Thursday, October 25, 2007

Analyst lowers rating on Forest City, cites "difficult financing market"

Let's put that Wall Street Journal interview yesterday with Joanne Minieri, new president of Forest City Ratner, the New York division of Forest City Enterprises (FCE), in a little more context--one in which an investment analyst, long bullish on the company, has put up a yellow "caution" sign. That also hints at potential delays in the Atlantic Yards project.

Minieri told the Journal: The availability of capital to do these terrific developments and stimulate the economy concerns me... Liquidity and the availability of funds is always something I try not to lose too much sleep over, but it can keep me up at night. Value creation is impacted tremendously when you have to pay more for financing proceeds.

(Two-year stock chart from Yahoo Finance.)

Ratings revision

On 9/14/07, RBC Capital Markets analyst Rich Moore, who follows Forest City Enterprises, issued a ratings revision, nudging FCE down from "outperform"--meaning better than its peers in the real estate sector--to the middle ranking of "sector perform." In doing so, RBC rather dramatically cut its Forest City price estimate fom $80 to $54. (The current price is about $56.)

The reasons include a tougher market for homebuilding and office space, but also, more crucially, "an overstretched balance sheet in a difficult financing market" and a requirement to sell assets "to fund the big development pipeline."

The ratings revision was the subject of an AP story last month; the nine-page document was provided to me by a reader who got it from his broker. Moore is the top-rated analyst of FCE.

Optimism remains

However, the forecast remains optimistic, as Moore called FCE "one of the top, if not the top, mixed-use developers in the country," which "is poised to produce significant value from a development pipeline" that likely exceeds the $10 million current book value. However, for the next year, don't expect anything special.

Beyond general economic trends like demand for commercial space and access to capital, the report also cites "higher raw material and labor costs" as well as "additional risks, including the threat of terrorism, weather and key personnel changes," which FCE has outlined in documents (as I've noted) filed with the Securities and Exchange Commission.

AY delay?

Does that pipeline include Atlantic Yards? Probably not. Moore's report also refers to the "shadow pipeline," projects in development. Remember, FCE categorizes Atlantic Yards in the "initial development stage," one step behind the "shadow pipeline."

But the report also states that FCE "will likely face some near term difficulty funding its development pipeline," which suggests potential delays in moving ahead projects like Atlantic Yards. (Another potential delay: the "crisis" in availability of finance for affordable housing.)

Minieri, to the Journal, was philosophical: We will probably encounter a couple of different market cycles as we move through that development.

Moore hinted at potential delays to the New York Observer in September 2006:
“The quality that Forest City has is that they are very disciplined about moving forward in stages,” said Rich Moore, an analyst at RBC Capital Markets who covers Forest City Enterprises. “They build one office tower and see if they are doing well, and if they are not, there is always the option of waiting until the market catches up to them or of altering their plans.”

In other words, Forest City will build as it sees fit, not necessarily to produce the project's stated public purposes, among them affordable housing and open space, within the stated project timeline.

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