General Electric Co. said Thursday its GE Capital unit has sufficient capital to weather even the worst storms amid investor skepticism of the company's optimism, notably about commercial real estate.
In addressing one of investors' biggest fears, GE Capital had $48 billion in commercial real-estate debt as of December and said it expects losses of $10.6 billion from its commercial and consumer operations.
Many have expressed fear that deterioration on some of its biggest investment holdings, like commercial mortgage backed securities, will weigh more on GE Capital's bottom line than executives estimate.
GE shares were up 7.6% in premarket trading to $11.12. The stock has essentially doubled the past several weeks after shares were pummeled amid worries about GE Capital. Through Wednesday, the stock was still down 36%.
Earlier this month, GE Chief Financial Officer Keith Sherin dismissed rumors that GE has $45 billion in commercial mortgage-backed securities that will need to be marked down, instead maintaining it has $2.9 billion in CMBS in its investment portfolio and a $50 billion commercial real-estate loan book in a senior secured position.
Investors have become single-minded in their focus on GE Capital as they fear the unit's $637 billion balance sheet at the end of 2008 is riddled with souring assets like commercial real-estate loans and securities that make the unit and its parent vulnerable to future losses.
GE Capital also said Thursday this year's general expenses were likely to fall 19% as its work force shrinks 13%.
Investors were hoping to get a more detailed picture of what the world's largest landlord holds in its commercial real-estate portfolio from Thursday's meeting. But observers worried a disclosure might not ease doubts about whether the conglomerate is owning up to the potential losses it faces from the investments.
Many companies have been clobbered by steep declines in the value of office buildings, apartments, stores, hotels and other commercial property. The Dow Jones REIT Index has slid 60% in the past 12 months.
When values were rising, real estate used to be a major earnings machine for GE's finance arm. By selling a few buildings, the company could immediately recognize profits. But, with the sales market at a virtual standstill, profits are plummeting and the risk of losses is increasing.
In his annual letter to shareholders, GE Chairman and Chief Executive Jeffrey Immelt offered a frank view on the company's real-estate holdings: "Today, I wish we had less exposure to commercial real estate."
About 80% of its real-estate holdings were bought with cash and have no mortgages. That means that unlike other highly leveraged property investors, GE runs little risk of having to sell properties to pay off creditors.
The company on Thursday also reiterated Sherin's statement earlier this month that GE Capital would be profitable for the current quarter and full year.
It went on to say 90-day delinquency rates for its U.K. mortgage portfolio, another area of investor concern, were rising steadily, nearing 14% last month. GE Capital said it cut back its mortgage originations everywhere, particularly in the U.K., where it scaled back its 2009 outlook to $100 million in originations from $4.8 billion last year.
It has $22 billion in assets in U.K. mortgages, 26% of which are prime.