Blue Vault Nontraded REIT Studies: Tracking the Evolution of an Industry
October 17, 2023 | Johnathan Rickman | Blue Vault
For more than a decade, Blue Vault has been at the forefront of assessing the performance, fees, and net asset values (NAV) of individual nontraded real estate investment trusts (REITs). Our suite of studies provides a panoramic, historical look at the industry’s evolution from its initial life cycle-offering approach to its current, more-liquid model of perpetual and continuous offerings with no closing dates.
Blue Vault studies aim to provide insight into each nontraded REIT’s potential to generate shareholder returns. They also seek to provide an objective and useful perspective on the way these products impact investors through various fees and expenses – with better decisions on behalf of investors the end goal.
A Brief History of Blue Vault Studies
It all began in June 2012 when we published the first comprehensive study of full-cycle events in the nontraded REIT industry. Working in collaboration with the Real Estate Finance and Investment Center at the University of Texas at Austin’s McCombs School of Business, Blue Vault matched data from the National Council of Real Estate Investment Fiduciaries (NCREIF) and the FTSE NAREIT indices with data from nontraded REITs with similar assets to create first-of-its-kind custom benchmark comparisons. Returns for these custom benchmarks were also calculated using adjustments that controlled for differences in leverage and cost of debt.
From the first three studies, Blue Vault went on to work with researchers from the University of Georgia’s Terry College of Business, compiling similar data sets assessing the performance of nontraded REITs that provided shareholders with full liquidity. Since then, the industry has gone from amassing $84 billion in assets under management at the end of 2011, to its current total of $236 billion in AUM.1
Today, Blue Vault sources much of its information from SEC filings and publicly available data provided by sponsors. As industry offerings become diversified and more liquid – and more complex – Blue Vault has moved to simplify its calculations while providing advisors and investors with the same industry-leading insight.
The forthcoming 8th edition of Blue Vault’s Nontraded REIT Full-Cycle Study will assess a total of 92 full or final liquidity events. But for now, let’s look deeper into how we develop our studies of nontraded REITs.
Full-cycle events occur when a REIT completes a listing of its common stock on a public exchange, is acquired by or merges with another entity, or completely liquidates its real estate portfolio. A full-cycle event gives shareholders the opportunity to completely liquidate their common stock holdings for the first time. While nontraded REITs typically offer above-average distribution yields, their performance cannot be fully assessed until shareholders experience a full-cycle exit event providing them full liquidity.
Our full-cycle studies analyze full-cycle events, adding to the sample size with each edition. For each nontraded REIT, we calculate an internal rate of return, or average compounded rate of return, in two ways: The first calculation assumes no reinvestment of distributions. The second assumes that all distributions were reinvested at the then-prevailing price for reinvestments, which may include DRIP discounts.
For the 7th edition of our full-cycle study, we compared the annualized rates of return for investors to both the FTSE All REITs index and the S&P 500 over matched holding periods. In addition, we calculated annualized rates of return over matched holding periods for Intermediate-Term U.S. Treasury Bonds.
For each nontraded REIT, we also compare data based on when an investment was made: during the first quarter of an offering, the middle quarter of an offering, and the last quarter of an offering. We also analyze returns to tendered shares. These comparisons and calculations provide advisors and investors with insight into shareholder returns as well as a pulse check on the overall health of the nontraded REIT industry.
Every nontraded REIT program files an SEC Form S-11 when a new REIT product is introduced to the market. Blue Vault combs through these filings and all subsequent filings for various fees and expenses. We look at every offering and every share class to locate the following:
· Asset management fees
· Acquisition fees
· Disposition fees
· Performance-based fees
· Upfront fees and commissions
The most important fees in their impact on shareholder returns are asset management fees, or advisory fees, that are paid continually over the life of a REIT. Fee structures differ depending on share class, but a yearly asset management fee of 1% – based on total equity, for example – can have a big impact on shareholder returns.
To align the incentives of the sponsor with those of the shareholder, offerings levy a performance participation fee if the level of non-compounded returns to shareholders exceed a specified hurdle rate at the time of a full-cycle event. For daily or monthly NAV products, these fees can be assessed quarterly or annually based on calculated shareholder returns for each period.
Economies of scale may motivate REITs to grow by purchasing more assets, and fees are often the engine that helps the industry expand its potential. However, competition in the industry (and due diligence) is also helping to reduce fee exposure and lower costs.
To assess the pricing and NAV of nontraded REIT programs, our NAV studies report the following:
· Every offering price for the most common share class
· Each subsequent offering price change
· Each announcement of NAVs by share class
We also highlight the timing of NAV announcements, measured in quarters, after a REIT offering becomes effective. This helps advisors compare the trends in NAVs over the life of different programs.
1 Blue Vault Nontraded REIT Industry Review First Quarter 2023