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Gramercy: A Liquidation Type Scenario
Posted by: whopper investments (IP Logged)
Date: March 16, 2012 08:35AM

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



Stocks Discussed: GKK,
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