SL Green (SLG, Financial) is one of the biggest real estate companies in New York City, specializing in office spaces. The company has a strong track record of delivering consistent dividend growth, and its share price has held up relatively well during periods of market volatility. In addition, SL Green's portfolio is diversified across many different property types, which helps to mitigate risk. For these reasons, I believe SL Green is an attractive option for investors looking for a haven in the current market conditions.
The biggest concern bears have for this stock is that it primarily deals in office spaces in a major metropolitan area, meaning it has seen demand drop as the Covid-19 pandemic accelerated the work-from-home trend. Many tenants closed their businesses or moved out of SL Green's properties, and the company's stock price fell sharply.
However, things are now changing, with business coming back to the office. The occupancy level in Manhattan, which was 94.3% before the pandemic came about, has now increased to 92% again after a sharp fall-off in 2020. This is a pretty healthy number and signals that the company is on the right track to reaching pre-pandemic levels.
SL Green is well-positioned to weather the current economic downturn, as its properties are largely leased to creditworthy tenants with long-term leases. However, the company is not immune to the challenges posed by the Covid-19 pandemic and the resulting work-from-home movement. Even with its successful recovery so far, investors fear that tenants will continue to leave New York City for cheaper office space, leading to depressed occupancy levels and overcapacity in SL Green's portfolio.
Thus, the company's stock has been under pressure in recent years due to concerns about the future of the New York office market. However, that also means SL Green could represent a value opportunity at current levels.
Why the work-from-home trend will not hurt SL Green
The work-from-home lifestyle has become increasingly popular in recent years, and the pandemic has only accelerated this trend. A growing number of employees are now taking advantage of the flexibility and freedom that work-from-home arrangements offer. For many people, working from home means no more commuting, saving time and money. In addition, working from home often leads to a better balance between work and personal life. With less time spent traveling to and from work, employees have more time to spend with their families or pursue other interests outside of work. Moreover, for some job positions, working from home leads to higher productivity, not only due to a better work-life balance but also due to eliminating the distractions and unnecessary meetings that can plague office environments.
The number of people who work remotely is on the rise, and about half of the U.S. office workforce currently believes they can do their job this way per a Gallup report. However, 38% of fully remote employees prefer hybrid jobs where they can still have in-person office experiences.
There are many reasons why working from home will never completely replace the need for office space. First, not everyone can work from home. Many jobs, even office jobs, cannot be done from home, and others may require employees to be close to one another in order to succeed in group projects. Even those who can work from home may not always want to because they may want to meet their co-workers in person. Finally, working from home can be isolating, and for some, it is not easy to stay focused without the structure of an office. Many companies require or prefer their employees to work in the office for these reasons. A new Insight Global survey found that nearly 80% of American employees fear remote workers will be the first to go during a recession, so job stability is also a consideration.
The return of tourism is a big boon
New York City is one of the world's most popular tourist destinations, and the return of tourism is helping to boost the local economy.
International tourism showed strong signs of recovery, with arrivals reaching 57% of pre-pandemic levels in the first seven months of this year. The UNWTO World Travel Barometer reported an increase during this time period, too - it almost tripled.
According to SL Green, revenues are beginning to rebound as more people visit the city. With international travel restrictions beginning to ease up, more people will likely visit New York City in the coming months. As tourism increases, so too will the city's economic fortunes. With a presence in the New York Metropolitan Area, SL Green will benefit from this development.
SL Green possesses impeccable dividend credentials
Real estate investment trusts like SL Green are always a hot topic among investors, and for a good reason. REITS tend to offer high dividends due to being required to pay out 90% of their taxable income to shareholders, making them an attractive option for income-seekers. And of all the real estate investment trusts out there, SL Green is one of my favorites. This REIT is one of the largest office landlords in New York City, and its portfolio includes some of the most iconic buildings in Manhattan. Moreover, SL Green has a proven record of delivering consistent dividends to shareholders.
Historically, SL Green paid a dividend distribution every four months. It changed this distribution to monthly in April 2021. The company increased its annual dividend for 11 consecutive years, and its payout is not in danger at this point. Although the payout ratio of 0.87 might seem high, we need to consider that this is a low payout ratio for a real estate investment trust. The main reason for the REIT's success has been that it manages its business well, which is one reason it has raised dividends for 11 consecutive years.
Takeaway
SL Green's ability to weather the Covid-19 pandemic is a testament to the strength of its portfolio, the quality of its tenants and the enduring demand for office space in the long-term. While the pandemic has created challenges for the company, SL Green emerged from the crisis mostly intact, and I believe the work-from-home trend won't be big enough in the years to come to severely dent the company's earnings. SL Green has high occupancy rates because its properties are located among the most desired parts of New York City. This usually means its dividend is also quite healthy. Additionally, SL Green's stock is down by almost 50% this year on overblown fears, which could present a value opportunity.
