Insider Sales Reported At Several REITs: But Are They Significant?

Investors perk up their ears whenever insider transactions are reported on stocks, seeking clues that may portend a rise or fall in share prices. But it's common knowledge that insider buys are far more significant than insider sales. Insiders most often buy shares expecting the company stock to go up. However, insiders may sell shares for reasons that could have nothing to do with company performance.

Although an insider might sell because of concerns about a company's next quarterly earnings, the sale could also be to purchase a new home, pay expensive college tuition or wedding, or rebalance a portfolio that contains too much of one stock. In short, investors are unlikely to ever know the reason for the sale, so there should be no assumptions about motivation.

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If a shareholder learns that an insider has sold shares of that stock, the best thing to do is to investigate further by checking the Securities and Exchange Commission (SEC) Form 4. Company insiders or legal representatives must always fill out this form when buying or selling company stock.

Anyone can access Form 4 from the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database at sec.gov by clicking on search filings, full-text search, and putting the company name into the search box. Another easy way to see a Form 4 is to look on a Brokerage platform for a particular stock under "company news." If an insider has recently bought or sold company stock, it may include the link to see Form 4. 

Within the past five weeks, several REITs have reported insider sales. These include One Liberty Properties, Inc. OLP, Extra Space Storage Inc. EXR, Essex Property Trust Inc. ESS, Four Corners Property Trust Inc. FCPT, and UDR Inc. UDR. With earnings season approaching, an investor might conclude that each of these companies is about to miss street estimates or report declining revenue and Funds From Operations (FFO).

But that may be jumping to conclusions. Most company insiders have enough faith in their companies to know that even one bad quarter will not matter much to the total return over the long run.

If an investor checks Form 4, other reasons for the sale may be evident. For example, on July 1, CEO Joseph D. Margolis of Extra Space Storage sold 7,500 shares of company stock at $152.58. However, the small print at the bottom of Form 4 reveals the following: "This transaction was effected according to a rule 10b5-1 trading plan adopted by the reporting person dated as of March 1, 2024."

Rule 10b5-1 was adopted in 2000 to provide an affirmative defense to insider trading liability. It is intended to show circumstances in which an insider has a written plan well in advance to sell shares of the company stock. For example, an insider may have an automatic plan to sell twice a year, regardless of the stock price.

On July 1, another insider at Extra Space Storage, William N. Springer, Executive VP and chief S&P Officer, sold 139 shares at $151.92. With two insiders selling, an investor might be inclined to believe the company is sure to be going downhill. However, the explanation part of Form 4 states, "Represents shares withheld by the Issuer in payment of the tax liability arising in connection with the settlement of vested restricted stock awards. Restricted stock awards vest 25% annually over four years, beginning on the anniversary of the grant date." 

In other words, the company gives insiders shares of its stock, and each year for four years, the insider receives 25% of the total. However, some shares are withheld to pay the taxes due from the settlement of the stock awards.

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It's not unusual to see three or four company insiders selling shares of stock on the same day, and when that occurs, it's often for tax liability reasons. It's also helpful to check the number of securities still owned by the company insider, which is also clearly listed on Form 4. 

After Mr. Springer sold 139 shares, he still had 13,919 shares owned directly and another 1,177 shares owned indirectly by a 401(k) Plan. These 15,096 total shares at $164.81 (as of 7/17/24 closing) are now worth approximately $2.48 million. If Extra Space Storage was about to go out of business, company insiders would probably sell more.

Ironically, most of the REITs mentioned above have increased in price since the insider sales occurred. The bottom line is that investors should never let a headline about an insider selling influence a decision to sell that stock. Always check Form 4 to learn more about the transaction and check the SEC website to see if others are also selling shares. If the company is performing well, especially if analysts are upgrading or lifting price targets on the stock, there is absolutely no reason to panic.

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