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Blue Vault LifeStages 101

August 7, 2014

When considering an investment in nontraded REITs, both investors and financial advisors need to be aware that these investment vehicles move through distinct developmental stages over time as they grow from inception to maturity. As a result, their performance characteristics more closely mirror those of direct property investments, private equity, and other illiquid vehicles. In addition, metrics such as total assets, debt, distribution yields, and MFFO payout ratios may vary greatly from REIT to REIT, depending on where each program is in its life cycle.

In 2010, Blue Vault created a proprietary classification system that enables investors and financial advisors to more effectively compare nontraded REITs within their appropriate peer group and avoid meaningless comparisons to nontraded REITs that are in different LifeStages. For example, a performance metric such as the MFFO payout ratio will vary greatly for a newly effective nontraded REIT that has been raising capital for less than one year compared to a nontraded REIT that is five years old and closed to new investments.

Blue Vault’s LifeStage™ classification system accounts for differences in metrics by categorizing each nontraded REIT according to its life cycle. This system is based on two broad categories that are further divided into five smaller sub-categories. The first category, known as the “effective” phase, occurs at the initial launch of a nontraded REIT and primarily focuses on raising capital and acquiring properties. The three LifeStages™ within the effective phase are defined as Emerging, Growth, and Stabilizing. The second category known as the “closed” phase, begins when the nontraded REIT no longer accepts new investments and is more focused on managing an existing portfolio of assets rather than acquiring properties. The two LifeStages™ within the closed phase are defined as Maturing and Liquidating.

Since we began tracking key metrics for the nontraded REIT market in 2009, we have begun to see a significant shift as the industry is comprised of more “closed” REITs than “effective” REITs. We believe these changes indicate a positive trend in the industry as more nontraded REITs decide to limit the number of months they spend raising capital and focusing on completing full-cycle events more quickly. In fact, as we noted in our June 2014 publication of the Nontraded REIT Industry Review, looking back over the past 18 months, we see a clear pattern as it relates to shorter fundraising and holding periods.

Furthermore, for the 15 nontraded REITs that have completed full-cycle events between January 1, 2013 and June 4, 2014, the average number of months from inception to the completion of a liquidity event dropped from 6 years (72 months) down to 5.25 years (63 months). Additionally, as it relates to the period post fundraising and prior to a liquidity event, we see that the average number of months spent “maturing” the portfolio dropped from 2.3 years (28 months) down to 1.8 years (21 months). Overall, we believe this is both good for investors as well as for the industry.

As a thought leader in the nontraded REIT industry, we believe that evaluating nontraded REITs by LifeStage™ offers a more meaningful way to compare performance. While this article highlights the benefits of this classification system, we have also created a short video that further explains each LifeStage™ which can be viewed below.

The LifeStages Of A Nontraded REIT 

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