Real Estate Stock Shorting Spiked In The Spring But Hasn't Gone Away

The stock market tumble at the beginning of the coronavirus pandemic led to a rise in investors shorting the stocks of real estate companies, with some influential figures feeding the flames. Four months into the crisis, as the major stock market indexes have risen to nearly pre-pandemic levels, many investors are still betting against real estate stocks.

The share of investors betting against REITs, especially those in the retail and hotel sectors, spiked in February and March, stock trading data shows, but it has still remained elevated above normal levels into the summer.

"People realized, 'My business trip is getting canceled,' and that's impacting airlines, travel and hotels, and there was an opportunity to make money on the short side because the hotel business was directly impacted by all these shutdowns that occurred," Robert W. Baird & Co. Director of Equity Research Michael Bellisario said.

"The headlines started to snowball, and it was 10 to 15 days of hotel stocks falling off a cliff because people, as they always do, assume the worst is going to happen," Bellisario added. 

David Auerbach, an institutional trader with World Equity Group and a consultant with IRRealized, said investors also rushed to short retail stocks as they saw states shutting down businesses. 

"It's been a lot of the retail and lodging names that have been seeing the shorting activity," Auerbach said. "Some of the retail names that have been under pressure prior to the COVID pandemic have been accelerated because of what's going on."

Hotel and retail stocks weren't the only ones that made headlines that caused investors to short them. In mid-March, billionaire investor Carl Icahn told CNBC he is shorting the commercial bond market in his "biggest position by far." Activist hedge fund manager Jonathan Litt in May said he was betting against New York's office market by shorting Vornado, SL Green and Empire State Realty Trust.

"Jonathan Litt has a negative short thesis out on New York office, and he's commented publicly that he thinks New York office is going to be weak for the near future," Auerbach said. "For those that follow his thesis, I'm sure there are guys out there shorting it."

Vornado's short interest ratio, the number of shares that are shorted divided by the average daily trading volume, has steadily risen over the course of the pandemic, according to Bloomberg Terminal data Auerbach shared with Bisnow. It went from 2.1% in mid-March to 4.25% in late May to 6.9% as of Friday. 

The practice of short selling carries more inherent risk than buying a stock, making it less common. Short-selling investors borrow shares in a company and sell them in the hopes they can buy the stock back at a lower price and keep the difference. But if the price of the stock rises, they must buy it back at the higher price. The ability of the stock to rise indefinitely means there is no limit to the amount of money a short-seller can lose, whereas a standard stock buyer can only lose the initial money they invested. 

Real estate firms are not typically the most shorted stocks because owning portfolios of physical assets makes them more stable and less prone to sharp drops. But when a crisis like a pandemic happens, investors have the opportunity to bet against certain real estate sectors. 

"Prior to COVID or the recession, I've never quite understood shorting REIT stocks in the normal course of events because they march to the beat of a different drum," said Georgetown University professor Jonathan Morris, a real estate industry veteran who now teaches a master's program course on REITs. "They have dividend returns, a slight linear uptick annually in earnings and maintain a relatively low leverage ratio ... They're long-term investments, but when you get to a black swan event, all chips are off the table."

Morris said it made logical sense for investors to look at what was happening in March, with states requiring retail businesses to shut down, and consider shorting stocks in the retail sector.

"If you look at what's most affected by COVID, malls and retail, those have just gotten crushed," Morris said. "Those sectors have really gotten beaten up, and if you're an unemotional investor, those are the sectors you would have thought intuitively about shorting as March became April."

Shorting activity in retail REITs appears to have peaked in the early part of the crisis. Simon Property Group's short interest the week of Feb. 21 was 8.6%, according to Bloomberg Terminal data. It then dropped to 5.47% the week of March 20 and 2.89% the week of May 29. Regency Centers showed the same pattern, with its short interest reaching 11.3% as of Feb. 21 before falling in the subsequent months.

Most hotel stocks also appear to have been shorted the most in March, according to data provided by financial services firm Robert W. Baird & Co. End-of-month short interest for Choice Hotels International peaked at 14% March 31, and it dropped to 9% by June 30. Hotel REIT Hersha Hospitality Trust reached 12% short interest March 31 and fell to 8% by June 30. 

The recent spike in coronavirus cases in some parts of the country, which has led some governors to reverse the reopening process, has created some new shorting activity this summer, Bellisario said.

The hotel REITs with the highest exposure in California, Texas and Florida — three of the hardest-hit states this summer — include Xenia Hotels & Resorts, Apple Hospitality REIT, Summit Hotel Properties and RLJ Lodging Trust, Bellisario said. Those stocks have all fallen over the last month. 

"Investors called me and said, 'Can you send me a geographic exposure chart? Who has the most Texas exposure?'" Bellisario said. "That was certainly on investors' minds and a reason to take the other side of a trade."

Investors have also looked to short hotel stocks that are outperforming the sector, Bellisario said, because they are likely to come back down. RLJ and Pebblebrook Hotel Trust experienced a rising stock price relative to the sector in late May and early June, for reasons that Bellisario said weren't clear. Those two REITs were the only ones with double-digit short interest ratios as of June 30, Baird's data shows. 

"For whatever reason, they were going up the most," Bellisario said. "It's hard to know exactly why, and that's probably why the short interest was elevated — because they were relative outperformers and that's more reason for people to short."

The practice of shorting stocks has also been affected by the rise of casual day traders participating in the market as people have been stuck at home during the pandemic. Barstool Sports founder Dave Portnoy has posted frequent live streams, branded as "Davey Day Trader Global," to his 1.5 million Twitter followers discussing his stock trading activity during the pandemic, Bloomberg reported. 

“Part of it has to do with a lot of the day trading activity," Auerbach said. "People are home and they’re watching the media more, they’re watching some of the things going on and they see Dave Portnoy or one of these Robin Hood guys and they’re following along. So I think there’s some added pressure coming from other players in this market.”

Contact Jon Banister at jon.banister@bisnow.com.