A. REITs' Competitive Advantage May Dim
B. Important Near Term Events
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)
I. Yuletides Wishes

A. REITs' COMPETITIVE ADVANTAGE MAY DIM
Since REITs were established in the 1960's, they have enjoyed a competitive advantage over other stocks because their dividends are not subject to corporate taxes. Further, because they are required to pay nearly all their income in the form of dividends, they have provided some of the best yields of any stock group. With a new Republican Congress looking for ways to stimulate the economy and the stock market, a proposal being considered is the elimination of corporate taxes on all stock dividends. Since both individuals and corporations pay taxes on income distributed as dividends, this proposal may eliminate what has often been viewed as an unfair double taxation.

This legislative change could help narrow the gap between the yields of REITs and Non-REITs, which has been about five to seven full percentage points over the last few years (i.e. 6% - 8% vs. 1% - 2%, respectively). A couple decades ago, this yield gap was significantly less. If the proposed dividend tax break is passed, some Non-REITs that already pay respectable dividends, such as utilities and some financial firms, may have yields that are more similar to REITs. For example, a current dividend for a Non-REIT of 4 percent could jump to about 5.5 percent. At the same time, rising vacancies and pressure on rents among REITs could decrease the average yields of some REITs, now about 7%, by 10 and 20 percent in the next year or two, as mentioned in our past newsletter. In addition, the benefits of being a REIT could lessen, causing some of these firms to change to C corporations. Further, new firms may arise that are much more dividend oriented and more competitive to REITs. Further, if this change helps boost the stock market and economy, it could increase sector rotation, possibly away from REITs. This will be a very important issue to follow, as it could unfavorably affect REITs.   Top

B. IMPORTANT NEAR TERM EVENTS
There are several events and reports that will influence financial markets in the coming weeks. First, job reports released today, December 6th, indicate a job loss of 40,000 jobs in November and a growing unemployment rate from 5.7% to 6%. Together with the decline in manufacturing for the third month in a row reported last week, it appears the economy is weakening. Second, on December 8th, the inspectors in Iraq are scheduled to issue their first report. The clock is winding down on this potentially volatile situation. Third, time may also be running out for a government bailout of one of our largest airlines, UAL. A Chapter 11 filing of United could have negative consequences not only in the travel, hotel and resort industries, but could hurt also hurt metro economies where United Airlines has hubs or eliminates service. Fourth, as reported in the Wall Street Journal earlier this week, housing markets across the country are softening and more are beginning to decline. With less home equity buildup, the favorable impact that consumer spending has had on the economy could lessen. Fifth, interest rates will be very sensitive due to the before-mentioned issues. However, largely due to an increasing U.S. trade deficit, some economists see the 10-year treasuries moving from around 4% to over 5% within the next 6 months. The optimum time to refinance and lock-in the lowest rate could be behind us and may be slipping further away. Sixth, although retail sales were strong after Thanksgiving pushing retail stocks higher, the back-to-work period for the west coast dockworkers may soon resurface as an issue again. Finally, tax selling and buying will accelerate near the end of this year and, together with the items previously mentioned, may cause a very volatile and interesting period over the coming month.   Top

C. ADDITIONAL PROPERTY VALUE CONCERNS
Despite rising vacancies and softer rents, values for both residential and commercial properties have remained relatively firm so far. As discussed in previous newsletters, values have been largely supported by a favorable low interest rate environment. Rates are still only about 50 basis points, or one-half percent, above their 40-year low. But if rates move up, the increase will place greater pressure on property values. Another factor that has an adverse affect on commercial property values, in particular, is increasing insurance costs related to earthquakes, wind, water, fire and, more recently, especially terrorism. Also, lower insurance limits or exclussions result in greater liability exposure. Besides these external elements, buildings can also be inflicted by physical ailments that may affect value. As properties age, and most are over 15 years old, they need more maintenance, repairs and refurbishment to offset increasing physical deterioration and functional obsolescence that can limit property appreciation. In addition, environmental issues, that can even render some properties worthless, are becoming more of a concern. Besides asbestos, toxic waste/chemicals, radon and lead paint, the latest concern is mold.

Mold has been a problem in residential properties for some time. Since litigations concerning mold have increased in both number (now in the thousands) and in the dollar amount per claim, most insurance companies have dropped it from residential insurance coverage. As recently reported this week in the Wall Street Journal, mold is also becoming a major issue with commercial properties. Not only can some owners spend over $20 million in a property to remediate mold problems, but the property may be out of commission for months, resulting not only in lost income, but possible added expense in relocating existing tenants. The Center for Disease Control (CDC) is conducting a study on the harmful affects of mold expected to be completed next year, and Congress may consider a bill to nationalize requirements for mold inspection and remediation. Although mold problems are more prevalent in some areas of the country, like California, than others, it increases the risk associated with property ownership and can significantly impact property values.   Top

D. LARGE CAP REITs PERFORMANCE
Large Caps in November increased 3.9%, with only three of the stocks having negative performances. The best performers for the month were Crescent Real Estate Equities (CEI) and Host Marriott Corp. (HMT), increasing 12.9% and 11.6%, respectively. The laggard was iStar Financial (SFI), down -3.3%. The best performer year-to-date (YTD) was General Growth Properties (GGP), up 27.3%. The laggard YTD was Trizec Properties, Inc. (TRZ), losing -39.7%. YTD, Large Cap REITs have dropped -0.8% in price. (Please see Large Cap REITs.)   Top

E. EQUITY REIT PERFORMANCE
For November, Equity REITs had a strong monthly price gain of 3.37%, increasing their appreciation for the year to 5.12%. Only 1 out of the 14 groups showed a slight monthly loss. The top performers were Retail Malls & Centers, up 8.41%, and Retail Regional Malls, up 6.52%. Retail stocks with malls have outperformed other sectors recently due to Simon's (SPG) acquisition offer for Taubman (TCO) which caused the intended acquisition to rise about 15% over the last month. The laggard was HealthCare, dropping -0.76%. For the year, more than one-half of all property groups are still showing gains. The top performing groups YTD were Retail Factory Outlets, up 41.67%, followed by Retail Malls & Centers, up 22.55%. The laggards YTD, were Hotels and Apartments with price declines of -8.91% and -6.88%, respectively. The best individual REITs for the month were Center Trust, Inc. (CTA) and Taubman Centers, Inc. (TCO), both from the Retail Group, gaining 30.3% and 17.5%, respectively. The worst monthly performers were Omega Healthcare Investors, Inc. (OHI) and Roberts Realty Investors (RPI), losing -23.4% and -7.4%, respectively. The best performers YTD were Center Trust, Inc. (CTA) and Chelsea GCA Realty, Inc. (CPG), gaining 80.9% and 5.2%, respectively. The worst performers YTD were Golf Trust of America (GTA) and Prime Group Realty Trust (PGE), down -73.5% and -48.9%, respectively.(Please see Equity Gainers and Losers.).   Top

F. MORTGAGE REIT PERFORMANCE
For November, Mortgage REITs increased 3.79% and YTD have showed a strong increase of 6.88%. Despite moderately increasing interest rates, all of the groups were positive this month compared to the reverse just last month. The best monthly performing Mortgage REIT group was Residential Mortgages up 11.16%. The best individual Mortgage REITs for the month were American Residential Inv. Trust (INV) and Fog Cutter Capital Group (FCCG), gaining 56.6% and 16.9%, respectively. The worst monthly performer was Capital Trust (CT), losing -7.2%. The best performers YTD were Dynex Capital (DX) and CRIIMI Mae, Inc. (CMM), gaining 100% and 99.3%, respectively. The worst performers YTD were Apex Mortgage Capital (AXM) and Arizona Land Income Corp. (AZL), down -42% and -26.4%, respectively. (Please see Mortgage Gainers and Losers.)   Top

G. REALTY CORPORATIONS
For November, only 1 of the 10 Realty and Housing Corporation groups were negative. Overall, they had a strong monthly increase of 10.23%. Still, the price gains YTD for this sector were down -3.03%. The best group for the month was OnSite Technology with a gain of 58.4% due to the small number of stocks in this group (6) and the strong performance of a couple issues. The worst group was Home Builders, off -3.3%. The best performing group YTD was Tech & Net up 82.8%. The worst performing group YTD, OnSite Tech, was still down -31.7%. The best monthly Realty Corps were American Tower Corp (AMT) and On Command Corporation (ONCO), gaining 175.9% and 66.7%, respectively. The worst monthly performers were Monterey Homes Corp (MTH) and Kennedy Wilson (KWIC), losing -17.3% and -13.3%, respectively. The best performers YTD were LendingTree (TREE) and Vista Info Sol (FNIS), up 126.4% and 95.9%, respectively. The worst performers YTD were Lipid Sciences, Inc. (LIPD) and On Command Corp. (ONCO), down -81.8% and -75.4%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top

H. REAL ESTATE MUTUAL FUNDS (REMFs)
For the month of November, 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 edged into positive territory with an overall return of 2.84%. However, the top three REMFs YTD - consisting of Security Capital, Morgan Stanley and Alpine Realty Income - have double digit returns between 21.5% and 11.6%. (Please see REMFs.)   Top

I. YULETIDE WISHES
We wish all of our readers Happy Holiday tidings and a prosperous New Year. If you need some shopping ideas, keep in mind books and other offerings from RealtyBooks (www.realtybooks.com) and Homebuddy (www.homebuddy.com).   Top

Stock Changes - Stock symbols Buckhead (BUCK.OB), Frontline Cap (FLCGQ.OB), SBA Comms Corp (SBAC), Terremark (TWW) and SpectraSite (SITE) have all fallen below $1 and were deleted from our databases.

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.