REIT M&A Heating Up: Why Chambers Street Shares Just Dropped

On July 1, Chambers Street Properties CSG and Gramercy Property Trust GPT announced that Chambers Street will be acquiring Gramercy for 3.19 CSG shares to 1 GPT share, in a deal that valued Gramercy at $25.36 per share.

This represented an 8.5 percent premium for GPT shares based upon the June 30, close of $23.37 per share.

At mid-day, CSG shares were trading at $7.30 per share, sinking 8 percent on the news, while GPT shares were lower by 2.89 percent. Both stocks closed in the red on Wednesday.

According to the joint release, the combined entity will retain the Gramercy name and ticker symbol, with a total capitalization of ~$5.7 billion. Chambers Street shareholders will own 56 percent of the combined entity, with Gramercy shareholders owning 44 percent.

Tale Of The Tape - Chambers Street

During the past 52-weeks, Chambers Street has traded in a range of $6.94 - $8.58 per share, and are now down ~9.5 percent YTD.

Tale Of The Tape - Gramercy

During the past 52 weeks, Gramercy has traded in a range of $21.92 to $29.58 per share, and are now down ~17.7 percent YTD.

Gramercy CEO Gordon DuGan will become the CEO of the combined entity, while Chambers Street non-executive Chairman Charles Black will continue in that role after the merger.

Merger Rationale

• Greater Scale: The combined entity will have 288 properties, totaling 58 million square feet in the U.S. and Europe; and expects to generate $15 million in cost savings by the end of 2016.
• Portfolio Diversification: The top 10 tenants will represent less than 30 percent of base rents, with no one tenant accounting for more than 7.5 percent.
• Core Markets: "Eighty-five percent of the combined company's real estate assets will be in target markets, such as New York/New Jersey, Dallas, Baltimore/Washington, D.C., Los Angeles and South Florida."
• Balance Sheet: The combined entity is expected to have a stronger balance sheet, and anticipates a more "cost-effective access to capital."
• Capital Recycling: The combined entity will have a higher unencumbered asset base, which should provide "…enhanced flexibility to sell assets and reposition portions of the portfolio with minimal prepayment expense."

Notably, the combined portfolio is 99 percent leased, with a remaining lease term of over 7 years.

Dividend Policy

"Each company intends to continue its current dividend policy until the close of the transaction. Following the close of the transaction, the new company expects its dividend payout ratio to be lower than the current Chambers Street payout ratio and higher than the current Gramercy payout ratio."

Notably, Gramercy has increased its dividend 40 percent during the past year.

Adopting Gramercy Operating Strategy

Following the close of the transaction, the combined company also intends to pursue the disposition of certain suburban office properties in order to reduce the level of these holdings to approximately 25% of its total portfolio over the long term, in line with Gramercy's stated targets.

Source: GPT Q1 presentation

In addition, the combined company expects to continue to be an active acquirer of single-tenant net leases and properties.

It also intends to accelerate the growth of its European operations, according to the joint release.

Source: GPT Q1 presentation

Gramercy CEO Gordon DuGan has a proven history of underwriting European assets from his tenure at net-lease REIT W.P. Carey Inc. WPC.

DuGan served as WPC President and then CEO from 1999 to 2010, and during that time, helped grow assets under management (AUM) from $2 billion to $10 billion.

Combined Top 10 Markets

Source: July 1, 2015 Presentation

The New York/New Jersey market will be the largest for the combined entity.

Pro Forma Balance Sheet Highlights

Source - July 1, 2015 Presentation