Let's assume GPT earns 30 cents per share in 2014.
With 71 million shares outstanding, the 2014 profit would be $21.3 million.
Let's also assume they issue 19 million shares at $5.25 thus raising $100 million.
So now total outstanding shares are 90 million.
Now let's say they use the $100 million to buy back the Preferred.
This saves $8 million in Preferred payments in 2014.
Add the $8 million savings to the assumed $21.3 million profit in 2014 and you get $29.3 million.
$29.3 million divided by 90 million shares outstanding is 33 cents per share profit.
The increase in EPS is 3 cents (33 cents - 30 cents) per share or 10%.
Assuming the share price rises 10% in line with the 10% EPS increase,
GPT share price jumps 52 cents from $5.25 to $5.77/share.
If GPT issues new shares at a price higher than $5.25, the jump in EPS is even greater than 10%.
If GPT is at $6.00/share in 2014, the share price jumps to $6.75/share on the Preferred redemption.
There is NO OTHER USE of GPT's cash that will earn them 8.125% per year on $100 million, every year, other than redeeming, i.e. buying back the Preferred !
In the meantime, in 2014 more properties will be bought and EPS will steadily increase.
My conservative price target for the end of 2014 is $7.00 to $7.25
I thought this was covered a few months ago. On a levered basis, the return from buying assets was greater than the cost of redeeming the preferred. I don't remember the exact math, but it went something like buying assets with a 7.5% yield and using 50% debt at a cost of 4.5% produces a levered return over 10%. As long as they can find assets that return over the cost of the preferred, that is what they will do. REITs are in business to grow their portfolio and add assets. If they can't do that any longer, they sell. The preferred is not the most pressing issue now that it is being brought current and issuing common while it is still in the $5 range just to buy back the preferred won't be done. I think they will use the credit line first to acquire assets before they issue more equity as acquisitions increase the dividend which improves the pricing on the equity.
This issue was discussed on this board some time ago.
It is in the company's (and shareholder's) best interest to invest in accretive acquisitions and continue to grow its portfolio and balance sheet. The levered return associated with that activity is far greater than buying in the preferred and, as importantly, demonstrates the company's ability to execute on its business plan.
A larger balance sheet that is properly constructed will go much further toward the company ultimately achieving an investment grade rating than buying in the preferred. The preferred should remain a permanent part of the company's capital structure until its cost is so out of line with market that the company should consider other alternatives. I think this scenario is highly unlikely given expected increasing rates over the next several years.