Builder and developer Forest City Enterprises (NYSE:FCE.A) reflected the difficult conditions facing real estate developers as its second quarter earnings fell substantially. The earnings decline was mostly the result of the timing of asset sales. The company maintains that real estate fundamentals, however, are improving.
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Real Estate Market Weighs Down Results
Cleveland, Ohio-based Forest City Enterprises builds, develops and manages shopping malls, apartments and office buildings, mostly throughout the east?in places such as New York, Washington DC and other major metropolitan areas, and has been around since 1920, though perhaps not many investors have heard of it. It has a market cap of over $2 billion, has been and continues to be active in some major urban developments around the country.????
The second quarter for the developer saw timing as well as overall market conditions weigh on its earnings. Largely due to the timing of asset sales, the company had a lot less profit to show for its efforts than in the year ago quarter. The company sold its stake in the NBA New Jersey Nets for a $31.4 million pre-tax gain in the year ago quarter. Forest City's property sold or held for sale for the recent quarter only produced $3.3 million revenue and interest, compared to $16 million in the second quarter last year. Its disposition of joint ventures produced no gain this quarter, where in last year's same quarter it gained $55 million from these partial investments.????
The company's net income fell to $4.3 million, or 2 cents a share, from $118.7 million, or 62 cents a share in the year ago quarter. Real estate revenue fell to $253.2 million from $294.2 million, a 14% drop from the year ago quarter. Earnings before depreciation, amortization and taxes fell to $70.7 million, or 35 cents a share, compared to $105.6 million, or 54 cents a share in the second quarter last year, the difference largely resulting from the sale of the Nets team. Forest City's office occupancies dropped to 90.3% from 90.9% in the year ago quarter, while its retail occupancies stayed even at 90.3%. Expenses overall for real estate operations fell to $214.5 from $228.7.?(For related reading, see Understanding The Income Statement.)
Rebuilding?a Sector
Investors tend to know real estate through REITs such as Simon Property Group (NYSE:SPG) or Vornado Realty Trust (NYSE:VNO), which often own and manage shopping and office complexes. Forest City Enterprises is perhaps more akin to commercial property firms like Brookfield Properties (NYSE:BPO) or CB Richard Ellis Group (NYSE:CBG). Forest City is part of the renaissance of lower Manhattan as it spent $875 million for its 8 Spruce Street building, called "New York by Gehry," one of many newly constructed buildings woven into the World Trade Center area. The New York Times (NYSE:NYT) reviewed the building in superlatives, feeling that the skyscraper is better than any other built in the last fifty years in New York City. Forest City's building is one of many new stars now rising from the ashes of the World Trade Center neighborhood, as many of the major developers and realty companies have participated in the great rebuild. (For more on REITs, see The REIT Way.)
The Bottom Line?
The new Gehry building in lower Manhattan is more than symbolic for Forest City. Management has stated that the company has largely done well throughout the recent challenging times for real estate, and it's mostly right about that. The company has managed to increase revenues and its prior fiscal year was profitable. Considering the climate for real estate in the last couple of years, that's more than respectable. Now Forest City hopes that with its upcoming renaissance in Manhattan, this will augur a renaissance for its industry as well.
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By Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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