Archstone-Smith Trust Risk Assessment - Essay Example

Archstone-Smith Trust Risk Assessment December 3, 2006 (Insert Here) Table of Contents Archstone-Smith Trust Risk Assessment December 3, 2006 1 (Insert Name Here) 1 Abstract 4 Archstone-Smith Trust. Since 1970, Archstone-Smith has increased market viability, customer base, and stock prices. Market value of the Archstone-Smith Trust in 2002 was around $10 billion dollars and now it's around $19 billion dollars. This report will try to find and analyze its S.W.O.T. (Strengths, Weaknesses, Opportunities, Threat) and provide recommendations the company's future. This includes an analysis of the major competitor, Equity Residential, and a critical review of the base theories and the manner in which Archstone-Smith functions. 4 Introduction 5 Background 5 Brand Creation 6 The United States Housing Market 8 Problem 9 Purpose 9 Scope 10 Discussion 10 Strengths 12 Weaknesses 14 Opportunities 15 Threats 16 Conclusion 17 Recommendation 18 References 19 List of Illustrations Illustration 1.0: Archstone-Smith Brand Image 6 Illustration 1.2: Archstone-Smith Trust High Rise in San Fransisco, California 6 Illustration 1.3 ArchStone-Smith Housing Community 9 Illustration 2.0: Archstone-Smith Investment Project 10 Illustration 2.1: 12 SWOT Matrix 12 Abstract Archstone-Smith Trust. Since 1970, Archstone-Smith has increased market viability, customer base, and stock prices. Market value of the Archstone-Smith Trust in 2002 was around $10 billion dollars and now it's around $19 billion dollars. This report will try to find and analyze its S.W.O.T. (Strengths, Weaknesses, Opportunities, Threat) and provide recommendations the company's future. This includes an analysis of the major competitor, Equity Residential, and a critical review of the base theories and the manner in which Archstone-Smith functions. Introduction Archstone-Smith Trust began as a Texas REIT (Real-Estate Investment Trust) named El Paso Real-Estate Investment Trust. In 1960 Congress established REIT, which opened the window of opportunity to the small investors invests in real estate in a manner similar to mutual funds. Investors could take REIT public and be able to trade their share in the same mannerism as corporations traded stocks. The Securities and Exchange Commission (SEC) as normal stock exchanges monitored these REIT public trades. Background In 1970 the company decided to change its name from El Paso Real Estate Trust to Property Trust of America. Property Trust of America started investing in a wide range of real estate with its new name. In 1980 the company's portfolio reached from shopping malls to a Holiday inn in San Francisco's Fisherman's Wharf. The evaluation was difficult because REIT's assets were so diversified into various sectors. William D. Sanders, the real estate mogul joined Property Trust America and focused on the apartment market in the Southwest. In 1989, Sizeler Property Investment Inc. decided to take over the Property Trust America, but in the middle of negotiation Sizeler gave up and sold their share to SWRT. SWRT was a company that was specially established by Sanders to buy back the shares from Sizeler Property Investment Inc. Soon after Sanders retired he established a new form of business venture that invests in real estate, investment banking, consulting, and research with help from some institutional investors. The name of the company was Security Capital Group and its first investment was Property Trust America. When REIT hired Southwest Realty Advisors to consult Property Trust America they recommend Property Trust America to focus on Apartments. In 1991, Property Trust America went public to expend fund. Property Trust America focused its business in apartment buildings during the 90's. Brand Creation The brand name Archstone was named by Lippincott &Margulies, one of the best branding firms in the U.S., to create the first national brand in apartments. Illustration 1.0: Archstone-Smith Brand Image In May 2001, Archstone acquired Charles E. Smith Residential Realty Inc. who was in the apartment business for 50 years for $2.2 billion with their debt of $1.4 billion. With this acquisition Archstone Smith Trust owned almost 87,500 apartment units and 5,000 under construction in the U.S. Charles E. Smith Residential Realty Inc. had many downtown high-rises. Archstone Smith Trust's portfolio had become strong from the acquisition of new downtown high-rise properties. Illustration 1.2: Archstone-Smith Trust High Rise in San Fransisco, California The United States Housing Market The impact of undergoing U.S. housing market to the economy is greater than earlier expectations. For the result, it's forcing FRB to lower the interest rate first in last three years before June 2007. Bloomberg investigated through 82 wall-street object-economists and most of those people answered that FRB probably will lower the interest rate about .25% between April and June in 2007. They expect that there is possible additional decrease in the interest rate in three month after the first decrease. The last time U.S. lowered their interest rate was in June 2003 and the federal fund rate is 5.25% now. The investigation also said that the prospect for the U.S. economy will get worse then the previous one. The growth of U.S. GDP in third quarter was held at 2.5% and it will be harder to go over the same point during the fourth quarter. It is lower than Commerce Department's earlier forecast. Professionals are saying that it is the real estate market that drove the economic prospect down. The real estate price went down for the fist time over last 11years. Ben Bernanke, the Chairman of FRB, also said that real estate market is in substantial adjustment and this will be a burden to U.S. economy to be lowered 1% in the second half of this year. At this point rental apartment in real estate market seem to be alternative and safer choice than purchasing. Even though lower interest rate might help on mortgages but falling real estate prices are making buyers and banks very unattractive to real estate purchases. Problem High interest rate is slowing down the housing market. It is expected that many people will coma back to rent market from mortgage. Some of the real estate investment companies were preparing for this moment to come by buying apartments that came out in the market due to the exodus from rent market to mortgage market. As of one of the largest companies in the market, Archstone-Smith Trust must be ready for upcoming chances. Archstone-Smith Trust must be ready and attack these chances with very efficient strategies to hold on its leading position in the market. Illustration 1.3 ArchStone-Smith Housing Community Purpose The purpose of this report is to show that how Archstone-Smith Trust operates its apartment and compare to its upcoming competitors and their strategies of services to survive through these threats. This report suggests Archstone-Smith Trust how to improve it positions in this market successfully and be able to attract more residents to this community by analyzing the strengths, weaknesses, opportunities, and threats. Scope The following research will focus on the marketability of Archstone-Smith as in the context of organizational strategy. This includes an analysis of the major competitor, Equity Residential, and the strengths, weaknesses, opportunities, and threats as they pertain to the organization as a real estate investor. The following dissuasion is a critical review of the base theories and the manner in which Archstone-Smith applies these theories to its strategic management. The final recommendations are relative to the changes Archstone-Smith should incorporate into its organizational strategy in order to become more marketable within the industry. Discussion Archstone-Smith Trust is one of the largest REIT in U.S. that has core concentration is apartment business. Even though, the U.S. market for real estate business is under depression the apartment companies seem to show noticeable increase in profits. Low interest rate lowered the mortgage rate and people started buying houses. This phenomenon pulled people out of rent market to mortgage market. Many apartment-building owners started to lose tremendous amount of profits. Illustration 2.0: Archstone-Smith Investment Project In 2005 the U.S. economy started to show some signs of overheating, so that the FRB started to raise FFR (Federal Funds Rate) to reduce the money to prevent overheating in the economy. A lot of money moved to finance market from the real estate market for more attractive returns, which pushed the interest rate and mortgage rate up, and made house buying market look less attractive. The Stock prices of investors and stakeholders instead of cashing out their properties went up noticeably in 2006. One of them was Archstone-Smith Trust. Market value of the Archstone-Smith Trust in 2002 was around $10 billion dollars and now it's around $19 billion dollars. ("Archstone-Smith Investor Home," 2006) This report will try to find and analyze its S.W.O.T. (Strengths, Weaknesses, Opportunities, Threat) and provide recommendations the company's future. Illustration 2.1: SWOT Matrix Strengths The strengths of Archstone-Smith can be identified as the core competencies of the company, its context within the real estate industry, and its collaborators. Archstone Smith's skills lie in the ability to make marketable decisions. These decisions involve stakeholders, management and investors. These choices in marketable investments are made through mediation channels, where Archstone incorporates and involves bankers, consultants, and researchers towards the institutional investments. In an interview with Tina Tavares, Community Manager, Boston Kendal SQ, she stated that the occupancy rate is "Currently 97%, and it is pretty good for this time of the year. We ask the residents to give 60-day leaving notice in advance, so we can react to the market faster. We spend a lot of money in marketing. We actually back up what we say in the marketing such as guaranteed customer satisfaction." Which shows a core competence of market viability and customer satisfaction. This shows a core competency of Archstone as being one of business information management. The ability to manage information is further seen in Archstone's acquisition of Charles E. Smith Residential Realty Inc, which gave Archstone the commanding share of the localized real estate market. For Archstone Smith, the economic context of the industry must include the idea of "macro-economic unification" which, in the words of Glyn and Sutcliffe, "represents the idea that the world is now really a single economy in the macro-economic sense. That means that the main determinants of income and employment can now only be understood at a global and no longer a national level." (Glyn and Sutcliffe, 1992, p. 77). This means that the company must be prepared to examine their business from an economic viewpoint that encompasses these three levels of activity, especially as the world becomes a more unified economy. Archstone-Smith has shown its ability to excel, even at times when consumer confidence is weakening in the market (FDIC 2002). Archstone's two major collaborators are Ameriton Properties and Oakwood Worldwide. Ameriton is a private investment company that handles the acquisition, development and sale of apartment communities (Archstone Smith 2006). Ameriton uses Archstone's national capabilities to create investment value in short and medium real estate investments. According to Archstone-Smith (2006) these investments include: Acquiring, repositioning and reselling existing apartment assets; Developing high-quality apartments for resale to institutional owners; and Creating incremental value through opportunistic investments in apartments that may be created as the result of changing market environments. Ameriton currently has multiple operating apartment communities, as well as apartment communities that are planned or under construction which encompass 8,400 units and 1.6 billion dollars (Archstone-Smith 2006). Oakwood Worldwide is a corporate housing provider, which boasts 80 percent of the corporate housing market. Their relationship with Archstone is one of provisioning high-quality extended-stay furnished accommodations throughout the United States (Archstone Smith 2006). The Ameriton corporate partnerships allow Archstone to acquire and develop a larger portion of the real estate investment market. The partnership with Oakwood Worldwide allows the company to have a constant furnishing value chain, thus creating marketability and a stronger influence in the corporate housing market. Weaknesses In the interview, Tina Taveres commented that "As far as the weakness of the company I don't see much of that actually. A Very strong and a very profitable company, and so there is not much room for weaknesses in the company. We strive everyday to make sure every single one of our employees is extremely well trained. We spend a lot of money in training and marketing so there is not much of weak side for this company." However, the following will show that the weaknesses of Archstone-Smith are related to the lack of technological innovation that is shown in entrepreneurial companies such as Equity Residential (see Threats). Spending "a lot of money in training and marketing" does not solely allow for a viable company. The use of information systems infrastructure by industrial and service companies may be a source of competitive advantage for innovative and knowledge-based companies. Archstone focuses heavily on a linear strategic management system. Their competitors, Equity Equity Residential guides attention toward the understanding of the organizational learning process and the management of a firm's knowledge base. The management of knowledge plays an outstanding role in any interdisciplinary theory of entrepreneur-ship (Ripsas, 1998) and in the development of technology-based companies. Archstone must be prepared to address new technologies, innovate old technologies, while maintaining high quality of apartment rentals. Opportunities Archstone's opportunities are to develop on consumer confidence. The FDIC (2002) reports that consumer confidence in the apartment market is decreasing. The FDIC (2002) further reports that market conditions are 'tight.' This is due to a lack of consumer confidence that stems from increased prices. In short, the consumer confidence level has shrunk because there is an excess supply in the apartment retail market, and this has put a pressure on the apartment managers, causing increases in price. Tina Taveres recognized the opportunities of Archstone: "We are pretty big company already. As Archstone is purchasing buildings in the core markets, I can see it is growing and growing and I think the sky is the limit." Showing the importance of purchasing and marketing. Customer-validated performance measures reflect customer confidence and help employees manage the value chain's processes and activities by concentrating their attention on improving what matters to the customer (Frazer-Robinson 1997). For Archstone, quality customer market analysis is a multi-stage measurement. This is defined by the customer's expected service level on dimensions of reliability, timeliness, responsiveness and competence from the company's perspective at the time of encounter, before the sales staff performed the required service for the customer (Frazer-Robinson 1997). Customer confidence must become focal point in market research and analysis as a cumulative, abstract affective construct that describes the total client's experience with the sales staff and is measured by the satisfaction with animeinteranational.com expertise, media and marketing skills performance and overall satisfaction with agency performance (Frazer-Robinson 1997). Threats Archstone Smith's most significant threat is the competitor Equity Residential. Equity Residential, as a competitor of Archstone, has created a niche in the market by utilizing their company skills towards innovation. They are currently the largest publicly traded owner, operator and developer of apartments, and have been selected one of America's Most Admired Companies by Fortune magazine (Equity Residential 2006). This is strongly do to their innovation in Web-based applications. Equity Residential has offered multiple services for apartments, both family and corporate, and responded to the lack of consumer confidence by maintaining quality life-style communities that are attractive and have multiple amenities. Archstone, however, has maintained a classical approach to their corporate structure, and in that instance may not be changing as quickly as innovative companies like Equity Residential. Equity Residential's principal activity is that of an investment trust. Currently, the company has evolved to the largest apartment developer and manager in the United States, with 15.4 billion dollar market capitalization, encompassing 2.0 billion dollars per year in revenue, and boasting 7,400 employees (Kapadia 2006). This has been possible because the company holds in high regard information technology innovation. As a facilitator, Equity Residential has maintained high property value (in light of low consumer confidence) through development and leveraging competitive advantages. Equity Residential utilizes geographic and economic diversity by expanding through low, middle, high, and corporate level rentals throughout the United States. Furthermore, Equity Residential uses a strong information management technique that focuses on operational efficiency for the satisfaction of the customer and the employee, thus there is less turnover in renting and employment, which saves money (Kapadia 2006). Conclusion Archstone-Smith Trust is under tremendous market and industry pressure. The competition presents a unique threat, as ArchStone-Smith does not utilize the same technology resource management strategy. Equity Residential is a strong competitive force for Archstone. This is not only due to their sheer size and revenue, but the corporate innovation strategy Equity Residential employs. The ability to manage information and maintain a strong knowledge base in regards to market capital (as geographic and economic) has assisted Equity Residential in becoming a competitive force within the apartment rental market. Further threats stem from the real-estate market viability, which has sustained revenue highs and lows throughout the last decade. The strengths Archstone-Smith Trust represents are significant as the ability to manage market information for the betterment of the company. Archstone-Smith has an opportunity to develop stronger customer relationship management strategies through knowledge-based technology management. Recommendation The recommendation is to plan, develop and incorporate knowledge from various sources and create a comprehensive and real-time database of 'intellectual capital' across the roles of individuals within the company. The key to this knowledge management process is to develop an operational system of expertise for individual knowledge to be combined in a meaningful manner to develop composition and relationships with diverse working methods in a qualitative capacity (Garber 2006). The identification and clarification of access rights and responsibilities will be implemented in regards to the access person's essential job functions, and the management of information organization will determine the status of information security rights as well as access. The process framework for insertion and management of client information and team knowledge will be developed with specific security objectives regarding the use and distribution of information within the system. Internal and external auditors may be used by the administration to determine compliance with business policy and information standards. Teamwork will be an important part of the business goals for enabling a comprehensive client centric database. (Fumy pp 2-4 2005). References Camagni, R. (1991), Innovation networks. Spatial perspectives. Belhaven, London Deetz, S. (1995). Transforming communication, transforming business: Stimulating value negotiation for more responsive and responsible workplaces. International Journal of Value-Based Management, 8, 255-78. FDIC (2002) Survey of Real Estate Trends. Retrieved December 2, 2006 from http://www.fdic.gov/bank/analytical/survey/2002jul/index.html. Frazer-Robinson, John (1997) Customer-driven marketing: The ideal way to increased profits through marketing, sales and service improvement. London : Kogan Page ,1997 368p Fumy, Walter (2006) IT Security Techniques International Organization for Standardization (ISO) 1, rue de Varemb, Case postale 56 CH-1211 Geneva 20, Switzerland Retrieved May 26, 2006 from www.iso.org Garber, Vitalij (2006); Keynote Presentation, Proceedings of the 2nd Annual System of Systems Engineering Conference. Retrieved December 2, 2006 from EBSCOHost Database. Glyn Andrew and Sutcliffe Bob (1992), "Global but Leaderless : The New Capitalist Order", R. MILIBAND (ed), The Socialist Register 1992, pp. 76-95 Kapadia, Hari (2006). Equity Residential - Sales Analysis. Wright Investors' Service. Retrieved December 2, 2006 from http://wrightreports.ecnext.com/coms2/reportdesc_SALES_29476L107 McCormick, James M (2005) Pick a Strategy and Tailor Your Branches to It. 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