The real estate market has generally been favorable in recent years, and real estate investment trusts like Gramercy Property Trust (NYSE:GPT) have sought to tap into strong demand for good properties. Yet even a strong environment for the industry doesn't guarantee growth, and like many of its peers, Gramercy has consistently looked to acquisitions in order to help expand the scope of its business.

Coming into Tuesday's second-quarter financial report, Gramercy investors were a bit nervous about whether the REIT would successfully find ways to keep growing key financial measures. As we've seen in past quarters, Gramercy wasn't able to come through with results that satisfied shareholders completely. Let's take a closer look at Gramercy Property Trust and what its latest results say about its prospects going forward.

An industrial distribution property in Europe, with the letters DSV on the side of the building.

Image source: Gramercy Property Trust.

Gramercy Property Trust sees its numbers shrink

Gramercy's second-quarter results revealed how previous troubling trends got worse during the quarter. Revenue was down 6% to $131.4 million, which was even worse than the roughly 4% decline that most investors were looking to see. Net income plunged by around three-quarters, and the more important adjusted funds from operations (FFO) dropped 15% to $65.9 million. That produced adjusted FFO per share of $0.44, and the REIT also missed the consensus forecast for core FFO.

Taking a closer look at the numbers, Gramercy continued to make strategic transactions both to acquire and to sell properties in its portfolio. The REIT spent $171.5 million to purchase 10 industrial properties, and build-to-suit land-parcel purchases added another $49.1 million to the spending column. Occupancy rates on all but one of those properties were at 100%, ensuring smooth cash flow stemming from their purchase.

Gramercy also sold off 11 properties during the quarter. The REIT received $183.3 million for those properties, and the cap rate at which it sold them indicated on average more expensive valuations than the cap rates on the properties it acquired during the quarter. Sales centered on the office and retail bank branch real estate segment, and the company recorded net gains of $2 million on the sales.

Looking at Gramercy's leases, the company executed a single new lease and renewed three agreements. The deals covered nearly 900,000 square feet of space, and average lease terms of more than eight years emphasized the REIT's preference for long-term tenants.

Elsewhere, Gramercy completed the sale of its Gramercy Property Europe fund's assets after the end of the quarter. The transaction paid more than $100 million to Gramercy, and the REIT made additional moves to simplify its European exposure and consolidate its European business to its Gramercy Europe subsidiary, which acquired three properties during the quarter and will manage Gramercy Property Europe's former assets for the next year. Gramercy's asset management business saw an expected drop in fee revenue due to the scaling-down of a key relationship.

Can Gramercy bounce back?

Of most concern to Gramercy investors is the REIT's warning about the remainder of the year. Gramercy cut its guidance for 2017, saying that core FFO will now be between $2.05 and $2.10 per share, with adjusted FFO of $1.90 to $1.95 per share. Both sets of numbers were below the previous ranges that Gramercy set at the beginning of the year. Gramercy cited dispositions from early in the year and delayed acquisition activity until later in the year for the shortfall.

Gramercy did continue to ensure that it had sufficient liquidity to make transactions. Thanks in large part to its previously announced $274 million offering of stock, Gramercy had $970 million in available liquidity as of June 30, up by more than $185 million from three months ago.

Gramercy's shareholders weren't entirely pleased with the warning on FFO, and the stock fell 2% early in the trading session following the announcement. Gramercy needs to find ways to keep its FFO moving higher rather than losing ground, or else investors will conclude that they need more than just a 5% dividend yield to keep them satisfied with the REIT's long-term growth prospects.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.