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Are Heavy Insider Sales a REIT Sell Signal?

When company insiders sell shares, there may be many reasons that have little to do with the fundamentals of the business or how executives and directors feel about the company's prospects. They may need money to pay taxes, to prepare for retirement or to buy a vacation home.

On the other hand, when there is a pattern of selling across an industry, that makes other investors wonder whether it's time to rethink their own commitment to those companies. This little cloud of doubt has just appeared in the REIT sector, where insiders at dozens of companies have been making abnormally high sales and abnormally low purchases in recent months. In the first quarter, REIT insiders sold $169 million worth of stock while buying $1.1 million. That followed a fourth quarter of 2004 where insiders sold $271 million versus purchases of $33 million, according to data compiled by Lehman Brothers REIT analyst David Harris.

"There has been heavy selling on the REITs for a year to 18 months. The rate of sales in the first quarter was off the fourth quarter. But there's some seasonality involved as tax considerations factor into sales at the end of the year," says Harris. His conclusion: "We do see this persistent heavy selling as a sign that insiders feel it's a good time to liquidate some of their assets."

Despite a dip in the first quarter, REIT shares are still richly valued. The Morgan Stanley REIT Index is back up to 769.64, just off its 52-week high of 776.08. REITs today are selling at a greater than 10 percent premium to the net asset value of the companies' underlying real estate. The norm historically has been a premium of between 5 percent and 7 percent above NAV. In addition, REIT IPOs spiked last year, along with a host of secondary offerings by existing REITs.

Much of the insider activity is connected to the cashing out of options--which Harris says is less worrisome than general sales. But even when option sales and rights offerings are stripped out, the ratio of sales to acquisitions is still high. In the first quarter insiders sold $38.3 million in stock while buying just $1.1 million. In the fourth quarter of 2004 the amounts were $81.2 million in sales and $1.6 million in acquisitions.

Looking specifically at the retail REIT sector, insiders from six companies sold a combined $69 million during the first quarter. Of that, about $18.5 million was not related to options. A handful of names pop out. Four insiders at Vornado Realty Trust sold stock in the first quarter, including chairman and CEO Steven Roth, who sold 15,000 shares for $10.8 million in January. Three insiders at Kimco Realty Corp. sold a combined $18.8 million in option deals, including vice chairman and chief investment office David Henry.

But the biggest sale involved Simon Property Group where Denise Marie Debartolo York, who sits on Simon's board of directors, sold $25.3 million worth of stock during the first quarter. Since then, York has sold an additional $6.6 million of stock. York is a daughter of Edward Debartolo, founder of the Debartolo Realty Corp., which merged with Simon in 1996.

Attempts to reach Simon's investor relations department were unsuccessful. York, who is chairman of the Debartolo Corp. and runs the NFL's San Francisco 49ers, could not be reached for comment.

The standout purchasers were several insiders at Kite Realty Group, which conducted its IPO last year. They bought $610,603 worth of stock. Kite, which opened at around $14.85, is trading at $14.48.

-- David Bodamer

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