Bonds.

We recorded depreciation and amortization expenses of $1,886 for the three months ended September 30, 2013, compared to $44 for the three months ended September 30, 2012. The increase of $1,842 is primarily due to the acquisition of 20 properties subsequent to September 30, 2012.

We recorded interest expenses of $538 for the three months ended September 30, 2013, compared to $0 for the three months ended September 30, 2012. The increase of $538 is due to the financing we secured on our Indianapolis Industrial Portfolio and the loan assumed on the acquisition of the specialty asset located in Hutchins, Texas.

Management, general and administrative expenses were $4,672 for the three months ended September 30, 2013, compared to $8,262 for the same period in 2012. The decrease of $3,590 is primarily related to reduced salary and employee benefit costs of $2,678, 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, audit and tax fees of $173, legal fees of $390, rent allocation of $102, and the write-off of $297 related to our strategic review process in 2012.

Real estate acquisition costs were $238 for the three months ended September 30, 2013 and are primarily comprised of costs incurred to complete the acquisition of four properties during the three months ended September 30, 2013, which were accounted for as business combinations.

The provision for taxes was $744 for the three months ended September 30, 2013, versus negative $39 for the three months ended September 30, 2012. The increase of $783 is primarily related to taxes on our asset management business which is conducted in a TRS and is primarily attributable to additional incentive fees recognized.

Comparison of the nine months ended September 30, 2013 to the nine months ended

September 30, 2012

Revenues

                                                      2013        2012      Change
    Management fees                                 $  30,275   $ 26,762   $   3,513
    Rental revenue                                      6,484          -       6,484
    Investment income                                   1,233        299         934
    Operating expense reimbursements                      764          -         764
    Other income                                          236         91         145
    Total revenue                                   $  38,992   $ 27,152   $  11,840
    Equity in net income (loss) of joint ventures   $ (2,808)   $     88   $ (2,896)

Management fees for the nine months ended September 30, 2013 are $30,275 and $26,762 for the nine months ended September 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 nine months ended September 30, 2013, we earned $22,137 from our contract with KBS, $6,051 from our contract with the Bank of America Portfolio Joint Venture, and $2,087 from other management contracts. For the nine months ended September 30, 2012, there was $26,762 earned from our contract with KBS. The increase in management fees is partially offset by an increase of $6,056 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 . . .

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