Introduction
Preferred Apartments Communities operates multifamily properties throughout U.S at selected target markets (Nasdaq.com, 2016). The company segments consist of retail, real estate and multifamily communities financing. The multifamily communities consist of about 10 owned residential while the retail segment has about 10 owned retail shopping centers and the financing segment consist of bridge loans and mezzanine loans among others. As for Essex Property Trust Company, it engages in the ownership and renting of apartments in communities (Essex Property Trust Inc., 2014). The company mostly operates in metropolitan areas where demand is determined by population growth and employment growth while supply is constrained. It also operates in markets that have high barriers to entry where proper regulatory approval is difficult to obtain. . It has grown to become fully integrated as an REIT (Reagan, 2015). As for Avalon Bay Communities, it deals with acquiring, managing and developing apartment communities that have high barrier-to-entry. By June 2014, Avalon owned 275 apartment communities with 82,348 apartment homes of which 6 communities were being reconstructed and 32 communities under construction.
Preferred Apartments Communities External Environment Analysis
Preferred Apartments Communities as a company faces various external threats some of which include increased taxation, depreciation and competition. Preferred Apartment also faces competition from quite a number of other REITs of rental property such as Avalon Bay Apartments and Essex Property Trust. More competition is faced from the side of residents who make decisions of whether to own homes or rent apartments. Normally, when home prices go high, then renting becomes more favorable and when home prices go low then owning becomes more attractive. Another threat that Preferred Communities faces is increase in taxation as was the case of 2014 where the real estate taxes rose by 88.3% compared to 2013. .
Despite the many challenges faced by Preferred Communities, there exist various opportunities in the business. Some of the opportunities include fast growing markets, sale of properties at significant prices and increase in occupancy rate. The market potential of some places are favorable for the Preferred Communities as for the case of Coastal California where job growth and vibrant technology are likely to expand over time hence leading to improvement in growth of revenue.
The real estate business can also be favored when the occupancy rate of an area gets better for example in the case of 2014 where the rate was at 96.3% compared to 96.1 the year before. Additionally, upcoming innovation centers attract jobs creation hence creating the need for apartments. Therefore, for areas like West Coast that have the ability to attract job growth, companies like Preferred Communities would flourish for investing in them.
An EFE matrix helps in evaluating the prevailing external factors that affect a business. Below is a table of Preferred Community EFE matrix
EFE matrix for Avalon Bay Communities
EFE Matrix for Essex Property Trust
A CPM matrix assists in identifying the key competitors of a firm and compares them through critical success factors. It also reveals the relative weaknesses and strengths of a company against competitors hence a company gets to know the areas that need improving and those that need protecting. Below is CPM table for Essex Property Trust, Preferred Communities and Avalon Bay Communities.
As much as Essex Trust is among the largest REIT companies in U.S, it faces competition from quite a number of other REITs of rental property with one of their main competitor being Avalon Bay Communities (Barnes, 2015). Essex Property Trust I part of S& P 500 index and is part of NYSE major stock with a $14.4 billion capitalization. Likewise, Avalon Bay is also part of REIT and member of S&P 500. Both companies engage in markets that have high barrier-to-entry. Additionally, both companies have allocation in most REITs that are ETFs. In terms of apartments Avalon Bay had 239 apartment communities as of 2014 December while Avalon Bay had 247apartment communities (Ori, 2015). This therefore shows the tight competition between these companies.
The real estate industry trend is that when job growth is deteriorating, the companies experience low revenues per unit and falling occupancy while when job growth increases rental revenue per unit and rise in occupancy rates. The other trend in REIT industry is that it’s turning out to be one of the most rewarding financial strategies because they are relatively stable to invest in. Moreover, in countries like the U.S.A, REITs are required to maintain a minimum of 90% dividends. Another trend is that individual income taxes are expected to be paid from all the money received from payouts. Additionally, the diversity of REIT properties means that the tax rates on earnings vary.
The trends facing Preferred Communities include classification of the company’s 2015 distributions for tax purposes of federal income. To achieve this, the company releases information that assists in distributing form 1099 on the distributions of the company. The also company intends to continue acquiring more multifamily communities as well as apply for competitive housing products. Moreover, the company intends to continue investing about 20% of its assets in other real estate investments.
Internal Environmental Analysis
Preferred Communities trades as a small REIT whose main focus is on apartments though it has other nominal investments. The company’s background is that of a multifamily that started in 2009 as Maryland Corporation. It’s guided by the philosophy of being dividend driven and yield driven. The company buys properties of 15years and newer though at times they buy a little older ones that have substantial renovations hence the longevity needed. The company has 10 Mezzanine loans and other assets in Georgia, Virginia and Pennsylvania. In terms of business, the company focuses on developing apartment properties in markets whose supply is constrained. Additionally, the company enhances rental demand through providing affordable rents that are relative to costs of housing. Moreover, the company focuses on metropolitan markets whose population is more than one million. Additionally, in order to measure performance and functionality, the company uses Net Operating Income while REITs uses FFO to measure cash generated from operations. In terms of management, the company operates as self-managed and self-administered REIT in U.S.
Preferred Community culture is to invest in multifamily apartments though they are taking time to invest in other nominal investments (Nasdaq.com, 2016). In terms of company management, the executive team including the chief capital officer, John Isakson who was introduced to the business by his father have been into the multifamily career. This, therefore, means that his decisions are made out of experience. For Preferred Community to perform more successfully in the future it will have to protect its strengths while working on its weaknesses. Some of its strengths include its research driven strategies, increased cash flows and loyal and experienced employees. The use of research driven strategies gives the company an upper hand in knowing market trends of their operation areas as well as other viable locations. Moreover, Preferred Community has highly experienced employees an example being their chief capital officer who was introduced to the business at a young age.
Preferred Community weaknesses may include saturated market, employee theft, uninsured losses and breach of information systems. The real estate business is quickly getting saturated with various companies offering various offers. Some of the company employees have signature authority to bank accounts hence exposing the company to a risk of possible theft. Additionally, employees that have access commercially valuable information may compromise it resulting to losses. At times some losses may not be covered in an insurance policy hence the company should try its best to insure to the best of its ability. When it comes to information systems breaches, security measures can be in place but absolute security may not be guaranteed due to employee errors or other vulnerability hence the company has a duty to keep strengthening its security measures.
IFE matrix helps in evaluating the main strengths and weaknesses of a business. Below an IFE matrix for Preferred Community.
Financial analysis requires to be undertaken under the help of financial ratios so as to be used in gauging company strengths and weaknesses. This is because financial ratios of a company assist in understanding the financial statements of a company (Glakas, 2011). Below is a financial analysis table for Preferred Community.
Financial Analysis for Preferred Communities in 2015
Preferred Community can capitalize on its strengths through investing in areas that give it more income while it can improve on its weaknesses through a market survey and borrowing of ideas from competitors.
Conclusion
Therefore, Preferred Community Company engages in the ownership and renting of apartments in communities. The company mostly operates in metropolitan areas where demand is determined by population growth. Preferred Community as a company faces various external threats some of which include increased taxation, depreciation and competition. However, some of the opportunities availability include fast growing markets, sale of properties at significant prices and increase in occupancy rate. As for the weaknesses of Preferred Community they include saturated market, employee theft, uninsured losses and breach of information systems. Meanwhile some of its strengths include its research driven strategies, increased cash flows, brand name and loyal and experienced employees. Therefore, with proper utilization of strengths and opportunities and improving of weaknesses and threats Preferred Community is capable of expanding further.
References
Bernes, P. (2015). Investing in Essex Property Trust. Retrieved February 4, 2016, from http://marketrealist.com/2015/10/investing-essex-property-trust-must-know-company- overview/
Essex Property Trust Inc. (2014). 2014 Annual Report. Retrieved February 4, 2016, from http://www.snl.com/interactive/lookandfeel/103163/Essex2004AnnualReport.pdf
Glakas, S. (2011). 15 Financial Ratios Every Investor Should Use. Retrieved February 4, 2016, from http://www.investinganswers.com/education/ratio-analysis/15-financial-ratios- every-investor-should-use-3011
Nasdaq.com, (2016). Preferred Apartment Communities, Inc. Stock Quote & Summary Data. Retrieved February 4, 2016, Nasdaq.com 2016 http://www.nasdaq.com/symbol/apts
Reagan, L. (2015). Essex Property Trust Inc. Retrieved February 4, 2016, from http://corvuswire.com/2015/12/30/essex-property-trust-inc-ess-sets-new-1-year-high-at- 244-71/712287/
Ori, J. (2015). REIT Focus: Avalon Bay Communities, Inc. Retrieved February 4, 2016, from
http://seekingalpha.com/article/2837556-reit-focus-avalonbay-communities-inc
