Dont be fooled by the $19 book value, fair value is proberbly zero.
The book value per common is actually around $17. If the book value doesn't account for the drop in real estate prices, it also doesn't account for the drop in price of debt.
There are many examples of insiders buying when the company is dead and not buying when it is on the rise. Look at TMA executives before it went under.
Value of debt across the board has declined. So taking 30-40 cents on the dollar is current market value, not neccessarily special consideration for GKK situation. In the case of key bank, they had unsecured, non-recourse debt. They probably got close to market value for the debt.
We agree that CRE has not bottomed and that GKK posted first earnings loss in history.
We know the company has solid cash flows from the real estate portfolio. Losses right now are coming from the finance arm. They seem to be taking prudent steps to address the finance issues (i.e. last quarters debt restructuring, selling problem loans and buying CMBS, increasing loan loss reserves to 50% of NPLs, etc.) As repays come due, CDOs should be strengthed with AAA CMBS. It is a long slog from here, but they are taking the proper actions.
It is hard, but we have to ignore short term fluctuations in price. This thing will go up and down, up and down. The question you have to ask is what is the value of this company? If you could buy a $50K Mercedes for $20K would you? And would you sell it if the next day someone brought the same Mercedes for $10K? We all have to make our own decisions on the value of the Company, but I submit that in the current environment, market price is not indicative of true value of GKK or many other companies.
"The book value per common is actually around $17. If the book value doesn't account for the drop in real estate prices, it also doesn't account for the drop in price of debt."
The depth on the buildings is mortage depth and havent necessaerly fallen. See what happened to home owners, their house has fallen 50% in value, but they still have the same mortage to repay.
Even if the mortage depth is for sale at a 50% discount (which it is not, only bonds are), GKK would not be able to buy them at a discount because they dont have the cash to do that.
SLG has currently issued new stock so they will have the cash for doing depth buyback, but GKK dont have such plans. They have been buying bonds but far from what is needed to offset real estate decline. It has onlu been enought to offset loan loss reserves, and it seems they are not so agressive on this anymore because of liquididy.
Also consider average lease is 10.2 years and 78% of tenants are investment grade credit rating. I'd say the cash flows from the real estate are likely to outlast the current down turn. Especially if they successfully renegotiate the Dana portfolio.
"Let's say I brought a house for $100K. I look up a few years later and they tell me its worth $50K. As I write my mortgage check, I think to myself, wow, I am upside down on this house. But, I keep writing my monthly mortgage checks and one day someone says your house is worth $150K. So, I went from 0 equity to negative equity to positive equity. The whole time, the real effect on me was 0. I kept living in my house and paying my mortgage.
I'm terrible at analogies, but the point is, GKK real estate is providing consistent and steady cash flow. Their core portfolio is 96% rented. Since the end of 1Q09, they have leased additional space. So, you can say the assets are worth $0 all day long but GKK is getting a steady paycheck from these worthless assets.
Of the assets they are trying to sell, 1Q09 they were getting 6% cap rate. Entire portfolio was purchased in 2008 at a decent discount, so I suspect the property values haven't deteriorated as much from their carrying value as you might think. "