Skip to main content

Three months later, Morningstar again says Forest City Enterprises stock is worthless

It looks like déjà vu from December. An analyst from Morningstar, in a report (subscribers-only) that repeats nearly verbatim the conclusions in a report issued three months ago, yesterday again warned that stock from Forest City Enterprises (FCE), parent company of Forest City Ratner, is essentially worthless.

And, most likely, company representatives will fire back, as they did in December, by contrasting Morningstar's take with more optimistic assessments from other analysts and pointing out that the Morningstar analyst didn't speak to them.

Indeed, for the past three months, five analysts tracking FCE have consistently rated the stock (FCE.A) as a buy, or 2, on a scale of 1 (Strong Buy) to 5 (Sell), according to Yahoo Finance.

Specifically, two called it a Strong Buy (1), one called it a buy (2), and two recommended Hold (3). No one rated it Underperform (4) or Sell (5).

Market cap plummets

Still, at least one dramatic change bolsters Morningstar's pessimism. Morningstar's December report, based on data from 9/30/08, calculated FCE's market capitalization (the number of shares outstanding multiplied by the price) at $605 million.

The report issued yesterday, based on data from 12/31/08, listed the market cap at $447 million, a 26% drop. The market cap, as of yesterday, had continued to fall, to $397.3 million, a 34% drop since the end of last September. Yesterday, the stock went down 11% to $3.84. Given that, in May 2007, the stock topped $72, the market cap was once nearly 20 times higher.

Another reason for pessimism is Forest City's decision, which apparently surfaced after the report was written, to start selling some prime properties to raise cash. 

Morningstar's take

Morningstar analyst David Rodziewicz (who, as a 2008 college graduate, presumably does not have the experience of other analysts tracking the company) offers some harsh conclusions:
Although the company has historically performed well, its increased position in retail real estate and high leverage should weigh on performance and will probably lead to financial distress. Volatile economic conditions, a challenging credit market, and the likelihood of bankruptcy lead us to a very high fair value uncertainty rating on this no-moat real estate company.

Specifically, while Morningstar estimates Forest City will earn 6.9% on its assets over the next decade, its weighted average cost of capital is estimated at 10.1%.

While Forest City specializes in mixed-use projects in partnership with municipalities, the strategy has become more difficult in "as credit markets continue to remain tight and government budgets are strained."

Defaulting on debt

Given such higher borrowing costs and decreasing earnings, Forest City faces a crossroads:
As underwriting standards become more conservative and property values decline, the likelihood increases that Forest City will have to sell off properties to pay down debt. If this scenario were to play out, there may be no value left for common shareholders.

This is why some investors are buying FCE bonds at a deep discount. And why FCE has begun to sell some prime properties

Valuation: worthless, most likely

The report concludes:
We are maintaining our fair value estimate at $0. In our opinion, the chance of common shareholders realizing any value from an investment in Forest City is very small. 
(Emphasis added)

If the economy recovers, or of the developer can find a cheap source of financing, Morningstar says the company could survive, with a $10 share price.

Note that analysts surveyed by Yahoo Finance suggest targets between $10 and $22, with a mean (average) of $15 and a median (middle value) of $13.

Note that the Barclays Center naming rights deal, coupled with triple tax-exempt financing for the planned arena, would constitute a cheap source of financing--at least for one project.

Trouble in the pipeline

The Morningstar report suggests that Forest City will have trouble achieving the returns anticipated in its $1.8 billion development pipeline.

Atlantic Yards has not yet reached that pipeline. FCE categorizes Atlantic Yards in the "initial development stage," one step behind the "shadow pipeline," which itself is behind the development pipeline.

Earnings estimate and upcoming info

Morningstar forecasts average EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) growth of 2.2% over the next three years. In December, Morningstar estimated growth of 2.1% over five years.

In December, Morningstar estimated that net operating income would increase "at a paltry 1.4%, on average, during the next five years." Yesterday's report estimates 2.1% over ten years.

We'll see what Forest City says. Their annual report is due in the coming weeks, and that will be followed by a conference call with investment analysts.

Comments

  1. when the market cap drops to 100,000,000 maybe we can buy out the corporation or buy them out of the project?

    ReplyDelete

Post a Comment

Popular posts from this blog

Barclays Center/Levy Restaurants hit with suit charging discrimination on disability, race; supervisors said to use vicious slurs, pursue retaliation

The Daily News has an article today, Barclays Center hit with $5M suit claiming discrimination against disabled, while the New York Post headlined its article Barclays Center sued over taunting disabled employees.

While that's part of the lawsuit, more prominent are claims of racial discrimination and retaliation, with black employees claiming repeated abuse by white supervisors, preferential treatment toward Hispanic colleagues, and retaliation in response to complaints.

Two individual supervisors, for example, are charged with  referring to black employees as “black motherfucker,” “dumb black bitch,” “black monkey,” “piece of shit” and “nigger.”

Two have referred to an employee blind in one eye as “cyclops,” and “the one-eyed guy,” and an employee with a nose disorder as “the nose guy.”

There's been no official response yet though arena spokesman Barry Baum told the Daily News they, but take “allegations of this kind very seriously” and have "a zero tolerance policy for…

Behind the "empty railyards": 40 years of ATURA, Baruch's plan, and the city's diffidence

To supporters of Forest City Ratner's Atlantic Yards project, it's a long-awaited plan for long-overlooked land. "The Atlantic Yards area has been available for any developer in America for over 100 years,” declared Borough President Marty Markowitz at a 5/26/05 City Council hearing.

Charles Gargano, chairman of the Empire State Development Corporation, mused on 11/15/05 to WNYC's Brian Lehrer, “Isn’t it interesting that these railyards have sat for decades and decades and decades, and no one has done a thing about them.” Forest City Ratner spokesman Joe DePlasco, in a 12/19/04 New York Times article ("In a War of Words, One Has the Power to Wound") described the railyards as "an empty scar dividing the community."

But why exactly has the Metropolitan Transportation Authority’s Vanderbilt Yard never been developed? Do public officials have some responsibility?

At a hearing yesterday of the Brooklyn Borough Board Atlantic Yards Committee, Kate Suisma…

Barclays Center event June 11 to protest plans to expand Israeli draft; questions about logistics

At right is a photo of a poster spotted in Hasidic Williamsburg right. Clearly there's an event scheduled at the Barclays Center aimed at the Haredi Jewish community (strict Orthodox Jews who reject secular culture), but the lack of English text makes it cryptic.

The website Matzav.com explains, Protest Against Israeli Draft of Bnei Yeshiva Rescheduled for Barclays Center:
A large asifa to protest the drafting of bnei yeshiva in Eretz Yisroel into the Israeli army that had been set to take place this month will instead be held on Sunday, 17 Sivan/June 11, at the Barclays Center in Downtown Brooklyn, NY. So attendees at a big gathering will protest an apparent change of policy that will make it much more difficult for traditional Orthodox Jewish students--both Hasidic (who follow a rebbe) and non-Hasidic (who don't)--to get deferments from the draft. Comments on the Yeshiva World website explain some of the debate.

The logistical questions

What's unclear is how large the ev…

Atlanta's Atlantic Yards moves ahead

First mentioned in April, the Atlantic Yards project in Atlanta is moving ahead--and has the potential to nudge Atlantic Yards in Brooklyn further down in Google searches.

According to a 5/30/17 press release, Hines and Invesco Real Estate Announce T3 West Midtown and Atlantic Yards:
Hines, the international real estate firm, and Invesco Real Estate, a global real estate investment manager, today announced a joint venture on behalf of one of Invesco Real Estate’s institutional clients to develop two progressive office projects in Atlanta totalling 700,000 square feet. T3 West Midtown will be a 200,000-square-foot heavy timber office development and Atlantic Yards will consist of 500,000 square feet of progressive office space in two buildings. Both projects are located on sites within Atlantic Station in the flourishing Midtown submarket.
Hines will work with Hartshorne Plunkard Architecture (HPA) as the design architect for both T3 West Midtown and Atlantic Yards. DLR Group will be t…

Forest City acknowledges unspecified delays in Pacific Park, cites $300 million "impairment" in project value; what about affordable housing pledge?

Updated Monday Nov. 7 am: Note follow-up coverage of stock price drop and investor conference call and pending questions.

Pacific Park Brooklyn is seriously delayed, Forest City Realty Trust said yesterday in a news release, which further acknowledged that the project has caused a $300 million impairment, or write-down of the asset, as the expected revenues no longer exceed the carrying cost.

The Cleveland-based developer, parent of Brooklyn-based Forest City Ratner, which is a 30% investor in Pacific Park along with 70% partner/overseer Greenland USA, blamed the "significant impairment" on an oversupply of market-rate apartments, the uncertain fate of the 421-a tax break, and a continued increase in construction costs.

While the delay essentially confirms the obvious, given that two major buildings have not launched despite plans to do so, it raises significant questions about the future of the project, including:
if market-rate construction is delayed, will the affordable h…

Revising official figures, new report reveals Nets averaged just 11,622 home fans last season, Islanders drew 11,200 (and have option to leave in 2018)

The Brooklyn Nets drew an average of only 11,622 fans per home game in their most recent (and lousy) season, more than 23% below the announced official attendance figure, and little more than 65% of the Barclays Center's capacity.

The New York Islanders also drew some 19.4% below announced attendance, or 11,200 fans per home game.

The surprising numbers were disclosed in a consultant's report attached to the Preliminary Official Statement for the refinancing of some $462 million in tax-exempt bonds for the Barclays Center (plus another $20 million in taxable bonds). The refinancing should lower costs to Mikhail Prokhorov, owner of the arena operating company, by and average of $3.4 million a year through 2044 in paying off arena construction.

According to official figures, the Brooklyn Nets attendance averaged 17,187 in the debut season, 2012-13, 17,251 in 2013-14, 17,037 in 2014-15, and 15,125 in the most recent season, 2015-16. For hoops, the arena holds 17,732.

But official…

At 550 Vanderbilt, big chunk of apartments pitched to Chinese buyers as "international units"

One key to sales at the 550 Vanderbilt condo is the connection to China, thanks to Shanghai-based developer Greenland Holdings.

It's the parent of Greenland USA, which as part of Greenland Forest City Partners owns 70% of Pacific Park (except 461 Dean and the arena).

And sales in China may help explain how the developer was able to claim early momentum.
"Since 550 Vanderbilt launched pre-sales in June [2015], more than 80 residences have gone into contract, representing over 30% of the building’s 278 total residences," the developer said in a 9/25/15 press release announcing the opening of a sales gallery in Brooklyn. "The strong response from the marketplace indicates the high level of demand for well-designed new luxury homes in Brooklyn..."

Maybe. Or maybe it just meant a decent initial pipeline to Chinese buyers.

As lawyer Jay Neveloff, who represents Forest City, told the Real Deal in 2015, a project involving a Chinese firm "creates a huge market for…