The headquarters of Archstone-Smith is a six-story building, shared with other tenants, and tucked into a nondescript suburban office park in Englewood, Colo. For all intents and purposes, the home office of the firm—considered the fourth-largest owner of multifamily real estate—is in the middle of nowhere. There aren't even any key Archstone-Smith assets in the Denver metro area. Its only strategic benefit as a location: equidistance from the company's 10 core markets in the Sunbelt and on the East and West coasts. If need be, CEO Scot Sellers or any other employee stationed at corporate can hop on a plane and be on site at virtually any Archstone-Smith property within three or four hours.
Since a $22.2 billion buyout of the real estate investment trust by a partnership between Tishman Speyer and Lehman Bros. Holdings completed last Oct. 5, the centrality of headquarters has continued to streamline the travel docket for Sellers and the Archstone-Smith executive team, who have been on the road introducing the company to private equity investors in the pension fund, endowment, and sovereign wealth spaces. Their message: removed from the hassles and glare of Wall Street, Archstone-Smith—which considers itself the No. 1 U.S. multifamily real estate firm—is about to get bigger, better, and stronger.
Just how much better and stronger, however, is a bit nebulous. Sellers says one of Archstone-Smith's liabilities as a REIT—a corporate irreverence and maverick sensibility—will be a key asset in the private arena. “We are willing to stand up and do what we think is right, even in the face of criticism,” Sellers says. “We felt it was right to build the development infrastructure we have, and we didn't think it was right to focus on funds from operations [aka FFOs], so we didn't. There were people who did not like that about us.”
But when asked what enterprises Archstone-Smith might engage in during 2008, Sellers is more demure. “We would much rather do things and then talk about them, as opposed to talking about them and then hopefully executing,” Sellers says. “As a public company, [we] had to announce to the market when [we] rolled out a new initiative because it was a material event. Moving forward, we will be slower to talk about things we are doing.” IN THE PIPELINE Of the initiatives already a matter of public record, Archstone-Smith executives quickly key in on leveraging the company's behemoth development pipeline of $5 billion, approximately $1 billion of which has come online in the four months since the Tishman Speyer/Lehman Bros. transaction. Sellers says the company expects to add an additional $2 billion to $3 billion to the pipeline but will not commit to that amount being added in 2008. Also unclear is how private equity investors—whoever they may be—will play into the firm's development initiatives.
“We are getting out and telling our story to a lot of private investors whom we have not met before,” Sellers says. “I can say that we intend to be an important player in the private real estate investment community and over time, deal with a number of investors there, but I cannot say in what capacity. We do mezzanine lending, acquisitions, development, redevelopment, [and] value-add.”
While Sellers won't identify any of those possible investors specifically by name, organizations he mentions in an explanation of the type of partners Archstone-Smith may be courting include the IBM pension fund, the Harvard University Endowment, European pension funds, and “large pools of investable capital in Asia.” Still, the company is operating in a private equity arena it has not fully competed in since 1997, when it first listed its shares as a REIT on the New York Stock Exchange. And no firm would be wont to publicly allocate investment dollars it has yet to receive.
However, Archstone-Smith executives are verbose on at least one subject: their summation of the company's development capabilities, especially inasmuch as they lament their past inability to go full throttle on the development front—or at least get recognition for it—while under the unappreciative eye of FFO-hungry public equity investors and analysts.
“Every analyst has written that we have the best portfolio in the country,” Sellers says. “Whether or not we have the best development pipeline is arguable, but it is certainly one of the very best. No one disagrees with that—whether it is one or two, it is right there at the top.” Of course, it was those same analysts who dinged Archstone-Smith—and virtually all other publicly traded multifamily REITs—for development investments seen as dilutive to net-asset value and ancillary to powering share price-boosting FFO.
Not so Tishman Speyer and Lehman Bros., Sellers says, who value Archstone-Smith's insistence on both the long and short term real estate investment horizons so common in the private sector. “The thing they liked about our company so much is that we always thought and talked and acted like a private company,” Sellers says. “Even as a REIT, we said, ‘Look, we are not in the business of creating FFO.' We literally have made billions of dollars through our investment efforts in developing well located apartment buildings but the public market ignores that because it is not FFO—they are focused on that to a fault. The private owners love those billions of dollars in development and they want us to keep doing it. Their marching orders are, ‘Great, how much more can we do?'”
MIXING IT UP The answer to that question is quite a bit, says Al Neely, Archstone-Smith's chief development officer overseeing activity in the company's 10 core markets of Seattle, San Francisco, Los Angeles, Phoenix, Dallas, Houston, Atlanta, Washington, D.C., New York City, and Boston. Across the markets, Archstone-Smith is seeing a great deal of opportunity, Neely says. “We did have some difficulty the last few years competing with condo developers, but with the downturn in that market, we are now in a better position to control sites and begin to make things happen.”
Increasingly for the company, those things happening on the development end involve leveraging mixed-use capabilities that have clandestinely emerged as one of Archstone-Smith's primary skill sets. “We quietly went about establishing ourselves in mixed-use, but I think people know we are in this space and here to stay,” Neely says. And when Neely and other executives at Archstone-Smith say “mixed-use,” they don't mean some street-level coffee shops and Laundromat retail, they mean titanic footprints involving apartment, condo, office, and high-end anchored shopping experiences.
Case in point: the redevelopment of Washington, D.C.'s convention center site, an $800 million dollar joint venture with Gerald Hines that Neely describes as “significant retail, significant office, about 460 apartments and a couple hundred condominiums, all integrated over a parking deck.” The convention center development—expected to break ground later this year—will likely emulate Archstone-Smith's Wisconsin Place, a similar D.C. mixed-use joint venture with New England Development that is two-thirds complete and is looking at a late 2008 lease-up of 432 units that share a parking deck with Bloomingdales, Neiman Marcus, and Whole Foods—a set up that Neely describes as “a destination living and shopping experience.”
Green building is also getting a closer look by Archstone-Smith development teams eager to explore new things that might not have been pleasing profit drivers on Wall Street. In Manhattan, the 627-unit Archstone Clinton is on track for LEED certification by the U.S. Green Building Council and boasts building materials with low- or no-VOC emissions, high-efficiency condensing boiler equipment, artificial light-dimming systems, and variable-speed hot water pumps that use less energy by matching water flow to demand.
“At least right now, green building is in the early stages of moving into the multifamily world,” says Archstone executive vice president Neil Brown, who heads up development in the Eastern and Southern states under Neely. “As developers think about it more and come up with ways that are cost effective to incorporate it into their buildings, I think the industry as a whole is certainly going to gravitate towards it.”
HOSPITALITY SUITE Whether at green, mixed-use, or prototypical podium, wrap, and high-rise apartment communities, Archstone-Smith will continue to upgrade its on-site property management teams this year. In January 2007, to the chagrin of Wall Street analysts and investors, the company announced a general manager program under which property managers with traditional multifamily backgrounds will be replaced by veterans from the hospitality industries.
“We are bringing in managers from the Ritz Carlton, the Four Seasons, and the Marriot International Continental hotels, and saying, ‘Look, you have spent 25 years in the hospitality industry, and we are looking to replicate that same level of customer service,'” explains Jack Callison, Archstone-Smith's president of U.S. operations. According to Callison, the program has been extremely successful in adding innovative best practices to Archstone-Smith's property management group, although he declines to identify what those best practices are.
Still, Callison maintains that the program isn't “just rhetoric” and that Archstone-Smith is bringing GMs in the program to customer service summits in Denver, Washington, D.C., and Los Angeles to help distill their experience and observations down to “actionable items” that can be expanded across the company's operating platform.
If initial results are any indication, Archstone-Smith might have reason to keep the details of their program under wraps: Callison says the company's first GM has improved NOI at his Studio City, Calif., community by 7 percent, has increased personnel retention to 90 percent, and has pushed customer satisfaction scores at the property into the top 2 percent of Archstone-Smith assets across the country.
INTO THE OPEN? That general manager will likely have his work cut out for him maintaining customer satisfaction scores in relation to Archstone-Smith's portfolio, if, as planned, the company continues to add to its property roster and grab share in its core markets. Neely, for one, doesn't expect expansion into new markets by Archstone-Smith in 2008, although he says re-entering Florida is one option under consideration by the executive team.
“Florida is a place where we have done some work in the past, and we're looking at it right now. We don't have immediate plans. We'll watch it,” Neely says. “But we maintain an equal level of scrutiny in all of our markets. We want to continue to be the dominant player in the markets we are in and continue to deeply penetrate those markets.”
Despite the dearth of market moves, don't expect Archstone-Smith to be entirely quiet in 2008. “We are always divesting and repositioning assets—it's one of our core capabilities,” Sellers says. “We have been really good sellers; we have been really good buyers. We are always looking for opportunities to turn our portfolio towards what we see coming.”
Just don't expect any hand-tipping as to what the company sees on its short-term or long-term strategy horizons. While Sellers says he doesn't expect anything unusual to transpire over the next 12 to 18 months, he again points to Archstone-Smith's track record, and says the company's performance will ultimately speak for itself. “The focus is really the same: fabulous assets in great locations in the hardest markets to build in.”
Certainly not an apt description for the company's headquarters building in Englewood, Colo., but Sellers wryly clarifies that even in that non-descript office property lies one of Archstone-Smith's surreptitious keys to success and an indication of how the multifamily titan is likely to proceed in the private arena. “We have been in this building for a long time,” Sellers says. “It's a plain, suburban office building. It's nothing fancy. We are not in the cool part of town. It's a simple, easy place, and it is less expensive. We generally do things like that. We try to be understated.”
- Age: 50
- Favorite Quote: “Seek first the Kingdom of God, and His righteousness and all of these things will be given to you as well.” —Jesus Christ
- Best Business Decision: Sticking to the strategy that Archstone articulated in 1994, despite more than eight years of criticism. “We have always said that the willingness to stand up and do what we believe in is a hallmark of our company.”
- Best Advice You Ever Received: The most common regrets at the end of people's live are: 1) I wish I had spent more time with my family, and 2) I wish I had taken more risks. Live your life so as to not have either of those regrets.
- Ideal Leader: “Ronald Reagan accomplished so much in his life and was also someone that people felt great interacting with and wanted to be around. That is a tremendous combination of skills.”
- Leadership Philosophy: Hire smart people with a passion for excellence and a desire to serve others, and provide an environment that supports and encourages them to use their talents accordingly.
- Favorite Activities: “I got in quite a few days of surfing in Mexico and California last year and also played several national 50-and-over tennis tournaments, which was a lot of fun and very challenging.”
ARCHSTONE-SMITH
- Founded: 1963 (as El Paso Real Estate Investment Trust)
- Headquarters: Englewood, Colo.
- Employees: 2,666
- Geographic Coverage: National and international (Germany)
- 2007 Revenue: Undisclosed
- Units Owned/Managed: 87,667
- Development Pipeline: $6.3 billion
FRESH BREW
A little bit of java recharges the business center for the 21st century.No doubt about it—today's apartment renters live in a mobile society. Blackberries, cell phones, and laptops provide many with the opportunity to work and network from home. And Gen Y? If they can't move throughout a multifamily complex and plug and play at the same time, their response to a lease overture is likely “whatever.” During the past decade, the answer for most developers to this itinerant professionalism has been the business center: an alcove off of the clubhouse with a couple of PCs and utilitarian finishes, which felt like, well, an office.
Like other multifamily developers, Englewood, Colo.-based Archstone-Smith has discovered that's not quite what residents in core high-barrier markets want. Their solution: pull the technology into the clubhouse, add mood lighting, pump up the WiFi, and brew some lattes. In the resulting Starbucksesque environment—dubbed a “click café”—Archstone-Smith residents can grab a paper, get a caffeine fix, check email, and relax 24/7 in a chic atmosphere.
“At most of our communities, we're putting in click cafés to provide a social networking area to recreate a sense of community where people will want to live with us for years and years to come,” says Jack Callison, Archstone-Smith's president of U.S. operations. “We're trying to create a sense of environment, trying to create what [Archstone-Smith chief development officer] Al Neely calls the ‘there, there.'”
In fact, the cafés have been a triple shot of success, Neely says, enabling residents to fully leverage tech amenities that sat dormant in business centers and reinvigorating the social atmosphere of the clubhouse. This is creating a greater brand identity for the Archstone-Smith apartment product. “People like to be social; they don't want to feel isolated in their amenities,” Neely says. “So we've made a point to use a lot of glass, open up the cafés visually to any courtyards or fitness centers or pools, and make the space welcoming. It has become the heart and the soul of our communities.”
That's an achievement that any Archstone-Smith resident should be able to warm up to, fresh out of the pot.