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TOXIC ASSET? GE To Reduce Real Estate Investments by $10 Billion

Stops Underwriting and Originating New Equity To Shrink its Real Estate Portfolio Below $80 Billion
October 1, 2008
Citing the growing perception among investors of real estate as a toxic asset class, General Electric said last week that it plans to reduce its real estate holdings by $10 billion next year - more than 11% of its current holdings.

"One thing that's obviously been in investor minds is the size of our commercial real estate portfolio," said Keith Sherin, CFO of General Electric. "We have a fantastic real estate portfolio. It's very high-quality. The delinquencies in the book are 0.27% of assets, so it's performing very well. But the size is something investors have expressed concern about and for us it's around $90 billion today. We're going to take that down to below $80 billion in 2009 and we're going to continue to remix the business."

This article is excerpted from this week's issue of WATCH LIST, a weekly report of property and credit market conditions and real estate investment opportunities by CoStar Senior News Editor Mark Heschmeyer.

Sherin said GE has stopped underwriting originating new equity and will do so until it gets its portfolio down to less than $80 billion.

"We've previously guided that we'd about $1.5 billion to $1.7 billion of earnings in real estate," Sherin said. "I would say that we're certainly tiering towards the low end of that guidance today. And we're going to have higher delinquencies, especially today we're seeing it in the consumer side, not so much in the commercial side, but we do expect that going forward. And as you have higher delinquencies, we will put up higher provisions."

Sherin also said GE will have some mark-to-market pressure in the third quarter due to volatility in the capital markets.

"The categories that we're dealing with in there are mark-to-markets on equity securities and preferred positions we hold in companies that we're having to mark in the quarter," Sherin said. "We also have some retained interest from our securitizations that we have to deal with on the mark in there. And then we have the warehouse where we have assets for sale, we have about $2.5 billion, $3 billion warehouse and those get mark to market every quarter. So that's the biggest piece."
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