5-15-03                                                                                           Vol. 6: No. 5 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: REITs Rally with Lower Interest Rates As Economic Optimism Slowly Improves A. REITs Rally With Lower Interest Rates B. Mixed Economic Signals C. Large Cap REIT Performance D. Equity REIT Performance E. Mortgage REIT Performance F. Realty Corporations G. Real Estate Mutual Funds A. REITs RALLY WITH LOWER RATES, Despite Earning Declines Many fears and concerns have subsided since the success of the Iraq War late last month. Consumer confidence jumped about 20 points, the most since the Gulf War. Fear of higher gas prices has dissipated as have concerns over domestic terrorism. Although a significant spike in stock prices did not occur immediately after the bombing in Iraq seized, stock prices did rise during the last couple of weeks, despite quarterly earnings that were generally disappointing. And for most REITs, lower earnings and FFOs (a measure of profits) also were reported. Yet, all of the 17 REIT groups we follow had positive price gains last month, exhibiting an overall price gain of 6.03% in April. Additionally, all Realty and Housing Companies were also positive last month and posted an even higher overall price jump of 10.12%. (Please see Equity REITs and Realty Co.s below.) This is one of the few times in quite a while that none of more than two dozen groups we follow were negative. Besides a general consensus that real estate markets are gradually improving, the catalyst spurring REITs higher is largely due to lower interest rates. This past week, the Federal Reserve indicated that they might lower rates even further if the economy remains sluggish. There is also increasing speculation that interest rates may stay low into 2004 and the benchmark 10-year treasuries, moving down to their 44-year low again this week, may even go lower. Although lower rates have been strongly linked with lower stock prices, this past week or two marked a deviation from this trend - like having your cake and eating it too. We have been negative about the economy for some time, and overly concerned that when the economy improved, it would bring higher interest rates. This would make the yields from REITs less attractive and cause real estate values to tumble. As we noted, the only way to avoid this situation is for interest rates to remain low and the economy to be relatively stable, yet slow. The prospect of this seemed fairly improbable, but as noted in our last newsletter, there have been signs indicating a delicate balance between economic growth and lower rates might be achievable. This view is now becoming more pervasive.   Top B. MIXED SIGNALS. Although an economy with modest growth may avoid certain pitfalls in real estate, it creates other challenges. First is the devaluation occurring with the dollar against other currencies. Since the beginning of the year, the dollar has dropped more than 10% against the Euro. Because of deflation and higher rates in other countries, there is a greater outflow of foreign money. This is not a positive sign for equity and debt markets, however it allows our goods abroad to be less expensive. Fortunately, since the currency of China and some of our other major Far East trading partners is tied to the U.S. dollar, prices of our imported goods from these countries should not increase. The combination of these factors could help reverse our trade deficit and create a stronger economy in 2004. Also, together with lower gas prices, the devaluation of the dollar could help the U.S. travel industry (not tied to international travel), to rebound this summer. Second, the SARS epidemic, which appears to be under better control despite claiming more lives than at first thought, should still create more stateside vacations and trips this coming summer. Even so, with a vaccine for SARS years away, it is still a dangerous human health threat, and resulting changes in travel and business could slow worldwide growth. Third, although the eminent threat and enormous costs feared from the Iraq situation have subsided, serious challenges for the U.S. remain: restoring utilities, assembling a police force, determining property ownership, providing humanitarian aid, avoiding conflicts, preserving and returning historic treasures, repairing oil facilities and establishing an oil entity. But these may all be pale next to the daunting task of creating a democratic Iraq that will function as one country among a divided people. In addition, as the recent bombing in Saudi Arabia indicates, conditions in the Mid-East are far from stable and terrorists groups have not disappeared. Fourth, although recently enacted federal legislation may make the penalties more severe if corporate fraud is committed, the annual costs to conform to this legislation are estimated at about $1.5 million. Even though this cost is not significant to large public firms, with a market capitalization barrier that may be raised by about $30 million, it will however make it more difficult for firms to provide IPOs and for many smaller firms to remain public. This may result in the creation of fewer new jobs that could keep a lid on future economic growth. Finally, the compromises required to President Bush's tax incentives have lowered the overall costs, but the result may also be less than what is needed to kick-start the economy. This maybe not all bad, however, as it may also prevent interest rates from rising sooner. Also, with the elimination of corporate dividend taxes being less significant than what was originally proposed, this will probably result in an inconsequential impact and may have a more benign affect upon REITs than what may have otherwise occurred.   Top C. LARGE CAP REIT PERFORMANCE Although Large Cap REITs ended with a monthly price increase of 3.9%, they trailed behind the broader Equity REIT performance. The best large cap performer for April was between Health Care Property Inv. (HCP) and Host Marriott Corporation (HMT) which both had a gain of 11.6%. The worst performing large cap REITs for the month were AMB Property Corporation (AMB), falling -3.4%, and Crescent Real Estate Equities (CEI), dropping -1.4%. The best performing stock, Year-To-Date (YTD),(for the third month in a row), was Kimco Realty Corporation (KIM), gaining 18.1%, and the worst YTD was Hospitality Properties (HPT), losing -18.2%, respectively. Please see Large Cap REITs.)   Top D. EQUITY REIT PERFORMANCE Equity REITs had a strong monthly gain of 5.09% for April. With short term rates dropping to paltry returns, REITS remain attractive to many investors looking for some way to boost their yields. Although management issues and the relatively small market cap size of REITs have made some investors leery of this sector, the fraud occuring in other industries, recently exacerbated by the HealthSouth scandal, is improving the comparative image of REITs. S&Ps addition of 93 public REITs to the 4,000 stocks it covers also helps affirm the REIT sector. And, despite weak commercial real estate markets and lower REIT income that which places pressure on REIT dividends, stable to declining rates are causing most property values, and the underling values of REITs, to remain fairly firm. As a result, the stock values of REITs can appear to be less vulnerable than many other public firms. As noted previously, April was a particularly good month for Equity REITs with price gains evident in all groups. Those with the best monthly performance were Hotels, up 12.3%, followed by HealthCare, up 11.5%. Both of these groups have rebounded from a great deal of downward, especially Hotels which benefited from a rather quick war in Iraq. The lowest gain of any group, yet still positive, was the Specialty group, up 1.28% . The best performing groups YTD were Specialty, up 12.02%, followed by Retail Factory Outlets, up 11.47%. The worst groups YTD for April were Hotels, down -6.15%, and HealthCare, down -4.01%. The best performing stocks for April were Jameson Inns, Inc. (JAMS) and LTC Properties, Inc. (LTC), gaining 27.3% and 22.4%, respectively. The worst monthly performers were Gofl Trust of America (GTA) and Hospitality Properties (HPT), losing -13.7% and -5.7%, respectively. The best performing stocks YTD were Golf Trust of America (GTA) and Prime Group Realty Trust (PGE), gaining 58.5% and 38.8%. The worst performing stock YTD were Felcor Suite Hotels, Inc. (FCH), losing -38%, and Meristar Hospitality (MHX), losing -37%, respectively. (Please see Equity Gainers and Losers.).   Top E. MORTGAGE REIT PERFORMANCE The Equity sector with a strong gain of 6.03% April. Mortgage REITs continue to provide some of the most attractive yields in the marketplace, causing their share prices to increase. The best performing group for the month was Residential Mortgage, jumping 16.42%. YTD the mortgage sector had a strong gain of 6.64%. The best performers for April were American Residential Inv. Trust (INV) and Novastar Financial, Inc. (NFI), up 49.6% and 25.8%, respectively. The worst performers was Fog Cutter Capital Group (FCCG) losing -7.2%, respectively. The best performers YTD were American Residential Inv. Trust (INV), up 50%, and Novastar Financial, Inc (NFI), up 38.4%. The worst performing stock YTD was Capstead Mortgage Corp (CMO), losing -54.8%, respectively. (Please see Mortgage Gainers and Losers.)   Top F. REALTY CORPORATIONS Although REITs posted a strong showing last month, Realty and Housing Corporations surpassed this performance with an impressive price gain of 10.12% in April. As in the other sectors, all groups that are part of this sector showed positive gains as well. In addition, the buy out of Lending Tree (TREE) by USA Interactive (USAI) was not even factored into last months gain, since the announcement occurred after the first of the month. The best monthly performer was Home Builders with a gain of 16.7%. The worst monthly performer was Timberland with a gain of 6%. The best performing group YTD was Home Builders with a gain of 22.2%. The worst YTD group was Mobile Home Manufacturers with a loss of -9.7%, respectively. The best stock performers for April were Winter Sports, Inc. (WSKI), up 62% and Foster Wheeler Corp. (FWC), up 61.5%. The worst monthly performers were On Command Corporation (ONCO) and WestCoast Hospitality (WEH), down -30.7% and -15.7%, respectively. The best performers YTD were American Tower Corp. (AMT) and Foster Wheeler Corp (FWC), gaining 88.1% and 81%. The worst performers YTD were Cavalier Homes, Inc. (CAV), down -38.1%, and US Realtel Inc. (USRTE), down -36.2%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top G. REAL ESTATE MUTUAL FUNDS (REMFs) Posting one of the best returns of any stock sector last month, real estate sector funds produced an average total return of 4.02% for April. Still, this lags the gains of the broader REIT and Realty Corporation sectors as most funds are probably underweighted in the best monthly performing groups, Hotels and Health Care. The best performing monthly REMFs were Alpine, CGM Realty and Morgan Stanley with respective overall returns of 10.49% to 9.03%. Since the beginning of the year, REMFs have been at a gain of 7.11%. The best performers YTD were CGM Realty and Alpine, with returns of 19.59% to 15%. (Please see REMFs.)   Top Stock Changes. Aegis Realty Trust (AER) merged with Phillips Edison Ltd. 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, and are calculated as of the end of each month. 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 ©2003, WebVisers Inc. All rights reserved .