GE Capital to Cut Commercial Real Estate (Wall Street Journal)

By Bob Sechler and Paul Glader (June 7, 2010)
Wall Street Journal 

The head of General Electric Co.'s finance arm said the company aims to cut its holdings of commercial real estate by half, detailing plans to reduce the scale of a business that has proved a huge headache in the wake of the credit crisis.

GE Capital holds an $80 billion portfolio of assets like office and apartment buildings, as well as loans secured by commercial property. Mike Neal, chief executive of GE Capital and a GE vice chairman, on Friday said the firm aims to cut that portfolio to $40 billion and to shift its composition more toward loans and away from ownership stakes.

While he didn't give an exact time frame for the goal, the comments further clarified GE Capital's plans for a troubled business. The market value of commercial buildings the company owns has fallen by nearly 40%, or $7 billion, since 2008 GE estimates. The company also has lost more than $1.6 billion since 2008 in its commercial real-estate debt portfolio, which includes loans to others to buy or develop properties.

"We're probably largely through just the free fall in asset values," Mr. Neal said of the real-estate holdings at an investor conference. But the sector still is "not out of the woods yet."

GE Capital, hard hit by the financial crisis, has relied on cash injections from its parent company and government guarantees in the bond market during the past two years to shore up its massive lending business. While losses and delinquencies are easing in consumer and equipment lending businesses, GE Capital's real-estate delinquency rates keep climbing.

Mr. Neal said continued high unemployment will fuel delinquencies and serve as a persistent drag on the real-estate sector, with empty cubicles and dark office buildings around the country.

Cutting back the commercial real-estate portfolio is part of GE's effort to shrink GE Capital to about $400 billion of assets from about $650 billion at the end of 2009. The company will do so by selling some lines of business outright and also by not writing new loans to cover those that are paid off.

Mr. Neal said the company is looking at exiting several small rental businesses, such as trailer and container leasing, but didn't definitively answer a question on whether GE Capital would sell its private label credit-card division, which he said had a record quarter.

"We are in the process of exiting small operations around the world," he said. The company, for example, is still aiming to sell its 21% stake in Turkey's Garanti Bank, he said.

GE Capital, regarded as systemically risky along with major Wall Street banks, is bracing for new financial-service regulations from Congress in coming months. The company, long regulated by the Office of Thrift Supervision, which would go away under bills passed by the House and Senate, is likely to be regulated in the future by the Federal Reserve.

"I'm more concerned about the regulations than the regulator," said Mr. Neal. "Whatever the regulations are, we will comply with them."

He said the company has already been working to improve its reserves and manage its balance sheet more conservatively. He said GE will reduce its reliance on short-term borrowing, called commercial paper. The company has $45 billion of commercial paper at present, about 10% of its funding needs, down from roughly $100 billion in 2008, when Lehman Brothers declared bankruptcy and the market dried up, forcing the government to step in with liquidity support for GE and others.

"That's a lesson learned," said Mr. Neal. "We'll never have those kinds of levels again."

Meanwhile, he said GE Capital is likely to experience some headwind from the economic problems in Europe, where GE Capital has roughly $140 billion of assets. "To the extent that this causes an overall economic malaise on the continent," Mr. Neal said, "we get impacted by that."

Grandpa would not be surprised to see Jim Cramer commence with round 2 of positive comments about commercial real estate and REITS. After all, Cramer recommended buying British Petroleum a couple of weeks ago and just threw the stock under the bus. Of course the stock dropped roughly 30+% during the two week time frame. Remind me again why anyone tunes in to view this clown?