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Shorts Move Into REITs at Record Levels

Updated from 1:47 p.m. EDT

Short interest in REIT stocks is nearing an all-time high, which has some long-term investors in the sector saying the group may be setting itself up for a technical bounce.

Given the stock market's wild of late, however, gauging where the stocks are heading is no easy task.

Short interest on the U.S. MSCI REIT Index is at 10%, compared with 4% for the entire New York Stock Exchange, according to data compiled by Bloomberg. Investors who sell stocks short profit from declines in the share price.

SNL Financial, which tracks a wider index of REIT stocks, says the median short interest on the group rose to 8% at the end of February, compared with 4.5% a year ago.

The high short-interest levels are catching the eyes of several dedicated REIT money managers, who tell TheStreet.com that REIT stocks are generally trading below the private-market values of their real estate. The sector has been slammed lately amid the difficulties in the credit markets and job market uncertainty.

Among the REITs with the highest levels of short interest are office owner Maguire Properties (MPG) and apartment owner Post Properties (PPS), which have short interest of 34% and 20%, respectively.

Both companies are subject to possible buyouts. Maguire is exploring strategic alternatives, while Post Properties has received a buyout offer from a Canadian pension fund and its former chairman. If either deal gets done, the REIT sector as a whole could get a nice near-term boost.

The historical short-interest levels for REITs could not be confirmed, as MSCI does not track the data. Nonetheless, several industry sources said the current rate is at or near all-time high levels.

A few stocks worth eyeing for short-squeeze bounces include office landlord SL Green (SLG) and luxury apartment developer AvalonBay (AVB).

Office landlords have been hurt lately by uncertainty over the job fallout from the financial services industry in New York City. SL Green, which has heavy exposure to prime office buildings in midtown Manhattan, now carries a 13% short interest. SL Green shares fell 3.6% to $79.91 Friday, partly due to worries of a liquidity crisis at Bear Stearns (BSC).

In a research report Friday, Bank of America analyst Christy McElroy said she met with SL Green's leasing team this week and left "with the impression that despite all of the negative headlines about the New York office market, leasing continues to be vibrant with solid rent spreads (year to date)."

For example, 100,000 square feet of space was leased at SL Green's 711 3rd Ave. building at a 34% rent spread from the previous lease, she says. Additionally, 156,000 of space was leased a 333 W. 34th St. at a 38% spread.

Luxury apartment developer AvalonBay (AVB) could also be due for a bounce, according to squeezetrigger.com, a Web site that looks at technicals in stocks for trading ideas.

The site on Friday said AvalonBay, which has a 14% short interest, rose above the $94.99 short squeeze trigger price on Thursday. In recent trading, shares were down $2.15, or 2.2%, to $93.84.

One REIT trader says there is a disconnect today between high-quality and low-quality names in the sector. He recommends shorting names with high yields but lower-quality buildings, like Pennsylvania REIT (PEI) and Glimcher Realty Trust (GRT), while owning high-quality names like Simon Property Group (SPG), Vornado Realty (VNO), Boston Properties (BXP) and Federal Realty Trust (FRT).

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