Alpha Buying: Why REIT Insiders Are Betting Big Amid Economic Uncertainty

The best description for the current market conditions is that this is a market of high uncertainty.

We have the Trump administration with tariffs, and people are stunningly surprised that he is using tariffs as a tool to:

A: Raise revenue, and…

B: Shape global trade policy. He just spent three years telling you that was what he was going to do if he got back into the White House. And he’s doing exactly what he said he was going to do..

Now, he has been somewhat uneven in his approach. There’s been some flip flopping, on-again, off-again approaches from the Trump administration.

But the course on tariffs remains, for the most part, true.

Where the uncertainty comes in is that we don’t know how this plays out. There’s a lot of people walking around out there with very confident opinions of what’s going to happen and how it’s going to happen, when it’s going to happen.

Those people should probably be punched in the face because we’re in uncharted territory.

We have done this type of widespread tariff behavior before, but in that case, it led to a global depression and World War II.

Now, I don’t necessarily think all of the same ingredients are present that were there when we did widespread tariffs on all of our trading partners under the Smoot-Hawley Act back in the nineteen thirties.

However, how this plays out remains unclear.

We’ve seen Canada and Mexico come back to the table.

We’ve seen them walk away from the table again.

Then we have also seen Europe and China both kind of dig their heels in and say, no, we’re going to fight back on this.

What the implications of Donald Trump’s trade policy, and let’s be frank, trade war, are long-term is very much a major unknown.

Put it together with all of the layoffs and cuts and everything going on under DOGE (the Department of Government Efficiency), and you can see where businesses would be a little bit uncertain.

The Bell Curve of Outcomes
There’s always been a bell curve of outcomes here. Now, if we go to the far left-hand side of the curve, that’s the negative outcome. Tariffs cause inflation. The combination of tariffs slowing global trade and all of the layoffs in the United States lead to economic weakening, and we get a period of stagflation.

That seems like a highly likely outcome at this point, but mild to moderate stagflation with some higher prices from tariffs and an economy that’s long overdue to be weaker. Will we see a recessionary stagflation like we saw in the 1970s? Most economists, among those whose opinions I respect a lot, don’t think so. They think that we’ll have mild to moderate impacts, both of which are probably past due.

The Fed will be put in a position where they have to respond, and we will probably see some lower interest rates out of it by the end of the year. Right now, all the models are saying two cuts. That’s up from no cuts, which was down from six cuts about six months ago. So how much faith we want to put in the reliability of those forecasts is an uncertain matter, shall we say.

Record-High Business Uncertainty
The level of business uncertainty in the National Federation of Independent Businesses right now is the second highest it’s ever been.

The highest it ever was last summer when the election was still considered to be a toss-up.

But this isn’t the  version of Donald Trump that Wall Street thought they were getting.

Donald Trump 2.0 does not keep score by the daily movements of the stock market the way he did in his first administration.

He came out and said markets go up and down. He’s concentrating on what he thinks is fixing the country’s trade policy.

That is going to involve a lot of disruption.

As a result, business owners who were highly confident in November and December are now looking around going, ” I’m not quite so sure I want to invest money in my business. I don’t know if I want to expand. I don’t know if I want to borrow money or hire people.”

The uncertainty level is the second highest since the 1970s, and it’s rising. It’s catching up very, very quickly and may well surpass it before all this is over.

This is definitely a market of uncertainty because everything still applies to the stock market. Is this a bear market?

No, it’s not. We’re headed in that direction, but we’re not there yet. A bear market generally is twenty percent down from the highs. Could we get there?

Sure. It’s. You never rule anything out.

So far this has been an extremely quiet market pullback.

There’s not a lot of pain. People are still trying to buy the dip.

Retail’s pulling back a little bit, it looks like. So there is a building sense of caution and fear. We’ve even seen high-yield credit spreads begin to creep up, something they haven’t done in some time.

There is a little bit of fear coming in the market, but it’s not really widespread panic.

That’s very important to understand. We are headed into—we’re in a correction. We are not in a bear market. We’ll decide if we’re there when we get there and not a moment before. There’s nowhere near enough fear and panic.

There’s short-term measures like the CNN Fear and Greed Index that have shown some opportunities. But when you look at high-yield credit spreads, which are our ultimate measure, they have popped off the bottom in a manner that they have not done in some time, rising from 2.6 a month ago to over 3.2 today.

That’s about a fifty percent spike in high-yield credit spreads.

When we look at insiders, they’re not that active yet, particularly in the C-suite.

The CEO, the CFO, the chairman of the board, the chief operating officer, they’re not getting up and saying, “Wow, given everything that’s going on in our company, this business is incredibly cheap. We’re going to go out because we’re going to make four or five, six, seven times our money or more if we buy stock now. We’re going to get aggressive. We’re going to buy a lot of stock.”

We’re not there yet.

We’re nowhere near the insider buy-sell ratios that we would have seen in 2009, for instance, 2020, or other major market turning points.

Will we get there?

I think so.

I think eventually, if the market continues to move down, insiders are going to start to get active as businesses just get unsustainably cheap.

We are seeing some activity from insiders in REITs, which is fairly unusual except at major turning points.

REIT executives generally own some stock. They have lots of incentives in the form of stock and option grants. All too often in REITs, they have external management where it’s a management company that’s running the REIT, and they are not directly involved in the ownership of the real estate investment trust.

They’re getting paid a percentage fee on assets.

Those guys aren’t really looking to buy a lot of stock.

When we see C-suite executives start to move into real estate, we’re starting to get close to a pretty important turning place.

That’s consistent with what we’ve been seeing in the real estate markets for some time. If you look at the recent data over the last several months you had Blackstone’s John Gray coming out and saying, "This is it, the bottom’s in, it’s time to buy.

We had the guys at KKR saying, “This is a time to amp your risk level up higher in real estate and real estate-related debt.”

that’s two of the biggest buyers of real estate in the world turning bullish

We have seen three months of higher prices now.

We have seen transaction levels increasing pretty much across the board for real estate for the last three months. More importantly, we have seen default rates falling steadily for the last several months in every segment of the real estate market, including office.

One area where we’re starting to see some insider buying is hotels.

Leisure travel is starting to pick up. We are finally seeing better group and business travel as well.

Since the peak in 2022, when it became clear that that was a very short-term blip in the market, hotel assets have fallen by about ten percent in price, which is actually better than office, better than some segments of the warehouse market. On average, commercial real estate just declined twenty percent. So, hotels have actually done a little bit better than some other segments of the market.

Pebble Brook Hotel Trust PEB
We are starting to see some C-suite buying—CEOs and CFOs coming out and making open market purchases in a couple of real estate investment trusts. One is one of my favorites. Being up front, Pebble Brook Hotel Trust, we own the debt, we own some preferred, and we really like the common stock in here.

When we look at Pebble Brook, we’ve got a real estate investment trust that has forty-six hotels and resorts. They’re primarily looking to be in the lifestyle and high-end urban market.

We’re talking the Jekyll Island Club Resort, the Southernmost Hotel in Key West, along with The Marker down there in Key West.

Pebblebrook has a fifty-fifty business and leisure mix.

And right now, management estimates that the REIT trading at a fifty percent discount to the private market value of the hotels that they own.

Pebble Brook is currently trading at about $11 a share.

They estimate NAV at over $24 so less than fifty percent of value.

There is only a tiny dividend at the moment because they’ve just had to reinvest so much money back into the properties that they’re not showing the cash flow.

That will eventually come. When they do get a dividend return to this thing, the gains will be absolutely spectacular.

The urban part of their business in  cities like Boston, San Diego, LA, DC, San Francisco, and Chicago has  been the slowest to recover

There are  a lot of good things going on with this particular hotel group.

You’re looking at management saying, “You know what? We love our business. We love the value of our properties. They’re stupid, ridiculous cheap.” As the urban market, the city market hotels continue to recover, that’s going to drive cash flow. The dividend will come back, and this stock will go from this current eleven-dollar area way back up much closer to that net asset value of twenty-five dollars a share.

We have seen the CEO out in the open market making large purchases of the stock. He’s committed to the idea that we are in the early stages of a turnaround, and fantastic things are coming for Pebble Brook Hotel Trust.

Diamond Rock Hospitality DRH
We’re also seeing some insider buying at Diamond Rock Hospitality, a REIT that I have owned before, and I’m thrilled to own again. Diamond Rock shares are currently trading at about seven dollars and ninety-five cents with projected dividend for this year of about 4.72 percent.

Iti is pretty much the same story.

Diamond Rock owns luxury, upscale hotels serving the upper end of the market.

They have 9,594 rooms with 36 properties in 26 different markets. 

They’re in all the markets that you think that they would be in across the United States

They are growing cash flows. Occupancy levels are going up.

They use short-term management agreements with their property brands. That way they can be terminated at will.

It makes the hotels much more liquid.

When you look at the markets Diamond Rock is in, it is obvious there’s just not going to be a lot more hotels built.

The Florida Keys have sort of run out of land.

Vail, Colorado, same problem.

In Fort Lauderdale, you have to be on that coastal strip. You can’t be on the other side of that Intracoastal bridge or it’s just not a hot property.  

In Destin, Florida it is the same thing. You got to be down on the beach. Lake Austin, there’s only so much land around the lake. Same in Lake Tahoe.

In Paradise Valley and Yellowstone, it’s tough to get anything built there these days.

Management’s looking around and saying, “Our stock is getting hit. It’s at a very low price. It’s trading at a fraction of what we think it would be worth in the private market. It’s time to step up and start adding to our position in the stock.”

Just last week, we saw the CEO go out into the market and make another purchase of shares, making a significant addition to his current holdings.

We expect to see more insider buying in REITs generally and hotels specifically if this market continues to move lower.

But for now, those are two that really jump out and stand out because insiders are saying enough is enough.

The stock is too cheap.

We’re going to buy some stock.

Remember, they’re not looking to make a few percentage points.

They’re looking to earn several multiples of the price of the stock as conditions continue to improve.