SUBJECT: RealtyStocks’ Observer Vol. 2: No. 3 – March 2, 1999 Monthly Feature: Rising Interest Rates & Lower REIT Prices NOTE: All gains or losses mentioned in RealtyStocks are price changes only; dividends are excluded. A. Rising Rates B. The Relationship of Rates, Stock Prices & REITs C. Equity REIT Performance D. Mortgage REIT Performance E. Realty Corporations F. Real Estate Mutual Funds (REMFs) G. New Trends A. RISING RATES Rising interest rates have gradually declined for several years. Within the past five years, the yield on 30 year Treasuries (Long Bonds) has decreased from over 8% to under 5% in late 1998. However, in February of this year, the yield on the long bond increased from 5.1% to about 5.6%. The 10-year treasury yield increased even more last month, from 4.7% to 5.4%, or about 70 basis points.   Top B. THE RELATIONSHIP OF RATES, STOCK PRICES & REITs In general, declining rates are viewed as favorable for stock prices while increasing rates are unfavorable. This is one explanation for the decline in stocks during February. Increasing rates make it more costly for companies to do business and can limit growth and demand. Therefore, it would seem that REITs are subject to further decline if interest rates continue to rise. Interestingly, some academic studies indicated that Equity REIT performance does not necessarily follow this pattern. Studies apparently show that Equity REITs are not highly correlated with interest rates, but that Mortgage REITs are more "traditional" in their performance with respect to changing rates. Interest rates have only recently begun to rise and it is uncertain if this is a blip or a larger trend. REITs have not reacted well recently to increasing rates, as discussed in the following.   Top C. EQUITY REIT PERFORMANCE Equity REITs declined 4.73% in February, bringing the total decline for the year to a -5.29%. It appears the smaller companies are now becoming weaker while the REITs with large capitalized values are performing a bit better. This is a reversal from last year. There were no positive returns for any of the Property Type groups. The groups sustaining the least damage were Office and Retail Malls & Centers with -1.54% and -1.20% losses, respectively. The worst performing group was HealthCare, which is more sensitive to interest rates than most others, with -11.07%. One of the best performing REITs is Starwood Lodging with a gain of 24% for the month and 36% for the year to date. (Please see Equity Gainers and Losers.)   Top D. MORTGAGE REIT PERFORMANCE Despite the rise in rates, Mortgage REITs faired better than their counterparts, losing only -2.92% for the month. Residential Mortgage actually showed a slight gain of 1.27%. Two of the best performing Mortgage REITs are American Residential and Answorth, with year to date gains of over 20%. (Please see Mortgage Gainers and Losers.)   Top E. REALTY CORPORATIONS Realty Corporations performed similar to Equity REITs in February, with a decline of 4.91%. Due in part to higher rates, Builders and Construction & Engineering were hit the hardest with price declines of -7.57% and -7.1% respectively. Only one industry, Property Services, showed a slight positive return of 1.6%. The best performers for February were two lower priced stocks under $6: Royal LePage and Interstate General with increases of 40% and 27.8%, respectively. Two other strong monthly performers with gains over 19% were United Park City Mines and Bando McGlocklin Capital. Top F. REAL ESTATE MUTUAL FUNDS Only four Real Estate Mutual Funds (REMFs) avoided losses for the month. The best performer was MSDW Inst'l European with a 2% overall return. Fidelity Real Estate Investment recently posted one of their best comparative monthly returns with a gain of 0.5%. The average total monthly return for approximately 80 REMFs was -2.0%. Top F. NEW TRENDS We are starting to see the issues of some smaller companies come under increasing downward pressure. This could signal an opportunity for more mergers or acquistions in the coming months. Some future takeovers should provide attractive gains. If rates continue to rise, Mortgage REITs should face greater performance in February. Should rates stabilize and start to decline, Mortgage REITs may become especially attractive. Top Disclaimer: The material provided herein should not be taken as endorsements or recommendations to invest in a stock, fund, a group of stocks or other securities. No guarantee can be made as to the expected performance of such investments. Investors should consult all available information, including data external to RealtyStocks and associated Web sites, and exercise own best judgement before making any investment decisions. InRealty Sponsors Inquire about our special advertising banner promotions! E-MAIL: stocks@inrealty.com Copyright © 1999, Schott Consulting Services. All rights reserved .