Amazon (NASDAQ:AMZN) is a behemoth that continues to expand its collection of businesses, spanning from online and brick-and-mortar sales to, of course, the largest cloud computing services unit around. And Amazon is hiring employees by the ocean liner. In the past year, the company has raised its headcount by over 65%. And this has been a growing trend with hiring increasing by nearly 50% for the prior years of 2015 and 2016, and hiring increased another 65% for the full 2017 year.
That’s a lot of folks at this company. No wonder Amazon is looking for more real estate beyond its Terry Avenue North address in Seattle, Washington. And yes, I know that much of the workers for Amazon are spread around the nation at its many warehouses, processing centers and other facilities, but the company has grand plans to continue expanding its current footprints as well as reaching into new markets.
This brings in the search for the now-famed HQ2 project whereby Amazon is seeking another center for management and company development beyond Seattle. And while nothing has been confirmed, there have been some very credible leaks that Amazon will be choosing Crystal City, Virginia and Long Island City in the New York City borough of Queens for its two HQ2 centers.
That said, Dallas, Texas has a great deal to offer Amazon as well. And it has been cited as one of the more likely finalists. Being a major hub of commerce and finance in the central U.S. makes it ideal for some further development by Amazon – even if Austin might be more palatable for some of Amazon’s millennial workers.
So, considering what we know about Amazon and its plans, what are the ways to play Crystal City and Long Island City?
Crystal Clear
Back in the late 1940s, Crystal City was nothing like its name implies. It was a stretch of industrial and warehouse properties that were alongside rail lines and rail yards on the western side of the Potomac River across from the nation’s capital city of Washington.
But a Russian immigrant by the name of Charles Emil Smith had a better vision for the land. He had a vision for the properties and — with some acquisitions and some major work to move rail lines and rail yards in the region — he and his partners built a series of apartment and office buildings that started in 1963 with Crystal House, an apartment building with an elaborate crystal chandelier in the lobby.
And other buildings sprung up with the word crystal in their names and it stuck to become the Crystal City community inside Arlington county.
It is prime for Amazon. It has plenty of vacancies in office properties after numerous defense contractors moved, as well as Federal Government agencies including the U.S. Patent Office shifted to other areas around and beyond the Capital Beltway.
And its collection of Class B and Class C apartment buildings have also seen a number of openings. And there is a great deal of smaller single-family homes within walking distance of offices that haven’t soared in price as much as other areas around the metropolitan Washington area.
And while the Metro (the Washington area subway) is severely troubled — it has stations right there connecting into the city of Washington as well as Reagan National Airport just to the south. And there is also a regional commuter rail station and lots of parking. It is really is Amazon “prime.”
Charles Smith’s company sold much of the commercial properties which many ended up controlled by JBG Smith Properties (NYSE:JGBS). JBG Smith is a public real estate investment trust (REIT) with a variety of office, retail residential and other properties around the nation. The stock took a huge jump on the latest news. But the Crystal City properties are just part of the company that has a lot of baggage on its books.
Margins are negative on its operations and it continues to lose money with a loss on capital of 1.7% and a loss on assets of 1.4%. it has limited cash and debt is high at 73.7% of its equity. No wonder that it trades somewhat cheap as the shares are valued at only 1.59 times book. And with revenue and profit challenges it is expensive on a price-sales of 7.4 times.
This is not the way to play Amazon in Crystal City.
The way I’d play it would be to look at the collection of apartment buildings owned and operated by Equity Residential (NYSE:EQR) and Avalon Bay (NYSE:AVB). Both of these REITs have a number of buildings in the area as well as the adjacent communities. And both are much healthier than JBG Smith.
Moreover, Charles Smith’s apartment buildings in the area (after being shuffled around by Tishman Speyer and Lehman Brothers) were acquired by Equity Residential.
Equity Residential is a nicely profitable REIT with funds from operations (FFO), or the revenue from its actual buildings, rising by 7.2% over the trailing year. And the return on its FFO is an ample 11.7%. And it contributes to a nice 6.50% return on equity. And its debts are low at only 45.2% of capital. It is valued at a reasonable 2.43 times its book and pays a nice-ish dividend yielding 3.2%.
Other properties in the area are owned and operated by Avalon Bay. Avalon Bay has similarly solid performance with a lower level of growth from its FFO at a trailing year’s gain of only 2.8%. But it has a good FFO return running at 11.80%, which drives a nice return on equity of 8.0%. And like Equity Residential, it has debts under control at only 41.4%.
Both of these REITs would make for a better buy over JBG Smith.
Long Island City
New York has its appeal, as I know as a former resident. But I was a Manhattan guy and Queens might be nicer now … but it is Queens. It still comes with wicked taxes and onerous local government oversight and a strained subway system and bus network.
But it does have vacancies in commercial properties and residential apartments. And getting to LaGuardia is easier than getting to it from Manhattan.
Equity Residential and Avalon Bay are right there as well. So, whether Amazon does two HQ2’s or sticks with Crystal City, by buying into these two REITs you are covered.
One other bit about Long Island City. It needs (really needs) a sewer line and other infrastructural fixes. My favorite play on this is Aegion Corporation (NASDAQ:AEGN) based in my other town of Saint Louis, Missouri. Aegion has many infrastructure repair products including those that are perfect for fixing sewer and water lines.
Revenues are up some 11.2% over the past year and if the Democrats in their new House leadership do anything with the president on infrastructure, this company will further profit. New York City is already budgeting for Queens, so it will be in the bidding by my estimates.
Bottom Line on Amazon HQ2
One last company to take a look at with nice multifamily properties in Dallas and other consistent cities is Independence Realty Trust (NYSE:IRT). This REIT focuses on quality garden and mid-rise apartments that are pleasant and slightly upscale.
IRT has a nice 9.2% return on FFO but has higher administrative costs with its style of properties to manage, which results in a lower return on equity of 2.9%. The dividend is ample at 7.3% and it has a control on debt for longer-term stability.
This REIT is worth taking a look at with or without Amazon in the Dallas Fort-Worth Metroplex.
Neil George is the editor of Profitable Investing and does not have any holdings in the securities mentioned above.
