REIT short sales reverse course and fall

The bears are starting to ease up on real estate investment trusts.

The number of REIT shares being shorted fell 3.1% between mid-July and mid-August, reversing a trend that has gripped the sector for much of the past two years, according to a JPMorgan report released last week.

The decline, which occurred between July 15 and Aug. 15, marked the first full month that short-selling activity has trended down since mid-2006, said analysts at New York-based JPMorgan Chase & Co. The data appear to indicate that skeptics have become less cynical about REITs.

“I think there’s a perception there’s been overselling of the equity REIT market, which explains why the short positions have leveled off and started to come down some,” said John Good, an attorney in the Memphis, Tenn., office of Bass Berry & Sims PLC of Nashville, Tenn.

Short interest, as a percentage of total REIT float, fell 0.4% to 10.7% during the month, the report said. However, this is still significantly higher than the 4.7% average short-interest ratio among New York Stock Exchange issues during the period.

Based on current trading volumes, it would take 7.4 days to cover the shorts.

In general, when short-selling increases, it reflects cynicism on Wall Street and a belief that the stocks will fall. When short-selling declines, the opposite is true.

To sell short, a seller borrows shares in a particular company and sells them to another buyer on a bet that the share price will decline. Since the short seller doesn’t actually own the shares to start with, the seller must buy those shares at some point in the future so that he can cover the sale and repay the lender.

If the stock price drops between the time the seller sold the shares and the time he buys new ones, he pockets the profit. If, however, the share price has risen, he takes a loss.

REIT short sellers, typically hedge funds and other sophisticated traders, have been steadily betting against real estate for the past few years. They correctly won a bet last year when they predicted that REITs would end their seven-year run of outperforming the Standard & Poor’s 500 stock index.

Equity REITs had outpaced the S&P 500 from 2000 through 2006, but faltered last year when they posted total returns of -15.7%, which was far short of the S&P’s 5.5% return, according to the National Association of Real Estate Investment Trusts, based in Washington.

The deepening credit crunch, weakening economy, housing crisis and bank industry woes caused investors to start looking nervously at which REITs might be affected most. The biggest concerns have revolved around REITs that have big chunks of debt coming due, those that have short-term leases that will roll over during this weak economic climate, and those that rely heavily on development pipelines that may not be able to be funded and leased in the current credit environment.

“There was a perception that all commercial real estate was overpriced and overvalued, that REIT stocks were overvalued … and you had a credit crisis coming on,” Mr. Good said.

As the credit crisis expanded outside the residential subprime mortgage sector, investors started short-selling real estate names across the board, causing REIT stocks to fall 25% to 30%. At the same time, some investors wrongly sold off REITs when they dumped troubled banking and financial services stocks, Mr. Good said.

However, he speculated that investors are rethinking this sell-off, given the low leverage levels, strong management teams and detailed financial disclosures of publicly traded REITs.

Triple net lease REITs saw the biggest dropoff in short-selling activity, as short interest as a percentage of total float in this sector fell 2.02% during the period. This was followed by manufactured housing REITs, which slipped 1.1%, apartment REITs, which dropped 0.52%, and mall REITs, which fell 0.46%.

However, short-selling didn’t decline across the board for REITs. Industrial, shopping center and self-storage REITs continued to see short-selling activity increase.

Industrial REITs saw the biggest increase, rising 0.33%, mainly over concerns about the group’s heavy development pipelines and exposure to the weakening global economy. Shopping center and self-storage REITs saw short interest as a percentage of equity rise 14% and 5% respectively.

The REIT with the highest short interest as a percentage of total float was First Industrial Realty Trust Inc., a Chicago-based industrial REIT, at 32.8%. This was followed by Maguire Properties Inc. of Los Angeles, Equity One Inc. of North Miami Beach, Fla., Tanger Factory Outlet Centers Inc. of Greensboro, N.C., Federal Realty Investment Trust of Rockville, Md., Glimcher Realty Trust of Columbus, Ohio, AvalonBay Communities Inc. of Alexandria, Va., Digital Realty Trust Inc. of San Francisco, Cousins Properties Inc. of Atlanta and Home Properties Inc. of Rochester, N.Y. — all of which had ratios above 18%.

E-mail Janet Morrissey at [email protected].