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Gramercy Property Trust Celebrates Its First Post-Merger Results

By Dan Caplinger – Feb 26, 2016 at 10:41AM

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The REIT completed its key combination with Chambers Street Properties.


One of Gramercy's properties. Image source: Gramercy Property Trust.

Real estate investment trusts have risen in popularity over the past 20 years because investors have looked for solid sources of dependable income with higher yields than other assets can offer. Gramercy Property Trust (GPT) has properties across the U.S., and it offers a nice dividend yield of more than 7% to its investors. Coming into Friday's fourth-quarter financial report, investors in Gramercy Property Trust had hoped that the REIT would be able to keep growing, and at least by some measures, Gramercy managed to outpace their expectations. Let's look more closely at the latest results from Gramercy Property Trust to see what might lie ahead for the REIT in 2016.

Gramercy Property Trust gets real
Gramercy's fourth-quarter results reflected its recent merger with Chambers Street Properties. Revenue jumped 87% year over year to $70 million, which was higher than the $63 million that most investors had expected to see. GAAP funds from operations finished with a loss, but adjusted FFO climbed more than 160% to $34.6 million, or $0.15 per share, up by 25% from the previous year's $0.12 per share.

The big news for the quarter, of course, was the Chambers Street merger. Under the deal, Gramercy investors got 3.1898 shares of Chambers stock for every Gramercy share they owned, but the post-merger entity kept the Gramercy name. Gramercy says that it is now the largest industrial and office net lease real estate investment trust, carrying an enterprise value of about $6 billion and more than 320 properties on its books totaling 63 million square feet. Gramercy did point out that merger-related costs, as well as acquisition expenses, were primarily responsible for its GAAP FFO loss. For the quarter, those costs amounted to $42.1 million, or $0.22 per share.

One result of the merger was new financing, and the combined company refinanced its debt into various credit facilities, term loans, and senior notes. In total, Gramercy got $2.225 billion in newly refinanced debt, most of which is in term loans with initial terms of three to seven years.

Gramercy reported continuing growth on the acquisition front. The REIT acquired seven properties during the quarter, paying $66.5 million. The properties have an average lease term of almost 16 years, which gives Gramercy valuable stability. After the quarter ended, Gramercy bought three more properties but also sold off three multitenant office portfolios worth more than half a billion dollars.

Gramercy's asset management business took a small hit during the quarter. The manager of about $900 million in commercial properties saw its fee revenue fall about 10% to $4.7 million.

What's next for Gramercy?
Gramercy took the opportunity to reaffirm its overall 2016 outlook. The company expects core FFO and adjusted FFO to come in between $0.66 and $0.75 per share, assuming that dispositions of properties and acquisitions of replacement properties will both amount to about $1 billion.

Yet arguably the biggest issue that faces not only Gramercy but also commercial REITs generally is whether the interest rate environment will continue to be favorable. Shares of Gramercy responded negatively to the specter of higher rates in 2015, and because the REIT needs to have financing available in order to make acquisitions, borrowing costs can play a substantial role. Lately, the rate environment has been more stable, but worries about a slowing economy could eventually create concerns about the ability of Gramercy's tenants to avoid default in some cases.

Gramercy's shareholders seemed happy with the results, sending the stock up more than 1% following the announcement. If the real estate market keeps holding up as well as it has, then Gramercy could reap the rewards in 2016 and beyond.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gramercy Property Trust. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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