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Separating Fact from Fiction: A Rebuttal to Recent Articles Regarding Nontraded REIT Performance

June 18, 2014

In our opinion, recent articles and blog postings have presented a biased view of nontraded REIT performance. For example, in the June 15, 2014, Wall Street Journal article titled “Nontraded REITs are Hot, But Have Plenty of Critics” and in online blog posts by the Securities Litigation & Consulting Group, we believe the data fall short of offering readers a balanced view of nontraded REIT performance. Moreover, this commentary completely ignores the results of our past two Nontraded REIT Full-Cycle Performance Studies prepared in collaboration with The University of Texas, which would have given readers an unbiased perspective from experts in the space.

So in order to separate the facts from fiction, we have provided some additional points of clarity and thoughts for consideration.

As it relates to the use of benchmarks, does the research reference reasonable and truly comparable data for comparative purposes?

In a recent report by Securities Litigation, the author states that investors “lost $27.7 billion investing in nontraded REITs” by comparing returns on 27 full-cycle nontraded REITs to a single index, the Vanguard Real Estate Index Fund (VGSIX). As researchers dedicated to presenting the facts, we believe it is inappropriate to suggest that investors who averaged 8.27% annualized returns* in nontraded REITs have “lost” $27 billion because their average returns were less than those of a particular traded index. By that logic, any investment portfolio that underperforms relative to an index has “lost” value, a conclusion that is not defensible at the most basic level.

To further illustrate this point, this statement is no different than saying that because the majority of all mutual funds underperform broad market indices such as the S&P 500, investors have also “lost billions” annually by investing in mutual funds simply because they could have, with the benefit of hindsight, invested differently.

Is the presentation of results complete or does it focus on certain examples of relatively poor performance?

In the articles mentioned above, one nontraded REIT is singled out as an example because it underperformed 24 of the 27 full-cycle REITs analyzed. By shining the spotlight on one underperforming example, the authors are trying to bias readers into concluding that all nontraded REIT investments are poor choices compared to one real estate index.

Introducing additional data that were ignored in these articles, according to the 2013 Blue Vault Full-Cycle Performance Study, results showed that for all of the 27 nontraded REITs with measurable data that had completed full-cycle events from inception of the industry (1990) through November 2013, nontraded REITs outperformed both the S&P 500 and Intermediate U.S. Treasury Bonds. In fact, when comparing results over matched holding periods, these 27 nontraded REITs averaged total annualized returns of 8.27% versus the S&P 500 return averages for the same periods of 6.08% and returns on Intermediate Term U.S. Treasury Bonds of 6.22%.

Do the critics' comparisons truly take into account the attributes that make nontraded REITs attractive investments for some portfolios?

While critics of nontraded REITs are quick to point out the difference between the average annual shareholder returns for a small sample of nontraded REITs and the traded REIT index, they fail to mention two important characteristics of nontraded REITs that appeal to investors:  distribution yields and lack of return correlations with other asset classes.

Distribution Yields: The trailing 12-month dividend yield on the Vanguard REIT Index (VGSIX)** was 3.69% at March 31, 2014, while the average distribution yields for nontraded REITs were 6.40% for effective REITs and 6.13% for closed REITs as of that date. For many investors this difference in yields is a significant benefit.

Correlation: The 2013 Blue Vault Full-Cycle Performance Study also showed that the total returns for 27 full-cycle REITs had no significant correlation with returns on stocks or Treasury bonds over matched holding periods, while exceeding both asset classes in average returns. This indicates potential for portfolio risk reduction via allocation of some portion to nontraded REITs.

It is also relevant to REIT investors that the benchmark VGSIX index fell 37% in 2008 and had a 10-year Beta of 1.13**, displaying above-average systematic risk. The disadvantages of illiquidity are sometimes offset by the increased volatility and systematic risk of alternatives, which the critics conveniently fail to mention.

* Average annualized returns for all REITs analyzed in the Blue Vault Partners Full-Cycle Performance Study dated November 2013.
** Yahoo Finance ticker VGSIX, +Risk

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Derek Hayes Analyst, Cambridge Investment Research Blue Vault's Services April 14, 2016