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. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  5. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  6. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  7. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  8. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  9. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  10. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  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 >>
Trading Center