7-11-03                                                                                           Vol. 6: No. 7 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: IPO MARKET IS DOMINATED BY REITS During the First Half of 2003 A. IPO Drought Ends with Two REIT IPOs B. Grade Card Time and Interest Rates C. Are REITs Compromising Long Term Strength? C. Large Cap REIT Performance D. Equity REIT Performance E. Mortgage REIT Performance F. Realty Corporations G. Real Estate Mutual Funds A. IPO DROUGHT ENDS WITH TWO REIT IPOs For the first half of 2003, the IPO's of two REITs raised a combined $1.4 billion on the same day, June 25th. There have only been eight other IPOs this year and they have collectively raised a mere $735 million or the equivalent of about one-half of what the REIT offerings attracted. One of the REIT IPOs, Maquire Properties (MPG), consisting of mostly Los Angeles area office buildings, came public at $19 per share and at the low end of its estimated range, but still raised a hefty $693 million. Some 21% of the firm is owned by the founder and CEO, Thomas Maquire III. The demand for the other offering, American Financial Realty Trust (AFR), was stronger as its offering at $12.50 per share was at the upper end of its estimated ($11-$13) range, which also enabled the size of its round to increase by about 10%. Its total proceeds were $804 million - the largest U.S. based IPO so far in 2003. AFR opened at $14.25 per share on its first day and so far has reached as high as $15. On July 1st, AFR aquired 158 bank and office properties in 19 states from Bank of America for a price of $769.8 million. AFR was founded last year by the former vice chairman of Salomon Brothers, Lewis Ranieri. Though both companies invest in office-type properties, MPG is considered an Office REIT and thus far has a fairly concentrated portfolio in southern California. In contrast, AFR has a much larger geographic diversification and it's focus is long term leases, primarily to banks with a strong relationship with BofA, and is considered a Specialty REIT. So far this year, Office REITs have performed as well as most other major property groups, however, Specialty REITs, which normally offer higher dividend yields, have been one of the best performing segments. This may explain why, at least in part, the IPO and after market demand for AFR has been slightly stronger than for MPG in the brief period since they become public. REITs have been one of the best performing groups for nearly three years. Now a couple REITs may have invigorated an IPO market that has been dormant for a similiar period. Ironically, instead of the noted IPOs catapulting REITs higher, along with the strong performance of tech stocks in the past quarter, they may shift investment momentum to other industries. Even still, as long as rates stay low and real estate market fundamentals do not deteriorate, REITs should remain relatively stable. Furthermore, if the economy improves in a low interest rate environment, REITs may still have a little more kick left.   Top B. ARE REITs COMPROMISING LONG TERM STRENGTH TO KEEP UP DIVIDENDS IN THE SHORT TERM? Pressure on REITs to keep dividends from significant declines could result in a two-fold process that may begin to undermine the strength of some REITs. First, the financing orientation for some REITs may involve more floating rates, shying away from short term general obligations and even longer (5 to 10 year) property specific commitments. Although this can reduce debt service and cause stronger dividend payments, it could also make some REITs more vulnerable to much higher financing costs if rates ratchet higher. Secondly, selective asset sales may also help stronger dividend payments, but acquiring replacement properties at more attractive yields may be difficult and could involve greater risks. Hence, to maintain healthy dividend payments in the short term, some REITs may be sacrificing better returns in the longer term. Analyzing the financing structure and property sales of REITs is difficult, but may be worthwhile before making a significant investment in a specific REIT.   Top C. GRADE CARD TIME & INTEREST RATES. Within the next couple of weeks, most firms will be reporting second quarter earnings and analysts will be revising their ratings. This will provide more insight about the health of the economy and will probably increase market volatility. Overall, we do not expect a resounding upward momentum in earnings. However, there will be some days in the coming weeks that earnings will be quite positive, while others will not. Also, some industries will fare better than others. We remain concerned, as we have mentioned months ago, that as some industries become more attractive it could begin to cause a sector rotation, possibly causing more money to flow out of real estate than into it. If more REITs tap the public market, it could also place more strain on their sector in general. However, as long as interest rates stay fairly stable, a strong outflow from REITs is probably unlikely in the near term. As recently as a month ago, mortgage rates were at their lowest levels in over 50 years and we thought the 10-year Treasury yield might slip under 3%. Although this yield dipped to 3.1% on June 13, it rose more than 50bp in just a couple weeks, closed last week above 3.7% and now looks like it may push over 4%. Now that yields seem to be back in sync with the movement of stock indexes, should earnings for this past quarter generally exceed expectations, expect a fire to stay lit under stocks and yields to trend higher. Still we anticipate earnings to be fairly mixed and 10-yr. rates to stay fairly stable this coming quarter, hopefully staying under 4%. However, there are indications that the economy is improving and the banter from the Fed is that they may not expect to ease rates further and deflation may become less of a concern. Though they expect rates to say low, there seems to be an upward rate bias at this point. As we mentioned before, the health of REITs and both commercial and residential real estate markets could be jeapordized should 10-yr. yields jump another full point or two. Although we currently believe that these rates can stay around 4% through most of the year, should rates spike, the appeal of real estate is likely to drop.   Top D. LARGE CAP REIT PERFORMANCE Large Cap REITs ended June with a strong monthly price increase of 2%. They were also slightly ahead of the broader Equity REIT performance. The best large cap performer for June was between HealthCare Property Inv.(HCP) and iStar Financial (SFI) gaining 8% and 6.8%. The worst performing large cap REIT for the month was Duke Realty Corp. (DRE), falling -2.9%. The best performing stock, Year-To-Date (YTD), was iStar Financial (SFI), gaining 30.1%, and the worst YTD was Hospitality Properties (HPT), losing -11.2%. Please see Large Cap REITs.)   Top E. EQUITY REIT PERFORMANCE Equity REITs had a price gain of 1.91% for June. Out of the fifteen groups, only 4 property groups had losses. Those groups with the best monthly performances were Specialty, up 9.14%, followed by HealthCare, up 6.33%. The worst group for the June was the Hotel group, down -0.89%. The best performing groups YTD were Specialty, up 27.59%, followed by MHParks, up 17.16%. The worst group YTD for June, yet still positive was Hotels, up 2.36%. The best performing stocks for June were Golf Trust of America (GTA) and Omega Healthcare Investors Inc. (OHI), gaining 37.3% and 23.5%, respectively. The worst monthly performers were Transcontinental Realty Investors Inc (TCI) and Monmouth Real Estate Investment Corp. (MNRTA), losing -14.7% and -13.9%, respectively. The best performing stocks YTD were Golf Trust of America (GTA) and Agree Realty Corporation (PGE), gaining 137% and 43.8%. The worst performing stock YTD were Felcor Suite Hotels, Inc. (FCH), losing -31.4%, and Meristar Hospitality (MHX), losing -22.1%, respectively. (Please see Equity Gainers and Losers.).   Top F. MORTGAGE REIT PERFORMANCE Mortgage REITs bested their equity counterparts with a price surge of 3.02% for June. The best performing group for the month was Residential & Commercial Mortgage, leaping 10.82%. YTD the mortgage sector posted a stellar gain of 35.64%. The best performers for June were Impac Commercial (ICH) and iStar Financial (SFI), up 35.3% and 33.3%, respectively. The worst performer was Fog Cutter Capital Group (FCCG) losing -5.7%, respectively. The best performers YTD were American Residential Inv. Trust (INV), up 130.2%, and Novastar Financial, Inc (NFI), up 92.6%. The worst performing stock YTD was Capstead Mortgage Corp (CMO), losing -54.3%, respectively. (Please see Mortgage Gainers and Losers.)   Top G. REALTY CORPORATIONS Realty and Housing Corporations had a price gain of 3.79% in June. The best monthly performers were Resort Co's with a gain of 7.4% and Developers up 7.47%. The worst monthly and YTD performer was Timberland with a loss of -2% and a gain of 0.5%, respectively. The best performing group YTD was OnSite Technology with a gain of 82.8%. The best stock performers for June were Lipid Sciences, Inc. (LIPD), up 75.6% and Champion Enterprises (CHB), up 45.9%. The worst monthly performers were Rayonier Timber (RYN) and Foster Wheel Corp. (FWC), down -36.1% and -19.2%, respectively. The best performers YTD were Tut Systems, Inc (TUTS) and American Tower Corp (AMT), gaining 212.7% and 150.7%. The worst performers YTD were US Realtel, Inc. (USRTE.OB), down -37.9%, and Rayonier Timber (RYN), down -27.1%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top H. REAL ESTATE MUTUAL FUNDS (REMFs) The average total return for real estate funds in June was 3.85%. Since the beginning of the year, REMFs have performed quite well with a total return of 18.41% according to Morningstar, or 13.8% as stated by fund-tracker Lipper. Since the beginning of the year, Merrill Lynch estimates that $1.5 billion has poured into REMFs. However, with the resurgence of technology and other sectors in the last quarter and with most REITs near 52-week highs, we do not believe REMFs will be able to duplicate their first half performance in the second half. The best performing monthly REMFs were Cohen, Alpine and CGM Realty with respective overall returns of 6.05% to 5.59%. The best performers YTD were CGM Realty and Alpine, both with returns of 48.84% to 42.16%. (Please see REMFs.)   Top Stock Changes. Maguire Properties (MPG), American Financial Realty Trust (AFR), NewCastle Investment (NCT) and iStar Financial Inc. (SFI) were added to our lists. 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 .