Of GE Real Estate’s portfolio, approximately 30 percent is directly owned real estate, 51 percent is debt, 17 percent is invested in joint ventures and 2 percent consists of commercial mortgage-backed securities.

While not the largest real estate investor in the U.S., GE Real Estate is larger than most. In comparison, TIAA-CREF owns approximately $42 billion in real estate, a number that combines real estate holdings from the company’s insurance and pension fund arms. Of TIAA-CREF’s investment, 56 percent is conventional mortgages, 24 percent is commercial mortgage–backed securities, 12 percent is directly owned real estate, and 7 percent is REIT securities. But analysts are hard-pressed to think of another real estate investor larger than GE Real Estate.

So, how do you manage such a large real estate portfolio? Some REITs, for example, focus on owning and managing stabilized real estate in single asset classes. Operating companies develop and sell assets. Lenders provide debt. Institutions typically employ broader strategies that include providing debt and equity and also owning property outright.

GE Real Estate pursues all of these strategies and is developing others, in virtually every real estate sector. The unit’s portfolio includes offices (32 percent of its holdings), apartments (18 percent), retail and storage (11 percent each), industrial (10 percent), and hotels (6 percent). In addition, 12 percent of the portfolio’s assets are classified as other and include miscellaneous property types such as parking facilities.

While most of the company’s assets are in the U.S., GE Real Estate owns about $125 million in international assets located in Europe and Asia, a total that Michael Pralle, president and CEO of GE Real Estate, intends to increase.

Pralle assumed the helm of GE Real Estate in the middle of 2000 and set about implementing new strategies that include expanding the unit’s global reach and something Pralle calls operating platforms.

In fact, GE Real Estate has retooled its strategy three times since the early 1990s to accommodate the unit’s stunning growth.

The Traditional GE Real Estate Approach

GE made its first real estate investments in the 1950s. In the early 1970s, management created a separate real estate business unit, which operated much like other institutional real estate lenders. Through the 1980s and into the early 1990s, the unit operated primarily as an office property lender.

When the office market crashed in 1992, the company ended up owning a portfolio of offices and upgraded its strategy. “Like many lenders (at that time), we created a bad bank and a good bank,” Pralle says. “We brought in operating partners to run the properties in the bad bank and offered incentives for improvements that they made. We also contributed some good assets to the bad bank pool.”

In the years following the crash, GE Real Estate built its equity portfolio by buying assets from the Resolution Trust Corporation (RTC). During the same period, the unit initiated a new strategy and began to pursue debt as well as equity business in new asset classes, adding residential, industrial and retail to its traditional focus on the office sector.

The Beginnings of a Global Strategy

In 1987, GE Real Estate began laying a foundation for global expansion by opening an office in the United Kingdom. Over the next 10 years, the company expanded its interests in the U.K. and eventually opened operations in France.

Then in 1997, the unit increased its focus on international expansion with the acquisition of two real estate operating companies in France. Pralle has carried this emphasis forward. “Today, we see more opportunities outside of the U.S. than inside,” he says.

When Pralle joined GE Real Estate, he brought substantial international experience with him and further accelerated the global expansion. A six-year veteran of McKinsey and Co., Pralle joined the senior GE executive team in 1989. All told, he has spent one-third of his career in Europe, one-third in Asia, and one-third in the U.S. Pralle has used his international experience to usher in a major global strategic initiative at GE Real Estate.

In 2000, Pralle’s strategy hit high gear when the company acquired MEPC, the fourth-largest publicly traded real estate operating company in the U.K. The deal added international office, mutifamily and retail properties to the unit’s portfolio. The acquisition also added operational responsibilities to the executive job descriptions at GE Real Estate.

Global Real Estate Requires Global Expertise

A global real estate strategy requires operational expertise, and GE Real Estate’s current portfolio reflects this new strategic priority. Pralle estimates that the overall portfolio earned about $600 million in 2002. Of that, traditional debt and equity investments will contribute about $375 million.

The remaining $225 million in earnings will come from managing real estate operations—from individual buildings to companies–in Europe, Asia and the U.S. This component of GE Real Estate’s portfolio includes assets of $100 million in North America; $55 million in Asia; and $70 million in Europe.

“Our businesses in Europe and Asia are principally equity businesses,” Pralle says. “We’re mostly owners of real estate in these areas. In Europe, the debt business is limited by the low interest rates offered by European banks. For example, German banks today price loans at 80 to 100 basis points over LIBOR and generate a 5 percent to 6 percent return on equity. That isn’t
acceptable to us. So we don’t do much lending in Europe.

“In Asia, we own about 170 buildings, mostly in Japan. We rent them out. We have bought some non-performing loans in Asia and we have a small debt business. But our primary business in Asia is to own and operate real estate,” Pralle says.

According to William Hauser, director and portfolio manager with HVB Capital Management in New York, GE Real Estate has accumulated a stable of assets in the U.S. and internationally that would be difficult to reproduce. “These assets go beyond a portfolio of properties and include acquisitions focused on business opportunities,” he says.

From Global Back to Local

Even the best portfolio isn’t always enough, and real estate experts never tire of pointing out that real estate is a local business. Domestic as well as global holdings require people on the ground, in the vicinity with an understanding of what makes that area tick.

Over the years, GE Real Estate has put people on the ground around the globe. Today, the unit operates 38 offices in 18 countries. Half of those offices span the U.S. The rest dot Europe and the Asia-Pacific region. Each office operates with significant local expertise. One hundred French citizens staff GE Real Estate’s Paris office. Another 100 Swedes ply their trade in the company’s Stockholm office. In Asia, approximately 95 Japanese manage the Tokyo office. “We’re probably the only truly global real estate company in the world,” Pralle says.

Combine local expertise with the ability to share best practices around the world and GE’s Aaa rating, which provides low-cost capital, and GE Real Estate holds a daunting competitive edge anywhere and everywhere on the planet. And Pralle is putting that edge to work.

The Next Step: Owning and Operating

Indeed, one of Pralle’s key goals is to build a portfolio of operating companies. “I can see developing a portfolio of a dozen operating businesses that we can trade in and out of over time,” he says. “The idea is to buy these businesses for some multiple of cash flow, eight, nine or 10, whatever it is. Then apply our management processes and techniques to improving cash flow through cost controls, top-line revenue improvements and acquisitions. Several years down the road, we’ll sell these companies with no multiple expansion, but twice the cash flow.”

Pralle sees owning and operating real estate companies as another, perhaps safer, way to generate income for GE Real Estate. In short, real estate operations represent the unit’s newest strategic priority.

“This is a long-term approach compared to more typical institutional asset plays,” Hauser says. “The return on equity derived from building a business or company will be higher than what a couple of assets can yield, because the process doesn’t require market timing—buying low and selling high. Success requires only applying sound business management. What makes the idea unique is that GE Real Estate can use inexpensive business capital and then take its time improving the asset, without worrying about quarterly earnings pressures that a public real estate company might have to deal with.”

The 2002 acquisition of Security Capital, an international real estate operating company, provides Pralle with an opportunity to execute this concept.

Security Capital owned controlling interests in two real estate investment trusts: Storage USA, Inc., an owner, operator and developer of self storage facilities in the U.S.; and Regency Centers Corporation (NYSE: REG), an owner, operator and developer of grocery-anchored neighborhood shopping centers in the U.S. The company also owned a 30 percent stake in ProLogis (NYSE: PLD). GE Real Estate came away from the acquisition with a 9.9 percent stake in ProLogis, more than 95 percent ownership of Storage USA and a 59 percent interest in Regency.

The three REITs do not necessarily imply a preference for the REIT model as a business approach, according to Pralle. “We like to buy good real estate at good prices,” he says. “If we found an undervalued REIT, we might be interested in buying the real estate. We thought the marketplace undervalued Security Capital, and in that acquisition, we bought $5.5 billion of real estate at roughly a 9 cap-rate and got the operating platforms for free. For us, that was an attractive part of the deal.”

Security Capital also owned a number of other real estate businesses now operating under the GE Real Estate umbrella. These include InterPark, a manager and owner of parking facilities in the U.S.; BelmontCorp, a leading owner, operator, and developer of senior assisted living facilities; and Security Capital Research & Management, a real estate investment advisor.

Finally, the transaction brought GE Real Estate an interest in Security Capital European Realty, a holding company that owns and operates public car parking facilities, self-storage facilities, and offices for multi-national companies in Europe.

Imagining the Future

The Security Capital acquisition brought a number of real estate operating companies into the portfolio. Pralle can build and sell or keep these businesses, depending upon how they fit into still another strategy: operating platforms.

“A platform would be a self-contained business unit with a leader and a critical mass,” Pralle explains. “Say we bought a billion dollars of industrial space and put in a management team and said your charter is to develop this business. That would be a platform.”

GE Real Estate owns a large portfolio of multifamily assets, including 35,000 units acquired in a single company-sized transaction about two years ago. Is that a platform? “These businesses aren’t connected in any integrated way,” Pralle says. “But it is something we’re looking at as a potential platform. We like the multifamily asset class and would eventually like to have a mutifamily platform.”

Retail is another asset class in which GE Real Estate might develop a platform, Pralle continues. The Regency Centers component of the Security Capital acquisition could form the core of a retail platform. GE Real Estate has also entered into a joint venture with Kimco Realty Corporation (NYSE: KIM), another shopping center REIT, to purchase centers that can be repositioned. “I can see our retail activity evolving into a platform over time,” Pralle says.

Pralle looks at operating platforms as additional income levers. “If the debt business is down in the U.S., we’ll be able to make money on operating platforms in Europe,” he says. “If we can’t sell our properties in Paris because the market there is depressed, we can hold them for a couple years and earn money on the parking business in the U.S.”

Pralle doesn’t plan to limit the platform concept to industrial, retail and multifamily assets. He describes the real estate market as forming a three-dimensional matrix with asset classes, capital structure and geography forming the axis of the matrix. GE Real Estate plays on all three axis. “But a matrix like this has many cells,” he says. “We’re probably only in 35 percent. My view is that we can do business in a lot more. We can expand into more asset classes. We can expand into new financing structures. And we can expand geographically.”

In the end, Pralle’s strategy becomes conventional and familiar: diversify. The difference is that diversifying a nearly $30 billion portfolio requires an entire world of real estate.