3-11-01                                                                                           Vol. 4: No. 3 RealtyStocks’ Observer If you're not receiving this free monthly e-newsletter, please register. Rent a Condo for the 2002 Winter Olympics! See: ParkCityTownhome.com Monthly Feature: APPROACHING CROSSROADS A. Are We at an Economic Crossroads? B. Taking the High or Low Roads C. Bottoms Down D. Large Cap REIT Performance E. Equity REIT Performance F. Mortgage REIT Performance G. Realty Corporations H. Real Estate Mutual Funds (REMFs) A. ARE WE AT AN ECONOMIC CROSSROADS? Not many celebrations took place so you may have missed the one-year anniversary this past Friday, March 9th, marking the all time high for the Nasdaq composite of 5,048.62. It also set a new 27-month low on this date of 2,052.78. This represents nearly a 60% annual decline which means that the Nasdaq index would need to climb 146% to match its high. For value and REIT investors this may not seem particularly important, but it could signal a turning point and not necessarily a positive one. We may be at an economic crossroads, and the doors of the business expansion we enjoyed for the past decade appear to be closing. The malaise in the Nasdaq has unquestionably been one of over valuation, but it is also one of slower demand for products and services and lower earnings resulting in large layoffs from such bellwethers as Cisco, Intel, Dell and others. The sudden woes in technology are not isolated and they could very well spread to more industries leading us into something many younger adults have not yet faced as a wage earner - a recession. We will soon see if the lowering of interest rates and tax cuts are enough to turn around a slowdown, but negative momentum seems to be building on multiple fronts. In nearly every recession there is a decline in real estate values and rentals, which is not expected to bode well for REITs. The residential area is often the first to turn. In some areas of the country housing prices have been flat or even declining , and in some stronger areas residential sales activity has slowed. Important warning indicators to watch for in REITs are rising vacancies and declining rents. This data may be difficult to obtain, however, and may lag behind in quarterly reports for at least a quarter or two. Some REITs will be more insulated than others because of geographic orientation and property types. As previously mentioned in this column, apartments can be the first to be impacted and are a good place to first focus for cracks. Still, most REITs may act copacetic in the near term unless economic indicators really turn down. Assuming the best, that we avoid the recession and that technology bounces back later this year, what will that do to REITs? In this current environment REITs have held their own. Most large cap issues have lost a little, the smaller caps have gained a little, and the higher yield bearing issues, such as the Mortgage REITs, are performing the best. So, if the Federal Reserve finds it no longer necessary to raise rates later this year and they begin to edge back up, yields on REITs become less attractive. And if money funnels back into technology stocks, it may take away funds in REITs. Consequently, the best situation for REITs in the near term is a probably a drawn out economic affair. Considering recent cycles, that seems to be more compressed today than in the past, this may not be the crossroads.   Top B. TAKING THE HIGH OR LOW ROADS Besides being at an economic crossroads, many people are now at an investment crossroads. The growing number of people that have taken their money out of stocks and placed it in money markets are not taking any roads at all. They are parked at the crossroads, watching and waiting. Some are watching to see if more people come back from one road than another and which new road they will take. Others will wait to see where the economy is headed to get a better look of the roads ahead. It is pretty clear that the technology route has been more travelled from than to, for those that have not fallen completely off. Those that took the road of value stocks have been nicely rewarded, and it was a road that started lower and longer the earlier one took it. REITs have shared this road and have certainly been the high road this past year. A strange aspect about these roads of investment choices is that they are not straight up or down, but undulate. And time moves the crossroads. Depending on when a road was taken, someone can be much higher or lower on the same road. For more conservative investors, and those called contrarians, a frequent strategy is to start out on descending roads believing that they will get higher and avoid the ascending roads that will become lower. In other words, do the opposite of the heard which can sometimes provide more opportunities to buy low and sell high. In economic uncertainties, when many high roads turned into treacherous terrain, there is a growing tendency to go back to those crossroads and reexamine investment directions. This intersection is becoming more congested, and what seems low or reasonable in this economic climate can become lower, as discussed below.   Top C. BOTTOMS DOWN In last months newsletter, we mentioned stocks that are "down and out" can turn around and go from the bottom up. We also warned that some stocks will not turnaround. These are the ones that go bottom down and sink. At first they may file Chapter 11, become delisted, and struggle to survive, but eventually some go out of business. Lights out have occurred with an increasing number of Internet companies. When those tech firms that were the most heralded are in question, such as Yahoo which posted dismal earning outlooks last week, the future prospects of many New Economy firms with more questionable prospects becomes even more in doubt. Unfortunately, several stocks trying to hang on are contained in our Tech & Net and Onsite sectors. We may be removing more of these stocks soon primarily because they fall below our one to two dollar range. This will remove about one-half of these stocks. We hope it will begin to mark the bottom of public real estate technology stocks. With an industry that is so large, it seems that technology can provide some enormous benefits. However, with the dismal performance of real estate tech stocks, it may be a while before the public markets will support new offerings in this sector. This provides a great opportunity for a few of the significant players to pick up even more market share. Therefore, the best opportunities in this sector may be to stick with the leaders and avoid bottom fishing. If economic cycles are truly more compressed than in the past, we could see some significant changes in the next few weeks, or month or two, that may make this present period a crossroads. Good things may truly happen to those that wait. However, with compressed cycles, those that wait too long have been known to miss the train.   Top D. LARGE CAP REIT PERFORMANCE In contrast to the strong performance of broad market Equity REITs, the 20 largest REITs posted a loss of -2.2% in February. The largest gainer was Spieker Properties, Inc. (SPK) and Vornado Realty Trust (VNO), both rising 4.3%, followed by Equity Residential Properties Trust (EQR), up 1.4%. The biggest losers were General Growth Properties (GGP), Prologis Trust (PLD) and Rouse (RSE), all down from -10.3% to -5.7%. Of note, the same groups that lagged in the broad group performance, Office and Apartment REITs, also fell behind with most of the large cap issues. (Please see Large Cap REITs.)   Top E. EQUITY REIT PERFORMANCE Equity REIT prices were up 0.34% in February. The performances of the property groups were mixed, six declined. The worst group for the month of February with a loss of -6.11%, Healthcare, was one of the best performers last month . The best monthly performing groups were Offices and Retail Factory Outlets, both with a gain of 5.85%, respectively. The best performing Equity REITs for February were Transcontinental Realty Investors (TCI) and Westfield America (WEA), up 14.3% and 13.8%, respectively. The worst monthly performers were healthcare REITs, Omega Healthcare Investors, Inc. (OHI) and LYC Properties, Inc. (LTC), down -51.3% and -12.6%, respectively. (Please see Equity Gainers and Losers.).   Top F. MORTGAGE REIT PERFORMANCE Mortgage REITs are up slightly for February with a 1.97% gain. The best performing Mortgage REIT group was Residential Mortgages up 4.01%. The best monthly performing Mortgage REITs were Apex Mortgage Capital (AXM) up 15.2% and PMC Commercial Trust (PCC), up 10.3%. The worst performers for this period were Fog Cutter Capital Group (FCCG), down -12.5%, and American Residential Inv. Trust (INV), falling -12%. (Please see Mortgage Gainers and Losers.)   Top G. REALTY CORPORATIONS Realty and Housing Corporations went down in February by -2.06%. The best monthly performing groups were Construction & Engineering and Home Builders. The worst performing group was Tech & Net, down -13.60 for February. The best monthly stocks were Foster Wheeler Corp (FWC) up 63.9%, Chicago Bridge & Iron Co. (CBI) rising 37.9% and Schuler Homes, Inc. (SHLR) up 33.8%. The worst monthly stocks were Silverleaf Resorts, Inc (SVR) and Teligent, Inc (TGNT) down -62.1% and -46.7%. (Please see Realty Corp. Gainers and Losers.)   Top H. REAL ESTATE MUTUAL FUNDS (REMFs) The changes in the favorite REIT groups, mentioned in our past newsletter, are continuing to have some significant changes in REMF performance. Although the average fund dropped a scant -0.24% in February, and it still seems that the large majority of the 118 REMFs were negative for the month. Those funds that have not shifted away from apartments, offices and only the large caps are the under performers so far this year. The best performering REMFs were different than last month, and included Security Capital European, rising 4.86%, MSDW European, gaining 3.27%, and Cohen & Steers Special Equity, up 2.46%. The best leading funds for 2001 include the best performer last month, FBR Growth, up 9.11%, and Alpine U. S. up 8.9%. (Please see REMFs.)   Top Stock Changes - American Homestar Corp. (HSTR) was changed to (HSTRQ) and Western Investment Real Est. Trust (WIR) was deleted.   Top 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 judgement 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 .