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REIT Reversal

*Insiders think it's time to sell! BIG NEWS folks! Also keep in mind all 13 homebuilding stocks I follow were DOWN today in an up-market and with a weakening advance/decline line as more stocks declined today... it's clear what sector would be the leader in a bull-market... and I'll give you a hint... it's not anything oil-related!!!

Money & Investing
REIT Reversal
Stephane Fitch, 07.13.05, 4:17 PM ET

LOS ANGELES - Is it time to sell off your real estate investment trust stock? Some company insiders seem to think so. Among the directors and managers of real estate investment trusts, selling outpaced insider buying 173 to 1 in the second quarter of this year.

According to Lehman Brothers analyst David Harris, total insider sales volume during the three months ended June 30 was $296 million. Granted, that's a pittance if you consider that REITs have a total stock market value of $338 billion. And 85% of the sales were related to options grants and thus may not be indicative of insiders' true sense of whether the market has reached a top or not. Yet even stripping out the options-related transactions, the insider sales volume increased 35% over first quarter, Harris reports. And this is the highest level of insider selling since Lehman began watching the metric in 2002.

What prompted the sales? "Soaring stock prices," says Harris. Anybody who bailed out of the S&P 500 stocks in mid-2000 and headed for the safety of REITs, which own vast collections of office, apartment, shopping mall and other types of commercial properties and distribute rental income to their shareholders in the form of dividends, will tell you it was a great move. REITs have returned an average 20.4% per year since July 2000. Now REIT price-to-earnings ratios are significantly higher than those of the stocks in the S&P 500.

The insider selling adds a bit of fuel to the debate over whether real estate investment trusts are overpriced. In quarters when REIT stocks were rising fastest, the insider sales have tended to shoot up. The previous insider sales record was set in the fourth quarter of 2003, when the stocks returned 11% and insider sales exceeded $275 million.

The heaviest levels of insider selling this year have occurred among some "blue chip" REITs. Vornado Realty Trust (nyse: VNO - news - people ), a large owner of office properties and shopping centers in and around New York City, recorded $121 million in sales. (Of the sales, $13.9 million was by Vornado's celebrated Chairman Steven Roth.) Simon Property Group (nyse: SPG - news - people ), the Indianapolis-based shopping mall owner, posted $51 million in sales, mostly by a relative of Eddie DeBartolo, who is not involved in Simon's day-to-day operations. Boston Properties (nyse: BXP - news - people ), owner of office buildings in Boston, New York and Washington, D.C., reported $23 million of sales. (Only $4.7 million of Boston's stock was sold by Chief Executive Edward Linde.) Other companies with significant amounts of insider selling include Archstone-Smith Trust (nyse: ASN - news - people ) and Avalon Bay Communities, both owners of apartment properties.

Okay, so should you be thinking of taking profits on your REIT shares? That depends on where you intend to reinvest the dough. According to Green Street Advisors, an independent research firm in Newport Beach, Calif., REITs are starting to make other types of stocks look really cheap. REITs are trading at 19 times estimated 2005 "adjusted funds from operations," or AFFO (net income with unnecessary depreciation and all amortization added back). The S&P 500, by contrast, is trading for about 15 times 2005 estimated net. The disparity in p/e ratios has never been worse, according to Green Street.

REITs stack up only slightly better against bonds. Low-investment grade corporate bonds are yielding about 6% interest compared with the 5% "AFFO yield" for REITs. (AFFO yield is simply the inverse of a price/AFFO ratio.) Over the past dozen years, bonds have had this kind of premium over REITs only 8% of the time.

The only kind of investment that makes REIT stock look reasonably cheap: directly owned commercial real estate. Buying office buildings, shopping malls, warehouses and the like has gotten really expensive. So REITs are trading at a modest 6% premium to the underlying value of their property holdings. That's close to the historical norm.


LINK: http://www.forbes.com/home/strategies/2005/07/13/reit-investing-insider-cz_sf_0713reits2.html