20 October 2009

GE Real Estate Holdings Worry Investors


General Electric Co's $84 billion real estate portfolio remains a worry for investors, who wonder if the conglomerate will have to take big write-downs to reflect the lower value of real estate debt and equity holdings.

The GE Real Estate unit was the only GE Capital business to post a loss in the latest quarter.

"People are worried about commercial real estate," said Russell Croft, vice president and portfolio manager of Croft-Leominster, which owns 263,000 GE shares.

"I want to hear what they're doing to shrink GE Capital and get more detail on the real estate (holdings)," Croft said. The company has a strong industrial business but "cleaning up GE Capital" was key to extending GE's recent share rally.

Shares of GE, the biggest U.S. conglomerate, fell 5 percent Friday as its quarterly sales disappointed Wall Street even as its profit topped expectations.

GE Real Estate, part of the GE Capital division, posted a loss of $538 million in the quarter, double the loss in the preceding quarter. By comparison, GE Real Estate earned $244 million in last year's third quarter.


The commercial real estate sector has been on the decline for more than a year and represents the next great threat to the financial markets, according to recent government reports.

About $1.4 trillion of commercial real estate debt is expected to mature from 2009 through 2013, with 41 percent of that coming due over the next three years. Much of the maturing debt carries a large balloon payment at the end.

Meanwhile, borrowers are facing lenders who have shut their doors to making any more investments in commercial real estate, and are particularly shying away from large loans. On top of that, properties values have sunk and in many cases aren't worth the debt they carry.

The financing available to roll over a lot of commercial debt coming due in the next few years is limited. Much of GE's commercial real estate equity is not worth what the company paid for it, especially assets bought near the market peak in 2006 and 2007.

"They're still not taking impairments on the commercial real estate portfolio and there's a lot of concern about that," said Jack De Gan, chief investment officer at Harbor Advisory Corp, which owns GE shares in client portfolios.

"They acquired that portfolio very late in the rally for commercial real estate," De Gan said. "There's a lot of concern among investors there are significant write-downs yet to come out of that portfolio."

Standard & Poor's noted on Friday that delinquencies, charge-offs and nonperforming assets remain elevated across GE's major businesses, calling real estate credit performance and asset-value deterioration "particularly severe."


GE Real Estate's $84 billion in assets represent about 15 percent of total GE Capital assets of $551 billion.

Impairments in the real estate portfolio are "running above plan," GE Chief Financial Officer Keith Sherin told analysts on the company's earnings conference call. But Sherin added: "the risks are understood and manageable."

GE has taken $467 million in real estate equity impairments so far this year, versus an earlier outlook of less than $300 million. Total credit losses and impairments are $1.5 billion year-to-date, GE said.

Sherin said delinquencies were "right in line" with bank real estate portfolios, and noted GE's asset mix and geographic exposure are different than those of banks.

Delinquencies in the commercial real estate debt portfolio -- a warning sign that precedes defaults -- rose to 4.19 percent from 4.03 percent in the prior quarter. The percentage of non-earning assets rose slightly from the second quarter.

The company, which said it evaluates its debt portfolio twice a year, increased its reserves for potential losses on its debt portfolio, but said it was not clear the losses would materialize.

GE has been working to shrink its huge finance arm, which has been hit hard by the credit crunch, and on Friday stressed the strong performance of many of its infrastructure businesses. But GE CEO Jeff Immelt acknowledged the poor performance of GE Real Estate.

"All the other businesses at GE Capital are profitable except for Real Estate, and that is the one we are really going to have to work through," Immelt said.

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