Gramercy Property Trust's (GPT) CEO Gordon DuGan on Q2 2016 Results - Earnings Call Transcript

| About: Gramercy Property (GPT)

Gramercy Property Trust, Inc. (NYSE:GPT)

Q2 2016 Earnings Conference Call

August 03, 2016 11:00 AM ET

Executives

Gordon DuGan - CEO

Benjamin Harris - President

Nicholas Pell - CIO

Jon Clark - CFO

Analysts

Scott Frietek - Bank of America Merrill Lynch

Craig Bibb - CJS Securities, Inc.

Ki Bin Kim - Suntrust Robinson Humphrey, Inc.

Mitch Germain - JMP Securities

James Bambrick - RBC Capital Markets

Daniel Donlan - Ladenburg Thalmann & Co.

Operator

Thank you, everybody for joining us. And welcome to Gramercy Property Trust's Second Quarter 2016 Financial Results Conference Call. A reminder, a supplemental for the call is posted on the company’s website at gptreit.com in the Investor Relations section under Events and Presentations. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this event is being recorded.

The company would like to remind 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-Q 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 measure most directly comparable to each non-GAAP financial measure discussed and a reconciliation of differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found in the company’s press release announcing second quarter earnings, a copy of which can be found on the company’s website.

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 your questions to two per person.

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

Gordon DuGan

Thank you very much. Good morning and welcome to our earnings call. I’ll be making references to the supplemental disclosure that we have on our website. So if anybody has a chance to pull that up or just jot down the page numbers, I reference it, you’ll see where the reference is. I am going to keep my remarks remarkably brief and normal this time. Joining me are Ben Harris, Nick Pell, and Jon Clark, who will all be making remarks as well.

There are three things that I want to touch on this call. The first is, we continue to benefit from strong earnings growth. The second theme I want to highlight is our accelerated execution of our business plan. And then the third is that our company is extremely well-positioned for future growth.

In terms of earnings, it’s pretty straight forward, core FFO was $0.21 versus $0.14, a 50% increase. AFFO was $0.18 versus $0.13 a year ago, a 39% increase even without the KBS promotes that Jon will talk about. There is still very significant growth in earnings for the company, for the quarter and we're very pleased with that.

The second thing, I want to spend little bit more time on is the accelerated execution of our business plan, which has a number of factors to it. Number one, dispositions. On page seven of our supplemental, you will see that between the assets that we've closed in sale and those assets under contract, it's nearly 1.4 billion of asset sales at a 6 9 cap rate with just over six-year average lease term. Ben will give more color on this, but obviously we've done very, very well. The markets held in very well on the disposition side.

And then if we take the other side of the coin on the business - one of the other sides of the coin on the business plan, on acquisitions on page six, Nick Pell will give some more color on the environment. But again of all the - if you just look at the total, 635 either closed, awarded or under contract at a roughly 7 cap rate with an average 12-year lease term. Again, the business plan is coming along extremely well. Dispositions are outpacing acquisitions as we've said. We've also described that as temporary dilution and - but both sides of the equation are coming along extremely well and we feel very good about that and again you will get a little bit more color on both of those.

The other thing was to significantly reduce our exposure to office. If you go to page eight of the supplemental, the piece that I find most interesting is our NOI on a pro forma basis for a fully invested companies, call it roughly 410 million. We've taken office exposure from 47%, down to 28% of the pro forma of the potential NOI in a very short period of time and so one of the main goals was to decrease office exposure without it being an earnings dilutive exercise, the disposition acquisition totals, I'd give you a good feel for that and then if you look at page eight, where we've taken the office NOI down to a 111 million out of 411 million of potential NOI, we've made very, very significant progress on that as well.

Our goal again is to get the company to a 75% industrial NOI business. We're well on our way to that and again Ben will talk a little bit more about that in a bit. On the leasing side also page 14, we've very effectively managed lease role and we'll continue to manage lease role, Ben will discuss the leasing staffs in a few minutes.

Couple of other areas so that I wanted to highlight, one is JV cleanup. We have reduced our equity investment on our balance sheet from 580 million to 145 million and then post quarter end, we sold the last two JV assets getting our equity investment down to around 105 million and that we were able to close basically the cleanup of the Duke JV, the cleanup of the Goodman Europe JV. We've made a tremendous amount of progress on the business plan of simplifying our JV structures. We want as few JVs as possible, but with the caveat that we think they are still appropriate where one, we can generate attractive risk adjusted returns on equity. Two, their assets, we don't want to own on our balance sheet. And three, we can earn management fees and promote. Europe would be a good example of an asset single dependent assets in Europe are good example of an asset class that fits all three criteria in our view. Where it doesn't fit those criteria, we are exiting JVs and you see the tremendous progress we made in the second quarter on that front.

The other area where we continue to execute is our third party management business. Our KBS contract contributed 14 million of promote. Now those are gross revenues, Jon will describe the net effect on our earnings, because you do have taxes and expenses related to that promote that means that the net affects much lower. But we were able to generate $14 million of promote on the KBS contract, it’s in its final year. We still have roughly 3 to 6 million of promote to come, we believe. And I think that the point that I would take away from, what we’ve been able to generate on the KBS contract is the tremendous operating platform that we’ve put in place at Gramercy. We're able to leverage that platform for our own assets and for others. We've said many times that we are, we run the businesses and operating business, not an asset aggregator. And I think our ability to generate significant promotes for others or to manage our own portfolio very effectively is a signal and a sign of that tremendous operating platform that we have.

Just two more points that I want to make. One, I think the company is extremely well-positioned for future growth. We expect to be a net acquirer on balance for the reminder of the year and especially in Q4. We’ll effectively finish the repositioning in Q3 of this year. I would say that we expect trough earnings to be Q3, because we’ve accelerated the business plan, the accelerated dispositions will have a trough effect on earnings in Q3. It all depends on our reinvestment rate. There is also another small effect to our earnings on the acquisitions side as we do build-to-suits, some of those earnings don’t come into place for two, three or four quarters and of the 354 million of acquisitions in Q2 of roughly 65 million were in a build-to-suit that won’t come into place until the middle of 2017, the earnings won’t - so there is an earnings depressive effect or what I'd guess, I would describe as an earnings lag on build-to-suit that I would ask investors to watch for.

But as we get into Q4, and we’re through the repositioning that will give us a chance to revisit the dividend, we will go into that period. We have with very low leverage today, we’re at 4.2 times net debt-to-EBITDA. That’s a pure low level of leverage. That gives us tremendous financial flexibility as we look to grow the company again. And the last thing I’d point out that I think makes us somewhat unique is because of the property focus that we have, we’re able to achieve true diversification across tenant industry. And that’s not available in my view to single tenant retail focused companies that aren’t able to achieve the same tenant diversification that we are again across industry.

And on that point, we just finished an exhaustive tenant-by-tenant credit review. We feel very good about credit quality; we did not see a deterioration in our credit quality. We happened to have no defaults at the moment, obviously that isn’t some that lasts forever, but it is a sign of the relative health of our tenant base. And I would just say that we also believe and time will prove this out in our view that loss factors will be lower on industrial single tenant assets than in single tenant retail assets, where there are credit defaults. Again, our credit base is in very good shape right now and we’ve just done an exhaustive review of it.

The last thing, I'll touch on very briefly is Europe, especially post-Brexit. I’ve had a lot of questions, we’ve all had a number of questions about what’s going on in Europe. In the UK to start with, we have roughly $45 million of capital exposure. Those are in three Goodman JV asset in the Coventry building. Interestingly, post-Brexit, we have two leases, one final and done, one is in the process of being signed. The first leases on our Coventry office building, we have inked a new lease on that building post-Brexit. It was a 12% increase on the existing rental that the asset, the existing rent level the asset had previously. It’s a re-lease of the asset. We plan to put it into the market to sell in September. We also are in the process of signing a lease on one of the Goodman JV assets. It’s the Rugby asset. We expect a 16% increase on the existing rental level that’s a renewal. And then we will also sell that asset into the marketplace hopefully starting in September. That will leave us with two assets in the UK. One, we expect to renew and sell this year. The other, we expect to take longer to release and sell, but that will take us into '17, hopefully with just one UK asset and a really minuscule exposure to the UK.

I don’t want to spend a lot of time on the Brexit situation just because we have so little capital exposed to it and we are about to have much less capital that we don't spend a lot of time worrying about it. But as of now logistics assets are considered defensive and have not yet had a significant impact from any Brexit.

Turning to Gramercy Europe, we have roughly $60 million of capital exposed there. Again, very little of our capital base. And again, these are primarily logistics assets. 50% of which are in Germany and 90% of which are in Germany, the Netherlands and France. Since Brexit, sovereign yields have compressed, BBB corporates on the continent have compressed, which should be a positive sign for single tenant long duration property assets like ours. I would say that the reason we continue to like the business is that we are generating 6% to 7% plus asset yields in environments where the long-term fixed rate borrowing rate is less than 2%, again that's fixed rate borrowings and we think there will be substantial capital available for the business either through an IPO or other capital raises in 2017.

But I would also say what would change our view about Gramercy Europe is one of two things, and causes to look to exit Gramercy Europe. One is, if we have a strategy that we don't believe we can raise significant capital around and meaningfully impact our earnings. If it's a niche business that does not raise significant capital that's not a great interest to us. And then the second thing that would change our view of Gramercy Europe is if we felt that the Euro currency itself was unsustainable. And those are my brief comments on Europe post-Brexit.

Our continued focus will be on execution, keep ahead of our plan, finish the repositioning and begin to grow by Q4 of this year. Again, we believe we're extremely well-positioned to do so to begin to play offense again in the remainder of this year and certainly in Q4 and grow the business and we're doing it from a standpoint a very low leverage and tons of liquidity.

So with those comments, I'll turn it over to Ben Harris, our President.

Benjamin Harris

Thank you, Gordon. Let me begin with a quick overview of the portfolio. Our portfolio today totals nearly 55 million square feet with 40% of the rent generated from investment grade tenants in a wide range of diverse industries and with more than 80% of the rent from assets in our target markets. This is a very important differentiator with respect to our strategy.

We ended the quarter with occupancy across the portfolio of 98.5%, nearly 60% of the portfolio in industrial assets and that will be nearly 70% when we finish the expected dispositions and reinvestment proceeds. We continue to make great progress towards repositioning the portfolio. During the quarter, we sold four office assets for $166 million, having additional $365 million and assets under agreement for sale, and another $180 million in assets currently in the market.

With the sale of those assets, we have sold $1.6 billion in assets at an average cash cap rate of 6.9% and will be through the bulk of the disposition plan. We will likely continue to sell select assets as we reposition them through the balance of the year and into next year. But I would expect us to be a net acquirer of assets going forward rather than a net disposer of assets, which we have been through the first half of this year.

During the quarter, we also sold the Goodman Europe JV assets to our European vehicle and initiated the resolution and wind down of our Duke JV, which we completed subsequent to the quarter end with the sale of a final asset to a third party.

Just touching on same store sales, if you look at page 24 of our supplemental that gives the statistics. But for the quarter, our industrial portfolio generated a 1.8% same store sales NOI growth, and our office portfolio experienced a 0.8% decline for total U.S. portfolio same store sales, cash NOI growth of 0.6%. The drop in office same store sales was largely due to assets we currently have in the market or it's been awarded to buyers. If you look at that cohort as a standalone group that cohort had a negative same store sales NOI of approximately 3.9% and is in large measure due to free rent under several large office leases and lease renewals, which we executed during the period in preparation for the sale of those assets.

Beginning this quarter, we've started to breakout same store sales for assets under redevelopment or repositioning. This is in an effort to give investors a clear picture of the NOI impact from the previously announced repositioning of the Jacksonville campus, which we now call Gramercy Woods and other similar transactions that we may undertake in the future. Under the Gramercy Woods restructuring, we made a deal with Bank of America to remove Jacksonville from our existing master lease and extend the term for 15 years on the bulk of the space in exchange for letting them out of 366,000 square feet. We've proactively signed leases with new tenants for 240,000 of that vacancy at an average leasing spread of more than 17% and expect to lease the remaining vacancy throughout the balance of the year. We believe this transaction created significant value. However, it will cause some noise in our financials as you saw on Q2 and we will continue breakout Gramercy Woods in leasing metrics and same store sales numbers in order to give investors a clear picture of the activities around that asset.

Just quickly on leasing statistics and CapEx, this is slides 28 and 30 in the supplemental. During the quarter, we generated a cash ABR leasing spread of 6.9% on commenced leases and a straight line or GAAP ABR leasing spread of 10.9% with tenant retention of more than 80% and an average lease term on commenced leases of nearly 14 years. Year-to-date, we've proactively extended leases on approximately 1.7 million square feet for ABR of approximately $20 million extending the weighted average lease term of back group of leases by nearly nine years. Now it's done with the cash leasing spread of more than 15%. I think that is a singular statistic to emphasize the point Gordon made earlier about the breadth and capacity of our platform.

For the quarter, we had revenue maintaining CapEx of approximately $6.5 million, the largest components being tenant improvement allowance and leasing commissions for two large single tenant office leases, which we renewed and a large office lease signed in a multi-tenant building and all three of those assets are currently in the process of selling.

In addition, we have leasing commissions due under two large leases in their Gramercy Woods campus. We expect to have height levels of CapEx during the balance of the repositioning plan and also due to the repositioning of the Jacksonville campus. However, as we complete these repositionings and dispositions, we expect CapEx to normalize to levels more closely reflected in our reserve method outlined on slide 30 of the supplemental.

With that, I'm going to turn it over to Nick to talk a little bit about the investment environment.

Nicholas Pell

Thanks, Ben.

The day-to-day industrial acquisitions environment remains generally unchanged for us when we last spoke in May, albeit a 19-year treasury that's about 20-25 basis points tighter continuing to fuel capital inflows into core real estate across the U.S. We closed $355 million of deals in Q2 with the initial cap rate of 7 3 and a straight line cap rate of 8.2% and a weighted average term of 12 years. We remain on track to meet our annual acquisition target of $1 billion based on our current pipeline for Q3 and Q4 with an additional $228 million of transactions already closed or under contract to close this quarter.

If the aforementioned deal is closed the year-to-date deal volume would be $635 million at an approximate cap, initial cap rate of 7% and the weighted average term of approximately 12 years. We continue to invest in high quality locations with over 90% of this transaction volume taking place within our target markets. We've spent the last few quarters increasing our efforts in aggregating smaller infield portfolios in some of the country's largest industrial markets like LA and Miami continuing with our core investment theme of investing in good real estate that happens to be not leased. We have approximately $700 million of LOIs in the market and continue to compete favorably on deals that fall outside the scope of the persistent pressure of core capital within our target markets. And we're going to expect to finish the year strong based on what we're actively pursuing in the marketplace today.

With that, I'll turn it over to Jon.

Jon Clark

Thanks Nick.

There is so much content that's in our press release and supplement that we put in our website this morning. I'm just going to hit on some of the larger items that affected 2Q and just really point you to the website for additional items.

As this was described very active quarter, some sizable transactions that really had a direct impact on the financial statements this quarter. And I'll just summarize those quickly, but I'll point you also to the press release where we added the chart so that you could see these significant items and the impact of those items on GAAP income, FFO, core FFO and AFFO, which really AFFO being the least affected by these items and probably a best comparison to prior quarter results.

So as Gordon described, overall these are all reduced some of the complexity on our financial statements going forward, but added quite a bit of noise this quarter. I’ll just go in order of size.

First of all, the incremental incentive fees earned in our asset management business. We earn incentive fees on the managed assets based on achieving a value over a strike on a portfolio-by-portfolio basis. During the quarter, there was just a tremendous amount of sales activity that the team completed for KBS, our client, and we recognized 4.2 million in total incentive fees, 14 million of which related to the U.S. asset management business and the remainder was related to Europe. That compares to incentive fees in the first quarter of about 1 million. The additional revenue was offset by a direct expense, as Gordon described before, that totaled 4.3 million and that included tax expense. So the cumulative contribution from the incentive fees this quarter was 9.9 million to net income, positively affecting GAAP income and all of our non-GAAP measures by $0.02 a share.

This is revenue that we largely expected in 2016, but the sales volume was just moving faster than we had thought, as the management team did a great job executing on sales and the revenue which primarily hitting us in second quarter.

Next we have two transactions that happened right at the end of the quarter, resulting in GAAP gains and adjustments for second quarter. For the Duke JV as part of the dissolution of the venture, seven assets were distributed to us and we recorded a gain of about 7.2 million on these assets and that gain represents basically the adjustment to restore the carrying value of the assets, which were previously recorded on the equity method back to the fair value of the assets, once they were consolidated on our books when they were distributed to us.

Additionally, related to Duke, we’ve recorded a loss on extinguishment of debt for 1.4 million. This was for two secured debt instruments that we assumed in connection with the assets transferred and we immediately extinguished bad debt with cash on hand. The Duke JV dissolution added $0.01 to GAAP income, but these items had no real effect on FFO core or AFFO.

After the distribution of these assets whereas the end of the quarter, there was still one remaining property in the Duke joint venture, which you'll see on the face of the financial statements in the joint venture line. That asset was sold in July. We received our share of the proceeds which was about 41.1 million and that pretty much approximates what our carrying value was in the joint venture, so essentially the last asset will get sold with minimal gain or loss in 3Q.

Next, moving on to the Goodman Europe joint venture sale to Gramercy Europe. This also resulted in an accounting adjustment, that resulted in a gain of 5.3 million or $0.01 per share for GAAP income. And again no effect really on FFO core or AFFO and this essentially was similar to Duke. It is an adjustment to bring assets that were previously recorded on the equity method back to essentially the fair value that was the result of the transfer to Gramercy Europe and that fair value adjustment also included any foreign currency gain loss.

And then finally that brings us to the Jacksonville ops campus as Ben had described, which is now called Gramercy Woods. So in connection with the new lease agreement with the bank and the space that was vacated this quarter, we wrote off below market lease intangibles, which increased GAAP income by 5.5 million. We also wrote off what is referred to as the in-place lease intangible, which represents lease in commissions and essentially tenant improvements on the vacated space and that increased depreciation and amortization expense by about 5.4 million in the quarter.

So net the items for the repositioning posted in the second quarter had little impact on GAAP. It did increase FFO and core FFO by 5.5 million, which is about $0.01 and it had no effect on AFFO, our AFFO adjustments are reduced by intangibles. Some of this noise is going to continue in the third quarter. The new lease for the Bank of America space that Ben described commences on October 1st. So there'll be one more quarter of some intangible adjustments in 3Q. And by 4Q, the intangibles will be normalized.

Really quickly just a few things on the income statement, just to roll for the income to include the one-time items. Total revenue was $139.4 million, incentive fees included in that were $14.2 million compared to $1 million in prior quarter. And that repositioning of Gramercy Woods added about $5.5 million to total revenues. Property operating expenses were pretty flat. Property management expenses were up slightly due to increased cost related to the incentive fees that I described before. G&A for the quarter was $8 million compared to $7.7 million in the prior quarter very comparable and acquisition cost, you'll see on their higher than first quarter, but reflected basically a higher volume of that acquisitions including as well building portfolio.

Interest expense was $16.9 million for this quarter compared to $21.9 million in the prior quarter. $2.5 million of this was a reduction related to a reversal of a mark-to-market charge on our hedges. During the quarter, we did amend our term loan, so the hedges would be more effective and going forward mark-to-market noise on our hedges, on our P&L should be minimal. The remainder of the decrease in interest expense just reflects a lower average debt balance for the quarter compared to the prior quarter.

And finally on our income statement tax expense was $2.7 million primarily related to the incentive fees, but now due to the size of the growth of the REIT after the chambers merger. We're able to do more of this asset management fee business inside the real estate investment trust rather than the taxable subsidiary. So going forward, this will give us a much more favorable tax position.

Just real quick, I was going to point out just a couple of things on the balance sheet. When you look at our balance sheet, there is a sizeable cash balance, the cash balance reflects the $149.3 million in net proceeds that came in from the Goodman Europe sale, which happened right at quarter end. Restricted cash, I would point out has $42.9 million of cash sitting in escrow from property sales in connection with lifetime [ph] exchanges and that cash was available to immediately deploy into subsequent acquisitions. Gordon pointed out the change in the JV balance earlier and I would just say that there is a schedule in the supplemental that provides the JV detail by investment.

And then finally, the last thing I wanted to just point out is that you'll probably notice there is increase in accounts receivable. And a bulk of that increase is essentially the incentive fees that we recorded. Those incentive fees earned during the quarter contractually won't be paid to us until later in the year.

Overall, our collections have been really good, not seeing any issues with collections on tenants. About $30.4 million of our tenant receivables is straight-line rent receivable and with the regular the remaining balance is just regular receivables too. That's really all I had.

Gordon back to you.

Gordon DuGan

Thanks very much, Jon. With that, we'll turn it over to questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Ki Bin Kim of Suntrust. Please go ahead.

Ki Bin Kim

Thanks. Good morning, everyone. Gordon, can you talk a little bit more about the credit quality review that you guys undertook. What is the scope of it? How did you gauge credit quality especially for industrial tenants and maybe some color on that?

Gordon DuGan

Sure. Yes, thanks Ki Bin. Good morning. We did a tenant-by-tenant credit review something that we do periodically typically quarterly. At this time, we did it with maybe a little bit more attention to potential slippage of credit given a slowing economy and certainly with other net lease related companies focus on single tenant retail, where concerns are increasing around credit quality, wanted to make sure we had a good handle on where we were.

So, our review is tenant-by-tenant full financial review. We review their financial statements and review their property use, has there been any change and their use of the property. But the primary focus is on the credit of the company, how is cash flow generation and how our earnings? What's the balance sheet look like? And there was almost very, there was very little change in credit quality, a couple went up, a couple went down; nothing into the dangerous level. And nothing that was significant surprise. So, I would say that overall, the credit quality is exactly where we thought it was, right on where we have our own internal scoring system and things were basically unchanged from the quarter before. But we wanted to make sure we did an exhaustive credit review to get to that point. That doesn’t mean we don’t have a couple of small tenants that we have on the watch list or other companies that we keep an eye on. Because we do, but we didn’t see any deterioration in credit quality across the portfolio in the quarter.

Ki Bin Kim

And what percentage of your tenants that you do this for, is it for all of them? Because I imagine some of the smaller ones might be hard to get their financial data from?

Gordon DuGan

We do a review, it’s a full portfolio review. We do have some tenants that we don’t get natural reporting under the leases. In those cases, we try to look at whatever publicly available and what we have. And also, it was definitely over 90% of our rental.

Ki Bin Kim

Okay. And just second question, could you - you guys mentioned some build-to-suit activity, can you just remind us that’s not, you don’t take on the development risk, right? Use a third party for it?

Gordon DuGan

Yes, exactly. We have a typical build-to-suit arrangement that we - we actually pioneered that back at WP Carrier, I worked in my first on in 1991. And we have a third party developer contractor that’s on the hook for construction cost and typically overages. And then we have a tenant for 100% of the building and we have two underway right now. One in Austin and one Chicago. The one in Chicago was closed in the second quarter and the reason I brought it up is while we did 350 million of acquisitions for Q3 of that 350, if you have to deduct out the 65 build-to-suit because that will not be generating while its closed and papered, it doesn’t generate earnings in Q3, because it’s a build-to-suit that we won’t receive. In that case, it’s a takeout contract that we expect will begin in Q3 of next year.

Ki Bin Kim

Okay. All right, thank you.

Operator

Our next question comes from Scott Frietek of Bank of America Merrill Lynch. Please go ahead.

Scott Frietek

Great. Thanks and good morning.

Gordon DuGan

Good morning, Scott.

Scott Frietek

Appreciate the color on Gramercy Woods. I was just wondering if you guys could discuss any other significant vacancies across the portfolio, that might have led to the occupancy debt in the quarter? And if so, the prospects to backfill.

Gordon DuGan

The occupancy dip was more just the fact that the denominator is going down. But the - our largest vacancy right now is industrial building, it's a little over 300,000 feet in Minneapolis. We had a vacant building, a 100,000-foot industrial building in the Charlotte market that’s subsequently leased and then some very small scattered vacancy in our South East portfolio in the Spartanburg market. And then we have some at New Jersey building, very small office building that we move the tenant out and we’re repositioning and then we mentioned the vacancy in the Gramercy Woods portfolio.

Scott Frietek

Okay, thanks. That’s helpful. And then in terms of near-term explorations for, I guess the back half of the year and then into ‘17?

Gordon DuGan

If you flip, it’s page 10 of the supplement. Slide 14, this is our year-by-year lease maturities by property type, so you can see that we’ve addressed over 80% of the 2016 renewals and roughly two-thirds of the ‘17 renewals. Some color Scott, I think we’re in great shape on the remainder for ‘16. We’ve got a couple of deals we’re extremely close on - report this morning and walk down the head of our asset management’s office 11 times yesterday. But we’re really close on a couple of things there I'm in the category of I'm superstitious so until I think I don’t count it, but we’re really in good shape on the remainder ‘16.

We’re in very good shape for ‘17, we have one big industrial roll earlier in ‘17 that we’re working on so quite say outside in the Southeast we’re already touring people through but there is some vacancy that we’re addressing but we feel very good about it and no particular worries other than blocking and tackling across the portfolio, but ‘16 we’re in great shape on I think I'm hopeful by Q3 that we basically report no new vacancies, but those things aren’t in inked yet, so even though I hope they would be by today.

Scott Frietek

Okay, perfect. And finally, just on any potential changes to strategy in Europe? Could you just provide an update on potential timing for the Europe IPO?

Gordon DuGan

Yeah, we - after Brexit my initial reaction was will there goes any potentially with Europe IPO? And what we’ve seen and what the feedback we’re received Continental European stocks have held up, property stocks have held up reasonably well. Given our strategy of long duration single tenant assets in Germany, Netherlands, France, we have received very good feedback about what it could look like for an IPO in early first half of ‘17.

I'm cautious on it just because there’s still a lot of moving parts in and I think that there’s a decent possibility to open IPO in the first half of ‘17 and the types of assets we own, income producing, long duration single tenant assets should be in favor for lower longer world. And that strategy has not changed but I did outline a couple of the things that would cause those to change our strategy one we don’t believe it can be significantly larger or two, we lose safe in the Europe currency and the volatility that gets introduced in that case.

Scott Frietek

Okay, that’s it for me. Thanks guys.

Gordon DuGan

Thanks, Scott.

Operator

Our next question comes from Craig Bibb of CJS Securities. Please go ahead.

Craig Bibb

Hi, guys. I guess this is a question for Nick. It looks like the acquisitions are following the quarter are pretty aggressive cap rates, so kind of why is that the right price and how difficult is it to find industrial properties that caps about 7%?

Nicholas Pell

I think it’s - our range in cap rates deals that we’ve closed this quarter ranges - or this first half of the year is 6% to 9.5%, so it’s a pretty wide range. Every deal had its own risk return parameters. I think we still feel confident in our ability to deliver our acquisition targets for the year at the levels and cap rates that we’ve sat out on any given transaction and maybe a lumpy, a tighter cap rate here and a higher quality location or higher quality building or tenants whoever is driving the lower risk profile of the asset, but on a blended basis we still feel confident that we can go out and find enough deals to deliver our targets.

Craig Bibb

Okay, so the fact the most recent deals are at the lower cap rates, it’s just lumpiness that…

Nicholas Pell

I wouldn’t read into it, it has to do with specific deals characteristics and not overall trend.

Craig Bibb

Yeah, okay. And then just back to Gramercy Europe for a second, the spreads you laid out are really attractive there, but Gordon said it was a little wary of whether it’s going to be possible to actually raise enough capital to pursue that, do you have to do an IPO, I would think there is capital around?

Gordon DuGan

No, we don’t, it’s a very good point Craig. We don’t there is capital floating around and we just needed to scale and get bigger and for it to be meaningful and I just I want to caution that we needed we wanted to be meaningful if it’s not meaningful we won't continue to do it. But the spread is the attractive part it's the best spread anywhere in the world today.

Craig Bibb

Okay, and then one last tiny question. Can you give us the same store NOI for retail I assume?

Gordon DuGan

We just haven't owned we haven't own those assets for year-over-year comparable period. So they are excluded from the same-store sale because you can't. We don't have anything to compare them to. Our lease is it's a five-year bond, so it will flat for five years and then have an escalation a cumulative escalation and then last for five-year cumulative escalation so won't. It won't be tremendously exciting.

Jon Clark

Yeah, and in every five years we get a 10% increase in the rent.

Craig Bibb

Okay, great. Thanks a lot guys.

Gordon DuGan

Thanks Craig.

Operator

Our next question will come from Mitch Germain of JMP. Please go ahead.

Mitch Germain

Good morning, guys.

Gordon DuGan

Hey Mitch. Good morning.

Mitch Germain

Good morning. Are there any - maybe for Nick any specific themes that you guys are thinking about how with regards to acquisitions maybe target markets, e-commerce trends anything that you guys are specifically focusing here?

Nicolas Pell

Yeah, one of the themes that I touched on briefly in my remarks is, we've been looking at infield buildings and it relates to the e-commerce trend and the push for people and companies to be closer to population centers and just in time delivering and matching Amazon's huge push from that standpoint. So we are buying, be building in top five primary markets. And those may come with smaller tenancies or smaller size tenants and other risks we may be taking, but very high quality buildings, very releasable, very strong user sales that back up our investment thesis there. So that will be one.

I think we're also continuing to be sensitive to lease term and buying lease term around the country. It's a defensive position vis-à-vis market cycles to have long lease terms in your portfolio, something we believe in dramatically. So we are going to be picking out certain population centers that we think are very strong demographics and looking at those locations. We have a deal expected to close next week in one of those markets that we're bullish on. So yeah, we are kind of try to find certain pockets of relative value and waiting to pick our spots there based on the opportunities set.

Mitch Germain

Great. And then where do we stand on the disposition program. I mean you guys are at $1.6 billion or so with everything under contract LOI closes. How much more is left in your mind?

Gordon DuGan

The only stuff that's left it's largely what I would call value add assets that you want to take through some sort of value add spread either a lease extension or a lease restructuring or repositioning and then a sale. And so those assets that will be a normal course activity for our portfolio going forward. I would consider that the disposition plan largely complete at the end of that $1.6 billion. Going forward, we will likely be a seller of $100 million or $200 million of assets per year going forward. But we'll be slipping into being much more net acquirer than the net seller.

Mitch Germain

Great. And then the last one from me maybe Gordon. I know you're spending a lot of time in Europe and working with that entity. How would you characterize the pace of investment, seems like things are just moving a little bit slower than you originally planned? Is that a good way to characterize it?

Gordon DuGan

Yeah, I would say two things. I would say that the pace of investment is slower than we originally had hope. The yields are right on where we had hope the quality of the assets maybe even little better than we had hope. But the pace has been slower. And I would say that initially I spent a very decent amount of my time as we were setting up the operation. I'm not spending as much time today on a day-to-day basis because we have the team up and running. We have a fully staffed team both on the investment side and the asset management side, and I'm a little I faced a little slower than I would like.

Mitch Germain

Just for me. Thanks.

Gordon DuGan

Thanks, Mitch.

Operator

Our next question comes from James Bambrick of RBC. Please go ahead.

James Bambrick

Hi, guys. Good morning. Could we go into more detail on how the Duke JV properties were distributed? Did any equity change hands or did we go evenly?

Nicholas Pell

The way we did we came up with agreed upon values for all of the individual assets in the portfolio and then we took all but two of those assets Duke took one of those assets, there was a very small cash true up to make the numbers set allowed and then we agreed to sell the final asset which you already then a contract to a buyer and then the solution payment was made based on that. Duke had a carried interest in the portfolios that they had, promote that they reduce so that the final day solution payment was adjusted based on their promote payment. But the only cash that changes hand with this small settlement to true up the numbers on the initial dissolution. I think it was Jon $2 million?

Jon Clark

$2.5 million and $2 million.

James Bambrick

Okay. And then there is no promote on your gazette side? Is that transaction is all KBS?

Nicholas Pell

This was a legacy Chamber Street JV and Duke with manager. So Duke Chamber Street on 80% of the equity, Duke on 20% and Duke was the manager and was odd fees and promote under dollar management. As Gordon mentioned earlier that our plan and to the extent we use utilized JVs, we want to be the operator and get paid fees and promote and so we've been unwinding all of these legacy JVs where they were Chamber Street legacy JVs that where they were the essentially the capital partner and paying other people fees and promote.

James Bambrick

Okay, make sense. And then on the property management side of things for you guys with KBS winding down and Gramercy Europe not being as big as maybe expected, are you looking for additional opportunities to leverage in the platform?

Gordon DuGan

I would say that we're always open minded if there were opportunities that fit that kind of that pattern I mentioned interesting returns on risk adjusted basis assets we wouldn't own on our balance sheet and a place where we can earn fees and promote. So we've done it from time-to-time we had a small contract with Oak tree we've got on other assets from time to time. And yeah, we are always on the lookout for opportunities. We don't want to overcomplicate our income statement more than amount of activity does. So, we're wary of the way we just do it. But if something were to fit those three criteria we would be open minded.

James Bambrick

Okay, great. And then last one for me. Your full year guidance the range is still pretty wide. I was wondering what factors are driving that uncertainty?

Gordon DuGan

Big factors just the timing of new acquisitions. If even on a quarterly basis we have sold 25% of our asset base this year and then we are reinvesting call it 15% of our asset base if we close on a $1 billion and the timing within the period make such a big difference on a quarterly basis as we all know. So it's really just even if we do 400 million of volume Q3 and investment volume that all closes for last two weeks. There is zero Q3 earnings power from those assets basically. So it's just the timing thing and it is pretty wide and we ask people to hang in there with us. But again they are on a lot of REITs that are selling 25% of their asset base from the beginning of the year and then buying 20% of their asset base once again.

Nicholas Pell

We have 550 some odd million dollars at dispositions in the market right now. The timing of those dispositions also impact to the extent we sell them earlier in the period it depresses these earnings more in that period versus later in that period.

Gordon DuGan

Yeah, and while we’re reiterating guidance obviously the acceleration of this position puts more pressure on earnings and then acceleration of the investment puts up the pressure. So, we’re actually for people to hang in other quarter, while we get that clarity.

James Bambrick

Okay. So then you still feel good about the acquisition pipeline through the end of the year, but just don’t know that’s going to triple in to next year or may be end of this year?

Gordon DuGan

Yeah, and if it all happens waited toward the end of the year then we don’t get the earnings power until next year.

James Bambrick

Okay, thanks very much guys.

Operator

Our next question comes from Karen Ford of MUFG [ph]. Please go ahead.

Unidentified Analyst

Hi, good morning. As you guys are working on ‘16 and ‘17 explorations, what are the prospects for rent spreads going forward? And can you just talk about why the industry leases that you guys did this quarter had negative rent spreads?

Gordon DuGan

I’ll touch briefly on ‘16 and ‘17 office explorations. The, I have mentioned at the last call that we have nature office explorations occurring in ‘16 and ‘17, at the beginning of the year as we looked at ‘16 and ‘17 we had eight major lease explorations. We’ve managed, six of those have been released. Two of those have been closed to being done. The six of have been at a higher ABR than the prior rents. So we had a positive leasing spread on those six. And the two that remain to be done, we expect the higher a positive leasing spread on those as well.

So, we think the, one that the biggest concerns at the announcement of the Chamber street merger was office lease role and near term office lease role and I think we’ll be through that in very good shape in ‘16 and ‘17 on wood. Those two final lease deals are not done. And so until they’re done I think talking about them any more than Karen. And so again, I think on the office side, it’s been very good, really reflecting the fact that there is been no supply of class A office buildings in the sub urban markets that these assets are in, in California, Florida and Minneapolis and Dallas et cetera.

And also reflecting the fact that these are high quality real estate assets. On the industrial side, I’ll let Ben take a shot at it.

Benjamin Harris

Yeah, I don’t think there was any real trend, leasing spreads have actually been pretty good across the industrial. It’s a very small cohort that you’re talking about. The, there was one lease that we extended and in exchange for a small rent break in the Philadelphia area. I think that’s the only one that comes to mind as being significant that wasn’t, it wasn’t material.

Unidentified Analyst

Okay, thanks for the color.

Gordon DuGan

Yeah, our expectation is good leasing spread from the industrial this year.

Unidentified Analyst

Got it. Second question, just for you guys planning to establish ATM facility. I know obviously that the EBITDA is very low, I just wanted to get your thoughts on how you think about using the ATM going forward?

Gordon DuGan

Yeah, the first thing I’d say is that we don’t have one today old Gramercy had one that we had utilized from time-to-time and because through the merger acquisition of Chamber street, Chamber Street with the legal survivor, we lost our ATM. So, I would say that this is kind of a normal way put the ATM back in place. Now I would also say that with the recent run in stocks, we’ve gone from a company that announce, last quarter that we were putting a stock buyback and didn’t buy any stock buyback, because the stock ran as faster than we could buy any of its back. And so, at current levels except for the fact we don't need to, because we have lost the liquidity and a ton of capacity. So we thought we put one in place and we'll look to use it from time-to-time nothing imminent on that.

Unidentified Analyst

Thanks. And then just one last one. Obviously you did some great leasing at Coventry. Can you just talk about by your appetite post-Brexit for Coventry and Goodman UK?

Gordon DuGan

Sure thing. So Coventry is the weaker [ph] of the building, it's an office building in the secondary city in the UK obviously in Coventry. The lease activity was strong. We leased it National Grid and the National Utility in the UK that's also expanded outside the UK.

Expectation on pricing is 8% to 9% cap rate on that asset. It's the smallest of our UK assets thank goodness because that's not great cap rate, but that's where we expect it to go. The three Goodman assets are higher quality assets in the Coventry building. I spoke with our partner about expectation, their expectation is that they expect the Rugby asset which we are finalizing the lease renewal on hopefully this week to trade below 6% cap rate and the two remaining logistics assets to trade I would say on the somewhere around 6 as they get leased and then sold. And I think it reflects that logistics are still a price asset class globally but in the UK they're considered more defensive than retailer office. And we haven't sold any of them yet so that's our expectation. I would say that Goodman's view that they could see price widening by 25 basis points but that they also wouldn't be surprised if we were right on top of our pre-Brexit expectations.

Unidentified Analyst

Great. Thanks very much.

Nicholas Pell

Just to go back to your earlier question. That $255,000 fee industrial that was just that single building in Pennsylvania that I mentioned.

Unidentified Analyst

Got it, okay.

Nicholas Pell

It was an asset that we proactively extended. It was an 11-year lease that we cut a deal with the tenant to extent to 15-year lease in exchange for a small rent concession.

Unidentified Analyst

Make sense. Thanks.

Nicholas Pell

Thanks Karen.

Operator

Our next question comes from Dan Donlan of Ladenburg Thalmann. Please go ahead

Daniel Donlan

Thank you and good morning. Just wanted to walk through the amortization market lease intangibles one more time with Jon or Ben. It went from $4 million to $9 million. And I think if I heard you correctly you said it's going to drift back to kind of that $4 million or $5 million range in the fourth quarter given what's going on at the Gramercy Woods project is that right?

Jon Clark

Yeah, Dan, this is Jon. And in the third quarter actually you're going to have about another $4.5 million of intangibles the lease commencement for that new Bank of America space starts October 1. So we finish that we're going to hyper amortized that below market lease intangible from the date the lease was signed until the day it commences. So it's about $4.5 million that will come in 3Q with the intangibles we got.

Daniel Donlan

Okay. So is it going to stay around that $9 million level for the second quarter?

Jon Clark

After 3Q then this noise will be done. I would say actually for the rest of the year overall your below market lease intangible is going to exceed yours in place by about $4.9 million. If you go, we'll be filing the 10-Q Dan, expect tomorrow. If you go that chart that we put in the 10-Q, which is generally in my footnote see you should be able to see that.

Daniel Donlan

Okay, perfect. And then are there any remaining incentive fees and guidance or are you anticipating would you anticipating the rest of the year there?

Nicholas Pell

No, the $3 million to $6 million gross incentive fees of incentive fees. The hardest part to anticipate is timing. We knew we would receive substantial incentive fee income this year. we did not think it would hit us quickly as Q2, as Jon mentioned or what's going to mentioned, I can’t remember if he mentioned it and but we do expect another roughly 3 to 6 million of gross incentive fees through the end of this year.

Gordon DuGan

And just to remind you how the incentive fee structure works, each individual asset or portfolio have its own promote structure and the biggest driver to this quarter’s activity was one of the largest set portfolios, portfolio we call BBD2 as we’ve successfully sold through a portion of that asset it put us into the promote for that portfolio so it was a fairly big component of it and with the reason that those big recognitions in this quarter.

Daniel Donlan

Okay. And then looking at page 30 with the CapEx you’ve got this build-to-suit in there for revenue generating if I took that out and I kind of look at the revenue maintaining, revenue generating, when does that start to look a little bit close to what the reserve is going to be I mean obviously the reserve has come down as you campaigned a pair back the office and your maintaining as well as generating has come down as well as you’ve kind of done the heavy lifting that you needed to do, but is that something where obviously it’s going to be different quarter-to-quarter but is that some, when do you think that kind of starts to look close to one another is that kind of a 2017 event or do we have to wait for 2018? Just kind of curious there.

Benjamin Harris

See, I’ll answer that in two parts. The Gramercy Woods asset will have significant CapEx through the middle of next year so that’ll be a component that you should expect CapEx related spending or constructing a structured parking garage and doing tenant mortgage, we move those tenants in. the balance of the portfolio I would expect to look more normal and more consistent with the reserve method. I would say beginning to middle of next year as we get through the rest of the dispositions.

What’s happening and what has been driving the CapEx for the first half of this year, we’ve been proactively extending leases to make assets more sellable and when you do that you end up incurring leasing costs and TI dollars and until we get through and sell most of these big office leased assets the elevated CapEx or the elevated leasing activities will drive CapEx up.

If we were to just hold all these assets in, if we just owned the static office portfolio we wouldn’t be pulling all that activity forward and so this activity would be spread out over a longer ownership period so you wouldn’t have these sort of abnormal spikes.

Nicholas Pell

Yeah I would think Dan, I’ll be a little more optimistic Q1 of ‘17 I think as Ben correctly pointed you have to kind of do pass a portfolio and hold them see what’s aside. But for the rest of the portfolio I'm hopeful Q1’s pretty clean.

Benjamin Harris

I was trying to give you something that I could outperform.

Daniel Donlan

Yeah.

Benjamin Harris

For ones who play closer to the line.

Daniel Donlan

Right, right understood and then as far as the billion dollars this year I mean you’re close but you still probably need a couple I think like 350 million or something like that. If you do fall short is it because you need a big portfolio or a large sale lease back or do you think you can get to that billion just granularly?

Nicholas Pell

Yeah I think we feel confident we can still get there granularly. I mean the way we invest in the market we’re price checking the market all the time. We’re walking away from deals that we don’t feel are priced appropriately and making sure we’re not making markets across different geographies and so I think as part of that there’s - it’s process and it takes a while, but we still feel very confident in our billion dollars.

It is as you point out, little over $350 million we get there, we’ve got a lot of - out in the market very, very far and long and a few of them and look it’s selling off these buildings it costs more, it’s easier to sell and to buy generally, it’s easier to move dollars out selling office and buy industry because they’re smaller and that’s why you see it going slower I think. But we still feel very confident in our ability and we are we got a lot of momentum across the country with the team and I think chunky stop is always great, because it boosts in quickly. But we don't need it.

Daniel Donlan

Okay, and then just lastly - sorry, go ahead.

Gordon DuGan

I was just going to say if we find something chunky at larger portfolio or large at least that would be that sort of upside to recognition.

Daniel Donlan

Okay. And as we think about as you've reset the portfolio into next year as you give acquisition guidance. But I mean does the number kind of rest is or is there specific number in mind that you are looking at in terms of percentage of the portfolio that you want to grow some of the peers have that like a 20% asset growth type of number. Just kind of curious if you kind of shrink back and this year as maybe a little bit of more accelerated just because you have to redeploy all the sales that you've made this year.

Gordon DuGan

From an investment standpoint it's driven a lot by opportunity and what the marketplace is like. But we are very happy, we've been running around $1 billion a year in acquisition a little above a little below the last few years and I think that remains to be in my mind the right place to be short of something unusually chunky coming along which we don't see or forecast or can imagine is going to happen.

So I think it's probably a pretty good number again, I reserve the right to revisit that number as we give guidance for '17. But I'm thinking around a $1 billion is the right level and the last thing the only other color I would give to that is that the growth that we hope to achieve depending on market conditions from our current asset base of 5 billion. Let's say we buy 1 billion a year for the next few years that should be kind of a sweet spot in terms of ease of access to capital hopefully as well as buying assets and almost the vast, vast majority of those assets will be bought on a granular one by one basis where we have a real competitive advantage. So I think part of the reason I keep emphasizing our platform for growth is a $1 billion a year starting from today is a pretty good number and a good growth a point and I think it's a better sweet spot than being a lot smaller in growing where access to capital is more pinkie.

Nicholas Pell

Just one other thing to add to that, Gordon has talked to that a lot on various calls. But we have a firm due that we are in a low rate low return world for the foreseeable future and if you overlay that to the opportunity that we see in buying long duration stabilized high quality industrial assets that the pricing that we are seeing today. We think it's a really unique opportunity. We think you are getting in outsized spread and outsized return in these assets if you really think through what a 1.5% to 2% treasury market means and what of 1.5% to 2% GDP growth market means. We don't think that the GDP growth is there in a sustained way to justify really, really aggressive rental rate growth assumptions which drive a lot of the other more speculative strategies. So we think this is a really interesting time to be buying the assets that we are buying at the pricing levels that we are buying them at.

Daniel Donlan

Okay. Appreciate the thoughts.

Gordon DuGan

Thanks, Dan.

Operator

Our next question is a follow up from Ki Bin Kim of Suntrust. Please go ahead.

Ki Bin Kim

Thanks, I know call is getting long. So I'll try to keep it brief. Just one up in the last question you said about $1 billion for year of acquisition. Just roughly that on a net basis or it sounded like more growth. So just curious on a net basis what does that look like?

Gordon DuGan

Well, I don't think we are really ready to give that kind of guidance numbers. But it's - I would say it's got be between 6 and 800 million of net. Something like that. Again I reserve the right to revisit this is we don’t give guidance for '17, but it's something like that.

Ki Bin Kim

Right. And just last question on Gramercy Woods. If I think you've said it was Bank of America assets, but if look at your page 39 and look at the buildings in Jacksonville that have a very low weighted average lease term last year. If I have to get about 400,000 square feet, but in your press release you said about a 1 million. So just curious and where is the remainder come from because it seems you're still pretty good on duration less than the other assets. So I was wondering if there is anything I missing there.

Gordon DuGan

We also own some industrial assets in Jacksonville, so let me just catch up on where you’re looking?

Ki Bin Kim

I'm looking at page 39 this is your office assets, Bank of America office assets in Jacksonville with the low lease on duration less.

Gordon DuGan

You're talking about the 2.6-year average lease term?

Ki Bin Kim

Yeah that and one is under a year. I was just trying to get a scope get better handle the scope of the project if it was more than just steep assets. Because it sounds like it was one business part.

Gordon DuGan

It is one business part, it doesn't just a various component of it. Yeah, the way again I think we think about it is it's a series of buildings on one business park exactly as you said Ki Bin. It's the all Barnett Bank Corporate headquarters. And we took the 1.1 million square feet took back the 366,000 square feet in the couple of in two separate buildings and we've lease 240,000 of that space. And so by breaking it out by building some of those buildings are showing up as having that kind of vacancy. But all of the weighted average lease term on the leases that we've signed which are 80% of the campus is almost 14 years and the rest is vacant. So 120,000 of the 1.1 million square feet is vacant. And then the rest is a weighted average lease term of just under 14 years. So either long lease store is getting hopefully ready to be long leased.

Ki Bin Kim

All right. Thank you guys.

Gordon DuGan

Okay, thanks Ki Bin.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to Gordon DuGan for any closing remarks.

Gordon DuGan

Thank you again for joining us. I was pleased we mentioned to keep our remarks down and give more time for questions and also encourage everybody to look at our new website gptreit.com. It's been redesigned including the property section, where you can click on various markets and see all of the assets we have in those markets and the photos of assets within those markets. I think you'll find it very informative. Thanks again for joining us.

Operator

The conference is now concluded. Thank you for attending today's presentation. You now disconnect your lines. Have a great day.

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