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.

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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.

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