5-15-02                                                                                           Vol. 5: No. 5 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: REITs PROVIDE RELIEF TO INVESTORS A. REITs Provide Relief B. Economic Indicators Improve, but Uncertainty Remains C. Large Cap REIT Performance D. Equity REIT Performance E. Mortgage REIT Performance F. Realty Corporations G. Real Estate Mutual Funds (REMFs) A. REIT RELIEF Despite the uncertainty and recent volatility in the equity markets, REITs continue to provide relief to investors looking for price stability and income. REITs ended April with a 2% price gain and are up over 10% so far this year. With an economic recovery apparently underway, and the Federal Reserve reluctant to raise interest rates in the next few months, conditions are still conducive for good near term REIT performance. In the beginning of the year, we mentioned REITs would perform best in this type of environment, but were skeptical that these conditions would materialize for most of the year. Instead, we were fearful of a prolonged economic slump, another terrorist event and most recently, an eminent rise in interest rates. Now, with a more stable environment for rates and an improving economy, the current outlook for REITs provides for gradual increases expected in both occupancies and rents over the next year or two. Along with fairly stable debt service, this should cause earnings stability for REITs within a year and moderate growth the year after. The stability of both commercial and residential real estate markets have also improved the perception of REITs, especially in this time when many industries are having difficulties. In addition, the issue concerning questionable practices of some REITs now looks mild in light of the improprieties in accounting, management and trading among other industries. In fact, the reputation of the REIT industry now looks better than many others. The sweet performance REITs so far this year, however, is not expected to go unabated. There are still several wild cards that could cause havoc with the economy and the securities market. But as the value opportunities in the debt and equity markets are at greater parity, finding an underperforming niche that can provide some overall annual return in the teens has become exceedingly difficult. With the average REIT still returning about 6%, it only takes a price appreciation of several percent to achieve this goal. Without any change in REIT prices, this goal has already been met for most existing REIT investors at this point in time, and may still be possible for those now establishing positions. REITS are on track to post a third consecutive year of double digit gains.   Top B. ECONOMIC INDICATORS IMPROVE; UNCERTAINTY REMAINS According to recent economic data, the economy is improving as reflected by several indicators recently released. Interestingly, consumers have held up the economy and now appear to be propelling it, while major corporations still appear a little weak. As we come out of this recession, corporations are expected to be more lean and efficient which could provide upside earning surprises in the quarters ahead. However, if there is a strong rebound, there may be a renewed concern over inflation. Consumer prices rose .5% last month, but adjusted for rises in gasoline, were at a more reasonable increase of .3%. This is the third month in a row for rising consumer prices. Inflation has been very tame for over a decade, but has not dropped off the radar screen for many investors, or the Federal Reserve members, especially the Chairmen, Allan Greenspan. Most economists expect interest rates to remain stable for most or all of the summer and to rise very slightly before year's end. However, another significant monthly rise or two in consumer prices, especially with stronger corporate profits, could move up the timing and amount of rate increases this year. From an investment perspective, the debt markets no longer appear to be particularly attractive with the prospect of higher rates. Equity markets look more balanced, but still expensive by historical standards when looking a earning multiples, especially those measured by PEs. Although NASDAQ had its best weekly rise in over a year last week, we remain doubtful that a tech recovery has reached bottom and that a strong bull market will step forth this year. Besides the fall of tech and telecommunications, several other industries have problems that may worsen. It appears to us that major changes and consolidations are far from over, and the very existence of a couple other major companies may be in jeopardy fairly soon. Therefore, achieving an overall return of 10% or more today, considered to be very meek just a couple years ago, is now a major accomplishment. With so few good investment options, it is not particularly surprising that real estate, both residential and commercial, will continue to receive continued interest. The Middle East situation became worse as we expected in our last newsletter. Although the situation at times seems a bit better, there is still little hope of any immediate resolution. The threat of oil price increases seems more sanquine at this juncture. Still, the U.S. and President Bush have a most difficult task in balancing relations with Arab countries, especially those that supply the bulk of our foreign oil, and Israel. The situation is still very tenuous, but there is a growing consensus, or maybe just complacency, that things will not spin out of hand.   Top C. LARGE CAP REIT PERFORMANCE For a couple of months in a row, the Large Cap REITs underperformed the broader REIT index and posted an increase of only 0.5% last month. Eight of the 20 Large Cap issues were negative for April. The heavy weighting this group has in apartments, industrial and office - sectors that have not performed particularly well last year - are struggling. Year-to-date (YTD), Large Caps have increased 8.6% and have fallen behind the broader equity REIT price increase of 10.25%. The best performer for April was iStar Financial Inc. (SFI), jumping 7.6%. The laggard was Avalon Bay Communities (AVB) down -7.6%. For the year, the best performers have been iStar up 24.6%, and two retail mall firms, General Growth (GGP) and Simon DeBartolo (SPG), up 17.9% and 14.9%, respectively. The worst performer was Equity Office (EOP) with a decline of -4.8%. Beginning in May, the Large Cap stocks have a new firm: Trizec Properties (TRZ). This firm, formerly Trizec Hahn (TZH), had also been a REIT before it was converted to a C Corp a couple of years ago. It becomes the second largest office REIT with a portfolio of 49 million square feet in seven cities and also a couple major retail holdings. (Please see Large Cap REITs.)   Top D. EQUITY REIT PERFORMANCE Equity REITS had a gain of 2.09% for April. All the groups showed positive gains. The best performing groups for April were MH Parks, up 5.37%, followed by Hotels, up 4.17%. The worst group for the month with a gain of only 0.12% was Offices. Non-traditional core property sectors have continued to perform well YTD with Hotels and Retail Factory Outlets leading the charge with increases of 25.48% and 21.3%%, respectively. The worst group YTD with a loss of -0.24% is Retail shopping centers. The best performing stocks for April were Humphrey Hospitality Trust (HUMP) and Patriot American Hospitality (WYN), gaining 25.5% and 22.2%, respectively. The worst monthly performers were Weingarten Realty Investors (WRI) and Golf Trust of America (GTA), that lost -31% and -18.8%, respectively. The best performers Year-to-Date are Patriot American Hotel (WYN) and Medtrust (LQI), gaining 96.4% and 39.2%, respectively. The worst performers YTD are Burnham Pacific Properties (BPP) and Malan Realty Investors. (MAL), off -63.3% and -28.4%, respectively. (Please see Equity Gainers and Losers.).   Top E. MORTGAGE REIT PERFORMANCE For April Mortgage REITs gained 3.15%, finally outperforming Equity REITs for the first time in a couple months. They show an overall price increase of 12%, a couple of percentage points above REIT Equities. The best performing Mortgage REIT group for the month was Residential Mortgages up 11.56%. The groups on the residential side, both exclusively and mixed, have performed well, both up about 29% YTD. The best individual Mortgage REITs for the month were Novastar Financial, Inc. (NFI) and American Residential Inv. Trust (INV), gaining 36.2% and 31.8%, respectively. The worst monthly performers were Impac Commercial (ICH) and Allied Capital Reit (ALD), losing -23.9% and -6.1%, respectively. The best performers YTD were American Residential Inv. Trust (INV) and Dynex Capital (DX), gaining 31.8% and 13.8%, respectively. The worst performer YTD was Impac Commercial (ICH), down -30.3%, respectively. (Please see Mortgage Gainers and Losers.)   Top F. REALTY CORPORATIONS Realty and Housing Corporations had a slight increase for April, up 0.62%. Only three of the 10 groups were negative, Constr. & Engineering, OnSite Technology and Developers, with respective drops of -12.8%, -9.30% and -0.20%. The best monthly performing group was Home Builders followed by Timberland, up 11.8% and 5.1%, respectively. For the year, only OnSite Technology was negative, losing -29.7%. The best YTD groups are Tech & Net and Home Builders, up 54.7% and 19.3%, respectively. The best individual Realty Corp. stocks were US Timberlands (TIMBZ) and Drew Industries (DW), gaining 29.4% and 22.8%, respectively. The worst monthly performers were SpectraSite Holding (SITE) and Foster Wheeler Corp. (FWC), losing -60.9% and -54.5%, respectively. The best performers YTD were Vista Info Sol (FNIS) and Lending Tree (TREE), up 131.1% and 126.3%, respectively. The worst performers YTD were SpectraSite Holdings (SITE) and SBA Communications Corp. (SBAC), down -88% and -78.3%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top G. REAL ESTATE MUTUAL FUNDS (REMFs) The total return of the average fund was slightly up in April, gaining 0.88%. However, Alpine U.S. and Security Capital posted strong monthly returns of 11.74% and 11.67%, respectively. So far this year, Alpine U.S. and CGM Realty have the best REMF performance with total returns of 25.54% and 24.5%, respectively. Five fund managers and nine funds have exceeded total returns of 15% YTD, but the average return for 157 REMFs during this period is 9.35%. (Please see REMFs.)   Top Stock Changes - Echelon International Corp (EIN) and American Skiing Company (SKI) have been deleted. Homestore.com, Inc (HOMSE) has changed to (HOMS). Trizec Hahn (TZH) is now Trizec Properties (TRZ). 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 .