Gramercy Property Trust (NYSE: GPT ) has delivered a massive 110% total return over the past three years. This has been spurred from the company's nearly seamless transition from a commercial finance business -- investing in loans and commercial mortgage-backed securities -- to an equity real estate investment trust.
However, while the potential for big returns and the company's reestablishment of a dividend are intriguing reasons to invest in the company, the best reason to buy Gramercy is its management team.
It's easy for investors to forget that the people behind the desk drive companies and create those returns we love. For that reason, I believe the people who Gramercy has tapped to run the business, their plan for success, and why they want to run this company, are three reasons to buy in this case.
Just over two years ago, Gramercy had amassed nearly $2 billion in loans and commercial mortgage-backed securities. However, based on a "strategic review in response to changes in market conditions," the company sold those assets and redirected its focus on investing in net leased real estate -- leases that require the tenant to pay a majority of real-estate related expenses.
To lead the company in its new direction, Gramercy recruited three key executives that had just left W.P. Carey -- one of the today's leading net lease REITs. Those executives are Gordon DuGan, Benjamin Harris, and Nicholas Pell.
DuGan was president and then CEO of W.P. Carey from 1999 to 2010, and oversaw growth of assets under management from $2 billion to approximately $10 billion. He took over the CEO job for Gramercy in 2012. Harris was W.P. Carey's head of U.S. investment and Pell held the position of director in the investment department. Harris and Pell today are president and head of investments at Gramercy, respectively. Ultimately, all three are more than qualified to lead the REIT.
2. Opportunistic strategy
Gramercy's business is broken into two segments: net leasing industrial and office real estate and asset management.
DuGan and Harris have said they believe the industrial real-estate space offers the most attractive opportunities for a number of reasons. Most notably, while larger companies are battling over larger acquisitions, Gramercy can use its position as a smaller market capital company to take advantage of smaller deals and still move the needle.
Moreover, the uniqueness of these assets makes switching costs for tenants more expensive, and therefore they are more likely to renew leases over time. Gramercy management also believes the industrial space, in particular, is underpenetrated.
On the asset management side, the most intriguing opportunities lie in value-add (improve existing properties) and build-to-suit (design and build to tenants' needs). As the economy has improved, these more risky and higher-yielding investments have been gaining steam over the last three years.
Because these assets require significant capital investments and do not create immediate cash flow, Gramercy does not see these as "on balance sheet" investments. However, due to experience and established networks, the asset management team is in a unique position to help third parties, as well as itself, take advantage in this space.
The two-pronged approach of disciplined net lease acquisitions and a strong asset management business creates what seems like almost endless opportunity. And I think management is poised to take advantage of this over time.
3. Why they're here
Experience and strategy are important, but why the executives care, what excites them about the business, and why they wake up in the morning is, for me, the difference between a good business and a great one.
However, executives don't always come right out and say why they want to run this business. Luckily for us, though, we have gotten such statements.
First, W.P. Carey explained that DuGan's exit was based on disagreements as to the direction of the company. That may suggest he wanted more control over strategy -- something he seems to have been granted at Gramercy.
Moreover, in response to a question on the company's potential for growth and the opportunities in the sector, DuGan said during Gramercy's first-quarter conference call: "That's one of the really exciting things about this business that gets us up early in the morning. That potential is absolutely 100% there."
The last word
Gramercy Property Trust has an experienced management team that has created an opportunistic plan for growth and seems genuinely excited to build something great.
So while a strengthening economy, past growth, and potential for future returns are appealing reasons to like this company, I believe the strong and dedicated management team the company has assembled is the best reason to buy Gramercy Property Trust.
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