Why I Believe Gramercy Will Continue To Shine

It's been a while since I wrote my first article on Gramercy Property Trust (NYSE:GPT). In fact, almost 2 ½ years have passed since that article in which I suggested that (Gramercy's) experienced management team should be able to get this company back on the REIT track and start paying dividends again".

For a quick refresher, Gramercy was once a high-flying mortgage REIT that originated and acquired whole loans, subordinate interests in whole loans, mezzanine loans and preferred equity interests in companies owning U.S. commercial real estate.

The company was then a major player in the commercial real estate collateralized debt obligation (CRE CDO) market until the credit slowdown sapped interest in these high-risk vehicles.

During the market peak (2009), Gramercy acquired a triple-net REIT by the name of American Financial Realty Trust (formerly AFR) for roughly $1.1 billion. The deal was meant to consolidate two niche REITs with individual exposure to both the debt and equity markets.

However, in 2009, the marriage between Gramercy and American Financial began to unravel, primarily due to the combined company's significant leverage as well as the growing distressed loans originated by Gramercy's legacy lending organization. After adding significant leverage to the failing multifaceted platform, lenders (Citigroup, Goldman Sachs, SL Green Realty, and LBS Debt Holdings) started closing in.

Analysts largely endorsed the merger suggesting that Gramercy would be able to diversify its business by acquiring more than 1,300 well-leased commercial properties - mostly leased to banks. Also, it was conceived that Gramercy would also eliminate a weaker-performing equity REIT while also stabilizing the riskier mortgage REIT platform.

American Financial (once led by Nicholas Schorsch) was a primary landlord to several of the nation's largest banks, among them Bank of America (BOA) and Wachovia (now Wells Fargo). Gramercy had planned to structure the deal to flip roughly one-third of the bank portfolio, pay American Financial stock, and assume around $2.3 billion in debt.

So as the deal closed, it was structured in a way such that Gramercy could transform a real estate finance company into a multifaceted operating company.

Gramercy, previously a financing unit run by executives from SL Green(NYSE:SLG), was the largest shareholder, followed by Citigroup and Goldman Sachs. All of the investors ended up losing and had it not been for the "hard net lease assets" owned by American Financial, Gramercy would have likely evaporated into thin air (since the toxic paper originated by the CDOs was virtually worthless). As a result, Gramercy was forced to cut its dividend and the share got rocked.

Gramercy Capital 2.0

But Gramercy - at least the entity - was still breathing life and on August 9, 2012 the new CEO (on a conference call) said "Gramercy Capital Corp. 2.0" would focus on using moderate leverage to create recurring, durable cash flows from net leased real estate, according to the transcript.

Net leased real estate is the equity ownership of real estate that has a long-term lease with a corporation, with the tenant paying the majority of the operating costs, taxes, insurance and maintenance. DuGan said he has worked in the net lease business for 24 years, and his team also has experience in the sector.

Gramercy, who at one time focused on two extremely different core business lines: high-risk commercial real estate lending and low-risk net-lease real estate, begin focusing on investments in the most risk-averse triple-net sector.

When DuGan joined the company he decided to undergo a strategic overview of operations, which resulted in the decision to dispose of the lending operations and focus exclusively on net lease. As DuGan explained (in an interview on REIT.com):

The issue at Gramercy was they did both lines of business with high leverage. And high leverage going into the downturn was a recipe for disaster.

DuGan stepped in at the perfect time in order to renew the company's focus and to take advantage of market opportunities. As illustrated below, Gramercy once had over $7.8 billion in assets and as of Q1-15 the company has over $1.5 billion in assets.