Gramercy (GKK) reported a really interesting quarter yesterday. Since I’ve written them up quite extensively previously, I’m going to post my quick thoughts and then some key take-aways in bullet form. Note that I’m traveling, and their 10-k is about 300 pages long, so I’ve only had time to go through the press release.
First, the company maintains incredible liquidity at the corporate level. At year end, they had $267m in assets at the corporate level, versus just $45m in liabilities ($23.2m, or more than 50% of their liabs, are simply accrued divs of preferred shares). The majority of their assets, $163m, consists of unrestricted cash. In addition, they hold $38.2m in fair value ($51.4m face value) of CDO assets at the corporate level that are not reported on the balance sheet as they are eliminated in consolidation.
As I’ve done before, let’s do a quick breakdown to see how this value distributes in a liquidation type scenario.
The non dividend liabilites would take up $21.4m of the cash. The preferreds liquidation preference is $88.2m, in addition to their $23.2m of preferred dividends, so they’d have a total claim on corporate assets of $111.4m.
In total, preferreds and corp. liabilities would take up $133m in cash. That would leave $30m in unrestricted cash left over for the common, or (using 51.1 shares outstanding)$0.587 in cash per share and, in total, $2.63 in common equity value per common share. In addition, you’d have to include the $38.2m ($0.7475 per share) in fair value CDO notes, for a total common equity value of ~$3.35.
Note that this value assumes zero value to future cash flows from their CDO or any potential recovery from their residual claims on the CDO, as well as no value to their new real estate mgmt agreement or their real estate mgmt capabilities.
In sum, I think the company continues to trade at a significant discount to their ultimate worth. While the recent run up in price (I’m writing this after market close March 15) has certainly taken them closer to their liquidation value, they still trade below liquidation value and, I think, significantly below their net cash flows in a run off situation.
Now, as promised, a quick bullet list of my take-aways from the quarter.
Cons
- No preferred dividends or outright sale of company
- Resignation of COO, effective immediately, with no more info given.
- CDO-2007 fails overcollateralization test, not eligible for reinvestmenting cash until failure cured.
- Yet to reach a permanent agreement regarding real estate management
Pros (in addition to the ones mentioned above!)
- After year end, sold 3 buildings for $34m, generating an additional $16.1m ($0.315 per share) in unrestricted corporate cash
- CDO 2005 and 2006 are both passing over-collateralization tests and are generating significant cash flows. If you look at page 5, it shows cash flows from the CDOs YTD. CDO 2005 has provided $5.9m in distributions and fees YTD, and CDO 2006 has generated more than $10.1m. In total, these two have generated more than $16m in cash YTD, or another $0.315 per share!
- Those last two items alone total $0.63 in cash generation so far this year!
Disclosure- Long GKK common and preferred
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The 2007 CDO is in an Event of Default (can’t be cured), which gives the bond holders certain rights to liquidate the CDO and return the proceeds to the senior bond holders. So while the management fees on might be minimal, how would losing the 2007 CDO change their value to prospective buyers? Gramercy no longer has the ability to fund asset purchases through their CDO structures, its now 100% a runoff business.
The majoirty holder of GKKRE 2007-1 waived the EoD as of yesterday.
Interesting, but only until August 27, 2012, what’s the significance of that date?
What is your source Ben?
Here’s the relevant text from the notice posted on the trustee’s website:
II. Notice of Waiver of Event of Default.
Pursuant to Section 5.14 of the Indenture, you are hereby notified that a Majority of the Controlling Class has waived (a) the Event of Default which occurred under Section 5.1(j) of the Indenture with respect to the Notes and its consequences and (B) immediately upon the occurrence thereof, if any, each Event of Default that may occur under Section 5.1(j) of the Indenture until the earlier of (i) August 27, 2012 and (ii) the date written instructions to the contrary are provided to the Trustee. Such Majority of the Controlling Class will continue to consider each such Event of Default under Section 5.1(j) of the Indenture and determine whether or not to waive such Event of Default or whether to exercise any other rights or remedies that it may have with respect to such Event of Default. Note that the Majority of the Controlling Class has reserved the right to revoke or extend any waiver at any time.
Thanks MDC