3-12-02                                                                                           Vol. 5: No. 3 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: IMPROVING ECONOMY May Raise Rates / Change Sector Leaders A. Improving Economy May Cause Higher Interest Rates B. Sector Leaders May Change C. Large Cap REIT Performance D. Equity REIT Performance E. Mortgage REIT Performance F. Realty Corporations G. Real Estate Mutual Funds (REMFs) A. AN IMPROVING ECONOMY MAY CAUSE RISING INTEREST RATES There are encouraging signs that the recession could be ending or even over, according to statements by the Federal Reserve Chairmen Alan Greenspan last week. Most economists expect the gross domestic product (GDP) to increase 2.5% or a little higher this year. Recent revisions indicate the GDP in the fourth quarter of last year, instead of being almost nil, actually increased 1.4%. This has caused Greenspan to be much more optimistic about economic recovery. There are still some leery signs, however. Business leaders are more sanguine about the recovery and although accounting scandal fears have eased, they have not disappeared. The decline in air travel has caused domestic airplane orders to drop and telecommunications spending and some other areas of technology are not yet rebounding. Also, the war in the Middle East is escalating and the threat of terrorism on our homeland may not be eliminated. It is therefore doubtful that the economic recovery will be smooth. Assuming the indicators used by Greenspan do not reverse course, and there are no surprises, a likely economic scenario is that a recovery will take hold during this year. However, it appears that the 40-year low in interest rates will reverse course with higher interest rates expected. Should the economy show a stronger rebound, there is fear the Fed could be more aggressive in tightening growth by raising rates before mid-year. It appears we could be at a new economic crossroads with major implications. First, there is much money in bonds that, in the event of higher rates, would lose value and may be headed towards cash or the equity markets. A sustained recovery should cause more exuberance in stocks as investors trade modest fixed and variable yields for higher potential capital gains. Second, to prevent the economy from overheating, the impact of higher interest rates would have a greater influence upon some industries than others. Third, as investors become less defensive, there should be a performance reversal among some stock sectors and an overall improvement in the equity markets.   Top B. SECTOR LEADERS MAY CHANGE As we have discussed for over a year, lower interest rates have dramatically boosted the demand for REITS with high yields such as most Mortages, HealthCare, Self Storage and Specialty as well as other sectors such as Home Builders and Manufactured Housing. Now with the prospects of higher rates, other stocks may become more attractive such as the core REIT groups, Property Services, Technology and even the Hotel REITs that have rebounded better than we expected so far this year. A more ominous trend for REITs that occurred back during strong stock market performances of the past is that realty stocks were largely passed over in preference to other sectors offering much greater appreciation potential. Due to longer leases of about three and five years or longer common with most property types, and large amounts of office sub-lease space available, bumps in earnings for most REITs may not be realized for one or two more years. Although the anticipation of higher rents and occupancies could well benefit REITs before then, at an average debt load of about 40%, higher rates could also cut into the earnings of most REITs. Should the economy recover more strongly than anticipated, the groups most likely to show earning improvements the quickest could be those that do not have longer-term leases, such as Apartments and Hotels.   Top C. LARGE CAP REIT PERFORMANCE These REITs increased 2.4% for the month and ahead of the broader REIT performance, which was dragged down largely by the subgroups that are more interest rate sensitive. Although the broader index of REITs has outperformed larger cap REITs for about two years, as mentioned previously, a new trend could be occurring. The best performer for February was Marriott (HMT), that jumped 7% on top of a double digit gain last month. The laggard was Vornado Realty (VNO) down -2.0% and the only other slightly negative performers were Equity Office (EOP) and Health Care Property (HCP). (Please see Large Cap REITs.)   Top D. EQUITY REIT PERFORMANCE Equity REITS had a gain of 5.16% for March. All the groups showed positive gains. The best performing group for March was HealthCare, up 8.66%, respectively. The worst group was MH Parks gain only 0.81%. The best performing stocks for March were Center Trust, Inc. (CTA) and Patriot American Hospitality (WYN), gaining 29% and 28.6%, respectively. The worst monthly performers were Burnham Pacific Properties (BPP) and Prime Group Realty Trust (PGE), that lost -54.8% and -17.9%, respectively. So far this year to date (YTD), the best performers are Patriot American Hotel (WYN) and LaSalle Hotel Properties (LHO), gaining 60.7% and 57.1%, respectively. The worst performers YTD are Burnham Pacific Properties (BPP) and Malan Realty Investors. (MAL), off -59.2% and -32.5%, respectively. (Please see Equity Gainers and Losers.).   Top E. MORTGAGE REIT PERFORMANCE Mortgage REITs were slightly down in February with a loss of -0.12%. This is one of the few times in the last couple of years that Mortage REITs have not outperformed Equity REITs, and also could be a harbinger of things to come during the coming year. The best performing Mortgage REIT group for the month was Residential up 3.27%. The best individual Mortgage REITs for the month were Resource Asset Management (RAS) and American Residential Inv. Trust (INV), gaining 12.6% and 7.4%, respectively. The worst monthly performers were Capstead Mortgage Corp. (CMO) and Dynex Capital (DX), losing -16.8% and -13.6%, respectively. The best performers YTD were Dynex Capital (DX) and Clarion Commercial Holdings (CLR), gaining 47.6% and 26%, respectively. The worst performer YTD was Capstead Mortgage (CMO), down -27.4%, respectively. (Please see Mortgage Gainers and Losers.)   Top F. REALTY CORPORATIONS Realty and Housing Corporations had a slight loss of -0.79% in February; however, of the 10 groups, six were positive. The best monthly performing group included Home Builders jumping 8.5%. The worst monthly performing groups were OnSite Technology, down -26%, and Tech & Net, off -6.5%. The best monthly Realty Corps were DeWolfe Co. Inc. (DWL) and Kit Manufacturing (KIT), gaining 54.6% and 53.3%, respectively. The worst monthly performers were SBA Communications Corp. (SBAC) and On Command Corporation (ONCO), losing -65.5% and -58.6%, respectively. The best performers YTD were DeWolfe Co. Inc. (DWL) and Bluegreen Corporation (BXG), up 97.7% and 59%, respectively. The worst performers YTD were SBA Communications Corp. (SBAC) and Homestore.com, Inc. (HOMSE), down -81.6% and -66.1%, respectively. Of note is that auditing problems we spoke of in the last newsletter have turned up in spades with Homestore (HOMSE) and is the reason for their stock plunge over the last several months. Apparently, the firm overstated revenues and is operating at a loss, the financial statements for the last two years need to be restated, it is subject to numerous law suits and the top executives in the firm are gone. Until recently, this firm had been one of the few dot com holdouts remaining, but may now be delisted soon. This could be a boost for its competitors, in particular Microsoft's HomeAdvisor. (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. The average fund was up 2% in February. The majority of REMFs, which are still tied closely to large cap and core REITs, could benefit in the event of performance changes among property groups. They could be in position to outperform the broader REIT base this year and should cause some new REMF leadership. The best monthly performer was Lend Lease up 5.73%. CGM Realty, Morgan Stanley, Security Capital and Alpine also performed well and were up between 3.5% and 5.7%. For the year, CGM Realty has the best REMF performance with a total return of 10.76% followed by Alpine U.S. at 8.97%. The average of 156 funds YTD is 2.29%. (Please see REMFs.)   Top Stock Changes - D.R Horton (DHI) completes purchase of Schuler Homes (SHLR), which deletes the symbol SHLR. Homestore.com, Inc. (HOMS) changed to (HOMSE). 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 ©2002, WebVisers Inc. All rights reserved .