Industry Experts Agree:
Effects of War Unknown

Which real-estate sectors will fare better than others in the aftermath of war?

Analysts at Friedman, Billings, Ramsey & Co., an Arlington, Va., investment banking firm, advise looking at which real-estate investment trusts generated the biggest returns to shareholders following the Gulf War in 1991 and the invasion of Afghanistan in 2001.

Based on stock-price appreciation and reinvested dividends during a one-year period after the start of those conflicts, residential mortgage-backed REITs "outperformed the rest by a wide margin," says Merrill Ross, managing director of the firm's real-estate group. That's because during wartime, the spread between short-term and long-term interest rates widens. "It's a knee-jerk reaction," Ms. Ross says. "The Fed becomes more accommodative by making short-term money cheap to help fund wars, which are expensive."

But most analysts and investment advisers agree each sector's performance will depend on how the war plays out.

"If you believe the war is a short one and the economy will rebound, you want to be focusing on REITs with short-term leases," such as hotel REITs, says Lee Schalop, an analyst with Bank of America Corp.'s Banc of America Securities unit. Those who expect a longer war with ill effects on the economy should focus on longer-term leases, such as REITs that focus on triple-net lease properties, he says. Triple-net lease properties are where the tenant pays the operating expenses, real-estate taxes and insurance in addition to rent, and the term of the lease is typically 20 years or more.

Ms. Ross at Friedman Billings believes triple-net lease properties offer a "safe footing," given their performance following previous wars and the fact that terms of the leases are longer than those typical at, say, most office properties.

One REIT that Ms. Ross believes stands to gain handsomely from the war is Entertainment Properties Trust, a play on triple-net-lease movie theater properties -- which in some cases get a percentage of the box-office take. Moviegoing tends to increase during international conflicts, she says. People typically curtail vacations and other trips, she adds, while movies provide an inexpensive form of escape and cost less than, say, sporting events or concerts.

Ralph Block, chief REIT portfolio manager of Bay Isle Financial LLC, an Oakland, Calif., investment-advisory firm, believes if the war ends quickly and with few casualties, the economy will rebound. If that turns out to be the case, he says, he thinks mortgage and triple-net-lease REITs don't look as appealing as apartment, hotel and office properties.

Indeed, last week when many believed the war in Iraq would be a quick one, investors began gobbling up hotel stocks. With events over the weekend, the sentiment on the war appears to have shifted and hotel stocks have traded back down, says Will Marks, director of real estate and hotel research at JMP Securities LLC in San Francisco.

For a safe bet in lodging, Mr. Marks likes Marriott International Inc., which manages hotels rather than owns them, and gets paid a management fee regardless of revenues. It doesn't suffer from the slower economy or the war as much as hotel owners do, such as Fairmont Hotels & Resorts Inc., Hilton Hotels Corp. and Starwood Hotels & Resorts Worldwide Inc.

"It's much safer to be a hotel manager right now," Mr. Marks says. "Weaker revenues won't kill the bottom line like it will for owners."

War worries haven't seemed to discourage buying of commercial real estate. The weeks before the war saw robust investment in apartment, industrial, office and retail properties, says Robert White Jr., president of Real Capital Analytics Inc., a New York real-estate research firm.

During the typically slow first two months of the year, $12 billion worth of apartment, industrial, office and retail properties traded hands, compared with $8.9 billion during the same period last year, he says. What's more, $13.2 billion worth of property hit the market, up from $7.2 billion a year earlier. "People are bringing their properties to market earlier this year," Mr. White says.

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