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GPT > SEC Filings for GPT > Form 10-K on 17-Mar-2014All Recent SEC Filings




Annual Report

(Amounts in thousands, except Overview section, share and per share data)


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 Portfolio joint venture, commercial real estate assets.

We were founded in 2004 as a specialty finance Real Estate Investment Trust 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 us as an equity REIT. 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 our new symbol GPT.

We seek to acquire and manage a diversified portfolio of high quality net leased properties that generates stable, predictable cash flows and protects investor capital over a long investment horizon. We expect that these properties generally will be leased to a single tenant. Under a net lease, the tenant typically bears the responsibility for all property related expenses such as real estate taxes, insurance, and repair and maintenance costs. We believe this lease structure provides an owner cash flows over the term of the lease that are more stable and predictable than other forms of leases, and minimizes the ongoing capital expenditures often required with other property types.

We approach the net leased market as a value investor, looking to identify and acquire net leased properties that we believe offer attractive risk adjusted returns throughout market cycles. We focus primarily on industrial and office properties, where we believe attractive investment opportunities currently exist. We focus on acquiring assets in major markets where strong demographic and economic growth offer, in our view, a higher probability of producing long term rent growth and/or capital appreciation. Our goal is to grow our existing portfolio and become a pre-eminent owner of net leased commercial industrial and office properties in the United States.

We believe that within the net leased industry, industrial and office investments offer a fundamentally different opportunity from the market for net leased retail assets. Industrial and office assets tend to be heterogeneous, and valuation is frequently influenced by local real estate market conditions and tenant preferences. In our view, the skillset required to properly underwrite industrial and office assets is specific to those assets and can be used to drive significant investment outperformance. We also believe that well-located industrial and office assets are better positioned to experience rent growth and asset price appreciation than single tenant retail assets in an inflationary environment.

As of December 31, 2013, we owned interests (either directly or through a joint venture) in 107 properties containing an aggregate of approximately 7.8 million rentable square feet. The following is a summary of the characteristics of our property portfolio at December 31, 2013 and also taking into account the lease for our build-to-suit project in Hialeah Gardens, Florida that is currently under construction and is anticipated to be completed in the second quarter of 2014 and leased to Preferred Freezer Services of Hialeah, LLC upon completion of construction:

99.1% occupancy;

a weighted average remaining lease term of 11.7 years (based on annualized base rent);

53.5% investment grade tenancy (includes subsidiaries of non-guarantor investment grade parent companies) (based on annualized base rent);

Industrial portfolio comprised of 4.2 million aggregate rentable square feet with an average base rent per square foot of $5.33;

Office portfolio comprised of 3.4 million aggregate rentable square feet with an average base rent per square foot of $9.53 (including the properties we own through joint ventures);


Specialty asset portfolio of three improved sites comprised of 186 acres of land and 256 thousand aggregate rentable square feet of building space that we lease to a car auction services company, a bus depot and a rental car company; and,

Top five tenants by annualized base rent include: Bank of America (31%); Adesa Texas, Inc., (11%); EF Transit, Inc., (6%); AMCOR Rigid Plastics USA, Inc., (6%); and Preferred Freezer Services of Hialeah, LLC, (5%). Our lease with Preferred Freezer Services of Hialeah, LLC starts upon completion of construction of the facility currently expected in the second quarter of 2014.

We have achieved a number of important milestones since our board of directors elected to reposition our company as a REIT focused on acquiring and managing income producing net leased properties, including:

Property Investment
During the year ended December 31, 2013, we acquired 29 properties aggregating approximately 4.0 million square feet for a total purchase price of approximately $340.8 million.

As of December 31, 2013, our property portfolio is 99.1% occupied for a weighted average lease term of 11.7 years, 53.5% is leased to investment grade tenants.

Sold Specialty Finance Business/Assets and Reduced Costs
In March 2013, we sold our collateral management and sub-special servicing contracts for our three CDOs, disposed of certain non-core legacy assets and exited the commercial real estate finance business.

We downsized our New York City headquarters office, closed one satellite property management office, reduced employee headcount, rebid our professional consulting and insurance contracts, and reduced annual run rate management, general and administrative expenses.

Raised Capital and Repaid Accrued Preferred Stock Dividends
In September 2013, we entered into a $100.0 million senior secured credit facility with an accordion feature to increase the facility to $150.0 million, which was exercised by us and approved by the lenders in February 2014.

In October 2013, we issued and sold 11.5 million shares of our common stock in a private placement at a price of $4.11 per share, resulting in total net proceeds to us of approximately $45.5 million.

In December 2013, our board declared, and in January 2014, we paid in full, the accrued and unpaid dividends on our Series A Preferred Stock and began the timely payment of the quarterly preferred dividends beginning with the dividend due January 15, 2014, positioning us to re-commence dividends on our common stock.

Optimized Asset Management Business
We executed or extended asset management contracts with third-party property owners, including our joint venture partners, resulting in an aggregate of $1.4 billion in assets under management at December 31, 2013;

During the year ended December 31, 2013, we generated $40.9 million in asset management revenue, including a $12.0 million out-performance fee (pre-tax) under our asset management agreement with KBS.


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.

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 primarily 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.

Property Investment

During the year ended December 31, 2013, we acquired 29 properties aggregating
approximately 4.0 million square feet for a total purchase price of
approximately $340.8 million. A summary of our consolidated portfolio as of
December 31, 2013 and 2012 is presented below:

[[Image Removed]]        [[Image Removed]]       [[Image Removed]]        [[Image Removed]]     [[Image Removed]]         [[Image Removed]]       [[Image Removed]]        [[Image Removed]]     [[Image Removed]]
                                      Number of Properties                            Rentable Square Feet                                  Occupancy                                    Weighted-average
                                                                                                                                                                                           Lease Term(1)
Properties                 December 31, 2013      December 31, 2012(3)     December 31, 2013     December 31, 2012(3)       December 31, 2013      December 31, 2012(3)     December 31, 2013     December 31, 2012(3)
Office/Banking Centers                 3                       -                     48,709                         -               100.0 %                    0.0 %                    8.45                         -
Industrial                            25                       2                  4,222,613                   539,429               100.0 %                  100.0 %                   10.38                     10.04
Specialty Assets                       3                       -                    255,738                         -               100.0 %                    0.0 %                   13.87                         -
Total                                 31                       2                  4,527,060                   539,429               100.0 %                  100.0 %                   10.55                     10.04

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(1) Weighted-average lease term is based upon the remaining non-cancelable lease term as of December 31, 2013 and 2012, respectively. The weighted-average calculation is based upon square footage.

(2) The Industrial properties line includes the build-to-suit property in Hialeah Gardens, Florida, which was purchased on May 30, 2013 and represents a 118 thousand square foot cold storage facility currently being constructed, which will be 100% leased for an initial term of 25 years when completed in the second quarter of 2014.

(3) Properties classified as held-for-sale at 12/31/2012 are not included in the table above.

Joint Ventures

Bank of America Portfolio - We own a 50% joint venture interest in the Bank of America Portfolio, which is comprised of 75 office properties and banking centers located across the United States totaling approximately 3.2 million rentable square feet. As of December 2013, 95% of the rentable square feet in the Bank of America Portfolio is leased to Bank of America, N.A. under a master lease with expiration dates through 2023. As of December 31, 2013, the Bank of America Portfolio had a total portfolio occupancy of approximately 96%. We acquired our joint venture interest in the Bank of America Portfolio in December 2012. The joint venture's acquisition of the Bank of America Portfolio was financed with a $200.0 million floating rate, interest-only mortgage loan maturing in December 2014, collateralized by 67 properties of the portfolio. The remaining eight properties are unencumbered. During the year ended December 31, 2013, the joint venture sold 38 properties for aggregate net proceeds of approximately $43.3 million.

Philips Electronics - We own a 25% interest in Philips HQ JV, which is owner of a fee interest in 200 Franklin Square Drive, a 200 thousand square foot office building located in Somerset, New Jersey which is 100% net leased to Philips Holdings, USA Inc., a wholly-owned subsidiary of Royal Philips Electronics, through December 2021. The property is subject to a $41.0 million fixed-rate mortgage loan with an anticipated repayment date in 2015.


Asset and Property Management

In addition to net leased investing, we also operate a commercial real estate management business for third-parties including our Bank of America Portfolio Joint Venture. As of December 31, 2013, this business, which operates under the name Gramercy Asset Management, managed approximately $1.4 billion of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. We manage properties for companies including KBS, Garrison through their investment in the Bank of America Portfolio Joint Venture, and Oak Tree Capital Management, L.P.

We have an integrated asset management platform within Gramercy Asset Management to consolidate responsibility for, and control over, leasing, lease administration, property management, operations, construction management, tenant relationship management and property accounting. To the extent that we provide asset management services for third-party property owners, we provide such services in consultation with and at the direction of such owners.

In December, 2013, one of our wholly owned TRSs extended the Original Management Agreement with KBS. The Original Management Agreement was extended through execution of an Amended and Restated Asset Management Services Agreement, or the Management Agreement, effective as of December 1, 2013. As part of the execution of the Management Agreement, KBS made a $12.0 million payment to our TRS in satisfaction of the profit participation provisions under the Original Management Agreement. In addition, the Management Agreement provides for a base management fee of $7.5 million per year as well as certain other fees as provided therein. The term of the Management Agreement will continue to December 31, 2016 (with a one year extension option exercisable by KBS), unless earlier terminated as therein provided, and also provides incentive fees in the form of profit participation ranging from 10% - 30% of incentive profits earned on sales.

Commercial Real Estate Finance

On March 15, 2013, we disposed of our Gramercy Finance segment, and exited the commercial real estate finance business. Our commercial real estate finance business invested in and managed a diversified portfolio of real estate loans, including whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, CMBS and preferred equity involving commercial properties throughout the United States, and which held interests in real estate properties acquired through foreclosures. The disposal was completed pursuant to a sale and purchase agreement to transfer the collateral management and sub-special servicing agreements for our three Collateralized Debt Obligations, or CDOs, to CWCapital Investments LLC, or CWCapital, for proceeds of $6.3 million in cash, after expenses. We retained our subordinate debt and equity ownership, or Retained CDO Bonds, in the CDOs, which may allow us 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 might be. On March 15, 2013, we deconsolidated the assets and liabilities of Gramercy Finance from our Consolidated Financial Statements and recognized a gain on the disposal of $389.1 million within discontinued operations. The carrying value of the retained CDO bonds was $6.8 million as of December 31, 2013.

In addition to our Retained CDO Bonds, we expect to receive additional cash proceeds for past CDO servicing advances when specific assets within the CDOs are liquidated. We received reimbursements of $6.1 million during the year ended December 31, 2013, and the carrying value of the receivable for servicing advance reimbursements as of December 31, 2013 is $8.8 million. We do not anticipate receiving a substantial portion of the remaining CDO servicing advance reimbursements until the second half of 2014.

Critical Accounting Policies

The following discussion related to our Consolidated Financial Statements should be read in conjunction with the financial statements appearing in Item 8 of this Annual Report on Form 10-K.

Our discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, known as GAAP. These accounting principles require us to make some complex and subjective decisions and assessments. Our most critical accounting policies involve decisions and assessments, which


could significantly affect our reported assets, liabilities and contingencies, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time and made based upon information available to us at that time. We evaluate these decisions and assessments on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. We have identified our most critical accounting policies to be the following:

Variable Interest Entities
Consolidated VIEs

As of December 31, 2013, we had no consolidated VIEs.

Collateralized Debt Obligations

On March 15, 2013, as a result of the disposal of the Gramercy Finance segment, we deconsolidated three VIEs, the CDOs. We were the collateral manager of the three CDOs and in our capacity as collateral manager, we made decisions related to the collateral that most significantly impacted the economic outcome of the CDOs, which was the basis upon which we concluded that we were the primary beneficiary of the CDOs as of December 31, 2012. In connection with the disposal of Gramercy Finance, we transferred the collateral management and sub-special servicing agreements for our three CDOs to CWCapital, thereby removing ourselves as the collateral manager and our ability to make any and all decisions related to the collateral, including those that would most significantly impact the economic outcome of the CDOs. As of March 15, 2013, we had no continuing involvement with the collateral to the CDOs, and as a result, we determined that we were no longer the primary beneficiary of the CDOs, and therefore deconsolidated the CDOs.

We have retained our subordinate debt and equity ownership, or the Retained CDO Bonds, in the CDOs, which were previously eliminated in consolidation and were not sold as part of the disposal of Gramercy Finance. The Retained CDO Bonds may provide us with the potential to receive continuing cash flows in the future, however, there is no guarantee that we will realize any proceeds from the Retained CDO Bonds, or what the timing of these proceeds might be. These interests have been recognized at fair value as the Retained CDO Bonds on the Consolidated Balance Sheets.

Unconsolidated VIEs
Investment in Retained CDO Bonds

As further discussed above, on March 15, 2013, we recognized an asset in Retained CDO Bonds in connection with the disposal of the Gramercy Finance segment. We are not obligated to provide any financial support to these CDOs. Our maximum exposure to loss is limited to our interest in the Retained CDO Bonds and we do not control the activities that most significantly impact the VIEs' economic performance.

Real Estate Investments

We record acquired real estate investments as business combinations when the real estate is occupied, at least in part, at acquisition. Costs directly related to the acquisition of such investments are expensed as incurred. We allocate the purchase price of real estate to land, building and intangibles, such as the value of above-, below- and at-market leases and origination costs associated with the in-place leases at the acquisition date. The values of the above- and below-market leases are amortized and recorded as either an increase in the case of below-market leases or a decrease in the case of above-market leases to rental revenue over the remaining term of the associated lease. The values associated with in-place leases are amortized over the expected term of the associated lease. We assess the fair value of the leases at acquisition based upon estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. To the extent acquired leases contain fixed rate renewal options that are below-market and determined to be material, we amortize such below-market lease value into rental revenue over the renewal period.

Acquired real estate definitions that do not meet the definition of a business combination are recorded at cost. Acquired real estate investments which are under construction are considered build-to-suit transactions


and are also recorded at cost. In build-to-suit transactions, we engage a developer to construct a property or provide funds to a tenant to develop a property. We capitalize the funds provided to the developer/tenant and the internal costs of interest and real estate taxes, if applicable, during the construction period.

Certain improvements are capitalized when they are determined to increase the useful life of the building. Depreciation is computed using the straight-line method over the shorter of the estimated useful life at acquisition of the capitalized item or 40 years for buildings, five to ten years for building equipment and fixtures, and the lesser of the useful life or the remaining lease term for tenant improvements and leasehold interests. Maintenance and repair expenditures are charged to expense as incurred.

In leasing office space, we may provide funding to the lessee through a tenant allowance. In accounting for tenant allowances, we determine whether the allowance represents funding for the construction of leasehold improvements and evaluate the ownership of such improvements. If we are considered the owner of the leasehold improvements, we capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the leasehold improvements or the lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event we are not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Factors considered during this evaluation usually include (i) who holds legal title to the improvements, (ii) evidentiary requirements concerning the spending of the tenant allowance, and (iii) other controlling rights provided by the lease agreement (e.g. unilateral control of the tenant space during the build-out process). Determination of the accounting for a tenant allowance is made on a case-by-case basis, considering the facts and circumstances of the individual tenant lease.

We also review the recoverability of the property's carrying value when circumstances indicate a possible impairment of the value of a property. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as changes in strategy resulting in an increased or decreased holding period, expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If management determines impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used and for assets held for sale, an impairment loss is recorded to the extent that the carrying value exceeds the fair value less estimated cost to dispose for assets held for sale. These assessments are recorded as an impairment loss in our Consolidated Statements of Comprehensive Income (loss) in the period the determination is made. The estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated or amortized over the remaining useful life of that asset.

During 2013, we recorded no impairment charges related to our investments in real estate. During 2012, we recorded impairment charges of $35,043 related to our investments in real estate, which were classified as discontinued operations related to the disposal of Gramercy Finance. During 2011, we recorded impairment charges of $1,237 related to our investments in real estate, which were re-classified as discontinued operations as part of the Settlement Agreement with KBS.

Investments in Joint Ventures

We account for our investments in joint ventures under the equity method of accounting since we exercise significant influence, but do not unilaterally control the entities, and we are not considered to be the primary beneficiary. In the joint ventures, the rights of the other investors are protective and participating. Unless we are determined to be the primary beneficiary, these rights preclude us from consolidating the investments. The investments are recorded initially at cost as an investment in joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the investments on our balance sheet and the underlying equity in net assets is evaluated for impairment at each reporting period. None of the joint venture debt is recourse to us. As of December 31, 2013 and 2012, we had investments of $39,385 and $72,742 in joint ventures, respectively.


Assets Held-for-Sale

As of December 31, 2013, we had no assets classified as held for sale.

In connection with our efforts to exit Gramercy Finance and the commercial real estate finance business, we classified the assets and liabilities of Gramercy Finance as held-for-sale. As of December 31, 2012, we had assets classified as held-for-sale of $1,952,264 related to the disposal of Gramercy Finance. We recorded impairment charges of $27,180 within discontinued operations on loans and real estate investments to adjust the carrying value to the lower of cost or fair value and other-than-temporary impairments of $128,087 within discontinued operations as we no longer could express the intent to hold CMBS investments until the recovery of amortized cost for all CMBS in an unrealized loss position. On March 15, 2013, we completed the disposal of Gramercy Finance. For . . .

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