I made a living trashing Netflix (NFLX) CEO Reed Hastings nearly a decade ago. And, frankly, I’m ashamed of it.
Not because I was wrong about Netflix. I never feel bad about being wrong on a stock or company. I’m embarrassed because I frequently attacked Hastings and made too big a deal about Netflix’s balance sheet. Reed Hastings is a visionary. I didn’t understand his vision. Looking back, I should have made the same arguments in relation to Netflix as I did in my defense of Jeff Bezos at Amazon.com (AMZN).
So, Reed, if you’re reading. I’m sorry.
At Medium, I take a broader view of Hastings’ recent interview with The Wall Street Journal (you might hit a paywall at the link). In this article, I consider it within the context of how it can help investors set themselves up for post-pandemic opportunity.
Reed Hastings hates work from home. Reed Hastings is, it’s worth repeating, a visionary. Like him or not (I have come to really like him), investors should listen to him. He has proven he knows a thing or two about a thing or two.
“No. I Don’t See Any Positives”
That was Hastings response to the question asking him about work from home. He went on to say:
Not being able to get together in person, particularly internationally, is a pure negative. I’ve been super impressed at people’s sacrifices…
If I had to guess, the five-day workweek will become four days in the office while one day is virtual from home. I’d bet that’s where a lot of companies end up.
I like to read into things. Unless it’s in a relationship with a significant other, it’s a good practice to develop. I also happen to think Hastings nailed it.
Even domestically, not being able to get together in person sucks.
I can’t tell you how many times I have said something in a virtual setting over the past six months that was horribly misunderstood. Without body language, you lose a lot. Along similar lines, the words “that’s an in-person conversation” have come up countless times. I say them. Other people say them to me. We get into something meaningful, then it hits a wall. There’s only so far you can go over chat or video. Without the in-person component, communication reaches a point where it becomes arduous via a smartphone or computer.
This is why cities thrive. Always have. Always will. This is why I’m regaining faith in the office. As much as I love remote work, I don’t work like most people. I collaborate differently. If I worked for Netflix or any other company like it, I don’t think I could do my job well without in-person collaboration. Ultimately, this is why cities and offices – which are basically cities within a city – exist.
What It Means For Investors
I’m not ready to buy big office REITs. I might never be. But I am taking my bullishness on urban and blue chip suburban apartment REITs even further, particularly Essex Property Trust (ESS) and AvalonBay Communities (AVB).
Here in Los Angeles, Netflix has a huge presence just a short walk from a major AvalonBay property in Hollywood. It’s also a short drive from two high-end Essex Properties in West Hollywood.
Source: AvalonBay Communities
Source: Essex Property Trust
I’m not saying everybody who works at Netflix lives or will live in these three apartment complexes. Some probably do. More probably live in others. There’s even a chance they’re Essex or AvalonBay properties.
What I am saying is that the urban fabric companies and people have been drawn to for decades isn’t going anywhere. In fact, amid a pandemic, I have never seen as many cranes in the air in Los Angeles as I do now. And, almost to a crane, they’re helping spring mixed-used development topped with luxury apartments.
If Hastings is correct – and companies adopt a four day office, one day work from home model – I can’t think of two companies better positioned in the urban metros and blue chip suburban areas where home or work coexist than ESS and AVB, particularly in Southern California, Northern California, and Seattle.
I know why I like living in cities. While they’re not for everyone, they’re for lots of people like me, across the age spectrum, but definitely skewing younger. If you’re going to eventually go back to the office the way Hastings visions, you’re going to live in prime urban and suburban neighborhoods in top notch apartment buildings and communities. It’s that simple.
The pandemic didn’t take away the social allure and practical convenience of this living arrangement. And it never will. It might have abruptly halted the work component, but the marriage between life and work requires above average housing in big cities and their adjacent suburbs. Many workers self-select to one of the two environments with ESS and AVB slapping leases in front of them.
The Latest on ESS and AVB
A quick refresher on why ESS is a must-own stock for dividend growth investors:
Source: ESS September 2020 Investor Presentation
ESS is a solid dividend aristocrat with a focused presence in the markets where the urban/suburban dynamic I describe – and I assume Hastings would buy into – exists.
No surprise that ESS buys into Hastings’ thought trajectory, even using his words to support it.
Source: ESS September 2020 Investor Presentation
Investors often place bets on the future. This slide supports an optimistic vision of the future for cities and, specifically, high-end apartment REITs.
And hiring hasn’t stopped.
Source: ESS September 2020 Investor Presentation
While it’s not ideal, given we’re in a global pandemic, the improvement in metrics, such as delinquencies, is heartening.
Source: ESS September 2020 Investor Presentation
Taken together, ESS’s long-term story remains intact. Rida Morwa provided a nice synopsis in a recent Seeking Alpha article on ESS:
We do not believe that these fundamentals are going to change anytime soon. The California coast is going to continue to be a place that people dream of living, it’s going to continue to be a place that is increasingly expensive to live, and ESS is going to continue to profit from that.
AVB provides a less comprehensive monthly look at operations than ESS, however it’s still useful and contributes to the overarching narrative.
Source: AVB September Collections Update
Thoughts from the data AVB gave up in September:
- Of course, it’s not great, but that’s to be expected. I don’t focus on it. In a pandemic amid record unemployment and very little stimulus to workers for months, I actually consider these numbers good.
- While I prefer ESS as a long-term investment, I like AVB because it keeps a more diversified portfolio geographically. So it has a broader tenant base.
- And it is a future dividend aristocrat with a nine-year history of increases. AVB recently declared Q3 dividend of $1.59 per share, payable October 15 to shareholders of record, September 30.
Reed Hastings is right.
He has a history of being right.
While I have always been a proponent of the urban environment – thus my ESS and AVB bullishness – I have not always agreed with Hastings. Poor choice on my part. While I don’t know if Hastings would buy ESS or AVB stock, it’s nice to be on the same page as him for once, at least in regards to the springboard for my conviction on these two stocks. I continue to incrementally add to my positions in both, reinvesting all dividends.
Disclosure: I am/we are long ESS, AVB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.