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Section 1: 10-Q (FORM 10-Q)

20150630 10Q Q2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

 

 

 

 

 

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to                             

 

Commission File Number: 001-32248

 

 

 

 

GRAMERCY PROPERTY TRUST INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

Maryland

 

06-1722127

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

521 5th Avenue, 30th Floor, New York, New York 10175

(Address of principal executive offices) (Zip Code)

 

(212) 297-1000

(Registrant's telephone number, including area code)

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES     NO  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES        NO  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer 

 

Smaller reporting company 

 

 

 

 

(Do not check if a smaller

 

 

 

 

 

 

reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES     NO 

 

The number of shares outstanding of the registrant's common stock, $0.001 par value, was 57,495,568 as of July 31, 2015.

 

 


 

 

GRAMERCY PROPERTY TRUST INC.

INDEX

 

 

 

 

 

 

 

 

 

 

PAGE

PART I.

 

FINANCIAL INFORMATION

 

3

ITEM 1.

 

FINANCIAL STATEMENTS

 

3

 

 

Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 (unaudited)

 

3

 

 

Condensed Consolidated Statements of Operations for the three month and six months ended June 30, 2015 and 2014 (unaudited)

 

4

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three month and six months ended June 30, 2015 and 2014 (unaudited)

 

5

 

 

Condensed Consolidated Statement of Equity for the six months ended June 30, 2015 (unaudited)

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)

 

7

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8

ITEM 2.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

44

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

60

ITEM 4.

 

CONTROLS AND PROCEDURES

 

62

PART II.

 

OTHER INFORMATION

 

63

ITEM 1.

 

LEGAL PROCEEDINGS

 

63

ITEM 1A.

 

RISK FACTORS

 

64

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

66

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

66

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

66

ITEM 5.

 

OTHER INFORMATION

 

66

ITEM 6.

 

EXHIBITS

 

67

SIGNATURES

 

69

 

 

 

 

 

 

2

 


 

Gramercy Property Trust Inc.

Condensed Consolidated Balance Sheets

(Unaudited, dollar amounts in thousands, except per share data)

 

PART I. FINANCIAL INFORMATION

 

ITEM I. FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2015

 

2014

Assets:

 

 

 

 

 

Real estate investments, at cost:

 

 

 

 

 

Land

$

418,161 

 

$

239,503 

Building and improvements

 

1,600,471 

 

 

828,117 

Less: accumulated depreciation

 

(51,773)

 

 

(27,598)

Total real estate investments, net

 

1,966,859 

 

 

1,040,022 

Cash and cash equivalents

 

43,595 

 

 

200,069 

Restricted cash

 

8,502 

 

 

1,244 

Joint ventures and equity investments

 

2,552 

 

 

 -

Assets held for sale, net

 

18,011 

 

 

 -

Servicing advances receivable

 

1,505 

 

 

1,485 

Retained CDO bonds

 

10,705 

 

 

4,293 

Tenant and other receivables, net

 

22,206 

 

 

15,398 

Acquired lease assets, net of accumulated amortization of $34,561 and $15,168

 

328,719 

 

 

200,231 

Deferred costs, net of accumulated amortization of $3,369 and $1,908

 

13,016 

 

 

10,355 

Goodwill

 

3,805 

 

 

3,840 

Other assets

 

18,351 

 

 

23,063 

Total assets

$

2,437,826 

 

$

1,500,000 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Liabilities:

 

 

 

 

 

Exchangeable senior notes, net

$

108,605 

 

$

107,836 

Senior unsecured term loan

 

200,000 

 

 

200,000 

Unsecured credit facility

 

350,000 

 

 

 -

Mortgage notes payable

 

308,543 

 

 

161,642 

Total long term debt

 

967,148 

 

 

469,478 

Accounts payable and accrued expenses

 

17,056 

 

 

18,806 

Dividends payable

 

12,924 

 

 

9,579 

Accrued interest payable

 

3,414 

 

 

2,357 

Deferred revenue

 

16,036 

 

 

11,592 

Below-market lease liabilities, net of accumulated amortization of $11,662 and $3,961

 

227,755 

 

 

53,826 

Derivative instruments, at fair value

 

3,853 

 

 

3,189 

Other liabilities

 

7,581 

 

 

8,263 

Total liabilities

 

1,255,767 

 

 

577,090 

Commitments and contingencies

 

 -

 

 

 -

Noncontrolling interest in the Operating Partnership

 

11,277 

 

 

16,129 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock, par value $0.001, 200,000,000 and 220,000,000 shares authorized, and 57,396,418 and 46,736,392 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively.

 

57 

 

 

47 

Series B cumulative redeemable preferred stock, par value $0.001, liquidation preference $87,500, 3,500,000 shares authorized, issued and outstanding at June 30, 2015 and December 31, 2014.

 

84,394 

 

 

84,394 

Additional paid-in-capital

 

2,053,265 

 

 

1,768,977 

Accumulated other comprehensive income (loss) 

 

1,445 

 

 

(3,703)

Accumulated deficit

 

(968,516)

 

 

(942,934)

Total stockholders’ equity

 

1,170,645 

 

 

906,781 

Noncontrolling interest in other partnerships

 

137 

 

 

 -

Total equity

 

1,170,782 

 

 

906,781 

Total liabilities and equity

$

2,437,826 

 

$

1,500,000 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

 


 

 

Gramercy Property Trust Inc.

Condensed Consolidated Statements of Operations

(Unaudited, dollar amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2015

 

2014

 

2015

 

2014

Revenues

 

 

 

 

 

 

 

 

 

 

 

Rental revenue

$

39,565 

 

$

10,276 

 

$

70,755 

 

$

17,770 

Management fees

 

4,232 

 

 

7,054 

 

 

12,418 

 

 

14,019 

Operating expense reimbursements

 

9,738 

 

 

2,697 

 

 

17,876 

 

 

3,378 

Investment income

 

525 

 

 

525 

 

 

763 

 

 

901 

Other income

 

87 

 

 

76 

 

 

270 

 

 

144 

Total revenues

 

54,147 

 

 

20,628 

 

 

102,082 

 

 

36,212 

Expenses

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Property management expenses

 

4,611 

 

 

4,981 

 

 

9,777 

 

 

10,225 

Property operating expenses

 

9,572 

 

 

2,858 

 

 

17,955 

 

 

3,680 

Total property operating expenses

 

14,183 

 

 

7,839 

 

 

27,732 

 

 

13,905 

Depreciation and amortization

 

24,716 

 

 

6,760 

 

 

43,414 

 

 

10,145 

Interest expense

 

7,728 

 

 

3,791 

 

 

13,998 

 

 

6,136 

Realized loss on derivative instruments

 

 -

 

 

3,415 

 

 

 -

 

 

3,300 

Management, general and administrative

 

4,778 

 

 

4,497 

 

 

9,551 

 

 

8,839 

Acquisition and merger-related expenses

 

3,455 

 

 

1,688 

 

 

6,961 

 

 

1,923 

Total expenses

 

54,860 

 

 

27,990 

 

 

101,656 

 

 

44,248 

Income (loss) from continuing operations before equity in net income from joint ventures and equity investments, gain on remeasurement of previously held joint venture, loss on extinguishment of debt, net gains on disposals, and provision for taxes

 

(713)

 

 

(7,362)

 

 

426 

 

 

(8,036)

Equity in net income of joint ventures and equity investments

 

123 

 

 

1,125 

 

 

122 

 

 

1,753 

Net gains on disposals

 

201 

 

 

 -

 

 

201 

 

 

 -

Income (loss) from continuing operations before gain on remeasurement of previously held joint venture, loss on extinguishment of debt, net gains on disposals, provision for taxes, and discontinued operations

 

(389)

 

 

(6,237)

 

 

749 

 

 

(6,283)

Gain on remeasurement of previously held joint venture

 

 -

 

 

72,345 

 

 

 -

 

 

72,345 

Loss on extinguishment of debt

 

 -

 

 

(1,925)

 

 

 -

 

 

(1,925)

Provision for taxes

 

(17)

 

 

(437)

 

 

(1,131)

 

 

(806)

Income (loss) from continuing operations

 

(406)

 

 

63,746 

 

 

(382)

 

 

63,331 

Income (loss) from discontinued operations

 

120 

 

 

(395)

 

 

58 

 

 

(481)

Net income (loss)

 

(286)

 

 

63,351 

 

 

(324)

 

 

62,850 

Net loss attributable to noncontrolling interest

 

21 

 

 

 -

 

 

63 

 

 

 -

Net income (loss) attributable to Gramercy Property Trust Inc.

 

(265)

 

 

63,351 

 

 

(261)

 

 

62,850 

Preferred stock dividends

 

(1,558)

 

 

(1,791)

 

 

(3,117)

 

 

(3,581)

Net income (loss) available to common stockholders

$

(1,823)

 

$

61,560 

 

$

(3,378)

 

$

59,269 

Basic earnings per share: (1)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations, after preferred dividends

$

(0.03)

 

$

2.67 

 

$

(0.07)

 

$

2.91 

Net income (loss) from discontinued operations

 

 -

 

 

(0.02)

 

 

 -

 

 

(0.02)

Net income (loss) available to common stockholders

$

(0.03)

 

$

2.65 

 

$

(0.07)

 

$

2.89 

Diluted earnings per share: (1)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations, after preferred dividends

$

(0.03)

 

$

2.61 

 

$

(0.07)

 

$

2.83 

Net income (loss) from discontinued operations

 

 -

 

 

(0.02)

 

 

 -

 

 

(0.02)

Net income (loss) available to common stockholders

$

(0.03)

 

$

2.59 

 

$

(0.07)

 

$

2.81 

Basic weighted average common shares outstanding (1)

 

55,612,741 

 

 

23,188,500 

 

 

51,204,638 

 

 

20,529,075 

Diluted weighted average common shares and common share equivalents outstanding (1)

 

55,612,741 

 

 

23,771,868 

 

 

51,204,638 

 

 

21,112,594 

 

(1) Adjusted for the 1-for-4 reverse stock split completed on March 20, 2015. Refer to Note 11, “Stockholders’ Equity,” for further information related to the reverse stock split.

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4

 


 

 

 

 

Gramercy Property Trust Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2015

 

2014

 

2015

 

2014

Net income (loss)

$

(1,823)

 

$

61,560 

 

$

(3,378)

 

$

59,269 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on debt securities and derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

  Unrealized gain on available for sale debt securities

 

11 

 

 

107 

 

 

5,761 

 

 

441 

  Unrealized loss on derivative instruments

 

1,468 

 

 

(2,062)

 

 

(664)

 

 

(2,203)

Foreign currency translation adjustments

 

269 

 

 

 -

 

 

51 

 

 

 -

Other comprehensive income (loss)

 

1,748 

 

 

(1,955)

 

 

5,148 

 

 

(1,762)

Comprehensive income (loss)

 

(75)

 

 

59,605 

 

 

1,770 

 

 

57,507 

Net loss attributable to noncontrolling interest

 

21 

 

 

 -

 

 

63 

 

 

 -

Other comprehensive income attributable to noncontrolling interest

 

15 

 

 

 -

 

 

53 

 

 

 -

Comprehensive income (loss) attributable to Gramercy Property Trust Inc.

$

(39)

 

$

59,605 

 

$

1,886 

 

$

57,507 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

5

 


 

 

Gramercy Property Trust Inc.

Condensed Consolidated Statement of Equity 

(Unaudited, dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gramercy Property Trust Inc. Stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Retained

 

Total

 

 

 

 

 

 

 

 

 

 

Series B

 

Additional

 

Other

 

Earnings /

 

Gramercy

 

 

 

 

 

 

 

 

Common Stock

 

Preferred

 

Paid-In-

 

Comprehensive

 

(Accumulated

 

Property

 

Noncontrolling

 

 

 

 

 

Shares

 

Par Value

 

Stock

 

Capital

 

Income (Loss)

 

Deficit)

 

Trust Inc.

 

interest

 

Total

Balance at December 31, 2014

 

46,736,392 

 

$

47 

 

$

84,394 

 

$

1,768,977 

 

$

(3,703)

 

$

(942,934)

 

$

906,781 

 

$

 -

 

$

906,781 

Net loss

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(261)

 

 

(261)

 

 

(29)

 

 

(290)

Change in net unrealized loss on derivative instruments

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(664)

 

 

 -

 

 

(664)

 

 

 -

 

 

(664)

Change in net unrealized gain on debt securities

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

5,761 

 

 

 -

 

 

5,761 

 

 

 -

 

 

5,761 

Offering costs

 

 -

 

 

 -

 

 

 -

 

 

(12,124)

 

 

 -

 

 

 -

 

 

(12,124)

 

 

 -

 

 

(12,124)

Issuance of stock

 

10,544,034 

 

 

10 

 

 

 -

 

 

289,900 

 

 

 -

 

 

 -

 

 

289,910 

 

 

 -

 

 

289,910 

Issuance of stock - stock purchase plan

 

1,485 

 

 

 -

 

 

 -

 

 

32 

 

 

 -

 

 

 -

 

 

32 

 

 

 -

 

 

32 

Stock based compensation - fair value

 

 -

 

 

 -

 

 

 -

 

 

1,863 

 

 

 -

 

 

 -

 

 

1,863 

 

 

 -

 

 

1,863 

Conversion of OP Units to common stock

 

114,507 

 

 

 -

 

 

 -

 

 

3,127 

 

 

 -

 

 

 -

 

 

3,127 

 

 

 -

 

 

3,127 

Reallocation of noncontrolling interest in the operating partnership

 

 -

 

 

 -

 

 

 -

 

 

1,490 

 

 

 -

 

 

 -

 

 

1,490 

 

 

 -

 

 

1,490 

Dividends on preferred stock - Series B

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3,117)

 

 

(3,117)

 

 

 -

 

 

(3,117)

Dividends on common stock

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(22,204)

 

 

(22,204)

 

 

 -

 

 

(22,204)

Contributions to consolidated equity investment

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

171 

 

 

171 

Foreign currency translation adjustments

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

51 

 

 

 -

 

 

51 

 

 

(5)

 

 

46 

Balance at June 30, 2015

 

57,396,418 

 

$

57 

 

$

84,394 

 

$

2,053,265 

 

$

1,445 

 

$

(968,516)

 

$

1,170,645 

 

$

137 

 

$

1,170,782 

 

 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

6

 


 

Gramercy Property Trust Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, dollar amounts in thousands)

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

2015

 

2014

Operating Activities:

 

 

 

 

 

Net income (loss)

$

(324)

 

$

62,850 

Adjustments to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

43,414 

 

 

10,145 

Amortization of acquired leases to rental revenue and expense

 

(6,067)

 

 

(66)

Amortization of deferred costs

 

1,352 

 

 

1,073 

Amortization of discounts and other fees

 

(1,136)

 

 

(428)

Payment of capitalized tenant leasing costs

 

(838)

 

 

(26)

Amortization of lease inducement costs

 

96 

 

 

 -

Straight-line rent adjustment

 

(5,484)

 

 

(1,704)

Realized loss on derivative instruments

 

 -

 

 

3,300 

Distributions received from joint ventures and equity investments

 

206 

 

 

3,165 

Equity in net income of joint ventures and equity investments

 

(122)

 

 

(1,753)

Net gain on disposal of properties

 

(201)

 

 

 -

Gain from remeasurement of previously held joint ventures

 

 -

 

 

(72,345)

Loss on extinguishment of debt

 

 -

 

 

1,925 

Amortization of stock-based compensation

 

1,683 

 

 

1,247 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

(963)

 

 

(77)

Tenant and other receivables

 

(579)

 

 

(4,824)

Accrued interest

 

(20)

 

 

(134)

Other assets

 

4,334 

 

 

(719)

Accounts payable, accrued expenses and other liabilities

 

(1,920)

 

 

3,162 

Deferred revenue

 

4,142 

 

 

11,362 

Net cash provided by operating activities

 

37,573 

 

 

16,153 

Investing Activities:

 

 

 

 

 

Capital expenditures

 

(1,769)

 

 

(12,933)

Distributions received from joint venture property sales

 

 -

 

 

3,841 

Contributions to joint ventures and equity investments

 

(2,192)

 

 

 -

Acquisition of real estate, net

 

(787,227)

 

 

(190,938)

Return of restricted cash held in escrow for 1031 exchange

 

3,338 

 

 

 -

Restricted cash for tenant improvements

 

(6,270)

 

 

(44)

Proceeds from repayments of servicing advances receivable

 

 -

 

 

10 

Net cash used for investing activities

 

(794,120)

 

 

(200,064)

Financing Activities:

 

 

 

 

 

Proceeds from sale of common stock

 

289,910 

 

 

229,080 

Proceeds from unsecured credit facility

 

575,000 

 

 

200,000 

Repayment of unsecured credit facility

 

(225,000)

 

 

 -

Proceeds from secured credit facility

 

 -

 

 

23,000 

Repayment of secured credit facility

 

 -

 

 

(68,000)

Repayment of mortgage notes payable

 

(2,471)

 

 

(198,627)

Proceeds from issuance of exchangeable senior notes

 

 -

 

 

115,000 

Offering costs

 

(12,124)

 

 

(11,421)

Payment of deferred financing costs

 

(3,274)

 

 

(7,573)

Preferred stock dividends paid

 

(3,117)

 

 

(39,668)

Common stock dividends paid

 

(18,845)

 

 

(2,477)

Proceeds from exercise of stock options and employee purchase under the employee share purchase plan

 

32 

 

 

 -

Contributions from noncontrolling interests in other partnerships

 

169 

 

 

 -

Distribution to noncontrolling interest holders

 

(215)

 

 

 -

Change in restricted cash from financing activities

 

(25)

 

 

 -

Net cash provided by financing activities

 

600,040 

 

 

239,314 

Net increase (decrease) in cash and cash equivalents

 

(156,507)

 

 

55,403 

Increase in cash and cash equivalents related to foreign currency translation

 

33 

 

 

 -

Cash and cash equivalents at beginning of period

 

200,069 

 

 

43,333 

Cash and cash equivalents at end of period

$

43,595 

 

$

98,736 

Non-cash activity:

 

 

 

 

 

Consolidation of real estate investments - joint venture interest

 

 -

 

 

106,294 

Debt assumed in acquisition of real estate

$

141,033 

 

$

2,657 

Redemption of units of noncontrolling interest in the operating partnership for common stock

$

(3,127)

 

$

 -

Supplemental cash flow disclosures:

 

 

 

 

 

Interest paid

$

11,820 

 

$

2,895 

Income taxes paid

$

1,065 

 

$

1,548 

Proceeds from 1031 exchange transactions

$

8,619 

 

$

 -

Use of funds from 1031 exchanges for acquisitions of real estate

$

(5,050)

 

$

 -

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

7

 


 

Gramercy Property Trust Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited, currency amounts in thousands, except per share data)

June 30, 2015

1. Business and Organization

Gramercy Property Trust Inc., or the Company, is a leading global investor and asset manager of commercial real estate. Gramercy specializes in acquiring and managing single-tenant, net leased industrial and office properties. The Company focuses on income-producing properties leased to high quality tenants in major markets in the United States and Europe. Gramercy is organized as a Real Estate Investment Trust, or REIT.

 

The Company earns revenues primarily through three sources, including (i) rental revenues on properties that it owns directly or in joint ventures in the United States, (ii) asset management revenues on properties owned by third parties in both the United States and Europe, and (iii) pro-rata rental revenues on its equity investment in Gramercy Property Europe plc, or the Gramercy European Property Fund.

 

On July 1, 2015, the Company entered into an Agreement and Plan of Merger, or the Merger Agreement, with Chambers Street Properties, or Chambers Street, and Columbus Merger Sub, LLC, an indirect wholly owned subsidiary of Chambers Street. Refer to Note 16 for further information on the proposed merger transaction, or the Merger.

In February 2015, the Company’s board of directors approved a 1-for-4 reverse stock split of its common stock and outstanding operating partnership units, or OP Units. The reverse stock split was effective after the close of trading on March 20, 2015, and the Company’s common stock began trading on a reverse split-adjusted basis on the New York Stock Exchange on March 23, 2015. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares received, in lieu of such fractional shares, cash in an amount determined on the basis of the average closing price of the Company’s common stock on the New York Stock Exchange for the three consecutive trading days ending on March 20, 2015. The reverse stock split applied to all of the Company’s outstanding shares of common stock and therefore did not affect any stockholder’s relative ownership percentage.

During the three months ended June 30, 2015, the Company acquired 16 properties aggregating approximately 2.3 million square feet for a total purchase price of approximately $368,586. During the six months ended June 30, 2015, the Company acquired 43 properties aggregating approximately 6.8 million square feet for a total purchase price of approximately $938,592.

 

As of June 30, 2015, the Company’s wholly-owned portfolio of net leased properties is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties

 

Number of Properties

 

 

Rentable Square Feet

 

 

Occupancy

Industrial Properties

 

64 

 

 

13,088,869 

 

 

100.0% 

Office/Banking Centers

 

81 

 

 

4,925,612 

 

 

98.5% 

Specialty Industrial

 

14 

 

 

676,472 

 

 

100.0% 

Specialty Retail

 

10 

 

 

1,330,544 

 

 

100.0% 

Data Centers

 

 

 

227,953 

 

 

100.0% 

Total

 

171 

 

 

20,249,450 

 

 

99.6% 

 

Tenants include Bank of America, N.A, Healthy Way of Life II, LLC (d.b.a Life Time Fitness), Nokia Networks, Kar Auction Services, CEVA Freight, LLC, and others. As of June 30, 2015, the Company’s asset management business, which operates under the name Gramercy Asset Management, manages approximately $800,000 of commercial real estate assets for third parties.

 

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and generally will not be subject to U.S. federal income taxes to the extent it distributes its taxable income, if any, to its stockholders. The Company has in the past established, and may in the future establish, taxable REIT subsidiaries, or TRSs, to effect various taxable transactions, subject to the restrictions in the Merger Agreement. Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities.

 

The Company conducts substantially all of its operations through GPT Property Trust LP, the Company’s operating partnership, or the Operating Partnership. The Company is the sole general partner of the Operating Partnership. The Operating Partnership conducts its commercial real estate investment business through various wholly-owned entities and its realty management business primarily through a wholly-owned TRS. Unless the context requires otherwise, all references to “Gramercy,” “Company,” “we,” “our” and “us” mean Gramercy Property Trust Inc., a Maryland corporation, and one or more of its subsidiaries, including the Operating Partnership.

8

 


 

Gramercy Property Trust Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited, currency amounts in thousands, except per share data)

June 30, 2015

2. Significant Accounting Policies

 

Basis of Quarterly Presentation

 

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, it does not include all of the information and footnotes required by GAAP for complete financial statements. In management’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. The 2015 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The Condensed Consolidated Balance Sheet at December 31, 2014 has been derived from the audited Consolidated Financial Statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements.

 

Principles of Consolidation

 

The Condensed Consolidated Financial Statements include the Company’s accounts and those of the Company’s subsidiaries that are wholly-owned or controlled by the Company, or entities which are variable interest entities, or VIEs, in which the Company is the primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. The Company has evaluated its investments for potential classification as variable interests by evaluating the sufficiency of each entity’s equity investment at risk to absorb losses.

 

Entities which the Company does not control and are considered VIEs, but where the Company is not the primary beneficiary, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated.

 

Real Estate Investments

 

The Company records acquired real estate investments as business combinations when the real estate is occupied, at least in part, at acquisition. Costs directly related to the acquisition of such investments are expensed as incurred. The Company allocates the purchase price of real estate to land, building, improvements and intangibles, such as the value of above- and below-market leases and origination costs associated with the in-place leases at the acquisition date. The values of the above- and below-market leases are amortized and recorded as either an increase in the case of below-market leases or a decrease in the case of above-market leases to rental revenue over the remaining term of the associated lease. The values associated with in-place leases are amortized to depreciation and amortization expense over the remaining term of the associated lease.

 

The Company assesses the fair value of the leases at acquisition based upon estimated cash flow projections that utilize appropriate discount rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. To the extent acquired leases contain fixed rate renewal options that are below-market and determined to be material, the Company amortizes such below-market lease value into rental revenue over the renewal period. Additionally, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase at the time of acquisition.

 

Acquired real estate investments that do not meet the definition of a business combination are recorded at cost. Acquired real estate investments which are under construction are considered build-to-suit transactions and are also recorded at cost. In build-to-suit transactions, the Company engages a developer to construct a property or provides funds to a tenant to develop a property. The Company capitalizes the funds provided to the developer/tenant and the internal costs of interest and real estate taxes, if applicable, during the construction period.

 

Certain improvements are capitalized when they are determined to increase the useful life of the building. Depreciation is computed using the straight-line method over the shorter of the estimated useful life at acquisition of the capitalized item or 40 years for buildings, five to ten years for building equipment and fixtures, and the lesser of the useful life or the remaining lease term for tenant improvements and leasehold interests. Maintenance and repair expenditures are charged to expense as incurred.

 

9

 


 

Gramercy Property Trust Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited, currency amounts in thousands, except per share data)

June 30, 2015

The Company also reviews the recoverability of a property’s carrying value when circumstances indicate there may be a possible impairment. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges and takes into account factors such as changes in strategy resulting in an increased or decreased holding period, expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If management determines it will be unable to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used and for assets held for sale, an impairment loss is recorded to the extent that the carrying value exceeds the fair value less estimated cost to dispose. These assessments are recorded in the Condensed Consolidated Statements of Operations in the period the determination is made. The estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset to be held and used, the new cost basis will be depreciated or amortized over the remaining useful life of that asset. The Company recorded impairment charges of $149 during the three and six months ended June 30, 2015 on one property that were sold during the period and no impairment charges during the three and six months ended June 30, 2014.

 

Joint Ventures and Equity Investments

 

The Company accounts for its investments in joint ventures and equity investments under the equity method of accounting since it exercises significant influence, but does not unilaterally control the entities, and is not considered to be the primary beneficiary. In a joint venture, the rights of the other investors are protective and participating. Unless the Company is determined to be the primary beneficiary, these rights preclude it from consolidating the investment. The investment is recorded initially at cost as an investment in joint venture or equity investment, and subsequently is adjusted for equity interest in net income (loss) and cash contributions and distributions. The amount of the investment on the Condensed Consolidated Balance Sheets is evaluated for impairment at each reporting period. None of the joint venture or equity investment debt is recourse to the Company. As of June 30, 2015 and December 31, 2014, the Company had equity investments of $2,552 and $0 in unconsolidated joint ventures and equity investments, respectively.

 

On June 9, 2014, the Company acquired from its joint venture partner the remaining 50% equity interest in its 67 property portfolio leased primarily to Bank of America, N.A., or the Bank of America Portfolio, and as of the acquisition date, the Company has consolidated the Bank of America Portfolio.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

 

Restricted Cash

 

The Company had restricted cash of $8,502 and $1,244 at June 30, 2015 and December 31, 2014, respectively, which primarily consisted of reserves for certain capital improvements, leasing, interest and real estate tax and insurance payments as required by certain mortgage loan obligations.

 

Variable Interest Entities

 

The Company had one consolidated VIE as of June 30, 2015 and December 31, 2014. The Company had four unconsolidated VIEs as of June 30, 2015 and December 31, 2014. The following is a summary of the Company’s involvement with VIEs as of June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company carrying

 

Company carrying

 

Face value of

 

Face value of liabilities

 

value-assets

 

value-liabilities

 

assets held by the VIEs

 

issued by the VIEs

Assets

 

 

 

 

 

 

 

 

 

 

 

Consolidated VIEs

 

 

 

 

 

 

 

 

 

 

 

European Fund Manager

$

333 

 

$

58 

 

$

333 

 

$

58 

Unconsolidated VIEs

 

 

 

 

 

 

 

 

 

 

 

European Fund Carry Co.

$

 -

 

$

 -

 

$

11 

 

$

12 

Retained CDO Bonds

$

10,705 

 

$

 -

 

$

1,489,123 

 

$

1,373,877 

 

 

10

 


 

Gramercy Property Trust Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited, currency amounts in thousands, except per share data)

June 30, 2015

The following is a summary of the Company’s involvement with VIEs as of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company carrying

 

Company carrying

 

Face value of

 

Face value of liabilities

 

value-assets

 

value-liabilities

 

assets held by the VIEs

 

issued by the VIEs

Assets

 

 

 

 

 

 

 

 

 

 

 

Consolidated VIEs

 

 

 

 

 

 

 

 

 

 

 

European Fund Manager

$

 -

 

$

 -

 

$

 -

 

$

 -

Unconsolidated VIEs

 

 

 

 

 

 

 

 

 

 

 

European Fund Carry Co.

$

 -

 

$

 -

 

$

 -

 

$

 -

Retained CDO Bonds

$

4,293 

 

$

 -

 

$

1,691,854 

 

$

1,547,693 

 

Consolidated VIEs

 

Gramercy Europe Asset Management (European Fund Manager)

 

In connection with the Company’s December 2014 investment in the Gramercy European Property Fund, the Company acquired equity interests in the entity, hereinafter the European Fund Manager, which provides investment and asset management services to Gramercy European Property Fund. The Company has determined that European Fund Manager is a VIE, as the equity holders of that entity do not have controlling financial interests and the obligation to absorb losses. As the Company controls the activities that most significantly affect the economic outcome of European Fund Manager, the Company has concluded that it is that entity’s primary beneficiary and has consolidated the VIE.

 

European Fund Manager is expected to generate net cash inflows for the Company in the form of management fees in the future, however, if the VIE’s cash inflows are not sufficient to cover its obligations, the Company may provide financial support for the VIE.

 

Unconsolidated VIEs

 

Gramercy Europe Asset Management (European Fund Carry Co.)

 

In connection with the Company’s December 2014 investment in the Gramercy European Property Fund, the Company acquired equity interests in the entity, hereinafter the European Fund Carry Co., entitled to receive certain preferential distributions, if any, made from time-to-time by Gramercy European Property Fund. The Company has determined that European Fund Carry Co. is a VIE, as the equity holders of that entity do not have controlling financial interests and the obligation to absorb losses. Decisions that most significantly affect the economic performance of European Fund Carry Co. are decided by a majority vote of that VIE’s shareholders. As such, the Company does not have a controlling financial interest in the VIE and has accounted for it as an equity investment.

 

Investment in Retained CDO Bonds

 

The Retained CDO Bonds are non-investment grade subordinate bonds, preferred shares and ordinary shares of three collateralized debt obligations, or CDOs, which the Company recognized subsequent to the disposal of Gramercy Finance in March 2013. The Company is not obligated to provide any financial support to these CDOs. The Company’s maximum exposure to loss is limited to its interest in the Retained CDO Bonds and the Company does not control the activities that most significantly impact the VIEs’ economic performance.

 

Assets Held For Sale

 

As of June 30, 2015 and December 31, 2014, the Company had one and zero assets classified as held for sale. The net asset value of the asset held for sale as of June 30, 2015 was $18,011. Real estate investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less costs to sell. Once an asset is classified as held for sale, depreciation expense is no longer recorded.

 

Tenant and Other Receivables

 

Tenant and other receivables are derived from management fees, rental revenue and tenant reimbursements.

 

11

 


 

Gramercy Property Trust Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited, currency amounts in thousands, except per share data)

June 30, 2015

Management fees, including incentive management fees, are recognized as earned in accordance with the terms of the management agreements. The management agreements may contain provisions for fees related to dispositions, administration of the assets including fees related to accounting, valuation and legal services, and management of capital improvements or projects on the underlying assets.

 

Rental revenue is recorded on a straight-line basis over the initial term of the lease. Since many leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that will only be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Tenant and other receivables also include receivables related to tenant reimbursements for common area maintenance expenses and certain other recoverable expenses that are recognized as revenue in the period in which the related expenses are incurred.

 

Tenant and other receivables are recorded net of the allowances for doubtful accounts, which as of June 30, 2015 and December 31, 2014 were $55 and $188, respectively. The Company continually reviews receivables related to rent, tenant reimbursements, management fees, including incentive fees, and unbilled rent receivables and determines collectability by taking into consideration the tenant or asset management clients’ payment history, the financial condition of the tenant or asset management client, business conditions in the industry in which the tenant or asset management client operates and economic conditions in the area in which the property or asset management client is located. In the event that the collectability of a receivable is in doubt, the Company increases the allowance for doubtful accounts or records a direct write-off of the receivable.

 

Intangible Assets and Liabilities

 

The Company follows the acquisition method of accounting for business combinations. The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, buildings and improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analyses and other methods. Identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and the value of in-place leases. Management also considers information obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets and liabilities acquired.

 

Above-market and below-market lease values for properties acquired are recorded based on the present value, using a discount rate which reflects the risks associated with the leases acquired, of the difference between the contractual amount to be paid pursuant to each in-place lease and management’s estimate of the fair market lease rate for each such in-place lease, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease values are amortized as a reduction and increase, respectively, of rental revenue over the remaining non-cancelable terms of the lease.

 

The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as-if vacant. Factors considered by management in its analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. Management also estimates costs to execute similar leases including leasing commissions and other related expenses. The value of in-place leases is amortized to depreciation and amortization expense over the lesser of the remaining non-cancelable term of the respective leases or the remaining depreciable life of the building.

 

Above-market and below-market ground rent values for properties acquired are recorded based on the present value, using a discount rate which reflects the risks associated with the ground leases assumed, of the difference between the contractual amount to be paid pursuant to each in-place ground lease and management’s estimate of the fair market lease rate for each such in-place ground lease, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market ground lease values are amortized as a reduction and increase, respectively, of rent expense over the remaining non-cancelable terms of the respective leases.

 

The Company recorded $10,142 and $18,139 of amortization of intangible assets as part of depreciation and amortization for the three and six months ended June 30, 2015, respectively. The Company recorded $2,411 and $3,168 of amortization of intangible assets as part of depreciation and amortization for the three and six months ended June 30, 2014, respectively.

 

The Company recorded $2,105 and $6,050 of amortization of intangible assets and liabilities as a net increase to rental revenue for the three and six months ended June 30, 2015, respectively. The Company recorded $212 and $70 of amortization of intangible assets and liabilities as a net increase to rental revenue for the three and six months ended June 30, 2014, respectively.

 

12

 


 

Gramercy Property Trust Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited, currency amounts in thousands, except per share data)

June 30, 2015

The Company recorded $0 and ($40) of amortization of ground rent intangible assets and liabilities as part of other property operating expenses for the three and six months ended June 30, 2015, respectively. The Company recorded $4 and $4 of amortization of ground rent intangible assets and liabilities as part of other property operating expenses for the three and six months ended June 30, 2014, respectively.

 

Intangible assets and acquired lease obligations consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,
2015

 

December 31,
2014

Intangible assets:

 

 

 

 

 

 

In-place leases, net of accumulated amortization of $31,436 and $13,581

 

$

306,651 

 

$

181,426 

Above-market leases, net of accumulated amortization of $3,397 and $1,520

 

 

26,882 

 

 

14,380 

Below-market ground rent, net of accumulated amortization of $100 and $67

 

 

3,454 

 

 

4,425 

Amounts related to assets held for sale, net of accumulated amortization of $372 and $0

 

 

(8,268)

 

 

 -

Total intangible assets

 

$

328,719 

 

$

200,231 

Intangible liabilities:

 

 

 

 

 

 

Below-market leases, net of accumulated amortization of $11,560 and $3,932

 

$

(224,186)

 

$

51,853 

Above-market ground rent, net of accumulated amortization of $102 and $29

 

 

(3,569)

 

 

1,973 

Total intangible liabilities

 

$

(227,755)

 

$

53,826 

 

The following table provides the weighted-average amortization period as of June 30, 2015 for intangible assets and liabilities and the projected amortization expense for the next five years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-