new CEO

Nonetheless, Cozzi said during the call that there will be challenges ahead in weathering the current market turbulence until the company is once again in a position to grow. To that end, Gramercy revealed several modifications in the agreements it has with SL Green Realty, Gramercy's largest shareholder and its manager through SL Green's wholly owned subsidiary, GKK Manager LLC. The modifications are designed to increase liquidity, a goal Cozzi also emphasized during Thursday's conference call. He outlined four immediate goals, to be pursued simultaneously over the next several months.

First of these goals will be "finding and hiring the best people" to fill the key positions that have been left vacant by the reorganization of the management team. There will be "a bottom-up review of the business plan for every individual asset in both Gramercy Finance and Gramercy Realty," to be followed by "incorporating these plans into a three-year company business plan," said Cozzi. The third of the measures will consist of "being proactive" about making sure that Gramercy is in a position "to pursue any and all liquidity creation strategies." Finally, he said, Gramercy will "aggressively manage our loan portfolio and pursue asset dispositions" where appropriate.

"We are in a difficult time and none of this will be easy," Cozzi said, adding that the market forces that caused this industry's current problems "will not disappear overnight."

According to a news release, the modification of agreements between Gramercy and SL Green comes four years after SL Green launched Gramercy from its own existing structured finance platform. The modifications were unanimously approved by special committees of each company's boards of directors.

Effective Oct. 1, the base management fee to GKK Manager will be reduced from 1.75% to 1.50%, and GKK Manager will remit all CDO collateral management fees to Gramercy from Q3 onward. Also effective Oct. 1, Gramercy will no longer pay asset servicing fees or special servicing fees to GKK Manager, nor will it pay outsource fees.Distributions by GKK Capital LP on account of the incentive return due to holders of the class B limited partnership interests for Q3 and Q4 will be eliminated, and there was a reduction in the termination fee due from Gramercy to SL Green in the event Gramercy elects not to renew the management agreement, which currently runs through Dec. 31, 2009.

Marc Holliday, who stepped down as Gramercy's president and CEO, said the reduction of the termination fee "paves the way for a possible future internalization" of GKK Manager "and all of its employees." The measures agreed upon by the Gramercy and SL Green boards are "initial but decisive steps" toward reducing operating costs and reducing "the perceived overhang of an internalization," Holliday said.

"SL Green has made these concessions in an attempt to help Gramercy succeed in stabilizing its financial position in the near term while poising it for future growth when the credit markets return," Holliday said. Eliminating the fees will improve Gramercy's operating performance and cash flow by approximately $20 million per year, he added.

According to Q3 numbers, the firm generated total revenues of $440.8 million during the first nine months of 2008, an increase of $204.1 million from $236.7 million during the same nine months of the prior year. As of Sept. 30, 2008, Gramercy owned 29 million net rentable sf of commercial real estate in 37 states and the District of Columbia with an aggregate asset book value of approximately $3.9 billion, in addition to $2.2 billion of loan investments, $857.4 million of commercial mortgage real estate securities investments, and $766.5 million other assets. As of Sept. 30, approximately 50.5% of the company's assets were comprised of commercial property, 28.6% of debt investments, 11% of commercial mortgage real estate securities and 9.9% of other assets.

However, the firm did report that net income to common stockholders was $7.3 million, a decrease from $94.8 million for the same quarter in the previous year. According to the firm, the change is due primarily to: depreciation expense of $22.3 million, as compared to $1.2 million in the prior year quarter; and the gain, net of the associated incentive fee, on the sale of the company's interest in One Madison Ave., which contributed $73.2 million, in the prior year quarter.

Instant Insights /

New Gramercy CEO Sees Challenges Ahead

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