No wonder Gramercy Capital (GKK) waited so late to release its second-quarter earnings - I'm sure they hope investors don't read the release. FFO for the quarter barely covered the dividend, and analysts are certain to question Gramercy's revised FFO guidance. The Company now sees full-year FFO of just $2.20 to $2.45 for fiscal year 2008 - despite already earning $1.32/share in the first six months of 2008 alone. GKK blamed the diminished expectations on an increase in non-performing loans and provisions for possible loan losses prompted by challenging economic conditions, severe illiquidity in the capital markets, and a difficult operating environment.
Gramercy's jump in its loan loss provisions was shocking. The Company's allowance nearly tripled after the Company recorded an additional $23.2 million in expected future losses. The hit to earnings would have been even more severe had it not been masked by the repurchase of $37.8 million of BBB to A+ rated CRE CDO bonds previously issued by Gramercy’s CDOs, which generated gains of $17.6 million.
Clearly, Gramercy's fundamentals are rapidly deteriorating, validating the stock's sharp fall during the past six weeks. Analysts will be quick to suggest the possibility of a dividend cut within the next two quarters, as Gramercy's $2.52/share annual dividend is no longer supported by the FFO outlook. While FFO is not equal to taxable income, it still remains an important bellweather for judging the health of the dividend. Given Gramercy's disclosures, it's difficult to tell if the Company had any spillover TI from 2007 that could possibly support a continuation of the $0.63/share dividend through the rest of 2008.
Gramercy's jump in its loan loss provisions was shocking. The Company's allowance nearly tripled after the Company recorded an additional $23.2 million in expected future losses. The hit to earnings would have been even more severe had it not been masked by the repurchase of $37.8 million of BBB to A+ rated CRE CDO bonds previously issued by Gramercy’s CDOs, which generated gains of $17.6 million.
Clearly, Gramercy's fundamentals are rapidly deteriorating, validating the stock's sharp fall during the past six weeks. Analysts will be quick to suggest the possibility of a dividend cut within the next two quarters, as Gramercy's $2.52/share annual dividend is no longer supported by the FFO outlook. While FFO is not equal to taxable income, it still remains an important bellweather for judging the health of the dividend. Given Gramercy's disclosures, it's difficult to tell if the Company had any spillover TI from 2007 that could possibly support a continuation of the $0.63/share dividend through the rest of 2008.
6 comments:
Patrick,
Thank you for the analysis. I been long in GKK for some time and I like the investment and the nice dividend.
If you haven read it yet, I want to include an excerpt from Fitch negative outlook:
"Collateral Analysis:
The pool is comprised of 'AAA' rated CMBS bonds (68.0%), two recently added CMBS in the 'AA' rating category (0.6%), and 11 commercial real estate loan (CREL) assets (31.4%). Of the 11 CREL assets, five (14.1% of the total pool) are whole loans and six (17.3% of the total pool) are subordinate pieces, either B-notes or mezzanine debt.
The Sheraton Hotel Miami and the Sheraton Hotel Orlando, cross-defaulted whole loans (collectively, 6.3% of the pool) secured by two full service hotels located in Miami and Orlando, Florida, are currently 60 days delinquent. In January 2008, the sponsor's non-compliance with the franchise agreement at the Miami property triggered a non-monetary loan default for both loans (they are cross-defaulted), and subsequently new management was installed at both properties. The Miami property is no longer operating as a Sheraton, and it is expected that the Orlando hotel will imminently become independent as well. In May 2008, the borrower filed for bankruptcy. According to the asset manager, the loans will most likely be worked out while remaining in the CDO. The workout strategy of the loans could include performing property improvement work and the re-flagging of the hotels.
The performance of all other CREL assets has been generally stable since closing. As of the June 2008 trustee report and per Fitch categorizations, the CDO is within all its property type covenants. Office loans comprise the largest percentage of CREL at 50.1%. Hotel loans have the next highest percentage at 37.4%. The CDO is also within all its geographic location covenants with the highest percentage of CREL located in New York at 48.1%.
The pool has better loan diversity relative to other CRE CDOs. Fitch's Loan Diversity Index (LDI) is currently 308 compared to the LDI covenant of 370"
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What is your opinion on the current stock price ($8.00)?. It seems a possible dividend cut has already been priced in.
I will appreciate your comments.
Mariano
I certainly think Gramercy could be a real buy on weakness here, but I was concerned that they had no deal flow in the second quarter except for repurchasing their own debt. Gramercy does have assets available to sell to also raise capital. Will reserve final judgment for after the conference call...
Well, I have read the call transcript and they have made clear they will reduce the dividend in Q3 and also indicated they may continue buying back GKK CDOs on a opportunistic way.
What is your opinion on yesterdays call?
Seems GKK has liquidity for the time being...Do you judge it as a good buy @ $7.?
Mariano
I think Gramercy put a pretty positive spin on some fairly ugly numbers. Just think about how poor GAAP/FFO numbers would have been without that $17.6 million gain on extinguishment of debt. That said, GKK is a buy on valuation at these levels. They're trading at something like a third of book. That's ridiculously low.
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