Highfields' short bet against Digital Realty Trust pays off

BOSTON Wed Oct 30, 2013 1:46pm EDT

BOSTON Oct 30 (Reuters) - Digital Realty Trust is paying off big for Highfields Capital less than six months after the investor warned that the real estate trust would face more competition Microsoft and Google.

With Digital Realty Trust's stock price down 14.70 percent on Wednesday, $13 billion Highfields is likely seeing this year's double-digit returns swell even more.

The San Francisco-based REIT missed analysts' third-quarter earnings forecasts when it reported funds from operations per share of $1.10 on Tuesday. Digital Realty Chief Executive Officer Michael Foust said he was disappointed with financial results, but pointed to "robust leasing velocity" as a bright spot.

Brokerage Raymond James on Wednesday cut Digital Realty Trust's rating to "market perform" from "outperform".

At the Ira Sohn Investment conference in May, Highfields' Chief Executive Jonathon Jacobson unveiled a short position against the company saying its stock price could drop as low as $19 a share. On Wednesday, it was trading at $48.78. In the last six months, shares are down nearly 30 percent.

Jacobson, who rarely discusses short positions by name, said Digital Realty Trust, or DRT, would not only have to battle more with Google, Microsoft and Amazon, which all have their own data centers, but also face higher spending.

DRT guided investors that its development expenditures could be as much as $1.12 billion and that recurring capital expenditures and capital leasing costs could be between $70 million and $75 million.

Jacobson said the dividend payments set at 78 cents a common share in March, June and September and kept there for a payout in December are unsustainably high. Investors tend to like REITs precisely because of their high dividend payments.

A spokeswoman for Highfields declined to comment. Jacobson refused to be interviewed for this story.

In a recent investor letter sent to clients and seen by Reuters, Boston-based Highfields said it planned to shrink its size by giving back between 5 percent and 15 percent of its capital because it feels it can deliver better returns with less money.

The fund gained roughly 18 percent after fees through the end of September, a source close to the firm said.

In the letter, Jacobson said Highfields had made money by shorting, or betting that a security's price would fall, but he did not mention the company by name.

Jacobson may be among a small group now making money on short positions, something that has become tougher as the stock market has risen nearly 24 percent this year. Hedge funds that do nothing, but short securities have lost 13.33 percent this year, according to Hedge Fund Research data.

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