2-11-02                                                                                           Vol. 5: No. 2 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Last Chance for a 5-Night Olympic Closing Ceremony Package with Tickets to 6 Events (5 sold out) for 2 to 6 People! See: www.2002Condo.com Monthly Feature: The Recession & Accounting Woes: SLOWING DOWN REITs A. REITs Finally Slowing Down B. Accounting Woes C. Large Cap REIT Performance D. Equity REIT Performance E. Mortgage REIT Performance F. Realty Corporations G. Real Estate Mutual Funds (REMFs) H. Happy President's Weekend A. REITs FINALLY SLOWING DOWN IN THIS RECESSION Although the commercial real estate market has been declining for at least a quarter or two, some major REITs are finally acknowledging this by lowering their earning guidance. Some of the largest REITs, including Equity Office (EQO), Equity Residential (EQR) and ProLogis (PLD), recently released statements indicating that occupancies in their portfolios are starting to slip and that they expect more pressure on rentals during the coming months. In the last quarter, ProLogis also had write-downs. These may increase among other REITs as well. Unlike other recessions where overbuilding was the culprit, this time around it appears that the major problems are declining job growth and excessive leasing. Office markets, especially in the largest cities, are awash with sub-lease space. This is hurting both rents and occupancies. The apartment market is also softening as more renters double up or move back with their parents or relatives. Retail has taken a temporary jolt with the reorganization of Kmart and, in general, has slowed with static or lower demand. The decline in manufacturing has also hurt industrial markets. Most property types are experiencing at least some discomfort, and even a little pain. Some exceptions that are still continuing to perform well, however, include REITs in health care, public storage and those in triple net leases and on the debt side. Another noteworthy trend is that commercial real estate in certain areas of the country, in particular the Silicone Valley and Bay area, are now suffering as much as any area after years of robust growth. Firms heavily exposed to this area, such as Mission West (MSW), have recently seen their stocks downgraded by analysts and their stock price decline about 15% since the beginning of the year. A REIT with some exposure to the ailing KMart, Kimco (KIM), has also been downgraded recently. Despite the bad news for some REITs, earnings and FFOs are generally expected to decline rather modestly in the near term. As a result, although stock prices of REITS are expected to come under greater pressure, they should not have major setbacks because of their attractive dividends and decent, albeit somewhat lower, revenues. (Please see REMFs.)   Top B. ACCOUNTING WOES The debacle of Enron, as well as Global Crossing, has cast a great deal of concern about accounting procedures and the financial conditions of many other companies. The first group of companies to come under pressure have been those that have complicated financial dealings, like Tyco, Williams, and even GE. Recently some technology stocks with concerns over accounting practices with their Asian investments have also suffered. Questionable accounting practices may be prolonging this recession. In addition, the strong recovery normally experienced recession may not occur. Finally, forthcoming legislative reform could increase fees not only for accounting, but for insurance and administration. This may also dampen future corporate earnings. Accounting reform may have some trickle down effect upon REITs. Although some off balance transactions or deals with conflicts involving principles may surface with some REITS, the nature of these dealings are not expected to be in any way comparable to the scope of the Enron dealings. Still, stricter accounting upon REITs may have a slight downward effect upon future earnings. Also, anything that is atypical in one industry, like funds from operations (FFO) among REITs, may cause investors to be more wary. As mentioned in last months newsletter, analysts are trying to move away from FFO. And, we believe they will be looking at various real estate accounting practices more closely and they will be more concerned over future write-downs or capital gains.   Top C. LARGE CAP REIT PERFORMANCE REITs with core holdings (apartments, offices and industrial) basically stayed even this past month with a miniscule increase of 0.1%. They continue to fall behind the broader REIT performance which includes subgroups that are still performing well like HealthCare, Specialty, Mortgage REITs and some smaller groups that bounced back last month. The best performer for January was Marriott (HMT), that surged 12.1%, followed by Public Storage (PSA), jumping 9.6%. The laggards were a couple apartment REITS, Equity Residential and Archstone, and Kimco (KIM), all declining about 6%. (Please see Large Cap REITs.)   Top D. EQUITY REIT PERFORMANCE Equity REITS are still performing well with a gain of 2.44% in January. This resulted from good continued performances in Health Care, Self-Storage and Specialty groups, but in particular, was due to rebounds in Factory Outlets and Hotels. These were the best two monthly performing groups for January with gains of 8.73% and 7.21%, respectively. Another reason for the good overall performance of REITs was that only three groups were negative for the month. The worst was Retail Centers off -2.41% followed by Apartments, down -2.26%. The best performing stocks for January were Patriot America Hospitality (WYN) and Medtrust (LQI), gaining 26.8% and 25.4%, respectively. The worst monthly performers were Omega Healthcare Investors Inc (OHI) and Malan Realty Investors (MAL), losing -26.7% and -18.7%, respectively. (Please see Equity Gainers and Losers.).   Top E. MORTGAGE REIT PERFORMANCE Mortgage REITs also continued their outstanding performance of last year, with a gain of 4.17% in January. The best performing Mortgage REIT group for the month was Residential & Commercial Mortgages up 10.63%. The best individual Mortgage REITs for the month were Dynex Capital (DX) and Clarion Commercial Holdings (CLR), gaining 71% and 20.8%, respectively. The worst monthly performers were Capstead Mortgage Corp. (CMO) and Fog Cutter Capital Group (FCCG), losing -12.8 and -8.2%, respectively. (Please see Mortgage Gainers and Losers.)   Top F. REALTY CORPORATIONS Realty and Housing Corporations started the new year on a positive basis with a January gain of 1.57%. However, of the 10 groups, four were negative. The best monthly performing groups included Home Builders, jumping 11.2%, with Timberland and Manufactured Housing both up slightly over 5%. The worst monthly performing groups were OnSite Technology, down -4.8%, and Construction & Engr., off -3.8%. The best monthly Realty Corps were On Command Corporation (ONCO) and ResortQuest International (RZT), gaining 151.8% and 41.8%, respectively. The worst monthly performers were Homestore.com (HOMS) and SpectraSite Holdings (SITE), losing -58.7% and -50.7%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top G. REAL ESTATE MUTUAL FUNDS (REMFs) The changes in the favorite REIT groups, mentioned earlier in this newsletter, are having some profound changes in REMF performance. Although the average fund was up a measly 0.3% in January, over three-quarters of 133 REMFs were negative for the month. They were pulled up by funds that successfully shifted away from apartments and offices into other groups. The best performers were Alpine U. S. up a strong 13%. Alpine International, FBR, Kensington and Merrill Lynch also performed well and were up between 3.8% and 8%. These represent new REMF performance leaders. (Please see REMFs.)   Top H. HAPPY PRESIDENT's WEEK(END) Hopefully you were out of the office for a long weekend, some place warm or fluffy with snow. If you're even luckier, maybe you're out for the whole week. Stock Changes - Lodgian Inc.(LOD), Captec Net Lease (CRRR) and Cabot Industrial Trust (CTR) have been deleted. 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 ©1998-2002, WebVisers Inc. All rights reserved .