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Gramercy Property Trust Inc (NYSE:GPT)

Q1 2013 Earnings Call

May 7, 2013 2:00 PM ET

Executives

Gordon DuGan – CEO

Jon Clark – CFO

Benjamin Harris – President

Analysts

Jonathan Feldman – Nomura Securities

Operator

Thank you, everybody for joining us and welcome to the Gramercy Property Trust’s First Quarter 2013 Financial Results Conference Call.

As a reminder presentation materials and a supplemental for the call are posted on the company’s website, www.gptreit.com in the Investor Section in the Events and Presentation’s tab.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

The company would like to first remind the listeners that during the call management may make forward-looking statements. Actual results may differ from the predictions that management may make today. Additional information regarding the factors that could cause such differences appear in the MD&A section of the company’s Form 10-K and other reports filed with the Securities and Exchange Commission.

Also during today’s conference call the company may discuss non-GAAP financial measures as defined by the SEC Regulation G. The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed and a reconciliation of the differences between each non-GAAP financial measures and the comparable GAAP financial measures can be found in the company’s press release announcing first quarter earnings, a copy of which can be found on the company’s website, www.gptreit.com.

Before turning the call over to Gordon DuGan, Chief Executive Officer of Gramercy Property Trust we would like to ask those of you participating in the Q&A portion of the call to please limit yourself to two questions per person.

Thank you, and please go ahead, Mr. DuGan.

Gordon DuGan

Thank you very much. Welcome, everyone. Let me start by just saying the quick format for today’s meeting. I am going to make a couple of comments on the numbers included in the press release. Our CFO, Jon Clark will then talk more specifically about the results. After that we will go through a brief business plan update that we have filed along with the supplemental report for the first quarter. Ben Harris, our President and I will take us through that and we hope to be pretty brief, I was noting that it’s been 40 days since our, roughly our last business plan update. So some of the material is the same, most of it is hopefully just progress. So I won’t, I’ll try not to go over things that we went over 40 days ago too much.

I also was reflecting on the fact it’s been 10 months since Ben and I joined Gramercy. There has been an incredible amount accomplished in that 10 months. It reminds me little bit of the line about little kids that the days are endless and the years fly by, 10 months have flown by in some ways and we had lot of long days as well. So it’s been great. We just couldn’t be more excited about where we are today, and we thank all of you for your support.

Let me jump into it. Q1, as I mentioned in the press release, went as expected actually little better than expected. The income from operations, I’ll just touch on a few points and then I’ll flush them out when we get to the business plan update. The income from operations I think is somewhat depressed due to some non-economic things. We sold the CDOs and have made an enormous amount of progress getting a financial statement that reconciles to economics.

Probably the last piece that isn’t there yet but will get done this quarter is in our Bank of America JV, we purchased the entity that the Defeasance entity, in other words when we bought the $485 million property from KBS, KBS had to give us those properties free and clear of loan. They defeased the existing conduit loan and then we bought that entity for basically nominal value. And that entity is running through our books until we sell it, which we expect to sell it this quarter. We have an agreement and a buyer and we will sell it this quarter. So economically there is no negative to owning the defeasance entity but it does flow through our GAAP financial as Jon will describe in greater detail.

Our loss from just the defeasance entity within the JV is roughly $2 million. There is no economic effect. We are not losing $2 million but that is how it flows through. We bought the entity for basically nothing because there is value in the entity, we expect to realize around $4 million for the JV in value when we sell that entity, and again we expect to do that this quarter. So the defeasance entity shows a loss of $2 million. Plus we have $2 million of depreciation on our pro rata ownership portion running through that entity. And if you look in the supplemental you will see on page 15 of the supplemental we’ve broken out the BofA JV portfolio so that you can follow what the core property NOI was, what the held for sale property NOI was, and then the negative effect of the defeasance pool.

We expect that, that will go away this quarter. We did it solely because we could make a nice little bit of money risk free. And we will be hopefully rid of this quarter. So I wanted to point out that the income from operations in terms of how I think about it economically is better than it shows. And the NOI from the Bank of America portfolio has been great as you will see in the business plan update.

The second thing CDO sale, that was accomplished. You see the benefit in here. We talked quite a bit about that. So I won’t repeat that. I would just say I think we are just beginning to see some of the savings both in terms of just manpower and in cost which both of which will eventually be cost from a simpler more focused and understandable business. That closing occurred just about 45 days ago, and we are just now having moved a couple of billion dollar of collateral off our books getting the benefits of a much more simple and focused business plan. And I think we are just going to be happier and happier with that as year goes on.

Next, acquisitions expenses, I am going to cover that in the business plan update but I would expect to see an ongoing acquisitions expense line in our income statement because we are going to be active acquirers as we turn the cash into income producing property. Also segment reporting you see in the press release, we have a segment reporting section. We are going to flush that out a little bit more in the dashboard which I unveiled at the March call. We have an updated version of that showing how the Q1 numbers flow through that. And we will continue to update it as the year goes on and we make progress building up our recurring cash flow.

Couple of other things investment pace; obviously deals we close in mid or late March don’t really affect Q1 revenue very much. We will get the full effect of anything we closed in March in Q2, and we continue to close deals. We are more active now than we’ve been since we got here and we’ll talk a little bit more about that as we go through the business plan update.

The last thing I would say there is sale – there is an item in the press release on a sale to a related party. That was interest in the CDOs, that was a minority interest in a portfolio of suburban office buildings. So that was not sold by Gramercy directly but rather by Gramercy when we were managing the CDOs. We sold that as part of the process of selling the CDOs in whole.

So with that let me turn it over to Jon to give some detail on the first quarter and then Jon is going to turn it back to me and Ben to go through what will hopefully a little faster business plan update than our March meeting.

Jon Clark

Thanks, Gordon. I would like to take a few minutes just to briefly walk through our financial statements that were included in the press release filed this morning. And it’s also to reiterate the fact that we have returned to preparing a supplemental report available on our website which I am going to refer to and we hope you’ll find it helpful. We expect to continue the practice of preparing a supplemental for each quarter as investors find it useful to provide additional schedule and analysis on our business, that aren’t really conducive to put into a financial statement or press release. We will further file Form 10-Q later on this week.

To start I want to focus in on the disposal of the CDO finance business which was completed this quarter, which achieve a number of goals that we had communicated and specifically to simplify our business and our financial reporting. Note that our CDO business was consolidated on our books not because we own the subordinate tranches of non-investment grade bonds, preferred shared and common shares, many of which we’ve retained after the sale, but because we were collateral manager for the CDO that would the CDO to be consolidated in our books in the first place.

By being the collateral manager we can show the aspect of the CDO that were most important to its performance, specifically decisions that were related to the underlying collateral within the CDOs. We also received fees from being the collateral manager and that fee revenue represented substantially all of the economics that we were currently receiving from our finance business at the date of sale.

We were the collateral manager of the CDOs through March 15th is when the sale of the various management contracts, the CWCapital for $9.9 million was completed. It was approximately $6.3 million in cash to us after expenses.

We accounted for the assets and the liability of that finance business unit through the date of the sale and we expended the same efforts to manage those assets and account for them as we had done in historic periods. So the result of operations from the Gramercy Finance unit up to the date of sale has been reported in discontinued operations, and on our income statement you see that basically broken out in three lines. It’s just the income from discontinued operations as Gordon had mentioned before the gain on the sale of the JV to related party, that was in the CDOs, tax provisions and the net gain on disposal.

The most striking thing about the disposal of the finance business is the large gain that was generated from the day the collateral management agreements were sold. The gain was calculated based upon the difference between the proceeds received after expenses; the fair value of the routine CDO bonds of 8.5 million, which I’ll discuss in a little bit; the accrual for the reimbursement of past servicing advances at $14.5 million, which was recognized at the date of sale; and the net difference between the carrying value of the liabilities and the asset of the Gramercy finance unit as of the date of disposal.

Basically this gain is the result of required impairment taken over time on underlying assets in the CDO, while they were consolidated on our books. And it records the excess of the outstanding balance of the CDOs, it also takes into account the outstanding balance of the CDO liabilities that were consolidated on our books.

Over the years the non-recourse liabilities for the CDOs became larger than the carrying value of the asset that secured the CDOs due to these impairments and in turn our shareholder equity balance became negative. This is the accounting that was required and this was the accounting and complexity that we every historically live with. So this gain basically is the reversal of that complexity. And our shareholder’s equity balance is now positive as we would expect it to occur.

The gain from disposal of Gramercy Finance was $389.1 million or 663 per share. Excluding the gain from disposal of Gramercy Finance our net loss to common stockholders from continuing operations on a fully diluted basis was negative $0.10 with the first quarter as compared to $0.12 negative $0.12 for the same quarter of the prior year.

Continuing with the non-CDO portion of the statement of operations the company’s revenues primarily reflect now only the rental revenues generated from the company’s focus on deploying capital into income producing net leased real estate and the fee revenue generated from our asset management business.

Just like last quarter rental income is relatively small at this point as only the revenue from the Indianapolis industrial portfolio which was acquired in November 2012 and revenue from the three additional assets which were acquired after March 18 2013 are included here. So as Gordon mentioned you’ll see this figure grow next quarter with the full contribution of the assets acquired in the first quarter as well as the expected growth of the investment pipeline that Gordon will speak about in a bit on the business plan update.

We also earned fee revenue from managing real estate assets for third parties through our Gramercy Asset Management segment. We earn management fees, administrative fees and property management fees from our realty business. Asset management fees are generally fixed fee arrangements, management fees and administrative fees are variable, and decline as the overall portfolio declines.

The most substantive part of our asset management business today remains the management agreement with KBS which positively contributes to cash flow. We managed just under a 1 billion of real estate for KBS primarily comprised of 356 bank branches and 95 office buildings. The KBS portfolio aggregates approximately 8.2 million rentable square feet.

The building count and portfolio size of the KBS portfolio has declined from 522 properties and 12.3 million rentable square feet as of December 31, 2012. A portion of the decline was attributable to KBS property sales and in particular there is a portfolio of 40 assets that we now manage for the new equity owners which we expect to manage for hopefully a term of the year. The utilization of our platform to manage additional assets results in incremental asset management fees without U.S. substantially increases in operating costs.

We’re also entitled to asset management fees from our joint venture. We expect our joint venture will contribute approximately 1 million of base asset management fees annually. Actually a bit more than that in 2013 plus we have the opportunity to earn incentive fee from the joint venture.

During the first quarter we recognized asset management fees from the joint venture of about 536,000. The fee is calculated based on the weighted average of an agreed upon basis of the assets within the joint venture. So accordingly as property sales in the held for sale portfolio of the joint venture continue the asset management fee is going to be reduced. So basically it’s starting out – your asset management fees are starting out a little higher than 1 million that we expect and we will end that once the sales program is complete.

The asset management agreement with KBS also includes an incentive base fee, which are subject to a 3.5 million minimum and a maximum of $12 million. The incentive fees for the KBS portfolio is based on the portfolio equity value achieving a threshold over a 375 million in value with certain adjustments. We’re currently accruing for the minimum $3.5 million fee. Our JV which is also eligible to receive an incentive based fee we’re not yet accruing for.

Our Bank of America joint venture together with our Philips building JV resulted in a $1.2 million net loss for the quarter from joint ventures. As Gordon described earlier 2.1 of this loss is related to the defeasement securities or essentially a pool of treasury securities that defeased the mortgage loan that had previously encumbered the assets acquired. So although cash flows of the defeasance pool covers the necessary debt service payments and this is not a cash drag to our joint venture, on a GAAP basis, the income generated from the defeasance securities which are (T Bills) do not equal the amount of interest expense on the underlying loans so for GAAP purposes a loss is generated.

The defeased mortgage will mature pursuant to its terms in December of 2013 and is pre-payable beginning in August 2013. So once extinguished and as Gordon described which we expect actually to extinguish it early and hopefully second quarter, the contribution of GAAP income from the joint venture is going to increase significantly.

We included a chart in our press release to summarize the components of the income from the Bank of America joint venture in particular. And we also provided a more complete financial schedule for the joint venture in our supplemental report that’s on our website.

Jumping to property operating costs, these costs include the direct cost related to our asset management business as well as costs related to our own portfolio. However substantially all of it is related to the asset management business and only about 132,000 is related to owned portfolio. We also provided in the press release business segment information so that you can actually see these cost broken out by segment.

Our management, general and administrative expenses from continuing operations were $4.4 million for the quarter of which approximately $3.7 million was related to corporate or the owned portfolio that’s what we refer to as the core MG&A; 693,00 was related to Gramercy Asset Management. So the decrease in MG&A expenses from the $5.1 million that we recorded in the same quarter of the prior year is primarily attributable to our reduced salary and benefit costs and a reduction in professional fees.

Next up is acquisition costs which Gordon has spoken about that earlier many of these assets that we acquired, we acquired for accounting purposes to expense costs that lead up to the acquisition. As a general rule building acquisition is considered a business combination with an in place lease. It would not be if there a constructed building or a sale-lease backed transaction purchasing building from the existing tenant. So you should expect the fee based on our acquisitions today that these costs will continue in connection with just then the pipeline.

Okay now let’s take a quick look at the balance sheet to just review some significant changes from previous balance sheets which included our finance business. First the scale of the assets consolidated on our books has reduced significantly from the disposal of the finance business unit. As have the liabilities in fact the company has no debt obligations as of now in an aggregate total liability of 1841.3 million is on our financial statements of which 32.2 million is the accrued on paid dividends to preferred shareholders.

On the asset section of the balance sheet there’s two new items. The first is servicing advance receivable of 14.5 million and this represents the balance of cash servicing advances paid by the company on behalf of the CDOs. This accrual is actually always been there however previously it was eliminated in the consolidation of the CDOs on our financial statements.

We have no continuing obligation to make additional services advances so accordingly this balance is going to decline overtime as we receive payments from the CDO trustee. And these payments are going to coincide to the resolution of certain assets within the CDOs and although the timing is very uncertain these receivables are of high priority of the highest priority of the waterfall CDOs and we expect that collection is assured.

The other new item on the balance sheet is the retained CDO bonds. These are the non-investment grade subordinate tranches of the CDOs that we retained after the sale which had a carrying value of 8.6 million. And again these bonds have always been there but they were eliminated in the consolidation when the CDOs were on our financial statements.

We also have subordinate interest which have no carrying value. It’s is the non-investment grade subordinate bonds that we retain that are attributable to most of the carrying value. These non-investment grade CDO bonds are carried on our books based upon an expected cash flow that we expect to receive from these bonds discounted to the present date. This value is going to accrete over time to that expected cash flow. We cannot however guarantee that we will realize proceeds from the retained bonds, or what that timing might be.

We do expect that any cash flow that we would receive is going to be backend loaded near the end of the expected life of the CDOs. The accretion of these bonds will appear in our statement of operations as investment income. And we are required and we will re-evaluate these bonds periodically and make changes necessary to adjust for any changes in expected cash flows. These changes might be reflected either in the form of a perspective adjustment yield or maybe in the form of impairment depending on the facts and circumstances leading to any change in the cash flows of the underlying CDO.

Finally, regarding our real estate assets on our balance sheet, so we have three acquisitions from the first quarter, and the Indianapolis Industrial which was closed last year. And Gordon has spoken about these and we will speak about them more in the business plan update. So I would just like to note that due to the fact that the new acquisitions during the quarter which were made after March 18 and accordingly since that timing was so close to the end of the quarter we did not finalize our purchase price allocation on these three assets. Accounting rules permit one year to finalize that purchase price allocation. However we expect to have the allocation finalized by next quarter.

So for the three acquisitions the carrying value on our books is subject to change as we further allocate the purchase price between lease intangibles and other items that are attributable to real estate assets when they are acquired.

Finally, I’ll just point out that at the end of the quarter we had a $105 million of cash as compared to $105.4 million as of December 31, as proceeds that we receive from the disposal of CDOs were essentially deployed into income producing real estate investments during the quarter and essentially leaving our cash balances almost the same. And our cash balance today is also about the same maybe a little higher as it was after quarter end. As we have taken in the distribution from our Bank of America joint venture of about $10.2 million and as we reported in our press release this morning, we deployed $7.9 million of that in on acquisitions of the Atlanta Truck Terminal.

Gordon, that’s all I had on the financial statement. I will turn it to you then.

Gordon DuGan

Thanks, Jon. Let’s go through the business plan update. Again it’s been relatively short time since we went through it at last time, but I thought it was important that we track the business plan update as we go. There are couple of additions here and I well – I point what’s been covered previously and what’s in addition again as we go.

Page three jumping into it, business plan; this is the same slide you have seen since August of last year. The reason for that is the business plan remains the same. We have ticked off the first, we are executing on the others. The plan is to create durable growing dividends, and the steps above that are the steps we need to take to get there.

Page four, the CDOs are sold. As Jon mentioned we retained the J and K bonds, the value of those we have on our books. I would just say on small thing I think I said it last time but it is worth noting, it doesn’t take much for that value to be zero in terms of the – it’s lot collateral that’s fairly highly leveraged but it also doesn’t take a lot for that value to be significantly more than what we have it on our books for. So it’s a very interesting option on the potential increase in value of that collateral.

We changed the name and ticker to reflect the new business plan and reflect the fact that we are pure play equity REIT at this point.

Page six, I will turn it over to Ben Harris to walk us through the next few pages, – a couple, a number of these you have seen before, and a number of them you haven’t, and this is our unveiling of a number of the acquisitions that we’ve made. Ben?

Benjamin Harris

Sure, we’ve been very active on the investment side. We have done a market by market analysis, and have come up with what we are calling our target market this is where the majority of our investment equity will occur. These are markets that we believe have strong fundamental growth, business friendly environment, have strong trade linkages which we think are key to any future rent support or rent growth in an inflationary environment. Real estate is only an inflation hedge when rents track inflation and so we want to be in markets where there is the potential for rent growth and strong – most of these are strong logistics locations, so they have demand from a whole variety of users.

We’ve been focusing, as Gordon has mentioned primarily on industrial and office assets. We think that within the net lease space that presents the most interesting opportunity. If the relative value of retail and industrial and office changes over time we will allocate capital according but we think office and industrial offer the most compelling economics today, specifically on the industrial side. We think industrial offers the most, what I would call sort of heterogeneous opportunities. So there is – it’s less commoditized than other parts in the net leased space and we think that presents some interesting opportunities.

We had the benefit of an enormous platform when we joined. Gramercy had a team that had been constructed as the original AFR business. So we have in house property management acquisitions, asset management capabilities well beyond the size of our portfolio. So we are able to execute on both large and small transactions. We can move very quickly. I would put our acquisitions capabilities up against almost anyone in our space. So we are really looking to use that as an advantage as we construct the portfolio.

Just flipping forward to page 11, I just wanted to walk through a couple of the acquisitions that we have, just to give people a better feel for what we are focusing on. The Bank of America portfolio, we’ve talked a lot about it. The purchase price number has changed slightly from the numbers that you had seen. This is based on the refinement of our allocation value between the core portfolio and the held for sale portfolio based on realized and in contract prices for held for sale assets. So that 140 is basically the original purchase price less the assets that we’ve sold, less that the assets that we had under contract, less the assets at their expected sale prices.

So we are actually – we are outperforming our sales plan slightly but that’s subject to a lot of execution going forward. We will continue selling those assets over the course of the year. But what we really like about this and it really highlights what we are trying to focus on. This is a core portfolio of high quality office buildings at very attractive places with a 10 year lease to BofA, NA which is the bank entity so not only you have several layers of protection here, you’ve high quality real estate at a good basis that’s critical to BofA operations, are subject to long lease. So it’s not – we are not constantly really seeing and (paying) a tenant change.

So that’s the big takeaway here. This transaction is one of the best transactions I think that either Gordon or I have done. So we are still very excited about it. We apologize if always talk about it but it’s an exciting deal. The Indianapolis portfolio, this was from last year again this is a portfolio of high quality, bulk industrial building in Indianapolis. We think Indianapolis is – will be one of the strongest performing mid- western markets going forward. It’s got a great business friendly environment, more than 10 years of lease term to three grade tenants the largest being Nestle and this above the waterfall so there’s tremendous installed capital that they paid to put in, including permitting and water access rights. So we think this is a great portfolio with great tenancy and very stable characteristics which is one of the things that we are looking for and as we construct this portfolio.

The next one the all Olive Branch asset, this is again a class A (TDR) bulk distribution facility and Olive Branch is right over the border from Memphis where a lot of the big bulk warehouses are built due to tax arbitrage outside of Tennessee. We are in this asset little bit over $40 a foot and we have an excess land parcel which the lease has a provision if (five below) the tenant can exercise that option to expand. We have a zero basis in that land. So if the tenant does exercise that option we think it’s a significant improvement to the asset. But if they don’t we still own a great asset at a great basis with a growing tenant that we are very excited about.

The next transaction, this is a manufacturing and distribution facility in Garland Texas, Garland is a sub market of Dallas. This was an older class B industrial building that was just recently subject to $1.5 million renovation. Again we are in this building for just over $30 a foot with a 19 year lease and very high current return. So we have great stable tenancy for 19 years and a basis that we think offers some very attractive support for our equity.

The next one the Con-Way Truck Terminal in East Brunswick this is exit 9 off of that New Jersey Turnpike. This is an irreplaceable infill location in a very densely populated region with one of the largest industrial markets surrounding it. Truck terminals are very difficult to replicate. We acquired this asset significantly below replacement cost at a very attractive yield with one of the leading truck terminal bulk freight carrier in the country at Con-Way Freight and again at a high cap rate. In our view this is great example of an asset that sort of falls between the cracks. It is – these truck terminals have great tenant demand characteristics but they are not considered sort of classic real estates from a core investor standpoint. So they don’t trade that way.

And the next one, this is the asset that we closed yesterday, this is another freight terminal in Atlanta. It’s located right near the 285 Interchange within a couple of miles of the Atlanta airport in a sub-market that’s primarily truck terminals. So great logistics market won these assets at very low basis. This is actually a vacant asset that was leased up. So we have validation of not only the functionality of the asset but also the economics. FedEx signed a lease to lease this up at an arms-length transaction. So we have strong support for our basis and again well below replacement cost.

That’s the theme of what we are trying to construct with this portfolio, it’s a portfolio that generates attractive current cash returns but has strong protection of capital and the potential for capital depreciation over time given the location and the functionality of the assets. So with that I will turn it back over to Gordon.

Gordon DuGan

As you look at page 17 it is just an update on our investment activity. We have one small deal closing this week in the closing and commitments and perhaps larger deal closing this week. And then we also have deals backed up right behind it. So as I said our investment activity is very strong right now. And it’s always little bit lumpy in the investment business but right now is a busy time and we are finding lots of interesting things at attractive yields, even in what is admittedly competitive environment, and I think that’s a testament to the team that we have. We are very focused, we really have short (inaudible) approach and I think the benefit is for our shareholders in being able to find attractive deals.

Page 18, this is just to give a feel for what the portfolio ends up looking like as you take all of these disparate investments and combine them. With the deal that closed – this (inaudible) closes this week, it’s 21.8 million of real estate NOI which has a seven cap at $311 million. And why is this valuable as real estate. Well it’s valuable because we are constructing a portfolio that’s 99% occupied, has a roughly tenure average lease term, no lease rollover in the next five years with the high amount of investment grade tenancy, at very reasonable basis in both the office portfolio and the industrial portfolio. I believe that this portfolio that we are constructing is the best, it’s the premiere net lease portfolio of anybody based upon these metrics and I welcome anybody to point one they thing is better because I really this is –- we are constructing the best portfolio in this space.

Page 19 is exactly what it appears to break down both by NOI and by location. Let’s jump over the next piece of the business, maximize the asset management profit center, which we will see we have change in this is we are now grossing up both revenue and expenses for property management. The net contribution projection is the same. But we do both receive and spend our property – we receive property management revenue and have property management expenses. So we have grossed out the revenue and expense line, to track what our Q and press release will show. And I think that’s a little bit better information.

The final two bullet points BofA JV we have a promote that we think is very much in the money, just if you go back to the BofA page and look at the 10% cap rate, on good assets with good credit. It doesn’t take much imagination to figure out a 10% cap rate and a 4% borrowing rate that, the 10% promote over a 10 return is very much in the money. And you see that here.

KBS we have an ongoing agreement plus a backend interest that we expect to receive in 2014. We are refining that value but while we are carrying at 3.5 we expect it to be, our expectation today is significantly higher if not 12.

Page 22, just a couple of the other benefits we get has been that we are really able to close deals and move quickly because of our asset management team. It’s a terrific group based mostly in Jenkintown, Pennsylvania and it’s humming now and we are very, very happy with it.

And then it’s also been a source of some investment opportunity. The last thing I would say, Q2 we expect to derive more revenue from additional sources of or additional clients if you will. And we will have more disclosure on the amounts and those clients as we go through Q2 to generate incremental revenues from this business. So we are very happy with how that’s performing.

Let’s skip ahead to 24, you have seen this before. I won’t go through it in detail. I would say that I am optimistic that this $13 million number can be achieved and/or surpassed. As we have begun to dig into costs and we have literary gone through every item in the general ledger from a dollar to a million dollars to figure out where costs are and we will see more and more of that benefit as this year goes. So I am hopeful we can beat this number and we are keeping this number we showed in March but again I am hope we can do better.

Page 25 we covered this last time. The way to think about our existing MG&A is that it’s a growth platform, if there was absolutely no opportunity to grow which I think is more than a worst case scenario, but call it that we would find other cost – expense opportunities but we have a platform that’s really poised to grow and you hate to cut back and then have to hire later, just for the sake of doing so. So we like what we have and it gives us a capability to grow and grow much larger.

27 you have seen this before the net lease market by summary on 27 and 28. Simply put valuations for net lease companies are the best that I have ever seen. The capital raising is very strong. There is a fundamental reason that I will come to at the end that I think justifies that yield. The simple point is that yields never been more valuable in this world, if I said in our annual letter that everybody will receive, any (inaudible) of interest rate of any sort whether its risk within interest rate such as the ten year treasury, a CD or high yield bonds. We will show that it is very, very difficult to get yields. This is a point I am sure you are all familiar with. But that’s what driving very attractive valuations for these companies.

29 and 30 the numbers are actually little better than this. The valuations have increased since we put this together but what you see is implied cap rate for large net lease companies that are trading at very attractive levels. As we go to page 31, I think what we are proving is we can invest money at attractive cap rates. Those cap rates are significantly above where net lease comparable companies trade as they get larger and show a track record of dividends.

That arbitrage between where we can buy assets and where ultimately things are being priced at least for the better performing net lease companies is as wide as I have ever seen it. And I will just also say that the net lease business as opposed to most other REIT businesses is very scalable. The largest owner of commercial real estate in the United States as a class are corporations. They own roughly 40% of all commercial real estate. So as companies divest themselves of real estate that presents opportunities for companies like Gramercy to be the buyer of that real estate, and it’s very, very scalable business. Our intention is to show exactly how that works.

Skipping ahead to 33, I thought this is an interesting chart. We were the top performing REIT in Q1, as I said in the annual shareholders letter that you will receive. This is not in here to have us take a victory lap. Just the opposite. We are more focused than ever on the opportunities that are presented to us. But I thought that was an interesting slide. You will see that if there was a common theme there, there are smaller companies and a couple of net lease companies.

Page 34, the slide on 33 is really just to say that the rally that we have seen in smaller less institutional REITs we think it gives access to capital. We are working on a credit facility. We are targeting the end of Q2 or early Q3, the preferred stock and common stock are not paying dividends currently. I think I have been very clear about it’s when not if. At the same time the preferred in particular because we don’t pay interest or carry-on the accrued portion has a carrying cost of about 6% and that’s a very attractive cost of capital while we continue to repositioned Gramercy and create the portfolio of real estate assets.

Page 35, from the beginning the goal has been exactly this, create durable growing dividend.

In 36 is the business dashboard that I mentioned. As you look at this what you see is how we think about how the first quarter went. And all of these numbers what I like about this dashboard, every one of these numbers ties back to a GAAP number, either in our press release or the supplemental and eventually there will be further breakdown in the Q that we filed this week. But all of these are GAAP numbers. And they all tied to GAAP number. The net lease corporate NOI is the – if you go to the supplemental it’s a combination of the BofA core NOI, the Philips NOI, plus the NOI on our income statement in the press release from the existing assets.

The asset management revenue is the asset management revenue, GAAP based. The expenses, the net lease corporate that’s a combination of the entire corporate MG&A that has to be carried as well as interest expense on the assets we purchased. MG&A is 3.7 million of that. As we add assets obviously that stays fixed or decreases and we are able to drop more to the bottom line. The contribution is exactly what we expected, actually little better than we expected for the quarter between net lease and asset management. More and more as I will show you on the next page the contribution is going to come out of net leased.

As I think about property acquisitions expenses they are really onetime expenses that are expensed to generate the investments that will create recurring cash flow. So they are one-time expense if you will but we will show them here. Depreciation and amortization preferred dividends and taxes. So Q1 we were basically breakeven before depreciation amortization and acquisitions expenses.

If you go to 37 what will you see is the net leased NOI of the assets that we will have as closed as of this week with the small closing we have, is 21.8. So expect to see in the second quarter significant pick up in the net lease contribution. The pipeline is the expected NOI contribution from the deals that we have signed up. Again expect that to start to hit in the second quarter and more fully in the third quarter. And so the prior page contribution numbers will see very large increases on the net lease side. So that we are covering the G&A and other expenses.

Page 38 is our acquisition capacity. This is as of 415, net-net-net. It excludes CDO equity, it excludes any backend participations in the Garrison promote or the KBS promote. It’s just cash on hand plus what I call receivables which were the CDO advances and the asset sales we have teed up. And what you see is that in addition to the pipeline and the assets that will start to contribute to NOI contribution Q2, Q3, we still have a significant amount of net equity capacity to buy additional assets and continue to build the ongoing cash flows. All of this is to say that we are very much on track to building and creating growing durable cash flows, and therefore dividends. And we will analyze the dividend situation quarter by quarter.

With that my closing remarks; we are testing your patience with the length of this call but we have a lot to cover. This is a very, very big quarter of progress for us. In my 25 career I have not seen a more attractive case for net lease investing than today. Net leased companies are able to buy at attractive asset yields, and the value of those companies is being recognized by the market. I think we have the best investment team in the business led by Ben Harris. Ben and the team are in my view the top team in this business. And you will see that – you saw that as we went through these investments we’ve made, you will see it more and more as we go forward. And I couldn’t as I think I said earlier be more excited about the future.

Last thing, if you have any thoughts on our supplemental or any of this information also feel free to – if you think there should be something else that we can add to it that would be helpful, we would love to know about it. We can always improve our disclosure and lot of what we disclose is in reaction to shareholder questions.

Speaking of shareholder questions with that I’ll turn it over to the operator to take questions from all of you.

Question-and-Answer Session

Operator

(Operator Instructions). Thank you. Our first question comes from Jonathan Feldman from Nomura Securities. Please go ahead.

Jonathan Feldman – Nomura Securities

Good afternoon, couple of questions just in terms of deal pipeline, can you just talk a little bit more about that in terms of what you are seeing, competition for deals and whether there is a reference for large deals or small deals and from a diversification and other standpoints?

Benjamin Harris

Sure. I would say the – Gordon alluded to it, it is a very competitive environment today. I would say that it is intensely competitive for larger transactions where we’ve been finding the most interesting opportunities on the small asset side. We think that those are being overlooked by a lot of the big institutional investors who are really looking to aggregate a very large portfolio.

So if you look across the net leased space at short of acquisitions guidance for 2013, there are several very large REITs that all have over billion dollars of acquisitions, expected acquisitions this year. You can’t accomplish that with $5 million and $10 million and $15 million transactions. So that’s where we are spending a lot of our time in finding the most interesting opportunities. We are looking at a lot of large portfolios and remain in that deal flow. But we haven’t seen as compelling economics in lot of those. Does that answer your question or…

Jonathan Feldman – Nomura Securities

Yeah, I think so I am just trying to get sense of kind of what we should expect in terms of the pace of things like this may be too strong or what we should expect in terms of pace of deal activity because I think obviously the deals that start from the BofA deal that you entered into have been on the smaller side. So I am just trying to get sense of pace of capital deployment. What I (want is) the Chase deal but obviously the markets are pretty attractive at least as you guys presented it.

Gordon DuGan

I think Jonathan I would just add to that to say that our ability to do these small transactions is better than anybody else’s I have ever seen. So we are able to knock these things out and not just distract ourselves because we have just a terrific platform to do it. So we are finding the best relative value there. We are also working very hard on portfolio transactions. There are a very large number of private portfolios that we believe are sellers for either cash or stock, at the right price with the right company and those prices are today.

So I think theirs is going to be lot more the IPO market is not great and especially not great if you have a small portfolio. So it is getting better but it’s still not nearly as active as it could be. So we think there is real opportunity on the portfolio side. It’s big game hunting when you go after the portfolios but it’s one of our goals to find another big portfolio to complement the deal by deal.

Jonathan Feldman – Nomura Securities

And then just the last question would focus around the balance sheet and just was curious if you could update us may be in a little bit more detail on how you are looking at the balance sheet from a raising debt perspective whether it be property level debt, term debt, deferred unsecured bonds and the markets, clearly been continue to improve along with the rally in corporate (trend) and I am just kind of curious how you guys think about as part of your strategy

Benjamin Harris

Well, I would say that we are using deal by deal debt on occasion where there is specific reasons for having debt on that specific transaction. So the Bank of America deal we have $200 million mortgage against that in that, because it was just too large to do any other way. (Technical Difficulty) And there is reason for it but right now we are in the process of building up an unsecured pool that we will use to put in place the credit facility.

So these small deal by deal investments that you see are terrific for aggregating a pool with some diversity that will give us better execution on the credit side when we put in place a credit facility. So part of what’s driving our approach is diversification, both for the equity investor but also to give us the most flexibility in terms of credit facility. In terms of preferred and common, both markets are very, very strong right now, and when it’s an appropriate time we would expect to look closely at those but as of right this moment we are busy getting the money deployed.

Jonathan Feldman – Nomura Securities

Thank you. And then just on the lastly on the BofA portfolio, do you think you are at the point where it’s likely settled out in terms of you guys holding the assets so you want to hold or is there further pruning if you will contemplated.

Jon Clark

We are roughly half way through the sales process which were little (Technical Difficulty) but within sort of staying distance what the plan was. Demand for the assets has been better than what we were expecting. So we are from a proceed standpoint we are little bit ahead of plan but I think the last quarter the portfolio will be the most difficult to sell. I don’t want too optimistic at this point but it’s – we have sort of sold or accepted an under contract transaction for roughly half the portfolio.

Gordon DuGan

And I would just say that of the core portfolio Jonathan our expectations would be to hold that. We are going to hold that long term. It includes a lot of assets in California with $8 rent on Bank of America properties. They are probably three cap, two cap, four cap assets but for the time being we think they are great long term hold. You will be thrilled – I would have been thrilled if my parents had left me any one of those assets but they are the things to hold for generations, but we could achieve very, very low cap rates on those California assets.

Jonathan Feldman – Nomura Securities

And are you as confident as you were in the past that BofA is going to be staying on those assets not exercising termination rent.

Gordon DuGan

Yeah, they are – just to be clear that the lease allows them to only terminate a very small portion of the space going forward and we are confident that we are mission critical campus (Technical Difficulty) at the end if lease term. On some of those California and Florida assets it would be great if they left but there is no chance of it.

Jonathan Feldman – Nomura Securities

Got it, thank you so much for your time this afternoon.

Gordon DuGan

Thanks, Jonathan.

Operator

(Operator Instructions). At this time we have no further question, and I will turn the call back over to Gordon for any final remarks.

Gordon DuGan

Well, we kept everyone a long time this afternoon. I really appreciate everybody’s time and attention. Again we are always available if you have questions on how we can improve what we are doing. We really thank you for your continued support, and we look forward to the next call.

Operator

Thank you, ladies and gentlemen .This concludes today’s conference. Thank you for participating. You may now disconnect.

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