I Changed My Mind On SL Green Realty
I Changed My Mind On SL Green Realty
Historically, it has always been a good time to invest in New York City during times of crisis. That's because the city always bounces back stronger than ever before:
“The death knell has been sounded for cities many times in the past—the future of New York alone was questioned by many during the fiscal crisis of the 1970s, the crime waves of the 1980s and 1990s, the aftermath of 9/11 and the Global Financial Crisis. Of course, New York not only weathered these storms but emerged stronger, for one simple reason: People young and old want to enjoy the vibrancy of a great city.”
With that in mind, we invested in several New York-centered REITs during the pandemic at exceptionally low prices:
The first one was Empire State Realty (ESRT), which earned us a 57% return in a 3 months holding period.
Then, we took a large position in Urstaft Biddle (UBA), earning us an 81% return in just 5 short months.
Finally, we redeployed some of these proceeds into SL Green (SLG), which is today the only New York-focused REIT left in our Portfolio:
So far, our contrarian investments in NYC have been very successful.
Even then, I am increasingly concerned that our initial thesis might have been wrong.
I may have underestimated the pain that NYC will endure and it is making me nervous about our investment in SLG. Below we discuss my main concern for NYC and discuss what we plan to do with SLG.
This Time Could Be Different
The four most expensive words of finance are “this time is different”. These words are always said during times of crisis, but in the case of NYC, they have always been wrong.
Yet, this time could really be different.
People and companies are moving away from NYC to relocate to Florida, and I fear that this could be just the beginning:
Blackstone, the largest private equity firm in the world, recently announced that it was moving to Miami.
Elliott Management, another major investment firm, is moving to West Palm Beach.
Billionaire investor Carl Icahn is also relocating his asset management firm to Florida.
Goldman Sachs is reportedly on the verge of moving its asset management division to Florida.
Jamie Dimon, the CEO of JP Morgan Chase, recently said he was open to moving the company's headquarters down south to Miami.
Ken Griffin's Citadel Group is considering it as well.
Etc...
According to Kathyrn Wylde, CEO of the business-backed Partnership for New York City, there are at least 20 major Finance and Tech companies that are already poised to leave NYC for Florida, and many more that are on the verge of doing it as well.
And why wouldn't they?
No state income tax
Lower cost of doing business
Warm weather and beaches
Easy flights back to NYC when needed
Same time zone
Thinking about it, if I had a company in NYC, I would likely move to Florida as well.
That's especially true when you consider that New York just passed plans to increase taxes on the most affluent residents and businesses, making NYC the highest taxed city in the nation:
Quoting a news report from Seeking Alpha:
Marginal income tax rates could be nearly 52%, which would mean the city's wealthiest residents could end up giving more of their paychecks to federal, state, and local governments than they keep for themselves. It would also push NYC past California, which currently has the highest marginal personal tax rate in the U.S. - just over 50% on income over $1M.
Executives at major Wall Street firms and other New York employers have warned city officials of the consequences. In a letter delivered to Gov. Andrew Cuomo and Democratic leaders of the state Legislature, 250 business executives said the package of tax increases would "jeopardize New York’s recovery from the economic crisis inflicted by COVID-19." New York is already having a slow recovery, with the state's unemployment rate at 8.9% in February, the second-highest among the 50 states and D.C.
That's unacceptable for many people and businesses after a year of soaring crime, harsh restrictions, and already paying some of the highest taxes and cost of living in the country.
James Whelan, President of the Real Estate Board of NY, explains that "the Legislature's proposals will move us in the opposite direction by driving away the businesses and tax base required to do that.
He added that "we have been down this road before. In the 1960s and 1970s, such policies ultimately discouraged investment in New York City and led to a diminished tax base and fewer resources for the delivery of government services. The results were devastating – two decades of fiscal problems along with rising crime and lower quality of life."
Is This Just the Beginning?
The issue here is that we are starting to see a snowball effect.
Here is what Leon Cooperman, the CEO of Goldman said in a recent interview:
I suspect Florida will soon rival New York as a finance hub, due in part to the 'Tax and Spend' policies of New York."
Today, information spreads faster than ever before, and when a company like Goldman decides to move from NYC to Florida, it incites a lot of other companies to move as well.
The population of New York had already been declining for years prior to the pandemic, and this trend is only accelerating:
What does it mean for SLG?
The recovery is likely to be long and painful.
Yes, you are getting it at a discount relative to pre-crisis levels, but you have all your eggs in one basket ("NYC"), and the future of this basket is increasingly uncertain.
With the move to hike taxes even further, I think that the city is going in the wrong direction, pushing even more companies to leave.
SLG owns a diverse portfolio of office buildings, and with companies moving out of state, SLG will suffer increasing competition from vacant buildings that will undercut rents.
That's without even considering the potential impact of work-from-home and the recession.
All in all, I think that the risk-to-reward isn't as compelling as I once thought it to be.
The share price is up by nearly 15% since we first invested in the company, and I expect to sell my position and redeploy elsewhere as soon as I have finished due diligence on two other companies.
This could happen already later this week. Stay tuned!
Good investing from your HYL Research Team,
Jussi Askola
