When properly managed, real estate can be one of the best investment vehicles around. When managed less well, the high levels of debt and long timelines for development and transactions can lead to outsized losses. Forest City Enterprises (NYSE:FCE.A) doesn't conveniently fit into either of those two buckets; the company is certainly making progress in its efforts to restructure, but the apparent value in the shares today isn't really enough to make it worthwhile for investors to buy into the story of transformation.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

A Diverse Real Estate Developer ...
Forest City has come a long way from its origin as a lumberyard almost a century ago. The company has been public for over 50 years, and in that time it has become a diverse developer and operator of real estate holdings.

As measured by net operating income, the company is fairly well diversified among office buildings (36%), retail (34%), and apartments (24%), with a few leftover pieces coming from military housing, hotels and land. That's a meaningful distinction when comparing Forest City to Boston Properties (NYSE:BXP) or Brookfield (NYSE:BPO) (heavily weighted towards offices), and the company is more like Vornado (NYSE:VNO) in that respect.

Management is also looking to drive more geographic diversity, as New York is presently almost one-third of NOI. Over 20% of the company's apartment income comes from the Cleveland area, with another 13% from NYC and Washington, DC. Likewise, the office and retail holdings are fairly concentrated, with 57% of office NOI coming from New York, and over 40% of retail coming from New York and LA, combined.

SEE: Exploring Real Estate Investments: Introduction

... That May Have Gotten Too Stretched Out?
Forest City Enterprises management seems to have fallen into a common trap a few years back - getting too spread out in terms of commitments and bringing too much debt on to the balance sheet. Over the past three years, management has tried to reverse course and debt levels have come down as the company has cut its real estate holdings by about 17% since 2009.

Of course, the major recession in the United States has taken a toll on this company and forced the company's hand with respect to restructuring. But there is still more work to do. The company is getting out of the land development business (one of the riskiest corners of real estate) and focusing more on profitability. At the same time, while long-range trends in operating margins haven't been great, occupancy rates seem to be improving.

SEE: The Risks Of Real Estate Sector Funds

The Bottom Line
Investors should realize that, unlike many real estate stocks, Forest City Enterprises is not organized as a real estate investment trust (REIT) and does not currently pay a dividend. The company also has a dual share structure that gives preferential voting rights. It's also worth noting that there's still plenty of risk here - the company has a hefty bit of debt on the balance sheet and pipeline risk with projects like 8 Spruce Street and Atlantic Yards.

SEE: How To Analyze Real Estate Investments Trusts

Right now, Forest City looks like a stock where the valuation doesn't fully compensate investors for the ongoing risks. The stock is arguably 15 to 25% undervalued, but I would argue that investors should demand a discount for the share structure, the absence of a dividend, the balance sheet and the need for further restructuring. Factoring that all in, Forest City is arguably fairly priced and doesn't really offer investors a compelling value proposition today.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Home & Auto

    Living in New York City: Co-ops vs. Condos

    Buying an apartment in New York City means familiarizing yourself with the pros and cons of these two types of dwellings.
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Home & Auto

    Renting vs. Owning: Which is Better for You?

    Despite the conventional wisdom, renting might make more financial sense than you think.
  4. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
  5. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  10. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Commercial Real Estate Loan

    definition of a commercial real estate loan
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!