Peeking Into a New Insider Buy

 | Mar 27, 2013 | 11:30 AM EDT
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Over at Rouse Properties (RSE), we saw a substantial round of insider buys last week: On March 21, CEO Andrew Silberfein and CFO John Wain bought 15,000 shares and 1,500 shares, respectively, at about $16.90 apiece. As with all insider purchases, this one is worth a further look, as stocks bought by insiders tend to outperform the market; in our opinion, this is because insider buying signals particularly high confidence, since the rational move would be avoiding too much company-specific risk. Moreover, because two insiders are buying Rouse -- making this a "consensus" buy -- this is considered particularly bullish, per studies.

Rouse has $850 million in market capitalization, and it owns and manages 30 U.S. shopping malls. It was spun out from General Growth Properties (GGP), a larger retail manager, early last year -- at which point its assets had been considered less attractive, with lower occupancy and rental rates than the parent company. But the stock has risen 43% since shortly after the market debut -- outperforming General Growth -- on trading volume that's lately totaled more than 200,000 shares per day. This illustrates why spinouts are attractive to a great deal of hedge funds and other value investors: After such moves, management becomes free to focus on strategic initiatives unique to their assets, without worrying about the larger company.

Due to Rouse's status as a real estate investment trust it gets preferential tax status if it returns a large share of income to shareholders. But, in this company's case, that hasn't translated into high dividends: It pays out just $0.07 per share quarterly, meaning an annual yield of only 1.7%, so we wouldn't call the stock a good choice for income investors.

As far as performance goes, comparisons to last year are somewhat complicated by the spinout, but Rouse did report $63 million in core funds from operations for 2012 -- a significant year-over-year decline. (For REITs, analysts tend use FFO as the key metric instead of income due to the extent of their real estate holdings, the value of which behaves differently from that of other assets.) That gives Rouse a price-to-FFO multiple of 14x, based on market cap.

However, the company also carries significant liabilities. For instance, former parent General Growth carries a market cap of $19 billion, and it reported just under $1 billion in "company FFO" for 2012. We're seeing a number of bears on Rouse, with 23% of the outstanding shares held short most recently -- and, as we've mentioned, investors in search of high yields should be looking elsewhere. Even General Growth has a higher yield, at 2.4%, and some REITs are much more generous with dividends.

The valuation may seem somewhat competitive with its larger peer after it adds back some additional charges, but the assets are generally recognized to be lower quality, so there should probably be something of a discount there.

Taking all that into consideration, we would lean against investing in Rouse for the time being -- even though two executives have bought the stock.

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