1-12-04                                                                                           Vol. 7: No. 1 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: 2003 in Perspective and Expectations for the Coming Year A. 2003 in Perspective B. Expectations for 2004 C. REITs & Real Estate in the Coming Year D. Equity REIT Performance E. Large Cap REIT Performance F. Mortgage REIT Performance G. Realty Corporations H. Real Estate Mutual Funds I. Reflections of Past Predictions and Best Wishes in the Coming Year! A. 2003 IN PERSPECTIVE By most measures, 2003 was an excellent year for investors. After 3-years of losses for the Dow Jones and Nasdaq indices, they were up 25% and 50%, respectively, for the year. Interest rates reached their lowest point in about 45 years, with a 10-year interest rate dip to nearly 3% this past summer, and still ended the year lower than the year before, creating gains for most bond holders. Homes prices continued to increase, with favorable rates, up around 10% nationwide. Some areas, like Los Angeles, were up over 20% for over two or even three years in a row. Trillions of dollars in equity that vanished after the dot com bust in 2000 have largely been restored, due not only to strong financial markets, but the appreciation of housing as well. Several factors contributed to the robust gains in 2003. Anticipation over the impending war in Iraq at the end of 2002, caused investor apprehension that continued through the first quarter of last year. This was lifted when the Hussein regime was dismantled which contributed to a rebound in the markets. Though Iraq has proved more difficult than many expected, people have become less concerned with terrorism, and more confident in the economy. With the devaluation of the dollar throughout most of last year, U.S. goods have also become more affordable abroad. Corporate earnings staged a tremendous rally last year and were in the double digit category for the last two quarters. Inflation remained so low, that by mid-year there was some concern deflation could occur and cause interest rates to drop. Despite significant commodity prices in gold and oil during the year, the Consumer Price Index (CPI) only gained about 2%. Low interest rates helped continue home and real estate appreciation, which in turn, helped consumer spending. The President's economic stimulus package that provided rebates causing consumers to spend more, also included tax reductions on dividends and capital gains making equity investments more appealing. This, along with increased corporate earnings, an improving economy and an imbalance in equity ownership (since many investors avoided equities for two or three years), help push stocks much higher last year. The nation's unemployment rate also dropped about one-half percent to end the year at 5.7%. These factors have helped the GDP end at over 5% for the year and over 7% in the last quarter alone.   Top B. EXPECTATIONS FOR 2004 Most economists are looking for a strong economy in 2004, but with lower GDP and corporate earnings growth expected, equity investments will probably not perform as strong as last year. Interest rates are finally expected to begin to increase, but very modestly and are expected to stay low for at least a couple of years. Though housing mortgage rates are expected to increase about 50 or 75 basis points, home appreciation should still continue, albeit at a slower rate, primarily due to increasing population growth. Two of the largest uncertainties for the coming year are employment growth and the presidential election. Despite a lower unemployment rate, an increasing number of people are still out of work, but are no longer collecting unemployment insurance. Employment growth, which needs to be about 150,000 monthly for the economy to just keep up with population increases according to many experts, has been anemic and barely positive. Though President's Bush re-election prospects look favorable, should a democratic President emerge, investor's may be looking at a less attractive economic climate and equity markets could decline. Of course there are other issues that could affect the economy this coming year. There is always the prospect of a domestic terrorist attack that would have a major impact. Also, an outbreak of SARS or another communicable disease, a greater mad cow epidemic, trade wars, a greater dollar devaluation, a greater deficit, etc., could all potentially contribute to a less favorable environment. However, should the economy really take off, with monthly employment growth over 200,000, higher commodity prices and higher inflation could cause interest rates to rise much more dramatically than expected. This could create a much more difficult environment for financial markets. Top C. REITs and REAL ESTATE in 2004 Not only did REITs post their fourth positive year in a row, but the gains last year almost equaled the total gains of the three years prior. Despite 2004 being one of the best ever annual REIT markets, REITs did not continue to be in the top 10% of industry sectors for a third year in a row. Instead, overall returns for REITs were near the middle of sector performance. Still, with average equity gains of 33.25% and mortgage gains of 51.04% in nearly 200 REITs we track -excluding dividends - most REIT investors were very pleased. (Please see Equity REITs and Mortgage REITs.) However, many commercial real estate professionals are still concerned. Generally speaking, rentals and occupancies have failed to make substantial improvements over the last three of years and in some markets are still way behind most levels from 2000. However, with interest rates so low, values have stayed fairly stable and have even increased in many situations with hopes that a stronger economy will improve rental markets. For the coming year, the key to increasing commercial real estate values will be employment growth and stable interest rates. Possibly the greatest problem facing real estate is the continuance of a jobless economic recovery, or that job growth will be limited and not as broad based among industries and geography as in the past. For instance, anyone seeking technical help recently is likely to know that such assistance is frequently supplied by other countries like India or Ireland. Besides technical help, this "offshoring" as it is called, is also becoming more common with programmers, tax advisers and even medical assistance. It is not a surprise that the U.S. is losing jobs to other countries in manufacturing, but this loss of skilled jobs, that were previously thought to be safe from exportation abroad, is a fairly new revelation. It appears that the global economy and technology may actually cause negative consequences upon the demand for the use of domestic real estate, affecting certain property types and geographic areas more than others. Therefore, expect more of a difference in the performance of REITs by property groups in the coming years.   Top D. EQUITY REIT PERFORMANCE Equity REITs posted a slight gain of 1.12% for December. The best monthly performers were HealthCare and Hotels, up 6.23% and 2.56%, respectively. For 2003, Equity REITs have appreciated 33.25%. Combining dividends of several percent, we estimate that the broad based overall returns for REITs was about 40%. Not only were all groups positive in 2003, but all were up at least 18%. Health Care and all Retail REITS, but especially Retail Regional Malls, were especially hot respective increases of 53.7% and 48.63%. The best performing Equity REITs for December were Humphrey Hospitality Trust (HUMP) and Omega Healthcare Realty Investors (OHI), gaining 18.5% and 18.1%, respectively. The worst monthly performers were Jameson Inns, Inc (JAMS) and Malan Realty Investors (MAL), losing -8.2% and -6.6%, respectively. The best performing stocks YTD were Omega Healthcare Investors Inc. (OHI) and Humphrey Hospitality Trust (HUMP), gaining 149.5% and 135.2%. The worst performing stock YTD were Phillips Int'l Realty (PHIR.ob), losing -37.1%, and Income Opportunity Realty Trust (IOT), losing -18%, respectively. (Please see Equity Gainers and Losers.).   Top E. LARGE CAP REIT PERFORMANCE Large Cap REITs had a gain of 2.5% for December, better than Equity REITs. However, for 2003, large caps trailed the broader REIT market performance by a few points and a gain of 30.8%. Still, this difference is less than during the last couple of years. The best large cap performer for December was Plum Creek Timber Co. (PCL) followed closely by Trizec Properties, Inc. (TRZ) gaining 11.2% and 10.6%, respectively. The worst performing large cap REIT for the month was Public Storage, Inc (PSA), falling -4.5%. The best performing stock, YTD, was General Growth Properties (GGP), gaining 86.9%, and the worst YTD and the only Large Cap REIT in the negative, was Apartment Investment & Management (AIV), losing -8%. Please see Large Cap REITs.)   Top F. MORTGAGE REIT PERFORMANCE With a price gain of 51.04% last year, the mortgage sector for the third year in a row significantly out performed Equity REITs. Mortgage REITs posted a slight gain of 1.24% in December, almost matching their equity counterparts.The best performers for December were Imperial Impac Commercial (ICH) and BRT Realty Trust (BRT), up 27.2% and 20.2%, respectively. The worst performer was American Residential Inv. Trust (NFI) losing -15.3%, respectively. The best performers YTD were Novastar Financial, Inc. (NFI) and Impac Commercial (ICH), gaining 266.4% and 200%. The worst YTD was Capstead Mortgage Corp.(CMO), losing -31.9%, respectively. (Please see Mortgage Gainers and Losers.)   Top G. REALTY CORPORATIONS 2003 was a terriffic year for Realty and Housing Corporations with a price gain of 51.86%, slightly edging out Mortage REITs. In particular, the few OnSite Tech stocks that still remain surged 163.5%, followed by another robust year of gains by Home Builders, up 88.5%. All other groups had double digit gains, up from about 12% to 48%. For December, Realty Corp. stocks gained 3.47% with all but three groups in positive territory. The best monthly industry performers were OnSite Tech and Timberland, gaining 18.6% and 6.6%, respectively. The worst monthly performer of these groups, was Home Builders with a loss of -3.5%. The best stock performers for December were US Realtel (USRTE.OB), up 83.6% and Lipid Sciences, Inc (LIPD), up 46.7%. The worst monthly performers were Heartland Partners, LP (HTL) and Southern Energy Homes (SEHI), down -24.6% and -14.4%, respectively. The best performers for 2003 were Tut Systems Inc. (TUTS) and Lipid Sciences, Inc. (AMT), gaining 411.1% and 208.6%. The worst performers YTD were US Realtel, Inc. (USRTE.OB), down -65.2%, and Bando McGlocklin Capital (DOLL), down -25.5%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top H. REAL ESTATE MUTUAL FUNDS (REMFs) The average real estate mutual fund in 2003 returned over 30% and performed closer to the broad based performance of REITs than during the last couple of years. Most funds stayed within a fairly close range of one another, except for two funds in particular, CGM Realty and Alpine US Real Est., which had stellar overall returns of 89.7% and 82%, respectively, that far outdistanced their peers. The next closest performer was Alpine with a return of 55.1%. It appears that much of the success of the top funds last year was attributed to Non-REIT investments in such groups as Home Builders and Developers. Although top funds noted have found a propensity to perform better than most over the last few years, to repeat such a disparity again will be challenging. The average total return for real estate funds for December was similar to the broader REIT performance of about 2%. The best performing monthly REMFs were Morgan Stanley & Third Avenue with respective overall returns of 6.84% to 5.61%. The best performers YTD were ING Global Real Estate and Alpine, both with gains of 4.42% and 2.64%, respectively. The overall average for YTD was -0.07% as of 1/6/04. (Please see REMFs.)   Top I. REFLECTIONS OF PAST PREDICTIONS AND BEST WISHES FOR THE COMING YEAR! We wish everyone a healthy and prosperous New Year! Last year proved much better than we expected for stocks and especially REITs, largely because the rise in interest rates we expected never materialized. We have become much more sanguine over interest rates and are more inclined to believe that interest rates may actually remain low for at least a couple more years. Though this should help real estate and REITS, the coming year is expected to be much more challenging for REITs than in the previous four years. We were fairly accurate in our prediction last year that REITs were unlikely to outperform the major equity indices 2003, however we were incorrect that the President's proposed economic incentives, especially regarding the elimination of taxes on dividends, would have negative consequences upon REITs. Fortunately for REIT investors, we were also off base in believing that interest rates would stage a significant rise. Several other predictions, however, such as the devaluation of the dollar, an improving economy and limited job growth were on target. Nevertheless, we hope that RealtyStocks and newsletter will help you stay informed, assist you with your investments and possibly guide you to areas where some real estate stock jewels may shine in the coming year.   Top Stock Changes. OnCommand Corp. (ONCO.OB) has been deleted from our list. ResortQuest Int'l (RZT) was acquired by Gaylord Entertainment Company (GET). Crown American Realty Trust (CWN) merged with Pennsylvania Real Estate Investment (PEI). 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 .