6-14-04                                                                                           Vol. 7: No. 6 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: SLOWER JOB GROWTH LOWERS RATES, Helps REITs A. Lower Growth B. Oil & Politics C. Rate Compression D. Equity REIT Performance E. Large Cap REIT Performance F. Mortgage REIT Performance G. Realty Corporations H. Real Estate Mutual Funds A. SLOWER JOB GROWTH The big surprise a couple weeks ago was that monthly job growth slowed from a strong pace of around 300,000 jobs over the prior three months, to only 112,000 new jobs in June. This was roughly half of what economists predicted, plus the results of the prior month was trended down. In addition, retails sales in June were negative and it has become evident with the release of recent corporate earning reports that, overall, the robust growth of U.S. business is no longer exceeding expectations. With the recent rise of oil prices, the fear of inflation has also risen. However, it seems like higher gasoline and fuel costs are having a more immediate affect of reducing retail expenditures and causing higher costs for businesses. For most economists, the current economic slow down is just a summer lull; the economy is expected to remain healty with a GDP growth in the second half of the year of about 4%. Most expect oil prices to decline and strong job growth to continue in late summer or fall. The immediate results of the economic slow down have actually resulted in some benefits, especially for real estate. Though the Federal Reserve raised the cost of funds a quarter of a point to 1.25% last month, mortgage interest rates have pulled back from their recent highs in late June and are now at there lowest levels in over two months. This is great news for people acquiring homes or commercial properties, and it even provides a window of opportunity for anyone who still may want to refinance. The reason for what seems to be a temporary retreat in longer term rates is that the fear of rapidly rising rates for short durations has lessened, thereby narrowing the spread between short and longer term rates.   Top B. OIL AND POLITICS Despite the possibility of relatively little movement in equity markets this summer, issues affecting the price of oil will probably be the most critical. There is some concern that Iraq's sovereignty may cause more reprisals in Iraq and other Arab nations thus affecting the flow of oil. The recent attacks in Saudi Arabia could continue, especially as the Saudi Royal family is trying to increase the flow of oil not only in their own country, but among OPEC countries as well. With domestic refineries at full production, what could be the greatest threat to a good summer, however, would be a calamity involving a major U.S. refinery. Also, with the tragic bombing of a mass transit system in Spain before a national election, a similar prospect will be of increasing concern in the U.S. Rather than such an incident occurring after labor day, with the national conventions this summer in Boston and New Year, an attack especially in either city, would also shatter a peaceful summer. Recent warnings of domestic terrorist attacks by the government have largely been ignored. Unfortunately, if the authorities are correct and such an attack is eminent, we believe it may occur earlier than October or November as opposed to the attacks in Spain around their national election. The results could severely jolt financial markets, likely sending both stocks and rates down. Therefore, despite the inclination for rates and stocks to rise this summer, we believe that hidden within the prospects of a good summer may be something more treacherous. Hopefully, it will remain benign, but the odds against daemonic actions within the next few months by such forces should not be entirely dismissed. At this point, preliminary polls show Kerry slightly ahead of Bush, but either candidate for the presidential election has an opportunity to win. The most deciding factor in the election could likely be the coming events in Iraq, or as in Spain, possible terrorist actions shortly before the election. Though Bush is resolved to support Iraq, it is becoming more apparent that the strategy in Iraq is changing and to avoid possible reprisals and discontent among the Iraqi people, it appears the U.S. is avoiding any confrontation with certain religious clerics. Though this may help mitigate problems in the near term, and could be favorable towards Bush in the fall elections, we suspect that this will pose greater problems for a new Iraqi government and elections planned early next year. Regardless of the presidential winner, what may be more important are the congressional elections. Still, largely due to the current strength of the economy, many economists do not believe that either candidate will have a particularly adverse economic impact. Kerry has recently developed economic policies and a platform to be more business friendly, but the effects of this, especially to investors, will be more evident this fall. Top C. RATE COMPRESSION May favor Residential vs. Commercial Real Estate The interesting aspect of rate increases is that they are not occurring proportionately among all maturities spreads are decreasing. For instance, five year treasuries have jumped from 2.78% on March 31st to 3.84% on June 1st; an increase of 1.05%, or 38%. Over this same period, 10-year and 30-year treasuries have increased 0.86% and 0.62%, or only 22% and 13%, respectively. Though these increases are steep in only 2-months, it is important to note the lower increases in longer maturities, especially as it relates to real estate. Why? Most residential real estate is financed for as long as a 30-year period, whereas, commercial real estate is typically financed with terms that are called after only 5 to 10 years. In recent years, the high prices paid for much commercial real estate are largely due to even shorter periods or floating rates. The spreads over these rates can be 150 to 250 basis points (bp), meaning that for short term rates a little over 1%, financing could be obtained for a little under 2.75% to around 3.75%. In the next couple of years, floating rates could move up to around 5% to 6%, which not only hurts the returns of highly leveraged properties, but higher rates are likely to increase the "cap" rate, which has an inverse relationship upon the future value of the property - unless occupanices and rental rates significantly improve. Though an improving economy should help the fundamentals of rental properties, it will not occur right away. As a result, commercial real estate values are under more pressure. In contrast, the rising financing cost of single family homes with a 30-year fixed rate mortgage are increasing much less than for commercial properties. Though an increasing number of residential loans in the last year are adjustable rate mortgages (ARMs) - about a third - the preponderance are for a longer period. Consequently, in the next year or two, we believe commercial real estate is more likely than residential real estate to be negatively affected by rising rates. The sales and mortgage activity for both sectors is likely to decline, however. For the last 5 weeks, residential mortgage applications have fallen about 14% for refinancings and, adjusted for new purchases, the overall decline is 8.9%   Top D. EQUITY REIT PERFORMANCE Equity REITs rebounded with a gain of 5.01% for May. The best group for May was Self Storage gaining 11.34%. The worst group for the month was MH Parks, losing -2.13%. The best performing groups Year-To-Date (YTD) was Retail Regional Malls, gaining 6.77%. The worst performing YTD group was MHParks, losing -13.09%. The best performing Equity REITs for May were Saul Centers, Inc (BFS) and American Real Estate Investments Corp (KTR), gaining 18.2% and 17.6%, respectively. The worst monthly performers for the month were Wellsford Residential Property Trust (WRP) and Jameson Inns, Inc (JAMS), losing -13.5% and -9%, respectively. The best performing REIT YTD was First Union Real Estate Investments (FUR), gaining 39.4%. The worst YTD performer was Phillips Int'l Realty (PHIR), losing -53.7%, respectively. (Please see Equity Gainers and Losers.).   Top E. LARGE CAP REIT PERFORMANCE Large Cap REITs outperformed the broader REIT performance with a gain of 7.5% for May. The best large cap performer for the month was Public Storage (PSA) gaining 21.2%. The worst performing large cap REIT for the month was St. Joe Company (JOE), falling -0.4%. YTD, the groups gained 1.7%. The best YTD performer is Avalon Bay Communities (AVB) gaining 13.9%. The worst YTD performer was Apartment Investment & Mng (AIV)losing -16.3%. Please see Large Cap REITs.)   Top F. MORTGAGE REIT PERFORMANCE The mortgage sector also posted strong returns with a positive gain of 4.93% for May. The best performing group for the month was Residential Mortgages, gaining 5.41%. However, YTD, this sector is still down -2.06%. The best performer for May was Novastar Financial, Inc. (NFI), up 16.4%, respectively. The worst performer was Fog Cutter Capital Group (FCCG) losing -8.5%, respectively. The best YTD performers were American Residential Inv. Trust (INV) and Imperial Mortgage Holdings, Inc (IMH), gaining 25.9% and 12.5%, respectively. The worst YTD performers were BRT Realty Trust (BRT) and Capstead Mortgage Corp (CMO), losing -25% and -18.4%. (Please see Mortgage Gainers and Losers.)   Top G. REALTY CORPORATIONS Realty and Housing Corporations had a slight price loss of -1.76% for May. It is interesting to note the return of CB Richard Ellis to a public company from the private sector, which will be included in our the The best monthly industry performers were Timberland Co's gaining 4%, followed by Lodging with a gain of 2%. The worst monthly performer group was Tech & Net Co's with a loss of -7.6%. The best stock performers for May were Nobility Homes, Inc (NOBH), up 24.1% and Catellus Development Corp (CDX), up 13.4%. The worst monthly performers were Bando McGlockin Capital (DOLL) and US Realtel, Inc (USRTE), down -46.7% and -31.1%, respectively. For YTD, the group gained 7.79%. The best YTD performers were Price Legacy Corporation (PLRE) and Nobility Homes, Inc (NOBH), gaining 376.4% and 95.8%. The worst YTD performer was Tuts Systems, Inc. (TUTS), losing -52%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top H. REAL ESTATE MUTUAL FUNDS (REMFs) The average total return for real estate funds for May was similar to the broader REIT performance of about 4.96%. The best performing monthly REMFs were PIMCO Real Estate and Profunds with returns of 8.38% to 7.8%. The best performing YTD REMFs were Morgan Stanley and Cohen & Steers with respective overall returns of 9.78% to 6.87% compared to the YTD average return for all funds of 2.12%. (Please see REMFs.)   Top Stock Changes. No changes. 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 ©2004, WebVisers Inc. All rights reserved .