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  • GPT Forum 124 comments
    Oct 23, 2013 4:02 PM | about stocks: GPT, FDX

    (click to enlarge)

    In order to hedge out some interest rate exposure, we shorted TMF against GPT, as discussed previously on Seeking Alpha. Here is the result to date:

    (click to enlarge)

    Welcome GPT investors, potential investors, skeptics and shorts, management and directors. Please use this forum as a central locale for discussion on GPT - its upside, downside, and probabilities associated with those outcomes.

    My questions include

    1. What is GPT worth?
    2. What is the best way for GPT's key decision makers to maximize value?

    But what are your questions? What would you like management to answer? What questions can fellow owners answer to help our fellow owners? My hope is for a conversation that includes all points of view, but one based upon primary research and direct, informed perspectives. Please use the comment section below for relevant questions and answers.

    My hope is that I can create a substantive forum for such a discussion, but it will work best if we can kick it off with a conversation with an industry insider. To that end, I spoke with GPT president Ben Harris.

    Some of the investors who took large, early positions in Gramercy around the time of your arrival are value investors. Can the precepts of value investing - buying securities in the capital markets at a discount to their intrinsic value - that brought us to Gramercy be applied to what you do in the real estate market? If so, how and why are values hidden? Where does the price system fail to recognize and price in value? Here is what Ben had to say:

    A value investor in the stock market tries to buy stocks for less than their intrinsic value. We try to apply the same basic principles to the real estate market - that is, we try to acquire single tenant net leased real estate properties that we believe offer outsized risk-adjusted returns at a price that we believe is less than the intrinsic value of the asset. We specifically focus on industrial and office assets because we believe the heterogeneity of these assets gives a value investor the most opportunity to find opportunity.

    The real estate market is like any other investment market. There are lots of different participants with different strategies, motivations, capital sources, etc. Many net lease investors follow formulaic strategies with "bright line" criteria around minimum lease term, tenant credit, location or asset type. We believe this kind of formulaic investing creates distortions that can be exploited by a savvy investor willing to do the work to understand where value exists.

    For instance, certain net lease investors invest with very strict minimum lease terms and will reject a property solely because the remaining lease term is less than a minimum threshold, regardless of the quality of the asset or the likelihood of renewal. We think this is an overly simplistic rule that creates opportunities to acquire assets at attractive levels that do not meet arbitrary minimums, but have effective lease terms significantly longer than the primary term or have very compelling residual values that are not reflected in the market price. We look for assets that are difficult for a tenant to replicate due to a unique location, special zoning, unique physical attributes, below market rents or a significant tenant investment in the facility that all contribute to a higher probability of renewal. We look to exploit these opportunities to actively "manufacture" longer leases through lease extensions or renewals.

    Our cross-dock truck terminal investments illustrate this strategy. Truck terminals need to be located in major transportation hubs in infill locations and are difficult to entitle due to their heavy truck traffic, low property taxes and noisy, 24-hour operations. This makes the entitling and construction of new terminals in major MSAs difficult and means that existing, functional terminals in in-fill locations tend to have high lease renewal rates and can also be re-leased quickly if vacated. We believe this gives these assets a "practical" lease term that is longer than the contracted lease term. When we buy truck terminals we also look to acquire terminals at a discount to replacement cost to add an additional layer of security because it increases the switching cost for a tenant to move to a new facility if one could be constructed. We recently acquired six highly functional cross-dock terminals in major MSA's in a series of separate transactions with an average lease term of approximately 6 years. All are leased to national carriers, all are in in-fill locations and all were purchased at a significant discount to replacement cost. While there is always a risk that a lease may not be renewed, we saw an opportunity to assemble a portfolio of high quality truck terminals in major markets where the market wasn't properly valuing the "stickiness" of tenants in these types of assets. We saw an opportunity to acquire a portfolio where the intrinsic value - in this case the likelihood of lease renewal - wasn't reflected in the price of the asset.

    Another relative value trade that we have been looking to exploit is the relationship between contract rents and the underlying market rents for the assets we acquire. Many net lease REITs put significant emphasis on tenant credit and lease term and comparatively less analysis of contract rents per square foot versus market rents. This strikes us as strange because many net leased assets are created in sale leaseback or build to suit transactions where rent levels are set on terms that often do not reflect the underlying market rent for similar space and can result in contract rents that diverge, sometimes significantly, from market rents for similar space in the same market. We also see this in how transactions are publicized - significant emphasis is put on lease term and tenant credit with rarely any mention of rent per foot or other traditional real estate metrics used by typical real estate investors. We believe this presents a significant opportunity (and significant risk) because we believe in today's yield-starved environment net lease investors are showing a bias towards near term yield at the expense of long term value. We think there are great opportunities to take the opposite side of that trade - in other words, we think people are overpaying for lower quality, incrementally higher cash flows in the form of over-rented net leased assets and, conversely, undervaluing higher quality more sustainable cash flows in the form of net leased assets leased at under-market rents or assets with compelling residual values.

    As an example, a FedEx (FDX) warehouse trades at a given cap rate based upon its lease term and not on whether its rents are at, above or below market. We look to acquire the FedEx warehouses in good markets where the rents are at or below market. We acquired a warehouse in the Philadelphia MSA where the lease had recently been renewed and rolled down to market levels. We could acquire this property at the same cap rate as other FedEx warehouses with contract rents well in excess of the rents that you could get from a new tenant. The difference in return will not be apparent right away - both assets pay the same yield during the primary term. Over time however, the asset with below-market rents will have a higher likelihood of renewal and will also be able to attract a new tenant at similar rent levels if the tenant doesn't renew. This cash flow is inherently more durable and it can be acquired at for the same price as the over-rented asset.

    The office building we purchased in Morristown, New Jersey, is another good example of hidden value in the underlying real estate. We acquired a Wells Fargo branch office building at a 7.2% cap rate ($117 per square foot) in a wealthy suburb of New York City. The original Wells Fargo rents were established in a portfolio sale leaseback where rent was allocated on a per foot basis without any regard for market rent for individual assets. While a 7.2% cap rate seems to be in-line with other Wells Fargo assets that trade in the market, Wells Fargo is currently paying a rent that is significantly below market - we just leased the portion of the building not occupied by Wells Fargo for $13 per square foot NNN versus $6 per square foot NNN for Wells Fargo. The Wells Fargo lease runs through 2024 and has renewal options so we will not be able to monetize the value of the space right away, but over time, the intrinsic real estate value of the asset, which we believe is significantly higher than the $117 per square foot that we paid, will begin to be reflected.

    Another area where we look for value investments is in specialized assets that fall outside traditional net lease investor parameters but offer unique utility to a tenant or an industry. These assets can offer very compelling risk-adjusted returns but may not be understood by the broader market or are out of bounds for most investors. As an example, we acquired an auto auction facility located in South Dallas and leased to KAR Auction Services for 16 years. The property is basically a 175 acre car dealership and is used to conduct and process wholesale auto auctions. We think KAR is a great company and Dallas is one of their top markets. As an added bonus, the property is a 175 acre site with all necessary infrastructure located in close proximity to the recently constructed Union Pacific intermodal terminal making it a potentially interesting industrial redevelopment play if KAR doesn't renew their lease at the end of the term. This asset doesn't fit in traditional investor baskets - I am not aware of any REIT with an allocation to auto auction sites - but by approaching the asset with an open mind, and doing the work to understand the Company, the site and the redevelopment potential, we found tremendous value that could be acquired at a very attractive yield.

    Ben, thanks for taking the time to discuss value investing in real estate. I am deeply grateful for your help with this blog as well as your leadership at Gramercy. I look forward to discussing the public REIT market and the benefits of that structure with Gordon on this blog in the future.

    Themes: Ben Harris Stocks: GPT, FDX
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Comments (124)
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  • I haven't looked to heavily into it, but the Cole / ARCP merger today is certainly interesting when thinking of GPT's in two or three years. Specifically liked slide 7 in the deck linked below.

    23 Oct 2013, 04:42 PM Reply Like
  • Hey Whopper - I agree. StockTalked that earlier. I think it lends credence to the "plan B" assumption that GPT could realize value through selling itself to the highest bidder if the organic growth plan doesn't work out.
    23 Oct 2013, 05:00 PM Reply Like
  • Some miscellaneous ramblings on GPT....


    A small point that may be obvious to many, but i think the turmoil in DC and general softness in the economy will delay the "taper" until Mar 2014 at the soonest. This lengthens the window for quality deals before interest rates rise. This should help a little.
    Closing a rapid succession of quality deals would go a long way toward building investor confidence and probably more importantly FFO.


    No expert here, but SG&A seems high for the current business. I understand maintaining that overhead if it is expected that the business will grow quickly.


    Disappointed that the common divvy was pushed back. I anticipated that it would have been accomplished this year. That should juice the stock.


    I still have faith in Dugan and am willing to give him a free pass on the timing of things for a while. I am sure Dugan realizes "the natives are getting restless" and is doing his best to push things along. His last CC was the best I've heard. Previous to that, they bordered on unprofessional in terms of preparation and delivery. Dugan is a documented rainmaker / salesman. Ample time and effort should be given to "sell" GPT to the investor community. Steak w/out the sizzle isnt nearly as appealing as the whole package.
    23 Oct 2013, 04:46 PM Reply Like
  • I agree with the comment on the CC, Dugan really sold the point he bought a million shares and could tell from his tone he wanted to show he has skin in the game. Major step up compared to last CC. I would still like other officers to buy more, 10,000 shares would help build confidence further.
    23 Oct 2013, 09:36 PM Reply Like
  • Although, the initial cap rate is a little lower on today's announced deal 100% leased for next 13 years with rate bumps and in a quality location seems like a very solid deal. I would agree that rates should hold for awhile which will allow them time for more quality deals with low fixed rate helping the bottom line. Appreciate everyone's input on GPT.
    23 Oct 2013, 05:31 PM Reply Like
  • Chris,
    Worth $5-5.50
    Best option: longer term debt deals, Yellen or not this micro-interest rate environment will not last forever, (if QE is needed much longer we are all in trouble)


    I think if they can lever up and execute at favorable cap rates $6 is achievable in q2 2014 assuming dividends, if they can achieve that and then call 10% of the preferreds or convert them to warrants with a provision to reduce the strike price by $2 per share per year it would be the best way to get the $7 mill in pref div overhang off its back while reducing dilution as executing would elimate the yield in terms of strike price.


    That being said the recent equity raise with downside protection on a already low sp shook me a bit
    23 Oct 2013, 09:53 PM Reply Like
  • Chris, thanks for setting this up.


    Do you know if GPT has moved to variable cap rates with new acquisitions?


    What is the potential downside to a secondary offering next year?
    24 Oct 2013, 12:12 PM Reply Like
  • Mlaffal33, what do you mean by variable cap rates? (never heard that before)
    26 Oct 2013, 01:43 PM Reply Like
  • Kadison- My apologies if that was unclear, I read something that their cap rates are 7.5% on average. I guess my question is how are they determining these capitalization rates and what is the new rental terms?
    26 Oct 2013, 08:36 PM Reply Like
  • Thanks Chris for creating this forum, it's nice to have a place to consolidate the debate on this company.


    I would appreciate getting anyone's thought's on two of the below issues:


    Why hasn't more mortgage financing been secured? Wouldn't this be the opportune time to lever up as much as possible given the low rate environment? Are the mortgages just not being announced?


    Is it a bit inaccurate to include the credit facility as part of equity capacity? By definition, it is essentially bridge financing until more permanent financing, be it debt or equity, can be secured. You shouldn't be able to lever it 1:1 with debt to come up with Gramercy's true remaining investment capacity as Gordon suggested on the last call.


    Again, it would be great to get anyone's thoughts on either of these topics.


    24 Oct 2013, 11:16 PM Reply Like
  • Author’s reply » GPT will update their mortgage financing on their Q3 earnings call; I hope that they show that they have moved markedly in the direction you advocate.
    25 Oct 2013, 10:57 AM Reply Like
  • Steve: Agreed on both points. However, perhaps they hesitate to lever up > 50% (anticipating future deals) as it could violate a promise of 50% leverage. I would be anticipatory and grab as much as possible now up to 80% of my needs at 50% once all acquisitions harnessed. But I come from a private RE background where non-recourse, low interest debt was mother's milk for quality properties like these NNN's.
    25 Oct 2013, 05:07 PM Reply Like
  • Thanks guys, I'm looking forward to the earnings release.
    25 Oct 2013, 09:39 PM Reply Like
  • Anybody have a guess as to what kind of dividend they'll initially be comfortable with when they start next year?
    30 Oct 2013, 11:44 AM Reply Like
  • Great question. I don't know. This is completely off the top of my head, but I think $0.15-$0.20/share/year should be doable by mid-next-year based on their current portfolio ffo minus MG&A/preferred plus what they should be able to close between now and then. That's roughly 3-4% on current prices. As portfolio FFO grows and more of it drops to shareholders (op leverage as roughly flat MG&A/pref take up a smaller % of that) it'll go up. I would expect increases at least twice a year (or preferably quarterly!) but we'll see what mgmt chooses to do.
    30 Oct 2013, 11:51 AM Reply Like
  • Author’s reply » $0.05/quarter announced in January, 2014 is my current expectation and hope. Less or later will disappoint GPT owners.
    30 Oct 2013, 11:54 AM Reply Like
  • Yeah, sounds reasonable. I just prefer to be conservative. I wouldn't be "disappointed" per se with $0.04/q, but I would be a little "antsy."
    30 Oct 2013, 12:14 PM Reply Like
  • Author’s reply » Question for Brad Thomas:




    What do you think the most reasonable assumption is for GPT’s dividend? I have been using a $0.05 per quarter starting in the first quarter of 2014. High? Low? What could they pay? What should they?
    31 Oct 2013, 10:36 AM Reply Like
  • Author’s reply » Thanks Brad for taking the time to speak with me about GPT. Based on our conversation, it is clear that GPT is likely to pay dividends in the first quarter of 2014. Obviously they have to address the preferreds. Brad seems to feel pretty good that this is coming. He would like to see it in the first quarter, as would I. They are a triple net REIT and they need to be paying dividends. The dividend will probably start at about 4% and be able to grow it from there.


    From there, our conversation hit on a much more interesting and important point: GPT is a takeout candidate. American Realty Capital Properties (ARCP) is a serial acquirer in need of a new CEO. After they close their COLE deal sometime around the second quarter of 2014, they could buy GPT and GPT’s management team. ARCP’s Chairman is a friend and admirer of GPT’s CEO and has tried to hire him in the past. GPT CEO Gordon DuGan would be the best choice for CEO of ARCP. He could manage a company of that scale and his vision for GPT would be in line with what he could accomplish at ARCP.


    As for price, looking at comparable deals we believe that the right offer would be around $7.50-8.50 and that GPT would push – or wait – for $9-10. Stay tuned. There will be more to come on this subject in the new year.
    31 Oct 2013, 03:24 PM Reply Like
  • Great insight - Chris/Brad, thanks for sharing. While you two have better access to mgmt than me, I also see a buyout as a very compelling possibility to unlock shareholder value.
    31 Oct 2013, 03:54 PM Reply Like
  • Terrier,


    I've discussed this with Chris earlier but would be great to get your perspective as well. For REIT's, what would be the reason behind purchasing a REIT at a large premium to book (as a $8 price would entail). How is that acretive when the company could simply purchase property themselves?


    1 Nov 2013, 02:19 PM Reply Like
  • That is the first good bit of news about this company since the end of March. It is too bad but I think a buyout is the only way GPT will realize its enterprise value. A merger in 2014 also makes sense if you look at the current board. I really don't understand why anybody not named Gordon Dugan is on the BOD. Holliday is a real mystery. Why would the CEO of the former companies parent company be on the board? Maybe that also explains the low institutional ownership. I believe that stands at 21-22%. Thanks Chris, this is a really good eye opener!
    31 Oct 2013, 10:23 PM Reply Like
  • No expert here, Dr. Pharma but a couple of thoughts.....


    I dont agree w/ the notion that the only way GPT can achieve its value is by being acquired. There is no reason to think Dugan cant continue to build GPT over a long period of time. He was a serial builder at WP Carey. The question is how long. GPT would be a great tuck in and accretive purchase for a larger player and i am sure Dugan has the talent to manage / build a much larger enterprise than GPT. He is likely under-employed.


    On the topic of the board, maybe the old CEO continues to have a large stake in GPT and wants to keep his finger on the pulse of the operation.


    Let me know what you think.
    1 Nov 2013, 09:09 AM Reply Like
  • I like the speculation here, certainly wish it happen.


    Btw, I assume that Gordon has sort of non-competitive agreement with GPT so that he cannot take a job at a competitor, unless GPT is bought out?
    1 Nov 2013, 01:26 PM Reply Like
  • Another good point. Not really looking to argue TFCAB. Kind of hard to see your argument when you provide no proof just opinion.
    1 Nov 2013, 02:43 PM Reply Like
  • Thank you for sharing your due diligence, Chris. Not many people know how to back up arguments lately.
    1 Nov 2013, 02:45 PM Reply Like
  • Author’s reply » This earnings announcement demonstrates GPT management’s continuing excellent execution of their plan. The current FFO supports a share price of over $3. When you add the pipeline and the fourth quarter expense reductions, it supports a price over $5. Once cash and GPT’s borrowing capacity is deployed, it will support a price of over $7.


    However, they do not appear to be deploying money as fast as they had previously planned. Why not?


    They are looking at Europe. Is that a sign that there are not enough favorable opportunities left in the US? Is European real estate currently a better bargain?


    Now that they announced that they will pay off the accrued interest on our prefs, the 8.125% interest rate on the prefs is too high. They need to address that problem. What is their solution?
    7 Nov 2013, 12:43 PM Reply Like
  • Conference call starting now... hopefully you'll get some answers!
    7 Nov 2013, 02:05 PM Reply Like
  • Have they commented on where in Europe and in what segment would they invest?
    7 Nov 2013, 02:52 PM Reply Like
  • Author’s reply » Just exploratory, higher cap rates in Europe, but no specificity on where in Europe or in what segments they would invest.
    7 Nov 2013, 02:56 PM Reply Like
  • I guess it would be UK. Out of three reasonable markets, which would be UK, Germany and France. Cap Rates in Germany are actually lower, France is a dead country so it might only make sense in the UK.
    7 Nov 2013, 03:09 PM Reply Like
  • They mention euro hedging on that slide, so they may be looking outside of the UK as well. Still, it sounds very early-staged and I wouldn't be surprised to see it turn into nothing.
    7 Nov 2013, 03:19 PM Reply Like
  • I like the fact that they are small and think outside of the box. Their size gives them a chance to pursue opportunities that larger REIT's won't or can't and they seem to work very hard to explore every avenue they can.
    7 Nov 2013, 03:31 PM Reply Like
  • My primary concern would be that whatever they gain in incremental cap rate might be eaten up by incremental SG&A expense, as I imagine there might be some of that associated with an entrance into Europe. Still, I trust the GPT team, and I'm sure they'll take all necessary factors into account before initiating any such action.
    7 Nov 2013, 03:35 PM Reply Like
  • True. They would need to make a "bigger" deal in order to cover the additional expense. On the other hand Long term NNN leases are not too much asset management intensive, the rest can be outsourced.
    7 Nov 2013, 04:29 PM Reply Like
  • It seems Dugan is quite a good agent of change. He has really turned this company around. I like looking at Europe for NNN leasing. I hope Dugan developed good contacts in Europe like he seems to have in the US. This could be a really great investment for the company. I hope the company achieves scale in 2014.
    7 Nov 2013, 08:52 PM Reply Like
  • I agree that Gordan is doing a great job. Europe is an interesting idea.


    However, just to give the other viewpoint:


    The company made $2.2M in AFFO. $0.6M of that is from the defeasance pool and should be non-recurring so the real number is more like $1.6M. Divided by the 70.1M of shares outstanding gets me to $0.02 share or $0.08 annualized.


    To get to $0.16/share (which would imply a $3.20 share price at a 5% dividend) they are going to have to bring in another $1.6M per quarter. This might actually be harder than it sounds if you think about it this way:


    $1.6M is $6.4M annualized. If they invest another $100M at a 7.5% cap they will get an additional $7.5M NOI. However, their remaining capacity is made up of borrowings so they will need to take out mortgages at around 4.5% to buy additional properties so really the incremental AFFO from investing another $100M would be $3M. ($7.5M - $4.5M). So if they invest another $100M they will have an AFFO of 0.13/share or an implied share price of $2.60 at a 5% yield.


    Basically, they are going to have to do another equity raise to get additional capacity to get their dividend into respectable territory.


    Would be happy to get anyone's thoughts. My math could be wrong, just did some quick back of the napkin calculations.


    7 Nov 2013, 09:37 PM Reply Like
  • Are you considering the pipeline? I'm pretty sure based on portfolio + pipeline they can afford at least $0.04/qtr. I'll have to check my model, but Chris thinks a nickel and I think 4 cents, and I think Chris is right.
    7 Nov 2013, 09:40 PM Reply Like
  • Yes and no. I believe the pipeline is around $100M so I just tried to show what $100M of additional acquisitions at a 7.5% gets you given that they have used up most of the "free" money and are now going to have to start utilizing their debt capacity to buy property. This is perfectly fine (I think they actually should lever more than 1:1) but they are going to need to pay interest on the debt so the incremental AFFO from buying additonal property starts to go down (although it is somewhat mitigated by levering the fixed MG&A cost).
    7 Nov 2013, 09:43 PM Reply Like
  • Steve, what do you think they can get their cost of borrow averaged down too? If they get it low enough then the spread should allow AFFO to cover a near nickel divi.
    8 Nov 2013, 04:03 AM Reply Like
  • Well the the 10 year UST is on the screen right now at 2.74 so its hard to see how they could possibly get their cost much lower than 4% - 4.5%
    8 Nov 2013, 09:29 AM Reply Like
  • Steven, something else to keep in mind, they are currently paying an absurd floating interest rate of roughly 13% on the debt of the Bank of America JV (their share of that debt is $100M). That's a $13M interest expense which will be refinanced next year. Even if interest rates rise, I suspect that they will be able to refinance that $100M debt with a 7% (being very conservative -- they should be able to much better than that) yield, which would reduce interest expense in that JV by $6M per year.
    8 Nov 2013, 12:50 AM Reply Like
  • Vjrao,


    I think they are paying 1M a quarter on that floating note - where are you getting 13% from? Also, the current note is interest only so I would expect the total cash outflow from the note will increase when it is refinanced due to 1). the increased interest rate as they switch from floating to fixed and 2). the fact that they will need to start to amortize the principal.


    8 Nov 2013, 09:23 AM Reply Like
  • Author’s reply » Debt yield is a lender concept used when discussing the leverage of a real estate loan. It is computed by taking the loan balance and dividing it by the rent generated by a given asset. It has become an important metric in the current low interest rate environment because LTV can become distorted by low cap rates pushing up values and making LTVs look lower than they will be when rates rise and values correct, which we anticipate will happen over the course of the next few years. A higher debt yield indicates lower leverage on the loan (it's basically the inverse of a debt multiple). The interest rate on the loan is significantly lower at around 4.5%.
    10 Nov 2013, 02:21 PM Reply Like
  • Chris,


    Thanks for clarifying that, so it sounds like they would look to increase the leverage of the BAC JV. That would actually be a very interesting development and could provide a significant incremental benefit to their AFFO. Again this will be somewhat mitigated by higher interest expense but it should be a net positive for the company.


    Thanks again for the info!


    11 Nov 2013, 12:09 AM Reply Like
  • I got the 13% figure from listening to the earnings call on Thursday. Here's a copy of the transcript of Dugan mentioning the financing on the BofA JV. He's describing Slide 5 in the business plan update:


    "Page 5, just a snapshot of our capitalization. This is our capitalization with joint ventures on our books, both the Philips and the Bank of America investments are accounted for by the equity method. But this is a more accurate snapshot of our capitalization. Let me just touch on one thing here. The Bank of America JV, that was purposely floating rate debt because we bought it knowing that we would do some work on the portfolio, potentially restructure the lease, and at the end of that period, we would term out the debt. So investors should expect that this thing gets termed out in 2014, maybe sooner in '14 than later, but it will get termed out in '14. And just to put that in perspective, the debt yield on the existing Bank of America loan is roughly 13%. The market has gotten much better on the lending side and it has a ridiculously high debt yield for very good property, very good lease and very good tenancy. So obviously, that's a no-brainer loan to refinance at that type of debt yield."


    Here's the link to the full transcript of the earnings call on Seeking Alpha:
    9 Nov 2013, 11:36 AM Reply Like
  • That's not tying to their financial statements. 13% on $100M would be $13M in interest a year or $4.25M a quarter. If you look at slide 16 of the supplemental pack you'll see they paid $1.17M in Q3. How does this reconcile to Gordon's statement?
    9 Nov 2013, 11:57 AM Reply Like
  • Steven,
    The Bank of America portfolio is a Joint Venture, it is not wholly owned by GPT. Under a 50-50 JV, US GAAP effectively requires GPT to use the "equity method" (as DuGan mentioned in the transcript) to account for the parent's proportional earnings of the Joint Venture.


    Without diving too deep into accounting principals, the "equity method" of accounting only requires that the value of a Joint Venture be reported as a single line item on the income statement.


    Under the "equity method", you will not see the individual revenues or expenses (including interest expense) of the JV on GPT's income statement. You will only see a single line item on the income statement for "Equity in net income for Joint Ventures" which represents GPT's 50% share in net income of the JV.


    Similarly, under the "equity method" the JV investment is accounted for as a single line item on the balance sheet called "Investments in Joint Ventures". You will not be able to see the individual assets, liabilities, or shareholders equity of the JV. The "Investments in Joint Ventures" valuation is roughly calculated as the initial book value of the parent company's investment in the JV, plus the proportionate share of earnings since the investment date, less the dividends paid to the parent since the investment date.


    In your comment above, you mentioned that cash flow may be affected by the refinancing of that JV loan. Under the "equity method", any cash flow due to interest expense that resides in the JV will not appear in GPT's statement of cash flows. However, any earnings accrued to the JV and reflected in the net income GPT must be "backed out" of the statement of cash flows under "Operating Activities". You will see a line item in the statement of cash flows under "Operating Activities" called "Equity in Net Loss of Joint Ventures" to reconcile GPT's net income back to the cash flow.


    However, to add to this mess, any dividends paid from the JV to GPT will appear in the statement of cash flows under "Investing Activities" (The Bank of America JV is most likely structured as a private REIT and must send significant dividends to GPT in order to maintain its REIT status).


    In short, the $1.17M in interest expense that GPT paid in Q3 was an interest expense of the parent and unrelated to the Bank of America JV. Without DuGan commenting on the Bank of America JV interest rate on the earnings call, we would have no easy way to know what the interest expense of the JV really is. However, now that we do know that the interest expense on that portfolio is roughly 13%, we can surmise that refinancing that debt to a lower interest rate will positively contribute to GPT's earnings. It really is an unknown if refinancing the portfolio would increase the dividend that the JV would pay back to GPT (as we don't know how the loan would be restructured and the other financial details of the JV), but reducing the interest rate that much would likely increase the JV's dividend to the GPT over the long run.
    9 Nov 2013, 01:00 PM Reply Like
  • vjrao,


    Thank you for the very detailed response.


    I think I'm being thick on this one but I'm still a little confused. Isn't slide 16 in this supplemental pack the statement of operations for the entire JV?



    If the interest expense was 13% wouldn't this be reflected in this financial statement? If you look all the way to the right, this is where I got the GPT $1.17M interest expense.


    Am I not thinking about this correctly?


    9 Nov 2013, 04:34 PM Reply Like
  • Hi Steven,
    I've done some digging into this, and maybe I am the one being quite thick now. I do see the interest expense in the Supplemental Q3 slideshow (which I hadn't previously seen -- thanks for pointing me to that). That being said, I cannot positively reconcile DuGan's statement that the JV is paying 13% with the fact that this quarter's interest expense was only $1.17M (when it would've been $3.25M if the interest rate was 13%). At this point I am stumped.


    The only possibility I can think of is that the floating interest rate for the mortgage loan of the properties in the JV was recently reset at the higher 13% rate (a possible cause for this reset would be that the loan was previously defeased by a portfolio of Treasury securities -- that portfolio was sold off in May 2013. If the loan covenants specify that the interest rate goes up if the collateral changes, that could trigger a rate reset), but that this interest rate did not apply in Q3 2013.


    Does anyone else have an opinion on this? It may be worth a call to GPT's IR group to see if they can comment on this....
    11 Nov 2013, 12:02 AM Reply Like
  • vjrao,


    Chris was kind enough to address this in one of his comments above - I think he cleared up the issue.


    11 Nov 2013, 12:10 AM Reply Like
  • Chris,
    Thanks for clarifying this issue.


    Steven, thanks for pointing out the inconsistency between the conference call and the supplemental. Seems like i learn something new everyday on SA. Much appreciated!!!
    11 Nov 2013, 07:57 AM Reply Like
  • Steven,
    For someone who sold on 10-13-13, you sure seem to
    have a lot of time to spend on this stock.
    You also showed up on the yahoo finance board "bashing"
    this stock shortly after you sold.
    Aren't there more than 10,000 stocks to research?
    If you sold, why don't you just move along?
    We get it---you don't like this stock and believe that it
    is overvalued.
    Are you now short GPT?
    9 Nov 2013, 01:22 PM Reply Like
  • I actually quite like having Steven on here. I do respect his comments and his diligent research. Although he and I have differing views on GPT for the moment, he forces me to look at alternative points of view and constantly reevaluate my investment perceptions. I find that having an alternative viewpoint adds to my personal investment process and ultimately investment knowledge base and portfolio return.


    Steven, keep up the good work and keep the comments coming. In my view you are welcome to participate on this board any time!
    9 Nov 2013, 01:41 PM Reply Like
  • ibeabubba,


    I wrote 3 articles on GPT so I'm still somewhat attached to it even though I'm neither long nor short. It's a great case study to learn about how REIT's work due to its small size and simple business model.


    I'm not trying to "bash" anything, I'm simply trying to understand where my analysis is wrong.


    I wouldn't say I think it is overvalued, I would probably consider it fairly valued.


    And one last point - If I was really trying to bash a stock on a Yahoo message board to try to drive the price down, I would not have self-identified myself as I did.


    9 Nov 2013, 04:38 PM Reply Like
  • vjrao,


    Thanks for the kind words and I could not agree more. The ability to debate and challenge analysis is what I like most about Seekingalpha.


    9 Nov 2013, 04:39 PM Reply Like
  • I understand the attachment.
    We humans have a hard time letting go of things, even if
    the circumstances have changed.
    Still, to make more than 30 comments on public message boards--all of them negative---within one month after saying you have sold your entire position---can and should lead others to question your motives!
    Congratulations, however, on having a lot of free time.
    9 Nov 2013, 06:49 PM Reply Like
  • vjrao
    I am glad you like having Steve here and that he
    is "forcing" you to look at an alternative view.
    Personally, I don't need anyone to force me to
    look at an alternative viewpoint---the market does
    that almost everyday!
    I am certainly not stopping or discouraging anyone from commenting---that is the whole purpose of a message board, after all.
    However, most people commenting on a particular stock have an interest in that stock---one way (long) or another (short) or are looking to buy or short or perhaps are writing a book.
    For someone to write a long negative article, sell, go on multiple different stock message boards and keep commenting on
    something that one sold a month ago, well...anyone with half
    a brain has to wonder???
    9 Nov 2013, 07:05 PM Reply Like
  • I'm going on different boards because I'm simply looking for answers to questions. I wouldn't say that following a stock is a waste of time if you have no position - like I said there is still an opportunity to learn how these companies operate.


    With that being said, do you have an answer to my question? What are you projecting for a starting dividend in 2014?
    9 Nov 2013, 07:41 PM Reply Like
  • 2014---5c/ quarter
    2015---7c/ quarter
    2016---10c/ quarter
    But it is all just a guess, no?
    9 Nov 2013, 07:45 PM Reply Like
  • At the end of the day, yes, although it should be an educated guess considering the cash inflows and outflows are more transparent than most companies/industries.


    My point about learning from this company is illustrated by your projections. I have my own projections which I will then compare to what the company actually generates in 2014. If I'm wrong, I will figure out why I was wrong and alter my analysis on these companies going forward and it will result in me being better at analyzing the next small-cap REIT that crosses my desk.


    I really do hope all of the longs do well with this company. I don't have any axe to grind and I believe that Gordon and Ben are really good at what they do and are acting in the shareholders best interests, something that can't be said for many management teams. One of the reasons I would not short GPT is that I would not want to bet against this team.


    9 Nov 2013, 08:15 PM Reply Like
  • Thank you for your responses and
    all the best of luck to you.
    9 Nov 2013, 11:20 PM Reply Like
  • So you are saying that someone should own stock in a company if they are to question it?
    9 Nov 2013, 07:11 PM Reply Like
  • Yo Doc,
    You obviously did not read my post above correctly.
    Please try to read it again.
    9 Nov 2013, 07:38 PM Reply Like
  • Seems to me a lot of people are attached to this stock for the very reason Steve just said. The company is small and the financials are easy to follow. I agree questioning a stock is not bashing and it sounds to me that Steve is asking questions and vjrao is kind enough to answer them as far as he knows. What I don't understand is that if you are so attached to a stock how come you have no opinion on it? Also it pretty weak to try to put someone down for asking questions.
    9 Nov 2013, 07:15 PM Reply Like
  • Newsflash for you---
    not a lot of people are attached to this stock.
    It is a small company.
    Who said I had no opinion?
    I have a strong opinion on the stock--it has been
    and continues to be a strong buy for me---mostly
    because of the management team led by Mr. DuGan.
    I did not put anyone down.
    9 Nov 2013, 07:42 PM Reply Like
  • If you should not ask questions what should a forum be like?
    9 Nov 2013, 07:17 PM Reply Like
  • Author’s reply » Regarding some of the back and forth above, I would simply reiterate my welcome to all including GPT investors, potential investors, skeptics and shorts, management and directors. I am thrilled that this has developed into a vigorous conversation. My hope is that it can fit in with the style and caliber of the academy -- backed up with research, intent upon improving our cumulative knowledge, iterative between people with differing points of view, and often robust in defense of our strongly held views. Steve Reiman is one of the better examples for what I'm looking for.
    9 Nov 2013, 07:45 PM Reply Like
  • Hi Chris,


    Does the IMF rate cut help GPT in any European investing?
    9 Nov 2013, 08:12 PM Reply Like
  • Author’s reply » Good question. In theory, it could. That being said, the European investing effort is pretty preliminary at this point.
    9 Nov 2013, 08:14 PM Reply Like
  • Haven't seen this asked/answered yet, and if it has forgive me, but have they mentioned if they will pay their divs monthly or quarterly? This company is on my short list to buy next week and this will factor in.
    Thanks for the forum, nice feature to have and more companies should be debated this way
    9 Nov 2013, 08:21 PM Reply Like
  • Author’s reply » My understanding is that it will be quarterly; I would advocate $0.05 per quarter to start but would not be shocked if they prefer to star with $0.04 and then raise it on a regular basis.
    9 Nov 2013, 09:39 PM Reply Like
  • I have never run across the term AFFO. What is this and how does it relate to FFO?
    9 Nov 2013, 08:22 PM Reply Like
  • Author’s reply » Adjusted Funds From Operations (AFFO) refers to a computation made by analysts and investors to measure a real estate company's cash flow generated by operations. AFFO is usually calculated by subtracting from Funds from Operations (FFO) both (1) normalized recurring expenditures that are capitalized by the REIT and then amortized, but which are necessary to maintain a REIT's properties and its revenue stream (e.g., new carpeting and drapes in apartment units, leasing expenses and tenant improvement allowances) and (2) "straight-lining" of rents. This calculation also is called Cash Available for Distribution (CAD) or Funds Available for Distribution (FAD).
    9 Nov 2013, 09:38 PM Reply Like
  • thanks, that makes sense. AFFO is just a FAD - got it. :*)
    9 Nov 2013, 09:50 PM Reply Like
  • I have a question regarding AFFO. Exactly how much do you think this company should generate? The company only had about $270 million, shares outstanding at 60 million, 3.5 million preferred at a dividend of 8.125% and $25 tender fee. I would think a 5% return sounds about right.
    11 Nov 2013, 12:49 PM Reply Like
  • The more I think about this, the more I want plan B (sale of the company) to come to fruition. I think we would need to wait for this one more year at least.
    13 Nov 2013, 10:10 AM Reply Like
  • I am sorry to say but I think your right.
    13 Nov 2013, 09:31 PM Reply Like
  • Good to see insider purchases:
    21 Nov 2013, 09:47 AM Reply Like
  • Author’s reply » I agree. I have wasted tons of time tracking down every reason for insiders to sell... and it typically is not analyzable. I do get to learn lots about management's hobbies (classic car collections, etc.) that demand liquidity. But, while there are lots of irrelevant reasons to sell, there is essentially one reason to buy -- because one thinks it is under priced.
    21 Nov 2013, 09:50 AM Reply Like
  • Thanks good catch.


    Speaking of which can anyone recommend a good site to use to get SEC filing notifications emailed for their stock watch list?
    21 Nov 2013, 10:05 AM Reply Like
  • True. One other reason we've all seen insider purchases is to make others' think that insiders think it's underpriced. But I do not think this mgmt team would do that, and I think this purchase is too big for any fancy footwork.
    21 Nov 2013, 10:07 AM Reply Like
  • Author’s reply » EDGR is the premier provider of data derived from filings and other disclosure documents. EDGR creates and distributes company data and public filings for equities, mutual funds and other publicly traded assets, delivering products through online subscriptions and data licenses:
    21 Nov 2013, 10:10 AM Reply Like
  • you can also set up a feedly account to have edgar RSS feeds forwarded to one location OR some investor relations sections on company websites have areas to give you sec and public relations updates in your email
    21 Nov 2013, 10:17 AM Reply Like
  • EDGR I think you have to pay. I use this one:
    21 Nov 2013, 11:16 AM Reply Like
  • Thanks MIaffal33. That's a great site.
    21 Nov 2013, 11:43 AM Reply Like
  • 2 huge days in a row. Seems odd for a 25,000 share insider purchase to push this hard. 4x volume today.
    22 Nov 2013, 12:49 PM Reply Like
  • Author’s reply » There is some insider buying, there is some Year End window dressing, there is an imminent dividend, there are new institutional holders, and ARCP-GPT would make sense and owning a stake first would be a reasonable tactic.
    22 Nov 2013, 01:03 PM Reply Like
  • I wondered if some new institutional holders were coming on board with volume like that. Nonetheless, sail on!
    22 Nov 2013, 01:12 PM Reply Like
  • Author’s reply » An elegant solution: I love elegant solutions to problems.


    Q: Clearing aside all tangential issues, who would be Nicholas S. Schorsch's best successor as CEO at American Realty Capital?


    A: Gordon DuGan. If Mr. Schorsch has to buy GPT in the process, it does not appear that he is averse to buying real estate assets.
    22 Nov 2013, 01:53 PM Reply Like
  • Author’s reply » Two questions for the forum:


    1.) What initial quarterly dividend would you advocate for GPT next quarter?


    2.) At what price would you sell your GPT shares to a strategic acquirer?


    Thanks for any answers and their rationales.
    25 Nov 2013, 07:22 AM Reply Like
  • I'm a scientist, and investing is my hobby once everyone else in my house is asleep. Hence I do not claim the expertise in accounting / reading balance sheets as others on this forum....


    1) I observe some unreasonable expectations in the hoi polloi. While I would like 5c, my reading of the finance tea leaves and assuming that the very nice execution continues, I think 3c or 4c is more likely.


    They seem to be growing cautiously -- which is how I would prefer it -- to avoid any backtracking. That is, I got the impression from the tone in the recent conference call that they would rather take "1 step at a time," rather than 3 steps forward and 2 back.


    2) Depends on when the offer comes. In FY14, about $6.50. (Current Price plus 4 or 5yrs of dividends is my working thesis...)


    I have realized the capital appreciation that I intended/projected; I'm sticking around for the dividend now since all my other income assets are producing crap. (Munis are paying nicely, but I have taken huge capital hits there...)
    25 Nov 2013, 04:52 PM Reply Like
  • Author’s reply » Thanks for the thoughtful reply.
    25 Nov 2013, 05:02 PM Reply Like
  • An acquisition wouldn't make sense for management for less that $9 per share, as DuGan & Co. have a $20M bonus that pays out when the stock trades above $9. I don't think that they would sell the company for less than that. In order to get to a level where a buy out at that share price is justified, we will have to wait quite a bit longer...


    However, I do like the fact that the team continues to execute!!


    Disclosure: Long GPT.
    25 Nov 2013, 05:06 PM Reply Like
  • Hi Chris. What I would advise (advocate) is 4 cents, based on my understanding of the FFO. Like Sandman I would hope that they are prudent with any distribution, since I intend to hold the stock.


    As for a buy-out, I want what Dugan wants - presumably his reward metrics are what he is shooting for. I'm pretty happy with this pick so far in any event, and you brought it to my attention. Thank you!
    25 Nov 2013, 05:10 PM Reply Like
  • Author’s reply » You're welcome, Qniform.
    25 Nov 2013, 05:14 PM Reply Like
  • Author’s reply » You are probably right. Thanks.
    25 Nov 2013, 05:14 PM Reply Like
  • I echo what others have said. I am fine with a conservative dividend of 3 or 4 cents as long as the growth can continue at a steady pace.
    25 Nov 2013, 05:38 PM Reply Like
  • Author’s reply » In that case, you will probably not be disappointed.
    25 Nov 2013, 05:40 PM Reply Like
  • I agree with what Vjrao has said, except I don't know that we will have to wait quite a bit longer for justification of a $9 price. Vjrao is thinking logically, but if Mr. Schorsch wants Mr. DuGan and Company bad enough I suspect he might find a creative way to justify that price. Now that ARCP is going to be a $21 billion company, over paying for GPT isn't necessarily material to ARCP.


    I realize this is probably wishful thinking but I've found that intelligent successful people still have the ability to let emotions rule.
    25 Nov 2013, 08:10 PM Reply Like
  • Paying a lower price to GPT shareholders based on NAV, and paying out the GPT management bonuses as if the price had hit their performance targets anyway, would be a cheaper way for ARCP to acquire GPT than paying $9 for all the shares.
    26 Nov 2013, 02:07 AM Reply Like
  • All the comments about what management would accept are apt, but the question was what we (stockholders) would accept. In reality, I think that management would have a rough time justifying the rejection $7 in early 2014, if such an offer came up.
    26 Nov 2013, 10:44 AM Reply Like
  • Author’s reply » Excellent point.
    26 Nov 2013, 10:50 AM Reply Like
  • Right, plus, doesn't everyone in the incentive plan already own some stock, anyway? That would lessen the pain. :)
    26 Nov 2013, 11:00 PM Reply Like
  • I'm sure mgmt's "$9/shr" bonus could be transferred across to an ARCP price target agreeable to both parties if a buyout offer were put forth.
    26 Nov 2013, 12:19 PM Reply Like
  • Hmmm, ARCP just hired David Kay as president. Not sure if this might take a little wind out of GPT?
    26 Nov 2013, 11:09 PM Reply Like
  • Just a word of thanks re: GPT.PRA, Chris. Bought 3 weeks ago at $34 on bizarre dip, receive a dividend of $10.23 on Monday, and trading at $24.75 today with a forward yield of 8.2%. A great cash/bond alternative.
    15 Jan, 12:29 PM Reply Like
  • Author’s reply » How excellent! That is just the trade I was hoping you'd make. As for the bizarreness of the opportunity -- it was due to everyone getting the shares in tax-advantaged accounts. The seller was a taxable American.
    15 Jan, 12:34 PM Reply Like
  • I did the exact same thing - I even found them a bit below $34 right after Christmas. Used my div. to purchase more common and have already seen a nice uptick there as well. Cheers.
    15 Jan, 12:49 PM Reply Like
  • 3.5 cents per common share quarterly div declared today.


    Right in line with expectations.
    13 Mar, 10:34 AM Reply Like
  • Gramercy Property Trust Inc. Reports Fourth Quarter and Full Year 2013 Financial Results
    13 Mar, 11:18 AM Reply Like
  • Market reaction points to disappointment I suppose, but I am seeing this 3% drop as an opportunity to repurchase shares at around 10% less than what I sold them for a few months ago. Long GPT!
    14 Mar, 08:34 AM Reply Like
  • Author’s reply » If you are interested in a portfolio including GPT prefs and similar opportunities, I set one up here:
    18 Mar, 11:19 AM Reply Like
  • Chris-any thoughts on today's GPT news/stock price?
    18 Mar, 03:19 PM Reply Like
  • Author’s reply » Nothing new from me. -C
    18 Mar, 03:56 PM Reply Like
  • Thanks Chris.
    18 Mar, 06:21 PM Reply Like
  • A while back I exited out of GPT common to preserve gains. I'll just keep a watch for a while to see how it goes.
    18 Mar, 06:12 PM Reply Like
  • I'm quite happy (assuming that the $100MM note is successfully issued) that GPT is able to now issue debt on an unsecured basis as opposed to a secured basis... It should give GPT some additional "dry powder" with which they can acquire new assets and grow their asset base faster. Glad to see they've taken this step.
    18 Mar, 07:18 PM Reply Like
  • And the term of the convert (3.75% convert at $6.2) is pretty good!
    19 Mar, 02:33 PM Reply Like
  • Agreed. I think they got great terms!


    Disclosure: Long GPT equity.
    19 Mar, 05:16 PM Reply Like
  • A question on the preferred issued recently. If all the $100 mil is converted, even at $6.20, would that not represent a significant dilution of the shares, as the current market cap is only approx $370 mil. I realize that the share price and market cap will likely be up in the future, when converted. Still, it seems to me somewhere between 10 - 20% dilution.


    I'm not that knowledgeable about preferred or convertibles, so maybe I'm missing something here. Thanks.
    2 Apr, 01:25 AM Reply Like
  • Hi Jack. Basically all REIT's issue equity to grow. As long as the cash raised is used to buy more properties which should be accretive to earnings investors are usually fine with it.
    2 Apr, 07:35 AM Reply Like
  • Thanks gsterling. Yeah, I'm not familiar with reit's either. That's interesting (and good to know). It now makes sense why no one else in this forum was too concerned.
    3 Apr, 01:01 AM Reply Like
  • Jack, this particular circumstance isn't only applicable to REITs either. Any debt or equity issuance is potentially dilutive if it doesn't add to assets or profit generation. Preferred stock is higher in the capital structure than the common, and converting it to common really has no net effect if it converts at a proportionate value below or equal to the total value of the assets owned in the total capital structure.
    3 Apr, 11:11 AM Reply Like
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