Following up on yesterday’s post on Gramercy Capital, I’ve received quite a few comments asking one of two things
“If there’s so much value here, why hasn’t private equity bought it already?”
“Doesn’t the company electing a preferred board member show that they don’t plan on paying their preferred dividends anytime soon?”
I think the answer to both these questions are somewhat correlated. I think there’s tons of value for a private equity buyer here; that’s why PE firms are sniffing around. However, the company literally just managed to solve their realty problem (announced solution on Sept. 1), and they are still in the process of “turning” the keys over to their banks. Post keys turnover, Gramercy will still have an extremely complex balance sheet with $2.5-3B in assets and liabilities.
In other words, potential acquirers have had only three months to see what the realty deal looked like and what Gramercy will look like post deal. And Gramercy only released its pro-forma statements for what they will look like post deal last night. AND Gramercy is still in the process of turning over the keys to its bank (won’t be completed until year end).
I don’t think this is exactly a situation that an acquirer is going to jump into. More likely, I think potential acquirers wait until Gramercy officially rids itself of realty and then make offers for the company.
Which brings us to the preferreds- why isn’t the company paying dividends on them? I think Gramercy is trying to maintain liquidity at the parent level for the pending bid for the company and to ensure smooth transition of the properties to their lenders.
And here’s a fun counter question- what if i’m wrong about all this? what if the company isn’t in play?
Well then you’re still buying the common at cash value. You’re still getting plenty of upside from any realty or CDO management fees / dividends. You’re still buying the preferreds at a huge discount to liquidation. And the company still has several catalyst on the horizon- most notably, the fact that, as a REIT, they will have to start paying dividends in the near future. Having the preferred elect a board member should only speed that process along.
Final thoughts- some have mentioned they think GKK could be about to raise equity. I don’t think that’s in the cards. Maybe if they were closer to the $4.50-$5.50 per share range they’d consider it. But given their strong liquidity position and management’s history of doing what it takes to preserve and increase shareholder value over the past two years, I can’t see them raising equity at these prices. Also, if you were absolutely convinced they were raising equity, why not go long the preferreds? Adding common equity beneath them would make the preferreds even safer- it’s one reason I added NCT preferreds (write up to come later)
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