Commercial real estate is at the center of the biggest U.S. business story of the day, week and probably month. GE Capital Real Estate confirmed plans to sell its massive commercial property portfolio to seven usual suspects in a deal valued at close to $30 billion.
GE has loved to blame its finance arms - particularly GE Capital Real Estate - for its woes sinc ethe September 2008 collapse of Lehman Bros. But now, GE is poised to sell its property portfolio at the height of the market, a move shareholders should like.
Chris Roush's Talking Biz News has a great post today about how the heavy-hitters covered this monster deal. Here's the story by Liz Hester.
Coverage: GE selling real estate holdings
BY LIZ HESTER · APRIL 10, 2015
The New York Times story by David Gelles had these details about the sale:
General Electric is poised to sell its enormous real estate portfolio in a sale that could fetch about $30 billion, according to people with knowledge of the matter who spoke on the condition of anonymity.
The move would be the biggest move yet for G.E.’s chief executive, Jeffrey R. Immelt, as he tries to refocus the company on its core industrial businesses and reduce its exposure to financial services.
Two financial institutions — Blackstone and Wells Fargo — are preparing to buy most of the portfolio, which includes office and apartment buildings as well as substantial loans, these people said. A deal could be announced as early as Friday.
Many details of the transaction were not immediately clear, including the price, which assets were being bought by Blackstone and Wells Fargo, and whether any other buyers were acquiring substantial assets from G.E.
Dana Mattioli, Eliot Brown and Ted Mann wrote for The Wall Street Journal that the move would likely be welcomed by investors:
The company’s real-estate business, run by its GE Capital unit, is at the heart of investors’ concerns that finance is too risky a business for an industrial company. Those concerns have weighed heavily on GE’s shares, which remain stuck well below the $30 mark where they traded before the financial crisis erupted in 2008. The stock’s weakness has been a source of frustration for GE executives, retirees and shareholders, tarnishing Mr. Immelt’s 13-year tenure at the company’s helm.
GE has been steadily paring its real-estate holdings since the financial crisis. But executives have recently concluded that they need to move more aggressively to scale down GE Capital amid persistent complaints from investors.
The company’s shares jumped 72 cents to $25.73 Thursday on news of the potential deal, which was first reported by The Wall Street Journal. The stock’s nearly 3% gain on the day was its largest since October 2013.
Real-estate investments aren’t an obvious fit with GE’s better-known businesses of building advanced aircraft engines, power turbines and medical devices. But real estate has been a big business for the company under Mr. Immelt, who plowed billions of dollars into property in search of profits.
The USA Today story by Kaja Whitehouse and Matt Krantz said that the company was refocusing on manufacturing:
An agreement on the transaction — part of GE’s bigger plan to return to basic manufacturing — could be reached as soon as Friday, said the person, who asked not to be identified because the deal is not yet public.
The sale, which includes warehouses, factories, malls, apartment buildings and other commercial properties spread across the globe, could mark the largest real estate sales since before the financial collapse. In 2007, Blackstone acquired Equity Office Properties Trust for $39 billion.
GE, known for lightbulbs and ovens, has been aggressively winding down its financial business, including loans and investments, in an effort to simplify its business and boost the stock price.
If the deal goes through, it will continue a period of dramatic change for GE. The company has been remaking itself for years to get out of banking and back into manufacturing. Along the way, its total assets, which include everything from cash and investments to plants and equipment, have fallen to $648.3 billion at the end of 2014 — down 19% from the peak as of the end of 2008, says S&P Capital IQ.
The Forbes story Erin Carlyle pointed out that GE isn’t the only company shedding assets:
If so, the company could become the latest in a string of firms to shed real estate assets and focus on their core businesses. Last week, Sears announced a plan to shed part of its real estate holdings and spin 254 stores off into a Sears-and-Kmart-only real estate investment trust, or REIT. Hudson’s Bay Co., the Canadian parent of Saks Fifth Avenue and Lord & Taylor, as well as casino operators Pinnacle Entertainment PNK -0.25% and Penn National Gaming have taken similar tactics. And activist investors at McDonald’s, Dillard’s, and casino operator MGM Resorts MGM +4.72% International have pushed for real estate spin-outs at those companies. Typically, these companies sell the assets and then lease them back from the new owner.
However, GE’s real estate differs from these other deals because it is an investment portfolio, as opposed to company-owned locations. GE’s real estate portfolio primarily consists of debt issued by property owners, the WSJ reports.
But both the recent REIT spin-outs and GE’s potential move are taking advantage of increased appetite for real estate in an environment of low yield on bonds. Prices for commercial real estate are rising. An index tracking commercial property prices by Green Street Advisors is up 15% since the top of the real estate cycle in 2007. In January the MCSI US REIT Index, which covers about 85% of the US REIT market, hit a level of 1,222.6, less than 1% below its 2007 peak of 1,200.2.
The move is one that should help investors become more comfortable with GE’s business model moving forward. Because the portfolio was mostly debt issued by property owners, meaning that shedding it should free up some capital for other investments.