I am and always have been a big fan of real estate investment trusts. While many REITs appear overpriced to me at this level, I can still find some bargains.
Furthermore, many of the REITs I bought since 2009 have been huge performers for me. Hotels and shopping center REITs were trading at give-away prices from 2008 to 2010, and I bought a bunch of them at the time. I know many investors still look at REITS as a source of income in the current yield-starved environment. If you can find the right REITs, that’s a wise choice in a world of zero interest rates.
My biggest problem with the REIT universe is that there are an awful lot of outside managers and non-owner management. When I ran a quick screen this morning for REITs and real estate companies in the U.S., I found 207 companies. Just 142 of them had insider ownership of 1% or more. Only 37 had insider ownership of 5% or greater. If the REIT management makes bad investments decisions that lead to an erosion of value, its only penalty is a reduction of the fees earned. Management does not lose anything or have to give back previous fees earned on inflated asset values.
Here are two REITs with major insider ownership:
Inland Real Estate (IRC)
Consider Inland Real Estate (IRC). The REIT owns and operates shopping centers and single tenant retail space throughout the midwest portion of the country. At the end of the third quarter, Inland Real Estate owned 136 properties with about 15 million square feet of space for lease.
Inland Real Estate has dominant positions in the Chicago and Minneapolis markets for these types of properties and are the largest shopping center REIT operating in both of those markets. Inland Real Estate is a solid income choice as the shares pay 5.41% at the current price.
Inland Real Estate has projects under development and is looking to expand the portfolio. Unlike most REITs, however, if IRC makes poor decisions, management feels the same pain as shareholders. Director Daniel Goodwin owns more than 11 million shares of Inland Real Estate. CEO Mark Zalatoris owns 176,000 IRC shares. Altogether, insiders own more than 13% of IRC stock. Insiders are significant shareholders. So, mistakes cost management significant amounts of money.
Cedar Realty Trust (CDR)
Cedar Realty Trust (CDR) is a similar business as they own supermarket properties in the northeast of the U.S. Cedar Realty’s focus is on the densely populated region between Washington, D.C. and Boston.
CDR has been disposing of assets that are less than optimal for the portfolio and have a few development projects in more attractive areas. If CDR gets it wrong and destroys equity value, management pays a price far beyond reduced fees or loss of salaries.
CEO Bruce Schanzer owns 2.6 million shares of CDR. So, he has a vested interest in steering CDR along a successful path. CFO Phillip Mays owns 569,000 CDR shares. All in all, CDR officers and directors own 8% of the company. CDR Management is sitting on the same side of the table as CDR shareholders.
CDR shares currently yield about 2.9%.
Investing alongside the people running the show makes a lot of sense to me, which is especially true in the real estate markets. It is easy to make money in real estate when everything is good, but when times turn difficult, I want to have my money invested with people who stand to lose as much or more than I do.
Full Disclosure: Long CDR.