IN-DEPTH: Real problems

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European REITs became the third most-shorted sector in March after basic materials and energy, two sectors that have perennially topped the list of most shorted stocks.

In January and February, the REIT sector was the seventh-most shorted sector in Europe with an average short interest of 2.3%, according to data compiled by Activist Insight Shorts. Short interest spiked to 2.6% in March but fell to fifth place in April with average short interest declining to 2.4%.

Real estate companies were not shorted indiscriminately. The average short interest in retail REITs was 5.8% in March, up from 4.1% in January, one of the biggest moves that propelled it to be the most-shorted industry. Short disclosures (filings that reveal new, increased, and decreased positions) at retail REITs almost doubled in February and March 2020 compared to the same period last year, while new short positions tripled to 16 in the two months ended March. Meanwhile, industrial and office REITs saw the number of short disclosures drop, according to Activist Insight Shorts.

‘Weakest player’

In individual stocks, Netherlands-based Wereldhave was the most-shorted company at the beginning of March, with nearly 22% of its capital tied to short selling transactions, followed by U.K.-based Hammerson, Corestate Capital Holdings, and Intu Properties.

Wereldhave, which owns shopping centers in the Netherlands, Belgium and France, faced falling occupancy rates and credit rating downgrades when the pandemic hit. The stock lost 53% in March, extending year-to-date losses to 70%. It has recovered some of the declines since then amid a broad market recovery. Meanwhile, the short interest in Wereldhave declined to 15.2%, with Odey Asset Management and Marshall Wace among the entities short the stock.

“The shopping malls are closed due to coronavirus but the bigger story is that Europe’s brick retail is sick,” Christian Auzanneau, a sell-side analyst at research firm AlphaValue, told Activist Insight Shorts. “Wereldhave is the weakest player in our coverage.”

Auzanneau believes Wereldhave will be forced to raise cash to keep its loan-to-value ratio at a level that would not trigger bond covenants.

Wipe out

The question is not when but at what price the capital raise will be done and if it will be possible at all in this environment. U.K.-based shopping malls owner Intu abandoned a rights issue in March due to lack of investor interest and is now looking to sell assets as private equity firms are reportedly circling to buy the strongest properties. Intu had a short interest of nearly 9% at the start of March but now only Odey has a large disclosed short position, totaling 3.6%. Intu shares have fallen 82% year-to-date.

Hammerson is another U.K.-based real estate firm that saw its stock hammered as rent collection dropped to 37% in the second quarter. Short interest in Hammerson was more than 10% in March and fell to 5.7% on Tuesday. Seven investors reported short positions, including Marshal Wace and ENA Investment Capital, an activist that recently targeted Bilfinger and Ontex Group.

The key risk for current shareholders in these three companies is that they may face a complete wipe-out if the debt is converted into equity, according to Auzanneau.

One company that has a high short interest and appeared to have weathered the storm is Corestate, a Germany-listed real estate company that manages assets across the entire real estate spectrum, including retail, residential, and logistics. Corestate shares have shed a third of their value since the start of the year, while short interest declined from around 9% to 4.5%.

Muddy Waters Capital, the activist short selling outfit led by Carson Block, has been short Corestate since October 2019, according to Activist Insight Shorts. Block said at the time that he did not reveal his views on Corestate due to potential repercussions from German regulators. Contacted by Activist Insight Shorts, Block stood by his previous statement.