Last week's GlobeSt.com Quick Poll asked readers if REITs can rebound in this market, with a total of 59% voting no and only 41% throwing their weight behind a possible rebound. Palisades Financial's Fort Lee-based principal and CFO Ira Bergstein talks to GlobeSt.com about the future of REITs.

There's no straight yes or no answer when it comes to REITs ability to rebound. Each one is different and it really depends on their structure and their debt, the latter of which is going to be the biggest factor. If they're a highly leveraged REIT and they have debt that's maturing in the next 12 months, I think they're going to have enormous problems because there's no exit strategy, no replacement for the debt. If they have unsecured debt in credit lines, they could be tripping coverage covenants and stock price covenants, which could cause some problems. But, bottom line, the illiquidity in today's market is going to cause a lot of REITs to have problems. General Growth and Centro are ones we've all been reading about, and with their debt coming due, there's a lot of uncertainty as to whether they'll both make it.

The other issue is the type or REIT--office, retail, industrial--you can't just put them all into one bucket. The retail REITs are going to be far, far worse off than industrial or office. While office will have its troubles too, retail is going to be the shining problem. You have half-a-dozen chains that have already gone into Chapter 11 and a lot of people feel that after Christmas more of them may follow. In the case of retail REITs, their debt was underwritten to Pro forma as opposed to historical numbers in many situations. Now they're seeing rising vacancies and reducing rents and they were anticipating tightening vacancies and increasing rents.

REITs are also looking at something that they haven't had to in years called a co-tenancy clause. What this clause says is: If Gap goes into a mall and the mall becomes 25% vacant for three months straight, they have the right to pay a reduced rent. If the mall remains 25% vacant for at least a year, Gap has the right to terminate their lease. Every major, national tenant gets this clause…and it's not always 25% or three months, it's negotiated each and every time depending on the strength of the tenant. The reason this is now a much bigger factor is that malls are empty for the first time in ten years. As a result, you'll see tenants pulling out of malls and you'll see the mall operators having more troubles.

Even strong REITs like Kimco--which, according to its balance sheets, has enough cash to pay off every mortgage tomorrow--are experiencing extremely low stocks. All in all, 2009 is going to be a terrible year for REITs and those that are around in 2010 will see further consolidation.

Instant Insights /

Palisades Financial's Bergstein

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