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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • Creating Recurring, Durable Cash Flows  9 comments
    Mar 28, 2013 2:35 PM | about stocks: GPT

    Growing durable dividends is the focus of our company.

    - Gordon F. DuGan

    Mr. DuGan is Chief Executive Officer and a Director of the Board of Gramercy Capital Corp. (GKK). In this video, he discusses this REIT's new focus on modest leverage and creating recurring, durable cash flows from net leased real estate.

    • CEO active in net lease real estate for 25-years
    • Low risk model
    • Risk vs. return, one of the best businesses for investors
    • Yield
    • Low volatility
    • Strong value proposition with growth
    • Building up cash flow quickly
    • A matter of "when not if" they pay dividends
    • Starting steady growing dividends

    Disclosure: I am long GKK.

    Additional disclosure: Gramercy Capital is Rangeley Capital's largest investment. Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification.

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Comments (9)
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  • Wilson Wang
    , contributor
    Comments (817) | Send Message
    Gordon is definitely an excellent CEO, but there's an element to his thesis that could be impacted. What if interest rate rises and valuations for REITs go down?


    Some net lease companies have pretty high valuations and low dividend yields, how do you feel these two risk factors will affect your valuation for GPT?
    31 May 2013, 05:56 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4039) | Send Message
    Author’s reply » Good questions and concerns. I think that interest rates will almost certainly rise (that is certainly how I'm set up) and valuations for REITs will almost certainly go down, but that there is still a margin of safety with GPT. GPT with a dividend will be valued higher than GPT without a dividend. It will get some discount to major dividend paying triple net lease REITs. But there can be a discount to those comps consistent with a significant premium to today's market price.
    31 May 2013, 06:54 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (817) | Send Message
    Well said Chris.


    But for the sake of GPT's shareholders, a condition that's extremely favorable for them is if interest rate remain low, and the management team is able to leverage the low interest rates with attractive financing so they can acquire more attractive net lease operations.


    So I guess this really comes down to, how much I will make rather than how much I will lose.


    How do you see the asset management side? It generates 8 million per year but it's extremely concentrated, I don't think the Gordon talked about it on the conference, but does he have any plans on expanding that attractive segment?


    If anything, I will most likely make a trip down to NYC myself over the next couple of months and hopefully ask him myself! That would be exciting!
    31 May 2013, 06:59 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4039) | Send Message
    Author’s reply » Yep on interest rates.


    Yep on upside:downside.


    Asset management is a good business. It is not the key to my investment thesis, but it has value.


    If I'm in Connecticut at the time, please visit on your way to NYC.


    31 May 2013, 07:05 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (817) | Send Message
    I will most definitely make the pilgrimage to Connecticut to visit you. And thank you for everything you've shared thus far on SA and in your hedge fund letters. You have definitely taught me a lot on how to evaluate special situations.
    31 May 2013, 07:08 PM Reply Like
  • SevenCostanza
    , contributor
    Comments (49) | Send Message
    I've been corrected by others for capitalizing asset management revenue when calculating an FFO multiple, since it is seen as being in runoff. My initial expectation, too, was that the asset management revenue was only going to last as long as the deal struck with KBS (two years, if I recall, with some incentive income if KBS could sell properties at a good price). This was back when GKK defaulted on its Realty portfolio and subsequently turned over the real estate to KBS. Since then my thinking has definitely changed. And management has been talking about it differently. In slide 22 of the business plan update you can see how they are thinking about the asset management platform: to offset G&A, generate fees from managing the halves of JVs that GPT doesn't own (e.g., the BofA portfolio), and to source new acquisitions. That's value creation where everyone expected only runoff revenue. This team is good.


    I hope to see, and would expect to see Gramercy enter into more JVs - it's a chance to generate some incremental management fees on the side, resulting in an overall higher ROI than owning 100% of a property portfolio.


    Check out slide 22 of the most-recent business plan update:



    And some highlights from the conference call:


    "The most substantive part of our asset management business today remains the management agreement with KBS which positively contributes to cash flow.


    ...The utilization of our platform to manage additional assets results in incremental asset management fees without substantial increases in operating costs.


    We’re also entitled to asset management fees from our joint venture. We expect our joint venture will contribute approximately 1 million of base asset management fees annually."


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

    1 Jun 2013, 12:17 AM Reply Like
  • Wilson Wang
    , contributor
    Comments (817) | Send Message


    Well said my friend, well said. I think one thing that's extremely interesting is the fact that GPT has the ability to grow at an exceptional rate. The current team they have are able to take on more deals and what not which allows them to scale up without increasing SG&A too much. That's building and enhancing shareholder value.


    I give a lot of props to Gordon and Ben for taking on the initiatives at GPT and really making this a premium net lease company.
    1 Jun 2013, 01:29 AM Reply Like
  • SevenCostanza
    , contributor
    Comments (49) | Send Message
    I agree, I'm quite pleased with management's execution.
    1 Jun 2013, 11:40 AM Reply Like
  • EJT
    , contributor
    Comments (32) | Send Message
    Seems to be quite a bit of concern on repricing of REITS based on interest rates rising. Curious your thoughts on ROIC, and ROICW. I sent a direct message to you on the subject as well. Their warrant overhang in diminishing quickly and their balance sheet is very under leveraged. Trying to look at the risk/reward on the ROICW warrants now that there has been a pull back, warrants expire October 2014, and trade with no time value premium. Thanks.
    2 Jun 2013, 01:36 PM Reply Like
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