GE has a $34 billion commercial real estate investment portfolio that it does not mark to market. According to accounting rules, the company doesn't have to mark to market because it is in a hold-to-maturity portfolio and 80% of the properties are not secured by mortgages. This is a fair point, and I would accept this explanation if it weren't for the fact that GE was flipping properties with the best of them during the commercial real estate boom to boost earnings. According to Real Capital Analytics, in 2007 GE sold $7 billion of real estate world-wide but acquired $16.6 billion in the same year. Since 2007 was the high, GE was able to conveniently book significant profits on the sales, while simultaneously paying too much to double down on real estate. If GE were just really bullish on commercial real estate and genuinely planned to hold to maturity, it would've had no reason to sell any properties in 2007. Clearly, this was an earnings massaging maneuver that is no longer available to the company. So, yeah, GE will definitely be holding to maturity now (i.e. no buyers). The properties that GE purchased in 2007 are down at least 30%, assuming anything ever trades in the commercial real estate market again on a valuation basis. The Wall Street Journal is filled with examples of the shocking rise in vacancies in several of the large buildings that GE purchased at the peak. Apparently, GE has chosen to estimate that the value of its commercial real estate holdings will fall this year by 1.5%. This seems incredibly hard to believe. In fact, once I read this line, I rolled around on the floor laughing for a bit. The folks at GE don't seem to understand that even if they don't think they need to mark to market, the market will do it for them. But I give them major props for finally offering transparency to their investors.
Wednesday, March 18, 2009
One of the highlights on the economic calendar for the week is GE's investor update tomorrow. The conglomerate has been battling (much-needed) criticism over its opaque balance sheet, that is packed to the gills with assets. Certainly, in a bull market, investors are not likely to question whether asset valuations are representative of market prices. But in an an economic environment where asset values are declining, a leveraged finance firm needs to provide reassurances to its investors that its valuations reflect reality. This is particularly true if the firm used to rely on selling assets out of its finance arm into a rising market to boost earnings.