A. REITs Fall in October
B. Rate Changes
C. Lingering Uncertainties
D. Large Cap REIT Performance
E. Equity REIT Performance
F. Mortgage REIT Performance
G. Realty Corporations
H. Real Estate Mutual Funds (REMFs)

A. REITs FALL IN OCTOBER
REITs experienced a broad based decline this past month declining -4.23% in price overall, and with none of the 16 property type groups posting a positive return. This was primarily a result of three factors. First, the quarterly earnings for most REITs, although not entirely unexpected, were down and near term earning outlooks were often negative, and at best cautious. In particular, major office REITs posted earning declines for the quarter in the teens and vacancy declines of about 5%, to occupancies of about 90%. This affect on earnings will also cause dividends to decline from a negligible amount for some REITs to over a full percent for others within the next year, assuming no price change. Secondly, as rates increased for most of October, bonds made a major retreat and the price of REITs largely followed the weakness of bonds. This was not entirely an earnings and interest rate affect, however, as a third factor, the rotation of stocks into other sectors mentioned in our previous newsletter, continued. Many fund managers decreased their exposure to real estate in recent weeks and this trend is expected to continue as long as interest rates edge up and other sectors are hot, especially technology.

In less than a month, between October 9th and November 6th, the Dow Jones jumped 20% and the NASDAQ was up a whopping 27%. The stock market performance for October was one of the best on record. Yet, REITs, like bond prices, have declined. There is an increasing sentiment that the bear market is dead. Even with a recent pull back late last week, there appears to be a general upward bias to the market for the rest of the year. With the average mutual fund down 11% for the year, many fund managers do not want to miss out on future market run-ups. With short-term money markets down to just over 1%, there will also be many individuals that may decide the worst is over as well. Those entering the market now are inclined to be looking for price appreciation, not dividends. These trends are not particularly good news for REITs.  Top

B. RATE CHANGES
Interestingly, although the 10-year rates on Treasuries increased 67 basis points (bps) in just two weeks, from 3.58% on October 9th to 4.25% in October 22nd, they broke the 4% level at the end of October and again late last week. The latest decline in rates was a bit of a surprise. After all, there was some good economic news due to increasing retail sales and a reduction in jobless claims last week, and more importantly, many believe that the election results will soon provide legislation to provide more tax cuts and other packages creating greater stimulus to the economy.

Instead, investors focused on the U.N. Security Council resolution pertaining to Iraq, becoming more concerned with the political, monetary, life and economic risks over an Iraq conflict. Also, the new government packages designed to stimulate the economy may cause the budget deficit to widen appreciably, which could cause interest rates to rise significantly within a few years. Further, the larger than expected cut in the discount rate, of 50 bps instead of 25 bps, may indicate that the Federal Reserve believes the economy is not only worse than they thought previously, but it also may preclude them from making any future rate cuts. And, they may have a new concern, deflation.   Top

C. LINGERING UNCERTAINTIES
Putting the D word aside, our biggest concern is the overall impact of the collective items that continue to fester. The Iraq situation may take at least a couple months to resolve; West coast shipping and deliveries may continue to have problems, the airline industry is in serious trouble and more firms will be filing for Chapter 11. Even though investors are aware of these issues, we believe that, collectively, these issues are an enormous drag on an economic recovery. But our biggest fear is the lack of corporate earnings growth. So far, there is little indication that corporate earnings are growing. Last week, Cisco released disappointing forecasts that contributed to the most recent stock market drop. Other than the exception of Microsoft, the outlook for the recovery of most technology firms is looking further away, possibly into 2004, or longer. And, there has also been relatively little consolidation in the technology sector, which would be a sign of capitulation and a turnaround. As we have previously discussed, we believe that until there is growth in technology, an economic recovery will be mild at best.

Instead, the lowering of rates will allow individuals to get further in debt, continuing some modest economic gains that are consumer driven. This may provide a false confidence that the economy is better. However, until corporations see their earning prospects improving, and the risks associated with Iraq are negated, a sustained economy recovery is highly doubtful. Although the bear market was one of the longest on records, the economic boom of the 1990s was also one of the longest. Just because it may seem like it's been long enough for a recovery to occur, does not mean this must be so. After all, the dynamics affecting this decade are far different than in the 90s.   Top

D. LARGE CAP REITs PERFORMANCE
Large Caps in October had a decline of -4.5%, similar to the broad based decline of all REITs, with all but four of the stocks having a negative performance. The best performers for the month are St. Joe Company (JOE) and sitar Financial Inc. (SFI), increasing 5.7% and 1.7%, respectively. The laggard is Host Marriott Corporation (HMT), down -11.6%. The best performer year-to-date (YTD) is General Growth Properties (GGP), up 23.9%. The laggard YTD is Trisect Properties, Inc. (TRZ), losing -38.2%. YTD, Large Cap REITs have dropped -4.3% in price. (Please see Large Cap REITs.)   Top

E. EQUITY REIT PERFORMANCE
Despite a strong stock market performance in October, Equity REITs had a monthly price loss of -4.33%, reducing their appreciation for the year to 1.83%. None of the 14 groups showed a monthly gain. The top performers, but still in the negative, are Diversified, down -1.06%, and Retail Factory Outlets, down -1.15%. The laggard is MHParks, dropping -8.17%. For the year, about one-half of all property groups are still showing gains. The top performing groups YTD are Retail Factory Outlets, up 36.66%, followed by Retail Regional Malls, up 11.86%. The laggards YTD, are Hotels and Apartments with price declines of -11.79% and -10.58%, respectively. The best individual REITs for the month are Income Opportunity Realty Trust (IOT) and Transcontinental Realty Investors, Inc. (TCI), gaining 51% and 7.9%, respectively. The worst monthly performers are Associated Estates Realty Corp. (AEC) and LTC Properties, Inc. (LTC), losing -25.1% and -22.9%, respectively. The best performers YTD are Center Trust, Inc. (CTA) and Konover Property (KPT), gaining 38.8% and 38.7%, respectively. The worst performers YTD are Golf Trust of America (GTA) and Prime Group Realty Trust (PGE), down -72.8% and -51.8%, respectively.(Please see Equity Gainers and Losers.).   Top

F. MORTGAGE REIT PERFORMANCE
For October, Mortgage REITs decreased -4.23%, but still show an increase for the year of 3.33%. All of the groups were negative this month. The best monthly performing Mortgage REIT group , but still in the negative, was Commercial Mortgages down -1.36%. The best individual Mortgage REITs for the month are iStar Financial, Inc. (NFI) and Impac Commercial (ICH), gaining 6.4% and 6.1%, respectively. The worst monthly performers was Apex Mortgage Capital (AXM), losing -42.5% due to recent downgrades. The best performers YTD are Dynex Capital (DX) and CRIIMI Mae, Inc. (CMM), gaining 107.1% and 97.8%, respectively. The worst performers YTD are Apex Mortgage Capital (AXM) and Arizona Land Income Corp. (AZL), down -42.8% and -24.8%, respectively. (Please see Mortgage Gainers and Losers.)   Top

G. REALTY CORPORATIONS
Contrary to the REIT performance, only 4 of the 14 Realty and Housing Corporation groups were negative in October. Overall, they had a monthly increase of 7.17%. Still, the price gains YTD for this sector are still negative, down -13.69%. The best group for the month is Tech & Net with a gain of 42.2% due to the small number of stocks in this group (5) and the strong performance of a couple issues. The worst group was OnSite Technology, off -27.3%. The best performing group YTD is Tech & Net up 28.7%. The worst performing group YTD, OnSite Tech, is down -62.3%. The best monthly Realty Corps are US Timberlands (TIMBZ) and HomeStore.com, Inc. (HOMS), gaining 241.3% and 146.7%, respectively. The worst monthly performers are SBA Communications Corp (SBAC) and Oakwood Homes Corp (OH), losing -97.2% and -88.1%, respectively. The best performers YTD are LendingTree (TREE) and Vista Info Sol (FNIS), up 107.6% and 87.8%, respectively. The worst performers YTD are SBA Communications Corp. (SBAC) and SpectraSite Holdings (SITE), down -97.2% and -96.4%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top

H. REAL ESTATE MUTUAL FUNDS (REMFs)
For the month ending November 12th, the overall average return for 133 funds was 3.51%, with all of the funds showing positive returns. Morgan Stanley, showing a positive return of 5.73%, was the best monthly performer. Overall returns for REMFs this year are in the negative, with a slight loss of -0.1%. Several REMFs have double digit returns with the best performers YTD including Security Capital, Morgan Stanley and Alpine Realty Income, up 20.10% and 11.61%, respectively. (Please see REMFs.)   Top

Stock Changes - Dewolfe Company (DWL) was bought out by a subsidiary of Cendant Corp (CD). Grubb and Ellis Corp (GBE) changed their symbol to (GBEL.OB). Also, Phillips Int'l Realty (PHR) changed their symbol to (PHIR.OB) and Wyndham Int (WYN) changed their symbol to (WBR).

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.