1-9-03                                                                                           Vol. 6: No. 1 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Review our prognastications for the coming year at RealtyStocks' 2003 Forecast available to Members Only. Monthly Feature: RETAIL SECTOR PROPS UP 2002 REIT RETURNS GO UNNOTICED A. Retail Sector Props Up 2002 REIT Returns B. Prognostications C. Trends to Watch in 2002 D. Large Cap REIT Performance E. Equity REIT Performance F. Mortgage REIT Performance G. Realty Corporations H. Real Estate Mutual Funds I. Holiday Gifts and Wishes A. FOR 3-YEARS IN A ROW, MARKETS ARE DOWN BUT REITs ARE UP This was the third year in a row that major indices were down. The final tally was even worse than last year. The Dow Jones fell 16.8%, the S&P 500 dropped 23.4% and the NASDAQ plunged 31.5%. What is seldom looked at, however, are the drops from the peaks of these indices, achieved in early 2000, and the gains now needed to match these peaks. With the Dow Jones dropping -26%, it would need to increase about 36% to reach its peak; with the S&P 500 declining -40% from its high, it would need an increase of about 67%; and, with the NASDAQ falling -73% since its peak, it would need a monsterous gain of 350% to return to its pinacle. In contrast, the REIT indices and most real este mutual funds are up nearly 30% in this same period, but of course, dividends represent most of this increase. The broader REIT market covered by RealtyStocks has performed even better with price increases over 20% and overall returns estimated around 40%. For investors focussed on yield and safety the last three years and investing in such areas as bonds and REITS, times are not that bad. Although most REIT indices barely showed positive returns, of about 2% to 4%, this takes into account dividends of several percent. So, the price of REITs actually declined within most REIT indices. Still, REITs finished near around the top 10% of all industry groups for the third year in the row. However, as shown below, the broader price performance of Equity REITs covered by RealtyStocks was even better with a price gain of 5.86% that, together with dividends of several percent, would indicate double digit overall returns. Although the major real estate property groups declined, retail had an outstanding performance with a 13% annual price increase. Since there are four retail property groups among the 14 we cover, this property group is also weighted more than in other indices. And, including the outstanding year of Mortgage REITs, which jumped 22.07% in price for 2002, the overall price increase of all REITs we follow was up 9.6% producing overall returns in the mid to upper teens. Therefore, most REIT indices, that exclude Mortgage REITs and underweight retail with an emphasis on large cap stocks, significantly underperformed the broad REIT gains of the past year. This also occurred last year in 2001, but in 2000 large cap REITS, (especially the core properties including office, apartments and industrial) outperformed the broader REIT market. We expect that in the next year or two, large cap REITs and indices may be in a position to outperform the broader REIT market.   Top B. XXXXXXXX Last year we indicated that those property type groups that were neglected or out of favor could be attractive in 2001. As previously noted, most of these groups were the top performers this past year. We also indicated that large cap REITs, that had a blockbuster 2000, would be unlikely to repeat and could underachieve the overall REIT performance. This also came to pass. In general, we expected REITs to return about 12 to 15 percent; most indices ranged in the low to mid teens in 2001. For 2002, any REIT or real estate stock forecast are predicated upon the extent and timing of the economic recovery. We have been much less optimistic about the strength of the economy for over a year now. Although we continue to be a bit more pessimistic than most, we nevertheless see the recession ending sometime later this year or early next year: more slowly and softly than most others. This will continue to keep returns fairly modest for the large cap REITs, yet possibly a bit better than last year. But the great performances of the star sub-groups last year should dampen. We therefore expect the total returns for the overall REIT market this coming year to be off from last year. However, the uncertainty in the economic climate, together with certain trends noted below, will make this year much more challenging - especially during the first half. And, a truly prolonged recession could make REIT returns this year flat or worse. We also expect more property type groups to be negative this coming year and do not see a quick turnaround in Hotel REITs.   Top C. REIT TRENDS More pressure upon REIT earnings is expected on multiple fronts. Although most REITS have taken their losses from sour technology investments, pressure on rents and occupancies continue. The glut of sublease space in major offer markets is also an issue. And there is new concern of rising operating expenses. In particular, due to Enron and 9/11, insurance and utility rates are expected to escalate, as may auditing and legal costs. More worrisome is that certain high profile properties may no longer be able to be adequately covered in the case of a calamity or future acts of terrorism. This could result in more potential loss exposure, especially among certain Office and Retail Mall REITs. Although some technology advances will reduce certain administrative costs, it will be important to track expenses this coming year. There may be less reporting uniformity among REITs in the near term. In an effort to make some investors become more comfortable with REITs, most analysts will support the use of earnings per share (EPS) usually together with the traditional funds from operations (FFO). However, not all REITs will provide EPS guidance or numbers, and the gains or loss from building sales may have a very significant impact on earnings. This use of multiple numbers may not be reassuring to many investors, especially at first. Additional REIT listings to the S&P 500 are expected in the next year or two. This last year marked a milestone for the listing to two REITs, Equity Office (EOP) and Equity Residential (EQR). Although this provides greater recognition of REITs, it may also begin to create a higher amount of correlation among REIT and equity market performance. Consolidation is expected to continue. Most recently, Rodamco liquidated its multi-billion dollar portfolio including many high profile retail properties among the top retail REITs. The largest REIT, Equity Office (EOP), became even larger last year with the acquisition of Spieker Properties. The merger of Archstone & Charles Smith, now Archstone-Smith, and Plum Creek's equisition of Timberland has created larger REITs. More credit rating concerns and downgrades are occurring among public real estate firms. This is a result of reduced revenues as well as the acquisition of additional companies or more assets that require greater short and long term debt. Unfortunately, these downgrades cause more expensive borrowings that may place further pressure on earnings. The debt load of REITs is therefore becoming more important.   Top D. LARGE CAP REIT PERFORMANCE Large Cap REITs finished 2001 with an overall price increase of 8%, about one third of what it was the previous year. Still, total returns finished respectably in the mid teens and several firms had excellent gains. The best large cap performer for the past year was Public Storage (PSA) which gained 37.4%, closely followed by iStar Financial (SFI) increasing 36.3% and Health Care Property (HCP) with a rise of 32.5%. Other firms that finished with gains of around 20% included some retailers Simon Debartolo, Kimco and Rouse and a timberland firm, Plum Creek (PCL). The worst performing large cap REITs were Host Marriott (HMT), falling -24.6%, and Bost Properties (BXP), dropping -12.6%. However, in December, Marriott was the best performing large cap, up 6.9%. (Please see Large Cap REITs.)   Top E. EQUITY REIT PERFORMANCE Equity REITS ended 2001 with a monthly gain of 1.97% and posted an annual increase of 17.17%. With equal weight given to all property type groups, and dividends included, the overall annual returns for all REITs (over $2 in price) last year was in the mid twenty percent range, about 10% more than the returns indicated by most REIT indices. However, last year, the total returns calculated by RealtyStocks were about 10% less than these indices. The reason for this difference is the emphasis of larger capitalized REITs in the indices. As previously noted, the best performing group last year was Health Care (up 62.8%) followed by Self Storage and Retail Malls (all up over 30%). Only two of the fourteen property groups were negative in 2001; Hotels (-17.7%) and Factory Outlets (-13.8%). The best performing stocks for the year were Meditrust (LQI) and Income Opportunity Realty Trust (IOT), gaining 124% and 123.3%, respectively. The worst performers last year were Patriot American Hospitality (WYN) and Konover Property (KPT), losing -68% and -67.1%, respectively. The best performing stocks for December were Omega HealthCare Investors (OHI) and National Health Investors (NHI), gaining 45.1% and 14.6%, respectively. The worst monthly performers were Kimco Realty Corporation (KIM) and Jameson Inn (JAMS), losing -34.1% and -17.7%, respectively. (Please see Equity Gainers and Losers.).   Top F. MORTGAGE REIT PERFORMANCE This sector finished 2001 with a gain of 52.42% and the Mixed (Residential & Commercial) group posted triple digit annual gains. For December, Mortgage REITs lagged behind their Equity counterparts with a gain of 1.21% and may indicate some cooling in the performance of this sector. The best performers for the year were Champion Enterprises (CHB) and Cavalier Homes, Inc. (CAV), up 347.6% and 231.4%, respectively. The worst yearly performers were Enron Corp (ENE) and Lodgian, Inc. (LOD), losing -99.3% and -95.8%, respectively. For December, the best monthly performer was Tut Systems, Inc. (TUTS), gaining 130.8%, and the worst was Interstate General Co. (IGC), losing -46.2%. (Please see Mortgage Gainers and Losers.)   Top G. REALTY CORPORATIONS Realty and Housing Corporations finished 2001 only slightly above Equity REITs with a gain of 18.11%, but behind the broader REIT gain of 25.58%. The industries in this sector were much more volatile than for REITS. The best yearly performer was Mobile Home Manufacturers with a spectacular rise of 91.7%, followed by strong performances from Home Builders, jumping 49% and Tech and Net, spurting 46.3%. On the dark side, Onsite Technology continued to freefall with a drop of -62.6%. Lodging posted some recovery since 9/11, but was still down -12.6% for the year. For December, Home Builders, and OnSite Tech were robust with gains of 27% and 15.4%, respectively. Resorts was the only negative group last month with a loss of -2.1%. The best performers for the year were Champion Enterprises (CHB), up 338.9%, respectively. The worst yearly performers were Enron Corp. (ENE) and Lodgian, Inc.. (LOD), down -99.1% and -96.1%, respectively. The worst monthly performers were Enron (ENE) and Forest City Enterprises (FCEa), down -98% and -29.4%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top H. REAL ESTATE MUTUAL FUNDS (REMFs) Overall, real estate sector funds had a very disappointing year when comparing their average return of only 8.59%, including dividends, to those of most REIT indices our annual REIT gains. REMFs under performed the overall returns of their sector more than most other sectors. There were some bright spots, however. Four fund managers, out of a few dozen, managed to achieve total returns in excess of 20% with the best returns achieved by Kensington Strategic with returns of about 30%. Following were Spirit of America, Alpine U.S., and Stratton Monthly Dividend. Still, when there were so many great performances last year, it is surprising that only a few percent of the 147 REMFs were able to have returns more than the average RealtyStock Equity REIT gains of about 18%. The best REMFs in December included those top performers for the year, including Alpine U.S. and Kensington. However, Advantus held the top spot with a total return of 11.57%. The average fund performance for December was 2.95%. If you are looking for a real estate fund, be careful not to choose one, that has high fees and under performs. (Please see REMFs.)   Top I. BEST WISHES FOR THE COMING YEAR! We wish everyone a healthy and prosperous New Year! Although we believe real estate stocks will perform more in line with with real estate equities this year, we believe there will be some excellent opportunities with individual issues and in certain property groups. We hope RealtyStocks may help you find some silver linings in the coming year.   Top Stock Changes - Stocks removed due to low stock prices (below $1) included Allied Riser (ARCC), Enron (ENE), Pinnacle Hldgs (BIGT), and Terremark (TWW) from the Onsite Group; Frontline Capital (FLCG), Homeseekers.com (HMSK.OB) and Improvnet (IMPV.OB) from the Tech Group. Equity Residential (EQR) was recently listed to the S&P 500. 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 .