New Gramercy to Put Assets on Chopping Block

By Gail Kalinoski, Contributing Editor

Brad Thomas, Forbes RE Investor

One of the first things on the to-do list for the new Gramercy Property Trust when a planned merger with Chambers Street Properties is completed later this year will be to start selling several suburban office assets to eventually reduce the combined company’s office holdings to about 25 percent of its total portfolio.

The companies, which announced the definitive agreement to merge Wednesday, noted in an investors’ presentation that $500 million to $700 million in office properties would be sold in the first year following the merger.

“Net-leased office is a difficult business in the best of times. It’s not surprising that Gramercy and other net-lease REITs therefore seek to reduce their concentration in this asset class,” Cedrik Lachance, a managing director and analyst at Green Street Advisors who covers net lease REITs, told Commercial Property Executive.

Brad Thomas, editor of Forbes Real Estate Investor newsletter, said the combined company “would have a lot of work to do to mitigate that multi-tenant office risk.”

“It continues to be an issue for Chambers Street and I think it will be for Gramercy as well,” Thomas told CPE.

The plan, approved unanimously by boards of both companies, calls for the two REITs, which both focus on industrial and office net lease assets, to merge in an all-stock deal. If approved by shareholders, the deal would close in the fourth quarter and create the largest industrial and office net-lease REIT with an enterprise value of approximately $5.7 billion. Chambers Street shareholders would own about 56 percent and Gramercy shareholders about 44 percent of the combined company that will retain the Gramercy name and trade under its GPT ticker symbol on the New York Stock Exchange. The New York-based Gramercy team will lead the combined company with current Gramercy CEO Gordon DuGan as CEO, Benjamin Harris as president and Jon Clark as CFO. Charles Black, the current chairman of Chambers Street’s board, will serve as the non-executive board chairman. Martin Reid, Chambers Street interim CEO since March, will be Head of Transition.

The combined portfolio would have 288 properties and 52 million square feet of space in major markets throughout the United States and Europe and occupancy of 99.2 percent. Upon closing, there would be 131 industrial properties with 37.3 million square feet and 131 office/banking centers with 12.3 million square feet. The remaining properties are data centers, specialty industrial and specialty retail, which represents the 10 high-end fitness centers that Gramercy acquired in early June for $300.5 million in a sale-leaseback deal with Life Time Fitness Inc.

“It’s really a win for both companies if we can drive the company forward in the way we intend to drive the company. Both sets of shareholders share in the upside,” DuGan said during a Wednesday conference call.

Asked whether other options had been considered by the Chambers Street board, Black told the analysts, “It was a very thorough process. We feel very comfortable that we have selected the most promising result for our shareholders.”

Some shareholders may not agree with DuGan and Black as shares for both companies traded down throughout the day Wednesday. And several law firms around the United States announced investigations into the planned merger and sought to talk with investors who may not be pleased with the terms of the agreement which call for Gramercy shareholders to receive 3.1898 shares of Chambers Street for each share of Gramercy common stock they own.

Rumors have been swirling about Chambers Street’s future since November when former president, CEO & Founder Jack Cuneo said he was retiring. Cuneo left the Princeton, N.J.-based REIT in March when Reid was named interim president & CEO.

In an April 6 story in his newsletter, Thomas predicted a possible M&A deal was ahead for Chambers Street and mentioned Gramercy as a possible suitor, noting such a deal could “add significant scale to Gramercy’s platform.”

“A transaction for Chambers Street had been widely anticipated,” Lachance said Wednesday. “The company was led by an interim CEO, which was the first clue a transaction was likely to occur. Plus Chamber owns a small portfolio and there can be benefits to scale in the net-lease sector. A combination between two small players makes strategic sense.”

DuGan described it as “the next logical step for Gramercy in creating a best-in-class net lease REIT.”

“We expect that combining with Chambers Street will create a market leader with greater scale, broader tenant and geographic diversification across the United States and Europe, and additional financial flexibility,” DuGan said in the release. “With a larger and more diverse platform, we believe the new Gramercy will be better positioned to pursue larger acquisition opportunities, which we anticipate going forward.”

DuGan said during the conference call that the greater scale would give the combined company the ability to seek more sale-leaseback deals similar to the Life Time Fitness transaction. He said one of the biggest corporate trends now is activist shareholders pushing companies to sell their real estate holdings in sale-leaseback transactions.

“I think we’re in a much better position to take advantage of that,” he said.

DuGan and Black said the two companies have complementary portfolios focused on major U.S markets. Eighty-five percent of the combined company’s assets will be in target markets such as New York/New Jersey, Dallas, Baltimore/Washington, D.C., Los Angeles and South Florida. The portfolio will have an average lease term of more than seven years and 43 percent of its tenants will be investment grade.

Merging the companies is expected to save $15 million a year in synergies.

J.P. Morgan Securities L.LC. served as financial advisor to Chambers Street and Paul, Weiss, Rifkind, Wharton & Garrison L.L.P. and Clifford Chance US L.L.P. served as legal advisors to Chambers Street.

Morgan Stanley served as financial advisor to Gramercy and Wachtell, Lipton, Rosen & Katz and Morgan, Lewis & Bockius served as legal advisors to Gramercy.