Prices of Real Estate Investment Trusts have been decimated in the coronavirus inspired sell-off this month.

The SPDR Dow Jones REIT ETF (IRE) has fallen by 38% in the past month as concerns about quarantines and lockdowns emptying offices, hotels, shopping centers, and other commercial real estate properties. Dire predictions about changes in work habits and a deep economic slowdown destroying the industry are everywhere on the internet and media.

In my opinion, if the current pricing of many REITs is justified, we will see a deep and lasting depression.

Prices of Real Estate Investment Trusts

I do not think that will happen. A lot of the destruction we have seen in REITs this month is because of forced selling by REITs index funds, and Exchange Traded funds. Over half of the market capitalization of the REIT Sector was owned by passive investment vehicles. When selling overwhelmed buying, the funds and ETFs were forced to sell, and there where very few buyers to be found.

While some selling was justified, what we have seen has way overshot the mark.

Offices and Directors of REITs feel that their companies are deeply undervalued. There are about 225 Real Estate Investment Trusts in the United States. 73 of them or 32% of the industry have seen insider buying this month. 40 REITs or 18% of the industry have seen insider buying in the past week.

American Homes 4 Rent (AMH)had insider purchases by three insiders that totaled over $20 million. At mall operator Simon Property Group (SPG)8 insiders, including the CEO David Simon, combined to buy more than $20 million worth of stock. Prison operator GEO Group (GEO) had buys from 3 insiders, including both the CEO and CFO, that totaled almost 10 million dollars.

All told 172 different officers and directors got out their checkbooks and made open market purchases of stock this month. Collectively they have spent $184 million worth of the REITs they manage and advise

While insiders may not be great market timers history has found them to be an excellent forecaster of future values of the business and assets they manage.

By: Tim Melvin

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