In the article written by Bruce Kelly of InvestmentNews on September 17, 2014, titled “Nontraded REITs stack up well compared with traded REITs,” he states that an August 2014 Green Street Advisors study is the “first to track nontraded REIT performance in comparison with their traded counterparts.” Unfortunately, Mr. Kelly forgot to check his facts when he wrote this statement because in another article he wrote on June 10, 2012, he stated that the Nontraded REIT Full-Cycle study prepared by Blue Vault Partners LLC and The University of Texas at Austin McCombs School of Business and released in 2012 was, “likely the first systematic examination of the realized returns for investing in nontraded REITs.”
In the latest article, Jim Sullivan of Green Street was quoted as saying “No one has done [this type of study] before. It quantifies what had been a gut thesis on relative performance.” Actually, Blue Vault has completed two such studies and will soon be releasing a third, which will update the full sample of all full-cycle events among nontraded REITs through July 2014 to 35 events. For the past two years, Blue Vault’s studies have focused on understanding the performance of nontraded REITs compared to their traded counterparts via the use of customized benchmarks that have been adjusted for property types, property locations, and differences in leverage. In addition, these annual studies compare nontraded REIT performance to institutional portfolios using NCREIF data. They have also measured returns over different holding periods, for the early, middle, and late offering period investors, and they have addressed the effects of sales loads on total returns.
It appears that this reporter has a different interpretation of full-cycle results depending upon whose study he quotes. The 2012 article’s headline was “Most nontraded REITs underperform market,” while the latest article’s headline took a more positive tone with “Nontraded REITs stack up well compared with traded REITs.” Interestingly, in the 2012 study by Blue Vault, which covered 17 full-cycle cases through mid-2012, the performance gap was actually less between the nontraded REITs and the publicly tradeds than in the Green Street update, which added 17 more full-cycle events to reach a sample size of 34.
The use of custom benchmarks by Blue Vault to measure nontraded REIT full-cycle performance recognizes that the best way to make “apples-to-apples” comparisons between the returns to investors in nontraded REITs versus traded alternatives is to adjust for asset types, locations, and leverage differences, as these all impact both returns and risks, and should be taken into account. It is also important to note that the nontraded REITs in the Blue Vault studies are only included when shareholders have achieved full liquidity, excluding nontraded REITs that have delayed the listing of a portion of their common shares by using different share classes that do not immediately trade on exchanges. Blue Vault’s samples exclude those REITs until common shareholders achieve full liquidity for all of their common share holdings, which in several cases has been 18 months after listing of their Class A common shares.
In November 2014, Blue Vault will publish its third annual performance study prepared in collaboration with The University of Texas. The updated study will include eight new companies with full-cycle events, benchmarks for healthcare and mortgage REIT performance, as well as comparisons of holding period returns for those investors who tendered shares to third parties via tender offers prior to the full-cycle events. It will also report holding period returns for investors who redeemed shares prior to the full-cycle events via share redemption programs.