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5 Heavily Shorted REITs That Could Pop - views
BALTIMORE (Stockpickr) -- Short-sellers are betting heavily against REITs -- and that’s exactly why investors should be buying them right now. Since the floor fell out of the housing market back in 2008, investors have been fleeing real estate investment trusts (REITs) en masse. After all, REITs are the most direct way to get exposure to the troubled real estate market, right? Not exactly.
In reality, even though properties are the biggest chunk of any REIT’s balance sheet, it’s better to think of REITs as income-generation vehicles than a way to bet on housing prices. That’s because, generally, REITs lease their properties with commercial lease agreements that limit renewal risks and don’t leave the firms on the hook for unexpected maintenance costs or tax bills. That means that REITs tend to have predictable incomes that are obligated to be passed onto shareholders in the form of dividend payouts.
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For income investors, REITs offer some of the most attractive yields right now.
That hasn’t stopped short sellers from betting against REITs, but heavy-handed short selling is one of the best catalysts for a pop in a handful of well known REIT names: it’s called a short squeeze. A short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors. As more and more of the short investors buy shares to cover their positions, share prices skyrocket.
Almost anything can trigger a short squeeze, including trumping earnings expectations, winning a lawsuit, unveiling a new product and even announcing a management change.
One of the best indicators of just how high a short-squeezed stock could go is the short-interest ratio, which divides shares short by average daily trading volume in order to get a ballpark estimate of the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.
Naturally, these plays aren’t without their blemishes -- there’s a reason that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year.
With that, here’s a look at REITs with short-squeeze potential in 2012.
Regency Centers (REG) is a trust that owns and manages 215 neighborhood shopping centers spread throughout 28 states and co-owns another 181 shopping centers with partners. In total, Regency lays claim to 45 million square feet of leasable space.
At present, Regency’s short interest ratio weighs in at 10.3; that means that it would take short sellers more than two weeks to cover their positions at current volume levels.
Because Regency anchors 80% of its shopping centers with grocery stores, there’s an organic draw for consumers to visit stores -- and the trust can market its properties better than management firms that don’t draw the same crowds. Demographics are also important for Regency: because the firm locates its properties in relatively affluent middle class locations, the firm has been benefitting from positive spending trends now that much of consumers’ anxiety about the economy has settled.
While some of Regency’s tenants were forced to close their doors in the wake of the financial crisis, its occupancy rate has been ticking back toward its 95% peak in recent quarters. At its current rate, REG should be able to return to prerecession levels in the next couple of years.
A manageable debt load and nearly 5% dividend yield should keep investors interested in this name in the near-term.
It’s been a strong year for Boston Properties (BXP). In 2011, this $14 billion office REIT has rallied more than 10%, besting the broad market by double digits year-to-date. The firm owns approximately 40 million square feet of leasable space in 146 properties, the majority of which are offices (BXP also owns several retail and residential buildings, as well as a hotel).
Short-sellers have made big bets against BXP, bringing the firm’s short interest ratio up to 10.5.
Boston Properties has had considerable exposure to real estate prices in the last few years, but that’s come from a string of acquisitions that the firm has picked up at comparatively low prices. Boston Properties has also been developing new properties, building out more than 2 million square feet of leasable office space at present. A significant liquidity cushion on BXP’s balance sheet should keep top line growth moving at a healthy pace.
With a 2.1% dividend yield, BXP’s payout to shareholders is on the lower end of the scale, which should make short-sellers somewhat less willing to hold out for a major drop in this REIT. On the flip side of that coin, a boosted dividend payout could send shorts scrambling to exit their positions. BXP is a name to watch in 2012.
On the long side of Boston Properties is Ken Heebner; the stock comprises 1.9% of Capital Growth Management's portfolio as of the most recently reported period.
Digital Realty Trust
Realty Trust (DLR) isn’t just the most heavily shorted REIT on this list -- it’s also the one that has the most attractive macro case for being a buyer right now. Put together, those factors make Digital Realty worth taking a look at for investors. The firm’s short ratio of 13.5 indicates that it would take nearly three weeks for shorts to exit their positions in this stock.
Digital Realty is a niche REIT that owns datacenters, internet gateways, and offices for technology firms. That positioning puts DLR in the unique position to benefit from the quickly increasing demand for specialized datacenter facilities. As cloud computing becomes less of a buzzword and more of a part of consumers’ daily lives, datacenters are becoming more in-demand -- and Digital Realty is one of the few firms that can offer meaningful capacity right now.
Because Digital Realty’s properties require customization to meet tenants’ technical needs, switching costs are high -- so even though leases tend to be for shorter-terms than at many traditional peers, retention remains high as a result. This firm’s 4.2% dividend yield, coupled with a strong macro argument for growth, makes it a solid name to watch in 2012.
Digital Realty also shows up in Capital Growth Management's portfolio.
Plum Creek Timber
When it comes to traditional real estate investment trusts, Plum Creek Timber (PCL) is one of the most unique names out there. The nearly $6 billion firm is part REIT and part traditional corporation, manufacturing wood products in addition to its timber property holdings.
That positioning means that Plum Creek is heavily tied to commodity costs. Shifts in timber prices directly impact this firm’s profitability, even if the recent rally in timber hasn’t been reflected in its share price yet.
Plum Creek owns 6.8 million acres of timberland in 19 states. While the firm’s timber harvesting business is less profitable per acre than the industry norm, this REIT has historically shown a willingness to unload portions of its portfolio for developers and conservationists who were looking to buy part of PCL’s land portfolio. That focus on shareholder returns is welcome -- particularly as piecemeal sales of land are so much more lucrative.
At present, Plum Creek’s short interest ratio comes in at 10.2, indicating that short sellers are still taking a sizable position in betting against this firm. While other timber REITs look more attractive than Plum Creek, that heavy shorting could mean a near-term pop in share price. A 4.65% dividend yield and ample balance sheet liquidity should keep longs interested in this stock too.
On the residential side of the REIT spectrum is AvalonBay Communities (AVB), a REIT that owns nearly 52,000 apartments spread across key metropolitan areas such as New York, Boston, Washington D.C. and San Francisco. That geographic positioning has two major benefits for AvalonBay: high barriers to entry and high renter demand.
Because AvalonBay is a residential REIT, it doesn’t get to engage in the same sorts of super-attractive leases that its commercial counterparts do. Instead, leases are short-term, and regulation is stricter for residential landlords.
While those two factors are posing a challenge right now, AvalonBay’s geographic focus is its saving grace right now. Because the firm is positioned in higher cost of living areas, consumers who were on the fence about buying qualifications during the housing boom are likely to remain out of the market until underwriting loosens up, keeping occupancy high for AVB.
A short interest ratio of 11.8 means that it would take more than two weeks for short sellers to close out their positions in AvalonBay. That gives this stock ample potential for a short squeeze as buyers become more ambitious in this market.
To see this week’s short squeezes in action, check out the REIT Short Squeezes portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.