Some of you may remember the movie, Jerry Maguire, played by Tom Cruise, that spawned several popular quotations, including "Show me the Money!" (shouted repeatedly in a phone exchange between Rod Tidwell and Jerry Maguire).
When I think about “show me the money”, I am referring to dividend growth, in both historical and future terms.
In simple terms, “show me the money” is a process that includes analyzing financial statements, talking to management, and understanding the company’s profitability and competitive forces.
In a few days, I plan to launch a new podcast series called “Shoe Me The Money” and each week I will be examining a REIT for its unique “moat-like” characteristics.
As a REIT analyst, it’s my job to ignore the noise and determine how a company can fend off competition and earn high returns on capital – increasing earnings, returning cash to shareholders, and compounding intrinsic value.
In my “Show me the money” podcast I will examine all of the company’s fundamentals with an emphasis on sustainability of the dividend. In other words, the “show me the money podcast” will be focused on the absolute certainty of profits and not just extraordinary returns.
For most investors, dividend growth is a critical catalyst that drives shareholder returns and in each and every “Show me the Money” podcast I will take a microscopic look at all of the essential drivers for dividend growth. That means, if a dividend looks spooky – because it’s not covered by cash flow – I will call it as a sucker yield. Also, if the dividend is stuck – with no chance for growth – I will call out as a value trap.
The other famous line in the Jerry Maguire movie was “help me, help you”. I hope that you will enjoy my podcast series in more ways than one – my hope is that my hours of research can be compacted to a data-based weekly show that showcases the best REITs to own.
Now let’s get started…
A REIT In Transition
Gramercy Property Trust was almost extinct in 2009, and that's when the marriage between GPT and American Financial began to unravel, primarily due to the combined company's significant leverage as well as the growing distressed loans originated by GPT's legacy lending organization.
The primary investors - SL Green, Citigroup, and Goldman Sachs - took significant losses in the paper bet. All ended up losing, and had it not been for the "hard net lease assets" owned by American Financial, GPT would have likely been extinct.
In 2012, Gramercy installed a new management team led by veteran REIT executive, Gordon DuGan. He placed a strong emphasis on reducing leverage and building a durable portfolio of high quality net lease assets.
Along with the new team (many experienced former W.P. Carey employees), DuGan was hired to reposition the company from real estate finance (legacy was Gramercy Capital Corp.) to net lease property owner, rebranding GPT into Gramercy Property Trust.
Photo of Gordon Dugan (from 2016 Annual Report)
On December 17, 2015, GPT and Chambers Street completed their merger. Under the agreement, GPT shareholders were to receive 3.1898 common shares of CSG for each share of GPT that they own. The transaction, which was first announced on July 1, 2015, created the largest industrial and office net lease REIT.
Now that the Chambers Street reverse merger is complete and assets are integrated, the GPT portfolio repositioning is basically done. Back in September 2015, GPT outlined a plan in phase one and phase two to sell $1.1 billion to $1.2 billion of assets, very largely office assets at a 6.7% to 7.2% cap rates.
The company is now almost complete with its intergration. As a % of the wholly-owned portfolio NTM Cash NOI, Gramercy has grown its industrial portfolio from 47% to ~72.7% in the past year. The goal by the end of 2017 is to have 75% of NTM NOI coming from Industrial, 15-20% from Office and 5-10% from Specialty Retail. As you can see below, GPT is an Office and Industrial REIT, focused heavily on Industrial:
In 2017, Gramercy should see the benefit of reduced complexity, with fewer moving pieces. The company sold approximately 25% of its asset base in 2016, and there is now much less noise in the growth model.
Given the shift to a predominantly Industrial portfolio, I compare Gramercy to the traditional Industrial REITs. Here’s how they have performed YTD:
A Closer Look Inside of Gramercy Property Trust
GPT's wholly-owned portfolio is comprised of 320 assets (67.5 million square feet) and the portfolio occupancy is 97.7%. The current top five markets measured by NOI are Chicago, Dallas, L.A., Baltimore/Washington and New York/New Jersey.
Here's a snapshot of the top 10 tenants:
Here's a snapshot of the top industries:
Gramercy’s acquisition pipeline is currently very healthy with nearly $260 million in transactions under contract including the two build-to-suits expected to deliver in Q3-17 located in Charleston and Chicago.
As you can see below, Gramercy has maintained a growing build-to-suit pipeline:
In Q2-17 Gramercy invested $171.5 million into new industrial assets at an average cash cap rate of 7.1% and a weighted term of just over 7 years. These assets included stabilized newly delivered Class A bulk warehouses, infill Class B buildings and two specialized industrial assets in Miami and the Inland Empire.
Gramercy’s pipeline for Q3 and Q4 looks very strong with $164 million under contract and considerably more than that that has been awarded. The company remains on pace for the year to achieve the high-end of its volume guidance ($1 billion for the year).
Subsequent to quarter end, Gramercy Property Europe plc completed the sale of 100% of the Fund’s assets. The transaction resulted in net distributions to Gramercy of €90.8 million ($103.8 million), inclusive of a promoted interest distribution of approximately €7.9 million ($9.0 million).
The Balance Sheet
Gramercy ended the quarter with a significant amount of cash, which was related to the proceeds from its April equity raise. The company reduced mortgage debt by about $55 million during the quarter and also reduced the revolver by about $50 million.
The remainder of those proceeds were utilized for acquisitions and the balance of restricted cash was up considerably from the prior quarter primarily due to cash held in 1031 exchanges primarily related to the sale of Gramercy Woods.
Gramercy’s effective interest rate stands at about 3.38%, down slightly from 3.5% in the prior quarter and that’s due primarily to the reduction in secured mortgage debt. Gramercy’s borrowing is 78% unsecured and 22% mortgage debt that’s encumbered by properties.
Gramercy is rated BBB- by S&P and that is comparable to (FR) and (LXP). Industrial peers with a more favorable credit profile include (DRE), (PSB), (PLD), (LPT), and (WPC).
Gordon DuGan, Gramercy;s CEO said on the latest earnings call, “we’re (Moody’s) on their positive watch list hopefully for an upgrade to triple B flat or BAA2.”
The Latest Earnings Results
On a GAAP basis, Gramercy recorded net income for Q2-16 of $0.04, NAREIT-defined FFO for the quarter was $0.49 as was the company defined core FFO and AFFO for the second quarter of 2017 was $0.44.
All the quarterly figures reflect the effect of the April 2017 capital raise, the increase in the diluted share count reduced FFO core and AFFO by about $0.03 per share.
Gramercy revised guidance down and narrowed the range to $2.05 to $2.10 per share for Core FFO and $1.90 to $1.95 per spare for AFFO for the year.
The revision reflects lower than expected payments during the first half of the year, which combined with the dilution from the equity offering in April and dispositions in the first half of the year causing the company to operate well below target leverage throughout the quarter.
Gramercy expects to make up for this lag through the balance of the year and expects to be at run rate quarterly core FFO of $0.53 to $0.54 and run rate quarterly AFFO of $0.49 to $0.50 by the end of this year. Here’s my AFFO forecast for 2017-2019:
Show Me The Money
As you see (above), Gramercy is forecasted to grow AFFO/share by an average of 7% in 2018 and 2019. Let’s take a look at the current dividend yield:
When you think about 7% growth and a 5% dividend yield, you think about a possible 12% total return opportunity. However, I think Gramercy will generate better returns…
As you see, Gramercy has plenty of cushion for dividend growth, however, when you combine the 2018 growth forecast, you can see that Gramercy has the potential for outsized dividend growth:
Now let’s examine the P/AFFO multiple:
Now let me tell you why I have included Gramercy in the “show me the money” category: This REIT has transformed into a simpler business model, it has no conflicts of interest (non-traded REITs) and it has sold off the European business. The company should trade in-line with other peers such as STAG and MNR….
Gramercy has plenty of powder to increase the dividend, and evidenced below, this REIT understands the concept of dividend growth: