5-5-01                                                                                           Vol. 4: No. 5 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: A RUN FOR THE ROSES WITHOUT REMFs (Real Estate Mutual Funds) A. The Derby Sans REMFs B. None Core REITs Shine C. Equity REIT Performance D. Mortgage REIT Performance E. Realty Corporations F. Large Cap REIT Performance G. Real Estate Mutual Funds (REMFs) A. THE DERBY SANS REMFs If this past weekend's Kentucky Derby was a race that featured mutual funds, those specializing in real estate (REMFs) would not have qualified. If the race was modified to feature just REMFs and measured by performance rather than time, one of the lowest course records would have been set, instead of the blistering pace of this year's winner, Monarchos. Though a comparison of REMFs and the Derby is a bit of a stretch, the interesting aspect is that the field for selecting a strong REMF performer would have appeared to provide good odds. As measured by our performance returns, five out of 13 equity groups of real estate investment trusts (REITs) posted double digit returns so far this year. Three mortgage REIT groups average in the 25% range. And the highest returns, between 25% to 40%, were from three housing groups. (Please see Non-Core REITs Shine.) With such strong performances, why has the average REMF reigned in only 0.96% gains? Further, out of 148 REMFs, why have only three of the funds been able to exceed 11% this year? There are several reasons REMFs have not been attracted to the best performing stock groups so far. First, most portfolio managers are hesitant to bet against winners. Last year the core industrial REITs (office, apartments and industrial) yielded total returns of about 20% while those of other groups languished. Second, most investment managers did not significantly alter their allocations, largely in part due to the herding instinct to stay with the similar investment philosophies as other managers. Third, since managers are rated on the performance of their peers, the herd effect helps improve their odds of having satisfactory returns and therefore increased job security. Fourth, the size of the companies in these other categories are relatively small (in terms of market capitalization) and many managers avoid positions that may be rather illiquid and volatile. Finally, out of some 300 companies RealtyStocks covers, only about one fifth are followed by more than one analyst. The lack of analyst coverage, with limited staff analysts anyway, makes most REMF portfolio managers reluctant to take positions in the majority of real estate stocks. Although most REMFs have a policy mandate that requires at least 65% of their holdings be in REITs, and some to avoid mortgage REITs, over 90% of the stocks in most REMFs are equity REITs. This effectively eliminates any meaningful returns from investments in mortgage or non-REITs. To date, the only major non-REIT mutual fund is Fidelity's Select Construction & Housing Fund (FSHOX). Despite their name, they have avoided positions in home building, manufactured housing and construction stocks, thereby missing the strong gains in this area. The best performing REMFs this year are from just four firms (out of dozens) that have taken a departure from the herd and also assumed more risk by taking strong positions in financials, housing or REITS involved in mortgages, health care and hotels. (Please see the REMF section below.) With over 100 REMFs, it would seem prudent for some investment group to offer a more balanced approach to a real estate mutual fund, while still being somewhat risk adverse. Such an index type of fund could require holdings with no more than 50% equity REITs, with the remainder in housing, construction, financing (including mortgage REITs) and real estate related issues. Besides providing an alternative from the herd, such a fund in today's economic environment could not only run for the roses, it might even win. (Please see our web site regarding REMFs.)   Top B. NON-CORE REITs & HOUSING SHINE Despite the near break even performance of most real estate mutual funds and indices so far this year, five equity REIT property groups tracked by RealtyStocks have registered double digit gains. These groups do not include the traditional "core" properties. Instead, the best performing REIT groups YTD have benefited from lower interest rates. They include the Health Care and Specialty REIT groups, which are up 24.37% and 17.09%, respectively. Another strong performing group is Self-Storage, up 13.37%, and two retail groups, Regional Mall and Retail Malls, are up 14.2% and 12.18%, respectively. (Please see Equity REITs below.) The best performing REIT groups, however, are not those involved in equities, but those involved in debt called Mortgage REITs. These REITs have been on a tear, with all three categories appreciating over 20%. Including dividends, Mortgage REITs have had total returns of over 30% thus far in 2001. (Please see Realty Corps below.) Posting the best returns of any real estate stock group so far this year, however, have been three housing and construction groups. Construction & Engineering stocks which have gained 41% YTD, are barely ahead of Mobile Home Manufactures (Manufactured Housing) which is up 39.9%. After both of these groups declined three years in a row, they have finally bounced back. Home Builders, the leading realty stock group last year with a price gain of 70%, continues to perform well, tacking on another 20% this year. Besides lower interest rates, another factor that has helped the stocks in these groups is consolidation. Most recently Del Webb (WBB) has increased significantly from its intended acquisition by Pulte (PHM). (Please see Large Cap REITs below.)   Top C. EQUITY REIT PERFORMANCE Equity REIT prices were up slightly again in April, adding 1.06% for the month for a year-to-date (YTD) total of 7.8%. Most groups were on the rise; only three had monthly declines. The best monthly performing groups were HealthCare, Self-Storage and Regional malls, gaining 3.38%, 2.70% and 2.68%, respectively. The worst groups for the month were Mobile Home Parks and Hotels. The best performing groups so far in 2001 continue to be those with the highest dividends, such as the Health Care and Specialty groups. The best performing Equity REITs for April were National Health Realty (NHR) and Meditrust (MT), both in health care and up 15.5% and 15.2%, respectively. Interestingly, the worst monthly performer was also in health care, Omega healthcare Investors (OHI), down -21.9%, closely followed by Humphrey Hospitality, off -21.6%. The best performers YTD are Meditrust (MT) and Health Care REIT (NHI), up 83.4% and 43.7%, respectively. The worst performers YTD continue to be Humphrey Hospitality Trust (HUMP) and Omega Healthcare Investors, Inc. (OHI), down -58.7% and -55.2%, respectively. (Please see Equity Gainers and Losers.).   Top D. MORTGAGE REIT PERFORMANCE Mortgage REITs posted one of their best monthly gains, up over 9.65%. Mortgage REITs have increased during each of the last four months and continue to be helped by the downward pressure on interest rates. The best performing Mortgage REIT group was Residential & Commercial Mortgages, up 16.72%. The best monthly performing Mortgage REITs were Dynex Capital (DX), up 75% and Fog Cutter Capital (FCCG), up 37.1%. The worst performers for this period were AMRESCO Capital (AMCT), down -26.8%, and INMC Mortgages (NDE), falling -20.3%. The best performers YTD are Novastar Financial, Inc. (NFI) and Imperial Mortgage (IMH), up 36.3% and 36%, respectively. The worst performers YTD are Impac Commercial (ICH) and INMC Mortgages (INMC), down -24.1% and -22.4%, respectively. (Please see Mortgage Gainers and Losers.)   Top E. REALTY CORPORATIONS Realty and Housing Corporations had a strong surge in April, jumping 8.68%. The strongest group was OnSite Tech, posting a monthly gain of 36.8%. This was the same group that helped drag down this sector last month. This month's lagging group was Lodging down -3.07%. The best monthly stocks were Spectra Site (SITE) rising 131.9% and SBA Communications (SBAC) increasing 116.2%. The worst stocks for April were Winstar (WCIEQ) and Allied Riser (ARCC), declining 93.5% and 56.1%, respectively. Both best and worst performers are from the OnSite Tech, a group that has been experiencing tremendous volatility due to the financial collapse of Winstar and others. This pressure has appeared to unnecessarily drag down some more viable stocks that are bouncing back. The best performers YTD are in Manufactured Housing and Construction & Engr. They include Champion Enterprises (CHB) up a whopping 192.7%, Foster Wheeler Corp. (FWC) shooting up 186.7%, Perial Corporation (PCR), rising 138.3%. The worst performers YTD are Internet Pictures Corp (IPIX) and Winstar Communications (WCII), both down over 95%. (Please see Realty Corp. Gainers and Losers.)   Top F. LARGE CAP REIT PERFORMANCE For the first month of this year, Large Cap REITs have finally posted a positive price gain 1.8% in April. Large Caps now have a price loss YTD of -1.7%. In a reversal from last month when most of these 20 stocks were negative, all but three were positive. The best performer for April was Post Properties, up 5.3%, followed by another apartment REIT, Archstone, with a 4.8% gain. The worst monthly performer was Rouse, dropping -6.7%. For the year, Public Storage leads all large caps with a gain of 12% and the worst was Equity Office with a price drop of -12.5%. (Please see Large Cap REITs.)   Top G. REAL ESTATE MUTUAL FUNDS (REMFs) As mentioned in the first section of this newsletter, few REMFs are taking advantage of the favorable impact that lower interest rates are having upon the real estate sector. However, four fund families with seven funds have separated in performance rank from most other REMFs. One of the biggest REMF beneficiaries this year has been a type of index fund that features mostly higher yielding REITs, especially those in health care, Stratton Monthly Dividend. It's up 12.75%, behind just two other funds; Alpine U.S. gaining 16.67%, and FBR Realty Growth, the best REMF thus far in 2001 forging ahead 17.38%. It should be noted, however, that these top funds provide more risk than other REMFs. FBR has about 25% of its holdings in non-REITs, including realty corps. and even utilities, and it has taken positions in many "non-core" REITs. Alpine also has few "core" REITs and has major home building holdings. These top performing REMFs are the exceptions that have invested away from most large cap REITs. Also noteworthy is that most of the gains for the top REMFs have come this past month. The top two funds for the year, FBR and Alpine, are the top performers in April as well with respective returns of 15.24% and 12.84%. (Please see REMFs.)   Top Stock Changes - Winstar Communications has been removed (WCIEQ), Host Funding (HFD) and Silverleaf Resorts (SVR) were removed because they are under a $1.   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 .