Gramercy Grabs American Financial

Gramercy Capital Corp. (GKK), a commercial real estate specialty finance mREIT, announced earlier today that it is buying American Financial Realty Trust (AFR), a net lease REIT for approximately $3.4 billion in a cash-and-stock deal.

Gramercy will acquire American's stock for $5.50 per share in cash and 0.12096 shares of its stock. American stockholders will own about 31% of Gramercy's outstanding shares when the transaction closes. The deal also includes the assumption of American's debt.

The acquisition shifts Gramercy from a pure specialty finance company to a diversified business with commercial real estate finance and property investment operations. The deal will boost Gramercy's assets by 65% and shift its portfolio to a 50-50 mix of net leased real estate and real estate backed securities.

After the transaction is complete, Gramercy expects to own approximately 27 million square feet of commercial real estate in 37 states to add to its $3.5 billion of debt investments.

Gramercy claims it is "uniquely qualified" to extract value from AFR's portfolio of bank-related properties, which is a plausible claim. Although Gramercy has only limited experience with net leased properties, its external manager, SL Green, has extensive experience leasing to members of the banking and financial services community.

The deal puts an end to the two-year struggle to right the ship at American Financial. AFR has been selling assets to try to improve profitability for its core portfolio, but success has been limited. With the company’s shares near all-time lows and the rumblings about a slowdown in the CMBS market, Gramercy appears to have made a very timely call.

Gramercy Gains Momentum

Gramercy Capital (GKK) is a mortgage REIT focused on originating and investing in various pieces of commercial loans. The company came public in August 2004 and has delivered solid performance ever since. In stark contrast to the troubles in the residential mREIT universe, Gramercy has thrived on its investments in New York City and surrounding areas.

GKK reported third-quarter results after the bell on Wednesday, and the results were impressive. The company posts funds from operations (FFO) of $0.83/share and raised full-year FFO guidance to $3.00 - $3.05/share. Interestingly, Gramercy is one of the few mREITs to use FFO as a key metric -- likely attributable to its sponsor, equity REIT giant SL Green Corp (SLG).

Much of Gramercy's earnings power this quarter, however, was due to a $92.2 million realized gain on sale of the Company's 45% interest in One Madison Avenue in Manhattan. Nonetheless, Gramercy continues to deliver quarter after quarter, and until the CRE market begins to show signs of stress, the Company is attractively valued at just over 1x book value and a yield of 9.8%. Moreover, GKK expects to declare a special dividend in the fourth quarter of 2007, as it has earned FFO of $2.36/share through the first nine months of 2007 but paid out dividends of just $1.82/share -- a payout ratio of just 77%.