Real estate investment trust Gramercy Property Trust (NYSE: GPT) has gotten a lot bigger over the past year thanks to recent acquisitions, and that has given it both opportunities to grow and challenges to overcome. Coming into Wednesday's third-quarter financial report, Gramercy Property Trust investors were fully expecting a huge revenue increase, but they also wanted to see sustained performance in the REIT's bottom line.
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Even though Gramercy posted a GAAP loss, growth in funds from operations pointed to solid prospects for the future, and a dividend increase showed the REIT's confidence in its ability to grow. Let's look more closely at Gramercy Property Trust's latest results, and what investors should anticipate looking forward.
Image source: Gramercy Property Trust.
Gramercy Property Trust moves ahead
Gramercy's third-quarter results were reasonably solid. Revenue roughly doubled, to $131.1 million, outpacing the consensus forecast among investors for $129.4 million on Gramercy's top line.
As we've seen in some past periods, Gramercy lost $2.5 million on a GAAP basis, or $0.01 per share. However, adjusted funds from operations climbed more than 150%, to $69.1 million, and that produced adjusted FFO per share of $0.16, up from last year's $0.14 per-share figure, even accounting for the additional shares issued as part of the REIT's merger late last year.
Looking more closely at how the quarter went for Gramercy, the REIT made a typical number of purchases, sales, and other strategic moves. On the acquisition front, Gramercy bought 16 different properties in 11 transactions, paying a total of almost $265 million. That provided an initial cash capitalization rate of 6.8% and an annualized straight-line capitalization rate of 7.3%.
This is somewhat less favorable than Gramercy has managed in past quarters, but reflects the strong state of the real estate market right now. The properties were scattered across the country in major metropolitan areas like Los Angeles, Chicago, and Houston, as well as several smaller markets.
Gramercy also made some sales of properties during the quarter. The REIT sold three office buildings and one industrial facility, raising $206.7 million. That represented a cap rate of 7.4%, which is also a bit less favorable than Gramercy has seen with sales in past quarters.
Joint ventures also played a role in Gramercy's latest moves. The company completed the dissolution of a joint venture with Duke Realty, but entered a new partnership with TPG Real Estate to form a new venture called Strategic Office Partners. Gramercy contributed six assets with a value of $187.5 million, and it received a 25% interest in the venture, plus $140.6 million in cash. The Gramercy Europe joint ventures also acquired three more properties, bringing the total to 33 properties in Europe.
Finally, Gramercy's asset management business saw an increase in fee revenue, rising by about two-fifths from year-ago levels, to hit $7.2 million. However, the figure was down considerably from the second quarter of 2016, with Gramercy saying that lower incentives were responsible for the sequential decline.
What's ahead for Gramercy?
Looking forward, Gramercy continues to see its performance for the remainder of the year staying fairly consistent with its previous projections. The REIT narrowed its full-year guidance, expecting core funds from operations to come in between $0.72 and $0.74 per share. Adjusted funds from operations should be between $0.66 and $0.68 per share.
Yet Gramercy did give investors good news by increasing its dividend. The REIT raised its quarterly payout by 14%, to $0.125 per share, and CEO Gordon DuGan noted how the increase "reflects our confidence in the Company's repositioned portfolio and its ability to deliver durable, long-term cash flows." The boost will send Gramercy's dividend yield up to around 5.5%.
Gramercy's shareholders didn't react immediately to the news in pre-market trading following the announcement. Yet the REIT's performance was solid, and the investing thesis for long-term investors appears to be intact, as Gramercy has made great progress in consolidating its acquisitions and moving forward aggressively.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Gramercy Property Trust. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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