7-12-02                                                                                           Vol. 5: No. 7 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: STOCKS SEEK CAPITULATION But Consumer & Investor Confidence Wane A. Consumer & Investor Confidence Continues to Wane B. REALCOMM Showcases Technology in CRE B. Values of Institutional Real Estate Remain Firm D. Large Cap REIT Performance E. Equity REIT Performance F. Mortgage REIT Performance G. Realty Corporations H. Real Estate Mutual Funds (REMFs) A. CONSUMER & INVESTOR CONFIDENCE CONTINUES TO WANE Fortunately, the terrorism concerns we expressed about July 4th, a couple weeks ahead of most warnings in the media, did not materialize. However, the Bush Administration continues to keep us informed about the possibility of other acts of terrorism. Most recently, such warnings involve possible "sleeper" terrorist cells in some of our major cities and a possible plot to poison water supplies, besides the dirty bomb threats last month. In the meantime, unethical business practices, especially accounting irregularities, continue to pop up. In addition to more bad news in the telecommunications industry, especially with regards to Worldcom, the drug industry is the latest sector under scrutiny along with such well-known names like Merck and Bristol-Myers. It is unclear how long constant negativity will continue. Some point to historical data that indicates a bear market should not last for more than two or three years and that capitulation should be soon. Yet, others fear that equity markets were so inflated that we may be due for a sideways market for the rest of this decade, similar to what occurred in the 1970s. In the near term, we expect more unpleasant surprises before we get into a consolidation period that will probably provide a platform and turning point for stocks.   Top The combination of the constant threat of terrorism and what seems like a new business scandal being uncovered everyday is taking its toll on the consumer driven economic recovery. However, what has probably garnered the most attention from investors at the end of this past month, is the gloom from the semi-annual review of mutual fund, equity and bond performance. Even though the markets strongly recovered shortly after 9/11 and throughout much of the first quarter, NASDAQ is down over 20% in just the first half of the year, and most indices are taking a double digit hit over this period. We have been in a bear market for about 2-years and retirement plans are looking much grimmer for many people. In the past 5-years, the average retirement fund on a $10,000 investment in 1997 doubled by 2000, but is now up just 25%. Additionally, an investment 4-years ago is only even and it is negative within a shorter period. During the last couple of years, many portfolios have been crushed with declines that are more severe, dropping 50% or more, especially for investors that still have heavy technology weightings. NASDAQ is now down 70% from its peak. This means it would take an increase of over 250% to get back to NASDAQ's high and, if a new perspective of annual returns are used of several percent to 10% or less, doubling or tripling a portfolio could take over a decade to achieve. Not only is this affecting retirement plans, but it seems inevitable that it will slow down consumer spending and diminish at least the strength of the economic rebound, if not derail it. Many economists, and even the Federal Reserve, may be too focused at looking at lagging indicators of a month or two ago, even two and three quarters past, instead of current developments. Now the additional concerns of a weak dollar, the exodus of much foreign money in our capital markets, more large corporate layoffs, the diminished expectations for corporate spending and the erosion of trillions of dollars in equity should start to catch their attention as to the possibility of a double dip recession, even without an act of terrorism. This quarter's corporate earnings performance will be especially critical, but as many a leery investor is now thinking, how inflated and reliable are the figures being released? Still, some earnings in the coming weeks are bound to be favorable, and there may be some sector rotation, especially into very beaten down stocks (e.g. tech), that may provide some optimism. However, if some authorities are correct, that it is not a matter of if domestic terrorism occurs but when, it is difficult to envision a sustained economic recovery and a strong rebound in the financial markets in the near term.   Top B. REAL ESTATE MARKETS REMAIN RATHER FIRM Despite the declines throughout domestic equity markets and softening leasing markets for commercial real estate (CRE) throughout much of the country, we are finding that property prices are relatively firm with top prices being achieved in the better markets. Apparently, this demand is being driven largely by opportunity funds and other purchasers for CRE that are using leverage. By financing up to 75% of the purchase price with attractive 10-year rates as low as around 6%, or even LIBOR floats with rates of around 3% that are subject to monthly or quarterly fluctuations, annual double digit cash flow returns into the high teens can be realized. However, such properties are not easy to find, and there are billions of dollars available for such investments. Therefore, as long as rates stay low, the values for institutional property in markets that are not overly soft are expected to stay firm. Although there are still concerns over diminished rates and occupancy levels for REITs, wide scale declines in commercial property values are not currently materializing primarily due to this positive leverage situation. For now, this bodes well for the asset values of most REITs.   Top C. REALCOMM SHOWCASES TECHNOLOGY IN CRE Late last month about 1,500 people attended the 4th annual Realcomm conference, held for the first time in Las Vegas. It was an interesting contrast from a couple years ago when the attendance was nearly a thousand stronger, companies had lavish parties and exhibitors provided excellent gifts. This year it was difficult to find a free pen or receive a free beer. The dot coms and the dot com wannabes were gone. And, it was difficult to find truly different ideas. Instead of revolutionary technology, more practical technology applications were being touted. For example, a couple smaller firms are offering customizable products to create marketing books for the sale of commercial properties and also hosting these publications for easy Web access. Instead of prospective purchasers receiving hard copies of such publications, they are now most likely to receive an e-mail with a brief summary of the property and a link to the on-line marketing book. This can save brokerage firms thousands of dollars in marketing costs - for each listing. Price Waterhouse has developed an ASP model for their tax consulting services that instantly allows their clients to obtain up-to-date tax information on all their properties - including the amount of tax savings through tax appeals. Also, instead of outsourcing certain services, such as placing each property within a portfolio on-line for current and prospective tenants, some firms like Prentice are now doing this in-house. Other firms are also moving away from outsourcing for certain technology applications, hiring specialized people in order to more effectively control costs and quality. So, technology is moving forward in real estate by steps, not leaps, and increasingly from within established companies rather than start-up firms. Possibly the most different aspect of this technology conference was that some large and established firms, previously absent from this conference, are now becoming active in real estate. One example is Oracle, which sponsored some sessions. In addition, Nextel has expanded more into real estate with its recent affiliation with Corrigo. Voice Stream, a public company, is interested in assisting real estate firms employ phone services with more sophisticated speech recognition capabilities. Although absent, it was interesting that software giant Intuit, which makes Quicken products, recently acquired one of the major real estate accounting software firms. So, it seems that mainstream companies are expanding into the real estate foray, and the small under capitalized firms that kick-started technology into real estate may be disappearing.   Top D. LARGE CAP REIT PERFORMANCE These REITs increased 1.2% in June with 10 of the 25 stocks in this group negative. Although they fell behind the broader REIT performance for the month, they are still a little above the broader performance for the first half and have increased 12.8% this year. Only one stock in this group is slightly negative for the year. The best performer for June was Prologis (PLD) and Simon Debartolo Group (SPG), that jumped 8.5% and 8.1%, respectively. The laggard was St. Joe Company (JOE) down -7.3%. The best performer YTD was Host Marriott (HMT), up 31.4%. The laggard and the only company to have a negative YTD was Avalon Bay Communities (HMT), losing -0.7%, respectively. YTD, Large Cap REITs have risen 12.8%. (Please see Large Cap REITs.)   Top E. EQUITY REIT PERFORMANCE Despite some modest declines in the first half of July, Equity REITs rebounded June with a broad based price gain of 3.18% that helps make their increase for the first half of the year 12.65%. Only one group, Diversified REITs, showed a monthly loss (of just -0.51%); the other low monthly performers, with gains under 1%, were Hotels and Offices. The top performers were both retail with Factory Outlets, up 9.3% and making up most of its lost from the previous month, and Regional malls, gaining 5.6%. For the year, the top performing groups both contain Regional Shopping Centers and include Retail Malls & Centers, up22.97%, followed Regional Malls, up 19.36%. None of the groups are negative year-to-date (YTD), but the laggards are Retail Centers and Apartments, with price increases of only 3.07% and 5.77%, respectively. The best performing stocks for June were Malan Realty Investors (MAL) and Mark Center Trust (AKR), gaining 25.2% and 18.1%, respectively. The worst monthly performers were Banyan Strategic Realty Trust (BSRTS) and Urstadt Biddle (UBP), which lost -43.5% and -17.9%, respectively. The best performers year-to-date are Dynex Capital (DX) and Patriot American Hotel (WYN), gaining 133.3% and 107.1%, respectively. The worst performers YTD are Burnham Pacific Properties (BPP) and Banyan Strategic Realty Trust (BSRTS), off -63.6% and -36%, respectively. (Please see Equity Gainers and Losers.).   Top F. MORTGAGE REIT PERFORMANCE For June, Mortgage REITs gained 1.91% producing, and though off from the double digit increase from May, still added to an exceptionally strong first half price increase of 28.86%. The best performing Mortgage REIT group for the month was Residential & Commercial Mortgages up 2.61%. The best individual Mortgage REITs for the month were Imperial Mortgage Holdings, Inc. (IMH) and Novastar Financial, Inc. (NFI), gaining 23.1% and 21.8%, respectively. The worst monthly performers were Hanover Capital Management (HCM) and Fog Cutter Capital (FCCG), losing -14.8% and -12.3%, respectively. The best performers YTD were Dynex Capital (DX) and American Residential Inv. Trust (INV), gaining 133.3% and 106.7%, respectively. The worst performers YTD was Impac Commercial (ICH) and Allied Capital Reit (ALD), down -20.3% and 12.9%, respectively. (Please see Mortgage Gainers and Losers.)   Top G. REALTY CORPORATIONS None of the Realty and Housing Corporations in June posted positive returns and overall price decline for the month was -5.17%. The worst groups were OnSite Tech and Tech & Net, off -12.8% and -11%, respectively. Developers stayed even and Construction/Engr. declined less than 1%. For the first half of the year, the best groups were Home Builders and Property Services, increasing 10.8% and 10.1%, respectively. Although the worst performing group YTD, OnSite Tech, was down -45.5%, it is more than offset by a 51.8% increase in Tech, helping create an overall YTD increase for Realty Corps. of 4.68%. The best monthly Realty Corps were US Realtel Inc. (USRTE) and MDC Holdings, Inc. (MDC), gaining 55% and 16.8%, respectively. The worst monthly performers were SpectraSite Holdings (SITE) and On Command Corporation (ONCO), losing -52.6% and -43.7%, respectively. The best performers YTD were Vista Info Sol (FNIS) and Lending Tree (TREE), up 135.5% and 115.4%, respectively. The worst performers YTD were SpectraSite Holdings (SITE) and SBA Communication Corp (SBAC), down -95% and -89.2%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top H. REAL ESTATE MUTUAL FUNDS (REMFs) The top five real estate mutual funds for the first half of the year all had stellar overall returns of over 20%, with Alpine U.S. claiming the top spot of 26.81%. It also had the best monthly return of 4.8%. International real estate funds also did very well YTD with Morgan Stanley Euro and Security Capital Euro placing second and third with gains of 26.39% and 25.7%. The average YTD return of 155 funds was 13.22% and for June the average return was 2.07%. Behind gold and a few other select funds, REMFs have delivered some of the best fund returns for the first half of 2002. (Please see REMFs.)   Top Stock Changes - 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 .