6-11-03                                                                                           Vol. 6: No. 6 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: Rates Edge Lower Helping REITs Post Strong Gains A. Smooth Sailing B. Uncharted Territory C. Large Cap REIT Performance D. Equity REIT Performance E. Mortgage REIT Performance F. Realty Corporations G. Real Estate Mutual Funds A. SMOOTH SUMMER SAILING To many, the outlook for the summer looks pretty good. The Federal Reserve will probably lower rates again later this month and interest rates continue to set new lows. The economic stimulus plan recently passed by Congress appears to have had a positive effect upon both stocks and rates. Up until a couple months ago, declining rates were highly correlated to declines in the Dow Jones Index. Now, it seems rates continue to decline regardless of the Dow's performance. In fact, the latest explanation for the increase in stocks is that lower rates are driving people into equities because it is the only way they can achieve better returns. Consolidation among firms, most recently in the tech sector, is also helping boost stocks. The recent increase in the stock market indices, with the Dow now above 9,100 along with 10-year Treasury rates dropping near 3%, at levels not seen in some 50-years, are unprecedented. However, possibly the biggest winner due to lower rates is real estate. Residential property values in most areas remain strong or are increasing the home equity boom, which is one of the few sparks helping the economy, will continue as long as rates decline. Though investors in most commercial realty markets plagued are by rising vacancies and lower rents, the capitalization rates used to value real estate have declined, along with interest rates, and are keeping commercial property values fairly firm. Concerns over Iraq and domestic terrorism are less and consumer confidence is rather strong. Yes, this may be a very good summer.   Top B. UNCHARTED TERRITORY. Looking out beyond the summer, as the weather cools and the color of northern landscapes change from green to brown, we expect a different view to emerge. Possibly the economic stimulus plan will help extend our precarious economic situation and slowly turn the economy around. But ultimately, an economic resurgence is dependent upon stronger job growth. With unemployment rates rising to over 6% and at their highest levels since 1994, more consolidation and automation eliminating jobs, and new legislation that constrains the emergence of new companies, new job growth is problematic. The Federal Reserve believes that lower rates will ultimately cause more industry expansion and jobs, but they are also becoming increasingly concerned that we could be entering a period of deflation. They are also bothered by the recent rise in natural gas prices which, besides creating increased costs to individuals and companies, may cause some industries to move abroad resulting in more layoffs. With many people expecting rates to drop even lower, there is a growing concern that the U.S. could repeat what occurred in Japan a couple decades ago when real estate and stock prices plunged so low that they have yet to recover. In particular, real estate values are apparently only a fraction of what they were a generation ago. Our only hope to avoid a potential bust of real estate values would be to enter a period where low interest rates can be sustained. This would require embarking in uncharted territories of a lifetime. With numerous economic booms and busts over the last few decades, however, it is difficult to imagine a prolonged economy with flat job growth, stable or lower consumer / commodity prices and stable real estate values. The pendulum concerning the economy may be swinging very far to one side, which normally means that when it swings back there will be some drastic changes. Ironically, situations regarding terrorism or unrest abroad, especially in the Mideast, Iraq or North Korea, could pull the pendulum even further back before a counter swing occurs. Low rates are already creating hardships among the elderly, and as more baby boomers retire, an even greater strain is placed on the economy. Another change in real estate, particularly among commercial properties, involves some innovative uses of technology, primarily to reduce costs. A week ago, this editor attended the fifth annual Realcomm Conference, which was held at Navy Pier in Chicago and drew nearly 2,000 people, and moderated panels on new business models and commercial lending. Increased automation is occurring making building operations more efficient, security for tenants better and allowing building owners to manage property more effectively. Instead of exhibitors dominated by start ups as in the early years of the conference, most firms exhibiting were established and included some of the behemoths, such as Intel, Cisco, Oracle, Unisys and Hewlett Packard. A particular area of interest with these firms is having most building functions controlled or monitored remotely and of implementing wireless (WiFi) networks, especially in larger office properties. For example, do not be surprised if you see large office buildings "Centrino Certified" by Intel later this year. The use of "soft phones" among WiFi may also become more widespread, first with desk tops and lap tops, but ultimately with PDAs. This could become a very disruptive technology to cellular and long distance carriers.   Top C. LARGE CAP REIT PERFORMANCE Large Cap REITs ended with one of there best monthly performances in some time, with a strong monthly price increase of 6.7%. They were also slightly ahead of the broader Equity REIT performance. The best large cap performer for May was between Trizec Properties, Inc.(TRZ) and Host Marriott Corporation (HMT) gaining 17.4% and 16.6%. The worst performing large cap REIT for the month was Apartment Investment & Mgmt (AIV), falling -6.7%. The best performing stock, Year-To-Date (YTD), (for the fourth month in a row), was Kimco Realty Corporation (KIM), gaining 22.1%, and the worst YTD was Hospitality Properties (HPT), losing -10.3%. Please see Large Cap REITs.)   Top D. EQUITY REIT PERFORMANCE Equity REITs had a second monthly gain in a row of over 5% finishing with a price gain of 5.6% for May, slightly higher than the previous month. Also, for a second month in a row, all property type groups had positive prices gains. Those groups with the best monthly performances were MHParks, up 13.19%, followed by HealthCare, up 12.79%. The lowest gain of any group, yet still positive, was the Apartment group, up 1.84% . The best performing groups YTD were MHParks, up 18.13%, followed by Retail Centers, up 15.42%. The worst group YTD for May, yet still positive were Hotels, up 2.83%. The best performing stocks for May were Omega HealthCare Investors, Inc (OHI) and Chateau Communities. (CPJ), gaining 55.1% and 38.7%, respectively. The worst monthly performers were Income Opportunity Realty Trust (IOT) and Century Realty Trust (CRLTS), losing -14.2% and -6.9%, respectively. The best performing stocks YTD were Golf Trust of America (GTA) and Agree Realty Corporation (PGE), gaining 72.6% and 36.4%. The worst performing stock YTD were Felcor Suite Hotels, Inc. (FCH), losing -25.8%, and Meristar Hospitality (MHX), losing -19.7%, respectively. (Please see Equity Gainers and Losers.).   Top E. MORTGAGE REIT PERFORMANCE The Equity sector bested their equity counterparts with a price surge of 6.22% for May. The best performing group for the month was Residential Mortgage, leaping 16.23%. YTD the mortgage sector posted a stellar gain of 13.87%. The best performers for May were American Residential Inv. Trust (INV) and Novastar Financial, Inc. (NFI), up 41.5% and 24.3%, respectively. The worst performer was Apex Mortgage Capital (AXM) losing -15.6%, respectively. The best performers YTD were American Residential Inv. Trust (INV), up 112.3%, and Novastar Financial, Inc (NFI), up 72.1%. The worst performing stock YTD was Capstead Mortgage Corp (CMO), losing -56%, respectively. (Please see Mortgage Gainers and Losers.)   Top F. REALTY CORPORATIONS Realty and Housing Corporations surpassed their double digit performance last month with an impressive price gain of 16.18% in May. The four best monthly performers, all up around 20% or more, were Tech & Net with a gain of 44.2%, OnSite Technology up 33.3%, Mobile Home Manufactures gaining 20.4% and Home Builders with a gain of 19.4%. The worst monthly and YTD performer was Timberland with a gain of 3.2% and 3.5%, respectively. The best performing group YTD was OnSite Technology with a gain of 79.6%. The best stock performers for May were On Command Corporation (ONCO.OB), up 80.3% and Tut Systems, Inc (TUTS), up 66%. The worst monthly performers were US Realtel, Inc. (USRTE.OB) and Amerihost Properties Inc. (HOST), down -21.6% and -10%, respectively. The best performers YTD were Tut Systems, Inc (TUTS) and American Tower Corp (AMT), gaining 183.3.1% and 153.8%. The worst performers YTD were US Realtel, Inc. (USRTE.OB), down -50%, and Chicago Bridge & Iron Co. (CBI), down -34.3%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top G. REAL ESTATE MUTUAL FUNDS (REMFs) Real estate sector funds average total return of 3.98%for May, and again produced a substandard return compared to the broader REIT market. Most funds are apparently still underweighted in the best monthly performing groups, Hotels and Health Care, and overweighted especially in apartments. The best performing monthly REMFs were Alpine, CGM Realty and Morgan Stanley with respective overall returns of 16.46% to 12.57%. Since the beginning of the year, REMFs have posted a total return of 12.24%, which is slightly below the broader market YTD performance. The best performers YTD were CGM Realty and Alpine, with returns of 39.62% to 34.17%. (Please see REMFs.)   Top Stock Changes. Moore Corporation, Ltd (MCL) was renamed to Moore Wallace (MWI). 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 .