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Gramercy Capital Corp. Reports Second Quarter 2012 Financial Results

Stocks in this article: GKK


Following a strategic review process which was completed in the second quarter of 2012, the Company’s Board of Directors concluded that the most attractive alternative available to the Company is to remain independent and to focus on building value by deploying the Company's capital into income-producing net leased real estate. The new investment criteria will focus on single tenant net lease investments with durable credits across the United States. The investments initially will be funded from existing financial resources. Subsequently, subject to market conditions, the Company expects to seek to raise additional debt and/or equity capital to support further growth. On July 1, 2012, Gordon F. DuGan became the Company’s Chief Executive Officer and will lead the new business effort. An operational review of the Company's existing assets and operations has begun with the goal of reducing the current cost structure, further strengthening the balance sheet and determining which legacy assets and operations complement the new investment strategy. The Company expects to provide an investor presentation to be posted to the Company’s website no later than September 30, 2012 to provide an update on the operational review and further communicate the new strategy.


As of June 30, 2012, the Company maintained $192.6 million of unrestricted cash as compared to approximately $186.3 million reported as of March 31, 2012. In addition, as of June 30, 2012, the Company held an aggregate of $47.4 million of par value Class A-1, A-2 and B CDO securities previously issued by the Company’s CDOs that were available for re-issuance. The aggregate fair value of the repurchased CDO bonds was $37.9 million as of June 30, 2012.

A substantial portion of the Company’s cash flow has been generated by distributions from its CDOs within the Gramercy Finance division. The Company's CDOs contain minimum interest coverage and asset overcollateralization covenants that must be satisfied for the Company to receive cash flow on the interests in its CDOs retained by the Company and to receive the subordinate collateral management fees. During periods when these covenants are not satisfied for a particular CDO, cash flows from that CDO that would otherwise be paid to the Company as a subordinate bondholder, holder of the preferred shares and in respect of the subordinate collateral management fee are diverted from the Company to repay principal and interest on the senior-most outstanding CDO bonds. As of July 2012, the most recent distribution date, the Company’s 2006 CDO was in compliance with interest coverage and asset overcollateralization covenants; however, the compliance margins were narrow and relatively small declines in collateral performance and credit metrics from one or more assets could cause the CDO to fall out of compliance. The Company’s 2005 CDO failed its overcollateralization test in July 2012 and previously failed it overcollateralization tests at the October 2011, April 2011 and January 2011 distribution dates. The Company’s 2007 CDO has failed its overcollateralization test beginning with the November 2009 distribution date and it is unlikely that the 2007 CDO’s overcollateralization test will be satisfied in the foreseeable future. We cannot be certain that the CDO tests will continue to be satisfied and that we will continue to receive cash flows relating to the Company’s CDOs in the future, and believe that we will likely fail the overcollateralization test for the 2005 CDO and/or the 2006 CDO at the October distribution date. The following chart summarizes the CDO compliance tests as of the most recent distribution dates (July 25, 2012 for the Company’s 2005-1 and 2006-1 CDOs and May 19, 2012 for the Company’s 2007-1 CDO):

Cash Flow Triggers CDO 2005-1 CDO 2006-1 CDO 2007-1
Overcollateralization (1)
Current 109.02% 105.25% 83.13%
Limit 117.85% 105.15% 102.05%
Compliance margin -8.83% 0.10% -18.92%
Pass/Fail Fail Pass Fail
Interest Coverage (2)      
Current 332.82% 627.79% N/A
Limit 132.85% 105.15% N/A
Compliance margin 199.97% 522.64% N/A
Pass/Fail Pass Pass N/A
  (1)   The overcollateralization ratio divides the total principal balance of all collateral in the CDO by the total bonds outstanding for the classes senior to those retained by the Company. To the extent an asset is considered a defaulted security, the asset’s principal balance is multiplied by the asset’s recovery rate which is determined by the rating agencies. For a defaulted security with a CUSIP that is actively traded, the lower of market value or the product of the security’s principal balance multiplied by the asset’s recovery rate as determined by the rating agencies is used for the overcollateralization ratio.
  (2)   The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by the Company.

Cash flows generated from the Company’s CDOs with respect to its ownership of non-investment grade bonds, preferred equity and collateral management agreements for the year to date 2012 are summarized as follows:

Collateral Manager Fees and CDO Distributions
CDO 2005-1 CDO 2006-1 CDO 2007-1  
Fees Distributions Fees Distributions Fees Distributions Total
1Q 2012 $ 2,398,596 $ 3,495,260 $ 1,026,567 $ 9,160,260 $ 172,153 $ - $ 16,252,836
2Q 2012 3,133,685 1,907,434 965,059 6,310,558 169,276 - 12,486,013
3Q 2012   331,519   -   933,494   8,238,366   175,009 (1 )   -   9,678,388
Total 2012 $ 5,863,800 $ 5,402,694 $ 2,925,120 $ 23,709,184 $ 516,438 $ - $ 38,417,237
(1) Estimated. Distribution date for CDO 2007-1 is August 15, 2012

Interest expense includes costs related to $2.3 billion of non-recourse long-term notes issued by the three CDOs that are consolidated on the Company’s balance sheet. Interest expense was $20.2 million for the three months ended June 30, 2012, compared to $20.4 million for the three months ended March 31, 2012.

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