Real Estate Inv. Trusts: REITs
It's Forest City for the Trees

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By LanRes
December 12, 2008

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In my humble opinion, FCE is likely to be one of the survivors of the global financial crisis. Yes, FCE has a high degree of financial leverage, so that is and will remain a big concern. However, FCE is controlled by the well-connected Ratner clan and they still have a lot of their equity in the REOC; they're one of the most seasoned and talented real estate firms in the industry; the quality of the FCE property portfolio is very high; and they're doing all of the right things to survive. They've curtailed doing any new development projects, just proceeding with those projects already underway. They're going to suspend the dividend in 2009 for now. And best of all, they are taking a brutally honest look at how really bad the economy may be next year. No sugar coating in the conference call -- they're concerned that unemployment rates could be in the double digits next year and indicate that the availability of CRE debt financing is not getting any better. Keep in mind that the family property company started in the 1920s -- they know harsh market cycles well.

While I presume FCE could wind up handing back the keys on some properties during the crisis if market conditions get horrendously bad, the current share prices (for FCE-A and FCE-B) are in line with my conservative estimates of NAV per share in this bleak property market. My concern, as always in bear markets, is that the share price could tank more and then the REOC goes public at a then-premium which still winds up being below where you acquired your shares. While I trust the Ratner clan to strive to avoid this type of scenario, the markets could weaken to the point that the extended family's hand is forced.

Bottom line is that this is a very risky market environment, with the economy unraveling faster than expected even by conservative observers. Most stocks may reach a bottom faster than they would have otherwise, but with jobs evaporating everywhere, foreclosures accelerating, etc., don't expect demand for any type of real estate to be getting better in 2009 and you can almost count on effective market rents to fall (in most sectors) well into 2010.

Lan Res