General Electric pays price for real estate, debt investments

General Electric Co Chief Executive Officer Jeffrey Immelt is paying the price for his investments in commercial real estate and UK property debt.

Profit at GE Real Estate dropped by $1.1 billion last year, according to the annual report from the parent company’s GE Capital finance arm. Fairfield, Connecticut-based General Electric’s real estate earnings are likely to fall further as occupancies and rents drop in a US recession that’s now in its second year, said James S Corl, who oversees distressed real estate investments at Siguler Guff & Co in New York.

“They spent a huge amount of money in real estate,” Corl said. “They paid a full price for what ends up being a lot of mediocre real estate.”

General Electric shares this week dropped below $6 for the first time since December 1991 on concern that GE Capital may require additional cash. GE Vice Chairman and Chief Financial Officer Keith Sherin said in a statement on Saturday that he sees no need to raise additional capital, and that the company’s financial services businesses expect to be profitable in the first quarter of 2009 and all year.

Sherin also said the company will host a GE Capital investor meeting later this month and examine the “hot spots in the company, including real estate, US consumer, global mortgage with a focus on UK home lending, and central and eastern Europe exposure.”

GE said on January 23 that its real estate unit will post a loss of $500 million this year as it absorbs $4 billion more in pretax losses. That will help drag GE Capital’s profit down to $5 billion from $8.6 billion in 2008, the company said.

“Did we end up with too much exposure in certain areas during the credit bubble? Maybe, a few,” Immelt said in his annual letter to shareholders, released March 2.

“Today, I wish we had less exposure to commercial real estate and UK mortgages.”

GE’s commercial real estate business consists of both property and real estate loans. It has stakes in or financing on 8,000 properties in 2,600 cities, with an average investment of less than $10 million, according to regulatory filings. GE’s property includes office buildings, warehouses and apartments, with about 71 per cent located outside the US, primarily in Europe, Asia, Canada and Mexico, the company said.

‘Cash-flow positive’
“Our conservative underwriting of properties for which a valid value-add strategy (improve the building, re-lease, raise rents) was appropriate makes us comfortable with our portfolio,” GE spokesman Russell Wilkerson said in a statement on Saturday. “We have business plans in place to improve properties where necessary. Many of these properties still carry below-market rents, providing us with protection and some upside.”