(Bloomberg) -- SL Green Realty Corp. is the most-shorted office REIT in the US — a puzzling development considering the stock’s strong rally this year has made it one of the best performers in the group.
The shares are up 11% in 2023, compared with a gauge of office real estate investment trusts that’s down more than 19% this year. SL Green declined 9.7% amid a broader selloff in the sector on Thursday.
Yet 26% of its float is sold short, amounting to $688 million in SL Green stock, according to data from S3 Partners. In contrast, industry giant Alexandria Real Estate Equities Inc. is down more than 29% this year, but only about 2.5% of its float is sold short.
While SL Green focuses on office real estate, a sector that’s been pummeled in the new post-Covid world, Piper Sandler analyst Alexander Goldfarb says it’s a questionable bet to short the shares considering the company’s holdings are mainly in attractive areas for office properties.
“We don’t see a catalyst to explain the outsized short interest,” he said. “No one is saying office isn’t in a tough spot, but NYC leasing today clearly favors Grand Central and Park Avenue, which in aggregate accounts for 55% of [SL Green’s] portfolio, with Midtown overall just over 90%.”
Since SL Green’s first-quarter earnings report in April, the stock has advanced over 40% and nearly doubled in price since its March low of $20. A short sale is a bet the stock will decline.
Even as SL Green gained, short sellers failed to relinquish their grip, with bearish bets on the stock remaining elevated. Put contracts outnumbered calls as of market close Thursday, with open interest of the former almost 60% higher than the latter, according to data compiled by Bloomberg.
SL Green’s short interest is more than three times the office REIT average and over six times the percentage of REITs overall, Goldfarb wrote in a note to clients Tuesday.
“We believe SLG’s short interest level is outsized relative to HPP and VNO, given all face a variety of issues, which have over 50% lower short interest than SLG, despite the dividend suspension of the two peers versus SLG’s ~8% current yield,” he wrote.
Among office REITs, SL Green features the most mark-to-market short losses, down 41% this year, according to S3 Partners data. That’s compared to Hudson Pacific Properties and Vornado Realty’s 19% and 40% losses.
And while debt maturities, lease expirations and committed spending threaten office real estate landlords more broadly, Goldfarb argues the “death of the office” narrative is getting old. Between SL Green’s ability to manage its debt load over the cycle, management’s long-term success at source financing and in-line short-term metrics versus peers, he views the company to be well-positioned.
The Piper Sandler analyst is one of three analysts with a buy rating on the stock, as nine analysts have hold ratings and five have sells.
(Updates story for market close.)
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