11-9-01                                                                                           Vol. 4: No. 11 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Rent A Luxury Park City Condo WITH Winter Olympic Tickets! See: 2002Condo.com Monthly Feature: RATE DECLINES: Friendly to REITs A. The Demise of Long Bonds & Lower Rates B. Economic Indicators Continue to Slip C. Large Cap REIT Performance D. Equity REIT Performance E. Mortgage REIT Performance G. Realty Corporations A. THE DEMISE OF LONG BONDS AND LOWER RATES Recently it was announced that a stalwart of the financial bond world, the 30-Treasury or "Long" Bond, will be eliminated. This surprise move has two important implications. First, the Treasury believes they can save a great deal of money issuing bonds from shorter durations like the 10-year treasury. If short-term rates continue to be less than long-term rates this will work. However, we have had reverse yield curves before and if short-term rates become higher than those for the longer term, the financial strength of the nation could receive a jolt. Second, money that needs to be placed in long-term financial instruments has fewer places to go. It has caused other such rates to decline, and has prompted some speculation that 30-year fixed rate mortgages may fall under 6%. The real loser here, however, will be the retirees and the growing number of baby boomers who are looking at retirement. They will receive less dividend and interest income and are, therefore, likely to spend less as well. In addition, the decline in short term rates, now under 2% for savings and CDs, exasperates the declining income for people on fixed incomes. With more downward pressure on rates expected in the near future, stocks that provide high and stable dividends, like many REITs that have dividends over 5%, should become more attractive. The REIT groups with the highest yields and most stable dividend prospects are likely to be the most appealing in the near future and, to a lesser extent, even REIT mutual funds (REMFs) that are dividend-oriented. (Please see REMFs.)   Top B. ECONOMIC INDICATORS CONTINUE TO SLIP Consumer confidence is at a four-year low, orders for manufactured goods have plummeted, and sales of existing housing recently slipped by more than expected. The quarterly onslaught of corporate earnings announced in recent weeks continues to bear more negative than positive news, and analysts are making more downgrades than upgrades. Layoffs continue to increase. The introduction of Windows XP a week ago is apparently meeting tepid enthusiasm that could also slow down the rebound within the computer industry. Most technology firms that were hailed as stalwarts for a new economy are not yet turning the corner, and the very existence of some of these firms may be in doubt. For months we have been waiting for more indicators that will be the final turning point as a prelude to an official acknowledgement that we are in a recession. More ominous housing data and other negative indicators are causing more economists to opine that a recession has probably begun. However, local and national economists for housing boards have continued to be positive, forecasting little, if any, drop off in home prices albeit some decline in sales activity. On the other side, and with less bias, appraisers and brokers in certain areas of the country are seeing price declines, especially in high-end homes. Eventually, as interest rates are unable to go much lower to keep prices stable, the erosion capital from stock market declines and the decline of earnings from job layoffs should eventually exert more downward pressure on residential real estate markets. Vacancies in the commercial sector should also increase while rents decline. Unlike previous recessions that were preceded by significant overbuilding, however, most markets are fairly balanced today. Baring a severe or prolonged recession, this should help mitigate price declines in both the residential and commercial sectors. The timing and significance of the negative trends noted will not affect all REITs equally. Apartment REITs are one of the first groups to feel pressure. Most recently, Equity Residential (EQR) posted a slight decline in net income for the third quarter, has mentioned that their traffic has declined significantly and does not expect gains until the fourth quarter of 2002. On the flip side, Self Storage REITs are doing better in tougher times as renters double up or move in with family and need to store more furnishings and belongings. The good economic news is that stock indices have rebounded past their closing levels on September 10th and mortgage rates are lower than they have been in years. Terrorist and anthrax scares seem to be subsiding, the support for President George Bush is higher than ever and Congress is working closer together than in years. There is a silver lining in the attitude that if the worst is not yet behind us, it will be very soon.   Top C. LARGE CAP REIT PERFORMANCE REITs with core holdings (apartments, offices and industrial) continue to languish. Since these type of REITS represent nearly all of the Large Caps, this group is underperforming the broader REIT performance. For October, only five of these 20 stocks posted gains and overall they posted a loss of -4.4%. This brings the total decline of Large Cap REITs in the last two months to 10% The best performer for October was Rouse (RSE) up 10.9%, offsetting most of its drop the previous month. For the year, the best performers by far are still Public Storage (PSA) rising 38.2% and the worst is Crescent Realty with a drop of -21.6%. (Please see Large Cap REITs.)   Top D. EQUITY REIT PERFORMANCE After a decline of -5.67% for September, Equity REITS showed some resilience by gaining 0.59%. The best performing groups for October were Regional Malls and HeathCare, both up 4.6%, respectively. The worst group for the month was Apartments dropping -6.15%. For the year, the best performing group was Health Care, up 52.43%, followed by Self Storage and Specialty REITs, up 32% and 24%, respectively. The best performing stock for October and so far Year-To-Date (YTD) was Income Opportunity Realty Trust (IOT), up 39.2% for the month and 124.5% YTD. The worst monthly performers were Prime Group (PGE) and Innkeepers (KPA) off -21.3% and -17.1%, respectively. The worst performers for the year were Humphrey Hospitality (HUMP), down -70.5% and Konover Property (KPT), loosing -66.2%. (Please see Equity Gainers and Losers.).   Top E. MORTGAGE REIT PERFORMANCE Mortgage REITs posted a decline of -1.22%, but the price gains for the year is still one of the highest of any groups this year, up 45.53%. The best performing Mortgage REIT group for October was Residential & Commercial Mortgages up 4.28%. The best individual Mortgage REITs for the month were Novastar Financial (NFI) and Answort (ANH), up 19.3% and 17.3%, respectively. The worst monthly performers were Clarion Commercial (CLR) and Am. Residential (INV), down -50.6% and -11.1%, respectively. The best performers YTD were Novastar Financial, Inc (NFI) and Capstead Mortgage Corp. (CMO), jumping 233.3% and 161.5%, respectively. The worst performers for the year were Impac Commercial (ICH) and Clarion Commercial (CLR), declining -59.5% and -47.2%, respectively. (Please see Mortgage Gainers and Losers.)   Top F. REALTY CORPORATIONS Realty and Housing Corporations turned around in October gaining 3.95% after a drop the prior month of almost -20%. The best monthly performing groups included Resort Co's., rising 12.57%, and, Home Buidlers, gaining 11.53%. The worst performing group for October were OnSite Technology, down -3.9%, and Timberland, off -2.8%. For the year, the Realty Corp groups vary considerably. The best groups YTD are Mobile Home Manufacturers and Construction/Eng., up 54.8% and 30.1%, respectively. On-Site Technology has the worst performance of any group, dropping -67.1% so far this year. The best monthly Realty Corp issues under $2/share were ResortQuest Int'l (RZT), vaulting 71.9%, and Dominion Homes (DHOM), surging 44.4%. The worst monthly performers were Enron (ENE) and SBA Communications (SBAC), down -55.2% and -41.3%, respectively. The best performers YTD were Champion Enterprises (CHB) and Lending Tree (TREE), up 214.9% and 147.3%, respectively. The worst performers for the year were Lodgian, Inc. (LOD) and Tut Systems, Inc. (TUTS), down -94.9% and -86.4%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top Stock Changes - Stock Symbols United Investors Realty (UIRT) and Westfield America (WEA) have been deleted. Tut Systems, formerly (TUT), is now TUTS. Note: In reporting group percentage changes, stocks that were under $1 are excluded from our calculations. If a stock is under $1 for more than two months, it is subject to removal from our coverage. All gains or losses regarding Realty Stocks are price changes only; dividends are excluded. 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 judgment before making any investment decisions. The author may have equity positions in some of the companies covered in RealtyStocks, which may change from time to time, and will divulge such information upon request   Top InRealty Sponsors Inquire about our special advertising banner promotions! E-MAIL: stocks@inrealty.com Copyright ©1998-2001, WebVisers Inc. All rights reserved .