Seeking Alpha: After A Solid Run, Valuation At Forest City Enterprises Seems More Reasonable

There is a lot more that Forest City Enterprises (NYSE:FCE.A) could do to create/enhance value for its shareholders. This soon-to-be-REIT has a lot of room left to reduce operating expenses, reduce leverage, and reduce complexity - all of which play into valuation in a negative way. I also believe that there is also room to improve communication with the investment community and adopt a more shareholder-friendly corporate structure.

But for those positives, I see enough negatives to not be so favorably inclined towards the shares as I was back in August. Asset sales have developed at a slower-than-expected pace and I'm concerned that major asset sales like Barclays, the Nets, and 625 Fulton could disappoint. I also think that reducing corporate expenses is easier projected than done and that the conversion to a REIT structure isn't a panacea. Same-store net operating income growth remains solid and I do believe the shares are undervalued, but the 10% to 15% undervaluation I see isn't enough to leave me as bullish on the shares as I was 20% ago.

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After A Solid Run, Valuation At Forest City Enterprises Seems More Reasonable

Seeking Alpha: Forest City Enterprises Still Not Getting Full Credit For Its Transition

What Forest City Enterprises (NYSE:FCE.A)(NYSE:FCE.B) is trying to do is not easy, nor is it something that can be completely quickly. Once a high-leverage property developer, Forest City is looking to remake itself as a less risky, less leveraged, more diversified property operator and developer. Forest City has become a large presence in the hot Brooklyn market and still has opportunities to sell non-core assets and improve existing operations, not to mention possibly convert to a REIT structure. There are some reasons for caution (the Ridge Hill development, perhaps most prominently), but the shares still look undervalued today.

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Forest City Enterprises Still Not Getting Full Credit For Its Transition

Seeking Alpha: A Look Through The Trees At A REIT-To-Be

Forest City Enterprises (FCE.A)(FCE.B) is still a company in transition. It is hard to say that the transition has gone unrewarded, as the stock is up more than 70% from its October 2012 lows and up almost five times from its early 2009 trough. Even so, the company's move from operating as a highly-leveraged property developer to a more focused and income-oriented REIT-type company seems to have more value yet to give.

Forest City has a lot of positives going for it. The company is well-diversified, with a third of its net operating income coming from its office properties, another third from retail, and about one-quarter from multi-family residential (apartments). The company is also geographically diversified (albeit centered on New York City) and has been extending its investment and development operations through joint ventures with other developers and partnerships with pension funds.

The company has done a good job of locking up much of its debt with fixed rates, and counter-intuitively may be less vulnerable to rising rates (or rate expectations) that undermine REIT investments. NAV valuations are tricky (a consummate example of "garbage in, garbage out"), but I believe that Forest City is still undervalued today and perhaps may be 25% or more undervalued.

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A Look Through The Trees At A REIT-To-Be

Investopedia: Investors Should Probably Delay A Trip To Forest City

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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