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Thoughts on GKK’s New Directions

June 18, 2012 | About:
whopper investments

whopper investments

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On Weds, Gramercy (GKK) announced the completion of their strategic review, a new direction for the company, and a new CEO. There were quite a few moving pieces here, and I’m going to hold off on judgement until we see their new plans for the company (which should come in the next two-three months), but here are my initial thoughts.

First, this is an unequivocal good thing for the preferreds. Why?

  1. The new plan calls for (eventually) raising new debt or equity to fund net-leased buildings. Guess what- there’s no way they are raising anything from the market until they get current on their preferred dividends, or get current in conjunction with the capital raise.
  2. The only reason to have a company own income producing net-leased buildings is to have the company as a dividend paying REIT. The company can’t pay dividends w/o getting current on its pref. payments
  3. The company has, in total, ~$100m owed to preferred (adding both liquidation value and accrued dividends). The new CEO just injected an additional $2.5m to the capital structure below the preferreds. Simply adds to the margin of safety.
I continue to expect the preferreds will go current on the div payments within the next year, and the new strategy / CEO role only enforces that.

On the common equity side, I’m not sure.

From an overall value realization point, I think shareholders would be slightly better off w/ a runoff scenario where everything is just paid down and the company is eventually sold off, as I don’t see any unique capabilities in the company owning real estate and they’re selling so far below liquidation value IMO. As a common holder, I really don’t want them to dilute. But if they pursue the net-lease strategy without diluting, I’m actually relatively happy.

In addition, much of the incoming staff’s bonus doesn’t kick in without the stock getting to the mid-single digits. I see no reason why it can’t get their if the new strategy is executed properly.

Overall, mildly disappointed that the company isn’t selling themselves, but excited to see the new strategy. Continue to see a lot of value in both the prefs and common.

Disclosure: long GKK equity and preferreds.


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