July 13, 2012 - 11:34pm EST by
2012 2013
Price: 27.65 EPS $0.00 $0.00
Shares Out. (in M): 4 P/E 0.0x 0.0x
Market Cap (in $M): 98 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0.0x 0.0x

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  • Mortgage REIT
  • Commercial Real Estate (CRE)
  • Preferred stock
  • Dividend yield


Gramercy Capital Preferred Stock -- GKK/PA $27.65

Gramercy Capital Corp is a REIT focused on originating and acquiring loans related to commercial and multi-family properties.  At least that’s what it was until a few weeks ago.  They recently completed a strategic review and instead of finding a buyer like many people wanted, they hired a new management team and changed their strategy, which I will talk about in a bit.

The focus of this write-up is the preferreds, so I'm not going to cover the company in detail. However, Gramercy common stock has been pitched to me by a few people.  It’s been written up all over the internet, here are just a few articles:

Frankly the fact that bloggers everywhere love the stock gives me a lot of pause.  That, combined with a complicated structure and a lack of time, caused me to ignore it.  However, what I did learn from briefly looking at it is that they had cumulative preferred stock with an 8.125% dividend ($25 par - 50.78 cents per quarter) which had the dividend turned off at the end of 2008.  The preferred holders got a representative on the board, so I kept an eye on it waiting for something that would signal the dividend could be turned back on seeing that many things required an affirmative vote of ? of the preferred holders.

New Strategy
I believe the new strategy is exactly that catalyst.  Here’s what the PR says about their new strategy:
Following its review, the Board concluded that the most appropriate 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. The new investment criteria will focus on single tenant net lease investments with durable credits across a wide variety of industries in markets with strong demographics. The investments initially will be funded from existing financial resources. Subsequently, subject to market conditions, the Company expects to seek to raise additional debt and/or equity capital to support further growth.

If you go through the prospectus for the preferreds, it unfortunately allows junior or senior securities to be issued without a vote:
In addition, certain changes that would be material and adverse to the rights of holders of the Series A Preferred Stock (including the issuance of a senior stock) cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding Series A Preferred Stock and all other series of parity preferred stock upon which like voting rights have been conferred and are exercisable, voting as a single class.

So while they may be able to raise funds to start executing on their new strategy (and in fact sold 1m shares to the new CEO at market rates), I can’t imagine the terms on any non related party debt or equity raise would be very good as long as the preferreds are in arrears.  

Dividends on the Common
Of course the preferred don’t allow common dividends to be paid without being made current, and the new strategy implies that GKK wants to get back into the normal REIT strategy of paying a dividend, raising equity when the value allows good deals to be done, doing more deals, increasing the dividend, rinse and repeat.  In fact if you look at comments made by the new CEO in his past life, he clearly values a dividend:

We have historically run our business from a relatively conservative standpoint. We maintained our dividend in all of our funds last year; we increased the dividend in the public company last year. And at a time when most companies were slashing their dividends, we were able to continue to pay our dividends, which our investors really appreciate.

It appears he understands the game, and in order to this, he’ll need to pay off the preferreds.

What yield?
So if we assume the preferred dividends are turned back on, where will it trade after the cumulative dividends are paid?  Assuming there isn’t a Ford preferred type of situation to take advantage of, most similar REIT preferreds trade in the ~9% range (NCT, RAS, NRF), so if we assume this trades down to $23 after the $7.11 is paid, which will provide an ~9% return if turned on tomorrow, but I would expect it to trade above $30 when they actually announce the dividend is turned on.

But when?
The first possible date would be the first earnings with the new CEO.  As part of his first few months on the job, he is to:
During his first 60 days, in addition to beginning the implementation of the Company's new investment strategy, Mr. DuGan, along with the Company's Board, will lead an operational review of the Company's existing assets and operations 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. The Company expects to provide an update on its implementation of the investment strategy and this operational review in connection with its second quarter 2012 financial results, which will be released no later than August 9, 2012

So it’s possible the prefs get turned on in the next month.  I’m not exactly sure on the timing, but I expect it sooner rather than later.  Obviously the sooner the better as it improves the IRR, however, the longer it takes, at least we’re accruing dividends at a 7.3% rate on the current price.

Clearly liquidity is a risk here, this thing barely trades and has already traded up about $2 since the new CEO was named.  There is no guarantee the new strategy will be successful.  They’ve got a lot of NOLs to work through, so their REIT status does not require a dividend payment anytime soon.


Turning the preferrd dividend back on.
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