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| Tuesday, February 9, 2010 |
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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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April 21, 2008 12:01 AM ET
Anyone who thinks the credit crunch will soon be behind us ought to look more closely at General Electric’s first-quarter results. While the headlines immediately following the disappointing numbers focused on GE as a bellwether for the broader economy, the company’s problems more clearly illustrate how much further real estate prices have to fall before the crunch is over. GE shocked investors April 11 when it missed its own and analysts’ first-quarter operating earnings estimates by 7 cents, at 44 cents a share, and cut its 2008 earnings outlook to between $2.20 and $2.30 a share, from a previous estimate of at least $2.42. In fact, many of GE’s industrial businesses posted respectable growth in cash flow during the first quarter. And it took advantage of its triple-A credit rating to issue $8.5 billion in bonds last Wednesday, the largest corporate offering in six years. Also last week, the company acquired Citigroup’s $13.4 billion in assets North American equipment finance business for an undisclosed amount. That may bolster the performance of GE’s commercial finance unit, to which the company attributed 5 cents of the 7-cent first-quarter miss, largely because of poor results in its real estate division. Operating income in the unit fell 16% year over year, to $476 million, even as revenue grew by an equal percentage, to $1.9 billion. In a conference call with analysts, CEO Jeffrey Immelt explained that the real estate business didn’t measure up because GE didn’t close as many deals as expected in the quarter. The reason? “We experienced an extraordinary disruption in our ability to complete asset sales and incurred impairments [on lower loan and asset values] and this was something we clearly didn’t see until the end of the quarter,” Mr. Immelt said. The “disruption” referred to Bear Stearns’ announcement March 15 that it needed federal help in finding a buyer or else it would fail, which caused the credit markets to freeze and scuttled planned property sales. Mr. Immelt noted that GE did manage to sell $1.7 billion in assets during the quarter, but said it had forecast another $900 million or so in sales that didn’t happen and would have yielded an estimated $100 million in gains. He added that some of those missed sales were completed in April. The real estate group ended the quarter with $87 billion in assets, roughly a tenth of the company’s total, up 46% year over year and growing by $7 billion in the quarter. About 85% of that $7 billion was in the form of senior secured debt issued at about 70% loan-to-value, with an expected 25% to 30% return on equity. “There are really good, solid opportunities out there…and the quality of the portfolio remains strong,” Mr. Immelt said of GE’s real estate finance businesses. Chief financial officer Keith Sherin added that GE was sitting on $3 billion in real estate property gains at the start of the year, which it can count on to selectively boost earnings over the course of the year. “GE Capital has great real estate assets,” he said. “But we are not completely immune from this capital market’s volatility.” Yet some think the company is being too optimistic about its ability to boost real estate results given the rate at which the nation’s economy is unraveling and the state of the already moribund commercial property market. Citigroup analyst Jeff Sprague said in a research note that GE’s first-quarter sales—56 properties netting $1.7 billion—was well off the previous quarter’s 123 properties for $2 billion, and he predicted a continued slowing in sales. Citigroup downgraded GE to hold from buy, in part because the company’s new earnings guidance includes $1.1 billion in gains on property sales, which Mr. Sprague regards as overly aggressive given the growing difficulty the company will have closing deals in the current economic environment. GE representatives didn’t return calls seeking interviews. David Tobin, a principal at Mission Capital Advisors, a New York investment bank that specializes in restructuring and reselling troubled real estate loan portfolios, said property sellers are all facing the same issue right now: “Asset values are declining, plain and simple.” Sellers, some spoiled by the double-digit returns of the past five years, are looking at offers much lower than they had expected and getting fewer of them, said Mr. Tobin. “That’s why we see people putting commercial property on the market and taking it off.” Deal completion is down because of would-be buyers’ expectations of rising vacancies and slower rent growth. And lenders’ underwriting standards are much tougher than they were. Kingsley Greenwood, chief executive of Debt Exchange, which provides commercial loan sale advisory services and a resale market for such debt, pegs the decrease in commercial real estate values as a result of the lower projected returns at 10% to 15% this year. In revising its guidance, GE did hedge its real estate bets for the rest of the year. Mr. Sherin said the real estate business, which made $2.3 billion in 2007, will be down by 15% to 20% this year, with property sale gains making up about 60% of its expected earnings. FW
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