ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except for share and per share data)
Overview
Gramercy Capital Corp. is
a self-managed, integrated commercial real estate investment and asset management company. In June 2012, following a
strategic review process completed by a special committee of our board of directors, we announced that we will focus on
deploying our capital into income-producing net leased real estate. Our new investment criteria focuses on net lease
investments in markets across the United States. As of December 31, 2012, we own directly or in joint venture, a portfolio of
116 office and industrial buildings totaling approximately 4.9 million square feet, net leased on a long-term basis to
tenants, including Bank of America, Nestlé Waters, Philips Electronics and others. We also have an asset and property
management business which operates under the name Gramercy Asset Management (formerly Gramercy Realty) and currently manages
for third-parties approximately $1.7 billion of commercial properties leased primarily to regulated financial institutions
and affiliated users throughout the United States. Additionally, we have a commercial real estate finance business which
operates under the name Gramercy Finance and manages approximately $1.7 billion of whole loans, bridge loans, subordinate
interests in whole loans, mezzanine loans, preferred equity and commercial mortgage-backed securities, or CMBS, which are
financed through three non-recourse CDOs. As described herein, in March 2013, we exited the commercial real estate finance
business and sold the collateral management and sub-special servicing agreements for our CDOs which will result in the
deconsolidation of Gramercy Finance from our Consolidated Balance Sheets. We have classified the assets and liabilities of
the Gramercy Finance segment as assets held-for-sale and have reported the results of operations of Gramercy Finance in
discontinued operations. Neither Gramercy Finance nor Gramercy Asset Management is a separate legal entity but are divisions
through which our commercial real estate finance and asset and property management businesses are conducted.
In connection with our efforts to
exit Gramercy Finance, on January 30, 2013, we entered into a purchase and sale agreement to transfer the collateral
management and sub-special servicing agreements for our three CDOs to CWCapital for approximately $9.9 million, less certain
adjustments and closing costs. We retained our subordinate bonds, preferred shares and ordinary shares in the CDOs,
which may provide us with the potential to recoup additional proceeds over the remaining life of the CDOs based upon
resolution of underlying assets within the CDOs, however, there is no guarantee that we will realize any proceeds from our
equity position, or what the timing of these proceeds may be. The transaction closed in March 2013. In February 2013, we also
sold a portfolio of repurchased notes previously issued by two of our three CDOs, generating cash proceeds of approximately
$34.4 million. In addition, we expect to receive additional cash proceeds for past CDO servicing advances of approximately
$14.0 million when specific assets within the CDOs are liquidated. We believe that the sale of the collateral management and
sub-special servicing agreements and sale of repurchased notes of our CDOs achieves a number of important objectives,
including, (i) maximizing the value of the servicing business through the sale to a large servicing operation (ii)
simplifying our going-forward business and significantly reducing our ongoing management, general and administrative expenses
through elimination of CDO related personnel costs and servicing advance requirements; (iii) generating in excess of
$50.0 million in liquidity currently invested in the CDO business; and (iv) providing for potential future proceeds through
the retention of the equity in the CDOs. Immediately subsequent to the transfer of the collateral management and sub-special
serving agreements, the assets and liabilities of the corresponding CDOs will be deconsolidated from our financial
statements.
We have elected to be taxed as a real estate
investment trust, or 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 we distribute our taxable income, if any, to our stockholders. We have
in the past established, and may in the future establish taxable REIT subsidiaries, or TRSs, to effect various taxable transactions.
Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities.
We conduct substantially all of our operations
through our operating partnership, GKK Capital LP, or our Operating Partnership. We are the sole general partner of our Operating
Partnership. Our Operating Partnership conducts our finance business primarily through two private REITs, Gramercy Investment Trust
and Gramercy Investment Trust II; our commercial real estate investment business through various wholly-owned entities; and our
realty management business through a wholly-owned TRS.
Unless the context requires otherwise,
all references to “Gramercy,” “our Company,” “we,” “our” and “us” mean
Gramercy Capital Corp., a Maryland corporation, and one or more of its subsidiaries, including our Operating Partnership.
Our principal business strategy is to acquire
real estate assets that generate stable, recurring cash flows with minimal outgoing capital expenditures. We also general cash
flows from management fees related to the management of commercial real estate for third-parties. For the near-term, these cash
flows are used to fund our continuing operations and we intend to retain any excess cash flow to grow our investment portfolio.
Once we achieve sufficient scale, we expect to resume cash distributions to our preferred and common stockholders.
Property Investment
In August 2012, we formed a joint venture
with an affiliate of Garrison. Subsequently, in December 2012, we contributed approximately $59,061 in cash plus the issuance of
6,000,000 shares of our common stock, valued at $15,000 as of the date of the execution of the purchase agreement to acquire a
50% equity interest in the joint venture’s acquisition of an office portfolio of 113 properties, or the Bank of America Portfolio,
from KBS. The acquisition was financed with a $200,000 two-year, floating rate, interest-only mortgage loan with a spread to 30-day
LIBOR of 4.15%, collateralized by 67 properties of the portfolio. The mortgage contains three one-year extensions conditional upon
the satisfaction of certain terms. The Bank of America Portfolio was previously part of the Gramercy Asset Management division, beneficial
ownership of which was transferred to KBS pursuant to a collateral transfer and settlement agreement dated September 1, 2011. The
Bank of America Portfolio totals approximately 4.2 million rentable square feet and is 84% leased to Bank of America, N.A., under
a master lease expiring in 2023, with a total portfolio occupancy of approximately 89%. The joint venture’s asset strategy
for this portfolio acquisition is to sell non-core multi-tenant assets and retain a core net-lease portfolio of high quality assets
in primary and strong secondary markets, primarily leased to Bank of America. In addition to our pro rata share of the net income
of the portfolio, pursuant to the joint venture agreement, we will receive an asset management fee as well as a performance based
fee for the portfolio management.
In November 2012, we also acquired two
Class A industrial properties located near Indianapolis, Indiana, or the Indianapolis Industrial Portfolio, totaling approximately
540,000 square feet for a purchase price of $27,125. The Indianapolis Industrial Portfolio is 100% leased to three tenants for
an average lease term of approximately 10.2 years.
We own a 25% interest in the equity owner
of a fee interest in 200 Franklin Square Drive, a 200,000 square foot building located in Somerset, New Jersey which is 100% net
leased to Philips Holdings, USA Inc., a wholly-owned subsidiary of Royal Philips Electronics through December 2021.
Asset and Property Management
Our asset and property management
business, which operates under the name Gramercy Asset Management, currently manages for third-parties, approximately
$1,700,000 of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the
United States.
In 2011, the business of Gramercy Asset
Management changed from being primarily an owner of commercial properties to being primarily a third-party manager of
commercial properties. The scale of Gramercy Asset Management’s revenues declined as a substantial portion of rental
revenues from properties owned by us, were replaced with fee revenues of a substantially smaller scale for managing
properties for third-parties.
During 2011, we sought to extend or restructure
Gramercy Asset Management’s $240,523 Goldman Mortgage Loan, and Gramercy Asset Management’s $549,713 Goldman Mezzanine Loans. The Goldman
Mortgage Loan was collateralized by approximately 195 properties held by Gramercy Asset Management and the Goldman Mezzanine Loans were collateralized
by the equity interest in substantially all of the entities comprising our Gramercy Asset Management division, including its cash and cash
equivalents. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, we entered into a series
of short term extensions to provide additional time to exchange and consider proposals for an extension, modification, restructuring
or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral
to the lenders if such discussions failed. On May 9, 2011, we announced that the scheduled maturity of the Goldman Mortgage Loan
and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.
Notwithstanding the maturity and non-repayment
of the loans, we maintained active communications with the lenders and in September 2011, we entered into the Settlement Agreement,
for an orderly transition of substantially all of Gramercy Asset Management’s assets to KBS, Gramercy Asset Management’s senior mezzanine
lender, in full satisfaction of Gramercy Asset Management’s obligations with respect to the Goldman Mortgage Loan and the Goldman Mezzanine
Loans, in exchange for a mutual release of claims among us and the mortgage and mezzanine lenders and, subject to certain termination
provisions, our continued management of Gramercy Asset Management’s assets on behalf of KBS for a fixed fee plus incentive fees. On
September 1, 2011 and on December 1, 2011, we transferred to KBS or its affiliates, interests in entities owning 317 and 116, respectively,
of the 867 Gramercy Asset Management properties that we agreed to transfer pursuant to the Settlement Agreement and the remaining ownership
interests were transferred to KBS by December 15, 2011.
In September 2011, we entered into an
asset management arrangement upon the terms and conditions set forth in the Settlement Agreement, or the Interim Management
Agreement, to provide for our continued management of the KBS portfolio through December 31, 2013 for a fixed fee of $10,000
annually, plus the reimbursement of certain costs. The Settlement Agreement obligated the parties to negotiate in good faith to replace the Interim
Management Agreement with a more complete and definitive management services agreement on or before March 31, 2012 and on March 30, 2012, we entered into an
Asset Management Services Agreement, or the Management Agreement, with KBS Acquisition Sub, LLC, or KBSAS, a wholly-owned
subsidiary of KBS Real Estate Investment Trust, Inc., or KBS REIT, pursuant to which the Company provides asset management
services to KBSAS with respect to the transferred properties, or the KBS Portfolio. The Management Agreement provides for
continued management of the KBS Portfolio by GKK Realty Advisors, LLC, or the Manager, through December 31, 2015 for (i) a
base management fee of $12,000 per year, payable monthly, plus the reimbursement of all property related expenses paid by
Manager on behalf of KBSAS, subject to deferral of $167 per month at KBSAS’s option until the accrued amount equals
$2,500 or June 30, 2013, whichever is earlier, and (ii) an incentive fee, or the Threshold Value Profits Participation, in an
amount equal to the greater of: (a) $3,500 or (b) 10% of the amount, if any, by which the portfolio equity value exceeds
$375,000 (as adjusted for future cash contributions into, and distributions out of, KBSAS by KBS REIT). In December 2012,
concurrently with the purchase of the Bank of America Portfolio by our joint venture with Garrison, the base management fee
of the Management Agreement was reduced by $3,000 per year to $9,000 per year, which was partially offset by the asset
management fee we receive from Garrison. In any event, the Threshold Value Profits Participation is capped at a maximum
of $12,000. The Threshold Value Profits Participation is payable 60 days after the earlier to occur of June 30, 2014 (or
March 31, 2015 upon satisfaction of certain extension conditions, including the payment by KBSAS to Manager of a $750
extension fee) and the date on which KBSAS, directly or indirectly, sells, conveys or otherwise transfers at least 90% of the
KBS Portfolio (by value).
We may terminate the Management Agreement
(i) without any KBSAS default under the Management Agreement, on or after December 31, 2012, upon 90 days’ prior written
notice or (ii) at any time by five business days’ prior written notice in the event of a KBSAS default under the Management
Agreement. The Management Agreement may be terminated by KBSAS, (i) without cause (as defined in the Management Agreement), with
an effective termination date of March 31 or September 30 of any year but at no time prior to September 30, 2013, upon 90 days’
prior written notice or (ii) at any time after April 1, 2013 for cause. In the event of a termination of the Management Agreement
by KBSAS after April 1, 2013 but prior to December 31, 2015, we will be entitled to receive a declining balance termination fee,
ranging from $5,000 to $2,000, calculated as specified in the Management Agreement.
Commercial Real Estate Finance
Our commercial real estate finance
business operates under the name Gramercy Finance. We have invested in and manage a diversified portfolio of $1,700,000 of
real estate loans, including whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, CMBS and
preferred equity involving commercial properties throughout the United States. As of December 31, 2012, Gramercy Finance also
held interests in five real estate properties acquired through foreclosures. Substantially, all of the investments managed by
Gramercy Finance were financed through three non-recourse CDOs. As further described below, in March 2013, we exited the
commercial real estate finance business and sold the collateral management and sub-special servicing agreements for our CDOs
which will result in the deconsolidation of Gramercy Finance from our Consolidated Balance Sheets. We have classified the
assets and liabilities of the Gramercy Finance segment as assets held-for-sale and have reported the results of operations of
Gramercy Finance in discontinued operations.
On January 30, 2013, we entered into
a purchase and sale agreement to transfer the collateral management and sub-special servicing agreements for our CDOs, to
CWCapital for approximately $9,900, less certain adjustments and closing costs. We retained our subordinate bonds, preferred
shares and ordinary shares in the CDOs, which may provide us with the potential to recoup additional proceeds over the
remaining life of the CDOs based upon resolution of underlying assets within the CDOs, however, there is no guarantee that we
will realize any proceeds from our equity position, or what the timing of those proceeds might be. The transaction closed on
March 15, 2013.
In connection with the sale, we recognized impairment charges of $27,180 within discontinued operations on loans and real estate
investments to adjust the carrying value to the lower of cost or market. We also recognized other-than-temporary impairments
of $128,087 within discontinued operations as we could no longer could express the intent to hold CMBS that were in an unrealized
loss position long enough to recover amortized cost.
Critical Accounting Policies
The following discussion related to our Consolidated
Financial Statements should be read in conjunction with the financial statements appearing in Item 8 of this Annual Report on Form
10-K.
Our discussion and analysis of financial
condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States, known as GAAP. These accounting principles require us to make some complex
and subjective decisions and assessments. Our most critical accounting policies involve decisions and assessments, which could
significantly affect our reported assets, liabilities and contingencies, as well as our reported revenues and expenses. We believe
that all of the decisions and assessments upon which our financial statements are based were reasonable at the time and made based
upon information available to us at that time. We evaluate these decisions and assessments on an ongoing basis. Actual results
may differ from these estimates under different assumptions or conditions. We have identified our most critical accounting policies
to be the following:
Variable Interest Entities
Consolidated VIEs
As of December 31, 2012, the consolidated
balance sheet includes $1,913,353 of assets and $2,374,516 of liabilities related to three consolidated VIEs, which are classified
as held-for-sale. Due to the non-recourse nature of these VIEs, and other factors discussed below, our net exposure to loss from
investments in these entities is limited to our beneficial interests in these VIEs.
Collateralized Debt Obligations
We consolidate three
collateralized debt obligations, or CDOs, which are VIEs and which are included in Gramercy Finance and are classified as held-for-sale. Since we are the collateral
manager of the three CDOs and can make decisions related to the collateral that would most significantly impact the economic outcome
of the CDOs, we have concluded that we are the primary beneficiary of the CDOs as of December 31, 2012. These CDOs invest in commercial real estate debt instruments, the
majority of which we originated within the CDOs, and are financed by the debt and equity issued. We are the collateral
manager of all three CDOs. As a result of consolidation, our subordinate debt and equity ownership interests in these CDOs
have been eliminated, and the Consolidated Balance Sheets reflects both the assets held and debt issued by these CDOs to
third-parties. Similarly, the operating results and cash flows include the gross amounts related to the assets and
liabilities of the CDOs, as opposed to our net economic interests in these CDOs. Refer to Note 6 for further discussion of
fees earned related to the management of the CDOs.
Our interest in the assets held by these
CDOs is restricted by the structural provisions of these entities, and the recovery of these assets will be limited by the CDOs’
distribution provisions, which are subject to change due to non-compliance with covenants, which are described further in Note
6. The liabilities of the CDO trusts are non-recourse, and can generally only be satisfied from the respective asset pool of each
CDO.
We are not obligated to provide any financial
support to these CDOs. As of December 31, 2012, we have no exposure to loss as a result of the investment in these CDOs.
Unconsolidated VIEs
Investment in Commercial Mortgage-Backed Securities
We have investments in CMBS, which are
considered to be VIEs. The majority of our securities portfolio, with an aggregate face amount of $1,179,802, is financed by
our CDOs, and are included in Gramercy Finance and are classified as held-for-sale. We have not consolidated the
aforementioned CMBS investments due to the determination that based on the structural provisions and nature of each
investment, we do not directly control the activities that most significantly impact the VIEs’ economic
performance. Our exposure to loss is limited to our interests in the consolidated CDOs described above.
Real Estate Investments
We record acquired real estate investments at cost. Costs
directly related to the acquisition of such investments are expensed as incurred. We allocate the purchase price of real
estate to land, building and intangibles, such as the value of above-, below- and at-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 income over the remaining term of the associated lease. The values associated with in-place leases are amortized over
the expected term of the associated lease. We assess the fair value of the leases at acquisition based upon estimated cash
flow projections that utilize appropriate discount and capitalization 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, we amortize such below-market lease value into rental income over the
renewal 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 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.
In leasing office space, we may provide funding
to the lessee through a tenant allowance. In accounting for tenant allowances, we determine whether the allowance represents funding
for the construction of leasehold improvements and evaluate the ownership of such improvements. If we are considered the owner
of the leasehold improvements, we capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful
life of the leasehold improvements or the lease term. If the tenant allowance represents a payment for a purpose other than funding
leasehold improvements, or in the event we are not considered the owner of the improvements for accounting purposes, the allowance
is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Factors considered
during this evaluation usually include (i) who holds legal title to the improvements, (ii) evidentiary requirements concerning
the spending of the tenant allowance, and (iii) other controlling rights provided by the lease agreement (e.g. unilateral control
of the tenant space during the build-out process). Determination of the accounting for a tenant allowance is made on a case-by-case
basis, considering the facts and circumstances of the individual tenant lease.
We also review the recoverability of the
property’s carrying value when circumstances indicate a possible impairment of the value of a property. The review of recoverability
is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s
use and eventual disposition. These estimates consider 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 impairment exists due to the inability 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 for assets held for sale. These assessments are recorded
as an impairment loss in our Consolidated Statements of Comprehensive Income (loss) 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, the new cost basis will be depreciated
or amortized over the remaining useful life of that asset.
During 2012, we recorded impairment
charges of $35,043 related to real estate, of which $26,298 was related to real estate classified as held-for-sale in
connection with the disposal of Gramercy Finance. During 2011, we recorded impairment charges of $1,237 related to our
investments in real estate. These properties were reclassified as discontinued operations as part of the Settlement Agreement
with KBS.
During 2010, we recorded
impairment charges of $933,884 related to our investments in real estate, including $85,294 of impairments on intangible
assets. Impairment charges for properties classified as held for investment were $913,648 and $20,236 has been recorded on
properties reclassified as discontinued operations. We recorded impairment charges totaling $912,147 in continuing operations
during 2010 to reduce the carrying value of 692 properties to estimated fair value. All of the impaired properties served
as collateral for the Goldman Mezzanine Loans and are part of the Gramercy Asset Management portfolio. We also
recorded impairment charges on three leasehold properties totaling $1,501 based on the difference between estimated cash
flow shortfalls over the sub-tenants’ lease term. No other real estate assets in the portfolio were determined to
be impaired as of December 31, 2010 as a result of the analysis. The estimated fair values for the properties serving
as collateral for the Goldman Mezzanine loans were calculated using discounted cash flows based on internally developed
models and residual values calculated with capitalization rates utilizing a study completed by a third-party property
management provider for similar types of buildings. We used a range of possible future outcomes or a probability-weighted
approach to determine the proper timing of the impairment. We determined that, as of December 31, 2010, based on a likelihood
of the range of possible outcomes and the probability-weighted cash flows, our investments in real estate were impaired.
Investments in Joint Ventures
We account for our investments in joint ventures
under the equity method of accounting since we exercise significant influence, but do not unilaterally control the entities, and
we are not considered to be the primary beneficiary. In the joint ventures, the rights of the other investors are protective and
participating. Unless we are determined to be the primary beneficiary, these rights preclude us from consolidating the investments.
The investments are recorded initially at cost as an investment in joint ventures, and subsequently are adjusted for equity in
net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the investments on our
balance sheet and the underlying equity in net assets is evaluated for impairment at each reporting period. None of the joint venture
debt is recourse to us. As of December 31, 2012 and 2011, we had investments of $131,986 and $496 in joint ventures, respectively
of which $59,244 were classified as held-for-sale in connection with the disposal of Gramercy
Finance at December 31, 2012.
Assets Held-for-Sale
In connection with our efforts to exit Gramercy Finance and the commercial real estate finance business,
we classified the assets and liabilities of Gramercy Finance as held-for-sale. As of December 31, 2012, we had assets classified
as held-for-sale of $1,952,264 related to the disposal of Gramercy Finance. We recorded impairment charges of $27,180 within discontinued
operations on loans and real estate investments to adjust the carrying value to the lower of cost or fair value and other-than-temporary
impairments of $128,087 within discontinued operations as we no longer could express the intent to hold CMBS investments until
the recovery of amortized cost for all CMBS in an unrealized loss position. For a further discussion regarding the measurement
of financial instruments and real estate assets of the Gramercy Finance segment see Note 11, “Fair Value of Financial Instruments”
and Note 3 “Dispositions and Assets Held-for-Sale”.
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 and current and prior periods are reclassified as “discontinued operations.”
As of December 31, 2012 and 2011, we had real estate investments held-for-sale of $88,806 and $42,965, respectively. We recorded
impairment charges of $35,043, $1,237 and $20,236 during the years ended December 31, 2012, 2011 and 2010, respectively, related
to real estate investments classified as held-for-sale.
Settlement of Debt
A gain on settlement of debt is
recorded when the carrying amount of the liability settled exceeds the fair value of the assets transferred to the lender or
special servicer. In 2012, we did not recognize any gain on settlement of debt.
Pursuant to the execution of the Settlement
Agreement, the transfer of 867 Gramercy Asset Management properties, with an aggregate carrying value of $2,631,902 and associated mortgage,
mezzanine and other liabilities of $2,843,345, occurred in September and December 2011 and we recognized a gain on settlement of
debt of $285,634 in connection with such transfer as part of discontinued operations. The gain on settlement of debt includes $54,083
of gain on disposal of assets. During the year ended December 31, 2011, we recorded $2,489 of legal and professional fees related
to the restructuring of the Goldman Mortgage Loan and the Goldman Mezzanine Loans.
In July 2011, the Dana portfolio, which consisted
of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed
in lieu of foreclosure. We recognized gain on settlement of debt of $74,191 year ended December 31, 2011 as part of discontinued
operations. We realized a $15,892 gain on the disposal the assets, which is included in the gain on settlement of debt.
Tenant and Other Receivables
Tenant and other receivables are primarily
derived from the rental income that each tenant pays in accordance with the terms of its lease, which 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 us 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 December 31, 2012 and December 31, 2011 were $211 and $280, respectively.
We continually review receivables related to rent, tenant reimbursements and unbilled rent receivables and determine collectability
by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in
the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that
the collectability of a receivable is in doubt, we increase the allowance for doubtful accounts or record a direct write-off of
the receivable.
Intangible Assets
We follow the purchase method of accounting
for business combinations. We allocate 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.
We utilize 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 analysis 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.
Above-market and below-market lease values
for properties acquired are recorded based on the present value (using an interest 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 capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable
terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the
initial term of the respective leases. If a tenant vacates its space prior to the contractual termination of the lease and no rental
payments are being made on the lease, any unamortized balance of the related intangible will be written off.
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. In estimating carrying costs, we include real
estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the anticipated
lease-up period, which is expected to average six months. We also estimate costs to execute similar leases including leasing
commissions, legal and other related expenses. The value of in-place leases is amortized to expense over the initial term of
the respective leases, which range primarily from one to 20 years. In no event does the amortization period for intangible
assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of
the in-place lease value is charged to expense.
In making estimates of fair values for purposes
of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection
with the acquisition or financing of the respective property and other market data. We also consider information obtained about
each property as a result of its pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating
the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Valuation of Financial Instruments
ASC 820-10, “Fair Value Measurements
and Disclosures,” among other things, establishes a hierarchical disclosure framework associated with the level of pricing
observability utilized in measuring financial instruments at fair value. Considerable judgment is necessary to interpret market
data and develop estimated fair values. Accordingly, fair values are not necessarily indicative of the amounts that we could realize
on disposition of the financial instruments. Financial instruments with readily available actively quoted prices or for which fair
value can be measured from actively quoted prices generally will have a higher degree of pricing observability and will require
a lesser degree of judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted
will generally have less, or no, pricing observability and will require a higher degree of judgment to be utilized in measuring
fair value. Pricing observability is generally affected by such items as the type of financial instrument, whether the financial
instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions.
The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.
Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date, or an exit price. The level of pricing observability generally correlates to the degree of judgment utilized in measuring
the fair value of financial instruments. The less judgment utilized in measuring fair value financial instruments such as with
readily available actively quoted prices or for which fair value can be measured from actively quoted prices in active markets
generally have more pricing observability. Conversely, financial instruments rarely traded or not quoted have less observability
and are measured at fair value using valuation models that require more judgment. Impacted by a number of factors, pricing observability
is generally affected by such items as the type of financial instrument, whether the financial instrument is new to the market
and not yet established, the characteristics specific to the transaction and overall market conditions.
The three broad levels defined are as follows:
Level I
— This level is comprised
of financial instruments that have quoted prices that are available in active markets for identical assets or liabilities. The
types of financial instruments included in this category are highly liquid instruments with actively quoted prices.
Level II
— This level is comprised
of financial instruments that have pricing inputs other than quoted prices in active markets that are either directly or indirectly
observable. The nature of these financial instruments includes instruments for which quoted prices are available but traded less
frequently and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III
— This level is comprised
of financial instruments that have little to no pricing observability as of the reported date. These financial instruments do not
have active markets and are measured using management’s best estimate of fair value, where the inputs into the determination
of fair value require significant management judgment and assumptions. Instruments that are generally included in this category
are derivatives, whole loans, subordinate interests in whole loans and mezzanine loans.
CMBS securities and derivative instruments
are carried at fair value, and are considered Level III. For more details, refer to Note 11 in the
accompanying financials statements.
At December 31, 2011, we measured CMBS securities
and derivative instruments at fair value on a recurring basis. We calculated the fair value using Level III inputs that required
management to make significant judgments and assumptions.
CMBS available for sale:
The fair values of our available for sale CMBS securities are generally valued by a combination of (i) obtaining
assessments from third-party dealers; and, (ii) pricing services who use combination of market-based inputs along with
unobservable inputs that require significant judgment, such as assumptions on the underlying loans regarding net property operating income, capitalization
rates, debt service coverage ratios and loan-to-value default thresholds, timing of workouts and recoveries, and loan loss severities.
Third-party dealer marks, which are used to value the majority of our CMBS securities, are indications received from dealers in
the respective security, from which we could transact at on the valuation date. We use all data points obtained, including comparable
trades completed by us or available in the market place in determining our fair value of CMBS. Pricing service models are designed
to replicate a market view of the underlying collateral, however, the models are most sensitive to the unobservable inputs such
as timing of loan defaults and severity of loan losses and significant increases (decreases) in any of those inputs in isolation
as well as any change in the expected timing of those inputs, would result in a significantly lower (higher) fair value measurement.
Derivative instruments:
Fair
values of our derivative instruments are valued using advice from a third-party derivative specialist, based on a combination of
observable market-based inputs, such as interest rate curves, and unobservable inputs such as credit valuation adjustments due
to the risk of non-performance.
At December 31, 2012, we measured real estate
investments and loans subject to impairment or reserves for loan loss at fair value on a nonrecurring basis.
Real Estate investments:
The real estate investments identified for impairment have been classified as assets held-for-sale. The impairment on
properties classified as held-for-sale is calculated by comparing unsolicited purchase offers to the carrying value of the
respective property. The marketing valuations are based on internally developed discounted cash flow models which include
assumptions that require significant management judgment regarding capitalization rates, lease-up periods, future occupancy
rates, market rental rates, holding periods, capital improvements and other factors deemed necessary by management. The impairment is calculated by comparing our internally developed discounted cash
flow methodology to the carrying value of the respective property.
Loans subject to impairments or reserves
for loan loss:
The loans identified for impairment or reserves for loan loss are collateral dependent loans. Impairment
or reserves for loan loss are measured by comparing management’s estimation of fair value of the underlying collateral to
the carrying value of the respective loan. These valuations require significant judgments, which include assumptions regarding
capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship,
actions of other lenders and other factors deemed necessary by management.
The valuations of financial instruments derived
from pricing models may include adjustments to the financial instruments. These adjustments may be made when, in management’s
judgment, either the size of the position in the financial instrument or other features of the financial instrument such as its
complexity, or the market in which the financial instrument is traded (such as counterparty, credit, concentration or liquidity)
require that an adjustment be made to the value derived from the pricing models. Additionally, an adjustment from the price derived
from a model typically reflects management’s judgment that other participants in the market for the financial instrument
being measured at fair value would also consider such an adjustment in pricing that same financial instrument.
Assets and liabilities presented at fair
value and categorized as Level III are generally those that are marked to model using relevant empirical data to extrapolate an
estimated fair value. The models’ inputs reflect assumptions that market participants would use in pricing the instrument
in a current period transaction and outcomes from the models represent an exit price and expected future cash flows. The parameters
and inputs are adjusted for assumptions about risk and current market conditions. Changes to inputs in valuation models are not
changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from
changes in market conditions. Accordingly, results from valuation models in one period may not be indicative of future period measurements.
Revenue Recognition
Real Estate Investments
Rental income from leases is recognized on
a straight-line basis regardless of when payments are contractually due. Certain lease agreements also contain provisions that
require tenants to reimburse us for real estate taxes, common area maintenance costs and the amortized cost of capital expenditures
with interest. Such amounts are included in both revenues and operating expenses when we are the primary obligor for these expenses
and assume the risks and rewards of a principal under these arrangements. Under leases where the tenant pays these expenses directly,
such amounts are not included in revenues or expenses.
Deferred revenue represents rental revenue
and management fees received prior to the date earned. Deferred revenue also includes rental payments received in excess of rental
revenues recognized as a result of straight-line basis accounting.
Other income includes fees paid by tenants
to terminate their leases, which are recognized when fees due are determinable, no further actions or services are required to
be performed by us, and collectability is reasonably assured. In the event of early termination, the unrecoverable net book values
of the assets or liabilities related to the terminated lease are recognized as depreciation and amortization expense in the period
of termination.
We recognize sales of real estate properties
only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized
using the full accrual method upon closing when the collectability of the sale price is reasonably assured and we are not obligated
to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements
of profit recognition on sale of real estate.
Finance Investments
At December 31, 2012, our loans,
other lending investments and CMBS are classified as held-for-sale in connection with the disposal of Gramercy
Finance.
Interest income on debt investments is recognized
over the life of the investments using the effective interest method and recognized on the accrual basis. Fees received in connection
with loan commitments are deferred until the loan is funded and are then recognized over the term of the loan using the effective
interest method. Anticipated exit fees, whose collection is expected, are also recognized over the term of the loan as an adjustment
to yield. Fees on commitments that expire unused are recognized at expiration. Fees received in exchange for the credit enhancement
of another lender, either subordinate or senior to us, in the form of a guarantee are recognized over the term of that guarantee
using the straight-line method.
Income recognition is generally suspended
for debt investments at the earlier of the date at which payments become 90 days past due or when, in our opinion, a full recovery
of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance
is demonstrated to be resumed.
Reserve for Loan Losses
Specific valuation allowances
are established for loan losses on loans in instances where it is deemed probable that we may be unable to collect all
amounts of principal and interest due according to the contractual terms of the loan. The reserve is increased through the
provision for loan losses on our Consolidated Statements of Operations and Comprehensive Income (Loss) and is decreased by
charge-offs when losses are realized through sale, foreclosure, or when significant collection efforts have ceased. The
determination of when significant collection efforts have ceased is based upon management’s assumption and judgments
regarding the probability of a successful remediation and is based upon factors such as the nature of the underlying
collateral or existence of additional collateral, borrower experience, financial strength, investment track record, and
borrower credit.
We consider the present value of payments
expected to be received, observable market prices, or the estimated fair value of the collateral (for loans that are dependent
on the collateral for repayment), and compare it to the carrying value of the loan. The determination of the estimated fair value
is based on the key characteristics of the collateral type, collateral location, quality and prospects of the sponsor, the amount
and status of any senior debt, and other factors. We also include the evaluation of operating cash flow from the property during
the projected holding period, and the estimated sales value of the collateral computed by applying an expected capitalization rate
to the stabilized net operating income of the specific property, less selling costs, all of which are discounted at market discount
rates. We also consider if the loan’s terms have been modified in a troubled debt restructuring. Because the determination
of estimated value is based upon projections of future economic events, which are inherently subjective, amounts ultimately realized
from loans and investments may differ materially from the carrying value at the balance sheet date.
Commercial Mortgage-Backed Securities
In connection with the disposal of
Gramercy Finance, as of December 31, 2012 we could no longer express the intent to hold our CMBS securities
in an unrealized loss position until the amortized cost basis is recovered, and as such we recognized an other-than-temporary
impairment for all CMBS securities in an unrealized loss position equal to the entire difference between the amortized cost
basis and the fair value.
On the date of acquisition of the CMBS securities,
we determine the appropriate accounting model for impairment and revenue recognition based on our assessment of the risk of loss.
We have designated our entire CMBS securities portfolio as available-for-sale. Securities that are considered to have a remote
risk of loss are those securities that we have determined are of high credit quality and are sufficiently collateralized to protect
the acquired class from losses.
Prior to the fourth quarter of 2012, when
we could express the intent and ability to hold our available-for-sale CMBS securities until maturity, unrealized losses that were,
in the judgment of management, other-than-temporarily impaired were bifurcated into (i) the amount related to credit losses and
(ii) the amount related to all other factors. The evaluation included a review of the credit status and the performance of the
collateral supporting those securities, including key terms of the securities and the effect of local, industry and broader economic
trends. The portion of the other-than-temporary impairment related to credit losses was computed by comparing the amortized cost
of the investment to the present value of cash flows expected to be collected and was charged against earnings. The portion of the other-than-temporary impairment related to all other factors was recognized
as a component of other comprehensive loss. The determination of an other-than-temporary impairment
is a subjective process, and different judgments and assumptions could affect the timing of loss realization. We calculated a revised
yield based on the current amortized cost of the investment (including any other-than-temporary impairments recognized to date)
and the revised yield was then applied prospectively to recognize interest income. Assumptions about future cash flows consider
reasonable management judgment about the probability that the holder of an asset will be unable to collect all amounts due.
We also assess securities which are not of
high credit quality on a quarterly basis to determine whether significant changes in estimated cash flows or unrealized losses
on these securities, if any, reflect a decline in value which is other-than-temporary. On a quarterly basis, we review the changes
in expected cash flows on these securities, and if there was a material decrease in estimated cash flows and the security was in
an unrealized loss position, we recorded an other-than-temporary impairment. If the security was in an unrealized gain position and there was a material decrease or increase in expected cash flows,
we prospectively adjusted the yield using the effective yield method.
Upon the disposition of a CMBS investment
designated as available-for-sale, the unrealized gain or loss recognized in accumulated other comprehensive income is reversed.
A realized gain or loss is computed by comparing the amortized cost of the CMBS investment sold to the cash proceeds received,
and the resultant gain or loss is recorded in other income.
Rent Expense
Rent expense is recognized on a straight-line
basis regardless of when payments are due. Accounts payable and accrued expenses in the accompanying Consolidated Balance Sheets
as of December 31, 2012 and 2011 includes an accrual for rental expense recognized in excess of amounts due at that time. Rent
expense related to leasehold interests is included in property operating expenses, and rent expense related to office rentals is
included in management, general and administrative expense.
Stock-Based Compensation Plans
We have a stock-based compensation
plan, described more fully in Note 12. We account for this plan using the fair value recognition provisions. We use the
Black-Scholes option-pricing model to estimate the fair value of a stock option award. This model requires inputs such as
expected term, expected volatility, and risk-free interest rate. Further, the forfeiture rate also impacts the amount of
aggregate compensation cost. These inputs are highly subjective and generally require significant analysis and judgment to
develop.
Compensation cost for stock options, if any,
is recognized ratably over the vesting period of the award. Our policy is to grant options with an exercise price equal to the
quoted closing market price of our stock on the business day preceding the grant date. Awards of stock or restricted stock are
expensed as compensation on a current basis over the benefit period.
The fair value of each stock option granted
is estimated on the date of grant for options issued to employees, and quarterly for options issued to non-employees, using the
Black-Scholes option pricing model with the following weighted average assumptions for grants in 2012 and 2011.
|
|
|
2012
|
|
|
|
2011
|
|
Dividend yield
|
|
|
5.0%
|
|
|
|
5.9%
|
|
Expected life of option
|
|
|
5.0 years
|
|
|
|
5.0 years
|
|
Risk-free interest rate
|
|
|
0.89%
|
|
|
|
2.02%
|
|
Expected stock price volatility
|
|
|
80.0%
|
|
|
|
105.0%
|
|
Derivative Instruments
In the normal course of business, we use
a variety of derivative instruments to manage, or hedge, interest rate risk. We require that hedging derivative instruments be
effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying
for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative
contract. We use a variety of commonly used derivative products that are considered “plain vanilla” derivatives. These
derivatives typically include interest rate swaps, caps, collars and floors. We expressly prohibit the use of unconventional derivative
instruments and using derivative instruments for trading or speculative purposes. Further, we have a policy of only entering into
contracts with major financial institutions based upon their credit ratings and other factors.
To determine the fair value of derivative
instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance
sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard
market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost and termination
cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such
value may never actually be realized.
In the normal course of business, we are
exposed to the effect of interest rate changes and limit these risks by following established risk management policies and procedures
including the use of derivatives. To address exposure to interest rates, we use derivatives primarily to hedge cash flow variability
caused by interest rate fluctuations of our liabilities.
We recognize all derivatives on
the balance sheet at fair value. Derivative instruments that are assets and liabilities of the CDOs are classified
as held-for-sale in connection with the disposal of Gramercy Finance. Derivatives that are not hedges must be adjusted to
fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through
earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective
portion of a derivative’s change in fair value will be immediately recognized in earnings. Derivative accounting may
increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of LIBOR,
swap spreads and other variables affecting the fair values of derivative instruments and hedged items, but will have no
effect on cash flows, provided the contract is carried through to full term.
All hedges held by us are deemed effective
based upon the hedging objectives established by our corporate policy governing interest rate risk management. The effect of our
derivative instruments on our financial statements is discussed more fully in Note 6.
Income Taxes
We elected to be taxed as a REIT, under Sections
856 through 860 of the Internal Revenue Code, beginning with our taxable year ended December 31, 2004. To qualify as a REIT, we
must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary
taxable income, if any, to stockholders. As a REIT, we generally will not be subject to U.S. federal income tax on taxable income
that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to U.S. federal
income taxes on our taxable income at regular corporate rates and we will not be permitted to qualify for treatment as a REIT for
U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue
Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and
net cash available for distributions to stockholders. However, we believe that we will be organized and operate in such a manner
as to qualify for treatment as a REIT and we intend to operate in the foreseeable future in such a manner so that we will qualify
as a REIT for U.S. federal income tax purposes. We may, however, be subject to certain state and local taxes. Our TRSs are subject
to federal, state and local taxes.
For the years ended December 31,
2012, 2011 and 2010, we recorded $3,330, $563, and $966 of income tax expense, respectively. Tax expenses for each year is
comprised of federal, state and local taxes. Income taxes, primarily related to our TRSs, are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation
allowance is provided if we believe it is more likely than not that all or a portion of a deferred tax asset will not be
realized. Any increase or decrease in a valuation allowance is included in the tax provision when such a change occurs.
Our policy for interest and penalties, if
any, on material uncertain tax positions recognized in the financial statements is to classify these as interest expense and operating
expense, respectively. As of December 31, 2012, 2011 and 2010, we did not incur any material interest or penalties.
Results of Operations
Comparison of the year ended December 31, 2012
to the year ended December 31, 2011
Revenues
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Management fees
|
|
$
|
34,667
|
|
|
$
|
7,336
|
|
|
$
|
27,331
|
|
Rental revenue
|
|
|
267
|
|
|
|
-
|
|
|
|
267
|
|
Investment income
|
|
|
600
|
|
|
|
-
|
|
|
|
600
|
|
Operating expense reimbursements
|
|
|
174
|
|
|
|
-
|
|
|
|
174
|
|
Other income
|
|
|
1,113
|
|
|
|
436
|
|
|
|
677
|
|
Total revenue
|
|
$
|
36,821
|
|
|
$
|
7,772
|
|
|
$
|
29,049
|
|
Equity in net income (loss) of joint ventures
|
|
$
|
(2,904
|
)
|
|
$
|
121
|
|
|
$
|
(3,025
|
)
|
Management fees for the year ended
December 31, 2012 are $34,667 and for the year ended December 31, 2011 are $7,336. Management fees are comprised of asset management,
property management and administration fees earned pursuant to the Management Agreement which was effective September 1, 2011 and
fees earned from our joint venture with Garrison commencing in December 2012.
Rental revenue was $267 and $0
for the years ended December 31, 2012 and 2011, respectively. The increase of $267 is due to the acquisition of the Indianapolis
Industrial Portfolio in November 2012.
Investment income was primarily
generated from a mezzanine loan investment made in connection with the acquisition of the Bank of America Portfolio.
Operating expense reimbursements
were $174 the year ended December 31, 2012 and were related to the Indianapolis Industrial Portfolio acquired in November 2012.
Other income of $1,113 for the
year ended December 31, 2012 is primarily comprised of $1,000 payment received related to settlement of a previously defaulted
loan investment held outside of our commercial real estate finance segment. The remainder of other income for the year ended December
31, 2012 and 2011 is related to interest earned on cash balances held by us.
The equity in net income (loss)
of joint ventures of $2,904 for the year ended December 31, 2012 represents our proportionate share of the loss generated by two
joint venture interests, including our joint venture with Garrison which contains the Bank of America Portfolio acquired in December
2012. The equity in net income of joint ventures of $121 for the year ended December 31, 2011 represents our proportionate share
of the income generated by one joint venture interest. Our proportionate share of the income (loss) generated by our joint venture
interests including $669 and $3,219 of real estate-related depreciation and amortization, which when added back, results in a reduction
of Funds from Operations, or FFO, of $7,846 for the year ended December 31, 2012 and a contribution to FFO, of $1,242 for the year
ended December 31, 2011, including losses of $5,611 and $2,098 classified as discontinued operations, respectively.
Expenses
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Property operating expenses
|
|
$
|
23,226
|
|
|
|
5,947
|
|
|
$
|
17,279
|
|
Depreciation and amortization
|
|
|
256
|
|
|
|
136
|
|
|
|
120
|
|
Management, general and administrative
|
|
|
25,446
|
|
|
|
22,150
|
|
|
|
3,296
|
|
Provision for taxes
|
|
|
3,330
|
|
|
|
563
|
|
|
|
2,767
|
|
Total expenses
|
|
$
|
52,258
|
|
|
$
|
28,796
|
|
|
$
|
23,462
|
|
Property operating expenses increased
by $17,279 from the $5,947 recorded in the year ended December 31, 2011 to $23,226 recorded in the year ended December 31, 2012.
The increase is attributable to additional costs incurred in connection with management of the KBS portfolio for twelve months
of 2012 as compared to only four months in 2011. Property operating expenses in 2011 was also reduced by the reversal of a reserve
for litigation of approximately $5,392 which was settled in 2011.
We recorded depreciation and amortization
expenses of $256 for the year ended December 31, 2012, compared to $136 for the year ended December 31, 2011. The increase of $120
is primarily due to the acquisition of the Indianapolis Industrial Portfolio in November 2012.
Management, general and administrative
expenses were $25,446 for the year ended December 31, 2012, compared to $22,150 for the same period in 2011. The increase of $3,296
is primarily related to the write off of $2,615 in costs related to our strategic review process completed in the second quarter
of 2012, $111 of include acquisition costs for Indianapolis industrial portfolio, increases of corporate legal fees of $715 and
salary and employee benefit costs of $1,201, which are partially offset by reductions in audit fees, other professional fees and
insurance of $1,347.
The provision for taxes was $3,330
for the year ended December 31, 2012, versus $563 for the year ended December 31, 2011. The increase of $2,767 is primarily related
to taxes on our realty asset management business which is conducted in a TRS.
Comparison of the year ended December 31, 2011
to the year ended December 31, 2010
Revenues
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
Management fees
|
|
$
|
7,336
|
|
|
$
|
-
|
|
|
$
|
7,336
|
|
Investment income
|
|
|
-
|
|
|
|
25
|
|
|
|
(25
|
)
|
Other income
|
|
|
436
|
|
|
|
1,172
|
|
|
|
(736
|
)
|
Total revenue
|
|
$
|
7,772
|
|
|
$
|
1,197
|
|
|
$
|
6,575
|
|
Equity in net income (loss) of joint ventures
|
|
$
|
121
|
|
|
$
|
(303
|
)
|
|
$
|
424
|
|
Management fees for the year ended
December 31, 2011 are $7,336 and for the year ended December 31, 2011 are $0. Management fees are comprised of asset management,
property management and administration fees earned pursuant to the Management Agreement which was effective September 1, 2011.
For the year ended December 31,
2012, other income is primarily related to interest earned on cash balances held by us. Other income of $1,172 for the year ended
December 31, 2010 also includes reimbursements of legal costs and ancillary income we received from third-parties.
The equity in net income (loss)
of joint ventures of $121 for the year ended December 31, 2011 represents our proportionate share of the income generated by one
joint venture interests. The equity in net loss of joint ventures of $1,172 for the year ended December 31, 2010 represents our
proportionate share of the income generated by two joint venture interests. Our proportionate share of the income or loss generated
by our joint venture interests include $3,219 and $4,347 of real estate-related depreciation and amortization, which when added
back, results in a contribution to Funds from Operations, or FFO, of $1,242 and $11,212 for the years ended December 31, 2011 and
2010, respectively, including loss of $2,098 and income of $7,168 classified as discontinued operations, respectively.
Expenses
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
Property operating expenses
|
|
$
|
5,947
|
|
|
|
4,033
|
|
|
$
|
1,914
|
|
Interest expense
|
|
|
-
|
|
|
|
280
|
|
|
|
(280
|
)
|
Depreciation and amortization
|
|
|
136
|
|
|
|
174
|
|
|
|
(38
|
)
|
Management, general and administrative
|
|
|
22,150
|
|
|
|
22,369
|
|
|
|
(219
|
)
|
Provision for taxes
|
|
|
563
|
|
|
|
966
|
|
|
|
(403
|
)
|
Total expenses
|
|
$
|
28,796
|
|
|
$
|
27,822
|
|
|
$
|
974
|
|
Property operating expenses increased
by $1,914 from the $4,033 recorded in the year ended December 31, 2010 to $5,947 recorded in the year ended December 31, 2011.
The increase is primarily attributable to additional costs incurred in connection with the management of the KBS portfolio beginning
in September 2011, partially reduced by the reversal of a reserve for litigation of approximately $5,400 which was settled in 2011.
Interest expense was $0 for the
year ended December 31, 2011 compared to $280 for the year ended December 31, 2010. Decrease in interest expense is due to financing
costs being fully amortized during the year ended December 31, 2010.
We recorded depreciation and amortization
expenses of $136 for the year ended December 31, 2011, compared to $174 for the year ended December 31, 2010. Management, general
and administrative expenses were $22,150 for the year ended December 31, 2011, compared to $22,369 for the same period in 2010.
The decrease of $219 includes reductions in salaries and benefits of $216, legal and professional fees of $88 and other administrative
costs of $513, partially offset by an increase in insurance and other professional fees of $564.
The provision for taxes was $563
for the year ended December 31, 2011, versus $966 for the year ended December 31, 2010. The decrease of $403 is primarily related
to state taxes incurred in connection with a gain on extinguishment of debt in the year ended December 31, 2010.
Liquidity and Capital Resources
Liquidity is a measurement of our
ability to meet cash requirements, including ongoing commitments to fund acquisitions of real estate assets, repay
borrowings, pay dividends and other general business
needs. In addition to cash on hand, our primary sources of funds for short-term (within the next 12 months) liquidity
requirements, including working capital, distributions, if any, debt service and additional investments, consist of: (i) cash
flow from operations; (ii) proceeds from the sale of our collateral management and sub-special servicing agreements and
proceeds from the sale of certain repurchased notes of our CDOs; (iii) proceeds from potential asset sales; and, to a lesser
extent; (iv) new financings and; (v) proceeds from additional common or preferred equity offerings. We believe these sources
of financing will be sufficient to meet our short-term liquidity requirements. Our future growth will depend, in large
part, upon our ability to raise additional capital. In the event we are not able to successfully access new equity or debt
capital, we will rely primarily on cash on hand, cash flows from operations, proceeds from the sale of collateral
management and sub-special servicing agreements and proceeds from the sale of certain repurchased notes of our CDOs, management fees and proceeds from asset sales to satisfy our liquidity requirements.
If we (i) are unable to renew, replace or expand our sources of financing, (ii) are unable to execute asset sales in a
timely manner or to receive anticipated proceeds from them or (iii) fully utilize available cash, it may have an adverse
effect on our business, results of operations, and ability to make distributions to our stockholders.
A summary of the distributions and fees received
from the CDOs, which was our primary source of liquidity for 2012, is presented below:
|
|
Collateral Manager Fees and CDO Distributions
|
|
|
|
CDO 2005-1
|
|
|
CDO 2006-1
|
|
|
CDO 2007-1
|
|
|
|
|
|
|
Fees
|
|
|
Distributions
|
|
|
Fees
|
|
|
Distributions
|
|
|
Fees
|
|
|
Distributions
|
|
|
Total
|
|
1Q 2012
|
|
$
|
2,399
|
|
|
$
|
3,495
|
|
|
$
|
1,027
|
|
|
$
|
9,160
|
|
|
$
|
172
|
|
|
$
|
-
|
|
|
$
|
16,253
|
|
2Q 2012
|
|
|
3,134
|
|
|
|
1,907
|
|
|
|
965
|
|
|
|
6,311
|
|
|
|
169
|
|
|
|
-
|
|
|
|
12,486
|
|
3Q 2012
|
|
|
332
|
|
|
|
-
|
|
|
|
933
|
|
|
|
8,238
|
|
|
|
169
|
|
|
|
-
|
|
|
|
9,672
|
|
4Q 2012
|
|
|
300
|
|
|
|
-
|
|
|
|
380
|
|
|
|
-
|
|
|
|
169
|
|
|
|
-
|
|
|
|
849
|
|
Total 2012
|
|
$
|
6,165
|
|
|
$
|
5,402
|
|
|
$
|
3,305
|
|
|
$
|
23,709
|
|
|
$
|
679
|
|
|
$
|
-
|
|
|
$
|
39,260
|
|
Our ability to fund our short-term liquidity
needs, including debt service and general operations (including employment related benefit expenses), through cash flow from operations
can be evaluated through the Consolidated Statements of Cash Flows included in our financial statements. Beginning with the third
quarter of 2008 our board of directors elected not to pay a dividend on our common stock. Additionally our board of directors elected
not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. As of December
31, 2012 and 2011, we accrued $30,438 and $23,276, respectively, for the Series A preferred stock dividends. Based on current estimates
of our taxable loss, we expect that we will have no distribution requirements in order to maintain our REIT status for the 2012
tax year and we expect that we will continue to elect to retain capital liquidity purposes; however, as our new business strategy
is implemented and sustainable cash flows grow, we will re-evaluate our dividend policy with the intention of resuming dividends.
In accordance with the
provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the
then current quarter on the Series A preferred stock are paid in full.
Our ability to meet our
long-term (beyond the next 12 months) liquidity and capital resource requirements will be subject to obtaining additional
debt financing and equity capital. Subsequent to our exit from the commercial real estate finance business, we will have no
corporate debt obligations, although we may pursue obtaining a corporate credit facility or line of credit for working
capital purposes or to facilitate with the acquisition of property investments. Our inability to renew, replace or expand
our sources of financing on substantially similar terms, or any at all may have an adverse effect on our business, results
of operations and our ability to make distributions. Any indebtedness we incur will likely be subject to continuing or
more restrictive covenants and we will likely be required to make continuing representations and warranties in connection
with such debt.
Our future borrowings may require us, among
other restrictive covenants, to keep uninvested cash on hand, to maintain a certain minimum tangible net worth, to maintain a certain
portion of our assets free from liens and to secure such borrowings with assets. These conditions could limit our ability to do
further borrowings and may have a material adverse effect on our liquidity, the value of our common stock, and our ability to make
distributions to our stockholders.
As of the date of this filing, we expect
that our cash on hand and cash flow from operations will be sufficient to satisfy our anticipate short-term and long-term liquidity
needs as well as our recourse liabilities, if any.
To maintain our qualification as a REIT under
the Internal Revenue Code, we must distribute annually at least 90% of our taxable income. This distribution requirement limits
our ability to retain earnings and thereby replenish or increase capital for operations. In accordance with the provisions of our charter, we may not pay any dividends
on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A Preferred Stock are
paid in full.
Cash Flows
Net cash provided by operating activities
decreased $86,822 to $283 for the year ended December 31, 2012 compared to $87,105 for the same period in 2011. Operating cash
flow was generated primarily by management fees, net interest income from our commercial real estate finance segment and net rental
income from our investment segment. The decrease in operating cash flow for the year ended December 31, 2012 compared to the same
period in 2011 was primarily due to the transfer of the KBS portfolio pursuant to the Settlement Agreement in 2011 and a corresponding
decrease in operating assets and liabilities of $22,114.
Net cash provided by investing activities
for the year ended December 31, 2012 was $248,288 compared to $51,133 during the same period in 2011. The increase in cash flow
from investing activities is primarily attributable to the increase in proceeds from real estate sales and loan syndications and
a reduction in new originations and funded commitments within our commercial real estate finance segment. These are partially offset
by cash payments made to acquire the Indianapolis Industrial Portfolio and the BOA Joint Venture as well as a reduction in principal
collections on investments.
Net cash used by financing activities
for the year ended December 31, 2012 was $306,894 as compared to $195,358 during the same period in 2011. The change is primarily
attributable to the decrease in restricted cash within the CDOs, and the increase in repayments of liabilities issued by our CDOs.
Capitalization
Our authorized capital stock consists of
125,000,000 shares, $0.001 par value, of which we have authorized the issuance of up to 100,000,000 shares of common stock, $0.001
par value per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2012, 60,731,002
shares of common stock and 3,525,822 shares of preferred stock were issued and outstanding.
In connection with Mr. Gordon F. DuGan’s
agreement to serve as our Chief Executive Officer, on June 7, 2012, Mr. DuGan also agreed to purchase 1,000,000 shares of our common
stock on June 29, 2012 for an aggregate purchase price of $2,520 or $2.52 per share. The per share purchase price was equal to
the closing price our common stock on the New York Stock Exchange on the day prior to the date Mr. DuGan entered into the subscription
agreement with us to purchase such shares of common stock. The issuance of such shares of common stock was a private placement
exempt from the registration requirements of the Securities Act.
We issued to KBS Acquisition Sub-Owner
2, LLC (i) 2,000,000 shares of our common stock, par value $0.001 per share; (ii) 2,000,000 shares of Class B-1 non-voting
common stock, par value $0.001 per share; and (iii) 2,000,000 shares of Class B-2 non-voting common stock, par value $0.001
per share on December 6, 2012. The shares were issued as consideration for our contribution to the joint venture with
Garrison in connection with the acquisition of the Bank of America Portfolio on the same date and were valued at $2.75 which
was the closing price of our common stock on the New York Stock Exchange on the day prior. Each share of the Class B-1 common
stock and Class B-2 common stock will be convertible into one share of our common stock at the option of the holder at any
time on or after September 5, 2013 and December 6, 2013, respectively. Each share of Class B-1 common stock and Class B-2
common stock that has not previously been converted and remains outstanding on March 5, 2014 shall, automatically and without
any action on the part of the holder thereof, convert into one share of common stock on such date. While outstanding, each
share of Class B-1 common stock and Class B-2 common stock will have identical rights to dividends and other distributions as
our common stock. The issuance of such shares of common stock was a private placement exempt from the
registration requirements of the Securities Act.
Preferred Stock
In April 2007, we issued 4,600,000 shares
of our 8.125% Series A cumulative redeemable preferred stock (including the underwriters’ over-allotment option of 600,000
shares) with a mandatory liquidation preference of $25.00 per share. Holders of the Series A preferred stock are entitled to annual
dividends of $2.03125 per share on a quarterly basis and dividends are cumulative, subject to certain provisions. On or after April
18, 2012, we may at our option redeem the Series A preferred stock at par for cash. Net proceeds (after deducting underwriting
fees and expenses) from the offering were approximately $111,205.
In November 2010, we settled a tender offer
to purchase up to 4,000,000 shares of our Series A preferred stock for $15.00 per preferred share, net to seller in cash. In the
aggregate, we paid approximately $16,620 to acquire the 1,074,178 shares of the Series A preferred stock tendered and not withdrawn.
The shares of Series A preferred stock acquired by us were retired upon receipt and accrued and unpaid dividends of $4,364 or $4.0625
per share of the acquired preferred stock were eliminated. After settlement of the tender offer, 3,525,822 shares of Series A preferred
stock remain outstanding for trading on the NYSE.
The $13,713 excess of the $30,332 carrying
value of the tendered preferred stock, including accrued dividends of $4,364, over the $16,620 of consideration paid was recorded
as a decrease to net loss available to common stockholders for the year ended December 31, 2010.
Beginning with the fourth quarter of 2008,
our board of directors elected not to pay the quarterly Series A preferred stock dividends of $0.50781 per share. As of December
31, 2012 and 2011, we accrued Series A preferred stock dividends of $30,438 and $23,276, respectively.
Deferred Stock Compensation Plan for Directors
Under our Independent Director’s Deferral
Program, which commenced April 2005, our independent directors may elect to defer up to 100% of their annual retainer fee, chairman
fees and meeting fees. Unless otherwise elected by a participant, fees deferred under the program shall be credited in the form
of phantom stock units. The phantom stock units are convertible into an equal number of shares of common stock upon such directors’
termination of service from the board of directors or a change in control by us, as defined by the program. Phantom stock units
are credited to each independent director quarterly using the closing price of our common stock on the applicable dividend record
date for the respective quarter. If dividends are declared by us, each participating independent director who elects to receive
fees in the form of phantom stock units has the option to have their account credited for an equivalent amount of phantom stock
units based on the dividend rate for each quarter or have dividends paid in cash.
As of December 31, 2012, there were approximately
462,102 phantom stock units outstanding, of which 457,602 units are vested.
Market Capitalization
At December 31, 2012, our CDOs, which
are classified as held-for-sale in connection with the disposal of Gramercy Finance, represented 89.1% of our consolidated
market capitalization of $2,455,015 (based on a common stock price of $2.94 per share, the closing price of our common stock
on the New York Stock Exchange on December 31, 2012). Market capitalization includes our consolidated debt and common
and preferred stock.
Equity Incentive Plan
In connection with the hiring of Gordon
F. DuGan, Benjamin Harris, and Nicholas L. Pell, who joined on July 1, 2012 as Chief Executive Officer, President and Managing
Director, respectively, we have granted equity awards to these new executives pursuant to a newly adopted outperformance plan,
or the 2012 Outperformance Plan. Pursuant to the 2012 Outperformance Plan, these executives, in the aggregate, may earn up to $20,000
of LTIP Units based on our common stock price appreciation over a four-year performance period ending June 30, 2016. The amount
of LTIP Units earned under the 2012 Outperformance Plan will range from $4,000 if our common stock price equals a minimum hurdle
of $5.00 per share (less any dividends paid during the performance period) to $20,000 if our common stock price equals or exceeds
$9.00 per share (less any dividends paid during the performance period) at the end of the performance period. In the event that
the performance hurdles are not met on a vesting date, the award scheduled to vest on that vesting date may vest on a subsequent
vesting date if the common stock price hurdle is met as of such subsequent vesting date. The executives will not earn any LTIP
Units under the 2012 Outperformance Plan to the extent that our common stock price is less than the minimum hurdle. Messrs.
DuGan, Harris and Pell were granted awards under the 2012 Outperformance Plan pursuant to which they may earn up to $10,000, $6,000
and $4,000 of LTIP Units, respectively.During the performance period, the executives may earn up to 12%, 24% and 36% of the maximum
amount under the 2012 Outperformance Plan at the end of the first, second and third years, respectively, of the performance period
if our common stock price has equaled or exceeded the stock price hurdles as of the end of such years. If the minimum stock price
hurdle is met as of the end of any such year, the actual amount earned will range on a sliding scale from 20% of the maximum amount
that may be earned as of such date (at the minimum stock price hurdle) to 100% of the maximum amount that may be earned as of such
date (at the maximum stock price hurdle). Any LTIP Units earned under the 2012 Outperformance Plan will remain subject to vesting,
with 50% of any LTIP Units earned vesting on June 30, 2016 and the remaining 50% vesting on June 30, 2017 based, in each case,
on continued employment through the vesting date. The LTIP Units had a fair value of $1,870 on the date of grant. We used a probabilistic
valuation approach to estimate the inherent uncertainty that the LTIP Units may have with respect to our common stock. Compensation
expense of $210 was recorded for the year ended December 31, 2012 for the 2012 Outperformance Plan. Compensation expense of $1,660
will be recorded over the course of the next 54 months, representing the remaining weighted average vesting period of the LTIP
Units as of December 31, 2012.
In connection with the equity awards made
to Messrs. DuGan, Harris and Pell in connection with the hiring of these executives, we adopted the 2012 Inducement Equity Incentive
Plan, or the Inducement Plan. Under the Inducement Plan, we may grant equity awards for up to 4.5 million shares of common stock
pursuant to the employment inducement award exemption provided by the New York Stock Exchange Listed Company Manual. The Inducement
Plan permits us to issue a variety of equity awards, including stock options, restricted stock, phantom shares, dividend equivalent
rights and other equity-based awards. All of the shares available under the Inducement Plan were issued or reserved for issuance
to Messrs. DuGan, Harris and Pell in connection with the equity awards made upon the commencement of their employment. Equity awards
issued under the Inducement Plan had a fair value of $3,830 on the date of grant. Compensation expense of $383 was recorded for
year ended December 31, 2012 for the 2012 Inducement Equity Incentive Plan. Compensation expense of $3,447 will be recorded over
the course of the next 54 months representing the remaining weighted average vesting period of equity awards issued under the Inducement
Plan as of December 31, 2012.
Indebtedness
The table below summarizes secured and other
debt at December 31, 2012 and 2011:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
$
|
2,188,597
|
|
|
$
|
2,468,810
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,188,597
|
|
|
$
|
2,468,810
|
|
|
|
|
|
|
|
|
|
|
Cost of debt
|
|
LIBOR+0.47%
|
|
|
LIBOR+0.45%
|
|
Mortgage and Mezzanine Loans
Certain real estate assets were subject to
mortgage and mezzanine liens. In September 2011, we entered into the Settlement Agreement for an orderly transition of substantially
all of Gramercy Asset Management’s assets to KBS, in full satisfaction of Gramercy Asset Management’s obligations with respect to the Goldman
Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among us and the mortgage and mezzanine
lenders and, subject to certain termination provisions, our continued management of Gramercy Asset Management’s assets on behalf of
KBS for a fixed fee plus incentive fees. On September 1, 2011 and on December 1, 2011, we transferred to KBS or its affiliates,
interests in entities owning 317 and 116, respectively, of the 867 Gramercy Asset Management properties that we agreed to transfer pursuant
to the Settlement Agreement and the remaining ownership interests were transferred to KBS by December 15, 2011. The aggregate carrying
value for the interests transferred to KBS was approximately $2.63 billion. In July 2011, the Dana portfolio, which consisted of
15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in
lieu of foreclosure. For further discussion of the impact of the Settlement Agreement and the transfer of the Dana portfolio, see
Settlement and Extinguishment of Debt within Note 2 to the Consolidated Financial Statements.
Goldman Mortgage Loan
On April 1, 2008, certain of our subsidiaries,
collectively, the Goldman Loan Borrowers, entered into a mortgage loan agreement, the Goldman Mortgage Loan, with GSMC, Citicorp,
and SL Green in connection with a mortgage loan in the amount of $250,000, which is secured by certain properties owned or ground
leased by the Goldman Loan Borrowers. The Goldman Mortgage Loan had an initial maturity date of March 9, 2010, with a single one-year
extension option. The Goldman Mortgage Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mortgage Loan provided for
customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mortgage
Loan. The Goldman Mortgage Loan allowed for prepayment under the terms of the agreement, as long as simultaneously therewith a
proportionate prepayment of the Goldman Mezzanine Loan (discussed below) was also be pre-paid. In August 2008, an amendment to
the loan agreement was entered into for the Goldman Mortgage Loan in conjunction with the bifurcation of the Goldman Mezzanine
loan into two separate mezzanine loans. Under this loan agreement amendment, the Goldman Mortgage Loan bore interest at 1.99% over
LIBOR. We had accrued interest of $256 and borrowings of $240,523 as of December 31, 2010.
In March 2010, we extended the maturity date
of the Goldman Mortgage Loan to March 2011, and amended certain terms of the loan agreement, including, among others, (i) a prohibition
on distributions from the Goldman Loan Borrowers to us, other than to cover direct costs related to executing the extension and
reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy Asset Management, (ii)
requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Goldman Mortgage Loan
extension term, and (iii) within 90 days after the first day of the Goldman Mortgage Loan extension term, delivery by the Goldman
Loan Borrowers to GSMC, Citicorp and SL Green of a comprehensive long-term business plan and restructuring proposal addressing
repayment of the Goldman Mortgage Loan. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine
Loans, we entered into a series of short term extensions to provide additional time to exchange and consider proposals for an extension,
modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly
transition of the collateral to the lenders if such discussions failed. On May 9, 2011, we announced that the scheduled maturity
of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring
of the loans by the lenders.
Notwithstanding the maturity and non-repayment
of the loans, we maintained active communications with the lenders and in September 2011, we entered into the Settlement Agreement,
for an orderly transition of substantially all of Gramercy Asset Management’s assets to KBS, Gramercy Asset Management’s senior mezzanine
lender, in full satisfaction of Gramercy Asset Management’s obligations with respect to the Goldman Mortgage Loan and the Goldman Mezzanine
Loans, in exchange for a mutual release of claims among us and the mortgage and mezzanine lenders and, subject to certain termination
provisions, our continued management of Gramercy Asset Management’s assets on behalf of KBS for a fixed fee plus incentive fees. On
September 1, 2011 and on December 1, 2011, we transferred to KBS or its affiliates, interests in entities owning 317 and 116, respectively,
of the 867 Gramercy Asset Management properties that we agreed to transfer pursuant to the Settlement Agreement and the remaining ownership
interests were transferred to KBS by December 15, 2011. The aggregate carrying value for the interests transferred to KBS was approximately
$2.63 billion. In July 2011, the Dana portfolio, which consisted of 15 properties totaling approximately 3.8 million rentable square
feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. For further discussion of the impact of the
Settlement Agreement and the transfer of the Dana portfolio, see Settlement and Extinguishment of Debt within Note 2 to the Consolidated
Financial Statements.
Goldman Senior and Junior Mezzanine Loans
On April 1, 2008, certain of our subsidiaries,
collectively, the Mezzanine Borrowers, entered into a mezzanine loan agreement with GSMC, Citicorp and SL Green in connection with
a mezzanine loan in the amount of $600,000, or the Goldman Mezzanine Loan, which was secured by pledges of certain equity interests
owned by the Mezzanine Borrowers and any amounts receivable by the Mezzanine Borrowers whether by way of distributions or other
sources. The Goldman Mezzanine Loan had an initial maturity date of on March 9, 2010, with a single one-year extension option.
The Goldman Mezzanine Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mezzanine Loan provided for customary events
of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mezzanine Loan. The
Goldman Mezzanine Loan allowed for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee during the first
six months, payable to the lender, as long as simultaneously therewith a proportionate prepayment of the Goldman Mortgage Loan
was also made on such date. In addition, under certain circumstances the Goldman Mezzanine Loan was cross-defaulted with events
of default under the Goldman Mortgage Loan and with other mortgage loans pursuant to which an indirect wholly-owned subsidiary
of ours is the mortgagor. In August 2008, the $600,000 mezzanine loan was bifurcated into two separate mezzanine loans, (the Junior
Mezzanine Loan and the Senior Mezzanine Loan) by the lenders. Additional loan agreement amendments were entered into for the Goldman
Mezzanine Loan and Goldman Mortgage Loan. Under these loan agreement amendments, the Junior Mezzanine Loan bore interest at 6.00%
over LIBOR and the Senior Mezzanine Loan bore interest at 5.20% over LIBOR, and the Goldman Mortgage Loan bore interest at 1.99%
over LIBOR. The weighted average of these interest rate spreads was equal to the combined weighted average of the interest rates
spreads on the initial loans. We had accrued interest of $1,454 and borrowings of $549,713 as of December 31, 2010.
In March 2010, we extended the maturity date
of the Goldman Mortgage Loan to March 2011, and amended certain terms of the loan agreement, including, among others, (i) a prohibition
on distributions from the Goldman Loan Borrowers to us, other than to cover direct costs related to executing the extension and
reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy Asset Management, (ii)
requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Goldman Mortgage Loan
extension term, and (iii) within 90 days after the first day of the Goldman Mortgage Loan extension term, delivery by the Goldman
Loan Borrowers to GSMC, Citicorp and SL Green of a comprehensive long-term business plan and restructuring proposal addressing
repayment of the Goldman Mortgage Loan. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine
Loans, we entered into a series of short term extensions to provide additional time to exchange and consider proposals for an extension,
modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly
transition of the collateral to the lenders if such discussions failed. On May 9, 2011, we announced that the scheduled maturity
of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring
of the loans by the lenders.
Notwithstanding the maturity and non-repayment
of the loans, we maintained active communications with the lenders and in September 2011, we entered into the Settlement Agreement,
for an orderly transition of substantially all of Gramercy Asset Management’s assets to KBS, in full satisfaction of Gramercy Asset Management’s
obligations with respect to the Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims
among us and the mortgage and mezzanine lenders and, subject to certain termination provisions, our continued management of Gramercy
Asset Management’s assets on behalf of KBS for a fixed fee plus incentive fees. On September 1, 2011 and on December 1, 2011, we transferred
to KBS or its affiliates, interests in entities owning 317 and 116, respectively, of the 867 Gramercy Asset Management properties that we
agreed to transfer pursuant to the Settlement Agreement and the remaining ownership interests were transferred to KBS by December
15, 2011. The aggregate carrying value for the interests transferred to KBS was approximately $2.63 billion. In July 2011, the
Dana portfolio, which consisted of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its
mortgage lender through a deed in lieu of foreclosure. For further discussion of the impact of the Settlement Agreement and the
transfer of the Dana portfolio, see Settlement and Extinguishment of Debt within Note 2 to the Consolidated Financial Statements.
Collateralized Debt Obligations
In the fourth quarter of 2012, we classified our CDOs as held-for-sale
in connection with the disposal of Gramercy Finance. The outstanding debt is presented as a component of the liabilities related
to assets held-for-sale on the Consolidated Balance Sheets.
During 2005, we issued approximately $1,000,000
of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2005-1 Ltd., or the 2005 Issuer, and Gramercy Real Estate
CDO 2005-1 LLC, or the 2005 Co-Issuer. At issuance, the CDO consisted of $810,500 of investment grade notes, $84,500 of non-investment
grade notes, which were co-issued by the 2005 Issuer and the 2005 Co-Issuer, and $105,000 of preferred shares, which were issued
by the 2005 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of
three-month LIBOR plus 0.49%. We incurred approximately $11,957 of costs related to Gramercy Real Estate CDO 2005-1, which are
amortized on a level- yield basis over the average life of the CDO.
During 2006, we issued approximately $1,000,000
of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2006-1 Ltd., or the 2006 Issuer, and Gramercy Real Estate
CDO 2006-1 LLC, or the 2006 Co-Issuer. At issuance, the CDO consisted of $903,750 of investment grade notes, $38,750 of non-investment
grade notes, which were co-issued by the 2006 Issuer and the 2006 Co-Issuer, and $57,500 of preferred shares, which were issued
by the 2006 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of
three-month LIBOR plus 0.37%. We incurred approximately $11,364 of costs related to Gramercy Real Estate CDO 2006-1, which are
amortized on a level-yield basis over the average life of the CDO.
In August 2007, we issued $1,100,000 of CDO
bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 Issuer, and Gramercy Real Estate CDO
2007-1 LLC, or the 2007 Co-Issuer. At issuance, the CDO consisted of $1,045,550 of investment grade notes, $22,000 of non-investment
grade notes, which were co-issued by the 2007 Issuer and the 2007 Co-Issuer, and $32,450 of preferred shares, which were issued
by the 2007 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of
three-month LIBOR plus 0.46%. We incurred approximately $16,816 of costs related to Gramercy Real Estate CDO 2007-1, which are
amortized on a level-yield basis over the average life of the CDO.
In connection with the closing of our first
CDO in July 2005, pursuant to the collateral management agreement, the Manager agreed to provide certain advisory and administrative
services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The collateral management
agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set
forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance, and a subordinate collateral management
fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per annum of the
net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral
debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible
investments in certain accounts, and (iii) with respect to the defaulted securities, the calculation amount of such defaulted securities.
The collateral management agreement for our 2006 CDO provides for a senior collateral management fee, payable quarterly in accordance
with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance,
and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the
indenture, equal to 0.25% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the
(i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance
of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities,
the calculation amount of such defaulted securities. The collateral management agreement for our 2007 CDO provides for a senior
collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to
(i) 0.05% per annum of the aggregate principal balance of the CMBS securities, (ii) 0.10% per annum of the aggregate principal
balance of loans, preferred equity securities, cash and certain defaulted securities, and (iii) a subordinate collateral management
fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the
aggregate principal balance of the loans, preferred equity securities, cash and certain defaulted securities.
We retained all non-investment grade securities,
the preferred shares and the ordinary shares in the Issuer of each CDO. The Issuers and Co-Issuers in each CDO holds assets, consisting
primarily of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity investments and CMBS, which serve
as collateral for the CDO. Each CDO may be replenished, pursuant to certain rating agency guidelines relating to credit quality
and diversification, with substitute collateral using cash generated by debt investments that are repaid during the reinvestment
periods (generally, five years from issuance) of the CDO. Thereafter, the CDO securities will be retired in sequential order from
senior-most to junior-most as debt investments are repaid. The financial statements of the Issuer of each CDO are consolidated
in our financial statements. The securities originally rated as investment grade at time of issuance are treated as a secured financing,
and are non-recourse to us. Proceeds from the sale of the securities originally rated as investment grade in each CDO were used
to repay substantially all outstanding debt under our repurchase agreements and to fund additional investments. Loans and other
investments are owned by the Issuers and the Co-Issuers, serve as collateral for our CDO securities, and the income generated from
these investments is used to fund interest obligations of our CDO securities and the remaining income, if any, is retained by us.
Substantially all of our loans and other
investments serve as collateral for our CDO securities, and the income generated from these investments is used to fund interest
obligations of our CDO securities and the remaining income, if any, is retained by us. The CDO indentures contain minimum interest
coverage and asset overcollateralization covenants that must be satisfied in order for us to receive cash flow on the interests
retained by us in our CDOs and to receive the subordinate collateral management fee earned. If some or all of our CDOs fail these
covenants, all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal
and interest on the most senior outstanding CDO securities, and we may not receive some or all residual payments or the subordinate
collateral management fee until the applicable CDO regained compliance with such tests. Our 2005 CDO failed its overcollateralization
test at the January 2013 distribution date, the most recent distribution date, and previously failed its overcollateralization
tests at the October 2012, July 2012, October 2011, April 2011 and January 2011 distribution dates. Our 2006 CDO failed its asset
overcollateralization tests as of the January 2013 distribution date, and previously failed its overcollateralization test as
of the October 2012 distribution date. Our 2007 CDO failed its overcollateralization test beginning with the November 2009 distribution
date. It is unlikely that the 2005, 2006 and 2007 CDO’s overcollateralization tests will be satisfied in the foreseeable
future. During periods when the overcollateralization tests for the CDOs are not met, our business, financial condition, and results
of operations are materially and adversely affected.
On March 14, 2012, an interest payment
due on a CMBS investment owned by our 2007 CDO was not received for the third consecutive interest payment date, which caused the
CMBS investment to be classified as a Defaulted Security under our 2007 CDO’s indenture. This classification caused the Class
A/B Par Value Ratio for the 2007 CDO notes to fall to 88.86% in breach of the Class A/B overcollateralization test threshold of
89%. This breach constitutes an event of default under the operative documents for our 2007 CDO. Pursuant to a letter dated in
March 2012, a majority of the controlling class of senior note holders waived the related event of default and further agreed to
waive any subsequent event of default related to the Class A/B overcollateralization test that may occur hereafter until the earlier
of January 30, 2014 or the date that written instructions to the contrary are provided by such majority of the controlling class
to the Trustee. The majority of the controlling class has reserved the right to revoke or extend such waiver at any time.
During the year ended December 31, 2012,
we repurchased no bonds previously issued by any of our three CDOs. During the year ended December 31, 2011, we repurchased, at
a discount, $49,259 of notes previously issued by two of our three CDOs. We recorded a net gain on the early extinguishment of
debt of $15,275 for the year ended December 31, 2011, in connection with the repurchase of notes of such Issuers.
Contractual Obligations
Combined aggregate principal maturities of
our CDOs, and operating leases as of December 31, 2012 are as follows:
|
|
CDOs
|
|
|
Interest
Payments
|
|
|
Total
|
|
2013
|
|
$
|
-
|
|
|
$
|
69,958
|
|
|
$
|
69,958
|
|
2014
|
|
|
-
|
|
|
|
68,643
|
|
|
|
68,643
|
|
2015
|
|
|
-
|
|
|
|
69,418
|
|
|
|
69,418
|
|
2016
|
|
|
-
|
|
|
|
72,813
|
|
|
|
72,813
|
|
2017
|
|
|
-
|
|
|
|
55,700
|
|
|
|
55,700
|
|
Thereafter
|
|
|
2,188,597
|
|
|
|
6,725
|
|
|
|
2,195,322
|
|
Total
|
|
$
|
2,188,597
|
|
|
$
|
342,257
|
|
|
$
|
2,531,854
|
|
Additionally, one of our subsidiaries is
a borrower under a $31,449 mortgage loan with our 2005 CDO and 2006 CDO acting as lenders, which bears interest at 5.0% and matures
in June 2012. These intercompany borrowings are eliminated upon consolidation and therefore do not appear on our Consolidated Balance
Sheet.
Leasing Agreements
Future minimum rental income under
non-cancelable leases including properties held-for-sale in connection with the disposal of Gramercy Finance
and excluding reimbursements for operating expenses, as of December 31, 2012 are as follows:
|
|
Operating
Leases
|
|
2013
|
|
$
|
3,779
|
|
2014
|
|
|
3,865
|
|
2015
|
|
|
3,897
|
|
2016
|
|
|
3,799
|
|
2017
|
|
|
3,668
|
|
Thereafter
|
|
|
15,467
|
|
Total minimum rental income
|
|
$
|
34,475
|
|
Off-Balance-Sheet Arrangements
We have off-balance-sheet investments, including
joint ventures. These investments all have varying ownership structures. Substantially all
of our joint venture arrangements are accounted for under the equity method of accounting as we have the ability to exercise significant
influence, but not control over the operating and financial decisions of these joint venture arrangements. Our off-balance-sheet
arrangements are discussed in Note 6 in the accompanying financial statements.
Dividends
To maintain our qualification as a REIT,
we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, determined before taking into consideration
the dividends paid deduction and net capital gains. Before we pay any dividend, whether for U.S. federal income tax purposes or
otherwise, which would only be paid out of available cash, we must first meet both our operating requirements and scheduled debt
service on our mortgages and loans payable. In accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends
and the dividend for the then current quarter on the Series A preferred stock are paid in full.
Beginning with the third quarter of 2008,
our board of directors elected not to pay a dividend on our common stock. Our board of directors also elected not to pay the Series
A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividends
have been accrued for seventeen quarters as of December 31, 2012. Based on current estimates of taxable loss, we believe we will
have no distribution requirement in order to maintain our REIT status for the 2012 tax year.
Inflation
A majority of our assets and liabilities
are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance more so than inflation.
Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
Further, our financial statements are prepared
in accordance with GAAP and our distributions are determined by our board of directors based primarily on our net income as calculated
for tax purposes, in each case, our activities and balance sheet are measured with reference to historical costs or fair market
value without considering inflation.
Related Party Transactions
The Chief Executive Officer of SL Green Realty
Corp. (NYSE: SLG), or SL Green, is one of our directors. An affiliate of SL Green provides special servicing services with respect
to a limited number of loans owned by our CDOs that are secured by properties in New York City, or in which we and SL Green are
co-investors. For the years ended December 31, 2012, 2011 and 2010 we incurred expense of $0, $3,058 and $477, respectively, pursuant
to the special servicing arrangement.
Commencing in May 2005, we are party to a
lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for our corporate offices at 420 Lexington Avenue, New
York, New York. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249
per annum for year one rising to $315 per annum in year ten. In May and June 2009, we amended our lease with SLG Graybar Sublease
LLC to increase the leased premises by approximately 2,260 square feet. The additional premises is leased on a co-terminus basis
with the remainder of our leased premises and carries rents of approximately $103 per annum during the initial year and $123 per
annum during the final lease year. On June 25, 2012, the lease was amended to reduce the leased premises by approximately 600 square
feet and to reduce rents by approximately $29 per annum during the initial year and $38 per annum during the final lease year.
All other terms of the lease remain unchanged, except we now have the right to cancel the lease with 90 days notice. For the years
ended December 31, 2012, 2011 and 2010 we paid $361, $307 and $339 under this lease, respectively.
In April 2007, we purchased for $103,200
a 45% Tenant-in-Common, or TIC, interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along
34
th
Street in New York, New York. The acquisition was financed with $86,063 10-year fixed rate mortgage loan. The property
is subject to a long-term ground lease with an unaffiliated third-party for a term of 70 years. The remaining TIC interest is owned
by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. We sold our 45% interest in December 2010 to a wholly-owned
subsidiary of SL Green for net proceeds of $25,350, resulting in a loss of $11,885. We recorded our pro rata share of net income
of $5,078 for the years ended December 31, 2010, within discontinued operations.
In July 2007, we purchased for $144,240 an
investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land
located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed
rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third-party. The remaining
TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu. We sold our 45% interest in December
2010 to a wholly-owned subsidiary of SL Green for net proceeds of $38,911, resulting in a loss of $15,407. We recorded our pro
rata share of net income of $5,926 for the years ended December 31, 2010, within discontinued operations.
In December 2010, we sold our interest in
a parcel of land located at 292 Madison Avenue in New York, New York to a wholly-owned subsidiary of SL Green. We received proceeds
of $16,765 and recorded an impairment charge of $9,759, within discontinued operations.
Funds from Operations
We present FFO because we consider it an
important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors
and other interested parties in the evaluation of REITS. We also use FFO as one of several criteria to determine performance-based
incentive compensation for members of our senior management, which may be payable in cash or equity awards. The revised White Paper
on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, defines FFO
as net income (loss) (determined in accordance with GAAP), excluding impairment write-downs of investments in depreciable real
estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable
operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs),
less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated
partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with GAAP and should
not be considered as an alternative to net income (determined in accordance with GAAP), as an indication of our financial performance,
or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it entirely
indicative of funds available to fund our cash needs, including our ability to make cash distributions. Our calculation of FFO
may be different from the calculation used by other companies and, therefore, comparability may be limited.
FFO for the years ended December 31, 2012,
2011 and 2010 are as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Net income (loss) available to common shareholders
|
|
$
|
(178,710
|
)
|
|
$
|
330,315
|
|
|
$
|
(968,773
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,205
|
|
|
|
70,215
|
|
|
|
115,051
|
|
FFO adjustments for unconsolidated joint ventures
|
|
|
669
|
|
|
|
3,219
|
|
|
|
4,347
|
|
Non-cash impairment of real estate investments
|
|
|
35,043
|
|
|
|
1,296
|
|
|
|
923,885
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non real estate depreciation and amortization
|
|
|
(4,059
|
)
|
|
|
(7,044
|
)
|
|
|
(7,925
|
)
|
Gain on sale
|
|
|
(15,915
|
)
|
|
|
(2,713
|
)
|
|
|
(13,302
|
)
|
Funds from operations
|
|
$
|
(157,767
|
)
|
|
$
|
395,288
|
|
|
$
|
53,283
|
|
Funds from operations per share - basis
|
|
$
|
(3.04
|
)
|
|
$
|
7.87
|
|
|
$
|
1.07
|
|
Funds from operations per share - diluted
|
|
$
|
(3.04
|
)
|
|
$
|
7.75
|
|
|
$
|
1.07
|
|
Recently Issued Accounting Pronouncements
In July 2010, FASB issued guidance which
outlines specific disclosures that will be required for the allowance for credit losses and all finance receivables. Finance receivables
includes loans, lease receivables and other arrangements with a contractual right to receive money on demand or on fixed or determinable
dates that is recognized as an asset on an entity’s statement of financial position. This guidance will require companies
to provide disaggregated levels of disclosure by portfolio segment and class to enable users of the financial statement to understand
the nature of credit risk, how the risk is analyzed in determining the related allowance for credit losses and changes to the allowance
during the reporting period. Required disclosures under this guidance as of the end of a reporting period are effective for the
Company’s December 31, 2010. In January 2011, the FASB delayed the effective date of the new disclosures about troubled debt
restructurings to allow the FASB the time needed to complete its deliberations about on what constitutes a troubled debt restructuring.
The effective date of the new disclosures about and the guidance for determining what constitutes a troubled debt restructuring
will then be coordinated. The guidance is effective for our September 30, 2011 reporting period. We have applied this update to
our Consolidated Financial Statements for the period ended December 31, 2012.
In December 2010, the FASB issued guidance
on the disclosure of supplementary pro forma information for business combinations. The guidance specifies that if a public entity
enters into business combinations that are material on an individual or aggregate basis and presents comparative financial statements,
the entity must present pro forma revenue and earnings of the combined entity as though the business combination that occurred
during the current period had occurred as of the beginning of the comparable annual period only. The adoption of this guidance
for our annual reporting period ending December 31, 2012 will not have a material impact on our Consolidated Financial Statements.
In April 2011, the FASB issued updated guidance
on a creditor’s determination of whether a restructuring will be a troubled debt restructuring, which establishes new guidelines
in evaluating whether a loan modification meets the criteria of a troubled debt restructuring. This guidance is effective as of
the third quarter of 2011, applied retrospectively to the beginning of the fiscal year as required, and its adoption did not have
a material effect on our Consolidated Financial Statements.
In May 2011, the FASB issued updated guidance
on fair value measurement which amends U.S. GAAP to conform to International Financial Reporting Standards, or IFRS, measurement
and disclosure requirements. The amendment changes the wording used to describe the requirements in U.S. GAAP for measuring fair
value, changes certain fair value measurement principles and enhances disclosure requirements. This guidance is effective as of
January 1, 2012, applied prospectively, and its adoption did not have a material effect on our Consolidated Financial Statements.
In June 2011, the FASB issued updated guidance
on comprehensive income which amends U.S. GAAP to conform to the disclosure requirements of IFRS. The amendment eliminates the
option to present components of other comprehensive income as part of the statement of stockholders’ equity and non-controlling
interests and requires a separate Statements of Comprehensive Income or two consecutive statements in the Statements of Operations
and in a separate Statements of Comprehensive Income (loss). This guidance also requires the presentation of reclassification adjustments
for each component of other comprehensive income on the face of the financial statements rather than in the notes to the financial
statements. This guidance is effective as of January 1, 2012, except for the disclosure of reclassification adjustments which was
postponed for re-deliberation by the FASB, and early adoption is permitted, and its adoption did not have a material effect on
our Consolidated Financial Statements.
In February 2013, the FASB issued additional guidance on comprehensive income which requires the provision
of information about the amounts reclassified out of accumulated other comprehensive income by component. This guidance also requires
presentation on the Consolidated Statements of Operations and Comprehensive Income (Loss) or in the notes, significant amounts
reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified
is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that
are not required under U.S. GAAP to be reclassified in their entirety to net income, a cross-reference must be provided to other
disclosures required under U.S. GAAP that provide additional detail about those amounts. This update is effective for reporting
periods beginning after December 15, 2012 with early adoption permitted. We have not elected early adoption, and while its adoption
is not expected to have a material effect on our Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedules
GRAMERCY CAPITAL CORP.
|
|
Report of Independent Registered Public Accounting Firm
|
62
|
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
|
63
|
Consolidated Balance Sheets as of December
31, 2012 and 2011
|
64
|
Consolidated Statements
of Operations and Comprehensive Income (Loss) for the years ended December 31, 2012, 2011 and 20
10
|
65
|
Consolidated Statements
of Stockholders’ Equity (Deficit) and Non-controlling Interests for the years ended December 31, 2012, 2011 and
20
10
|
66
|
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 20
10
|
67
|
Notes to Consolidated Financial Statements
|
68
|
Schedules
|
|
Schedule III Real Estate
and Accumulated Depreciation as of December 31, 2012
|
120
|
Schedule IV Mortgage Loans on Real Estate as of December 31, 201
2
|
122
|
All other schedules are omitted
because they are not required or the required information is shown in the financial statements or notes thereto.
Report of Independent Registered Public
Accounting Firm
The Board of Directors and Stockholders of Gramercy Capital
Corp.
We have audited the accompanying
consolidated balance sheets of Gramercy Capital Corp. (the “Company”) as of December 31, 2012 and 2011, and the
related consolidated statements of operations and comprehensive income (loss), stockholders’ equity and
non-controlling interests, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also
included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of Gramercy Capital Corp. at December
31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period
ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
We also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), Gramercy Capital Corp.’s internal control
over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2013 expressed
an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
|
New York, New York
|
March 18, 2013
|
Report of Independent Registered
Public Accounting Firm
The Board of Directors and Stockholders of Gramercy Capital
Corp.
We have audited Gramercy Capital Corp.’s
internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Gramercy Capital
Corp.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Gramercy Capital
Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based
on the COSO criteria.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2012 consolidated
financial statements of Gramercy Capital Corp. and our report dated March 18, 2013 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
March 18, 2013
Gramercy Capital Corp.
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Assets:
|
|
|
|
|
|
|
|
|
Real estate investments, at cost:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,800
|
|
|
$
|
2,241
|
|
Building and improvements
|
|
|
21,359
|
|
|
|
5,964
|
|
Less: accumulated depreciation
|
|
|
(50
|
)
|
|
|
(574
|
)
|
Total real estate investments, net
|
|
|
23,109
|
|
|
|
7,631
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
105,402
|
|
|
|
163,725
|
|
Restricted cash
|
|
|
12
|
|
|
|
24
|
|
Loans and other lending investments, net
|
|
|
73
|
|
|
|
828
|
|
Investment in joint ventures
|
|
|
72,742
|
|
|
|
496
|
|
Assets held-for-sale, net (includes consolidated VIEs of $1,913,353 and $1,990,826, respectively)
|
|
|
1,952,264
|
|
|
|
2,078,146
|
|
Tenant and other receivables, net
|
|
|
4,123
|
|
|
|
1,820
|
|
Derivative instruments, at fair value
|
|
|
-
|
|
|
|
6
|
|
Acquired lease assets, net of accumulated amortization of $42 and $32
|
|
|
4,386
|
|
|
|
73
|
|
Deferred costs, net of accumulated amortization of $2,033 and $2,137
|
|
|
415
|
|
|
|
1,891
|
|
Other assets
|
|
|
6,310
|
|
|
|
3,690
|
|
Total assets
|
|
$
|
2,168,836
|
|
|
$
|
2,258,330
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
8,908
|
|
|
$
|
13,010
|
|
Dividends payable
|
|
|
30,438
|
|
|
|
23,276
|
|
Deferred revenue
|
|
|
33
|
|
|
|
569
|
|
Below-market lease liabilities, net of accumulated amortization of $4 and $0
|
|
|
458
|
|
|
|
-
|
|
Liabilities related to assets held-for-sale (includes consolidated VIEs of $2,374,516 and $2,654,109, respectively)
|
|
|
2,380,162
|
|
|
|
2,661,278
|
|
Other liabilities
|
|
|
665
|
|
|
|
627
|
|
Total liabilities
|
|
|
2,420,664
|
|
|
|
2,698,760
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common stock, Class A-1, par value $0.001, 100,000,000 shares authorized, 56,731,002 and 51,086,266 shares issued and outstanding at December 31, 2012 and 2011, respectively.
|
|
|
57
|
|
|
|
50
|
|
Common stock, Class B-1, par value $0.001, 2,000,000 and 0 shares authorized, issued and outstanding at December 31, 2012 and 2011, respectively.
|
|
|
2
|
|
|
|
-
|
|
Common stock, Class B-2, par value $0.001, 2,000,000 and 0 shares authorized, issued and outstanding at December 31, 2012 and 2011, respectively.
|
|
|
2
|
|
|
|
-
|
|
Series A cumulative redeemable preferred stock, par value $0.001, liquidation preference $115,000, 4,600,000 shares authorized, 3,525,822 shares issued and outstanding at December 31, 2012 and 2011
|
|
|
85,235
|
|
|
|
85,235
|
|
Additional paid-in-capital
|
|
|
1,102,227
|
|
|
|
1,080,600
|
|
Accumulated other comprehensive loss
|
|
|
(95,265
|
)
|
|
|
(440,939
|
)
|
Accumulated deficit
|
|
|
(1,344,989
|
)
|
|
|
(1,166,279
|
)
|
Total Gramercy Capital Corp. stockholders' equity
|
|
|
(252,731
|
)
|
|
|
(441,333
|
)
|
Non-controlling interest
|
|
|
903
|
|
|
|
903
|
|
Total equity
|
|
|
(251,828
|
)
|
|
|
(440,430
|
)
|
Total liabilities and equity
|
|
$
|
2,168,836
|
|
|
$
|
2,258,330
|
|
The accompanying notes are
an integral part of these financial statements.
Gramercy Capital Corp.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Amounts in thousands, except share and per share data)
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
|
$
|
34,667
|
|
|
$
|
7,336
|
|
|
$
|
-
|
|
Rental revenue
|
|
|
267
|
|
|
|
-
|
|
|
|
-
|
|
Investment income
|
|
|
600
|
|
|
|
-
|
|
|
|
25
|
|
Operating expense reimbursements
|
|
|
174
|
|
|
|
-
|
|
|
|
-
|
|
Other income
|
|
|
1,113
|
|
|
|
436
|
|
|
|
1,172
|
|
Total revenues
|
|
|
36,821
|
|
|
|
7,772
|
|
|
|
1,197
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property management expenses
|
|
|
21,380
|
|
|
|
10,099
|
|
|
|
3,471
|
|
Property operating expenses
|
|
|
1,846
|
|
|
|
(4,152
|
)
|
|
|
562
|
|
Total property operating expenses
|
|
|
23,226
|
|
|
|
5,947
|
|
|
|
4,033
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
280
|
|
Depreciation and amortization
|
|
|
256
|
|
|
|
136
|
|
|
|
174
|
|
Management, general and administrative
|
|
|
25,446
|
|
|
|
22,150
|
|
|
|
22,369
|
|
Total expenses
|
|
|
48,928
|
|
|
|
28,233
|
|
|
|
26,856
|
|
Loss from continuing operations before equity in income (loss) from joint ventures and provisions for taxes
|
|
|
(12,107
|
)
|
|
|
(20,461
|
)
|
|
|
(25,659
|
)
|
Equity in net income (loss) of joint ventures
|
|
|
(2,904
|
)
|
|
|
121
|
|
|
|
(303
|
)
|
Loss from continuing operations before provision for taxes, gain on extinguishment of debt and discontinued operations
|
|
|
(15,011
|
)
|
|
|
(20,340
|
)
|
|
|
(25,962
|
)
|
Provision for taxes
|
|
|
(3,330
|
)
|
|
|
(563
|
)
|
|
|
(966
|
)
|
Net loss from continuing operations
|
|
|
(18,341
|
)
|
|
|
(20,903
|
)
|
|
|
(26,928
|
)
|
Net income (loss) from discontinued operations
|
|
|
(169,174
|
)
|
|
|
70,034
|
|
|
|
(912,222
|
)
|
Net loss from discontinued operations with a related party
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,759
|
)
|
Loss on sale of joint venture interests to a related party
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,292
|
)
|
Gain on settlement of debt
|
|
|
-
|
|
|
|
285,634
|
|
|
|
-
|
|
Net gains from disposals
|
|
|
15,967
|
|
|
|
2,712
|
|
|
|
2,658
|
|
Total net income
(loss) from discontinued operations
|
|
|
(153,207
|
)
|
|
|
358,380
|
|
|
|
(946,615
|
)
|
Net income (loss)
|
|
|
(171,548
|
)
|
|
|
337,477
|
|
|
|
(973,543
|
)
|
Net (income) attributable to non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(145
|
)
|
Net income (loss) attributable to Gramercy Capital Corp.
|
|
|
(171,548
|
)
|
|
|
337,477
|
|
|
|
(973,688
|
)
|
Accrued preferred stock dividends
|
|
|
(7,162
|
)
|
|
|
(7,162
|
)
|
|
|
(8,798
|
)
|
Excess of carrying amount of tendered preferred stock over consideration paid
|
|
|
-
|
|
|
|
-
|
|
|
|
13,713
|
|
Net income (loss) available to common stockholders
|
|
$
|
(178,710
|
)
|
|
$
|
330,315
|
|
|
$
|
(968,773
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on available for sale securities and derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period
|
|
$
|
345,674
|
|
|
$
|
(280,154
|
)
|
|
$
|
(64,747
|
)
|
Other comprehensive income (loss)
|
|
|
345,674
|
|
|
|
(280,154
|
)
|
|
|
(64,747
|
)
|
Comprehensive income (loss) attributable to Gramercy Capital Corp.
|
|
$
|
174,126
|
|
|
$
|
57,323
|
|
|
$
|
(1,038,435
|
)
|
Comprehensive income (loss) attributable to common stockholders
|
|
$
|
166,964
|
|
|
$
|
50,161
|
|
|
$
|
(1,033,520
|
)
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations, after preferred dividends
|
|
$
|
(0.49
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.44
|
)
|
Net income (loss) from discontinued operations
|
|
|
(2.95
|
)
|
|
|
7.13
|
|
|
|
(18.96
|
)
|
Net income (loss) available to common stockholders
|
|
$
|
(3.44
|
)
|
|
$
|
6.58
|
|
|
$
|
(19.40
|
)
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations, after preferred dividends
|
|
$
|
(0.49
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.44
|
)
|
Net income (loss) from discontinued operations
|
|
|
(2.95
|
)
|
|
|
7.13
|
|
|
|
(18.96
|
)
|
Net income (loss) available to common stockholders
|
|
$
|
(3.44
|
)
|
|
$
|
6.58
|
|
|
$
|
(19.40
|
)
|
Basic weighted average common shares outstanding
|
|
|
51,976,462
|
|
|
|
50,229,102
|
|
|
|
49,923,930
|
|
Diluted weighted average common shares and common share equivalents outstanding
|
|
|
51,976,462
|
|
|
|
50,229,102
|
|
|
|
49,923,930
|
|
The accompanying notes are
an integral part of these financial statements.
Gramercy Capital Corp.
Consolidated Statements of Stockholders’ Equity (Deficit) and Non-controlling Interests
(Amounts in thousands, except share data)
|
|
Common Stock,
Class A-1
|
|
|
Common Stock,
Class B-1
|
|
|
Common Stock,
Class B-2
|
|
|
Series A Preferred
|
|
|
Additional
|
|
|
Accumulated Other
Comprehensive
|
|
|
Retained Earnings
/ (Accumulated
|
|
|
Total Gramercy
Capital
|
|
|
Non-controlling
|
|
|
|
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Stock
|
|
|
Paid-In-Capital
|
|
|
Income (Loss)
|
|
|
Deficit)
|
|
|
Corp
|
|
|
interest
|
|
|
Total
|
|
Balance at December 31, 2009
|
|
|
49,884,500
|
|
|
$
|
50
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
111,205
|
|
|
$
|
1,078,784
|
|
|
$
|
(96,038
|
)
|
|
$
|
(527,821
|
)
|
|
$
|
566,180
|
|
|
$
|
1,338
|
|
|
$
|
567,518
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(973,688
|
)
|
|
|
(973,688
|
)
|
|
|
145
|
|
|
|
(973,543
|
)
|
Change in net unrealized loss on derivative instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(70,603
|
)
|
|
|
-
|
|
|
|
(70,603
|
)
|
|
|
-
|
|
|
|
(70,603
|
)
|
Reclassification of adjustments of net unrealized
loss on securities previously available for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,856
|
|
|
|
-
|
|
|
|
5,856
|
|
|
|
-
|
|
|
|
5,856
|
|
Issuance of stock - stock purchase plan
|
|
|
25,211
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
|
|
26
|
|
Stock based compensation - fair value
|
|
|
74,848
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,068
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,068
|
|
|
|
-
|
|
|
|
1,068
|
|
Acquisition of non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,680
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,680
|
)
|
|
|
(580
|
)
|
|
|
(2,260
|
)
|
Tender of Series A Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,970
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
13,713
|
|
|
|
(12,257
|
)
|
|
|
-
|
|
|
|
(12,257
|
)
|
Dividends accrued on preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,798
|
)
|
|
|
(8,798
|
)
|
|
|
-
|
|
|
|
(8,798
|
)
|
Balance at December 31,
2010
|
|
|
49,984,559
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85,235
|
|
|
|
1,078,198
|
|
|
|
(160,785
|
)
|
|
|
(1,496,594
|
)
|
|
|
(493,896
|
)
|
|
$
|
903
|
|
|
$
|
(492,993
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
337,477
|
|
|
|
337,477
|
|
|
|
-
|
|
|
|
337,477
|
|
Change in net unrealized loss on derivative instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,334
|
)
|
|
|
-
|
|
|
|
(19,334
|
)
|
|
|
-
|
|
|
|
(19,334
|
)
|
Change in net unrealized loss on securities available-for-sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(260,820
|
)
|
|
|
-
|
|
|
|
(260,820
|
)
|
|
|
-
|
|
|
|
(260,820
|
)
|
Issuance of stock - stock purchase plan
|
|
|
20,448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock based compensation - fair value
|
|
|
1,081,259
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,402
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,402
|
|
|
|
-
|
|
|
|
2,402
|
|
Dividends accrued on preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,162
|
)
|
|
|
(7,162
|
)
|
|
|
-
|
|
|
|
(7,162
|
)
|
Balance at December 31,
2011
|
|
|
51,086,266
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85,235
|
|
|
|
1,080,600
|
|
|
|
(440,939
|
)
|
|
|
(1,166,279
|
)
|
|
|
(441,333
|
)
|
|
$
|
903
|
|
|
$
|
(440,430
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
(171,548
|
)
|
|
$
|
(171,548
|
)
|
|
|
-
|
|
|
$
|
(171,548
|
)
|
Change in net unrealized loss on derivative instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,146
|
|
|
|
-
|
|
|
|
2,146
|
|
|
|
-
|
|
|
|
2,146
|
|
Change in net unrealized loss on securities available-for-sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
343,528
|
|
|
|
-
|
|
|
|
343,528
|
|
|
|
-
|
|
|
|
343,528
|
|
Issuance of stock - stock purchase plan
|
|
|
36,324
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
185
|
|
|
|
-
|
|
|
|
-
|
|
|
|
186
|
|
|
|
-
|
|
|
|
186
|
|
Stock based compensation - fair value
|
|
|
2,608,412
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,429
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,432
|
|
|
|
-
|
|
|
|
2,432
|
|
Issuance of stock
|
|
|
3,000,000
|
|
|
|
3
|
|
|
|
2,000,000
|
|
|
|
2
|
|
|
|
2,000,000
|
|
|
|
2
|
|
|
|
-
|
|
|
|
19,013
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,020
|
|
|
|
-
|
|
|
|
19,020
|
|
Dividends accrued on preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,162
|
)
|
|
|
(7,162
|
)
|
|
|
-
|
|
|
|
(7,162
|
)
|
Balance at December 31,
2012
|
|
|
56,731,002
|
|
|
$
|
57
|
|
|
|
2,000,000
|
|
|
$
|
2
|
|
|
|
2,000,000
|
|
|
$
|
2
|
|
|
$
|
85,235
|
|
|
$
|
1,102,227
|
|
|
$
|
(95,265
|
)
|
|
$
|
(1,344,989
|
)
|
|
$
|
(252,731
|
)
|
|
$
|
903
|
|
|
$
|
251,828
|
|
The accompanying notes
are an integral part of these financial statements.
Gramercy Capital Corp.
Consolidated Statements of
Cash Flows
(Amounts in thousands)
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(171,548
|
)
|
|
$
|
337,477
|
|
|
$
|
(973,543
|
)
|
Adjustments to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,195
|
|
|
|
69,430
|
|
|
|
114,485
|
|
Amortization of leasehold interests
|
|
|
-
|
|
|
|
(2,698
|
)
|
|
|
(2,727
|
)
|
Amortization of acquired leases to rental revenue
|
|
|
(188
|
)
|
|
|
(54,420
|
)
|
|
|
(68,507
|
)
|
Amortization of deferred costs
|
|
|
3,719
|
|
|
|
4,749
|
|
|
|
7,732
|
|
Amortization of discount and other fees
|
|
|
(25,704
|
)
|
|
|
(33,312
|
)
|
|
|
(28,140
|
)
|
Payment of capitalized tenant leasing costs
|
|
|
(61
|
)
|
|
|
(2,072
|
)
|
|
|
(2,939
|
)
|
Straight- line rent adjustment
|
|
|
(188
|
)
|
|
|
(6,772
|
)
|
|
|
26,289
|
|
Non-cash impairment charges
|
|
|
206,122
|
|
|
|
19,492
|
|
|
|
963,497
|
|
Non-cash impairment charges with related party
|
|
|
-
|
|
|
|
-
|
|
|
|
9,759
|
|
Net gain on sale of properties and lease terminations
|
|
|
(15,915
|
)
|
|
|
(2,712
|
)
|
|
|
(2,737
|
)
|
Impairment on business acquisition, net
|
|
|
-
|
|
|
|
(59
|
)
|
|
|
2,722
|
|
Net realized gain on loans
|
|
|
108
|
|
|
|
(16,643
|
)
|
|
|
1,483
|
|
Equity in net loss of joint ventures
|
|
|
8,515
|
|
|
|
1,977
|
|
|
|
(6,865
|
)
|
Gain on extinguishment of debt
|
|
|
-
|
|
|
|
(300,909
|
)
|
|
|
(19,443
|
)
|
Amortization of stock compensation
|
|
|
2,433
|
|
|
|
2,243
|
|
|
|
1,094
|
|
Provision for loan losses
|
|
|
(7,181
|
)
|
|
|
48,180
|
|
|
|
84,392
|
|
Unrealized gain on derivative instruments
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
Net realized loss on sale of joint venture investment to a related party
|
|
|
-
|
|
|
|
-
|
|
|
|
27,292
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
412
|
|
|
|
2,803
|
|
|
|
15,942
|
|
Tenant and other receivables
|
|
|
(2,803
|
)
|
|
|
27,693
|
|
|
|
4,576
|
|
Accrued interest
|
|
|
12,393
|
|
|
|
1,097
|
|
|
|
37
|
|
Other assets
|
|
|
(11,285
|
)
|
|
|
8,896
|
|
|
|
1,517
|
|
Management and incentive fees payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accounts payable, accrued expenses and other liabities
|
|
|
777
|
|
|
|
22,306
|
|
|
|
1,909
|
|
Deferred revenue
|
|
|
(518
|
)
|
|
|
(39,657
|
)
|
|
|
(40,994
|
)
|
Net cash provided by operating activities
|
|
|
283
|
|
|
|
87,105
|
|
|
|
116,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures and leasehold costs
|
|
|
(2,649
|
)
|
|
|
(7,752
|
)
|
|
|
(19,084
|
)
|
Payment for acquistions of real estate investments
|
|
|
(27,125
|
)
|
|
|
-
|
|
|
|
(4,550
|
)
|
Proceeds from sale of joint venture investment
|
|
|
-
|
|
|
|
387
|
|
|
|
-
|
|
Proceeds from sale of securities available for sale
|
|
|
-
|
|
|
|
65,584
|
|
|
|
-
|
|
Proceeds from sale of joint venture investment to a related party
|
|
|
-
|
|
|
|
-
|
|
|
|
64,203
|
|
Proceeds from sale of real estate
|
|
|
77,257
|
|
|
|
22,895
|
|
|
|
37,709
|
|
Proceeds from sale of real estate to a related party
|
|
|
-
|
|
|
|
-
|
|
|
|
16,765
|
|
New investment originations and funded commitments
|
|
|
(19,295
|
)
|
|
|
(293,450
|
)
|
|
|
(121,447
|
)
|
Principal collections on investments
|
|
|
254,789
|
|
|
|
329,975
|
|
|
|
221,975
|
|
Proceeds from loan syndications
|
|
|
15,300
|
|
|
|
-
|
|
|
|
25,617
|
|
Investment in commercial mortgage-backed securities
|
|
|
(535
|
)
|
|
|
(84,871
|
)
|
|
|
(63,562
|
)
|
Distribution received from joint venture
|
|
|
411
|
|
|
|
668
|
|
|
|
-
|
|
Investment in joint venture
|
|
|
(58,911
|
)
|
|
|
372
|
|
|
|
(3,168
|
)
|
Change in accrued interest income
|
|
|
-
|
|
|
|
71
|
|
|
|
(11
|
)
|
Sale of marketable investments, net
|
|
|
-
|
|
|
|
6,560
|
|
|
|
6,139
|
|
Change in restricted cash from investing activities
|
|
|
7,887
|
|
|
|
8,268
|
|
|
|
(5,881
|
)
|
Deferred investment costs
|
|
|
1,159
|
|
|
|
2,423
|
|
|
|
-
|
|
Net cash provided by investing activities
|
|
|
248,288
|
|
|
|
51,133
|
|
|
|
154,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of repurchase facilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(85
|
)
|
Purchase of interest rate caps
|
|
|
-
|
|
|
|
(1,277
|
)
|
|
|
(3,162
|
)
|
Repayment of collateralized debt obligations
|
|
|
(282,548
|
)
|
|
|
(164,977
|
)
|
|
|
-
|
|
(Repurchase) issuance of collateralized debt obligations
|
|
|
-
|
|
|
|
(33,997
|
)
|
|
|
(19,557
|
)
|
Payment for exchange of junior subordinate note
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,000
|
)
|
Repayment of mortgage notes
|
|
|
-
|
|
|
|
(33,315
|
)
|
|
|
(43,529
|
)
|
Proceeds from stock options excerised
|
|
|
-
|
|
|
|
160
|
|
|
|
-
|
|
Cash transfer pursuant to Settlement Agreement
|
|
|
-
|
|
|
|
(37,148
|
)
|
|
|
-
|
|
Deferred financing costs and other liabilities
|
|
|
-
|
|
|
|
(3,742
|
)
|
|
|
(6,698
|
)
|
Net proceeds of sale of common stock
|
|
|
2,555
|
|
|
|
-
|
|
|
|
-
|
|
Redemption of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,620
|
)
|
Change in restricted cash from financing activities
|
|
|
(26,901
|
)
|
|
|
78,938
|
|
|
|
(94,387
|
)
|
Net cash used for financing activities
|
|
|
(306,894
|
)
|
|
|
(195,358
|
)
|
|
|
(189,038
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(58,323
|
)
|
|
|
(57,120
|
)
|
|
|
82,500
|
|
Cash and cash equivalents at beginning of period
|
|
|
163,725
|
|
|
|
220,845
|
|
|
|
138,345
|
|
Cash and cash equivalents at end of period
|
|
$
|
105,402
|
|
|
$
|
163,725
|
|
|
$
|
220,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash activity
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gain (loss) and other non-cash activity related to derivatives
|
|
$
|
-
|
|
|
$
|
(19,334
|
)
|
|
$
|
(70,707
|
)
|
Mortgage loans, mezzanine loans and related interest satisfied in connection with deed-in-lieu of foreclosure and settlement agreement
|
|
$
|
-
|
|
|
$
|
721,404
|
|
|
$
|
-
|
|
Non-cash assets transferred in connection with deed-in-lieu of foreclosure and settlement agreement
|
|
$
|
-
|
|
|
$
|
2,776,447
|
|
|
$
|
-
|
|
Mortgages and liabilities transferred in connection with deed-in-lieu of foreclosure and settlement agreement
|
|
$
|
-
|
|
|
$
|
2,378,324
|
|
|
$
|
-
|
|
Supplemental cash flow disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
67,110
|
|
|
$
|
140,687
|
|
|
$
|
205,441
|
|
Income taxes paid
|
|
$
|
5,624
|
|
|
$
|
955
|
|
|
$
|
591
|
|
The accompanying notes
are an integral part of these financial statements.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
1. Business and Organization
Gramercy Capital Corp., or the
Company or Gramercy, is a self-managed, integrated commercial real estate investment and asset management company. The
Company was formed in April 2004 and commenced operations upon the completion of its initial public offering in August 2004.
In June 2012, following a strategic review process completed by a special committee of the Company’s Board of
Directors, the Company announced it will focus on deploying the Company's capital into income-producing net leased real
estate. The Company’s new investment criteria focuses on single tenant net lease investments across a variety of
industries in markets across the United States. The Company has acquired and now owns, directly or in joint venture, a
portfolio of 116 office and industrial buildings totaling approximately 4.9 million square feet, net leased on a long-term
basis to tenants, including Bank of America, Nestlé Waters, Philips Electronics and others. The Company also has an
asset and property management business which operates under the name Gramercy Asset Management and currently manages for
third-parties, approximately $1,700,000 of commercial properties leased primarily to regulated financial institutions and
affiliated users throughout the United States. Additionally, the Company has a commercial real estate finance business which
operates under the name Gramercy Finance and manages approximately $1,700,000 of whole loans, bridge loans, subordinate
interests in whole loans, mezzanine loans, preferred equity, and commercial mortgage-backed securities, or CMBS, which are
financed through three non-recourse collateralized debt obligations, or Gramercy Real Estate CDO 2005-1, Ltd., a Cayman
Island company, Gramercy Real Estate CDO 2006-1, Ltd., a Cayman Island company, and Gramercy Real Estate CDO 2007-1, Ltd., a
Cayman Island company, or collectively, the CDOs. As described herein, in March 2013, the Company exited the commercial real
estate finance business and sold its collateral management and sub-special servicing agreements for the Company’s CDOs
which will result in the deconsolidation of Gramercy Finance from the Company’s Balance Sheets. The Company has
classified the assets and liabilities of the Gramercy Finance segment as assets held-for-sale and has reported the
results of operations of Gramercy Finance in discontinued operations.
Neither Gramercy Finance nor Gramercy Asset Management is a separate legal entity but are divisions of the Company through
which the Company’s commercial real estate finance and asset and property management businesses are conducted.
The Company has elected to be taxed as
a real estate investment trust, or 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. 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 its operating partnership, GKK Capital LP, or the Operating Partnership. The Company is the sole
general partner of the Operating Partnership. The Operating Partnership conducts its finance business primarily through two private
REITs, Gramercy Investment Trust and Gramercy Investment Trust II; its commercial real estate investment business through various
wholly-owned entities; and its realty management business through a wholly-owned TRS.
In
connection with the Company’s efforts to exit Gramercy Finance, on January 30, 2013, the Company entered into a
purchase and sale agreement to transfer the collateral management and sub-special servicing agreements for its
three Collateralized Debt Obligations, CDO 2005-1, CDO 2006-1 and CDO 2007-1, to CWCapital Investments LLC or CWCapital,
for approximately $9,900, less certain adjustments and closing costs. Wells Fargo Securities LLC was the
Company’s investment advisor for the sale. The Company retained its subordinate bonds, preferred shares, and ordinary
shares in the three CDOs, which may provide the potential to recoup additional proceeds over the remaining life of the CDOs
based upon resolution of underlying assets within the CDOs, however, there is no guarantee that the Company will realize any
proceeds from its equity position, or what the timing of these proceeds might be. The transaction closed in March 2013.
In February 2013, the Company also sold a portfolio of repurchased notes previously issued by two of its three CDOs,
generating cash proceeds of $34,381. In addition, the Company expects to receive additional cash proceeds for past CDO
servicing advances of approximately $14,000 when specific assets within the CDOs are liquidated. Immediately subsequent to
the transfer of the collateral management and sub-special serving agreements, the assets and liabilities of the CDOs will
be deconsolidated from the Company’s Consolidated Financial Statements.
In
August 2012, the Company formed a joint venture, or the Joint Venture, with an affiliate of Garrison Investment Group, or
Garrison. Subsequently, in December 2012, the Company contributed $59,061 in cash plus the issuance of 6,000,000 shares
of the Company’s common stock, valued at $15,000, representing a 50% equity interest in the Joint Venture’s acquisition
of an office portfolio of 113 properties, or the Bank of America Portfolio, from KBS Real Estate Investment Trust, Inc. or
KBS. The acquisition was financed with a $200,000 two-year, floating rate, interest-only mortgage loan with a spread to
30-day LIBOR of 4.15%, collateralized by 67 properties of the portfolio. The mortgage contains three one-year extensions,
conditional upon the satisfaction of certain terms. The Bank of America Portfolio was previously part of the Gramercy Asset Management
division, beneficial ownership of which was transferred to KBS pursuant to a collateral transfer and settlement agreement, or
the Settlement Agreement, dated September 1, 2011. The Bank of America Portfolio totals approximately 4.2 million rentable
square feet and is 84% leased to Bank of America, N.A., under a master lease expiring in 2023, with a total portfolio
occupancy of approximately 89%. The Joint Venture’s asset strategy for this portfolio acquisition is to sell
non-core multi-tenant assets and retain a core net-lease portfolio of high quality assets in primary and strong secondary
markets, primarily leased to Bank of America. In addition to the Company’s pro rata share of the net income of the
portfolio, pursuant to the joint venture agreement, the Company will receive an asset management fee as well as a performance
based fee for the portfolio management. At December 31, 2012, the Company’s 50% interest in the Bank of America
Portfolio had a carrying value of $72,541.
Gramercy
Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
1.
Business and Organization - (continued)
In November
2012, the Company also acquired two class A industrial properties located near Indianapolis, Indiana, or the Indianapolis
Industrial Portfolio, totaling approximately 540 thousand square feet for a purchase price of $27,125. The
Indianapolis Industrial Portfolio is 100% leased to three tenants for an average lease term of approximately 10.2 years.
In 2011, the Company’s
Gramercy Asset Management business changed from being primarily an owner of commercial properties to being primarily a third-party
manager of commercial properties. The scale of Gramercy Asset Management’s revenues declined as a substantial portion of rental
revenues from properties owned by the Company were replaced with fee revenues of a substantially smaller scale for
managing properties for third-parties. In September 2011, the Company entered into the Settlement Agreement for an orderly
transition of substantially all of Gramercy Asset Management’s assets to KBS, Gramercy Asset Management’s senior mezzanine lender, in
full satisfaction of Gramercy Asset Management’s obligations with respect to the Goldman Mortgage Loan and the Goldman Mezzanine
Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to
certain termination provisions, the Company’s continued management of Gramercy Asset Management’s assets on behalf of KBS
for a fixed fee plus incentive fees. On September 1, 2011 and on December 1, 2011, the Company transferred to KBS or its
affiliates, interests in entities owning 317 and 116, respectively, of the 867 Gramercy Asset Management properties that the Company
agreed to transfer pursuant to the Settlement Agreement and the remaining ownership interests were transferred to KBS by
December 15, 2011. The aggregate carrying value for the interests transferred to KBS was $2,631,902. In July 2011, the Dana
portfolio, which consisted of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its
mortgage lender through a deed in lieu of foreclosure.
In September 2011, the Company entered
into an asset management arrangement upon the terms and conditions set forth in the Settlement Agreement, or the Interim Management
Agreement, to provide for the Company’s continued management of the transferred properties, or the KBS portfolio, through
December 31, 2013 for a fixed fee of $10,000 annually, plus the reimbursement of certain costs. The Settlement Agreement obligated
the parties to negotiate in good faith to replace the Interim Management Agreement with a more complete and definitive management
services agreement on or before March 31, 2012 and on March 30, 2012, the Company entered into an Asset Management Services Agreement,
or the Management Agreement, with KBS Acquisition Sub, LLC, or KBSAS, a wholly-owned subsidiary of KBS Real Estate Investment
Trust, Inc., or KBS REIT, pursuant to which the Company will provide asset management services to KBSAS with respect to the KBS
Portfolio. The Management Agreement provides for continued management of the KBS Portfolio by GKK Realty Advisors, LLC, or the
Manager, through December 31, 2015 for (i) a base management fee of $12,000 per year, payable monthly, plus the reimbursement
of all property related expenses paid by Manager on behalf of KBSAS, subject to deferral of $167 per month at KBSAS’s option
until the accrued amount equals $2,500 or June 30, 2013, whichever is earlier, and (ii) an incentive fee, or the Threshold Value
Profits Participation, in an amount equal to the greater of: (a) $3,500 or (b) 10% of the amount, if any, by which the portfolio
equity value exceeds $375,000 (as adjusted for future cash contributions into, and distributions out of, KBSAS by KBS REIT). In
December 2012, concurrently with the sale of the Bank of America Portfolio the base management fee was reduced by $3,000 per year
to $9,000 per year, which will be partially offset by the asset management fee the Company receives from Garrison. In any event,
the Threshold Value Profits Participation is capped at a maximum of $12,000. The Threshold Value Profits Participation is payable
60 days after the earlier to occur of June 30, 2014 (or March 31, 2015 upon satisfaction of certain extension conditions, including
the payment by KBSAS to Manager of a $750 extension fee) and the date on which KBSAS, directly or indirectly, sells, conveys or
otherwise transfers at least 90% of the KBS Portfolio (by value).
The Company may terminate the Management
Agreement (i) without any KBSAS default under the Management Agreement, on or after December 31, 2012, upon 90 days’ prior
written notice or (ii) at any time by five business days’ prior written notice in the event of a KBSAS default under the
Management Agreement. The Management Agreement may be terminated by KBSAS, (i) without Cause (as defined in the Management Agreement),
with an effective termination date of March 31 or September 30 of any year but at no time prior to September 30, 2013, upon 90
days’ prior written notice or (ii) at any time after April 1, 2013 for Cause. In the event of a termination of the Management
Agreement by KBSAS after April 1, 2013 but prior to December 31, 2015, the Company will be entitled to receive a declining balance
termination fee, ranging from $5,000 to $2,000, calculated as specified in the Management Agreement.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies
Reclassification
Certain prior year balances have been reclassified to conform with the current year presentation for assets
classified as discontinued operations. Certain reclassifications were made to the Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income
(Loss) and footnote disclosures for all periods presented to reflect held-for-sale and discontinued operations as of December 31,
2012.
Additionally, the Company has changed the format of
its Consolidated Balance Sheets for all periods presented to present the assets and liabilities of the consolidated Variable Interest
Entities, or VIEs, parenthetically on the Consolidated Balance Sheets. This change in format did not have any effect
on any of the reported line items within the Consolidated Balance Sheets, other than presenting the combined assets and combined
liabilities for each of the respective line items previously presented under the assets and liabilities of the VIEs and those assets
and liabilities not in the VIEs.
Principles of Consolidation
The Consolidated Financial Statements include
the Company’s accounts and those of the Company’s subsidiaries which 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, and determined that the Company is the primary beneficiary for three VIEs and has included
the accounts of these entities in the Consolidated Financial Statements.
Entities which the Company does not control
and entities which are 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.
Gramercy Finance
In connection with the purchase and
sale agreement of the collateral management and sub-special servicing agreements for the Company’s CDOs the
Company classified the assets and liabilities of Gramercy Finance as held-for-sale and has reported the results of operations
of Gramercy Finance in discontinued operations. As of December 31, 2012, the Company had assets of Gramercy Finance classified as
held-for-sale of $1,952,264. The Company recorded impairment charges of $27,180 within discontinued operations on loans and
real estate investments to adjust the carrying value to the lower of cost or fair value and other-than-temporary impairments
of $128,087 within discontinued operations as the Company no longer could express the intent to hold CMBS investments until
the recovery of amortized cost for all CMBS in an unrealized loss position. For a further discussion regarding the
measurement of financial instruments and real estate assets of the Gramercy Finance segment see Note 11, “Fair Value of
Financial Instruments”, Note 3 “Dispositions and Assets Held for Sale” and Note 6 “Liabilities
Related to Assets Held-for-Sale”.
Variable Interest Entities
The following is a summary of the Company’s
involvement with VIEs as of December 31, 2012:
|
|
Company
carrying
value-assets
|
|
|
Company
carrying value-
liabilities
|
|
|
Face value of
assets held by
theVIE
|
|
|
Face value of
liabilities
issued by the
VIE
|
|
Consolidated VIEs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
$
|
1,913,353
|
(1)
|
|
$
|
2,374,516
|
|
|
$
|
2,469,856
|
|
|
$
|
2,593,392
|
|
|
(1)
|
Collateralized debt obligations are a component of liabilities related to assets held-for-sale on the Consolidated
Balance Sheets.
|
The following is a summary of
the Company’s involvement with VIEs as of December 31, 2011:
|
|
Company
carrying
value-assets
|
|
|
Company
carrying value-
liabilities
|
|
|
Face value
of
assets held by
the VIE
|
|
|
Face value of
liabilities
issued by the
VIE
|
|
Consolidated VIEs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
$
|
1,990,826
|
|
|
$
|
2,654,109
|
|
|
$
|
2,927,748
|
|
|
$
|
2,880,953
|
|
Unconsolidated VIEs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS-controlling class
|
|
$
|
-
|
(1)
|
|
$
|
-
|
|
|
$
|
624,592
|
|
|
$
|
624,592
|
|
|
(1)
|
CMBS are assets held by the collateralized debt obligations
classified on the Consolidated Balance Sheets as an asset of Consolidated VIEs.
|
Consolidated VIEs
As of December 31, 2012, the
Consolidated Balance Sheets includes $1,913,353 of assets and $2,374,516 of liabilities related to three consolidated VIEs,
which are included in Gramercy Finance and classified as held-for-sale. Due to the non-recourse nature of these VIEs, and
other factors discussed below, the Company’s net exposure to loss from investments in these entities is limited to
its beneficial interests in these VIEs.
Gramercy Capital
Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies – (continued)
Collateralized Debt Obligations
The Company consolidates three
collateralized debt obligations, or CDOs, that are VIEs and which are included in Gramercy Finance and are classified
as held-for-sale. Since the Company is the collateral manager of the
three CDOs and can make decisions related to the collateral that would most significantly impact the economic outcome of the
CDOs, the Company has concluded that it is the primary beneficiary of the CDOs as of December 31, 2012. These CDOs invest
in commercial real estate debt instruments, the majority of which the Company originated within the CDOs, and are financed
by the debt and equity issued. The Company is named as collateral manager of all three CDOs. As a result of consolidation,
the Company’s subordinate debt and equity ownership interests in these CDOs have been eliminated, and the
Consolidated Balance Sheets reflect both the assets held and debt issued by these CDOs to third-parties. Similarly, the
operating results and cash flows include the gross amounts related to the assets and liabilities of the CDOs, as opposed to
the Company’s net economic interests in these CDOs. Refer to Note 6 for further discussion of fees earned related to
the management of the CDOs.
The Company’s interest in the assets
held by these CDOs is restricted by the structural provisions of these entities, and the recovery of these assets will be limited
by the CDOs’ distribution provisions, which are subject to change due to non-compliance with covenants, which are described
further in Note 6. The liabilities of the CDO trusts are non-recourse, and can generally only be satisfied from the respective
asset pool of each CDO.
The Company is not obligated to provide
any financial support to these CDOs. As of December 31, 2012, the Company has no exposure to loss as a result of the investment
in these CDOs.
Unconsolidated VIEs
Investment in CMBS
The Company has investments in
certain CMBS, which are considered to be VIEs. The Company’s securities portfolio, with an aggregate face amount of
$1,179,802, is financed by the Company’s CDOs, which are included in Gramercy Finance and are classified as
held-for-sale. The Company has not consolidated the aforementioned CMBS
investments due to the determination that based on the structural provisions and nature of each investment, the Company does
not directly control the activities that most significantly impact the VIEs’ economic performance. The Company’s
exposure to loss is limited to its interests in the consolidated CDOs described above.
Real Estate Investments
The Company records acquired
real estate investments at cost. 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 and intangibles, such as the value of above-,
below- and at-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 income over the remaining term of the associated lease. The
values associated with in-place leases are amortized over the expected 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
and capitalization 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 income over the renewal 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 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.
Gramercy Capital Corp.
Notes To Consolidated Financial
Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies – (continued)
In leasing office space, the Company
may provide funding to the lessee through a tenant allowance. In accounting for tenant allowances, the Company determines
whether the allowance represents funding for the construction of leasehold improvements and evaluates the ownership of such
improvements. If the Company is considered the owner of the leasehold improvements, the Company capitalizes the amount of the
tenant allowance and depreciates it over the shorter of the useful life of the leasehold improvements or the lease term. If
the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the
Company is not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease
incentive and is recognized over the lease term as a reduction of rental revenue. Factors considered during this evaluation
usually include (i) who holds legal title to the improvements, (ii) evidentiary requirements concerning the spending of the
tenant allowance, and (iii) other controlling rights provided by the lease agreement (e.g. unilateral control of the tenant
space during the build-out process). Determination of the accounting for a tenant allowance is made on a case-by-case basis,
considering the facts and circumstances of the individual tenant lease.
The Company also reviews the
recoverability of the property’s carrying value when circumstances indicate a possible impairment of the value of a
property. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest
charges, expected to result from the property’s use and eventual disposition. These estimates consider 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 impairment exists due to the inability 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 for assets held-for-sale. These assessments are recorded as an impairment loss in the Consolidated
Statements of Operations and Comprehensive Income (Loss) 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, the new cost basis will be depreciated or amortized
over the remaining useful life of that asset.
During 2012, the Company recorded impairment
charges for properties classified as held for sale of $35,043 of which $26,298 was related to the disposal of Gramercy Finance.
During 2011, the Company recorded impairment charges for properties classified as held for investment of $1,237. These properties
were reclassified as discontinued operations as part of the settlement agreement.
During 2010, the Company recorded impairment
charges of $933,884 related to its investments in real estate, including $85,294 of impairments on intangible assets. Impairment
charges for properties classified as held for investment were $913,648 and impairments for properties reclassified as discontinued
operations were $20,236. The Company recorded impairment charges totaling $912,147 in continuing operations during 2010 to reduce
the carrying value of 692 properties to the estimated fair value. All of the impaired properties served as collateral for the Goldman
Mezzanine Loans and were part of the Gramercy Asset Management portfolio. The Company also recorded impairment charges on three leasehold
properties totaling $1,501 based on the difference between estimated cash flow shortfalls over the sub-tenants’ lease term.
No other real estate assets in the portfolio were determined to be impaired as of December 31, 2010 as a result of the analysis.
The estimated fair values for the properties serving as collateral for the Goldman Mezzanine loans were calculated using discounted
cash flows based on internally developed models and residual values calculated with capitalization rates utilizing a study completed
by a third-party property management provider for similar types of buildings. The Company used a range of possible future outcomes
or a probability-weighted approach to determine the proper timing of the impairment. The Company determined that, as of December
31, 2010, based on the likelihood of the range of possible outcomes and the probability-weighted cash flows, its investments in
real estate were impaired.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies – (continued)
Investments in Joint Ventures
The Company accounts for
its investments in joint ventures 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 the joint ventures, 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 investments. The investments are recorded initially at cost as an investment
in joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions.
Any difference between the carrying amount of the investments on the Consolidated Balance Sheets and the underlying equity in
net assets is evaluated for impairment at each reporting period. None of the joint venture debt is recourse to the Company.
As of December 31, 2012 and 2011, the Company had investments of $131,986 and $496 in unconsolidated joint ventures,
respectively, of which $59,244 were classified as held-for-sale in connection with the disposal of
Gramercy Finance at December 31, 2012.
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
Restricted cash at December 31, 2012
consists of $61,305 on deposit with the trustee of the Company’s collateralized debt obligations, or CDOs, that is
classified as held-for-sale in connection with the disposal of Gramercy Finance, and $92 related to
real estate assets held-for-sale which represents amounts escrowed pursuant to mortgage agreements securing the
Company’s real estate investments and CTL investments for insurance, taxes, repairs and maintenance, tenant
improvements, interest, and debt service and amounts held as collateral under security and pledge agreements relating to
leasehold interests.
Assets Held for Sale
In connection with
the Company’s efforts to exit Gramercy Finance and the commercial real estate finance
business, the Company classified the assets and liabilities of Gramercy Finance as held-for-sale. As of December 31, 2012,
the Company had assets classified as held-for-sale of $1,952,264 related to the disposal of Gramercy
Finance. The Company recorded impairment charges of $27,180 within discontinued operations on loans and real estate
investments owned to adjust the carrying value to the lower of cost or fair value and other-than-temporary impairments of
$128,087 within discontinued operations as the Company no longer could express the intent to hold CMBS investments until the
recovery of amortized cost for all CMBS in an unrealized loss position. For a further discussion regarding the measurement
of financial instruments and real estate assets of the Gramercy Finance segment see Note 11, “Fair Value of Financial
Instruments” and Note 3 “Dispositions and Assets Held-for-Sale”.
Real estate investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less cost to sell. Once an asset is classified
as held-for-sale, depreciation expense is no longer recorded and current and prior periods are reclassified as “discontinued
operations.” As of December 31, 2012 and 2011, the Company had real estate investments held-for-sale of $49,062 and $42,965,
respectively. The Company recorded impairment charges of $35,043, $1,237 and $20,236 during the years ended December 31, 2012, 2011
and 2010, respectively, related to real estate investments classified as held-for-sale.
Settlement of Debt
A gain on settlement of debt is recorded
when the carrying amount of the liability settled exceeds the fair value of the assets transferred to the lender or special servicer.
In 2012, the Company did not recognize
any gain on settlement of debt.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies – (continued)
Pursuant to the execution of
the Settlement Agreement, the transfer of 867 Gramercy Asset Management properties, with an aggregate carrying value of $2,631,902
and associated mortgage, mezzanine and other liabilities of $2,843,345, occurred in September and December 2011 and the
Company recognized a gain on settlement of debt of $285,634 in connection with such transfer as part of discontinued
operations on the Consolidated Statements of Operations and Comprehensive Income (Loss). The gain on settlement of debt
includes $54,083 of gain on disposal of assets. During the year ended December 31, 2011, the Company recorded $2,489 of legal
and professional fees related to the restructuring of the Goldman Mortgage Loan and the Goldman Mezzanine Loans in the
Consolidated Statements of Operations and Comprehensive Income (Loss).
In July 2011, the Dana portfolio,
which consisted of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage
lender through a deed in lieu of foreclosure. The Company recognized gain on settlement of debt of $74,191 year ended
December 31, 2011 as part of discontinued operations on the Consolidated Statements of Operations and Comprehensive Income
(Loss). The Company realized a $15,892 gain on the disposal the assets, which is included in the gain on settlement of
debt.
Tenant and Other Receivables
Tenant and other receivables are primarily
derived from the rental income that each tenant pays in accordance with the terms of its lease, which 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 December 31, 2012 and 2011, were $211 and $280, respectively.
The Company continually reviews receivables related to rent, tenant reimbursements and unbilled rent receivables and determines
collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business
conditions in the industry in which the tenant operates and economic conditions in the area in which the property 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 in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Intangible Assets
The Company follows the purchase 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.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies – (continued)
Above-market and below-market lease values
for properties acquired are recorded based on the present value (using an interest 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 capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable
terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the
initial term of the respective leases. If a tenant vacates its space prior to the contractual termination of the lease and no rental
payments are being made on the lease, any unamortized balance of the related intangible will be written off.
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. In estimating carrying costs, management includes real estate taxes, insurance
and other operating expenses and estimates of lost rentals at market rates during the anticipated lease-up period, which is expected
to average six months. Management also estimates costs to execute similar leases including leasing commissions, legal and other
related expenses. The value of in-place leases is amortized to expense over the initial term of the respective leases, which range
primarily from one to 20 years. In no event does the amortization period for intangible assets exceed the remaining depreciable
life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value is charged to expense.
In making estimates of fair values
for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that
may be obtained in connection with the acquisition or financing of the respective property and other market data. Management
also considers information obtained about each property as a result of its pre-acquisition due diligence, as well as
subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and
intangible liabilities assumed.
Intangible assets and acquired lease obligations
consist of the following:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
In-place leases, net of accumulated amortization of $359 and $1,388
|
|
$
|
3,639
|
|
|
$
|
4,305
|
|
Above-market leases, net of accumulated amortization of $48 and $153
|
|
|
935
|
|
|
|
672
|
|
Amounts related to assets held for sale, net of accumulated amortization of $365 and $1,509
|
|
|
(188
|
)
|
|
|
(4,904
|
)
|
Total intangible assets
|
|
$
|
4,386
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
Intangible liabilities:
|
|
|
|
|
|
|
|
|
Below-market leases, net of accumulated amortization of $1,395 and $1,469
|
|
$
|
2,161
|
|
|
$
|
3,207
|
|
Amounts related to liabilities held for sale, net of accumulated amortization of $1,391 and $1,469
|
|
|
(1,703
|
)
|
|
|
(3,207
|
)
|
Total intangible liabilities
|
|
$
|
458
|
|
|
$
|
-
|
|
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies – (continued)
The following table provides the weighted-average
amortization period as of December 31, 2012 for intangible assets and liabilities and the projected amortization expense for the
next five years.
|
|
Weighted-
Average
Amortization
Period
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
In-Place Leases
|
|
|
10.0
|
|
|
$
|
382
|
|
|
$
|
382
|
|
|
$
|
382
|
|
|
$
|
382
|
|
|
$
|
382
|
|
Total to be included in Depreciation and Amorization Expense
|
|
|
|
|
|
$
|
382
|
|
|
$
|
382
|
|
|
$
|
382
|
|
|
$
|
382
|
|
|
$
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Above-Market Lease Assets
|
|
|
6.7
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
147
|
|
Below-Market Lease Liabilities
|
|
|
10.4
|
|
|
|
(216
|
)
|
|
|
(216
|
)
|
|
|
(216
|
)
|
|
|
(216
|
)
|
|
|
(211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total to be included in Rental Revenue
|
|
|
|
|
|
$
|
(69
|
)
|
|
$
|
(69
|
)
|
|
$
|
(69
|
)
|
|
$
|
(69
|
)
|
|
$
|
(64
|
)
|
The Company recorded $80, $23,374 and $44,413 of amortization of intangible assets as part of depreciation
and amortization, including $50, $23,374 and $44,413 within discontinued operations for the years ended December 2012, 2011, and
2010, respectively. The Company recorded $188, $54,420 and $68,507 of amortization of intangible assets and liabilities as an increase
to rental revenue, including $196, $54,420 and $58,507 within discontinued operations for the years ended December 2012, 2011,
and 2010, respectively.
Deferred Costs
Deferred costs include deferred financing
costs that represent commitment fees, legal and other third-party costs associated with obtaining commitments for financing which
result in a closing of such financing. These costs are amortized over the terms of the respective agreements and the amortization
is reflected as interest expense. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid
before maturity. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined
that the financing will not close. Deferred costs also consist of fees and direct costs incurred to originate new investments and
are amortized using the effective yield method over the related term of the investment.
The Company has deferred certain expenditures
related to the leasing of certain properties. Direct costs of leasing including internally capitalized payroll costs associated
with leasing activities are deferred and amortized over the terms of the underlying leases.
Other Assets
The Company makes payments for certain
expenses such as insurance and property taxes in advance of the period in which it receives the benefit. These payments are classified
as other assets and amortized over the respective period of benefit relating to the contractual arrangement. The Company also escrows
deposits related to pending acquisitions and financing arrangements, as required by a seller or lender, respectively. Costs prepaid
in connection with securing financing for a property are reclassified into deferred financing costs at the time the transaction
is completed.
Asset Retirement Obligation
Accounting for asset retirement obligations,
refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional
on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method
of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of
a liability for the conditional asset retirement obligation is recognized when incurred — generally upon acquisition,
construction, or development and (or) through the normal operation of the asset. The Company assessed the cost associated with
its legal obligation to remediate asbestos in its properties known to contain asbestos and recorded the present value of the asset
retirement obligation. As of December 31, 2012 and December 31, 2011 the Company has recorded a liability of approximately $0 and
$814, respectively. The Company recorded an expense of $0, $139, and $122 for the years ended December 31, 2012, 2011, and 2010,
respectively, within discontinued operations.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies – (continued)
Valuation of Financial Instruments
ASC 820-10, “Fair Value Measurements
and Disclosures,” among other things, establishes a hierarchical disclosure framework associated with the level of pricing
observability utilized in measuring financial instruments at fair value. Considerable judgment is necessary to interpret market
data and develop estimated fair values. Accordingly, fair values are not necessarily indicative of the amounts the Company could
realize on disposition of the financial instruments. Financial instruments with readily available actively quoted prices or for which
fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and will require
a lesser degree of judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted
will generally have less, or no, pricing observability and will require a higher degree of judgment to be utilized in measuring
fair value. Pricing observability is generally affected by such items as the type of financial instrument, whether the financial
instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions.
The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date, or an exit price. The level of pricing observability generally correlates to the degree of judgment utilized
in measuring the fair value of financial instruments. The less judgment utilized in measuring fair value financial instruments
such as with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active
markets generally have more pricing observability. Conversely, financial instruments rarely traded or not quoted have less observability
and are measured at fair value using valuation models that require more judgment. Impacted by a number of factors, pricing observability
is generally affected by such items as the type of financial instrument, whether the financial instrument is new to the market
and not yet established, the characteristics specific to the transaction and overall market conditions.
The three broad levels defined are as follows:
Level I
— This level is comprised
of financial instruments that have quoted prices that are available in active markets for identical assets or liabilities. The
type of financial instruments included in this category are highly liquid instruments with actively quoted prices.
Level II
— This level is comprised
of financial instruments that have pricing inputs other than quoted prices in active markets that are either directly or indirectly
observable. The nature of these financial instruments includes instruments for which quoted prices are available but traded less
frequently and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III
— This level is comprised
of financial instruments that have little to no pricing observability as of the reported date. These financial instruments do not
have active markets and are measured using management’s best estimate of fair value, where the inputs into the determination
of fair value require significant management judgment and assumptions. Instruments that are generally included in this category
are derivatives, whole loans, subordinate interests in whole loans and mezzanine loans.
For a further discussion regarding the measurement
of financial instruments see Note 11, “Fair Value of Financial Instruments.”
Revenue Recognition
Real Estate Investments
Rental income from leases is recognized
on a straight-line basis regardless of when payments are contractually due. Certain lease agreements also contain provisions that
require tenants to reimburse the Company for real estate taxes, common area maintenance costs and the amortized cost of capital
expenditures with interest. Such amounts are included in both revenues and operating expenses when the Company is the primary obligor
for these expenses and assumes the risks and rewards of a principal under these arrangements. Under leases where the tenant pays
these expenses directly, such amounts are not included in revenues or expenses.
Deferred revenue represents rental revenue
and management fees received prior to the date earned. Deferred revenue also includes rental payments received in excess of rental
revenues recognized as a result of straight-line basis accounting.
Other income includes fees paid by
tenants to terminate their leases, which are recognized when fees due are determinable, no further actions or services are
required to be performed by the Company, and collectability is reasonably assured. In the event of early termination, the
unrecoverable net carrying values of the assets or liabilities related to the terminated lease are recognized as
depreciation and amortization expense in the period of termination.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies – (continued)
The Company recognizes sales of real estate
properties only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate
sold is recognized using the full accrual method upon closing when the collectability of the sale price is reasonably assured and
the Company is not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the
sale meets the requirements of profit recognition on sale of real estate.
Finance Investments
As of December 31, 2012,
the Company has classified its debt investments, which includes CMBS and loan investments, as held-for-sale in connection with
the disposal of Gramercy Finance. Interest income and fees generated by the debt investments have been reclassified
into discontinued operations for the years ended December 31, 2012, 2011, and 2010.
Interest
income on debt investments is recognized over the life of the investments using the effective interest method and recognized on
the accrual basis. Fees received in connection with loan commitments are deferred until the loan is funded and are then recognized
over the term of the loan using the effective interest method.
Anticipated exit fees, whose
collection is expected, are also recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire
unused are recognized at expiration. Fees received in exchange for the credit enhancement of another lender, either subordinate
or senior to the Company, in the form of a guarantee are recognized over the term of that guarantee using the straight-line method.
Income
recognition is generally suspended for debt investments at the earlier of the date at which payments become 90 days past due
or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is
resumed when the loan becomes contractually current and performance is demonstrated to be resumed. As of December 31, 2012,
the Company had suspended income recognition on one subordinate interest in a whole loan with a carrying value of $3,000. As
of December 31, 2011, the Company had suspended income recognition on one whole loan with a carrying value of $51,417.
Reserve for Loan
Losses
Specific valuation allowances
are established for loan losses on loans in instances where it is deemed probable that the Company may be unable to collect all
amounts of principal and interest due according to the contractual terms of the loan. The reserve is increased through the provision
for loan losses within discontinued operations and is decreased by charge-offs when losses are realized through sale, foreclosure,
or when significant collection efforts have ceased. The determination of when significant collection efforts have ceased is based
upon management’s assumption and judgments regarding the probability of a successful remediation and is based upon factors
such as the nature of the underlying collateral or existence of additional collateral, borrower experience, financial strength,
investment track record, and borrower credit.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting
Policies – (continued)
The Company considers the
present value of payments expected to be received, observable market prices or the estimated fair value of the collateral (for
loans that are dependent on the collateral for repayment), and compares it to the carrying value of the loan. The determination
of the estimated fair value is based on the key characteristics of the collateral type, collateral location, quality and prospects
of the sponsor, the amount and status of any senior debt, and other factors. The Company also includes the evaluation of operating
cash flow from the property during the projected holding period, and the estimated sales value of the collateral computed by applying
an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, all of which
are discounted at market discount rates. The Company also considers if the loan’s terms have been modified in a troubled
debt restructuring. Because the determination of estimated value is based upon projections of future economic events, which are
inherently subjective, amounts ultimately realized from loans and investments may differ materially from the carrying value at
the balance sheet date.
|
|
Whole loans
|
|
|
Subordinate interest in whole loans
|
|
|
Mezzanine loans
|
|
|
Preferred equity
|
|
|
Total
|
|
Reserve for loan losses, December 31, 2009
|
|
$
|
165,905
|
|
|
$
|
60,000
|
|
|
$
|
163,897
|
|
|
$
|
28,400
|
|
|
$
|
418,202
|
|
Additional provision for loan losses
|
|
|
64,547
|
|
|
|
-
|
|
|
|
8,013
|
|
|
|
23,000
|
|
|
|
95,560
|
|
Recoveries of loan losses
|
|
|
(11,168
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,168
|
)
|
Charge-offs
|
|
|
(92,461
|
)
|
|
|
585
|
|
|
|
(147,202
|
)
|
|
|
-
|
|
|
|
(239,078
|
)
|
Reserve for loan losses, December 31, 2010
|
|
|
126,823
|
|
|
|
60,585
|
|
|
|
24,708
|
|
|
|
51,400
|
|
|
|
263,516
|
|
Additional provision for loan losses
|
|
|
31,200
|
|
|
|
5,782
|
|
|
|
17,114
|
|
|
|
12,009
|
|
|
|
66,105
|
|
Recoveries of loan losses
|
|
|
(12,670
|
)
|
|
|
-
|
|
|
|
(5,255
|
)
|
|
|
-
|
|
|
|
(17,925
|
)
|
Charge-offs
|
|
|
(403
|
)
|
|
|
(64,000
|
)
|
|
|
(2,453
|
)
|
|
|
-
|
|
|
|
(66,856
|
)
|
Reserve for loan losses, December 31, 2011
|
|
|
144,950
|
|
|
|
2,367
|
|
|
|
34,114
|
|
|
|
63,409
|
|
|
|
244,840
|
|
Additional provision for loan losses
|
|
|
9,479
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
1,989
|
|
|
|
12,468
|
|
Recoveries of loan losses
|
|
|
(14,001
|
)
|
|
|
(2,367
|
)
|
|
|
-
|
|
|
|
(3,938
|
)
|
|
|
(20,306
|
)
|
Charge-offs
|
|
|
(110,678
|
)
|
|
|
-
|
|
|
|
(34,114
|
)
|
|
|
(61,460
|
)
|
|
|
(206,252
|
)
|
Reserve for loan losses, December 31, 2012
|
|
$
|
29,750
|
|
|
$
|
1,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,750
|
|
During the year ended December 31, 2012, the Company incurred
charge-offs totaling $206,252 relating to realized losses on nine loans. During the
year ended December 31, 2011, the Company incurred charge-offs totaling $66,856 relating to realized losses on five loans. The
Company maintained a reserve for loan losses of $30,750 against six separate investments
with an aggregate carrying value of $166,379 as of December 31, 2012, and a reserve for
loan losses of $244,840 against 15 separate investments with an aggregate carrying value of $294,163 as of December 31, 2011.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies –
(continued)
Commercial Mortgage-Backed Securities
In connection with the disposal
of Gramercy Finance, as of December 31, 2012 the Company could no longer express the intent to hold its CMBS securities
in an unrealized loss position until the amortized cost basis is recovered, and as such the Company has recognized an other-than-temporary
impairment for all CMBS securities in an unrealized loss position equal to the entire difference between the amortized cost basis
and the fair value.
On the date of acquisition of the CMBS
securities, the Company determines the appropriate accounting model for impairment and revenue recognition based on management’s
assessment of the risk of loss. The Company has designated its entire CMBS securities portfolio as available-for-sale. Securities
that are considered to have a remote risk of loss are those securities that management has determined are of high credit quality
and are sufficiently collateralized to protect the acquired class from losses. Management makes this determination based
upon an evaluation of the underlying collateral, which is performed on every acquisition, regardless of the acquisition price and
rating.
Prior to the fourth quarter of
2012, when management could express the intent and ability to hold its available-for-sale CMBS securities until
maturity, unrealized losses that were, in the judgment of management, other-than-temporarily impaired were bifurcated into
(i) the amount related to credit losses and (ii) the amount related to all other factors. The evaluation included a review of
the credit status and the performance of the collateral supporting those securities, including key terms of the securities
and the effect of local, industry and broader economic trends. The portion of the other-than-temporary impairment related
to credit losses was computed by comparing the amortized cost of the investment to the present value of cash flows expected
to be collected and was charged against earnings on the Consolidated Statements of Operations and Comprehensive Income (Loss).
The portion of the other-than-temporary impairment related to all other factors was recognized as a component of
other comprehensive loss on the Consolidated Balance Sheets. The determination of an other-than-temporary impairment is
a subjective process, and different judgments and assumptions could affect the timing of loss realization. The Company
calculated a revised yield based on the current amortized cost of the investment (including any
other-than-temporary impairments recognized to date) and the revised yield was then applied prospectively to recognize
interest income. Assumptions about future cash flows consider reasonable management judgment about the probability that the
holder of an asset will be unable to collect all amounts due.
The Company also assesses securities
which are not of high credit quality on a quarterly basis to determine whether significant changes in estimated cash flows or
unrealized losses on these securities, if any, reflect a decline in value which is other-than-temporary. On a quarterly
basis, the Company reviewed the changes in expected cash flows on these securities, and if there was a material decrease in
estimated cash flows and the security was in an unrealized loss position, the Company records an other-than-temporary
impairment in the Consolidated Statements of Operations and Comprehensive Income (Loss). If the security was in an
unrealized gain position and there was a material decrease or increase in expected cash flows, the Company prospectively
adjusted the yield using the effective yield method.
The Company determines the fair value of
CMBS based on the types of securities in which the Company has invested. The Company consults with dealers of securities to periodically
obtain updated market pricing for the same or similar instruments. For securities for which there is no active market, the Company
may utilize a pricing model to reflect changes in projected cash flows. The value of the securities is derived by applying discount
rates to such cash flows based on current market yields. The yields employed are obtained from the Company’s own experience
in the market, advice from dealers when available, and/or information obtained in consultation with other investors in similar
instruments. Because fair value estimates, when available, may vary to some degree, the Company must make certain judgments and
assumptions about the appropriate price to use to calculate the fair values for financial reporting purposes. Different judgments
and assumptions could result in materially different presentations of value.
Upon the disposition of a CMBS
investment designated as available-for-sale, the unrealized gain or loss recognized in accumulated other comprehensive income
is reversed. A realized gain or loss is computed by comparing the amortized cost of the CMBS investment sold to the cash
proceeds received, and the resultant gain or loss is recorded in other income on the Consolidated Statement of
Operations and Comprehensive Income (Loss).
Rent Expense
Rent expense is recognized on a straight-line
basis regardless of when payments are due. Accounts payable and accrued expenses in the accompanying Consolidated Balance Sheets
as of December 31, 2012 and 2011 includes an accrual for rental expense recognized in excess of amounts due at that time. Rent
expense related to leasehold interests is included in property operating expenses, and rent expense related to office rentals is
included in management, general and administrative expense.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies –
(continued)
Stock-Based Compensation Plans
The Company
has a stock-based compensation plan, described more fully in Note 12. The Company accounts for this plan using the fair value recognition
provisions.
The Company uses the Black-Scholes option-pricing model to estimate the fair value
of a stock option award. This model requires inputs such as expected term, expected volatility, and risk-free interest rate. Further,
the forfeiture rate also impacts the amount of aggregate compensation cost. These inputs are highly subjective and generally require
significant analysis and judgment to develop.
Compensation cost for stock options, if
any, is recognized ratably over the vesting period of the award. The Company’s policy is to grant options with an exercise
price equal to the quoted closing market price of its stock on the business day preceding the grant date. Awards of stock or restricted
stock are expensed as compensation over the benefit period. For the year ended December 31, 2012 and 2011, basic EPS was determined
by dividing net income allocable to common stockholders for the applicable period by the weighted-average number of shares of
common stock outstanding during such period. Net income during the applicable period is also allocated to the time-based unvested
restricted stock as these grants are entitled to receive dividends and are therefore considered a participating security. Time-based
unvested restricted stock is not allocated net losses and/or any excess of dividends declared over net income; such amounts are
allocated entirely to the common stockholders other than the holders of time-based unvested restricted stock. For the year ended
December 31, 2012, the Company had 1,383,388 weighted-average unvested restricted shares outstanding.
The fair value of each stock option granted
is estimated on the date of grant for options issued to employees, and quarterly awards to non-employees, using the Black-Scholes
option pricing model with the following weighted average assumptions for grants in 2012 and 2011.
|
|
2012
|
|
|
2011
|
|
Dividend yield
|
|
|
5.0
|
%
|
|
|
5.9
|
%
|
Expected life of option
|
|
|
5.0 years
|
|
|
|
5.0 years
|
|
Risk free interest rate
|
|
|
0.89
|
%
|
|
|
2.02
|
%
|
Expected stock price volatility
|
|
|
80.0
|
%
|
|
|
105.0
|
%
|
Derivative Instruments
In the normal course of business, the Company
uses a variety of derivative instruments to manage, or hedge, interest rate risk. The Company requires that hedging derivative
instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential
for qualifying for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception
of the derivative contract. The Company uses a variety of commonly used derivative products that are considered “plain vanilla”
derivatives. These derivatives typically include interest rate swaps, caps, collars and floors. The Company expressly prohibits
the use of unconventional derivative instruments and using derivative instruments for trading or speculative purposes. Further,
the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and
other factors.
To determine the fair value of derivative
instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each
balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt,
standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost and termination
cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such
value may never actually be realized.
In the normal course of business, the Company
is exposed to the effect of interest rate changes and limits these risks by following established risk management policies and
procedures including the use of derivatives. To address exposure to interest rates, the Company uses derivatives primarily to hedge
the cash flow variability caused by interest rate fluctuations of its liabilities.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies – (continued)
The Company recognizes all
derivatives on the Consolidated Balance Sheets at fair value. Derivative instruments that are assets or liabilities of
the consolidated VIEs are classified as held-for-sale as of December 31, 2012 in connection with the disposal of
Gramercy Finance. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in
fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be
immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and
stockholders’ equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting the
fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is
carried through to full term.
All hedges held by the Company are deemed
effective based upon the hedging objectives established by the Company’s corporate policy governing interest rate risk management.
The effect of the Company’s derivative instruments on its financial statements is discussed more fully in Note 6.
Income Taxes
The Company elected to be taxed as a
REIT, under Sections 856 through 860 of the Internal Revenue Code, beginning with its taxable year ended December 31, 2004.
To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to
distribute at least 90% of its ordinary taxable income, to stockholders. As a REIT, the Company generally will not be subject
to U.S. federal income tax on taxable income that the Company distributes to its stockholders. If the Company fails to
qualify as a REIT in any taxable year, it will then be subject to U.S. federal income taxes on taxable income at regular
corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four
years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief
under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net
cash available for distributions to stockholders. However, the Company believes that it will be organized and operate in such
a manner as to qualify for treatment as a REIT and the Company intends to operate in the foreseeable future in such a manner
so that it will qualify as a REIT for U.S. federal income tax purposes. The Company is subject to certain state and local
taxes. The Company’s TRSs are subject to federal, state and local taxes.
For the years ended December
31, 2012, 2011 and 2010, the Company recorded $3,330, $563, and $966 of income tax expense, respectively. Income taxes,
primarily related to the Company’s TRSs, are accounted for under the asset and liability method. Deferred tax assets
and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. A valuation allowance is provided if we believe it is more
likely than not that all or a portion of a deferred tax asset will not be realized. Any increase or decrease in a valuation
allowance is included in the tax provision when such a change occurs.
The Company’s policy for interest
and penalties, if any, on material uncertain tax positions recognized in the financial statements is to classify these as interest
expense and operating expense, respectively. As of December 31, 2012, 2011 and 2010, the Company did not incur any material interest
or penalties.
Earnings Per Share
The Company presents both basic and diluted
earnings per share, or EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were exercised or converted into common stock, as long as their
inclusion would not be anti-dilutive.
Concentrations of Credit Risk
Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash investments, debt investments and accounts receivable.
The Company places its cash investments in excess of insured amounts with high quality financial institutions. Historically, the
Company performed ongoing analysis of credit risk concentrations in its loan and other lending investment portfolio by evaluating
exposure to various markets, underlying property types, investment structure, term, sponsors, tenants and other credit metrics,
however, following the disposal of Gramercy Finance in the first quarter of 2012, the Company will only be exposed to
credit risk from cash investments and accounts receivable.
Two investments accounted for
approximately 21.5% of the total carrying value of the Company’s debt investments as of December 31, 2012 compared to three
investments that accounted for approximately 21.1% of the total carrying value of the Company’s debt investments as of December
31, 2011. Four investments accounted for approximately 16.0% of the revenue earned on the Company’s debt investments for
the year ended December 31, 2012, seven investments accounted for approximately 16.3% of the revenue earned on the Company’s
debt investments for the year ended December 31, 2011 and seven investments accounted for approximately 17.2% of the revenue earned
on the Company’s debt investments for the year ended December 31, 2010. The largest sponsor accounted for approximately
20.0% and 14.1% of the total carrying value of the Company’s debt investments as of December 31, 2012 and 2011, respectively.
The largest sponsor accounted for approximately 12.0% of the revenue earned on the Company’s debt investments for the year
ended December 31, 2012, compared to approximately 5.6% and 5.8% of the revenue earned on the Company’s debt investments
for the years ended December 31, 2011 and 2010, respectively.
One asset management client, KBS, accounted for 100% of the Companies management fee income for the year
ended December 31, 2012 and 2011.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
2. Significant Accounting Policies – (continued)
Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In July 2010, FASB issued guidance which
outlines specific disclosures that will be required for the allowance for credit losses and all finance receivables. Finance receivables
includes loans, lease receivables and other arrangements with a contractual right to receive money on demand or on fixed or determinable
dates that is recognized as an asset on an entity’s statement of financial position. This guidance will require companies
to provide disaggregated levels of disclosure by portfolio segment and class to enable users of the financial statement to understand
the nature of credit risk, how the risk is analyzed in determining the related allowance for credit losses and changes to the allowance
during the reporting period. Required disclosures under this guidance as of the end of a reporting period are effective for the
Company’s December 31, 2010. In January 2011, the FASB delayed the effective date of the new disclosures about troubled debt
restructurings to allow the FASB the time needed to complete its deliberations about on what constitutes a troubled debt restructuring.
The effective date of the new disclosures about and the guidance for determining what constitutes a troubled debt restructuring
will then be coordinated. The guidance is effective for the Company’s September 30, 2011 reporting period. The Company has
applied this update to its Consolidated Financial Statements for the period ended December 31, 2011 and its adoption did not have
a material effect on the Company’s Consolidated Financial Statements.
In December 2010, the FASB issued guidance
on the disclosure of supplementary pro forma information for business combinations. The guidance specifies that if a public entity
enters into business combinations that are material on an individual or aggregate basis and presents comparative financial statements,
the entity must present pro forma revenue and earnings of the combined entity as though the business combination that occurred
during the current period had occurred as of the beginning of the comparable annual period only. The adoption of this guidance
for the Company’s annual reporting period ending December 31, 2011 did not have a material impact on the Company’s
Consolidated Financial Statements.
In April 2011, the FASB issued updated
guidance on a creditor’s determination of whether a restructuring will be a troubled debt restructuring, which establishes
new guidelines in evaluating whether a loan modification meets the criteria of a troubled debt restructuring. This guidance is
effective as of the third quarter of 2011, applied retrospectively to the beginning of the fiscal year as required, and its adoption
did not have a material effect on the Company’s Consolidated Financial Statements.
In May 2011, the FASB issued updated guidance
on fair value measurement which amends U.S. GAAP to conform to International Financial Reporting Standards, or IFRS, measurement
and disclosure requirements. The amendment changes the wording used to describe the requirements in U.S. GAAP for measuring fair
value, changes certain fair value measurement principles and enhances disclosure requirements. This guidance is effective as of
January 1, 2012, applied prospectively, and its adoption did not have a material effect on the Company’s Consolidated Financial
Statements.
In June 2011, the FASB issued
updated guidance on comprehensive income which amends U.S. GAAP to conform to the disclosure requirements of IFRS. The
amendment eliminates the option to present components of other comprehensive income as part of the Statements of
Stockholders’ Equity and Non-Controlling Interests and requires a separate Statements of Comprehensive Income or two
consecutive statements in the Statements of Operations and in a separate Statements of Comprehensive Income.
This guidance also requires the presentation of reclassification adjustments for each component of other comprehensive income
on the face of the financial statements rather than in the notes to the financial statements. This guidance is effective as
of January 1, 2012, except for the disclosure of reclassification adjustments which was postponed for re-deliberation by the
FASB, and early adoption is permitted, and its adoption did not have a material effect on the Company’s
Consolidated Financial Statements. The Company has adopted the one continuous statement approach.
In February 2013, the FASB issued additional
guidance on comprehensive income which requires the provision of information about the amounts reclassified out of accumulated
other comprehensive income by component. This guidance also requires presentation on the Consolidated Statements of Operations
and Comprehensive Income (Loss) or in the notes, significant amounts reclassified out of accumulated other comprehensive income
by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified
to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified
in their entirety to net income, a cross-reference must be provided to other disclosures required under U.S. GAAP that provide
additional detail about those amounts. This update is effective for reporting periods beginning after December 15, 2012
with early adoption permitted. The Company has not elected early adoption, and its adoption is not expected to have
a material effect on the Company’s Consolidated Financial Statements.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
3. Dispositions and Assets Held-for-Sale
The Company classified Gramercy Finance as held-for-sale as of December 31, 2012 and two properties as held-for-sale as of December
31, 2011. The following table summarizes the assets held-for-sale as of December 31, 2012 and 2011.
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Assets held-for-sale:
|
|
|
|
|
|
|
|
|
Real estate investments, at cost:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
20,074
|
|
|
$
|
46,071
|
|
Building and improvement
|
|
|
17,592
|
|
|
|
44,561
|
|
Other real estate investments
|
|
|
-
|
|
|
|
20,318
|
|
Total real estate investments, at cost
|
|
|
37,666
|
|
|
|
110,950
|
|
Less: accumulated dep
|
|
|
(2,965
|
)
|
|
|
(2,907
|
)
|
Real estate investments, net
|
|
|
34,701
|
|
|
|
108,043
|
|
Restricted cash
|
|
|
61,385
|
|
|
|
34,191
|
|
Loans and other lending investments, net
|
|
|
784,945
|
|
|
|
1,081,091
|
|
Commercial mortgage backed securities - available-for-sale
|
|
|
931,383
|
|
|
|
775,812
|
|
Investment in joint ventures
|
|
|
59,244
|
|
|
|
-
|
|
Tenant and other receivables, net
|
|
|
1,519
|
|
|
|
1,260
|
|
Derivative instruments, at fair value
|
|
|
173
|
|
|
|
913
|
|
Accrued interest
|
|
|
13,251
|
|
|
|
28,660
|
|
Acquired lease asets, net of accumulated amortization
|
|
|
188
|
|
|
|
4,904
|
|
Deferred costs
|
|
|
6,466
|
|
|
|
9,216
|
|
Other assets
|
|
|
59,009
|
|
|
|
34,056
|
|
Total assets held-for-sale
|
|
$
|
1,952,264
|
|
|
$
|
2,078,146
|
|
The following operating results of the
Gramercy Finance and the assets held-for-sale as of December 31, 2012, and the assets sold during the years ended December
31, 2012, 2011 and 2010 are included in discontinued operations for all periods presented:
|
|
Year Ended December 31
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
162,059
|
|
|
$
|
562,393
|
|
|
$
|
633,725
|
|
Operating expenses
|
|
|
(54,747
|
)
|
|
|
(171,870
|
)
|
|
|
(1,124,825
|
)
|
Marketing, general and administrative
|
|
|
(18,508
|
)
|
|
|
(16,367
|
)
|
|
|
(11,240
|
)
|
Interest expense
|
|
|
(88,159
|
)
|
|
|
(186,620
|
)
|
|
|
(201,373
|
)
|
Depreciation and amortization
|
|
|
(967
|
)
|
|
|
(64,076
|
)
|
|
|
(108,553
|
)
|
Loans HFS & CMBS impairments charges
|
|
|
(171,079
|
)
|
|
|
(18,423
|
)
|
|
|
(39,453
|
)
|
Provision for loan loss
|
|
|
7,838
|
|
|
|
(48,180
|
)
|
|
|
(84,392
|
)
|
Impairment on business acquisition, net
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,722
|
)
|
Equity in net income from unconsolidated joint venture
|
|
|
(5,611
|
)
|
|
|
(2,098
|
)
|
|
|
7,168
|
|
Net income (loss) from operations
|
|
|
(169,174
|
)
|
|
|
54,759
|
|
|
|
(931,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from operations with a related party
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,759
|
)
|
Loss on sale of joint venture interest to a related party
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,292
|
)
|
Gain on extinguishment of debt
|
|
|
-
|
|
|
|
300,909
|
|
|
|
19,443
|
|
Net gains from disposals
|
|
|
15,967
|
|
|
|
2,712
|
|
|
|
2,658
|
|
Net income (loss) from discontiued operations
|
|
$
|
(153,207
|
)
|
|
$
|
358,380
|
|
|
$
|
(946,615
|
)
|
Discontinued operations have not been segregated
in the Consolidated Statements of Cash Flows.
Gramercy Finance Segment
In
December 2012, the Company’s Board of Directors approved the disposal of Gramercy Finance through, among other things,
the sale of the collateral management and sub-special servicing agreements for its three CDOs and on January 30, 2013, the
Company entered into a purchase and sale agreement to transfer these agreements to CWCapital for approximately $9,900, less
certain adjustments and closing costs. The transaction closed in March 2013.
Gramercy Capital
Corp.
Notes To Consolidated
Financial Statements
(Amounts in thousands,
except share and per share data)
December 31, 2012
3. Dispositions and Assets Held-For-Sale – (continued)
In connection with the disposal of Gramercy
Finance, the Company has classified the assets and liabilities of Gramercy Finance as assets and liabilities held-for-sale
as of December 31, 2012. As of December 31, 2012, the Company had assets classified as held-for-sale of $1,952,264. As a
result, the Company recognized impairment charges of $155,267 related to the impairment of the assets of Gramercy Finance.
For a further discussion regarding the measurement of financial instruments and real estate assets of Gramercy Finance see
Note 11. The Company has reclassified the results of operations of Gramercy Finance in discontinued operations for the
years ended December 31, 2012, 2011, and 2010.
Loans Investments
At December 31,
2012, the Company classified substantially all of its loan investments as held-for-sale and recorded an impairment of $882
to adjust the carrying value of seven loans to the lower of cost or market value. The fair value of the loans was measured by
an internally developed model which considered the price that a third-party would pay to assume the loan at December 31,
2012. For a further discussion regarding the measurement of financial instruments see Note 11, “Fair Value of Financial
Instruments.”
At December 31, 2012
and 2011, the Company’s recorded investments in impaired loans were as follows:
|
|
For the year ended December 31, 2012
|
|
|
|
Unpaid Principal Balance
|
|
|
Carrying Value
|
|
|
Reserve for
Loan Losses
|
|
|
Average Recorded Investment
(1)
|
|
|
Investment Income Recognized
|
|
Whole loans
|
|
$
|
191,061
|
|
|
$
|
163,379
|
|
|
$
|
29,750
|
|
|
$
|
158,552
|
|
|
$
|
7,694
|
|
Subordinate interests in
whole loans
|
|
|
4,000
|
|
|
|
3,000
|
|
|
|
1,000
|
|
|
|
3,692
|
|
|
|
585
|
|
Mezzanine loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Preferred equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
195,061
|
|
|
$
|
166,379
|
|
|
$
|
30,750
|
|
|
$
|
162,244
|
|
|
$
|
8,279
|
|
(1) Represents the average of the month end balances for the year ended December 31, 2012
|
|
For the year ended December 31, 2011
|
|
|
|
Unpaid Principal Balance
|
|
|
Carrying Value
|
|
|
Reserve for
Loan Losses
|
|
|
Average Recorded Investment
(1)
|
|
|
Investment Income Recognized
|
|
Whole loans
|
|
$
|
428,050
|
|
|
$
|
285,659
|
|
|
$
|
144,950
|
|
|
$
|
298,251
|
|
|
$
|
13,206
|
|
Subordinate interests in
whole loans
|
|
|
5,882
|
|
|
|
3,514
|
|
|
|
2,367
|
|
|
|
5,041
|
|
|
|
235
|
|
Mezzanine loans
|
|
|
34,114
|
|
|
|
-
|
|
|
|
34,114
|
|
|
|
9,399
|
|
|
|
882
|
|
Preferred equity
|
|
|
68,116
|
|
|
|
4,910
|
|
|
|
63,409
|
|
|
|
9,268
|
|
|
|
2,430
|
|
Total
|
|
$
|
536,162
|
|
|
$
|
294,083
|
|
|
$
|
244,840
|
|
|
$
|
321,959
|
|
|
$
|
16,753
|
|
(1) Represents the average of the month end balances for the
year ended December 31, 2011.
Gramercy Capital
Corp.
Notes To Consolidated
Financial Statements
(Amounts in thousands,
except share and per share data)
December 31, 2012
3. Dispositions and Assets Held-For-Sale – (continued)
During the year ended December 31, 2012, the Company completed 15 modifications, extending maturity for
a weighted-average term of 1.0 years. When an existing loan agreement is modified, the Company considers changes to interest rates,
maturity dates, extension and modification fees, changes to underlying collateral, forgiveness of debt, extension options, and
funding of reserve accounts among other features.
During the year ended December 31, 2012,
the Company modified two loans which were considered troubled debt restructurings. A troubled debt restructuring is generally any
modification of a loan to a borrower that is experiencing financial difficulties, and where a lender agrees to terms that are more
favorable to the borrower than is otherwise available in the current market. The Company reduced the interest rate on all of these
loans by a combined weighted average of 0.9% and extended all of the loans by a combined weighted average of 1.4 years. As of December
31, 2012, the Company had no unfunded commitments on modified loans considered troubled debt restructurings.
These loans were modified to increase the
total recovery of the combined principal and interest from the loans. Any loan modification is predicated upon a goal of maximizing
the collection of the loan. The Company believes that the borrowers can perform under the new terms and therefore none of the loans
which were modified and considered to be troubled debt restructurings were classified as non-performing as of December 31, 2012.
The Company’s troubled debt restructurings
for the year ended December 31, 2012 were as follows:
|
|
As of December 31, 2012
|
|
|
|
Number of
Investments
|
|
|
Pre-modification Unpaid Principal Balance
(1)
|
|
|
Post-modification Unpaid Principal Balance
(2)
|
|
Whole loans
|
|
|
2
|
|
|
$
|
75,767
|
|
|
$
|
75,767
|
|
Subordinate interests in whole loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mezzanine loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Preferred equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
75,767
|
|
|
$
|
75,767
|
|
(1)
Unpaid principal balance as of the last modification, but before any paydowns, not including payment-in-kind.
(2)
This represents the unpaid principal balance of the loan for the quarter end following the modification.
The Company’s troubled debt restructurings
for the year ended December 31, 2011 were as follows:
|
|
As of December 31, 2011
|
|
|
|
Number of
Investments
|
|
|
Pre-modification Unpaid Principal Balance
(1)
|
|
|
Post-modification Unpaid Principal Balance
(2)
|
|
Whole loans
|
|
|
3
|
|
|
$
|
139,725
|
|
|
$
|
140,404
|
|
Subordinate interests in whole loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mezzanine loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Preferred equity
|
|
|
1
|
|
|
|
12,214
|
|
|
|
12,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4
|
|
|
$
|
151,939
|
|
|
$
|
152,618
|
|
(1)
Unpaid principal balance as of the last modification, but before any paydowns, not including payment-in-kind.
(2)
This represents the unpaid principal balance of the loan for the quarter end following the modification.
Gramercy Capital
Corp.
Notes To Consolidated
Financial Statements
(Amounts in thousands,
except share and per share data)
December 31, 2012
3. Dispositions and Assets Held-For-Sale – (continued)
Available-for-Sale CMBS Investments
During the fourth
quarter, the Company recognized an other-than-temporary impairment of $128,087 on 53 CMBS investments because the Company
could no longer express the intent to hold its CMBS investments until the amortized cost basis of all securities in an
unrealized loss position is recovered. The Company recognized an other-than-temporary impairment for all CMBS investments
in a loss position equal to the entire difference between the investment’s amortized cost basis and its fair value at
December 31, 2012 and is included in net loss from discontinued operations. For CMBS investments which were not impaired as
of December 31, 2012, the Company recorded unrealized gains of $84,690 as a component of accumulated other comprehensive
income (loss) in stockholders’ equity (deficit).
The following is a
summary of the Company’s CMBS investments at December 31, 2012:
Description
|
|
Number of
Securities
|
|
|
Face Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Gain
|
|
|
Other-than-
temporary
Impairment
(1)
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate CMBS
|
|
|
3
|
|
|
$
|
36,937
|
|
|
$
|
35,672
|
|
|
$
|
34,908
|
|
|
$
|
-
|
|
|
$
|
(764
|
)
|
Fixed rate CMBS
|
|
|
104
|
|
|
|
1,142,865
|
|
|
|
939,990
|
|
|
|
897,357
|
|
|
|
84,690
|
|
|
|
(127,323
|
)
|
Total
|
|
|
107
|
|
|
$
|
1,179,802
|
|
|
$
|
975,662
|
|
|
$
|
932,265
|
|
|
$
|
84,690
|
|
|
$
|
(128,087
|
)
|
|
(1)
|
Other-than-temporary impairments recorded as of December
31, 2012 on all CMBS investments in an unrealized loss position.
|
The following is a summary
of the Company’s CMBS investments at December 31, 2011:
Description
|
|
Number of
Securities
|
|
|
Face Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate
|
|
|
3
|
|
|
$
|
53,500
|
|
|
$
|
51,848
|
|
|
$
|
47,855
|
|
|
$
|
-
|
|
|
$
|
(3,993
|
)
|
Fixed rate CMBS
|
|
|
108
|
|
|
|
1,185,777
|
|
|
|
982,801
|
|
|
|
727,957
|
|
|
|
44,115
|
|
|
|
(298,959
|
)
|
Total
|
|
|
111
|
|
|
$
|
1,239,277
|
|
|
$
|
1,034,649
|
|
|
$
|
775,812
|
|
|
$
|
44,115
|
|
|
$
|
(302,952
|
)
|
As of December 31,
2012, the Company’s CMBS investments had the following maturity characteristics:
Year of Maturity
|
|
Number of Investments Maturing
|
|
|
Amortized Cost
|
|
|
Percent of Total Carrying Value
|
|
|
Fair Value
|
|
|
Percent of Total Fair Value
|
|
Less than 1 year
|
|
|
1
|
|
|
$
|
20,020
|
|
|
|
2.1
|
%
|
|
$
|
19,399
|
|
|
|
2.0
|
%
|
1 - 5 years
|
|
|
105
|
|
|
|
955,642
|
|
|
|
97.9
|
%
|
|
|
912,357
|
|
|
|
97.9
|
%
|
5 - 10 years
|
|
|
1
|
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
509
|
|
|
|
0.1
|
%
|
Total
|
|
|
107
|
|
|
$
|
975,662
|
|
|
|
100.0
|
%
|
|
$
|
932,265
|
|
|
|
100.0
|
%
|
Real Estate Investments
The
Company designated real estate investments held-for-sale in connection with the disposal of Gramercy Finance and recorded
impairment charges of $26,298 as of December 31, 2012 to adjust the carrying value to the lower of cost or
market. The impairment is calculated by comparing the results of the company’s marketing efforts and unsolicited
purchase offers to the carrying value of the respective property.
Restricted cash
Restricted cash classified
as held-for-sale in connection with the disposal of Gramercy Finance consists of $61,305 on deposit with
the trustee of the Company’s CDOs.
Deferred costs
Deferred
financing costs of $6,401 related to the CDOs are classified as held-for-sale in connection with the disposal of Gramercy
Finance. For a further discussion regarding deferred costs see Note 10, “Deferred Costs.”
Gramercy
Capital Corp.
Notes
To Consolidated Financial Statements
(Amounts
in thousands, except share and per share data)
December
31, 2012
3. Dispositions and Assets Held for Sale – (continued)
Investments in Joint Ventures
The Company has two joint
ventures which are classified as held-for-sale, the Southern California office portfolio and the Las Vegas Hotel, which are
further described below.
Southern California Office Portfolio - In September 2012, the
Company, an affiliate of SL Green and several other unrelated parties recapitalized a portfolio of office buildings located in
Southern California, or the Southern California Office Portfolio, through the contribution of an existing preferred equity investment
to a newly formed joint venture. As of December 31, 2012, the Company’s 10.6% interest in the joint venture had a carrying
value of $7,215 and was classified as held for sale in connection with the classification of Gramercy Finance as held for sale.
For the year ended December 31, 2012, the Company recorded its pro rata share of net losses on the joint venture of $3,222, within
discontinued operations.
Las Vegas Hotel - In December 2012, the Company acquired via
a deed-in-lieu of foreclosure, a 30% interest through a TRS in the Las Vegas Hotel, a hotel and casino, located in Las Vegas, Nevada.
As of December 31, 2012, the joint venture had a carrying value of $52,029 and was classified as held for sale in connection with
the classification of Gramercy Finance as held for sale. For the year ended December 31, 2012, the Company recorded its pro rata
share of net losses on the joint venture of $2,388, within discontinued operations.
Real Estate Dispositions
During the years ended December 31, 2012,
the Company sold 21 properties compared to eight properties during the year ended December 31, 2011, for
net sales proceeds of $77,413 and $22,894, respectively. The sales transactions resulted in gains totaling $15,967 and $2,712
for the years ended December 31, 2012 and 2011, respectively, within discontinued operations.
|
|
For the year ended December
31, 2012
|
|
|
|
Number of
Properties
|
|
|
Net Sale
Proceeds
|
|
|
Gains
|
|
|
|
|
|
|
|
|
|
|
|
Finance
|
|
|
6
|
|
|
$
|
71,370
|
|
|
$
|
13,693
|
|
Realty
|
|
|
15
|
|
|
|
6,043
|
|
|
|
2,274
|
|
Total
|
|
|
21
|
|
|
$
|
77,413
|
|
|
$
|
15,967
|
|
|
|
For the year ended December
31, 2011
|
|
|
|
Number of
Properties
|
|
|
Net Sale
Proceeds
|
|
|
Gains
|
|
Finance
|
|
|
1
|
|
|
$
|
17,740
|
|
|
$
|
937
|
|
Realty
|
|
|
7
|
|
|
|
5,154
|
|
|
|
1,775
|
|
Total
|
|
|
8
|
|
|
$
|
22,894
|
|
|
$
|
2,712
|
|
The Company separately classifies
properties held-for-sale in the Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive
Income (Loss). In the normal course of business the Company identifies non-strategic assets for sale. Changes in the market
may compel the Company to decide to classify a property held-for-sale or classify a property that was designated as held-for-sale back to held for investment. During the year ended December 31, 2012, the Company did not reclassify any
properties previously identified as held-for-sale to held for investment. During the year ended December 31, 2011, the
Company did not reclassify any properties previously identified as held-for-sale to held for investment.
On September 1, 2011 and on December 1,
2011, the Company transferred to KBS or its affiliates, interests in entities owning 317 and 116, respectively, of the 867 Gramercy
Asset Management properties that it agreed to transfer pursuant to the Settlement Agreement and the remaining ownership interests were transferred
to KBS by December 15, 2011. The aggregate carrying value for the interests transferred to KBS was $2,631,902. In July 2011, the
Dana portfolio, which consisted of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its
mortgage lender through a deed-in-lieu of foreclosure.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
4. Acquisitions
Indianapolis Industrial Portfolio
In November 2012, the Company acquired
the Indianapolis Industrial Portfolio, two Class A industrial properties in the Indianapolis metropolitan area, totaling
540,000 square-feet for $27,125. The properties are 100% leased to three tenants with a 10.2 year weighted-average lease
term. The
Company is currently analyzing the fair value of the leases;
accordingly, the purchase price allocation is preliminary and subject to change. The initial recording of the assets included
$23,159 of real estate assets, $4,429 of intangible assets and $462 of intangible liabilities.
Pro Forma
The following table summarizes, on an unaudited
pro forma basis, the Company’s combined results of operations for the year ended December 31, 2012 and 2011 as though the
acquisition of the Indianapolis Industrial Portfolio was completed on January 1, 2011. The supplemental pro forma operating data
is not necessarily indicative of what the actual results of operations would have been assuming the transaction had been completed
as set forth above, nor do they purport to represent the Company’s results of operations for future periods.
|
|
2012
|
|
|
2011
|
|
Pro forma revenues
|
|
$
|
38,965
|
|
|
$
|
9,892
|
|
Pro forma net income (loss) available to common stockholders
|
|
$
|
(177,724
|
)
|
|
$
|
330,850
|
|
Pro forma earnings per common share-basic
|
|
$
|
(3.42
|
)
|
|
$
|
6.59
|
|
Pro forma earnings per common share-diluted
|
|
$
|
(3.42
|
)
|
|
$
|
6.59
|
|
Pro forma common shares-basic
|
|
|
51,976,462
|
|
|
|
50,229,102
|
|
Pro forma common share-diluted
|
|
|
51,976,462
|
|
|
|
50,229,102
|
|
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
5. Investments in Joint Ventures
Bank of America Portfolio
In August 2012, the Company
and Garrison formed a joint venture and in December 2012, the Company contributed $59,061 in cash plus the issuance of
6,000,000 shares of the Company’s common stock, valued at $15,000 as of the date of execution of the purchase
agreement and a value of $16,500 as of the date of closing, representing a 50% interest in the joint venture’s acquisition of
the Bank of America Portfolio from KBS for $485,000. The acquisition was financed with a $200,000 two-year, floating rate,
interest-only mortgage loan and collateralized by 67 properties of the portfolio. The remaining properties are unencumbered.
The Bank of America Portfolio is an office portfolio of 113 properties that was previously part of the Gramercy Asset
Management division, beneficial ownership of which was transferred to KBS pursuant to a collateral transfer and settlement
agreement dated September 1, 2011. The Bank of America Portfolio totals approximately 4.2 million rentable square feet and is
84% leased to Bank of America, N.A., under a master lease with expiration dates through 2024, with a total portfolio
occupancy of approximately 89%. At December 31, 2012, the investment has a carrying value of $72,541, and the Company
recorded its pro rata share of net income (loss) of the joint venture of ($3,020). The joint venture is currently analyzing
the fair value of the leases and the purchase price allocation has not been finalized.
Philips Building
The Company owns a 25% interest in the equity
owner of a fee interest in 200 Franklin Square Drive, a 200,000 square foot building located in Somerset, New Jersey which is
100% net leased to Philips Holdings, USA Inc., a wholly-owned subsidiary of Royal Philips Electronics through December 2021.
As of December 31, 2012 and December 31, 2011, the investment has a carrying value of $201 and $496, respectively. The Company
recorded its pro rata share of net income of the joint venture of $115, $121 and $120 for the years ended December 31, 2012, 2011
and 2010, respectively.
2 Herald Square
In April 2007, the Company purchased for
$103,200 a 45% Tenant-In-Common, or TIC, interest to acquire the fee interest in a parcel of land located at 2 Herald Square,
located along 34th Street in New York, New York. The acquisition was financed with a $86,063 ten-year fixed-rate mortgage loan.
The property is subject to a long-term ground lease with an unaffiliated third-party for a term of 70 years. The remaining TIC
interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. The Company sold its 45% interest
in December 2010 for a loss of $11,885. For the years ended December 31, 2012, 2011 and 2010 the Company recorded its pro rata
share of net income of $0, $0 and $5,078 respectively, within discontinued operations.
885 Third Avenue
In July 2007, the Company purchased for
$144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a
parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443
ten-year fixed-rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third-party.
The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. The Company sold
its 45% interest in December 2010 for a loss of $15,407. The Company recorded its pro rata share of net income of $0, $0 and $5,926
for the years ended December 31, 2012, 2011 and 2010 respectively, within discontinued operations.
Gramercy Capital
Corp.
Notes To Consolidated
Financial Statements
(Amounts in thousands,
except share and per share data)
December 31, 2012
5. Investments in Joint Ventures – (continued)
Citizens Portfolio
The Company, through its acquisition of
American Financial on April 1, 2008, obtained an interest in a joint venture with UBS. In October 2011, UBS contributed its 1%
ownership interest to the Company and the Company consolidated 100% of the joint venture interests and its accounts. In December
2011, pursuant to the Settlement Agreement, the Citizens Portfolio was transitioned to KBS, in exchange for a mutual release of
claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement
for the Company’s continued management of the assets on behalf of KBS. The Company transitioned 52 bank branches totaling
approximately 237,000 square feet to the mezzanine lender. These branches are fully occupied, on a triple-net basis, by Citizens
Bank, N.A. and Charter One Bank, N.A., two bank subsidiaries of Citizens Financial Group, Inc. The Company recorded its pro rata
share of net loss of $0, $0 and $2,884 for the years ended December 31, 2012, 2011 and 2010, respectively.
Whiteface Lodge
In April 2008, the Company acquired
via a deed-in-lieu of foreclosure, a 40% interest in the Whiteface Lodge, a hotel and condominium located in Lake Placid, New
York. In July 2010, the Company purchased the remaining 60% interest from the joint venture partner. In connection with the
acquisition, the Company controls 100% of the joint venture’s interest and has consolidated its accounts. The Company
has classified this as held-for-sale as of December 31, 2012 in connection with the disposal of Gramercy Finance. As
of December 31, 2010, the joint venture investment had a carrying value of $23,820. The Company recorded its pro rata share
of net loss of $0 and $1,375 for the years ended December 31, 2011 and 2010, respectively.
The Consolidated Balance Sheets for
the Company’s joint ventures at December 31, 2012 and 2011 are as follows:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Real estate assets, net
|
|
$
|
452,692
|
|
|
$
|
49,796
|
|
Other assets
|
|
|
219,760
|
|
|
|
8,546
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
672,452
|
|
|
$
|
58,342
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members' equity:
|
|
|
|
|
|
|
|
|
Mortgages payable
|
|
$
|
553,140
|
|
|
$
|
41,000
|
|
Other liabilities
|
|
|
90,255
|
|
|
|
1,711
|
|
Members' equity
|
|
|
29,057
|
|
|
|
15,631
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members' equity
|
|
$
|
672,452
|
|
|
$
|
58,342
|
|
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
5. Investments in Joint Ventures – (continued)
The Consolidated Statements
of Operations and Comprehensive Income (Loss) for the joint ventures for the three years ended December 31, 2012, 2011 and
2010 or partial period for acquisitions or dispositions which closed during these periods, are as follows:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
8,431
|
|
|
$
|
8,148
|
|
|
$
|
65,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
6,551
|
|
|
|
454
|
|
|
|
4,875
|
|
Interest
|
|
|
4,136
|
|
|
|
5,578
|
|
|
|
34,620
|
|
Depreciation
|
|
|
2,290
|
|
|
|
4,082
|
|
|
|
5,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
12,977
|
|
|
|
10,114
|
|
|
|
44,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from operations
|
|
|
(4,546
|
)
|
|
|
(1,966
|
)
|
|
|
20,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(4,546
|
)
|
|
$
|
(1,966
|
)
|
|
$
|
20,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company's equity in net loss
within continuing operations
|
|
$
|
(2,904
|
)
|
|
$
|
121
|
|
|
$
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company's equity in net
income within discontinued
operations
|
|
$
|
(5,611
|
)
|
|
$
|
(2,098
|
)
|
|
$
|
7,168
|
|
6. Liabilities Related to Assets Held-For-Sale
The Company classified Gramercy
Finance as held-for-sale as of December 31, 2012, and two properties as held-for-sale as of December 31, 2011. The following
table summarizes the liabilities related to assets held-for-sale as of December 31, 2012 and 2011:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Liabilities related to assets held-for-sale:
|
|
|
|
|
|
|
|
|
Collaterized debt obligations
|
|
$
|
2,188,597
|
|
|
$
|
2,468,810
|
|
Accounts payable and accrued expenses
|
|
|
10,552
|
|
|
|
6,922
|
|
Accrued interest payable
|
|
|
3,137
|
|
|
|
3,729
|
|
Deferred revenue
|
|
|
2,142
|
|
|
|
1,931
|
|
Below market lease liabilities, net
|
|
|
1,703
|
|
|
|
1,905
|
|
Derivative instruments, at fair value
|
|
|
173,623
|
|
|
|
175,915
|
|
Other liabilities
|
|
|
408
|
|
|
|
2,066
|
|
Total liabilities related to assets held-for-sale
|
|
|
2,380,162
|
|
|
|
2,661,278
|
|
Gramercy Capital
Corp.
Notes To Consolidated
Financial Statements
(Amounts in thousands,
except share and per share data)
December 31, 2012
6. Liabilities Related to Assets Held-For-Sale –
(continued)
Collateralized Debt Obligations
In the fourth quarter of 2012, the Company
classified its CDOs as held-for-sale in connection with the disposal of Gramercy Finance. The outstanding
debt is presented as a component of the liabilities related to assets held-for-sale on the Consolidated Balance Sheets.
During 2005, the Company issued approximately
$1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2005-1 Ltd., or the 2005 Issuer, and Gramercy
Real Estate CDO 2005-1 LLC, or the 2005 Co-Issuer. At issuance, the CDO consisted of $810,500 of investment grade notes, $84,500
of non-investment grade notes, which were co-issued by the 2005 Issuer and the 2005 Co-Issuer, and $105,000 of preferred shares,
which were issued by the 2005 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted
average rate of three-month LIBOR plus 0.49%. The Company incurred approximately $11,957 of costs related to Gramercy Real Estate
CDO 2005-1, which are amortized on a level-yield basis over the average life of the CDO.
During 2006, the Company issued approximately
$1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2006-1 Ltd., or the 2006 Issuer, and Gramercy
Real Estate CDO 2006-1 LLC, or the 2006 Co-Issuer. At issuance, the CDO consisted of $903,750 of investment grade notes, $38,750
of non-investment grade notes, which were co-issued by the 2006 Issuer and the 2006 Co-Issuer, and $57,500 of preferred shares,
which were issued by the 2006 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted
average rate of three-month LIBOR plus 0.37%. The Company incurred approximately $11,364 of costs related to Gramercy Real Estate
CDO 2006-1, which are amortized on a level-yield basis over the average life of the CDO.
In August 2007, the Company issued $1,100,000
of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 issuer and Gramercy Real Estate
CDO 2007-1 LLC, or the 2007 Co-Issuer. At issuance, the CDO consisted of $1,045,550 of investment grade notes, $22,000 of non-investment
grade notes, which were co-issued by the 2007 Issuer and the 2007 Co-Issuer, and $32,450 of preferred shares, which were issued
by the 2007 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of
three-month LIBOR plus 0.46%. The Company incurred approximately $16,816 of costs related to Gramercy Real Estate CDO 2007-1,
which are amortized on a level-yield basis over the average life of the CDO.
In connection with the closing of the
Company’s first CDO in July 2005, pursuant to the collateral management agreement, the Manager agreed to provide certain
advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the
CDO notes. The collateral management agreement provides for a senior collateral management fee, payable quarterly in accordance
with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance,
and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the
indenture, equal to 0.25% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of
the (i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal
balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted
securities, the calculation amount of such defaulted securities. The collateral management agreement for the Company’s 2006
CDO provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth
in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance, and a subordinate collateral management fee,
payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per annum of the net
outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral
debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible
investments in certain accounts, and (iii) with respect to the defaulted securities, the calculation amount of such defaulted
securities. The collateral management agreement for the Company’s 2007 CDO provides for a senior collateral management fee,
payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to (i) 0.05% per annum of the
aggregate principal balance of the CMBS securities, (ii) 0.10% per annum of the aggregate principal balance of loans, preferred
equity securities, cash and certain defaulted securities, and (iii) a subordinate collateral management fee, payable quarterly
in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the aggregate principal
balance of the loans, preferred equity securities, cash and certain defaulted securities.
The Company retained all
non-investment grade securities, the preferred shares and the ordinary shares in the Issuer of each CDO. The Issuers
and Co-Issuers in each CDO holds assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine
loans, preferred equity investments and CMBS, which serve as collateral for the CDO. Each CDO may be replenished, pursuant to
certain rating agency guidelines relating to credit quality and diversification, with substitute collateral using cash
generated by debt investments that are repaid during the reinvestment periods (generally, five years from issuance) of the
CDO. Thereafter, the CDO securities will be retired in sequential order from senior-most to junior-most as debt investments
are repaid. The financial statements of the Issuer of each CDO are consolidated in the Company’s financial statements.
The securities originally rated as investment grade at time of issuance are treated as a secured financing, and are
non-recourse to the Company. Proceeds from the sale of the securities originally rated as investment grade in each CDO were
used to repay substantially all outstanding debt under the Company’s repurchase agreements and to fund additional
investments.
Gramercy Capital
Corp.
Notes To Consolidated
Financial Statements
(Amounts in thousands,
except share and per share data)
December 31, 2012
6. Liabilities Related to Assets Held-For-Sale –
(continued)
The following table provides a summary of the outstanding
CDO debt and the underlying collateral of the Company’s CDOs as of December 31, 2012:
|
|
|
|
|
Underlying Collateral
|
|
|
|
Outstanding
Debt
|
|
|
Loans
|
|
|
CMBS Investments
|
|
|
Cash
|
|
|
|
Face
Value
|
|
|
Unpaid
Principal
Balance
|
|
|
Carrying
Value
(1)
|
|
|
Non-performing
Loans as a % of
Carrying Value
|
|
|
Face
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Non-investment Grade
CMBS as a % of
Fair Value
|
|
|
Restricted
Cash
|
|
CDO 2005-1
|
|
$
|
525,085
|
|
|
$
|
271,272
|
|
|
$
|
236,228
|
|
|
|
0.0
|
%
|
|
$
|
231,669
|
|
|
$
|
163,087
|
|
|
$
|
216,691
|
|
|
|
38.8
|
%
|
|
$
|
33,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDO 2006-1
|
|
|
640,832
|
|
|
|
461,091
|
|
|
|
439,348
|
|
|
|
0.0
|
%
|
|
|
133,289
|
|
|
|
78,967
|
|
|
|
91,589
|
|
|
|
71.9
|
%
|
|
|
12,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDO 2007-1
|
|
|
1,022,571
|
|
|
|
172,749
|
|
|
|
172,215
|
|
|
|
1.7
|
%
|
|
|
814,844
|
|
|
|
733,608
|
|
|
|
623,985
|
|
|
|
80.3
|
%
|
|
|
14,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CDOs
|
|
$
|
2,188,488
|
|
|
$
|
905,112
|
|
|
$
|
847,791
|
|
|
|
0.4
|
%
|
|
$
|
1,179,802
|
|
|
$
|
975,662
|
|
|
$
|
932,265
|
|
|
|
69.8
|
%
|
|
$
|
60,370
|
|
|
(1)
|
The loans held as collateral for the CDOs include loans
with an unpaid principal balance and carrying value of $10,943 in CDO 2005-1 and loans with an unpaid principal balance and carrying
value of $52,786 in CDO 2006-1 which are collateralized by real estate owned by the Company and are eliminated in consolidation.
|
Loans and other investments are owned by
the Issuers and the Co-Issuers, serve as collateral for the Company’s CDO securities, and the income generated from these
investments is used to fund interest obligations of the Company’s CDO securities and the remaining income, if any, is retained
by the Company. The CDO indentures contain minimum interest coverage and asset overcollateralization covenants that must be satisfied
in order for the Company to receive cash flow on the interests retained in its CDOs and to receive the subordinate collateral management fee earned. If some or all of the Company’s
CDOs fail these covenants, all cash flows from the applicable CDO other than senior collateral management fees would be diverted
to repay principal and interest on the most senior outstanding CDO securities, and the Company may not receive some or all residual
payments or the subordinate collateral management fee until the applicable CDO regained compliance with such tests. As of January
2013, the most recent distribution date, the Company’s 2005 and 2006 CDO failed its asset overcollateralization covenants.
The Company’s 2005 CDO failed its overcollateralization test at the October 2012 distribution date and previously failed
its overcollateralization tests at the July 2012, October 2011, April 2011 and January 2011 distribution dates. The Company’s
2006 CDO failed its overcollateralization test at the October 2012 distribution date. The Company’s 2007 CDO failed its
overcollateralization test beginning with the November 2009 distribution date. It is unlikely that the 2005, 2006, and 2007 CDO’s
overcollateralization tests will be satisfied in the foreseeable future. During periods when the overcollateralization tests for
the Company’s CDOs are not met, cash flows that the Company would otherwise receive are significantly curtailed.
On March 14, 2012, an interest payment due
on a CMBS investment owned by the Company’s 2007 CDO was not received for the third consecutive interest payment date, which
caused the CMBS investment to be classified as a Defaulted Security under the 2007 CDO’s indenture. This classification
caused the Class A/B Par Value Ratio for the 2007 CDO notes to fall to 88.86% in breach of the Class A/B overcollateralization
test threshold of 89%. This breach constitutes an event of default under the operative documents for the 2007 CDO. Upon such an
event of default, the reinvestment period of the 2007 CDO, which is scheduled to expire in August 2012, would have immediately
ended and the Company would have lost its ability to reinvest restricted cash held by the 2007 CDO. Additionally, an event of
default would have entitled the controlling class to direct the Trustee to accelerate the notes of the 2007 CDO and, depending
on the circumstances, force the prompt liquidation of the collateral. Pursuant to a letter dated in March 2012, a majority of
the controlling class of senior note holders waived the related event of default and further agreed to waive any subsequent event
of default related to the Class A/B overcollateralization test that may occur hereafter until the earlier of January 30, 2014
or the date that written instructions to the contrary are provided by such majority of the controlling class to the Trustee. The
majority of the controlling class has reserved the right to revoke or extend such waiver at any time.
The future principal and interest obligations
for the Company’s CDOs, which are held-for-sale at December 31, 2012, are as follows:
|
|
CDOs
|
|
|
Interest
Payments
|
|
|
Total
|
|
2013
|
|
$
|
-
|
|
|
$
|
69,958
|
|
|
$
|
69,958
|
|
2014
|
|
|
-
|
|
|
|
68,643
|
|
|
|
68,643
|
|
2015
|
|
|
-
|
|
|
|
69,418
|
|
|
|
69,418
|
|
2016
|
|
|
-
|
|
|
|
72,813
|
|
|
|
72,813
|
|
2017
|
|
|
-
|
|
|
|
55,700
|
|
|
|
55,700
|
|
Thereafter
|
|
|
2,188,597
|
|
|
|
6,725
|
|
|
|
2,195,322
|
|
Total
|
|
$
|
2,188,597
|
|
|
$
|
343,257
|
|
|
$
|
2,531,854
|
|
Gramercy Capital
Corp.
Notes To Consolidated
Financial Statements
(Amounts in thousands,
except share and per share data)
December 31, 2012
6. Liabilities Related to Assets Held-For-Sale –
(continued)
During the year ended December 31, 2012,
the Company did not repurchase any notes previously issued by two of its three CDOs. During the year ended December 31, 2011,
the Company repurchased, at a discount, $49,259 of notes previously issued by two of its three CDOs. The Company recorded a net
gain on the early extinguishment of debt of $15,275 for the year ended December 31, 2011, in connection with the repurchase of
notes of such Issuers.
Derivative Instruments
Derivative assets with a notional value of $200,129 and a fair
value of $173 and derivative liabilities with a notional value of $1,005,087 and a fair value of $173,623 are held within the Company’s
CDOs and are classified as held-for-sale at December 31, 2012. These derivative instruments are designated as cash flow hedges,
and will be transferred with the CDOs’ liabilities in connection with the disposal of Gramercy Finance. The Company has three
interest rate caps that are held outside of the CDOs with a notional value of $89,726 and a fair value of $0, which will remain
with the Company subsequent to the disposal of Gramercy Finance.
The Company recognizes all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the
change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will
be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and stockholders’
equity prospectively, depending on future levels of LIBOR interest rates and other variables affecting the fair values of derivative
instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.
The following table summarizes the notional
and fair value of the Company’s derivative financial instruments at December 31, 2012. The notional value is an indication
of the extent of the Company’s involvement in this instrument at that time, but does not represent exposure to credit, interest
rate or market risks:
|
|
Benchmark Rate
|
|
Notional
Value
|
|
|
Strike
Rate
|
|
|
Effective
Date
|
|
Expiration
Date
|
|
Fair
Value
|
|
Assets of Non-VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Cap
|
|
3 month LIBOR
|
|
$
|
38,500
|
|
|
|
6.00
|
%
|
|
Jul-12
|
|
Jul-13
|
|
$
|
-
|
|
Interest Rate Cap
|
|
1 month LIBOR
|
|
|
24,000
|
|
|
|
5.00
|
%
|
|
Jul-11
|
|
Aug-14
|
|
|
-
|
|
Interest Rate Cap
|
|
1 month LIBOR
|
|
|
27,226
|
|
|
|
4.50
|
%
|
|
Jul-12
|
|
Jun-13
|
|
|
-
|
|
|
|
|
|
$
|
89,726
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of Consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Cap
|
|
3 month LIBOR
|
|
|
10,387
|
|
|
|
4.73
|
%
|
|
Dec-10
|
|
Feb-15
|
|
|
-
|
|
Interest Rate Cap
|
|
3 month LIBOR
|
|
|
8,877
|
|
|
|
5.04
|
%
|
|
Oct-10
|
|
Feb-16
|
|
|
3
|
|
Interest Rate Cap
|
|
3 month LIBOR
|
|
|
47,000
|
|
|
|
7.95
|
%
|
|
Jun-11
|
|
Feb-17
|
|
|
24
|
|
Interest Rate Cap
|
|
3 month LIBOR
|
|
|
12,300
|
|
|
|
7.95
|
%
|
|
Jul-11
|
|
Feb-17
|
|
|
6
|
|
Interest Rate Cap
|
|
3 month LIBOR
|
|
|
23,000
|
|
|
|
4.96
|
%
|
|
Jun-10
|
|
Apr-17
|
|
|
13
|
|
Interest Rate Cap
|
|
3 month LIBOR
|
|
|
48,945
|
|
|
|
4.80
|
%
|
|
Mar-10
|
|
Jul-17
|
|
|
65
|
|
Interest Rate Cap
|
|
3 month LIBOR
|
|
|
49,620
|
|
|
|
4.92
|
%
|
|
Jun-11
|
|
Jul-17
|
|
|
62
|
|
|
|
|
|
|
200,129
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
Liabilities of Consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap
|
|
3 month LIBOR
|
|
|
10,000
|
|
|
|
3.92
|
%
|
|
Oct-08
|
|
Oct-13
|
|
|
(294
|
)
|
Interest Rate Swap
|
|
3 month LIBOR
|
|
|
17,500
|
|
|
|
3.92
|
%
|
|
Oct-08
|
|
Oct-13
|
|
|
(515
|
)
|
Interest Rate Swap
|
|
1 month LIBOR
|
|
|
8,627
|
|
|
|
4.26
|
%
|
|
Aug-08
|
|
Jan-15
|
|
|
(688
|
)
|
Interest Rate Swap
|
|
3 month LIBOR
|
|
|
14,650
|
|
|
|
4.43
|
%
|
|
Nov-07
|
|
Jul-15
|
|
|
(1,479
|
)
|
Interest Rate Swap
|
|
3 month LIBOR
|
|
|
24,143
|
|
|
|
5.11
|
%
|
|
Feb-08
|
|
Jan-17
|
|
|
(4,200
|
)
|
Interest Rate Swap
|
|
3 month LIBOR
|
|
|
214,312
|
|
|
|
5.41
|
%
|
|
Aug-07
|
|
May-17
|
|
|
(34,653
|
)
|
Interest Rate Swap
|
|
3 month LIBOR
|
|
|
16,412
|
|
|
|
5.20
|
%
|
|
Feb-08
|
|
May-17
|
|
|
(3,128
|
)
|
Interest Rate Swap
|
|
3 month LIBOR
|
|
|
699,443
|
|
|
|
5.33
|
%
|
|
Aug-07
|
|
Jan-18
|
|
|
(128,666
|
)
|
|
|
|
|
|
1,005,087
|
|
|
|
|
|
|
|
|
|
|
|
(173,623
|
)
|
Total
|
|
|
|
$
|
1,294,942
|
|
|
|
|
|
|
|
|
|
|
$
|
(173,450
|
)
|
Gramercy Capital
Corp.
Notes To Consolidated
Financial Statements
(Amounts in thousands,
except share and per share data)
December 31, 2012
6. Liabilities Related to Assets Held-For-Sale –
(continued)
The Company is hedging exposure to variability
in future interest payments on its debt facilities. At December 31, 2012 and 2011, derivative instruments were reported at their
fair value as a net liability of $173,450 and $174,996, respectively. Offsetting adjustments are represented as deferred gains
or (losses) in Accumulated Other Comprehensive Income of ($2,146) and $19,334, which includes the amortization of gain or (loss)
on terminated hedges of $399 and $400 for the years ended December 31, 2012 and 2011, respectively. The Company anticipates recognizing
approximately $395 in amortization over the next 12 months. For the years ended December 31, 2012, 2011 and 2010, the Company
recognized decreases to interest expense of $217, $169 and $207, respectively, attributable to any ineffective component of its
derivative instruments designated as cash flow hedges. Currently, all but three derivative instruments are designated as cash flow
hedging instruments. Over time, the realized and unrealized gains and losses held in Accumulated Other Comprehensive Income will
be reclassified into earnings in the same periods in which the hedged interest payments affect earnings.
Other Liabilities Related to Assets Held-For-Sale
The Company has other liabilities related to assets held for
sale primarily consisting of accrued expenses and accounts payable related to accrued legal fees and operating expenses of real
estate and interest payable related to the outstanding CDO debt.
Gramercy Capital
Corp.
Notes To Consolidated
Financial Statements
(Amounts in thousands,
except share and per share data)
December 31, 2012
7. Debt Obligations
Certain real estate assets were subject
to mortgage and mezzanine liens. In September 2011, the Company entered into the Settlement Agreement for an orderly transition
of substantially all of Gramercy Asset Management’s assets to KBS, in full satisfaction of Gramercy Asset Management’s obligations with
respect to the Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among us and
the mortgage and mezzanine lenders and, subject to certain termination provisions, the Company’s continued management of
Gramercy Asset Management’s assets on behalf of KBS for a fixed fee plus incentive fees. On September 1, 2011 and on December 1, 2011,
the Company transferred to KBS or its affiliates, interests in entities owning 317 and 116, respectively, of the 867 Gramercy
Asset Management properties that the Company agreed to transfer pursuant to the Settlement Agreement and the remaining ownership interests
were transferred to KBS by December 15, 2011. The aggregate carrying value for the interests transferred to KBS was approximately
$2.63 billion. In July 2011, the Dana portfolio, which consisted of 15 properties totaling approximately 3.8 million rentable
square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure.
Goldman Mortgage Loan
On April 1, 2008, certain subsidiaries of
the Company, collectively, the Goldman Loan Borrowers, entered into a mortgage loan agreement, with GSMC, Citicorp and SL Green
in connection with a mortgage loan in the amount of $250,000, which is secured by certain properties owned or ground leased by
the Goldman Loan Borrowers. The Goldman Mortgage Loan had an initial maturity date of March 9, 2010, with a single one-year extension
option. The Goldman Mortgage Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mortgage Loan provided for customary
events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mortgage Loan.
The Goldman Mortgage Loan allowed for prepayment under the terms of the agreement, as long as simultaneously therewith a proportionate
prepayment of the Goldman Mezzanine Loan (discussed below) was also pre-paid. In August 2008, an amendment to the loan agreement
described below was entered into for the Goldman Mortgage Loan in conjunction with the bifurcation of the Goldman Mezzanine loan
into two separate mezzanine loans. Under this loan agreement amendment, the Goldman Mortgage Loan bore interest at 1.99% over
LIBOR. The Company had accrued interest of $256 and borrowings of $240,523 as of December 31, 2010.
In March 2010, the Company extended the
maturity date of the Goldman Mortgage Loan to March 2011, and amended certain terms of the loan agreement, including, among others,
(i) a prohibition on distributions from the Goldman Loan Borrowers to the Company, other than to cover direct costs related to
executing the extension and reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated
to Gramercy Asset Management, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of
the Goldman Mortgage Loan extension term, and (iii) within 90 days after the first day of the Goldman Mortgage Loan extension
term, delivery by the Goldman Loan Borrowers to GSMC, Citicorp and SL Green of a comprehensive long-term business plan and restructuring
proposal addressing repayment of the Goldman Mortgage Loan. Subsequent to the final maturity of the Goldman Mortgage Loan and
the Goldman Mezzanine Loans, the Company entered into a series of short term extensions to provide additional time to exchange
and consider proposals for an extension, modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman
Mezzanine Loans and to explore an orderly transition of the collateral to the lenders if such discussions failed. On May 9, 2011,
the Company announced that the scheduled maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without
repayment and without an extension or restructuring of the loans by the lenders.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
7. Debt Obligations – (continued)
Notwithstanding the maturity and non-repayment
of the loans, the Company maintained active communications with the lenders and in September 2011, the Company entered into the
Settlement Agreement for an orderly transition of substantially all of Gramercy Asset Management’s assets to KBS, Gramercy Asset Management’s
senior mezzanine lender, in full satisfaction of Gramercy Asset Management’s obligations with respect to the Goldman Mortgage Loan
and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders
and, subject to certain termination provisions, the Company’s continued management of Gramercy Asset Management’s assets on
behalf of KBS for a fixed fee plus incentive fees. On September 1, 2011 and on December 1, 2011, the Company transferred to KBS
or its affiliates, interests in entities owning 317 and 116, respectively, of the 867 Gramercy Asset Management properties that the Company
agreed to transfer pursuant to the Settlement Agreement and the remaining ownership interests were transferred to KBS by December
15, 2011. The aggregate carrying value for the interests transferred to KBS was $2,631,902. In July 2011, the Dana portfolio,
which consisted of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender
through a deed in lieu of foreclosure. For further discussion of the impact of the Settlement Agreement and the transfer of the
Dana portfolio, see Settlement and Extinguishment of Debt within Note 2 to the Consolidated Financial Statements.
Goldman Senior and Junior Mezzanine Loans
On April 1, 2008, certain subsidiaries of
the Company, collectively, the Mezzanine Borrowers, entered into a mezzanine loan agreement with GSMC, Citicorp and SL Green in
connection with a mezzanine loan in the amount of $600,000, or the Goldman Mezzanine Loan, which was secured by pledges of certain
equity interests owned by the Mezzanine Borrowers and any amounts receivable by the Mezzanine Borrowers whether by way of
distributions or other sources. The Goldman Mezzanine Loan had an initial maturity date of March 9, 2010, with a single one-year
extension option. The Goldman Mezzanine Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mezzanine Loan provided
for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman
Mezzanine Loan. The Goldman Mezzanine Loan allowed for prepayment under the terms of the agreement, subject to a 1.00% prepayment
fee during the first six months, payable to the lender, as long as simultaneously therewith a proportionate prepayment of the
Goldman Mortgage Loan was also made on such date. In addition, under certain circumstances the Goldman Mezzanine Loan was cross-defaulted
with events of default under the Goldman Mortgage Loan and with other mortgage loans pursuant to which, an indirect wholly-owned
subsidiary of the Company, is the mortgagor. In August 2008, the $600,000 mezzanine loan was bifurcated into two separate mezzanine
loans (the Junior Mezzanine loan and the Senior Mezzanine Loan) by the lenders. Additional loan agreement amendments were entered
into for the Goldman Mezzanine Loan and Goldman Mortgage Loan. Under these loan agreement amendments, the Junior Mezzanine Loan
bore interest at 6.00% over LIBOR, the Senior Mezzanine Loan bore interest at 5.20% over LIBOR and the Goldman Mortgage Loan bore
interest at 1.99% over LIBOR. The weighted average of these interest rate spreads was equal to the combined weighted average of
the interest rates spreads on the initial loans. The Goldman Mezzanine loans encumber all properties held by Gramercy Asset Management.
The Company had accrued interest of $1,454 and borrowings of $549,713 as of December 31, 2010.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
7. Debt Obligations – (continued)
In March 2010, the Company extended the
maturity date of the Goldman Mezzanine Loans to March 2011, and amended certain terms of the Senior Mezzanine Loan agreement and
the Junior Mezzanine Loan agreement, including, among others, with respect to the Senior Mezzanine Loan agreement, (i) a prohibition
on distributions from the Senior Mezzanine Loan borrowers to the Company, other than to cover direct costs related to executing
the extension and reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy
Asset Management, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Senior
Mezzanine Loan extension term and agreement, upon request, to grant a security interest in that account to KBS, and (iii) within
90 days after the first day of the Senior Mezzanine Loan extension term, delivery by the Senior Mezzanine Loan borrowers to KBS
of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Senior Mezzanine Loan, and with
respect to the Junior Mezzanine Loan agreement, (i) a prohibition on distributions from the Junior Mezzanine Loan borrower to
the Company, other than to cover direct costs related to executing the extension and reimbursement of not more than $2,500 per
quarter of corporate overhead actually incurred and allocated to Gramercy Asset Management, (ii) requirement of $5,000 of available cash
on deposit in a designated account on the commencement date of the Junior Mezzanine Loan extension term and agreement, upon request,
to grant a security interest in that account to GSMC, Citicorp and SL Green, and (iii) within 90 days after the first day of the
Junior Mezzanine Loan extension term, delivery by the Junior Mezzanine Loan borrower to GSMC, Citicorp and SL Green of a comprehensive
long-term business plan and restructuring proposal addressing repayment of the Junior Mezzanine Loan. Subsequent to the final
maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the Company entered into a series of short term extensions
to provide additional time to exchange and consider proposals for an extension, modification, restructuring or refinancing of
the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral to the lenders
if such discussions failed. On May 9, 2011, the Company announced that the scheduled maturity of the Goldman Mortgage Loan and
the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.
Notwithstanding the maturity and non-repayment
of the loans, the Company maintained active communications with the lenders and in September 2011, the Company entered into the
Settlement Agreement, for an orderly transition of substantially all of Gramercy Asset Management’s assets to KBS, in full satisfaction
of Gramercy Asset Management’s obligations with respect to the Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange
for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions,
the Company’s continued management of Gramercy Asset Management’s assets on behalf of KBS for a fixed fee plus incentive fees.
On September 1, 2011 and on December 1, 2011, the Company transferred to KBS or its affiliates, interests in entities owning 317
and 116, respectively, of the 867 Gramercy Asset Management properties that the Company agreed to transfer pursuant to the Settlement Agreement
and the remaining ownership interests were transferred to KBS by December 15, 2011. The aggregate carrying value for the interests
transferred to KBS was $2,631,902. In July 2011, the Dana portfolio, which consists of 15 properties totaling approximately 3.8
million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure.
8. Leasing Agreements
The Company’s properties are leased
and subleased to tenants under operating leases with expiration dates extending through the year 2024. These leases generally
contain rent increases and renewal options.
Future minimum rental income under
non-cancelable leases including properties held-for-sale in connection with the disposal of Gramercy Finance and
excluding reimbursements for operating expenses as of December 31, 2012 are as follows:
|
|
Operating
Leases
|
|
2013
|
|
$
|
3,779
|
|
2014
|
|
|
3,865
|
|
2015
|
|
|
3,897
|
|
2016
|
|
|
3,799
|
|
2017
|
|
|
3,668
|
|
Thereafter
|
|
|
15,467
|
|
Total minimum rental income
|
|
$
|
34,475
|
|
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
9. Related Party Transactions
The Chief Executive Officer of SL Green
Realty Corp. (NYSE: SLG), or SL Green, is one of the Company’s directors.
An affiliate of SL Green provides special
servicing services with respect to a limited number of loans owned by the Company’s CDOs that are secured by properties
in New York City, or in which the Company and SL Green are co-investors. For the years ended December 31, 2012, 2011, and 2010,
the Company incurred expense of $0, $3,058, and $477, respectively pursuant to the special servicing arrangement.
Commencing in May 2005, the Company is party
to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for its corporate offices at 420 Lexington Avenue,
New York, New York. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately
$249 per annum for year one rising to $315 per annum in year ten. In May and June 2009, the Company amended its lease with SLG
Graybar Sublease LLC to increase the leased premises by approximately 2,260 square feet. The additional premises is leased on
a co-terminus basis with the remainder of the Company’s leased premises and carries rents of approximately $103 per annum
during the initial year and $123 per annum during the final lease year. On June 25, 2012, the lease was amended to reduce the
leased premises by approximately 600 square feet and to reduce rents by approximately $29 per annum during the initial year and
$38 per annum during the final lease year. All other terms of the lease remain unchanged, except the Company now has the right
to cancel the lease with 90 days notice. For the year ended December 31, 2012, 2011 and 2010, the Company paid $361, $307 and
$339 under this lease, respectively.
In April 2007, the Company purchased for
$103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34
th
Street in New York, New York. The acquisition was financed with $86,063 10- year fixed rate mortgage loan. The property
is subject to a long-term ground lease with an unaffiliated third-party for a term of 70 years. The remaining TIC interest is
owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. The Company sold its 45% interest in December
2010 to a wholly-owned subsidiary of SL Green for net proceeds of $25,350, resulting in a loss of $11,885. The Company recorded
its pro rata share of net income of $5,078 ended December 31, 2010, within discontinued operations.
In July 2007, the Company purchased for
$144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a
parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443
10-year fixed rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third-party.
The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu. The Company sold
its 45% interest in December 2010 to a wholly-owned subsidiary of SL Green for net proceeds of $38,911, resulting in a loss of
$15,407. The Company recorded its pro rata share of net income of $5,926 for the year ended December 31, 2010, within discontinued operations.
In December 2010, the Company sold its interest
in a parcel of land located at 292 Madison Avenue in New York, New York to a wholly-owned subsidiary of SL Green. The Company
received proceeds of $16,765 and recorded an impairment charge of $9,759, within discontinued operations.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
10. Deferred Costs
Deferred costs at December 31, 2012 and
2011 consisted of the following:
|
|
2012
|
|
|
2011
|
|
Deferred Financing Costs
|
|
$
|
44,077
|
|
|
$
|
47,035
|
|
Deferred Acquisition Costs
|
|
|
146
|
|
|
|
256
|
|
Deferred Leasing Costs
|
|
|
245
|
|
|
|
214
|
|
|
|
|
44,468
|
|
|
|
47,505
|
|
Accumulated Amortization
|
|
|
(37,587
|
)
|
|
|
(36,398
|
)
|
|
|
|
6,881
|
|
|
|
11,107
|
|
Less: Held for Sale
|
|
|
(6,466
|
)
|
|
|
(9,216
|
)
|
|
|
$
|
415
|
|
|
$
|
1,891
|
|
At December 31, 2012, deferred
financing costs relate to the Company’s CDOs which are included in Gramercy Finance and classified as held-for-sale.
These costs are amortized on a straight-line basis to interest expense based on the contractual term of the related
financing.
Deferred acquisition costs consist of fees
and direct costs incurred to originate the Company’s investments and are amortized using the effective yield method over
the related term of the investment. Straight-line expense approximates the effective interest method.
Deferred leasing costs include direct costs
incurred to initiate and renew operating leases and are amortized on a straight-line basis over the related lease term.
11. Fair Value of Financial Instruments
The Company discloses fair value information
about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair values are based upon the application of discount
rates to estimated future cash flows based upon market yields or by using other valuation methodologies. Considerable judgment
is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative
of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions
and/or estimation methodologies may have a material effect on estimated fair value amounts.
In connection with the Company’s
disposal of Gramercy Finance and the subsequent exit from the commercial real estate finance business, more fully described
in Note 3 – “Dispositions and Assets Held for Sale”, the Company recorded impairment charges of $155,267 on
its loan investments, CMBS investments, and real estate held by the CDOs as a result of the reclassification of all
loan investments and real estate held by the CDOs as held-for-sale and the inability to express the intent to hold impaired
CMBS investments until amortized cost is recovered.
Gramercy Capital
Corp.
Notes To Consolidated
Financial Statements
(Amounts in thousands,
except share and per share data)
December 31, 2012
11. Fair Value of Financial Instruments –
(continued)
The following table presents the carrying
value in the financial statements, and approximate fair value of financial instruments at December 31, 2012 and 2011:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending investments
(1), (2)
|
|
$
|
784,135
|
|
|
$
|
816,283
|
|
|
$
|
1,081,919
|
|
|
$
|
1,060,646
|
|
CMBS
(2)
|
|
$
|
932,265
|
|
|
$
|
932,265
|
|
|
$
|
775,812
|
|
|
$
|
775,812
|
|
Derivative instruments
(2)
|
|
$
|
173
|
|
|
$
|
173
|
|
|
$
|
919
|
|
|
$
|
919
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
(1), (2)
|
|
$
|
2,188,579
|
|
|
$
|
1,474,236
|
|
|
$
|
2,468,810
|
|
|
$
|
1,509,907
|
|
Derivative instruments
(2)
|
|
$
|
173,623
|
|
|
$
|
173,623
|
|
|
$
|
175,915
|
|
|
$
|
175,915
|
|
|
(1)
|
Lending investments and CDOs are classified
as Level III due to the significance of unobservable inputs which are
based upon management assumptions.
|
|
(2)
|
In connection with the disposal of Gramercy Finance, lending investments,
CMBS investments, derivative
instruments, and collateralized debt obligations are classified as
held-for-sale as of December 31, 2012.
|
The following methods and assumptions were
used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value:
Cash and cash equivalents, accrued interest,
and accounts payable
: These balances in the Consolidated Financial Statements reasonably approximate their fair
values due to the short maturities of these items.
Lending investments
: These instruments
are presented in the Consolidated Financial Statements at the lower of cost or market value and not at fair value. The
fair values were estimated by using market floating rate and fixed rate yields (as appropriate) for loans with similar credit
characteristics.
CMBS investments
: These investments
are presented in the Consolidated Financial Statements at fair value. The fair values were based upon valuations obtained
from dealers of those securities, third-party pricing services, and internal models.
Collateralized debt obligations
:
These obligations are presented in the Consolidated Financial Statements on the basis of proceeds received at issuance
and not at fair value. The fair value was estimated based upon the amount at which similarly placed financial instruments would
be valued at December 31, 2012.
Derivative instruments
: The Company’s
derivative instruments, which are primarily comprised of interest rate swap agreements, are carried at fair value in the Consolidated Financial Statements based upon third-party valuations.
Disclosure about fair value of
financial instruments is based on pertinent information available to the Company at December 31, 2012 and 2011. Although the
Company is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not
been comprehensively revalued for the purpose of these financial statements since December 31, 2012 and 2011, and current
estimates of fair value may differ significantly from the amounts presented herein.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
11. Fair Value of Financial Instruments – (continued)
The following discussion of fair value was
determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is
necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of
the amounts the Company could realize on disposition of the financial instruments. Financial instruments with readily available
actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of
pricing observability and a lower degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely
traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring
fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair
value amounts. Determining which category an asset or liability falls within the hierarchy requires significant judgment and the
Company evaluates its hierarchy disclosures each quarter.
Fair Value on a Recurring Basis
Assets and liabilities measured at fair
value on a recurring basis are categorized in the table below based upon the lowest level of significant input to the valuations.
At December 31, 2012
|
|
Total
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
$
|
173
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
173
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
173
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
$
|
281,495
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
281,495
|
|
Non-investment grade
|
|
|
650,770
|
|
|
|
-
|
|
|
|
-
|
|
|
|
650,770
|
|
|
|
$
|
932,265
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
932,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
$
|
173,623
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
173,623
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
173,623
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
173,623
|
|
At December 31, 2011
|
|
Total
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
$
|
919
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
919
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
919
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
$
|
444,113
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
444,113
|
|
Non-investment grade
|
|
|
331,699
|
|
|
|
-
|
|
|
|
-
|
|
|
|
331,699
|
|
|
|
$
|
775,812
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
775,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
175,915
|
|
|
|
-
|
|
|
|
-
|
|
|
|
175,915
|
|
|
|
$
|
175,915
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
175,915
|
|
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
11. Fair Value of Financial Instruments – (continued)
Derivative instruments:
Interest rate caps and swaps were valued with the assistance of a third-party derivative specialist, who uses a combination
of observable market-based inputs, such as interest rate curves, and unobservable inputs which require significant judgment
such as the credit valuation adjustments due to the risk of non-performance by both the Company and its counterparties. The
fair value of derivatives classified as Level III are most sensitive to the credit valuation adjustment as all or a portion
of the credit valuation adjustment may be reversed or otherwise adjusted in future periods in the event of changes in the
credit risk of the Company or its counterparties. See Note 15 for additional details on the Company’s interest rate
caps and swaps.
Total losses or (gains) from derivatives
for the year ended December 31, 2012 and 2011 are ($2,146) and $19,334, respectively, and are included in Accumulated Other Comprehensive
Loss. During the year ended December 31, 2012, the Company entered into three interest rate caps.
CMBS:
CMBS securities
are generally valued on a recurring basis by (i) obtaining assessments from third-party dealers who primarily use
market-based inputs such as changes in interest rates and credit spreads, along with recent comparable trade data; and (ii)
pricing services who use a combination of market-based inputs along with unobservable inputs that require significant
judgment, such as assumptions on the underlying loans regarding net property operating income, capitalization rates, debt
service coverage ratios and loan-to-value default thresholds, timing of workouts and recoveries, and loan loss severities.
Third-party dealer marks, which are used to value the majority of the Company’s CMBS securities, are indications
received from dealers in the respective security, from which the Company could transact at on the valuation date. The Company
uses all data points obtained, including comparable trades completed by the Company or available in the market place in
determining its fair value of CMBS. Pricing service models are designed to replicate
a market view of the underlying collateral, however, the models are most sensitive to the unobservable inputs such as timing
of loan defaults and severity of loan losses and significant increases (decreases) in any of those inputs in isolation
as well as any change in the expected timing of those inputs, would result in a significantly lower (higher) fair value
measurement. Due to the inherent uncertainty in the determination of
fair value, the Company has designated its CMBS securities as Level III.
The following table reconciles the beginning
and ending balances of financial assets measured at fair value on a recurring basis using Level III inputs:
|
|
CMBS Available
for sale - Investment
Grade
|
|
|
CMBS Available
for Sale -Non-
Investment Grade
|
|
|
Derivative
Instruments
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
$
|
444,113
|
|
|
$
|
331,699
|
|
|
$
|
919
|
|
Transfers from securites held to maturity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Purchases of CMBS investments
|
|
|
535
|
|
|
|
-
|
|
|
|
-
|
|
Change in CMBS investment status
|
|
|
(207,650
|
)
|
|
|
207,650
|
|
|
|
-
|
|
Purchases of derivative investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of discounts or premiums
|
|
|
7,718
|
|
|
|
6,520
|
|
|
|
-
|
|
Proceeds from CMBS principal repayments
|
|
|
(32,651
|
)
|
|
|
-
|
|
|
|
-
|
|
Adjustments to fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income
|
|
|
69,430
|
|
|
|
274,098
|
|
|
|
(746
|
)
|
Gain (loss) from sales of CMBS investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other-than-temporary impairments recognized in earnings
|
|
|
-
|
|
|
|
(169,197
|
)
|
|
|
-
|
|
Balance as of December 31, 2012
|
|
$
|
281,495
|
|
|
$
|
650,770
|
|
|
$
|
173
|
|
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
11. Fair Value of Financial Instruments – (continued)
The following roll forward table reconciles
the beginning and ending balances of financial liabilities measured at fair value on a recurring basis using Level III inputs:
|
|
Derivative
Instruments - Interest
Rate Swaps
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
$
|
175,915
|
|
Purchases of derivative investments
|
|
|
-
|
|
Adjustments to fair value:
|
|
|
|
|
Unrealized loss
|
|
|
(2,292
|
)
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
173,623
|
|
Fair Value on a Non-Recurring Basis
The Company uses fair value
measurements on a non-recurring basis in its assessment of fair value on loans and other lending investments that have
been written down to fair value as a result of valuation allowances established for loan losses and loans and other lending
investments classified as held-for-sale to adjust the carrying value to the lower of cost or fair value. As of December 31,
2012, in connection with the disposal of Gramercy Finance, the Company classified all of its loan investments
as held-for-sale, and recorded impairments of $882 on seven loans. This differs from the Company’s determination
of allowances for loan losses as the Company considered the value that a purchaser would be willing to acquire the asset at
December 31, 2012 instead of at the ultimate resolution of the asset.
The Company recorded $35,043 in
impairments on real estate held-for-sale to adjust the carrying value to the lower of cost or market value of which $26,298
was related to the disposal of Gramercy Finance.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
11. Fair Value of Financial Instruments – (continued)
The following table shows the fair value
hierarchy for those assets measured at fair value on a non-recurring basis based upon the lowest level of significant input to
the valuations for which a non-recurring change in fair value has been recorded during the years ended December 31, 2012 and 2011:
At December 31, 2012
|
|
Total
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending investments - held-for-sale (allowance for loan loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans
|
|
$
|
60,335
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
60,335
|
|
Subordinate interests in whole loans
|
|
|
9,131
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,131
|
|
Mezzanine loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Preferred equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
69,466
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
69,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending investments - held-for-sale (impairment for lower of cost or fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans
|
$
|
|
174,477
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
174,477
|
|
Subordinate interest in whole loans
|
|
|
1,649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,649
|
|
Mezzanine loans
|
|
|
20,422
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,422
|
|
Preferred equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
|
196,548
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
196,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
|
|
$
|
3,593
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,593
|
|
Land
|
|
|
24,195
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,195
|
|
Hotel
|
|
|
24,034
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,034
|
|
Branch
|
|
|
4,749
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,749
|
|
Industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
56,571
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
56,571
|
|
At December 31, 2011
|
|
Total
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Whole loans
|
|
$
|
132,261
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
132,261
|
|
Subordinate interests in whole loans
|
|
|
3,514
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,514
|
|
Mezzanine loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Preferred equity
|
|
|
4,910
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,910
|
|
|
|
$
|
140,685
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
140,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending investments - held-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Subordinate interest in whole loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mezzanine loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Preferred equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Branch
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Hotel
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
11. Fair Value of Financial Instruments – (continued)
Real estate investments:
The properties identified for impairment have been classified as assets held-for-sale. The impairment on properties
classified as held-for-sale is calculated by comparing the results of the Company’s marketing efforts and unsolicited
purchase offers to the carrying value of the respective property. The marketing valuations are based on internally
developed discounted cash flow models which include assumptions that require significant management judgement regarding
capitalization rates, lease-up periods, future occupancy rates, market rental rates, holding periods, capital improvements
and other factors deemed necessary by management. The impairment is calculated by
comparing the Company’s internally developed discounted cash flow methodology to the carrying value of the respective
property.
Loans subject to impairments or reserves
for loan loss:
The loans identified for impairment or reserves for loan loss are collateral dependent loans. Impairment or
reserves for loan loss are measured by comparing management’s estimated fair value of the underlying collateral
to the carrying value of the respective loan. These valuations require significant judgments, which include assumptions regarding
capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan
sponsorship, actions of other lenders and other factors deemed necessary by management.
Quantitative information regarding the valuation techniques
and the range of significant unobservable Level III inputs used to determine fair value measurements on a non-recurring basis as
of December 31, 2012 are:
Financial Asset
|
|
Fair Value
|
|
|
Valuation technique
|
|
Unobservable Inputs
|
|
Range
|
Lending investments
- held-for-sale (allowance for loan loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans
|
|
$
|
60,335
|
|
|
Discounted cash flows
|
|
Discount rate
Capitalization rate
|
|
11.00% to 15.00%
6.50% to 9.00%
|
|
|
|
|
|
|
|
|
|
|
|
Subordinate interests in whole loans
|
|
|
9,131
|
|
|
Discounted cash flows
|
|
Discount rate
Capitalization rate
|
|
15.00%
7.00%
|
|
|
|
|
|
|
|
|
|
|
|
Lending investments - held-for-sale
(impairment for lower of cost or fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole loans
|
|
|
174,477
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
4.00% to 4.72%
|
|
|
|
|
|
|
|
|
|
|
|
Subordinate interests in whole loans
|
|
|
1,649
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
4.00% to 8.69%
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine loans
|
|
|
20,422
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
10.00% to 10.59%
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
|
|
|
3,593
|
|
|
Discounted cash flows
|
|
Discount rate
Capitalization rate
|
|
9.0%
8.60% to 9.8%
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
24,195
|
|
|
Unsolicited & solicited sale offers
|
|
Dollars per acre
|
|
$5,464 to $41,048
|
|
|
|
|
|
|
|
|
|
|
|
Branch
|
|
|
4,749
|
|
|
Discounted cash flows
|
|
Discount rate
Capitalization rate
|
|
9.0%
8.60% to 9.8%
|
|
|
|
|
|
|
|
|
|
|
|
Hotel
|
|
|
24,034
|
|
|
Discounted cash flows
|
|
Discount rate
Expense Growth Rate
|
|
12.00%
3.00%
|
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
11. Fair Value of Financial Instruments – (continued)
The valuations derived from pricing models
may include adjustments to the financial instruments. These adjustments may be made when, in management’s judgment, either
the size of the position in the financial instrument or other features of the financial instrument such as its complexity, or
the market in which the financial instrument is traded (such as counterparty, credit, concentration or liquidity) require that
an adjustment be made to the value derived from the pricing models. Additionally, an adjustment from the price derived from a
model typically reflects management’s judgment that other participants in the market for the financial instrument being
measured at fair value would also consider such an adjustment in pricing that same financial instrument.
Assets and liabilities presented at fair
value and categorized as Level III are generally those that are marked to model using relevant empirical data to extrapolate an
estimated fair value. The models’ inputs reflect assumptions that market participants would use in pricing the instrument
in a current period transaction and outcomes from the models represent an exit price and expected future cash flows. The parameters
and inputs are adjusted for assumptions about risk and current market conditions. Changes to inputs in valuation models are not
changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from
changes in market conditions. Accordingly, results from valuation models in one period may not be indicative of future period
measurements.
12. Stockholders’ Equity (Deficit)
The Company’s authorized capital stock
consists of 125,000,000 shares, $0.001 par value, of which the Company has authorized the issuance of up to 100,000,000 shares
of common stock, $0.001 par value per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. As of December
31, 2012, 60,731,002 shares of common stock and 3,525,822 shares of preferred stock were issued and outstanding.
In connection with Mr. Gordon F. DuGan’s
agreement to serve as the Company’s Chief Executive Officer, on June 7, 2012, Mr. DuGan also agreed to purchase 1,000,000
shares of the Company’s common stock from the Company on June 29, 2012 for an aggregate purchase price of $2,520 or $2.52
per share. The per share purchase price was equal to the closing price of the Company’s common stock on the New York Stock
Exchange on the day prior to the date Mr. DuGan entered into the subscription agreement with the Company to purchase such shares
of common stock. The issuance of such shares of common stock was a private placement exempt from the registration requirements
of the Securities Act of 1933, as amended.
The Company issued to KBS Acquisition Sub-Owner
2, LLC (i) 2,000,000 shares of common stock of the Company, par value $0.001 per share; (ii) 2,000,000 shares of Class B-1 non-voting
common stock of the Company, par value $0.001 per share; and (iii) 2,000,000 shares of Class B-2 non-voting common stock of the
Company, par value $0.001 per share on December 6, 2012. The shares were issued as consideration for the Company’s contribution
to the joint venture with Garrison in connection with the acquisition of the Bank of America Portfolio on the same date and were
valued at $2.75 which was the closing price of the Company’s common stock on the New York Stock Exchange on the day prior.
Each share of the Class B-1 common stock and Class B-2 common stock will be convertible into one share of the Company’s
common stock at the option of the holder at any time on or after September 5, 2013 and December 6, 2013, respectively. Each share
of Class B-1 common stock and Class B-2 common stock that has not previously been converted and remains outstanding on March 5,
2014 shall automatically and without any action on the part of the holder thereof, convert into one share of common stock on
such date. The issuance of such shares of common stock was a private placement exempt from the registration requirements of the
Securities Act of 1933, as amended.
Preferred Stock
In April 2007, the Company issued 4,600,000
shares of its 8.125% Series A cumulative redeemable preferred stock (including the underwriters’ over-allotment option of
600,000 shares) with a mandatory liquidation preference of $25.00 per share. Holders of the Series A cumulative redeemable preferred
shares are entitled to receive annual dividends of $2.03125 per share on a quarterly basis and dividends are cumulative, subject
to certain provisions. On or after April 18, 2012, the Company may at its option redeem the Series A cumulative redeemable preferred
stock at par for cash. Net proceeds (after deducting underwriting fees and expenses) from the offering were approximately $111,205.
In November 2010, the Company settled a
tender offer to purchase up to 4,000,000 shares of our Series A preferred stock for $15.00 per preferred share, net to seller
in cash. In the aggregate, we paid approximately $16,620 to acquire the 1,074,178 shares of the Series A preferred stock tendered
and not withdrawn. The shares of Series A preferred stock acquired by the Company were retired upon receipt and accrued and unpaid
dividends of $4,364 or $4.0625 per share of the acquired preferred stock were eliminated. After settlement of the tender offer,
3,525,822 shares of Series A preferred stock remain outstanding for trading on the NYSE. The $13,713 excess of the $30,332 carrying
value of the tendered preferred stock, including accrued dividends of $4,364, over the $16,620 of consideration paid was recorded
as a decrease to net loss available to common stockholders.
Beginning with the fourth quarter of 2008,
the Company’s board of directors elected not to pay the quarterly Series A preferred stock dividends of $0.50781 per share.
As of December 31, 2012 and 2011, the Company accrued Series A preferred stock dividends of $30,438 and $23,276, respectively.
Equity Incentive Plan
As part of the Company’s initial public
offering, the Company instituted its Equity Incentive Plan. The Equity Incentive Plan, as amended, authorizes (i) the grant of
stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code, or ISOs, (ii) the grant
of stock options that do not qualify, or NQSOs, (iii) the grant of stock options in lieu of cash directors’ fees and (iv)
grants of shares of restricted and unrestricted common stock. The exercise price of stock options will be determined by the compensation
committee, but may not be less than 100% of the fair market value of the shares of common stock on the date of grant. At December
31, 2012, 1,932,511 shares of common stock were available for issuance under the Equity Incentive Plan.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
12. Stockholders’ Equity (Deficit) – (continued)
Through December 31, 2012,
1,572,872 restricted shares had been issued under the Equity Incentive Plan, of which 97% have vested. The vested and
unvested shares are currently entitled to receive distributions on common stock if declared by the Company. Holders of
restricted shares are prohibited from selling such shares until they vest but are provided the ability to vote such shares
beginning on the date of grant. Compensation expense of $958, $301and $369 was recorded for the years ended December 31,
2012, 2011 and 2010, respectively, related to the issuance of restricted shares. Compensation expense of $270 will be
recorded over the course of the next 11 months representing the remaining weighted average vesting period of equity awards
issued under the Equity Incentive Plan as of December 31, 2012.
Options granted under the
Equity Incentive Plan to recipients who are employees of Gramercy are exercisable at the fair market value on the date of
grant and, subject to termination of employment, expire ten years from the date of grant, are not transferable other than on
death, and are exercisable in three to four annual installments commencing one year from the date of grant. The Company
issues new shares upon the exercise of vested options. In some instances, options may be granted under the Equity Incentive
Plan to persons who provide significant services to the Company but are not employees of the Company. Options granted to
recipients that are not employees have the same terms as those issued to employees except as it relates to any
performance-based provisions within the grant. To the extent there are performance provisions associated with a grant to a
recipient who is not an employee, an estimated expense related to these options is recognized over the vesting period and the
final expense is reconciled at the point performance has been met, or the measurement date. If no performance based provision
exists, the Company recognizes compensation expense over the vesting period on a straight line basis.
A summary of the status of the Company’s
stock options as of December 31, 2012, 2011 and 2010 are presented below:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at beginning of period
|
|
|
565,026
|
|
|
$
|
17.25
|
|
|
|
841,377
|
|
|
$
|
11.82
|
|
|
|
1,516,394
|
|
|
$
|
16.70
|
|
Granted
|
|
|
25,000
|
|
|
|
2.50
|
|
|
|
25,000
|
|
|
|
2.79
|
|
|
|
25,000
|
|
|
|
2.73
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(300,000
|
)
|
|
|
0.80
|
|
|
|
-
|
|
|
|
-
|
|
Lapsed or cancelled
|
|
|
(229,775
|
)
|
|
|
16.83
|
|
|
|
(1,351
|
)
|
|
|
22.50
|
|
|
|
(700,017
|
)
|
|
|
22.07
|
|
Balance at end of period
|
|
|
360,251
|
|
|
$
|
16.14
|
|
|
|
565,026
|
|
|
$
|
17.25
|
|
|
|
841,377
|
|
|
$
|
11.82
|
|
For the year ended December 31, 2012, all
options were granted with a price of $2.50. The remaining weighted average contractual life of the options was 4.2 years. Compensation
expense of $29, $138 and $180 was recorded for the years ended December 31, 2012, 2011 and 2010, respectively, related to the
issuance of stock options.
In connection with the hiring of
Gordon F. DuGan, Benjamin Harris, and Nicholas L. Pell, who joined the Company on July 1, 2012 as Chief Executive Officer,
President and Managing Director, respectively, the Company has granted equity awards to these new executives pursuant to a
newly adopted outperformance plan, or the 2012 Outperformance Plan. Pursuant to the 2012 Outperformance Plan, these
executives, in the aggregate, may earn up to $20,000 of LTIP Units based on the Company’s common stock price
appreciation over a four-year performance period ending June 30, 2016. The amount of LTIP Units earned under the 2012
Outperformance Plan will range from $4,000 if the Company’s common stock price equals a minimum hurdle of $5.00 per
share (less any dividends paid during the performance period) to $20,000 if the Company’s common stock price equals or
exceeds $9.00 per share (less any dividends paid during the performance period) at the end of the performance period. In the
event that the performance hurdles are not met on a vesting date, the award scheduled to vest on that vesting date may vest
on a subsequent vesting date if the common stock price hurdle is met as of such subsequent vesting date. The executives will
not earn any LTIP Units under the 2012 Outperformance Plan to the extent that the Company’s common stock price is less
than the minimum hurdle. Messrs. DuGan, Harris and Pell were granted awards under the 2012 Outperformance Plan pursuant to
which they may earn up to $10,000, $6,000 and $4,000 of LTIP Units, respectively. During the performance period, the
executives may earn up to 12%, 24% and 36% of the maximum amount under the 2012 Outperformance Plan at the end of the first,
second and third years, respectively, of the performance period if the Company’s common stock price has equaled or
exceeded the stock price hurdles as of the end of such years. If the minimum stock price hurdle is met as of the end of any
such year, the actual amount earned will range on a sliding scale from 20% of the maximum amount that may be earned as of
such date (at the minimum stock price hurdle) to 100% of the maximum amount that may be earned as of such date (at the
maximum stock price hurdle). Any LTIP Units earned under the 2012 Outperformance Plan will remain subject to vesting, with
50% of any LTIP Units earned vesting on June 30, 2016 and the remaining 50% vesting on June 30, 2017 based, in each case, on
continued employment through the vesting date. The LTIP Units had a fair value of $1,870 on the date of grant, which was
calculated in accordance with ASC 718. The Company used a probabilistic valuation approach to estimate the inherent
uncertainty that the LTIP Units may have with respect to the Company’s common stock. Compensation expense of $210 was
recorded for the year ended December 31, 2012 for the 2012 Outperformance Plan. Compensation expense of $1,660 will be
recorded over the course of the next 54 months, representing the remaining weighted average vesting period of the LTIP Units
as of December 31, 2012.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
12. Stockholders’ Equity (Deficit) – (continued)
In connection with the equity
awards made to Messrs. DuGan, Harris and Pell in connection with the Company’s hiring of these executives, the Company
adopted the 2012 Inducement Equity Incentive Plan, or the Inducement Plan. Under the Inducement Plan, the Company may grant
equity awards for up to 4,500,000 shares of common stock pursuant to the employment inducement award exemption provided by
the New York Stock Exchange Listed Company Manual. The Inducement Plan permits the Company to issue a variety of equity
awards, including stock options, restricted stock, phantom shares, dividend equivalent rights and other equity-based awards.
All of the shares available under the Inducement Plan were issued or reserved for issuance to Messrs. DuGan, Harris and Pell
in connection with the equity awards made upon the commencement of their employment with the Company. Equity awards issued under
the Inducement Plan had a fair value of $3,830 on the date of grant which was calculated in accordance with ASC 718.
Compensation expense of $383 was recorded for year ended December 31, 2012 for the 2012 Inducement Equity Incentive Plan.
Compensation expense of $3,447 will be recorded over the course of the next 54 months representing the remaining weighted
average vesting period of equity awards issued under the Inducement Plan as of December 31, 2012.
The Company had previously issued LTIP
unit awards to both the former Chief Executive Officer and the former President. During 2011, the Company entered into an
amendment to the LTIP unit award agreement with these executives to cancel the vesting schedule of outstanding LTIP units in
the Partnership (“LTIP Units”) and grant a new vesting schedule with respect to such LTIP Units. The new vesting
schedule provided for 50% of each executive's LTIP Units to vest on June 30, 2012 subject to continued employment and an
additional 50% of each Executive's LTIP Units to vest upon the satisfaction of certain vesting conditions relating to the
settlement of the Company's mortgage and mezzanine loans. Compensation expense of $401, $1,433 and $266 was recorded for the
years ended December 31, 2012, 2011 and 2010, respectively, related to the issuance and modification of LTIP units.
Employee Stock Purchase Plan
In November 2007, the Company’s board
of directors adopted, and the stockholders subsequently approved in June 2008, the 2008 Employee Stock Purchase Plan, or ESPP,
to provide equity-based incentives to eligible employees. The ESPP is intended to qualify as an “employee stock purchase
plan” under Section 423 of the Internal Revenue Code of 1986, as amended, and has been adopted by the board to enable the
Company’s eligible employees to purchase its shares of common stock through payroll deductions. The ESPP became effective
on January 1, 2008 with a maximum of 250,000 shares of the common stock available for issuance, subject to adjustment upon a merger,
reorganization, stock split or other similar corporate change. The Company filed a registration statement on Form S-8 with the
Securities and Exchange Commission with respect to the ESPP. The common stock is offered for purchase through a series of successive
offering periods. Each offering period will be three months in duration and will begin on the first day of each calendar quarter,
with the first offering period having commenced on January 1, 2008. The ESPP provides for eligible employees to purchase the common
stock at a purchase price equal to 85% of the lesser of (1) the market value of the common stock on the first day of the offering
period or (2) the market value of the common stock on the last day of the offering period.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
12. Stockholders’ Equity (Deficit) – (continued)
Deferred Stock Compensation Plan for Directors
Under the Company’s Independent Director’s
Deferral Program, which commenced April 2005, the Company’s independent directors may elect to defer up to 100% of their
annual retainer fee, chairman fees and meeting fees. Unless otherwise elected by a participant, fees deferred under the program
shall be credited in the form of phantom stock units. The phantom stock units are convertible into an equal number of shares of
common stock upon such directors’ termination of service from the board of directors or a change in control by the Company,
as defined by the program. Phantom stock units are credited to each independent director quarterly using the closing price of
the Company’s common stock on the applicable dividend record date for the respective quarter. If dividends are declared
by the Company, each participating independent director who elects to receive fees in the form of phantom stock units has the
option to have their account credited for an equivalent amount of phantom stock units based on the dividend rate for each quarter
or have dividends paid in cash.
As of December 31, 2012, there were approximately
462,102 phantom stock units outstanding, of which 457,602 units are vested.
Earnings per Share
Earnings per share for the years ended
December 31, 2012, 2011 and 2010 are computed as follows:
|
|
For the Year Ended December 31,
(1)
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Numerator - Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
(18,341
|
)
|
|
$
|
(20,903
|
)
|
|
$
|
(26,928
|
)
|
Net income (loss) from discontinued operations
|
|
|
(153,207
|
)
|
|
|
358,380
|
|
|
|
(946,760
|
)
|
Net Income (loss)
|
|
|
(171,548
|
)
|
|
|
337,477
|
|
|
|
(973,688
|
)
|
Preferred stock dividends
|
|
|
(7,162
|
)
|
|
|
(7,162
|
)
|
|
|
(8,798
|
)
|
Excess of carrying amount of tendered preferred stock over consideration paid
|
|
|
-
|
|
|
|
-
|
|
|
|
13,713
|
|
Numerator for basic income per share - Net income (loss) available to common stockholders:
|
|
|
(178,710
|
)
|
|
|
330,315
|
|
|
|
(968,773
|
)
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
(178,710
|
)
|
|
$
|
330,315
|
|
|
$
|
(968,773
|
)
|
Denominator-Weighted Average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
53,359,850
|
|
|
|
50,229,102
|
|
|
|
49,923,930
|
|
Less: Unvested restricted shares
|
|
|
(1,383,388
|
)
|
|
|
-
|
|
|
|
-
|
|
Denominator for basic income per share
|
|
|
51,976,462
|
|
|
|
50,229,102
|
|
|
|
49,923,930
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
LTIP
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock based compensation plans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Phantom stock units
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted shares
|
|
|
51,976,462
|
|
|
|
50,229,102
|
|
|
|
49,923,930
|
|
|
(1)
|
Net
income (loss) adjusted for non-controlling
interests.
|
Diluted income (loss) per share assumes
the conversion of all common share equivalents into an equivalent number of common shares if the effect is not anti-dilutive.
For the year ended December 31, 2012, 16,362 share options and 462,102 phantom share units, were computed using the treasury
share method, which due to the net loss were anti-dilutive. For the year ended December 31, 2011, 261,918 share options, and
499,143 phantom share units were computed using the treasury share method, which due to the net loss from continuing
operations were anti-dilutive. For the year ended December 31, 2010, 208,821 share options and 414,108 phantom share units,
were computed using the treasury share method, which due to the net loss were anti-dilutive.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
12. Stockholders’ Equity (Deficit) – (continued)
Accumulated other comprehensive income (loss) for the years
ended December 31, 2012 and 2011 is comprised of the following:
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized losses on interest rate swap and cap agreements accounted for as cash flow hedges
|
|
$
|
(179,956
|
)
|
|
$
|
(182,102
|
)
|
|
$
|
-
|
|
Net unrealized gain on available-for-sale securities
|
|
|
84,691
|
|
|
|
(258,837
|
)
|
|
|
(160,785
|
)
|
Total accumulated other comprehensive loss
|
|
$
|
(95,265
|
)
|
|
$
|
(440,939
|
)
|
|
$
|
(160,785
|
)
|
13. Benefit Plans
In June 2009, the Company implemented a
401(k) Savings/Retirement Plan, or the 401(k) Plan, to cover eligible employees of the Company, and any designated affiliate.
The 401(k) Plan permits eligible employees to defer up to 15% of their annual compensation, subject to certain limitations imposed
by the Code. The employees’ elective deferrals are immediately vested and non-forfeitable. The 401(k) Plan provides for
discretionary matching contributions by the Company. Prior to the implementation of the 401(k) Plan, as an affiliate of SL Green,
the Company’s employees were eligible to participate in a 401(k) Savings/Retirement Plan implemented by SL Green. Except
for the 401(k) Plan, at December 31, 2011, the Company did not maintain a defined benefit pension plan, post-retirement health
and welfare plan or other benefit plans. The expense associated with the Company’s matching contribution was $227, $218
and $367 for the years ended December 31, 2012, 2011 and 2010, respectively.
14. Commitments and Contingencies
The Company evaluates litigation contingencies
based on information currently available, including the advice of counsel and the assessment of available insurance coverage.
The Company will establish accruals for litigation and claims when a loss contingency is considered probable and the related amount
is reasonably estimable. The Company will periodically review these contingences which may be adjusted if circumstances change.
The outcome of a litigation matter and the amount or range of potential losses at particular points may be difficult to ascertain.
If a range of loss is estimated and an amount within such range appears to be a better estimate than any other amount within that
range, then that amount is accrued.
Two of the Company’s
subsidiaries were named as defendants in a case filed in August 2011 captioned Colfin JIH Funding LLC and CDCF JIH Funding,
LLC, v. Gramercy Warehouse Funding I LLC and Gramercy Loan Services LLC in New York State Supreme Court, New York County. The
dispute arose from the financing of the Jameson Inns and Signature Inns. Plaintiffs asserted a breach of contract
claim under an intercreditor agreement against the subsidiaries.
The same two of the Company’s subsidiaries
were named as defendants in a case filed in December 2011 captioned U.S. Bank National Association, as Trustee et al v. Gramercy
Warehouse Funding I LLC and Gramercy Loan Services LLC in New York State Supreme Court, New York County. The dispute arose from
the same financing of the Jameson Inns and Signature Inns. U.S. Bank National Association, or U.S. Bank, by and through its attorney
in fact, Wells Fargo Bank, N.A., asserted a breach of contract claim against the subsidiaries.
In January 2013, the Company settled the
claims for $5,333, which was fully accrued for as of December 31, 2012.
In addition, the Company and/or
one or more of its subsidiaries is party to various litigation matters that are considered routine litigation incidental to
its business, none of which are considered material.
Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share
and per share data)
December 31, 2012
14. Commitments and Contingencies – (continued)
The Company’s corporate offices
at 420 Lexington Avenue, New York, New York are subject to an operating lease agreement with SLG Graybar Sublease LLC, an affiliate
of SL Green, effective May 1, 2005. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents
of approximately $249 per annum for year one rising to $315 per annum in year ten. In May and June 2009, the Company amended its
lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2,260 square feet. The additional premises
are leased on a co-terminus basis with the remainder of the Company’s leased premises and carries rents of approximately
$103 per annum during the initial lease year and $123 per annum during the final lease year. On June 25, 2012, the lease was amended
to reduce the leased premises by approximately 600 square feet and to reduce rents by approximately $29 per annum during the initial
year and $38 per annum during the final lease year. All other terms of the lease remain unchanged, except the Company now has
the right to cancel the lease with 90 days notice.
The Company’s regional
management office located at 610 Old York Road, Jenkintown, Pennsylvania, is subject to an operating lease with an affiliate
of KBS. The lease is for approximately 17,000 square feet, and expires on August 31, 2013, with rents of approximately
$322 per annum. The Company’s regional management office located at 800 Market Street, St. Louis, Missouri is subject
to an operating lease with St. Louis BOA Plaza, LLC. The lease is for approximately 2,000 square feet, expires
on September 30, 2013, and is cancelable with 90 days’ notice. The lease is subject to rents of $32 per
annum.
As of December 31, 2012, the Company has
a non-cancelable ground lease with an expiration date extending through 2016. These lease obligations generally contain rent increases
and renewal options.
Gramercy
Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
15.
Income Taxes
The
Company has elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code beginning with its taxable
year ended December 31, 2004. To qualify as a REIT, the Company must meet certain organizational and operational requirements,
including a requirement to distribute at least 90% of its ordinary taxable income to stockholders. As a REIT, the Company generally
will not be subject to U.S. federal income tax on taxable income that it distributes to its stockholders. If the Company fails
to qualify as a REIT in any taxable year, it will then be subject to U.S. federal income taxes on taxable income at regular corporate
rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following
the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory
provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distributions
to stockholders. However, the Company believes that it is organized and will operate in such a manner as to qualify for treatment
as a REIT and the Company intends to operate in the foreseeable future in such a manner so that it will qualify as a REIT for
U.S. federal income tax purposes. The Company may, however, be subject to certain state and local taxes. Our TRSs are subject
to fiscal, state and local taxes.
The Company’s Asset and Property management business, Gramercy Asset Management,
conducts its business through a wholly-owned TRS. In addition to the limitation on the Company's use of its net operating losses
under Section 382, since the Company uses separate taxable REIT subsidiaries to conduct different aspects of its business, losses
incurred by the individual TRSs are only available to offset taxable income derived by each respective TRS.
Beginning
with the third quarter of 2008, the Company’s board of directors elected to not pay dividend to common stockholders. The
board of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth
quarter of 2008. The unpaid preferred stock dividend has been accrued for seventeen quarters as of December 31, 2012. Based on
current estimates of its taxable loss, the Company has no distribution requirements in order to maintain its REIT status for the
2012 tax year and it expects that it will continue to elect to retain capital for liquidity purposes; however, as the Company’s
new business strategy is implemented and sustainable cash flows grow, the Company will re-evaluate its dividend policy with the
intention of resuming dividends. However, in accordance with the provisions of the Company’s charter, the Company may not
pay any dividends on its common stock until all accrued dividends and the dividend for the then current quarter on the Series
A preferred stock are paid in full.
The
Company’s provision for income taxes for the years ended December 31, 2012, 2011 and 2010 is summarized as follows:
|
|
For the year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,990
|
)
|
|
$
|
(275
|
)
|
|
$
|
(45
|
)
|
State
and local
|
|
|
(1,061
|
)
|
|
|
(206
|
)
|
|
|
(921
|
)
|
Total
current
|
|
|
(3,051
|
)
|
|
|
(481
|
)
|
|
|
(966
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(174
|
)
|
|
|
(62
|
)
|
|
|
|
|
State
and local
|
|
|
(105
|
)
|
|
|
(20
|
)
|
|
|
|
|
Total
deferred
|
|
|
(279
|
)
|
|
|
(82
|
)
|
|
|
-
|
|
Total
income tax expense
|
|
$
|
(3,330
|
)
|
|
$
|
(563
|
)
|
|
$
|
(966
|
)
|
Net
deferred tax liabilities of $361 and $82 are included in other liabilities on the accompanying Consolidated Balance Sheets at
December 31, 2012 and 2011, respectively. These net deferred tax liabilities relate primarily to differences in the timing of
the recognition of income (loss) between GAAP and tax. All deferred tax assets relating to net operating loss carry forwards of
TRSs are fully reserved.
The
income tax provision differs from the amount computed by applying the statutory federal income tax rate to pre-tax operating income,
as follows:
|
|
For the year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Income tax
(expense) benefit at federal statutory rate
|
|
$
|
58,366
|
|
|
$
|
(118,314
|
)
|
|
$
|
340,453
|
|
Tax
effect of REIT election
|
|
|
(60,230
|
)
|
|
|
118,596
|
|
|
|
(340,294
|
)
|
State
and local taxes, net of federal benefit
|
|
|
(843
|
)
|
|
|
(186
|
)
|
|
|
(921
|
)
|
Permanent
difference
|
|
|
1,252
|
|
|
|
99
|
|
|
|
-
|
|
Valuation
allowance
|
|
|
(1,672
|
)
|
|
|
(737
|
)
|
|
|
(204
|
)
|
Other
|
|
|
(203
|
)
|
|
|
(21
|
)
|
|
|
-
|
|
Total
income tax benefit (provision)
|
|
$
|
(3,330
|
)
|
|
$
|
(563
|
)
|
|
$
|
(966
|
)
|
Gramercy
Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
15.
Income Taxes – (continued)
As
of December 31, 2012, the Company and each of its eight subsidiaries which file corporate tax returns, had total net loss carryforwards,
inclusive of net operating losses and capital losses, of approximately $535. Net operating loss carryforwards and capital loss
carryforwards can generally be used to offset future ordinary income and capital gains of the entity originating the losses, for
up to 20 years and 5 years, respectively. The amounts of net operating loss carryforwards and capital loss carryforwards as of
December 31, 2012 are subject to the completion of the 2012 tax returns. In January 2011, the Company and two of its subsidiaries
experienced an ownership change, as defined for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. In general,
an “ownership change” occurs if there is a change in ownership of more than 50% of its common stock during a cumulative
three year period. For this purpose, determinations of ownership changes are generally limited to shareholders deemed to own 5%
or more of the Company’s common stock. The provisions of Section 382 will apply an
annual limit to the amount of net loss carryforwards that can be used to offset future ordinary income and capital gains, beginning
with the 2011 taxable year.
In addition to the limitation on
the Company’s use of its net operating losses under section 382, since the company uses separate taxable REIT
subsidiaries to conduct different aspects of its business, losses incurred by the individual TRSs are only available to
offset taxable income derived by each respective TRS.
The
Company’s policy for interest and penalties, if any, on material uncertain tax positions recognized in the financial statements
is to classify these as interest expense and operating expense, respectively. As of December 31, 2012, 2011 and 2010, the Company
did not incur any material interest or penalties.
16.
Environmental Matters
The
Company believes that it is in compliance in all material respects with applicable federal, state and local ordinances and regulations
regarding environmental issues. Its management is not aware of any environmental liability that it believes would have a materially
adverse impact on the Company’s financial position, results of operations or cash flows.
17. Segment Reporting
The Company has determined that it has
three reportable operating segments: Finance, Asset Management and Realty/Corporate. The reportable segments were determined
based on the management approach, which looks to the Company’s internal organizational structure. These three lines of
business require different support infrastructures. In 2012, as a result of the KBS settlement and management agreements,
the Company changed the composition of its business segments to separate Asset Management from Realty. The years ended December
31, 2011 and 2010 have been restated to conform with this change.
The Realty/Corporate segment includes all of the Company’s
activities related to investment in commercial properties with credit grade tenants through-out the United States. The Realty/Corporate segment generates revenues from rental revenues from properties owned by the Company.
The Asset Management segment includes substantially all of the
Company’s activities related to asset and property management services. The Asset Management segment generates revenues from
fee income related to the management agreement for properties owned by KBS.
The Finance segment includes all of the Company’s activities related to origination, acquisition
and portfolio management of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity,
CMBS and other real estate related securities. The Finance segment primarily generates revenues from interest income on loans,
other lending investments and CMBS owned in the Company’s CDOs. Substantially all of the Finance segment has been included
in discontinued operations on the Consolidated Statements of Operations and Comprehensive Income (Loss).
Gramercy
Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
17. Segment Reporting
– (continued)
The Company evaluates performance based on the following financial measures for each segment:
|
|
Finance
|
|
|
Asset
Management
|
|
|
Realty /
Corporate
(1)
|
|
|
Total Company
|
|
Year Ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
34,667
|
|
|
$
|
2,154
|
|
|
$
|
36,821
|
|
Equity in net loss from unconsolidated joint ventures
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,904
|
)
|
|
|
(2,904
|
)
|
Total operating and interest expense
(2)
|
|
|
-
|
|
|
|
(24,824
|
)
(4)
|
|
|
(27,434
|
)
|
|
|
(52,258
|
)
|
Net income (loss) from continuing operations
(3)
|
|
$
|
-
|
|
|
$
|
9,843
|
|
|
$
|
(28,184
|
)
|
|
$
|
(18,341
|
)
|
|
|
Finance
|
|
|
Asset
Management
|
|
|
Realty /
Corporate
(1)
|
|
|
Total Company
|
|
Year Ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
7,336
|
|
|
$
|
436
|
|
|
$
|
7,772
|
|
Equity in net loss from unconsolidated joint ventures
|
|
|
-
|
|
|
|
-
|
|
|
|
121
|
|
|
|
121
|
|
Total operating and interest expense
(2)
|
|
|
|
|
|
|
(10,555
|
)
(4)
|
|
|
(18,241
|
)
|
|
|
(28,796
|
)
|
Net loss from continuing operations
(3)
|
|
$
|
-
|
|
|
$
|
(3,219
|
)
|
|
$
|
(17,684
|
)
|
|
$
|
(20,903
|
)
|
|
|
Finance
|
|
|
Asset Management
|
|
|
Realty /
Corporate
(1)
|
|
|
Total Company
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,197
|
|
|
$
|
1,197
|
|
Equity in net loss from unconsolidated joint ventures
|
|
|
-
|
|
|
|
|
|
|
|
(303
|
)
|
|
|
(303
|
)
|
Total operating and interest expense
(2)
|
|
|
-
|
|
|
|
(3,471
|
)
(4)
|
|
|
(24,351
|
)
|
|
|
(27,822
|
)
|
Net loss from continuing operations
(3)
|
|
$
|
-
|
|
|
$
|
(3,471
|
)
|
|
$
|
(23,457
|
)
|
|
$
|
(26,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
$
|
1,937,554
|
|
|
$
|
-
|
|
|
$
|
231,282
|
|
|
$
|
2,168,836
|
|
December 31, 2011
|
|
$
|
2,035,181
|
|
|
$
|
-
|
|
|
$
|
223,149
|
|
|
$
|
2,258,330
|
|
|
(1)
|
Realty / Corporate includes all corporate level items, including general and administrative expenses.
|
|
(2)
|
Total operating and interest expense includes operating costs on commercial property assets for the realty business and costs
to perform required functions under the management agreement for the asset management business. General and administrative expense
is included in Realty/Corporate for all periods. Depreciation and amortization of $256, $136 and $174 for the years ended December
31, 2012, 2011 and 2010, respectively, is included in the amounts presented above.
|
|
(3)
|
Net income (loss) from continuing operations represents loss before discontinued operations.
|
|
(4)
|
Total operating and interest expense for the Asset Management segment includes $3,444, $456 and $0 of income tax expense for
the years ended December 31, 2012, 2011 and 2010, respectively. Total operating and interest expense for the Realty/Corporate segment
includes ($114), $107 and $966 of income tax expense for the years ended December 31, 2012, 2011 and 2010, respectively.
|
18.
Supplemental Disclosure of Non-Cash Investing and Financing Activities
The
following table represents non-cash activities recognized in other comprehensive income for the years ended December 31, 2012,
2011 and 2010:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Deferred
losses and other non-cash activity related to derivatives
|
|
$
|
2,146
|
|
|
$
|
(19,334
|
)
|
|
$
|
(70,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of adjustments of net unrealized loss on securities previously available for sale
|
|
$
|
343,547
|
|
|
$
|
(260,820
|
)
|
|
$
|
5,856
|
|
Gramercy
Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
19.
Selected Quarterly Financial Data (unaudited)
This
unaudited interim financial information has been adjusted to reflect the effects of the disposition of assets and disposal
of Gramercy Finance, during the years ended December 31, 2012 and 2011, respectively.
2012 Quarter Ended
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
Total Revenues
|
|
$
|
9,666
|
|
|
$
|
9,157
|
|
|
$
|
9,644
|
|
|
$
|
8,354
|
|
Loss before equity in net income (loss) of joint ventures, provision for taxes
and discontinued operations
|
|
|
(310
|
)
|
|
|
(4,790
|
)
|
|
|
(5,416
|
)
|
|
|
(1,591
|
)
|
Equity in net income of joint ventures
|
|
|
(2,992
|
)
|
|
|
31
|
|
|
|
29
|
|
|
|
28
|
|
Loss from continuing operations before provision for taxes and
discontinued operations
|
|
|
(3,302
|
)
|
|
|
(4,759
|
)
|
|
|
(5,387
|
)
|
|
|
(1,563
|
)
|
Provision for taxes
|
|
|
48
|
|
|
|
40
|
|
|
|
(2,106
|
)
|
|
|
(1,312
|
)
|
Net loss from continuing operations
|
|
|
(3,254
|
)
|
|
|
(4,719
|
)
|
|
|
(7,493
|
)
|
|
|
(2,875
|
)
|
Net income from discontinued operations
|
|
|
(145,334
|
)
|
|
|
1,829
|
|
|
|
(12,218
|
)
|
|
|
2,516
|
|
Net loss attributable to Gramercy Capital Corp.
|
|
|
(148,588
|
)
|
|
|
(2,890
|
)
|
|
|
(19,711
|
)
|
|
|
(359
|
)
|
Preferred stock dividends
|
|
|
(1,792
|
)
|
|
|
(1,790
|
)
|
|
|
(1,790
|
)
|
|
|
(1,790
|
)
|
Net Income available to common stockholders
|
|
$
|
(150,380
|
)
|
|
$
|
(4,680
|
)
|
|
$
|
(21,501
|
)
|
|
$
|
(2,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations, after preferred dividends
|
|
$
|
(0.09
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.09
|
)
|
Net income from discontinued operations
|
|
|
(2.69
|
)
|
|
|
0.03
|
|
|
|
(0.24
|
)
|
|
|
0.05
|
|
Net income available to common
stockholders
|
|
$
|
(2.78
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations, after preferred dividends
|
|
$
|
(0.09
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.09
|
)
|
Net income from discontinued operations
|
|
|
(2.69
|
)
|
|
|
0.03
|
|
|
|
(0.24
|
)
|
|
|
0.05
|
|
Net income available to common stockholders
|
|
$
|
(2.78
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
54,120,499
|
|
|
|
52,308,653
|
|
|
|
50,759,306
|
|
|
|
51,261,325
|
|
Diluted weighted average common shares and common share equivalents outstanding
|
|
|
54,120,499
|
|
|
|
52,308,653
|
|
|
|
50,759,306
|
|
|
|
51,261,325
|
|
Gramercy
Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
19.
Selected Quarterly Financial Data (unaudited) – (continued)
2011 Quarter Ended
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
Total Revenues
|
|
$
|
6,211
|
|
|
$
|
1,117
|
|
|
$
|
330
|
|
|
$
|
114
|
|
Loss before equity in net income of joint ventures, provision for taxes and discontinued operations
|
|
|
(9,156
|
)
|
|
|
(1,164
|
)
|
|
|
(5,954
|
)
|
|
|
(4,187
|
)
|
Equity in net income of joint ventures
|
|
|
31
|
|
|
|
29
|
|
|
|
31
|
|
|
|
30
|
|
Loss from continuing operations before provision for taxes and discontinued operations
|
|
|
(9,125
|
)
|
|
|
(1,135
|
)
|
|
|
(5,923
|
)
|
|
|
(4,157
|
)
|
Provision for taxes
|
|
|
(490
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
(69
|
)
|
Net loss from continuing operations
|
|
|
(9,615
|
)
|
|
|
(1,135
|
)
|
|
|
(5,927
|
)
|
|
|
(4,226
|
)
|
Net income from discontinued operations
|
|
|
176,998
|
|
|
|
147,217
|
|
|
|
23,188
|
|
|
|
10,977
|
|
Net loss attributable to Gramercy Capital Corp.
|
|
|
167,383
|
|
|
|
146,082
|
|
|
|
17,261
|
|
|
|
6,751
|
|
Preferred stock dividends
|
|
|
(1,792
|
)
|
|
|
(1,790
|
)
|
|
|
(1,790
|
)
|
|
|
(1,790
|
)
|
Net Income available to common stockholders
|
|
$
|
165,591
|
|
|
$
|
144,292
|
|
|
$
|
15,471
|
|
|
$
|
4,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations, after preferred dividends
|
|
$
|
(0.22
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.12
|
)
|
Net income from discontinued operations
|
|
|
3.50
|
|
|
|
2.92
|
|
|
|
0.46
|
|
|
|
0.22
|
|
Net income available to common stockholders
|
|
$
|
3.28
|
|
|
$
|
2.86
|
|
|
$
|
0.31
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations, after preferred dividends
|
|
$
|
(0.22
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.12
|
)
|
Net income from discontinued operations
|
|
|
3.50
|
|
|
|
2.92
|
|
|
|
0.46
|
|
|
|
0.22
|
|
Net incom available to common stockholders
|
|
$
|
3.28
|
|
|
$
|
2.86
|
|
|
$
|
0.31
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
50,532,836
|
|
|
|
50,382,542
|
|
|
|
49,998,728
|
|
|
|
49,992,132
|
|
Diluted weighted average common shares and common share equivalents outstanding
|
|
|
50,532,836
|
|
|
|
50,382,542
|
|
|
|
49,998,728
|
|
|
|
49,992,132
|
|
Gramercy
Capital Corp.
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2012
20.
Subsequent Events
In
February 2013, the Company sold repurchased notes previously issued by the Company’s 2006 and 2005 CDOs, respectively, generating
proceeds of $34,381.
In March 2013, the Company closed on the acquisition of a 605,427 square foot Class A industrial
building located in Olive Branch, Mississippi, in an all-cash transaction for a purchase price of approximately $24,650. The property
is 100% leased to one tenant through December 31, 2022. The property also includes an adjacent 13.8 acre land parcel and the tenant
has the right to expand the building within the first five years of the lease for an additional lease rate. The lease may be terminated
after December 2017 with 18 months prior notice and payment of a termination fee of six months gross rent plus unamortized tenant
improvement costs. The Company is currently analyzing the fair value of the lease and the initial purchase price allocation has
not been completed.
As further described in Note 1, the
Company sold its collateral management and sub-special servicing agreements for the Company’s CDOs which will result
in the deconsolidation of Gramercy Finance from the Company’s Consolidated Balance Sheets.
Gramercy
Capital Corp.
SCHEDULE
III
Real Estate Investments
(In thousands)
|
|
|
|
|
|
|
|
|
Initial Costs
|
|
|
|
|
|
Gross Amount at Which Carried December
31, 2012
|
|
|
|
|
|
|
|
City
|
|
State
|
|
Acquisition
Date
(3)
|
|
Encumbrances at
December 31,
2012
|
|
|
Land
|
|
|
Building and
Improvements
|
|
|
Net Improvements
(Retirements)
Since Acquisition
|
|
|
Land
|
|
|
Building and
Improvements
|
|
|
Total
(1)
|
|
|
Accumulated
Depreciation
December 31, 2012
|
|
|
Average
Depreciable
Life
|
|
Industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greenwood
|
|
IN
|
|
11/20/2012
|
|
$
|
-
|
|
|
$
|
1,200
|
|
|
$
|
12,002
|
|
|
$
|
-
|
|
|
$
|
1,200
|
|
|
$
|
12,002
|
|
|
$
|
13,202
|
|
|
$
|
(29
|
)
|
|
|
40
|
|
Mount Comfort
|
|
IN
|
|
11/20/2012
|
|
|
-
|
|
|
|
600
|
|
|
|
9,357
|
|
|
|
-
|
|
|
|
600
|
|
|
|
9,357
|
|
|
|
9,957
|
|
|
|
(21
|
)
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
1,800
|
|
|
$
|
21,359
|
|
|
$
|
-
|
|
|
$
|
1,800
|
|
|
$
|
21,359
|
|
|
$
|
23,159
|
|
|
$
|
(50
|
)
|
|
|
|
|
Assets Held for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ocean City
|
|
NJ
|
|
4/1/2008
|
|
$
|
-
|
(2)
|
|
$
|
776
|
|
|
$
|
334
|
|
|
$
|
(531
|
)
|
|
$
|
369
|
|
|
$
|
210
|
|
|
$
|
579
|
|
|
$
|
(57
|
)
|
|
|
40
|
|
Casselberry
|
|
FL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
355
|
|
|
|
245
|
|
|
|
(48
|
)
|
|
|
325
|
|
|
|
227
|
|
|
|
552
|
|
|
|
(29
|
)
|
|
|
40
|
|
New Port Richey
|
|
FL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
376
|
|
|
|
224
|
|
|
|
-
|
|
|
|
376
|
|
|
|
224
|
|
|
|
600
|
|
|
|
(27
|
)
|
|
|
40
|
|
Snellville
|
|
GA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
120
|
|
|
|
330
|
|
|
|
(13
|
)
|
|
|
119
|
|
|
|
318
|
|
|
|
437
|
|
|
|
(27
|
)
|
|
|
40
|
|
Naples
|
|
FL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
44
|
|
|
|
21
|
|
|
|
-
|
|
|
|
44
|
|
|
|
21
|
|
|
|
65
|
|
|
|
(2
|
)
|
|
|
40
|
|
Winter Garden
|
|
FL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
858
|
|
|
|
1,135
|
|
|
|
(937
|
)
|
|
|
414
|
|
|
|
642
|
|
|
|
1,056
|
|
|
|
(139
|
)
|
|
|
40
|
|
Williamston
|
|
NC
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
53
|
|
|
|
146
|
|
|
|
40
|
|
|
|
53
|
|
|
|
186
|
|
|
|
239
|
|
|
|
(22
|
)
|
|
|
40
|
|
Succasunna
|
|
NJ
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
147
|
|
|
|
123
|
|
|
|
(89
|
)
|
|
|
75
|
|
|
|
106
|
|
|
|
181
|
|
|
|
(45
|
)
|
|
|
40
|
|
Mount Carmel
|
|
PA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
40
|
|
|
|
110
|
|
|
|
(149
|
)
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
40
|
|
Norristown
|
|
PA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
253
|
|
|
|
1,050
|
|
|
|
(701
|
)
|
|
|
85
|
|
|
|
517
|
|
|
|
602
|
|
|
|
(196
|
)
|
|
|
40
|
|
Petersburg
|
|
VA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
17
|
|
|
|
114
|
|
|
|
1
|
|
|
|
17
|
|
|
|
115
|
|
|
|
132
|
|
|
|
(13
|
)
|
|
|
40
|
|
Warrenton
|
|
VA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
271
|
|
|
|
1,423
|
|
|
|
(628
|
)
|
|
|
161
|
|
|
|
905
|
|
|
|
1,066
|
|
|
|
(161
|
)
|
|
|
40
|
|
Madison Heights
|
|
VA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
191
|
|
|
|
200
|
|
|
|
(84
|
)
|
|
|
147
|
|
|
|
160
|
|
|
|
307
|
|
|
|
(24
|
)
|
|
|
40
|
|
High Point
|
|
NC
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
305
|
|
|
|
434
|
|
|
|
(638
|
)
|
|
|
22
|
|
|
|
79
|
|
|
|
101
|
|
|
|
(51
|
)
|
|
|
40
|
|
Hampton
|
|
VA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
133
|
|
|
|
366
|
|
|
|
(121
|
)
|
|
|
114
|
|
|
|
264
|
|
|
|
378
|
|
|
|
(26
|
)
|
|
|
40
|
|
Lenoir
|
|
NC
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
288
|
|
|
|
298
|
|
|
|
(170
|
)
|
|
|
199
|
|
|
|
217
|
|
|
|
416
|
|
|
|
(35
|
)
|
|
|
40
|
|
Woodbury
|
|
NJ
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
418
|
|
|
|
1,081
|
|
|
|
(1,269
|
)
|
|
|
31
|
|
|
|
199
|
|
|
|
230
|
|
|
|
(127
|
)
|
|
|
40
|
|
Linwood
|
|
PA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
98
|
|
|
|
187
|
|
|
|
(266
|
)
|
|
|
-
|
|
|
|
19
|
|
|
|
19
|
|
|
|
(19
|
)
|
|
|
40
|
|
Goodwater
|
|
AL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
60
|
|
|
|
165
|
|
|
|
(153
|
)
|
|
|
15
|
|
|
|
57
|
|
|
|
72
|
|
|
|
(20
|
)
|
|
|
40
|
|
Jacksonville
|
|
FL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
160
|
|
|
|
439
|
|
|
|
(132
|
)
|
|
|
121
|
|
|
|
346
|
|
|
|
467
|
|
|
|
(52
|
)
|
|
|
40
|
|
Jacksonville
|
|
FL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
267
|
|
|
|
732
|
|
|
|
(861
|
)
|
|
|
85
|
|
|
|
53
|
|
|
|
138
|
|
|
|
(17
|
)
|
|
|
40
|
|
Bremen
|
|
GA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
113
|
|
|
|
311
|
|
|
|
-
|
|
|
|
113
|
|
|
|
311
|
|
|
|
424
|
|
|
|
(37
|
)
|
|
|
40
|
|
Midlothian
|
|
VA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
160
|
|
|
|
439
|
|
|
|
-
|
|
|
|
160
|
|
|
|
439
|
|
|
|
599
|
|
|
|
(52
|
)
|
|
|
40
|
|
Newport News
|
|
VA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
80
|
|
|
|
220
|
|
|
|
(258
|
)
|
|
|
8
|
|
|
|
34
|
|
|
|
42
|
|
|
|
(14
|
)
|
|
|
40
|
|
Columbus
|
|
GA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
187
|
|
|
|
513
|
|
|
|
(428
|
)
|
|
|
62
|
|
|
|
210
|
|
|
|
272
|
|
|
|
(61
|
)
|
|
|
40
|
|
Dobbs Ferry
|
|
NY
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
187
|
|
|
|
513
|
|
|
|
(533
|
)
|
|
|
92
|
|
|
|
75
|
|
|
|
167
|
|
|
|
(19
|
)
|
|
|
40
|
|
New Port Richey
|
|
FL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
227
|
|
|
|
623
|
|
|
|
(476
|
)
|
|
|
169
|
|
|
|
205
|
|
|
|
374
|
|
|
|
(34
|
)
|
|
|
40
|
|
Florence
|
|
SC
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
80
|
|
|
|
220
|
|
|
|
(49
|
)
|
|
|
83
|
|
|
|
168
|
|
|
|
251
|
|
|
|
(15
|
)
|
|
|
40
|
|
Hotel:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lake Placid
|
|
NY
|
|
7/20/2010
|
|
|
-
|
(2)
|
|
|
628
|
|
|
|
4,131
|
|
|
|
1,485
|
|
|
|
628
|
|
|
|
5,616
|
|
|
|
6,244
|
|
|
|
(271
|
)
|
|
|
40
|
|
Land:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indio
|
|
CA
|
|
11/12/2009
|
|
|
-
|
|
|
|
8,722
|
|
|
|
-
|
|
|
|
(3,721
|
)
|
|
|
5,000
|
|
|
|
1
|
|
|
|
5,001
|
|
|
|
-
|
|
|
|
-
|
|
Antioch
|
|
CA
|
|
1/21/2010
|
|
|
-
|
|
|
|
1,874
|
|
|
|
-
|
|
|
|
(649
|
)
|
|
|
944
|
|
|
|
281
|
|
|
|
1,225
|
|
|
|
(42
|
)
|
|
|
-
|
|
Kailua-Kona
|
|
HI
|
|
7/20/2010
|
|
|
-
|
(2)
|
|
|
19,911
|
|
|
|
-
|
|
|
|
(10,883
|
)
|
|
|
8,913
|
|
|
|
115
|
|
|
|
9,028
|
|
|
|
(31
|
)
|
|
|
-
|
|
Office:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daytona Beach
|
|
FL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
267
|
|
|
|
732
|
|
|
|
(557
|
)
|
|
|
123
|
|
|
|
319
|
|
|
|
442
|
|
|
|
(53
|
)
|
|
|
40
|
|
Dunedin
|
|
FL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
507
|
|
|
|
1,392
|
|
|
|
(1,555
|
)
|
|
|
86
|
|
|
|
258
|
|
|
|
344
|
|
|
|
(85
|
)
|
|
|
40
|
|
Batesville
|
|
AR
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
217
|
|
|
|
825
|
|
|
|
(425
|
)
|
|
|
112
|
|
|
|
505
|
|
|
|
617
|
|
|
|
(109
|
)
|
|
|
40
|
|
El Dorado
|
|
AR
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
95
|
|
|
|
3,168
|
|
|
|
(912
|
)
|
|
|
55
|
|
|
|
2,296
|
|
|
|
2,351
|
|
|
|
(672
|
)
|
|
|
40
|
|
Bloomington
|
|
IL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
201
|
|
|
|
552
|
|
|
|
(301
|
)
|
|
|
111
|
|
|
|
341
|
|
|
|
452
|
|
|
|
(60
|
)
|
|
|
40
|
|
Bedford
|
|
IN
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
136
|
|
|
|
373
|
|
|
|
(257
|
)
|
|
|
104
|
|
|
|
148
|
|
|
|
252
|
|
|
|
(16
|
)
|
|
|
40
|
|
Frankfort
|
|
IN
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
198
|
|
|
|
545
|
|
|
|
(229
|
)
|
|
|
198
|
|
|
|
316
|
|
|
|
514
|
|
|
|
(27
|
)
|
|
|
40
|
|
Munford
|
|
TN
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
155
|
|
|
|
596
|
|
|
|
(370
|
)
|
|
|
71
|
|
|
|
310
|
|
|
|
381
|
|
|
|
(70
|
)
|
|
|
40
|
|
Monticello
|
|
IA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
64
|
|
|
|
337
|
|
|
|
(49
|
)
|
|
|
55
|
|
|
|
297
|
|
|
|
352
|
|
|
|
(40
|
)
|
|
|
40
|
|
Vincennes
|
|
IN
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
133
|
|
|
|
366
|
|
|
|
(261
|
)
|
|
|
61
|
|
|
|
177
|
|
|
|
238
|
|
|
|
(30
|
)
|
|
|
40
|
|
Elmhurst
|
|
IL
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
929
|
|
|
|
1,026
|
|
|
|
(1,495
|
)
|
|
|
156
|
|
|
|
304
|
|
|
|
460
|
|
|
|
(138
|
)
|
|
|
40
|
|
Norton
|
|
VA
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
40
|
|
|
|
110
|
|
|
|
(151
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
40
|
|
Kansas City
|
|
KS
|
|
4/1/2008
|
|
|
-
|
(2)
|
|
|
40
|
|
|
|
110
|
|
|
|
(150
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
|
|
|
|
$
|
-
|
|
|
$
|
40,381
|
|
|
$
|
26,259
|
|
|
$
|
(28,973
|
)
|
|
$
|
20,075
|
|
|
$
|
17,592
|
|
|
$
|
37,667
|
|
|
$
|
(2,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
42,181
|
|
|
$
|
47,618
|
|
|
$
|
(28,973
|
)
|
|
$
|
21,875
|
|
|
$
|
38,951
|
|
|
$
|
60,826
|
|
|
$
|
(3,016
|
)
|
|
|
|
|
|
(1)
|
The aggregate cost basis of land, building and improvements, before depreciation, for Federal income tax purposes at
December 31, 2012 was $165,673.
|
|
(2)
|
These properties collateralize a $113,500 mortgage note payable of which $63,730 was outstanding as of December 31, 2012.
The mortgage note payable is with the Company’s CDOs and is eliminated in the Consolidated Financial
Statements.
|
|
(3)
|
The construction date is unknown for the properties.
|
Gramercy
Capital Corp.
SCHEDULE
III
Real Estate Investments
(In thousands)
Set
forth below is a rollforward of the carrying values for our real estate investments classified as held-for-investment:
|
|
Years Ended December 31
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Investment
in real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
68,690
|
|
|
$
|
2,471,923
|
|
|
$
|
3,338,540
|
|
Improvements
|
|
|
1,203
|
|
|
|
8,494
|
|
|
|
14,308
|
|
Business
acquisitions
|
|
|
39,202
|
|
|
|
61,626
|
|
|
|
74,505
|
|
Change
in held for sale
|
|
|
(7,519
|
)
|
|
|
(3,393
|
)
|
|
|
(25,911
|
)
|
Impairments
|
|
|
(22,637
|
)
|
|
|
(348
|
)
|
|
|
(822,645
|
)
|
Property
sales
|
|
|
(55,780
|
)
|
|
|
(20,547
|
)
|
|
|
(106,874
|
)
|
Transfer
of foreclosed assets
|
|
|
—
|
|
|
|
(2,449,065
|
)
|
|
|
—
|
|
Balance
at end of year
|
|
$
|
23,159
|
|
|
$
|
68,690
|
|
|
$
|
2,471,923
|
|
Accumulated
depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
2,983
|
|
|
$
|
168,541
|
|
|
$
|
107,460
|
|
Depreciation
expense
|
|
|
1,022
|
|
|
|
39,707
|
|
|
|
62,436
|
|
Change
in held for sale
|
|
|
(2,468
|
)
|
|
|
(296
|
)
|
|
|
(195
|
)
|
Property
sales
|
|
|
(1,487
|
)
|
|
|
(412
|
)
|
|
|
(1,160
|
)
|
Transfer
of foreclosed assets
|
|
|
—
|
|
|
|
(204,557
|
)
|
|
|
—
|
|
Balance
at end of year
|
|
$
|
50
|
|
|
$
|
2,983
|
|
|
$
|
168,541
|
|
Gramercy
Capital Corp.
Schedule IV
Mortgage Loans on Real Estate
(Amounts in thousands)
Type
of Loan
|
|
Location
|
|
Interest
Rate
(1)
|
|
Current
Maturity
Date
(2)
|
|
Periodic
Payment Terms
|
|
Prior
Liens
(3)
|
|
|
Face
Amount of Loans
|
|
|
Carrying
Amount of Loans
|
|
|
Principal
Amount of Loans Subject to Delinquent Principal or Interest
|
|
|
Tax
Basis
|
|
Office - CBD
|
|
Chicago, IL
|
|
6.27%
|
|
2/11/2017
|
|
Interest Only
|
|
$
|
675,838
|
|
|
$
|
99,281
|
|
|
$
|
84,874
|
|
|
$
|
-
|
|
|
$
|
84,874
|
|
Office - CBD
|
|
New York, NY
|
|
10.25%
|
|
7/11/2016
|
|
Interest Only
|
|
|
262,387
|
|
|
|
23,388
|
|
|
|
23,476
|
|
|
|
-
|
|
|
|
23,476
|
|
Office - CBD
|
|
Chicago, IL
|
|
6.27%
|
|
2/11/2017
|
|
Interest Only
|
|
|
655,961
|
|
|
|
67,839
|
|
|
|
57,994
|
|
|
|
-
|
|
|
|
57,994
|
|
Office - CBD
|
|
New York, NY
|
|
LIBOR + 3.25%
|
|
3/9/2016
|
|
Interest Only
|
|
|
95,000
|
|
|
|
88,500
|
|
|
|
83,672
|
|
|
|
-
|
|
|
|
83,672
|
|
Multi Family
|
|
Southwest, FL
|
|
LIBOR + 2.00%
|
|
12/11/2013
|
|
Interest Only
|
|
|
0
|
|
|
|
48,983
|
|
|
|
38,783
|
|
|
|
-
|
|
|
|
38,783
|
|
Retail
|
|
Evanston, IL
|
|
LIBOR + 4.00%
|
|
10/9/2013
|
|
Interest Only
|
|
|
0
|
|
|
|
28,500
|
|
|
|
28,549
|
|
|
|
-
|
|
|
|
28,568
|
|
Hotel
|
|
Texas
|
|
LIBOR + 4.00%
|
|
8/9/2015
|
|
Interest Only
|
|
|
0
|
|
|
|
34,353
|
|
|
|
34,126
|
|
|
|
-
|
|
|
|
34,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole Loans < 3%
|
|
|
|
5.28% - 7.09%
|
|
5/9/2013 - 4/11/2017
|
|
|
|
|
593,048
|
|
|
|
417,804
|
|
|
|
401,459
|
|
|
|
-
|
|
|
|
401,744
|
|
|
|
|
|
Libor + 3.00% - 5.50%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinate Loans < 3%
|
|
|
|
4.00% - 14.35%
|
|
5/9/2013 - 12/7/2015
|
|
|
|
|
59,677
|
|
|
|
11,795
|
|
|
|
10,780
|
|
|
|
4,000
|
|
|
|
10,796
|
|
|
|
|
|
Libor + 2.50%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine Loans < 3%
|
|
|
|
|
|
8/11/2013 - 5/5/2014
|
|
|
|
|
222,628
|
|
|
|
21,012
|
|
|
|
20,422
|
|
|
|
-
|
|
|
|
20,984
|
|
|
|
|
|
Libor + 6.50% - 7.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
2,564,539
|
|
|
$
|
841,455
|
|
|
$
|
784,135
|
|
|
$
|
4,000
|
|
|
$
|
785,017
|
|
|
(1)
|
All
variable rate loans are based upon one month LIBOR or three month LIBOR and reprice every one or three months respectively.
|
|
(2)
|
Reflects
the current maturity of the investment and does not consider any options to extend beyond the current maturity.
|
|
(3)
|
Includes
Liens that are pari-passu to the interests owned by the Company
.
|
1.
Reconciliation of Mortgage Loans on Real Estate:
The
following table reconciles Mortgage Loans for the years ended December 31, 2012, 2011 and 2010.
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Balance at January 1
(1)
|
|
$
|
1,081,919
|
|
|
$
|
1,123,528
|
|
|
$
|
1,383,832
|
|
Addtions during period:
|
|
|
|
|
|
|
|
|
|
|
|
|
New mortgage loans
|
|
|
19,295
|
|
|
|
325,279
|
|
|
|
114,456
|
|
Additional funding
(2)
|
|
|
2,536
|
|
|
|
12,907
|
|
|
|
13,653
|
|
Amortization of discount, net
(3)
|
|
|
7,755
|
|
|
|
3,241
|
|
|
|
1,033
|
|
Deductions during period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections of principal
|
|
|
(221,122
|
)
|
|
|
(334,856
|
)
|
|
|
(183,439
|
)
|
Transfers to real estate held-for-sale
|
|
|
(96,904
|
)
|
|
|
-
|
|
|
|
(80,581
|
)
|
Provision for loan losses
|
|
|
7,838
|
|
|
|
(48,180
|
)
|
|
|
(84,390
|
)
|
Valuation allowance on loans held-for-sale
|
|
|
(1,882
|
)
|
|
|
-
|
|
|
|
(2,000
|
)
|
Mortgage loan sold
|
|
|
(15,300
|
)
|
|
|
-
|
|
|
|
(39,036
|
)
|
Loss on sale of
mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at December 31
|
|
$
|
784,135
|
|
|
$
|
1,081,919
|
|
|
$
|
1,123,528
|
|
|
(1)
|
All amounts
include both loans receivable and loans held-for-sale.
|
|
(2)
|
Includes
capitalized interest, which is non-cash addition to the balance of
mortgage loans, of $5.4 million, $5.4 million and $6.5 million for
the years ended December 31, 2012, 2011 and 2010, respectively.
|
|
(3)
|
Net discount
amortization represents an entirely non-cash addition to the balance
of mortgage loans.
|