GPT - Gramercy Property Trust

[PlanMaestro]

The CDO bonds buybacks have started:

 

During 2011, the Company repurchased $46,525 and $1,734 par value of bonds issued by the Company’s 2006 and 2005 CDOs, respectively including $20,000 par value of Class A-1 from the 2006 CDO, $17,067 par value of Class A-2 from the 2006 CDO, and $667 par value of Class B from the 2005 CDO, generating gains on early extinguishment of debt of $14,418.

 

 

This will reduce my estimates of cash on hand below $3, but it is great capital allocation and provides a margin of safety for CDOs 2005 and 2006 if they trigger the OC tests (Redemption Strategy). The company has a total of $72M par value in CDO bonds.

[educatedidiot]

Thanks for the reply.  I did see the OC test table, but I was hoping they might provide better disclosure elsewhere.  I am assuming you came up with the $200 M by just trying to back into it from the stated OC values then?  I didn't think that would necessarily give an accurate estimate of the equity value.

 

My understanding is that they have $2.7 B in CDO bonds outstanding now.  $1.1 B were in 2007 and this CDO is still in it's investment period.  So there are $1.6 B outstanding between 2005 and 2006.  Those were both $1 B offerings, so I assumed that there is $700 M left in 2005 and $900 M left in 2006.  Using those numbers I get around $130 M in 2005 equity and $80 M in 2006 equity, or $210 M combined, around what you have estimated.  But if you extend that math to the 2007 CDO (a $140 M shortfall) and sum them all up you arrive at $70 M in combined equity -- whereas if you take the consolidated figures from the balance sheet, there would seem to be closer to $360 M in negative equity.  I've seen other cases in the past where trying to back into the CDO equity in this manner yields an inflated estimated, so I've never been comfortable with it.

 

Did you arrive at the $200 M estimate in that sort of a manner or is it based on some other information?

 

Thanks again for sharing your work on this name

[PlanMaestro]

Thanks for the reply.  I did see the OC test table, but I was hoping they might provide better disclosure elsewhere.  I am assuming you came up with the $200 M by just trying to back into it from the stated OC values then?  I didn't think that would necessarily give an accurate estimate of the equity value.

 

My understanding is that they have $2.7 B in CDO bonds outstanding now.  $1.1 B were in 2007 and this CDO is still in it's investment period.  So there are $1.6 B outstanding between 2005 and 2006.  Those were both $1 B offerings, so I assumed that there is $700 M left in 2005 and $900 M left in 2006.  Using those numbers I get around $130 M in 2005 equity and $80 M in 2006 equity, or $210 M combined, around what you have estimated.  But if you extend that math to the 2007 CDO (a $140 M shortfall) and sum them all up you arrive at $70 M in combined equity -- whereas if you take the consolidated figures from the balance sheet, there would seem to be closer to $360 M in negative equity.  I've seen other cases in the past where trying to back into the CDO equity in this manner yields an inflated estimated, so I've never been comfortable with it.

 

Did you arrive at the $200 M estimate in that sort of a manner or is it based on some other information?

 

Thanks again for sharing your work on this name

 

The exact numbers for both CDO 2005 and 2006 are a little higher and CDO 2007 is lower, and the $200M is a conservative number.

 

The CDO collateral math is different than GAAP. I think I explained this point in the series but if not, GAAP is based on provisions and management estimates of losses instead of collateral values. Those estimates are highly variable among REITs and I consider this management the most conservative in terms of GAAP numbers.

[MrB]

Berkadia Commercial Mortgage Hires Hugh Hall as Managing Director - Capital Markets

http://www.businesswire.com/news/home/20110210005474/en/Berkadia-Commercial-Mortgage-Hires-Hugh-Hall-Managing

 

".... founder and chief operating officer of commercial real estate finance company Gramercy Capital Corp. (NYSE: GKK), Hall established..."

[MrB]

Plan,

Please indulge two questions of mine.

1. How did you calculate the $3.5m senior collateral management fees? I assume it is from the Note Valuation Reports?

2. Who receives the Subordinate collateral manager fees? From the Note Valuation Reports I note these are almost double the senior fees.

[MrB]

CDO 2006. Gramercy wins appeal to 24 Aug 11

http://www.courthousenews.com/home/OpenAppellateOpinion.aspx?OpinionStatusID=11600

 

Fiesta De Vida. Par $31m/Recovery $12m

 

The judgment is affirmed. Gramercy is awarded costs on appeal.

 

Following a foreclosure proceeding which resulted in a deficiency, plaintiff

Gramercy Investment Trust (Gramercy) sued to recover the unpaid balance of a real

estate mortgage loan, naming as defendants Lakemont Homes Nevada, Inc. and

Lakemont Communities Nevada, LLC (collectively referred to as Lakemont), who were

2

the guarantors of the loan. Gramercy made a motion for summary judgment for the full

balance of the unpaid loan, approximately $31 million, without adjusting for the fair

market value of the property following the collapse of the real estate market. The trial

court granted the motion for summary judgment and Lakemont appeals.

[PlanMaestro]

Plan,

Please indulge two questions of mine.

1. How did you calculate the $3.5m senior collateral management fees? I assume it is from the Note Valuation Reports?

2. Who receives the Subordinate collateral manager fees? From the Note Valuation Reports I note these are almost double the senior fees.

 

1. Yes, but you can reverse engineer it (the fees% are disclosed in the 10K and other places)

2. I consider the subordinate management fees as part of the excess interest of the CDO because they require the CDOs to be passing all the OC tests. So the subordinate fees do not provide much margin of safety because they are paid only if the CDO is healthy.

[PlanMaestro]

CDO 2006. Gramercy wins appeal to 24 Aug 11

http://www.courthousenews.com/home/OpenAppellateOpinion.aspx?OpinionStatusID=11600

 

MrB, how do you do a search for Gramercy's cases on that site?

[MrB]

When I click on the link it automatically starts downloading the pdf. I just emailed you a copy too.

 

Bad news! I have quite a few more questions after spending some time on GKK today and I don't think you mentioned it in your posts.

 

1. At CDO-2006 the OC ratio for Class A/B dropped 129% to 124% from June to Sep 11 and Class C/D/E dropped from 116 to 113 over the same time. What drives this? I also note it is similar to the 4 percentage point drop in 2008. Similar story at CDO-2005

2. Page 5 of the 9/30/2011 monthly report for CDO 2005 indicates that Class F/G/H failed the OC test, but not A/B and C/D/E. Does it mean the entire CDO 2005 then fails?

3. In your first write up you said re CDO-2006 “With so much cash and the reinvestment period ending in August, CDO 2006 has another shot for a big improvement of its test by buying more assets at a discount to par/collateral value.” However, When I look at p17 of the 07/29/2011 monthly report I note that management paid virtually par for the $110m of loans. So why don’t they buy at a discount?

4. You said you worry about the Coyote Land investment. Why and what tipped you off initially that it might be in trouble? Was it the portfolio collateral file?

5. Furthermore, Coyote matures this month. I expect it to default right or are there other credible options? Furthermore and in light of question 2 it will make it even tougher to heal CDO-2005, right?

6. In the first writeup you noted “The most important of the options is to repurchase CDO bonds at a discount with Corporate cash and retire them. This reduces the CDO bonds and improves the OC test. Even more, the discounts are still big (40-50%) so it is very good use of unrestricted cash”. Where can one see where the CDO bonds are trading at? What are the sources for the pricing info?

7. What do you make of the June sales/purchase activity for CDO 2007? They essentially swapped $65m of CMBSs at 75 cents for the Willis Tower loan at par. See p17 of the 06/30/20011 monthly report.  Sidenote: Willis Tower sales process is nearing its end. Does this impact the loan in any way? http://online.wsj.com/article/SB10001424052970204010604576597081253490592.html

8. I am sure you know this, but I have not seen you mention it; p184 of 10K, mentions that in 2011 the company repurchased $48m par value bonds from 2005&2006, generating gains of $14m.

9. Line item, “Remaining Interest Proceeds to the Preferred Shares” in the waterfall report. Is that what you refer to as excess interest?

As always, tnx for sharing.  ;)

 

[MrB]

Plan,

On question 5. I just noted the "Extended Maturity Date" for Coyote is 1/31/2012. Nonetheless, the question still is why it is not a defaulted loan. It cannot keep current and it is still in "Interest Only period".

 

$74m of land in this area. Looks grim.

 

http://maps.google.com/maps?q=coyote,+cnr+Bailey+Avenue+and+Santa+Teresa,+san+jose&hl=en&ll=37.199399,-121.739588&spn=0.023108,0.045447&sll=37.195091,-121.744909&sspn=0.011486,0.022724&vpsrc=6&hnear=Santa+Teresa+Blvd+%26+Bailey+Ave,+San+Jose,+Santa+Clara,+California+95037&t=h&z=15

 

http://sanjoseca.gov/coyotevalley/CVSP_Text_Initial_Draft/section4.pdf

[PlanMaestro]

MrB, where did you read that the loan was extended to 2012? My understanding is that Coyote may have an interest accrual option.

 

 

Plan,

On question 5. I just noted the "Extended Maturity Date" for Coyote is 1/31/2012. Nonetheless, the question still is why it is not a defaulted loan. It cannot keep current and it is still in "Interest Only period".

 

$74m of land in this area. Looks grim.

 

http://maps.google.com/maps?q=coyote,+cnr+Bailey+Avenue+and+Santa+Teresa,+san+jose&hl=en&ll=37.199399,-121.739588&spn=0.023108,0.045447&sll=37.195091,-121.744909&sspn=0.011486,0.022724&vpsrc=6&hnear=Santa+Teresa+Blvd+%26+Bailey+Ave,+San+Jose,+Santa+Clara,+California+95037&t=h&z=15

 

http://sanjoseca.gov/coyotevalley/CVSP_Text_Initial_Draft/section4.pdf

[PlanMaestro]

When I click on the link it automatically starts downloading the pdf. I just emailed you a copy too.

 

Bad news! I have quite a few more questions after spending some time on GKK today and I don't think you mentioned it in your posts.

 

1. At CDO-2006 the OC ratio for Class A/B dropped 129% to 124% from June to Sep 11 and Class C/D/E dropped from 116 to 113 over the same time. What drives this? I also note it is similar to the 4 percentage point drop in 2008. Similar story at CDO-2005

2. Page 5 of the 9/30/2011 monthly report for CDO 2005 indicates that Class F/G/H failed the OC test, but not A/B and C/D/E. Does it mean the entire CDO 2005 then fails?

3. In your first write up you said re CDO-2006 “With so much cash and the reinvestment period ending in August, CDO 2006 has another shot for a big improvement of its test by buying more assets at a discount to par/collateral value.” However, When I look at p17 of the 07/29/2011 monthly report I note that management paid virtually par for the $110m of loans. So why don’t they buy at a discount?

4. You said you worry about the Coyote Land investment. Why and what tipped you off initially that it might be in trouble? Was it the portfolio collateral file?

5. Furthermore, Coyote matures this month. I expect it to default right or are there other credible options? Furthermore and in light of question 2 it will make it even tougher to heal CDO-2005, right?

6. In the first writeup you noted “The most important of the options is to repurchase CDO bonds at a discount with Corporate cash and retire them. This reduces the CDO bonds and improves the OC test. Even more, the discounts are still big (40-50%) so it is very good use of unrestricted cash”. Where can one see where the CDO bonds are trading at? What are the sources for the pricing info?

7. What do you make of the June sales/purchase activity for CDO 2007? They essentially swapped $65m of CMBSs at 75 cents for the Willis Tower loan at par. See p17 of the 06/30/20011 monthly report.  Sidenote: Willis Tower sales process is nearing its end. Does this impact the loan in any way? http://online.wsj.com/article/SB10001424052970204010604576597081253490592.html

8. I am sure you know this, but I have not seen you mention it; p184 of 10K, mentions that in 2011 the company repurchased $48m par value bonds from 2005&2006, generating gains of $14m.

9. Line item, “Remaining Interest Proceeds to the Preferred Shares” in the waterfall report. Is that what you refer to as excess interest?

As always, tnx for sharing.  ;)

 

Just a few questions?  :D

 

1. As has been reported in the WSJ, Hilton Las Vegas and Jameson Inn defaulted. From the information reported it looks like these loans were not so bad and that there is a chance for recovery. But for the moment the CDOs are taking a hit and this type of foreclosure negotiations has an element of unpredictability.

2. It the OC tests do not pass, the interest payments are used to retire CDO bonds from the most senior to the most junior.

3. My impression is that the use of cash of all CDOs was used to prioritize a curing of CDO 2005

4. Very large and it is a land loan.

5. It can always be extended or modified, where did you find that it was extended?

6. I have been following other mREITs transactions (RAS, RSO, NRF, NCT, ...)

7. As I said,my impression is that the critical goal of that transaction may have been to cure 2005 but also there might be some worries on the pricing of the CMBS and might wanted to sell them before all the mess of the last months. The transaction was closed very close to the peak of CMBS prices after a long run-up.

8. 30% discount, not fantastic but still it is good to have that margin of safety for 2006.

9. Gramercy also owns the J and K tranches plus the subordinated fees, so the waterflow cut is the interest remaining after paying the Hs.

[PlanMaestro]

Back in business.

 

10K, 10Qs and earnings statement all up in Edgar. As expected, lots of cash and CDOs 2005 and 2006 passing, for the moment, their OC tests.

[MrB]

Plan,

In the latest Q on page 5 of the pdf under the table Collateral Manager Fees and CDO Distributions it reads as follows. 

 

During the six months ended June 30, 2011 and the year ended December 31, 2010, the Company repurchased at a discount,

notes issued by its three CDOs, generating net gains on early extinguishment of debt of $14.5 million and $19.4 million,

respectively. Repurchases included some of the senior-most classes of notes from CDO 2005-1 and CDO 2006-1. The bonds

were not retired, but are reflected on the Company's balance sheet as a reduction in the amount of CDO bonds outstanding as

of June 30, 2011. The Company views the Class A-1, A-2 and B bonds as attractive investments with reasonable near-term

liquidity.

 

Firstly the notes are due in 2041 and according to the above statement they bought them at 70 cents (1-($14.5/$48.3)) $48.3 was the stated par value of the bonds. We know the A-1 tranche pays about $2.6m per annum. So if I calculate the returns (details below) I get 1.8% per annum for the A-1 investment, which does not strike me as great.

 

PV   (353,150,124) FV     498,747,105 Coupon         2,698,403 N 30 I 1.8%

 

So firstly, what does management mean when saying it is an attractive return and secondly, that it has reasonable near term liquidity? How do I need to think about this?

 

Thanks!

[PlanMaestro]

MrB, the average life of a CDO is more like 6 years after the end of the reinvestment period.  There are 2 uses for CDO bond repurchases:

 

1. Protect CDOs using redemption strategy: that works best for healthy CDOs that are too thin in their OC tests.

2. Capital Allocation: that works best for busted CDOs that have accelerated principal payments.

 

Check section redemption strategy of write-up http://variantperceptions.wordpress.com/2011/06/22/gramercy-capital-management-team/ where I explain how this can be good use of capital allocation ... especially if a CDO fails its OC test when the A and B tranches get accelerated payment. One thing to consider is that these are unlevered returns. Competitors like NCT Newcastle have accelerated buybacks using repo lines.

 

Plan,

In the latest Q on page 5 of the pdf under the table Collateral Manager Fees and CDO Distributions it reads as follows. 

 

During the six months ended June 30, 2011 and the year ended December 31, 2010, the Company repurchased at a discount,

notes issued by its three CDOs, generating net gains on early extinguishment of debt of $14.5 million and $19.4 million,

respectively. Repurchases included some of the senior-most classes of notes from CDO 2005-1 and CDO 2006-1. The bonds

were not retired, but are reflected on the Company's balance sheet as a reduction in the amount of CDO bonds outstanding as

of June 30, 2011. The Company views the Class A-1, A-2 and B bonds as attractive investments with reasonable near-term

liquidity.

 

Firstly the notes are due in 2041 and according to the above statement they bought them at 70 cents (1-($14.5/$48.3)) $48.3 was the stated par value of the bonds. We know the A-1 tranche pays about $2.6m per annum. So if I calculate the returns (details below) I get 1.8% per annum for the A-1 investment, which does not strike me as great.

 

PV   (353,150,124) FV     498,747,105 Coupon         2,698,403 N 30 I 1.8%

 

So firstly, what does management mean when saying it is an attractive return and secondly, that it has reasonable near term liquidity? How do I need to think about this?

 

Thanks!

[MrB]

Plan,

"the average life of a CDO is more like 6 years after the end of the reinvestment period"

The indenture states the notes mature in 2041, so I assume you say the above because after the reinvestment period ended the principal has to be used to pay down the notes, so effectively tying the maturity of the notes to the maturity of the collateral, right?

 

However, is it not possible to extent the maturity of collateral and thereby the maturity of the note?

Furthermore, is it not possible to exchange existing collateral for new collateral, after the reinvestment period ended and if you were to exchange for collateral with longer maturity you will extend the maturity of the note?

 

Thanks,

B

[PlanMaestro]

Plan,

"the average life of a CDO is more like 6 years after the end of the reinvestment period"

The indenture states the notes mature in 2041, so I assume you say the above because after the reinvestment period ended the principal has to be used to pay down the notes, so effectively tying the maturity of the notes to the maturity of the collateral, right?

 

However, is it not possible to extent the maturity of collateral and thereby the maturity of the note?

Furthermore, is it not possible to exchange existing collateral for new collateral, after the reinvestment period ended and if you were to exchange for collateral with longer maturity you will extend the maturity of the note?

 

Thanks,

B

 

Sorry MrB, I missed you post.

 

1. Yes, after the reinvestment period ends, the maturity of the CDO is tied up to principal payments of the collateral.

 

2. They can extend, if they want, and even restructure. However, if you look at the history of these type of loans, lots of them tend to get paid. I imagine that loans like Sears may get extended several times  but even in that one the borrowers may want to get cheaper financing from a CMBS or a bank at the time of maturity.

[MrB]

Makes sense. Thank you Plan.

[Kraven]

Note too that there will be limitations on the maturities of the underlying collateral.  Typically everything needs to mature on or prior to stated maturity with perhaps a small bucket of long dated collateral.  The intent is that sometime before maturity the collateral will be sold or mature.  No one wants a situation where stated maturity occurs and the underlying collateral hasn't been sold (and can't be sold for some reason or at a good price) and maturity is past that date.

[Olmsted]

GKK soliciting bids:

 

http://www.bloomberg.com/news/2011-11-01/gramercy-capital-bankers-said-to-solicit-bids-from-buyout-firms.html?cmpid=yhoo

[MrB]

Yesterday's 13D by Choi http://www.sec.gov/Archives/edgar/data/1287701/000106823811000392/gramercycapitalcorp-13d.htm

 

Item 4.                    Purpose of Transaction

 

The Reporting Persons acquired the shares of Common Stock of the Issuer for investment purposes and not with any purpose of changing or influencing the control of the Issuer or in connection with or as a participant in any transaction having that purpose or effect.  Subsequent to filing of the Schedule 13G, however, having learned through news reports of a potential strategic transaction, including the potential sale of the Issuer in a bid/auction process and upon assessment of his investment in the Issuer, Choi has determined that although he continues to hold his shares of Common Stock of the Issuer for investment purposes, he may seek information from management and the board of directors of the Issuer (the “Board”), and may engage in further discussions with management, the Board, other stockholders of the Issuer and other relevant parties, concerning such potential strategic transaction and the business, operations, governance, management, strategy, capitalization and/or future plans of the Issuer generally, or in proposing one or more of the actions described in subparagraphs (a)-(j) of Item 4 of Schedule 13D.  In addition, he plans to continuously evaluate, among other factors, developments involving the potential sale of the Issuer, the financial condition, results of operations, business and prospects of the Issuer, the securities markets in general and the market for the Common Stock, prevailing economic conditions and expected trends, all with a view to determining whether to hold, decrease or increase his investment in the Common Stock, through open market, privately negotiated or any other transactions.  Each of Spouse and Anda Investment Partners has orally agreed with Choi to vote the shares of Common Stock of the Issuer of which each is the beneficial owner in the same manner as Choi votes the shares of which he is the beneficial owner on any matter or transaction upon which Choi instructs them to vote.

[PlanMaestro]

Yesterday's 13D by Choi http://www.sec.gov/Archives/edgar/data/1287701/000106823811000392/gramercycapitalcorp-13d.htm

 

I have not found much on Choi. I know he is the CIO of Cosmo Investment Management in Korea and there is a Bloomberg interview from 2010. Is there more? ...

 

http://www.zoominfo.com/#!search/profile/person?personId=488454724&targetid=profile

[rijk]

nearly three months have passed since gkk was put up for sale....

 

the share price peaked at around $3.70 during mid sept when the initial buy out news appeared but has come down again to $2.70

 

if there is so much upside potential in gkk, wouldn't large pe firms have expressed their interest by now???

 

regards

rijk

 

 

[onyx1]

nearly three months have passed since gkk was put up for sale....

 

the share price peaked at around $3.70 during mid sept when the initial buy out news appeared but has come down again to $2.70

 

if there is so much upside potential in gkk, wouldn't large pe firms have expressed their interest by now???

 

regards

rijk

 

This might help.  All new information from last night.

 

http://www.sec.gov/Archives/edgar/data/1287701/000114420411068840/v242569_ex99-1.htm

 

http://www.whopperinvestments.com/gramercy-capital-gkk-this-aint-your-daddys-net-net

 

 

[PlanMaestro]

if there is so much upside potential in gkk, wouldn't large pe firms have expressed their interest by now???

 

I think the process started less than two months ago and there are a few that have showed interest. But the rumors I am hearing, from people that have inquired, is that selling the company is not a done deal and is only one of the avenues being pursued. I repeat, this is at the level of rumor and I have no way of verifying it.