Gramercy Property Trust (GPT) is a self-managed Real Estate Investment Trust owning directly, and in joint ventures, various industrial, office, and specialty properties. The company also runs a successful asset management company that manages commercial real estate assets for third-parties including joint venture partners.
GPT's transformation from a distressed non dividend paying REIT to a successful triple-net-lease REIT is nearly complete. The investment merits of the company's common shares have been outlined in several Seeking Alpha articles over the past year (search GPT on the Seeking Alpha homepage) and the investment thesis in GPT has played out as expected with the shares advancing from under $3 to over $5 presently. The discussion on GPT has moved away from a question of execution (can management execute on the business transformation plan) to whether there is still upside in the common shares (see the most recent SA article on GPT: The Great Debate - Bull Vs. Bear on Gramercy Property Trust [Nov 27, 2013]. The company's financial health is no longer in question and with the REIT now posting positive AFFO in the most recent quarter, management has communicated their intent and demonstrated the company's ability to reinstate the common dividend during the first quarter of 2014.
GPT management has fallen over itself being transparent and any follower of the company over the past year can attest to the quality of GPT's real estate portfolio (see the most recent Investor Update presentation here). The company's large SG&A expense in relation to its small asset base while excess capital is deployed in income producing real estate is currently masking the current portfolio's cash generation capabilities. While GPT is now producing positive AFFO on its own (after accruing for preferred dividends), the company's portfolio would be worth significantly more as an acquisition target which provides us comfort that there is little downside to owning shares (common or preferred).
GPT's equity capital structure includes ~3.5 million outstanding preferred shares with a coupon of 8.125%. The Board of Directors elected to defer dividend payments on the preferred shares starting with the payment scheduled for 1/15/2009. We can see the steep drop off in the value of the preferred shares at the end of 2008, this issue traded under $2 at one point. As the new management team has implemented a new business plan and GPT demonstrates the ability to pay accrued and reinstate regular dividends on this issue, the shares have recovered to a level just below Par + Accrued Dividends, which brings us to our investment thesis.
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The preferred shares last traded at $34.10 which equates to a discount to Par + Accrued Dividends of 3.9% (or 5.5% of Par).
Management has indicated the accrued dividends will be paid either December 2013 or early January 2014 meaning holders of the preferred shares are currently owed $10.47 in dividends (and accruing) and will be left with preferred shares paying an above market rate coupon of 8.125%. Comparison to a couple of established net lease REIT preferred issues shows the GPT-PA issue coupon is ~2% above average with uncertainty around where the issue will trade price-wise and its ultimate yield once it's current.
We believe investor uncertainty around the pricing of this issue in regards to an appropriate yield and any tax considerations will dissipate once the accrued dividends are paid off and expect the GPT-PA trading price to settle at Par or above once current. The three possible scenarios post pay-off are:
If the discount of ~$1 persists, an investor buying shares at current levels will be left with preferred shares yielding ~8.5% on his or her cost basis with almost no risk of permanent loss of capital due to GPT's high quality real estate portfolio.
Shares Trade At Par
If shares trade around Par, an investor buying shares at current levels will be left with preferred shares yielding 8.125% and price appreciation of ~$1.
Shares Trade At A Premium
If shares trade at a Premium, an investor buying shares at current levels will be left with preferred shares yielding something closer to a market rate of 7-7.5% and potential price appreciation of $3-5.
In conclusion, the GPT series A preferred shares offer an attractive yield of over 8% on a go-forward basis. The upcoming catalyst of dividends being made current should provide the market clarity in pricing the issue and offer investors buying at current levels an asymmetric risk/reward situation of $1-5 upside over the next 30-45 days with little downside risk.