6-14-02                                                                                           Vol. 5: No. 6 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: STOCKS SINK ON BUSINESS AND TERRORISM CONCERNS Yield Sensitive Debt and Equity Issues Benefit Sending Rates Lower A. Concerns Widen from Improper Business Practices to Terrorism B. Equities Slip; Issues with Yields Benefit C. Large Cap REIT Performance D. Equity REIT Performance E. Mortgage REIT Performance F. Realty Corporations G. Real Estate Mutual Funds (REMFs) A. CONCERNS OVER BUSINESS PRACTICES and TERRORISM Illegal business practices continue to widen from improper accounting practices and energy trading to illegal inside stock trading. In addition, threats of "dirty bombs" and biological terrorism have cooled consumer and investor enthusiasm. Together, these forces are driving investors out of non-yielding equities into securities with yields that offer more safety. Some stock indices are now at post 9/11 levels. In the near term, some optimists hope that when earning reports start to come out shortly after the end of June, it will provide a more upbeat indication of a business rebound. If the reverse is true, and if industry profits are insufficient to spur greater spending soon, it could be a very long and uncomfortable summer. After much criticism over the Bush administration's failure to alert the public about the possibility of an air tragedy before 9/11, we are now hearing a great deal about potential terrorism - to an extent that is unnerving. We are now being told that another act of terrorism is not just a possibility, but only a matter of time. A man recently arrested suspected of a dirty bomb plot strenghtens these warnings. If there is a coming date that would be especially onerous, it could be coming soon; our Independence Day, July 4th. Obviously, all security should be on high alert during this day and week, and hopefully will come to pass without any incidents. However, should some tragic incident occur at this time or within the next couple of months, it could exacerbate not only confidence in the economy, but also in our domestic security and lifestyle that to date has been largely restored. The timing of such an incident would be especially challenging for our struggling financial markets. Unfortunately, the decade with peace and a global economy in the nineties is bending to a new decade of global terrorism and growing uncertainty. We were surprised with the vibrance of the economy that Greenspan spoke about only a couple months ago, especially with the emergence of various business scandals. Instead of these fading away, it seems that there are constantly new business improprieties emerging, while the old ones linger. For example, the Arthur Anderson trial that looked like it might be resolved by a speedy trial, now may be in a jury deadlock that could require a re-trial. Resolving energy trading irregularities and establishing new accounting regulations may take months or more. A new war, possibly on Iraq, may also begin within months. And, America's summer pastime, baseball is plagued with steroid use issues and looks like it could stop soon because of labor and management disagreements. The skepticism about the economy expressed in this newsletter at the beginning of the year has heightened again. We hope we are wrong, but before the economy truly improves, the equity markets are likely to become worse.   Top B. EQUITIES SLIP SENDING YIELDS LOWER As we cautioned, certain sectors faltered this past month, especially the air, travel and lodging industries. The Lodging stocks and Hotel REITs that we cover declined 10.45% and 6.7% for May. In addition, many other sectors, particularly technology companies as measured by the NASDAQ, continued to decline. The double-digit daily increases in equities that commonly occurred just a couple years ago, have given way to double-digit daily declines. Examples last week include such well-known names as Intel, Tyco, Dynergy and Abbot Labs that have joined such other names in the last couple of months as Bristol Meyers, Lucent and IBM. Annual equity yields expected by many investors during the nineties in the upper teens to the high twenty-percentile range are changing dramatically. Staying even with the 10-year Treasuries or, just a few points above inflation, may be a challenge for most fund managers this year. However, those managers and investors in REITs, especially those on the mortgage or debt side, look likely to fair much better. Most recently, investors have been particularly attracted to 10-year Treasuries driving rates below 5%. Other investments with higher yields and safety are also attracting attention. This has attributed to the respectable performance of Large Cap REITs, last month up about 2%, which exceeds the overall Equity REIT results last month. Still, even though Equity REITs declined about one percent in May, they faired a great deal better than most stocks. And, with a stellar increase from Mortgage REITS of over 9% last month alone, the overall performance of REITs was actually positive. Unless quarterly June earnings surprise to the upside, it now appears that the rates are more likely to decline than increase this summer. Although it may be difficult for Mortgage REITs to duplicate their monthly performance increase again soon, they could still be one of the best performing areas in the near term as long as money is chasing attractive yields. Good yields for Equity REITs should also help them retain value, as long as the fundamentals behind REIT revenue and earnings are not compromised. Large Cap REITs, which are perceived as offering more security and diversity may also hold up well. However, what may be particularly worrisome, especially with the fear of dirty bombs, is the potential impact upon commercial real estate values in certain city centers. To date, it appears major metro centers like New York, and D.C., possibly Chicago, are some of the more likely potential targets. Therefore, care should be taken with any property investment in these areas, or with any REIT that has exceptional exposure to these areas, especially with office properties. This summer may be a good time to take some cards off the table, limit equity exposure and avoid major historical landmarks in large cities. We still believe equities will provide some excellent investment opportunities, but the worst may not be over yet.   Top C. LARGE CAP REIT PERFORMANCE These REITs increased 2.1% for the month of May and only 5 of 25 had monthly price declines. The best performer for May was Liberty Property (LRY) and Prologis (PLD), that jumped 7.5% and 7.37%, respectively. The laggard was Apartment Investment & Management Corp. (AIV) down -5.5%. The best performer YTD was Host Marriott (HMT), up 32.8%. The laggard was Equity Office Properties (EOP), losing -4.8%, respectively. YTD, Large Cap REITs have risen 9.4%. (Please see Large Cap REITs.)   Top D. EQUITY REIT PERFORMANCE Equity REITS had a nominal loss of -0.93% for May with all but six groups showing a loss. Most groups showed a loss. The best performing group for May was Retail Malls & Centers, up 4.75%, followed by HealthCare, up 2.19%. The worst group for the month was Retail Factory Outlets with a loss of -12.75%. The best performing stocks for May were Center Trust, Inc. (CTA) and Omega Healthcare Investors (OHI), gaining 17.1% and 15.8%, respectively. The worst monthly performers were Chelsea GCA Realty, Inc. (CPG) and Golf Trust of America (GTA), that lost -49.8% and -23.3%, respectively. The best performers Year-to-Date are Patriot American Hotel (WYN) and Medtrust (LQI), gaining 103.6% and Center Trust, Inc.(CTA) 59.8%, respectively. The worst performers YTD are Burnham Pacific Properties (BPP) and Chelsea GCA Realty, Inc. (CPG), off -65.5% and -38.7%, respectively. (Please see Equity Gainers and Losers.).   Top E. MORTGAGE REIT PERFORMANCE For May Mortgage REITs surged 9.47%, placing their YTD gains at 26.1%. The best performing Mortgage REIT group for the month was Residential & Commercial Mortgages up 14.90%. The best individual Mortgage REITs for the month were CRIMI Mae Inc. (CMM) and Fog Cutter Capital Group (FCCG), gaining 91.6% and 48.3%, respectively. The worst monthly performers were Capstead Mortgage (CMO) and Arizona Land Income (AZL), losing -15.4% and -14%, respectively. The best performers YTD were Dynex Capital (DX) and American Residential Inv. Trust (INV), gaining 132.9% and 109.8%, respectively. The worst performers YTD was Capstead Mortgage (CMO) and Impac Commercial (ICH), down -18.9% and 15.5%, respectively. (Please see Mortgage Gainers and Losers.)   Top F. REALTY CORPORATIONS Realty and Housing Corporations had a loss for May, losing -4.24%. Only three of the ten groups were positive, Tech & Net, Property Services and Mobile Home Manufacturers, with respective gains of 5.7%, 0.2% and 0.5%. The best monthly Realty Corps were Kit Manufacturing (KIT) and Vista Info Sol (FNIS), gaining 31.1% and 23.1%, respectively. The worst monthly performers were Buckhead America Corp. (BUCK) and ABM Industries (ABM), losing -52.7% and -52.7%, respectively. The best performers YTD were Vista Info Sol (FNIS) and Lending Tree (TREE), up 184.5% and 139%, respectively. The worst performers YTD were SpectraSite Holdings (SITE) and Buckhead America Corp. (BUCK), down -89.4% and -89%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top G. REAL ESTATE MUTUAL FUNDS (REMFs) Of 140 funds, the total return of the average fund had a slight loss in May, losing -0.11%. The best monthly performers were Morgan Stanley and Security Capital, up 6.41% and 5.97%. The average of 157 funds YTD gained 11.1%. (Please see REMFs.)   Top Stock Changes - Buckhead America Corp (BUCK) changed to (BUCK.OB). Crossman Communities (CROS), Schuler Residential (SHLR) and Suburban Lodges (SLAM) have been deleted. Trizec (TZH) has changed to (TRZ). Storage USA (SUS) has 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 ©2002, WebVisers Inc. All rights reserved .