Gramercy Capital Corporation Q1 2008 Earnings Call Transcript

Apr.17.08 | About: Gramercy Property (GPT)

Gramercy Capital Corporation (GKK) Q1 2008 Earnings Call April 17, 2008 2:00 PM ET

Executives

Marc Holliday - President, Chief Executive Officer and Director

Robert Foley - Chief Operating Officer

John B. Roche - Chief Financial Officer

Gregory Hughes - Chief Credit Officer

Analysts

[Diana Dutrage] - Private Investor

Don Fandetti - Citi

David Fick - Stifel Nicolaus

Douglas Harter - Credit Suisse

Jim Shanahan - Wachovia

Stephen Laws - Deutsche Bank

Rich Shane - Jefferies

Omotayo Okusanya - UBS

Andrew Wessel - J.P. Morgan

Ian Goltra - KIG

Operator

Thank you everybody for joining us and welcome to the Gramercy Capital Corp.’s First Quarter 2008 Earnings Results Conference Call. This conference call is being recorded.

At this time, the company would like to remind the listeners that during the call, management may make forward-looking statements. Actual results may differ from 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 in the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company’s website at www.gkk.com by selecting the press release regarding the company’s first quarter earnings.

Before turning the call over to Marc Holliday, President and Chief Executive Officer of Gramercy Capital Corp., 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. Go ahead, Mr. Holliday.

Marc Holliday - President, Chief Executive Officer and Director

Okay, thank you, and thank you everyone for joining us today for Gramercy’s first quarter earnings call. There is clearly much to talk about today relating to earnings, the closing of the merger with AFR, notable mandate changes and the outlook for the credit markets.

In this challenging economic climate, it's difficult to be completely satisfied with our results, but we did in fact achieved nearly everything we set out to do in the first quarter, and I believe our record of performance demonstrates that.

While we had solid earnings performance for the quarter of $0.69 per share of FFO after netting out gains and some additional loan loss provisioning, the highlight for the quarter was undoubtedly the successful closing of the $3.3 billion merger with American Financial Realty Trust. All the way back to the summer of 2007, we recognized the strong headwinds that would be facing leverage loan providers due to rapidly deteriorating credit markets and made a strategic decision to diversify Gramercy’s asset base and expand its business lines to include a net lease and value-add real estate platform that complements Gramercy’s real estate finance business.

After announcing the deal in November 2007, we were faced with the challenge of closing this opportunistic, but very complicated transaction during a period of time that coincided with one of the toughest market conditions that have existed in the market since the early 1990s.

The task of closing this complexity would be difficult even in good market. However, the economic climate and the dislocation amongst many of the financial service firms made this task ever more formidable. Ultimately, on April 1, we completed the transaction with 16 different lenders in tow, facilitating the origination or assumption of over $2.4 billion of financing and the completion of over $220 million worth of property sales comprising 54 separate properties in order to generate cash on hand at AFR to fund the portion of the remaining balance necessary to close.

The enormous effort provided by GKK manager and SL Green staff as well as many of the AFR employees who worked with us towards the common goal in the end were most responsible for this exceptional achievement. I want to extend my gratitude to every one whose extraordinary efforts made this transaction happen in an environment where others believe we could not do so, especially, the Gramercy and AFR shareholders for confirming our belief in the merits of this transaction with each constituency voting over 90% in favor of the transaction. That’s about as clear a mandate for the transaction as I could have imagined and we certainly thank our then existing Gramercy shareholders and our new Gramercy shareholders for voicing and voting with their sealed approval on the deal.

I would also like to highlight the efforts, particularly if one individual David Schonbraun who is a Director at SL Green and has worked tirelessly, ferociously over a two-year period on and off again and always on in the past nine to 12 months in order to bring a deal that had a lot of ups and downs, doubts into focus into reality, good job by him. There is dozens more behind him who also did an exceptionally good job on this deal and everyone has been most happy, relieved to get it behind us and going back to the business at hand of enhancing the Gramercy platform.

I am pleased to report that it was worthy effort as Gramercy achieved its objective and acquired a 29 million square foot diversified portfolio for $8.25 per share translating into all-in price of under $100 per square foot for all the real estate and generating an NOI yield on purchase price in excess of 8% per annum on the assets to be ultimately retained by Gramercy. This current yield is made even more compelling when measured against our weighted average cost of debt capital related specifically to this transaction, which stands at just a touch over 6% today.

Our primary business objectives for the AFR portfolio for the balance of the year consists of the following: selling an additional $125 million held-for-sale assets; making material headway in leasing up the under-leased value-add assets from approximately 70% occupancy to upwards of 75% occupancy; modifying and rationalizing the leases encumbering the Dana portfolio; exploring JV opportunities on some of the higher yielding net lease stabilized assets; and finally over time taking advantage of current market conditions for external growth by seeking out financial institutions who want to convert their Tier-1 capital -- convert their real estate into Tier-1 capital.

All of this will be undertaken by launching the integration of AFR into Gramercy. Another direct benefit of the AFR transaction beyond the scale, diversity and earnings that it provides for the company is the framework within which we can and have reorganized the company’s operations, staff, and leadership. Operationally, Gramercy’s specialty finance business will now operate under the name Gramercy Finance and the real estate investment business will operate under the name Gramercy Realty with both businesses being divisions of Gramercy Capital Corp.

Divisional personnel will be largely separate with little to know overlapping responsibilities between finance and realty and nearly all of these 125 plus total employees now will be full-time day-to-day employees of GKKM and not shared employees with SL Green. Both Gramercy Finance and Gramercy Realty will be headquartered in Manhattan while maintaining a large realty workforce in the Philadelphia area, with other employees located in Los Angeles, Charlotte, St. Louis, and a few other locations.

These divisions will be overseen by a newly transformed executive management team that will be ideally situated and positioned to integrate and maximize the performance of Gramercy Finance and Gramercy Realty.

As just recently reported by us, Bob Foley has been promoted to Chief Operating Officer effective immediately with responsibility for overseeing the real estate activities of Gramercy Realty, the asset management activities of Gramercy Finance, and he will continue to play an active role with shareholders and analysts in communicating Gramercy’s new strategic direction.

Stepping into Bob’s former role of Chief Financial Officer is John Roche, who served in an advisory role to Gramercy during the AFR acquisition and more notably is a season Chief Financial Officer with an impressive REIT and real estate background that he gained most recently at New Plan for seven years staying prior to with-sale to Centro. Mr Roche John also combines our office and debt related experience from his prior roles as Vice President of Finance at the Robert Martin Companies and the related companies and has public company experience as CFO with several of related externally managed platforms. So clearly that aggressive experience we believe will weave in perfectly to the role that Bob has essentially created from Day One of this platform, and John will now pick up demand to and carry that forward.

John will also chiefly be responsible for all the responsibilities and functions attended to the CFO role with an initial focus on the successful integration of AFR into Gramercy Capital Corp.

I extend my congratulations to both Bob and John, and I am confident that they will make a great team along with myself, Andrew Mathias, Greg Hughes, Andy Levine, David Schonbraun, Neil Kessner as we embark on the second phase of Gramercy's growth and success.

Also announced earlier today was the resignation of Hugh Hall, who after four years has elected to resign from both the company and the Board of Directors to pursue other opportunities. Hugh has been with us from the beginning when Gramercy was launched and we certainly appreciate his hard work and loyalty and wish him well as he moves on. We believe that through this reorganization we are approaching the integration in a challenging market environment, in a discipline step-by-step manner.

As stated on the last several conference calls, loan production has been intentionally kept to a minimum as our efforts have been directed toward back-filling the CDOs with higher yielding product as and when loans in the CDOs pay-off.

We've also been encouraging repayments and prepayments of more seasoned originated debt where possible in order to gain liquidity and replace those positions with higher yielding investments. And in addition, we've been valuing down the path on a sales and syndication effort of existing inventory particularly those positions that have significant future funding commitments associated with them in order to reduce the overhang of these commitments on the overall portfolio.

In that regard, we have successfully reduced our future funding commitments from almost $300 million last quarter to $165 million this quarter, a remarkable achievement in this current climate. You should expect more of the same for the next few quarters as we will continue to attempt to syndicate our positions, getting rid of lower yield positions and future funding commitments while only originating opportunistic first mortgage and mezzanine loans with an emphasis also on the purchase of high grade CMBS, a program we have been executing quite successfully to keep CDOs full capacity, while also enhancing our yields and we think minimizing risk by participating mostly in AAA and subordinate AAA levels.

Joe Romano and his team have done an excellent job of picking through the voluminous amounts of bonds available in the market to identify the ones we think go for the highest risk reward within the high grade market CMBS inventory.

Another area of focus within Gramercy is the aggressive asset management of all of our positions to ensure that we have the most current and up-to-date data on hand, and we are strictly enforcing our rights on the documents to require rebalancings where appropriate and permitted, and otherwise making sure borrowers are in compliance with their obligations under the loan documents. These efforts are proving to be successful as we receive pay-offs of loan positions that otherwise might had been more difficult to refinance further down the road in an illiquid market environment such as a land loan in California and a construction loan in Texas, both of which have been paid off this quarter, and has further evidence of these efforts we had an essential resolution and recovery of a previously non-performing asset in California where our collection efforts yielded full PAR, plus accrued at the default rate, late fees, legal fees and yield maintenance, and what has now turned out to be one of the company’s most profitable loans ever.

This is our version of turning lemons into lemonade. That’s the difference we believe management can exert and influence into situations to reorient potentially bad outcomes and turn them into positive resolutions. Clearly, however, not all situations can be handled with that degree of success and adeptness.

You will note that we did provide for an additional $10 million of loan provisioning during the quarter -- loan loss provisioning during the quarter in response to a rigorous review of our loan portfolio and continuing illiquidity in the credit markets. We as all players in the fixed income arena hope that the lower interest rates and liquidity being injected into the economy will begin to take effect and provide some liquidity back into the real estate market in order to provide takeout financing for borrowers of Gramercy and others, but evidently until this takes effect we are in the same boat as others having to carefully monitor our loan portfolio and be proactive in preemptives in forecasting and establishing loan loss reserves where we see potential areas of weakness.

We are early in our efforts to reorient and grow our business. The focus for the balance of the year will be on integration, asset management, enhancing liquidity, and investing opportunistically. These are all themes that you've heard from us over the past few quarters. I believe we are doing the best job that we can in executing on every one of these fronts to our best possible abilities given the constraints of a -- not only a difficult market, but possibly one of the most difficult operating environments that we have been experienced to and sitting around the table of just -- well over a 100 years of experience in all areas in lending in real estate investing and I think the conclusion on our end is that these are tough times, but we feel we are rising to the challenges that are being presented and I think the quarter's achievements reflects those efforts and just once again I want to thank all of our shareholders for basically sticking by us with the vote on AFR. We believe that the strategy that will pay substantial dividends over the years to come.

And I would like to turn the call over now to Bob Foley, who will review some of the financial performance for the quarter prior to then turning it over to John Roche who will just make a few introductory remarks to you folks as well as talk a bit about his vision and efforts on AFR integration.

Robert Foley - Chief Operating Officer

Great. Thank you, Marc. And in the interest of brevity, I will stick to the highlights, which are the significant changes in balances on our income statement, on our balance sheet. And if we don’t cover something in which you are interested, feel free to ask at the end of our presentation.

First, the income statement. Total revenues were $86.1 million; that’s up about 26% from the same quarter of 2007 and down slightly from the fourth quarter of 2007 due primarily to a slight drop in our investment balances and declining LIBOR and largely offset by the successful resolution of the $32 million loan that Marc described earlier. I have to say that our net investment, our asset management team was as typically relentless, so it produced a full PAR pay-off of almost plus about 7 million income including all the categories that Marc described including some legal fees, which I can tell you from experience is a pretty rare thing to accomplish.

Our team's worked out experience which parks in all the way back to the late 80s and nearly 90s did pay off in spades on this loan and we do believe it will serve us well and in good stat as we advance through the market correction.

With respect to our new investments effective spreads on new loans, we have about 359 basis points for the quarter and on our CMBS investing activity on the floating rate side; that spread was about 933 basis points. Gain on sale rose about 5.5% due to interest earnings on our substantial cash balances through the quarter and on the repurchase at a discount of about $13.5 million, AA rated CRE/CDO bonds, which we had issued earlier and that generated again about $3.5 million.

Management fees rose about $650,000 that’s due primarily to a full quarter's worth of base management fees on the direct equity placement that we closed in November of 2007 with an investment fund managed by Morgan Stanley.

MG&A declined by about $1 million over the comparable quarter of last year, that's a decline of about 26%, that’s due primarily to a decline in stock-based comp expense. That same category of expense was about flat in comparison to the fourth quarter of 2007. Our expense ratio for the quarter just ended was about 325 basis points.

The provision for loan losses as Marc mentioned was $8 million net. We had a gross provision recorded of 9.8 million. That’s a new reserve on one loan; augmented reserves on two others, and it also reflect a reversal aggregating 1.98 million on three loans including the San Francisco office building that Marc and I have described.

Turning quickly to the balance sheet. We continue to build and maintain high cash levels throughout the quarter. We closed the quarter with $383 million of cash and cash in our CDOs as a precursor to the closing of the AFR merger on April 1. None of the other non-investment categories on the asset side of the balance sheet registered material changes during the quarter with the exception of other assets which rose almost 8 million from the prior quarter and that’s due largely to some AFR-related merger cost that are being capitalized.

Borrowings under our secured credit facilities declined by 33.4 million during the quarter. At quarter-end, our outstandings on our two secured credit facilities stood at only 166.7 million. That reflects our well-known preference for funding our investment assets using the longest dated debt capital we can find, which for us is primarily our $3.1 billion of CDOs. And it also reflects the benefit of the application of cash from the many loan repayments and loan syndications that Marc described.

We did borrow a little bit under our unsecured credit facility. We drew down 50 million toward the end of the month and that was really part of the intricate process of closing the AFR transaction as we moved into April. CDO bonds outstanding just declined by the $13.5 million I mentioned earlier that we repurchased and as you know from prior quarters those bonds are not retired. They do remain outstanding, but they are presented net on the balance sheet as a reduction in the gross liability to third-party bond holders.

There was a slight rise in management and incentive fees that’s due primarily to a full quarter effect of $100 million equity placements that I’ve mentioned a couple of minutes ago. There was a sizeable $69.7 million decline in the dividends payable that largely reflects the payment earlier in the quarter of $2 per share special dividend that if you recall was generated from the $92 million gain produced by our sale in August of last year of our 45% joint venture interest in the One Madison Office Building. And then the regular dividend on our common shares and the dividend on our preferred shares both of which were accrued at the end of the quarter were paid out earlier this week, so you should receive those.

The value of our interest rate hedges against liabilities that we have allocated to fund longer-term fix rate investments, the vast majority of which you know are AAA rated CMBS declined by about 43.6 million. All of our CMBS are financed through our CDOs. The offsetting entry with respect to these derivative contracts was through other comprehensive income in our equity accounts and that explains virtually all of the change in that account for this quarter.

The aggregate notional amount of the derivative investments at the end of the quarter is the same 1.2 billion that it was at the end of the prior quarter. The value of those changes hedged or the value of those hedges changed obviously in response to the continued sharp decline in interest rates. To give you an example, 30 day LIBOR fell from 4.6% at the end of December 2007 to 2.8% on March 31 of this year. That’s a decline of 190 basis points.

And although we don’t mark-to-market our liabilities or our assets, a quick look at our FAS(b) 107 footnote in our most recent 10-K will confirm to you a point that we have made repeatedly for several quarters now and that is that the charged OCI for the change in the swap values is comfortably offset by the change in value of the CDO liabilities that they hedge.

Turning quickly to the investment portfolio. During the first quarter, we closed three mortgage loans totaling about 118.2 million. All of those loans were secured by office or other commercial properties.

The metrics for the portfolio taken as a hold didn’t change much during the quarter. Our largest geographic concentration remained the Northeastern United States at 44%, followed by the Western United States at 26%. That should make sense; we’ve been very very consistent for several quarters now that we intended to focus during this period of correction on the markets that we felt we knew and understood the best.

New York remains our favorite market at roughly 33% of our portfolio. By property type, offices are largest concentration at 39.8%; that's actually up slightly from 37% last quarter. Hotels are the second largest property types at 16.6%; that’s down from last quarter. And by form of investment, first mortgage loans still lead the path at almost 68%, and that’s been fairly consistent for several quarters.

Our real estate securities group was active this quarter. We did acquire almost $44 million of AAA and AA rated investment grade CMBS. All of that is match funded in our CDOs. In terms of liquidity, we continue to recycle capital to optimize returns to shareholder equity and to generate liquidity for opportunistic investment opportunities. Going forward that will be in both our Finance and our Realty businesses.

On the syndication side, we did sell three loans with an aggregate unpaid principal balance of 85.1 million. In connection with those sales, we manage to reduce our unfunded commitment obligations from 311 million at December 31 to 165.6 million at the end of the quarter.

And in terms of repayments, as Marc mentioned earlier, we have been very very aggressive working with our borrowers and so that's generated about $140 million of repayments during the quarter. So that’s it.

So, with that, I’d like to -- it is my pleasure actually to introduce my new partner John Roche who is going to take a couple of minutes and talk a little bit about his background and perhaps more importantly how that background relates to the integration of the recently acquired AFR business. John?

John B. Roche - Chief Financial Officer

Thanks Bob. I would like to say how excited I’m to be coming aboard and taking advantage of the platform that the existing GKK team has put together. I think it will take a period of time to digest the AFR acquisition. But I do would point out that the many of the characteristics of the AFR portfolio, a large number of assets geographically dispersed around the country is very similar to my prior experience at New Plan.

Many of the systems that are in place at AFR were implemented actually based upon some of the things that we did at New Plan. My brief time there, I think that there are significant opportunities to leverage off those systems both to more efficiently mange the now Gramercy Realty assets as well as take advantage of those for the Gramercy platform also.

I think in going down and spending time in Jenkintown that the acquisition has created a reinvigorated employee base. They are excited about the new direction of the company and I am confident that utilizing the skill set of the Gramercy team to this portfolio of what has been a under-managed group of assets that there is significant opportunity to create additional value there. So over the coming months, we will be going through and reevaluating all of the systems, all of the assets and looking to create a plan to again maximize the value of those assets on both the debt and the equity side.

Lastly, I'd just like to thank Marc and the rest of the Gramercy’s team about the opportunity and I am ready to get to work. Thanks.

Marc Holliday - President, Chief Executive Officer and Director

Great. Thank you.

John Roche - Chief Financial Officer

Thanks a lot.

Marc Holliday - President, Chief Executive Officer and Director

We certainly look forward to working with you and all of the new employees that we’ve retained and inherited from the AFR platform, the number of other new folks that we haven’t mentioned on the phone but have recently joined us to take part and what I can only describe really as a Phase II of our campaign to become a best-in-class REIT in the real estate and finance arenas.

We are all very excited. I think as John put it the -- I think the new AFR employees are invigorated, I think everyone is invigorated because we are kind of closing out a four-year chapter in which we achieved a lot of success in a narrow niche of the market, a niche that happens to be experiencing tremendous dislocation right now and fortuitously we embarked on this effort. I think it's really just the right time for our own platform purposes, but also I think we made a nice deal and I think that will evidence itself over the next year or two or three as we start to not only add value in ways that we do to the loan book of business but also to the real estate book of business.

So it was clearly probably as about as important to quarter for this company as we have had since our IPO and proud we accomplish what we did in such a challenging environment.

So, with that, operator we will turn it over for questions right now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

Marc Holliday

Operator, do we have a first question?

Operator

Your first question comes from the line of [Diana Dutrage] a Private Investor. Please proceed.

Diana Dutrage

Would you be able to comment on your thoughts for dividends going forward?

Marc Holliday

There is no change to our dividend policy right now. We’ve declared our quarterly dividend and I think as Bob mentioned paid it out a day or two ago. We have earnings that cover the dividend as you saw, $0.69 per $0.63. So, I can’t project what the future holds because I think we as everyone just are looking to see where these credit markets find footing, but clearly we’ve raised the dividend many many quarters since our initial IPO. Protection of that dividend has always been paramount to us as we have paid out in the past around 80 to 85% FFO payout ratio this quarter was even below those numbers. And you will see that going forward as a result of the real estate we’ve now acquired and I am really giving you more of a pro forma FFO payout ratio when I say it’s – it will be below the 80, 85% threshold accounting for our assets. And we will do our best to continue with our dividend strategy. That’s it. Next question, operator?

Operator

Thank you. Your next question comes from the line of Don Fandetti from Citi. Please proceed.

Donald Fandetti

Hi. Good afternoon. Marc, congratulations on getting the AFR deal done.

Marc Holliday

Yeah, thanks Don.

Donald Fandetti

A question about cash. If you look at the sources and you used it for AFR, it feels like things are a little tight. Can you talk about your cash position after the AFR deal?

Marc Holliday

Well, we still have liquidity. When you say cash, and we look at cash and available under the lines of credit because that’s how we operate. We still have at this moment, I think over 150 million of kind of immediately available liquidity with several 100 million more than that available for future deals on the lines of credit. And I don’t think that includes the CDO cash, which is -- how much is the CDO cash right now?

Robert Foley

It's about -- right now, it’s about 65 million.

Marc Holliday

65 million. So, I would call it ample, but nowhere near at the levels we would like to see it going into opportunistic markets, so clearly one of our mandates. And I think I said this, at the end of my comment, my footnotes and if I didn’t, I am going to add it, no I did say, so I am going to make sure, enhancing liquidity, and to be specific we are going to enhance liquidity through the aggressive sale of non-core AFR assets and non-core -- let me say non-core Gramercy Realty asset, let me try that out and non-core Gramercy Finance loans. It is an absolute mandate. We are going to be focusing on doing that aggressively over the next three to six months. And I think the success we had indirectly through the AFR platform in selling 54 properties, $221 million, we have in fact sold another $4 million of properties at, which comprise four properties, there is another 27 somewhat under contract. I would say satisfyingly, there seems to be a very decent market for these occupied and non-occupied bank branches and financial service facilities even in this market. And we can facilitate the sales would take that financing, we’ll go – have done very very little of that as part of the original sales. So I think consistent with our original business plan, we are going to kind of re-equify over the next three to six months through this process.

Donald Fandetti

Okay. And then lastly, can you talk a little bit about the pricing on the bridge versus your original expectations and sort of how that might impact your view on accretion of the AFR deal?

Robert Foley

I am sorry. I didn’t get the question. Pricing bridge?

Marc Holliday

Pricing on the bridge facility?

Donald Fandetti

Was the pricing on the bridge…

Marc Holliday

What was the price of the bridge facility?

Donald Fandetti

Yeah. Was it in -- I mean, was it higher than you expected? Was there any impact on your original accretion assumptions for the deal?

Marc Holliday

We had a range and we expected given the current climate that would be the high end of the range it was. I think it was 4…

Robert Foley

430.

Marc Holliday

430.

Robert Foley

435. The LIBOR is down over a 150 basis points.

Marc Holliday

Right. So net-net, when you net the LIBOR decrease against the high-end of the range of expectation, it’s actually come in and have been slightly more accretive than we otherwise would have projected.

Donald Fandetti

Okay.

Marc Holliday

Okay. Thanks Don.

Donald Fandetti

Thank you.

Operator

Your next question comes from the line of David Fick of Stifel Nicolaus. Please proceed.

David Fick

Good afternoon. Bob and John, in particular, congratulations. Well deserved John we got to know you well at New Plan and I think you are perfect for this job.

John Roche

Right.

David Fick

Can you talk about the modification if any of the management agreement given that roughly half of your business is now internally managed?

Marc Holliday

Well, we would say half of the business is internally managed, David, I just want to make sure you understand me. All of the employees, all are essentially Gramercy manager employees and will be paid a Gramercy manager expense, except for those employees that are directly responsible or located at the properties, those come out at the NOI numbers, and always did when we first went through the original metrics of the deal when we announced the deal, but all of the – most of all of the overhead in New York, Jenkintown is borne at the manager level and is paid for by the managers. So the only internal fees at this point or internal G&A costs are really for direct property employees.

Robert Foley

Yeah, that's correct.

Marc Holliday

Okay. So…

David Fick

Yeah, thank you for that clarification. Can you walk us through -- you just answered a question on the line, but can you talk to us how much of the bridge you actually had to use and sort of what the sources and uses were for 24 hours after you report?

Marc Holliday

Greg, you want to…

Gregory Hughes

We use the entire $850 million bridge and so, I mean we issued $350 million of new equity. We assumed $1.2 billion of new debt. Like I said, through the entire $850 million bridge, we did a new $240 million refinancing of the WBBD portfolio. We kept $100 million roughly outstanding on the Deutsche Bank credit facility that was out. We originated a new $75 million loan through one of the Gramercy's CDOs to help fund it and then there were roughly $130 million of cash on hand at AFR principally for property sales that we had conducted that was available. And then, kind of the balance came from cash on hand at Gramercy and then a couple of the asset sales that settled after April 1.

David Fick

Great. Again, congratulations. Thanks.

Marc Holliday

Thanks David.

Operator

Your next question comes from the line of Douglas Harter of Credit Suisse. Please proceed.

Douglas Harter

Hi, thanks. I was wondering do you have any LIBOR floors on the loans at legacy Gramercy?

Marc Holliday

On the loans that -- on our borrowings or on our debt investments?

Douglas Harter

On the debt investments?

Marc Holliday

Bob?

Robert Foley

Yeah, Doug, it's Bob. The answer is yes, we do. I don’t have the frequency count in front of me, but we typically sought to get LIBOR floors. I would say in this environment, comfortably more than half, but probably not two-thirds have floors and obviously where they were struck it depends on their vintage of origination. But yeah, we do get floors. We have floors on a lot of them, but not all of them.

Douglas Harter

So, in the current rate environment, those floors should be kicking in, in the second quarter?

Robert Foley

Well, a lot of them have already -- most of our loans reprice 30 days, so there are probably some that haven’t yet, but most have already kicked in.

Douglas Harter

All right. Thank you.

Robert Foley

Yep.

Operator

Your next question comes from the line of Jim Shanahan from Wachovia. Please proceed.

Jim Shanahan

Thank you very much. First question, I think you might have actually answered on the call and I might have missed it. What was at March 31st the balance of loans reserved against and how many loans was that?

Marc Holliday

I think it was that -- on March -- at quarter-end, we had 16 million total reserves.

Robert Foley

Right.

Marc Holliday

And how many loans?

Robert Foley

We had about 16.6 million, let’s call it of reserve, and in the neighborhood of probably about – I’m just looking at the total here, about a little more than 200 million of aggregate principal balance.

Jim Shanahan

Thank you, Bob. How many loans was that would you estimate?

Robert Foley

About 9, I think. Hang on. I will give you a precise count. One, two, three, four, five, six, seven, eight, nine.

Jim Shanahan

Good guess. And then the other question I think you discussed AFR. There was a discussion in the K that there might be AFR employees at the – that we know expenses of which we would see on the income statement. Are you suggesting that if there are they are going to be property level employees and then we would see, we would necessarily we would see any expense because they would be netted out of the operating income reported for the asset?

Marc Holliday

Right. They are actually going to be at the property level and that’s what we included in NOI.

John Roche

Which is getting consistent with the way AFR had previous reported.

Marc Holliday

That's reimbursed also as part of offerings.

Jim Shanahan

Could you say that again just for us?

Marc Holliday

Jim, they are also often reimbursed as part of operating expense recoveries by tenants.

Jim Shanahan

I see.

Marc Holliday

Which is why they are at the property level.

Jim Shanahan

I see. Okay. Thank you very much.

Operator

Your next question comes from the line of Stephen Laws at Deutsche Bank. Please proceed.

Stephen Laws

Hi, good afternoon.

Marc Holliday

Good afternoon, Stephen.

Stephen Laws

A few of my questions have been asked. A couple left. I guess first with the prepayments you saw, I guess really more the prepayments, the partial prepayments. Was there any kind of geographical concentrations or certain asset types that you have seen were to prepay more so than the others?

Robert Foley

No, I think that prepayment behavior is a function of aggressive asset management where the business plan is for the underlying property sponsorship and the strength of that sponsorship. We had -- as Marc said, we had a land loan prepay, we had a hotel loan prepay, we had an office loan in suburban Chicago prepay. So it’s hard to point to a particular trend by either property type or geography frankly.

Stephen Laws

And then, as you look at your portfolio and you look at loans that are scheduled to mature here, are there any that you still like you are going to be in a situation, be forced to either extend those loans for specific terms or would you guys look more to go for closing the property to get your capital out?

Marc Holliday

Well, let me make sure I understand the question. I mean, if you are saying in the upcoming -- let me make a more general statement, I wouldn’t limit it to upcoming maturities because I don’t have that schedule in front of me. But I think we typically look at situations if they are operating properties, we think there is either current value or value that can be created or restored over a reasonably short period of time, we would have much more of a posture of payers before close. Then other types of situations where there are non-operating properties or the markets are much more impacted clearly residential land in California, I would put on the table is a market that’s been severely beaten down as the housing market in California and other sunbelt locations have experienced de-stressed. Those are instances where probably time is the best answer. And if you have the right operating group in place doing all the right things but it’s merely a matter of a complete market dislocation, you are more inclined to at least consider extension. But I think each one we evaluate differently depending on market sponsor, whether we think we have the right expertise to create as much more value than the borrowers in certain instances. So, I think you will see that we will likely take that one or two hotel related assets in the coming months, not big positions, but positions we think are actually reasonably good hotel investments that probably just need a better and right management team and some of those comprise the reserves that we’ve taken already and that’s try to generalize but that’s a flavor for it.

Stephen Laws

Great. And then one final question on the income from JV equity investments. Can you talk to that and I apologize if I missed it on the call, but it's ticked up here sequentially four, five quarters in a row and contributed meaningfully with I think $0.09 this past quarter. Can you talk about what those investments are, what the outlook is for that portfolio?

Marc Holliday

Sure. That’s -- do you want to do that Greg?

Greg Hughes

Let’s tick in.

Marc Holliday

Yeah, let’s tick in. These are -- fundamentally, we have made a number of net lease and lease fee investments many a times in partnership with our partners at SL Green and when we own less than a controlling interest, we account for them on a joint venture basis. We recognize our proportional share of the income or loss. There are sometimes losses, which relate primarily to depreciation expense. We did do a couple of deals last year here in New York City that were largely a function of our relationship or to a greater extent Green’s relationship with or involvement in the local market and those are both ownership interest in land at Midtown, Manhattan. One of them is underneath the Lipstick Building over Third Avenue and the other is a office building at 41st at Madison, and those have very long-term leases to the owner of the improvements that sit on our land. And so, as we recognize income on a GAAP basis from those properties, over time you are going to see that JV number rise.

Stephen Laws

And, those investments were all carried in cost on the balance sheet?

Marc Holliday

Yeah, net of whatever we receive from the investments.

Stephen Laws

Great. Thanks for taking my questions.

Marc Holliday

No mention.

Operator

Your next question comes from the line of Rich Shane from Jefferies. Please proceed.

Richard Shane

Thanks guys for taking my questions. Just a couple and I assume that this would have been addressed prior closing, but were there any covenants -- financing covenants that you guys were in default on or in breach on at the closing that have to be amended at this point?

Robert Foley

No. I’m glad to hear that.

Marc Holliday

No, we look at that on Q4 rather than out…

Richard Shane

Okay. I assume, but again there is one other things you got to…

Marc Holliday

No, no, it’s a very good question. We are within our covenants post the AFR transaction and again just weaving together that entire capital package not only to have it there, they are on the closing date, they are at in all-in rate that we think is very attractive when compared against the rate on the investments, but also doing in the way that is covenant compliant. That was the challenge and we did meet all of those covenants.

Richard Shane

Great. Thank you. Second thing, anecdotally, we are starting to hear about vacancies rising in commercial properties in New Jersey. It is the market where you guys have some exposure. Could you -- is that something you are seeing and can you comment on that next to your portfolio?

Marc Holliday

I just want to make sure, what our exposure in New Jersey in a real estate sense is 55 corporate and fills up two asset that we own, fortunately two assets that are both long-term net leased for I would say remaining term of somewhere between 13 to 16 years remaining on those assets.

Robert Foley

Both are single layer embedded credits.

Marc Holliday

And both are single layer embedded credits. So I would say from an overall market health indicator, it concerns us as much of New Jersey as other markets. As it relate to those two equity investment assets, I would say there is very little concern we have along those lines. I don’t think we have much in the way of New Jersey commercial loans to speak up. But I would just caution that what you may be hearing or seeing anecdotally in New Jersey, I think we are seeing in many other markets. And the markets are tough and getting tougher. I think first to go with the credit markets and the latent response will be the business profitability and business occupancies and credit of these businesses. So, I think that’s the natural next shoe to drop on the heels of what was a pretty violent credit repricing, if you will, and we are preparing ourselves and conduct ourselves everyday. We have that as kind of the operating assumption in almost every market. So, I just want to make that clear to you that even though New Jersey may not be a much direct impact to us. I think as it relates to the broader market environment that’s really what leads to my four or five prong balance of your strategy is a fairly defensive posture that we began last summer and continue to maintain.

Richard Shane

Great. That’s very helpful guys. Thank you very much.

Marc Holliday

Thank you.

Operator

Your next question comes from the line of Omotayo Okusanya from UBS. Thank you.

Omotayo Okusanya

Good afternoon everyone. Congratulations in getting the AFR deal done. Now that all the moving parts have kind of settled, could you talk a little bit about what the level of accretion you are now expecting for the deal in 2008 and possibly '09?

Robert Foley

I will try to take that. We are, as I mentioned, just reconfirming numbers and going through that. We haven't found anything that we haven't expected. But I think again guidance is consistent with what that has been previously made out.

Marc Holliday

Yeah. I think the NOIs checked out through our underwriting. We are pleased with that. We are little behind on sales as we said to you I think on the last call and in a subsequent release and I reiterate now the sales we had projected originally around 350 millionish are 220 millionish. So that extra cash is a drag on accretion, but we believe that's a temporary phenomenon which will rectify itself as we perceive to sell assets over the balance of the year, but drag in part is then also offset by a somewhat lower LIBOR than we had anticipated. So I think on balance, the AFR transaction is coming in right around where we expect but will certainly have better color for you next quarter, we did just close obviously 10 days ago. So while we were working in candid with the management companies not the same as owning it and running it and having physical accessing possession of the relevant data that we will need to harness over this quarter come back to you next conference call with a lot better color.

Omotayo Okusanya

Okay. Bob, could you just remind me real quick, I don’t have my folder in front of me what the assumption for accretion would be when the deal was announced last quarter?

Robert Foley

We talked in the proxy of that, it basically being somewhat neutral.

Omotayo Okusanya

Okay. Got it. Okay. Then the second question I have for you guys is, with the quarter at $0.69, you guys did a heck of a job with -- working on the asset management side. But with guidance at 3.5 to 2.90, what are some of the pieces or assumptions you are making to kind of get you to that number if current run rate is 2.76? I know you also got this solid benefit in the quarter from the 6.9 million?

Marc Holliday

It just one of our investment income.

Robert Foley

Well, the -- I think our guidance is based off of not just this quarter's run rate but obviously it also includes some potential accretion coming off of AFR, which is not in our numbers. Again, Greg sort of said that it was neutral in the proxy but with the LIBOR decrease could be somewhat north of neutral offsetting in part again the slower sales and we still have cash available in the CDOs that we have been pretty prudent and restrained about investing that we can and will invest and invest at higher spreads. You have to remember that as product pays off almost universally, I feel comfortable in saying it will be redeployed at higher spreads than what’s coming off the CDO.

So, I don’t know – we don’t give quarterly guidance. I would look at the first quarter’s guidance as a run rate number. So, we will certainly evaluate guidance as we go forward down the road. I think but for additional loan loss provisioning, we certainly believe that our numbers are carrying out on AFR, it vary on the loan side. I think everything has to be tempered against what’s the credit market climate going to be over the next six to nine months and will borrowers be able to repay, will get access to liquidity. If so, then I think then it’s exactly within strike zone and if not then you have to have the more challenging questions about what kind of additional provisioning, if any would you need.

Omotayo Okusanya

Fair enough. Thanks a lot.

Marc Holliday

Okay. Thank you.

Robert Foley

Thank you.

Marc Holliday

Okay. Two more questions operator.

Operator

Yes. Your next question comes from line of Andrew Wessel from J.P. Morgan. Please proceed.

Andrew Wessel

Hey guys. I just had a couple of questions, one on loss reserves. Can you go -- is there any kind of -- I would imagine all non-mezzanine loans are non-performing now. Is that correct?

Robert Foley

No, I don’t think that's it. No. I wouldn’t equate a reserve loan with a non-performing loan.

Andrew Wessel

Okay.

Robert Foley

We don’t just simply wait for a loan to stop payment before we will assess it with the reserve. We think it's prudent.

Andrew Wessel

Sure. And then is there any underlying property type or loan type that makes up the majority of the loans -- majority mezz loans or the majority two multifamily or something of that nature?

Robert Foley

No. I think it's a related question to what you are asking. A big part of the reserve in this instance relates to one particular loan. In California to mezzanine loan on land on a situation where we believed, it's clearly at the time of origination we had the right sponsorship in place with Lehman Brothers and a major California Homebuilder as the borrower or sponsor and that loan is experiencing problems due to the housing climate in California, which in turn has affected land prices in California and right now that loan is a non-performing loan and is in the process of attempting to be restructured by the various credit requests.

Andrew Wessel

Okay.

Robert Foley

Again it's not -- when I am looking at these loans, there is no rhyme or reason, there is no theme I can tell you, it’s just a little more (multiple speaker).

Andrew Wessel

They are already syncretic, they are like someone off.

Robert Foley

They are syncretic, but if you are looking for concentration that would be the only one that would come off the pages, one that’s getting probably our priority attention.

Andrew Wessel

Okay, great. And then the other question is of those 99 properties that you have marked as non-core for the AFR portfolio not going forward, what are you going to book, I guess when the transaction closes, what are those going to be book value of that?

Robert Foley

Which properties in particular, Andrew?

Andrew Wessel

Just in that the press release out says an additional 99 properties to be non-core…?

Robert Foley

That would be held for sale properties.

Andrew Wessel

Yeah.

Robert Foley

I don’t know we have assigned (multiple speaker).

Marc Holliday

We don't allocate purchase price until next quarter. So at the end of Q and it would probably be flowing through. So if you are looking towards -- there likely would not be gains or losses associated with those properties, because they are being sold in the near-term. So their allocated purchase price will likely be right on top of what their sales values are.

Andrew Wessel

Great. Okay. Thank you very much.

Marc Holliday

Okay. Is that is operator?

Operator

Your final question comes from the line of Ian Goltra from KIG. Please proceed.

Ian Goltra

Good afternoon Mark and Bob.

Marc Holliday

Good afternoon.

Robert Foley

How are you doing?

Ian Goltra

Just a quick question regarding buying back the CRE/CDO bonds. There has to be a great use of capital. Can you just talk for a minute about how you look at that compared to when you are working through new loan originations and other possible options given the AFR acquisition?

Marc Holliday

Sure. I think Andrew is going to take that because he is most involved in making the investment allocations between bonds, GKK bonds, secondary market and other investment activity.

Andrew Mathias

I think that the CDO bonds we purchased primarily have come from specific sort of seller-driven situations where bid list have to be put out and certainly where that’s out there, we have been taking advantage of it, not sure, there haven't been any type of volume or flow in the trade of our bonds. So, where we see opportunities, we certainly take them, but it’s not a sort of a sustainable business because it’s really motivated by guys who have to sell. Nobody is particularly happy about levels where bonds are clearing today, in general including GKK bonds and sort of any other bonds. So, we’ve been with Joe Romano and his team taking advantage of both of those CDO bond opportunities and what we think are some extraordinary CMBS opportunities out there with super seniors CMBS AAAs trading out there in certain instances as wide as 400 over. So, we certainly avail ourselves of those and it's great collateral for the CDO, we can lever them very efficiently and ultimately good earnings.

Ian Goltra

Thank you.

Andrew Mathias

Thank you, Ian.

Marc Holliday

Okay. Thank you everyone for listening in and for the questions and we will report back to you in about three months time with a lot more visibility on Gramercy Realty as those numbers come together. So, thank you and we look forward to speaking again.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect.

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