A. REIT vs. Tech Stocks
B. REIT Acquisitions & Mergers
C. Annual NAREIT Conference and SEC Reg. FD
D. Tech Corner
E. Large Cap REIT Performance
F. Equity REIT Performance
G. Mortgage REIT Performance
H. Realty Corporations
I. Real Estate Mutual Funds (REMFs)

A. REIT vs. TECH STOCKS
In our newsletter a couple months ago, we mentioned that REITs have been negatively correlated with technology or Nasdaq performance. So, as Nasdaq moves lower, REITs should be rising. Last month we suspected the momentum with REITs was lagging. With one of Nadaqs biggest sell offs this year, REITs only managed to eke out a gain of slightly over 1%. Considering all other major market indications were down, this was a good achievment for REITs. However, this negative correlation between REITs and technology may begin to change if the market continues to be beaten down. REITs too, may be dragged down a bit. Or, if technology shares continue to get vaporized, eventually there should be a significant rebound for tech, and if the negative correlation is intact, this may cause some pressure on REITs. In either case, it may be difficult for REITs to perform well in the next month or two. The most positive impact on REITs recently has been the announcement of some mergers and acquisitions. Without these, REITs would have been lucky to be in positive territory for September. In our opinion, more merger announcements are needed for REITs to perform well. This current actvity will be briefly discussed below.

The Nasdaq has been very volatile, but may be continuing its steepest monthly decline this year. Since a level of over 4200 on September 1st of this year, the Nasdaq has declined about 900 points through October 5th; a drop of over 20% in a little over a month. Many observers are worried that its support of 3200 reached back on May 26th of this year may be tested. Its record high of over 5000 March 10th now seems like a distant memory. Technically, we could be dealing with two bear markets in only seven months. Traditionally October has been one of the worst months on record; however, during election years October has historically been good. If both the good and bad occurs this month, it will certainly be a trick and treat feat.   Top

B. REIT ACQUISITIONS & MERGERS.
Uban Shopping Centers (URB) acquisition by dutch-based Rodamco North American for over $800 million will create the third largest regional mall owner. First Washington Realty Trust (FRW), with a market cap over $250 million, has agreed to be purchased by an affiliate of California Public Employees' Retirement System, U. S. Retail Partners. The acquisition of 21 regional malls from Richard E. Jacobs group is being made by CBL and Associates (CBL). A more unusual offer has been made for Entertainmnet Properties Trust (EPT) by a much smaller BRT Realty (BRT) with only a $60 million market cap. The offer for EPR is at $15 per share, well above its current share price of $10 and near it's year high back in mid-July. Before all of these announcements within only the last week or two, one of the few mergers on the table was between Prentis Properties (PP) and Mack-Cali (CLI), a deal that interestingly was not widely embraced by many analysts. This negative sentiment lowered the price of both stocks and attributed to the unwinding of the deal officially announced two weeks ago. Since then, both stocks have bounced back about 10% to new year highs.

Nevertheless, it appears that the benefits of REIT consolidation will be challenged against more modest earnings growth of an increasing number of REITs. The consolidation and bankruptcy occuring in other industries involved with real estate, such as theater chains, has caused some analysts to lower FFO growth on some retail REITs by a couple percent or more. Should the economic slowdown become engaging and persistent, growth reductions witll occur in many real estate markets across multiple property types and negatively affect more REITs. Although not as dire as the Intel warning that began to spook tech stocks, the Post warning could be a reality check for many REITs.   Top

C. ANNUAL NAREIT CONFERENCE and SEC REGULATION FD.
According to the real estate section in the Wall Street Journal this past Wednesday, many attending the annual National Association of Real Estate Investment Trusts (NAREIT) this past week in Washington, D.C., expect more consolidation in the coming year. A hot topic that is expected to create more volatility with REITs, (but even more so with tech stocks) is the new SEC Regulation FD. This fair-disclosure rule bars selective disclosure or informative one-on-one meetings between a public company and an analyst or fund manager. It is intended to provide individual and institutional investors with a more similar playing field.

An example of greater REIT volatility lies with Post Properties (PPS) that declined with an announcement of lower earnings from 43.5 to under 35 in only one week. A decline in excess of 20% within a few days for a REIT has been very unusual. In the past, selective disclosure may have caused less of a dramatic decline in such a short time. Still, in relation to tech stocks this type of change is mild.   Top

D. TECH CORNER
Despite the Nasdaq decline, it appears modest compared to the drop in real estate technology and internet companies (RETICs) and Onsite service firms. Most of these companies are at or near their all time lows. Several of these companies have lost over 70% this year. These include IPIX, Mortgage.com, Homeseekers, ImproveNet, and Lending Tree for the RETICs, and Cypress, CAIS, Teligent and Allied Riser for the OnSite firms. RETICs in particular have been hammered losing over 50% overall this year. Onsite companies were off over 20% alone last month, but are still positive for the year.

The public market for new real estate technology companies may pose a problem for the dozens of such start ups that are looking for an eventual IPO exit strategy. Many of these will be attending the PikeNet conference in New York City October 22 and 23 in New York City or the Inman Real Estate Connect Conference the following three days in San Jose. This editor will be attending both conferences and will provide a brief overview of the conferences in the next newsletter. The impact of the tech markets colapse for such small companies could be very beneficial to the largest players in this field, Homestore (HOMS) and Costar (CSGP). It could allow these firms to pick up battered public companies or strugling start-ups at attractive prices while expanding their business lines. Therefore, consolidation may not only be occuring with REITs; also look for it with RETICs and OnSite companies soon.   Top

E. LARGE CAP REIT PERFORMANCE
With a price gain of only 0.3%, September was the second consecutive month that large cap REITs were under either the Equity or Overall REIT performance gains after out performing them most of the year. One of the reasons for this underachievement is that the consolidation activity cited is benefiting the small or medium sized REITs more than the very large REITs. The best performing large cap REITs for the month were Equity Office Properties (EOP), rising 7.1% followed by Avalon Bay (AVB), increasing 4.6%. The laggards were Post Properties, Inc. (PPS) down -11.2% and Public Storage, off -3.8%. Year-to-date (YTD) Spieker and Carramerica are the best performers, up 53.9% and 40.6%, while Post Properties and Simon Debartolo are the only issues in negative territory at -1.1% and -0.8%. (Please see Large Cap REITs.)   Top

F. EQUITY REIT PERFORMANCE
In September, nearly all of the property groups were up, and Equity REIT prices were up 1.17%. The best performing group was Retail Regional Malls, with a gain of 5.07%, helped by the potential acquistion of Urban Shopping Centers. The worst performing group, with a loss of -1.84%, was Specialty REITs. The best performing Equity REITs for September invloved acquistion candidates' Urban Shopping Centers (URB) and First Washington Realty Trust, Inc. (FRW), up 36% and 25.8%, respectively. The worst monthly performers were LTC Properties, Inc. (LTC) and Patriot American Hospitality (WYN), down -18.5% and -12.1%, respectively. The best performers YTD were Wellsford Residential Property Trust (WRP) and Urban Shopping Centers (URB), up 129.4% and 75.1%, respectively. The worst performers for the year were LTC Properties, Inc. (LTC) and MGI Properties (MGI), down -60.7% and -54.8%, respectively. Please see Equity Gainers and Losers.).   Top

G. MORTGAGE REIT PERFORMANCE
With interest rates declining, a more positive environment continued for Mortgage REITs. Almost all property groups pushed into positive territory in September with overall price increases of 1.67%. Residential & Commercial Mortgages posted the best mark with a 5.84% gain. The worst performing Mortgage REIT group was Commercial Mortgages with a 0.49% loss. The best performing Mortgage REIT for September was INMC Mortgage Holdings (NDE), up 21.5%. The worst monthly performers were American Residential Inv. Trust (INV) and Wilshire REIT (WREI), down -25% and -8%. The best performer YTD is Capstead Mortgage Corp (CMO) up 104.5% YTD. The bottom YTD performers are Dynex Capital (DX) and American Residential Inv. Trust (INV), down -77.7% and -41.8%, respectively. Please see Mortgage Gainers and Losers.   Top

H. REALTY CORPORATIONS
Realty and Housing Corporations lost -3.92% for September. This sector was brought down largely by the monthly losses of OnSite Technology, down -22.4%. The best monthly performance was Home Builders, up 8.7%. The best individual monthly performer was Southern Energy Homes (SEHI) with a large gain of 36.6%. The worst monthly stocks are Cypress Communications (CYCO) and Internet Pictures Corp (IPIX), down -46.4% and -41.6%. The best performers YTD were SBA Communications Corp. (SBAC), up 108.7% and Candlewood Hotel Co. Inc. (CNDL), up 100%. For the year, the worst performers were the same as the monthly worst, Cypress Communications (CYCO) and Internet Pictures Corp (IPIX), down -87.9% and -86.3% YTD. Please see Realty Corp. Gainers and Losers.   Top

I. REAL ESTATE MUTUAL FUNDS (REMFs)
For September, the average total return for 107 REMFs was 1.67%. For the year, REMFs still continue to post very attractive total returns averaging slightly over 20%. The top monthly performers include the Phoenix-Seneca funds with returns of about 5%, followed by Security Capital at 4.49% and Phoenix-Duff & Phelps at 4.18%. The best performers for the year include Security Capital U.S. Real Estate and SSgA Tuckerman Active REIT both up more than 25%. Please see REMFs.   Top

Stock Changes - within RealtyStocks: A spinoff of BRE Properties, Velocity HSI (VHSI.OB) is now public and listed under Onsite Tech. The symbol AIC changed to ANL.   Top

Note: All gains or losses regarding Realty Stocks are price changes only; dividends are excluded.