Commercial Real Estate: A Perfect Storm for REIT Short Sellers
Upon hearing the term “commercial real estate,” most folks run for the hills. The thought of rising rates, looming debt maturities, possible loan defaults, and the ongoing office sector meltdown makes anyone want to flee. You can blame it on Covid-19 all you want, but the commercial real estate market has created the perfect storm for REIT short sellers.
Shorting stocks is like dancing with the devil, and the risks only climb higher for novice investors. Even seasoned players get their fingers burnt. Just over a year ago, Jim Chanos, founder of Chanos & Company, unwisely underestimated Digital Realty (DLR), but as I’ve proven here on Seeking Alpha, he was dead wrong. Chanos & Co.’s down 4% year-to-date speaks volumes. Shorting can be dangerous–remember, the most you can earn on a short is 100% if the stock goes to zero. But the potential losses are limitless if the stock goes up.
For REITs–and other dividend-paying stocks–the risk for short sellers skyrockets. On top of being liable for any dividends the company pays while the short position is active, Interest charged for borrowing shares adds another layer of financial burden. Moreover, the real estate portfolios of REITs are rarely worthless, making it even more expensive to maintain a short position with limited rewards.
SL Green Realty (SLG) – Short Interest: 28%
SL Green Realty (SLG) is Manhattan’s largest owner of commercial real estate, possessing a portfolio that covers 32.5 million square feet. Their varied property types yield financial diversity, with a special focus on office properties. SLG is a dividend dynamo offering a juicy 9.22% dividend yield. Their current P/AFFO of 10.02x signals a significant discount, making SLG a Spec Buy in my book.
Medical Properties (MPW) – Short Interest: 23%
Medical Properties Trust boasts a sprawling portfolio of 337 properties containing approximately 43,000 licensed beds. The company’s pursuit of financial robustness has been evident in the sale of several assets to reduce debt, even at the cost of impacting revenues. MPW’s potential lies in its recovery and return to growth, which may make it a compelling investment opportunity at current price levels. Given the upside opportunities, Medical Properties Trust is labeled a Spec Buy.
Seritage Growth (SRG) – Short Interest: 25%
Seritage Growth Properties holds 42 properties totaling roughly 5.6 million square feet of gross leasable area; their NAV ranges between $541.0 million and $779.0 million. Based on this, SRG may offer an opportunity for gains, though uncertainties and risk factors require caution. Meanwhile, they currently hold no rating status in my coverage, leaving their potential open-ended.
Pebblebrook Hotel (PEB) – Short Interest: 17%
Pebblebrook Hotel Trust’s extensive portfolio covers 47 hotels and resorts across 13 urban and resort markets. PEBs recent challenges include tough weather situations and labor strikes, though their healthy liquidity and balance sheet strength keep them resilient. PEB is labeled as a Spec Buy due to the potential upside opportunities their stock presents.
Douglas Emmett (DEI) – Short Interest: 16%
Douglas Emmett’s 70 office properties and 14 multifamily properties are situated in prime submarkets within Los Angeles and Honolulu. DEI has faced several financial adjustments over recent years, including cutting dividends. However, the company has maintained a robust balance sheet and excel in a variety of markets, creating potential value for perceptive investors. Due to the potential along with the financial challenges, we currently have no rating for Douglas Emmett.
In Closing
In investing, short selling can be a double-edged sword. While it can occasionally expose overvalued shares and unearth critical issues, it can also spark volatility and, at times, unwarranted panic. Therefore, it remains imperative for investors to conduct thorough due diligence, focusing on sound fundamentals to make informed decisions.
Remember, the power of social media amplifies short sellers’ influence in disseminating information, making a diligent approach vital. It’s crucial for investors to delve deep into company fundamentals, while approaching short-seller analysis with caution. Valuing diligence, research, and second-level thinking will always be the cornerstone of successful investing.
