Pick any article published about, nontraded REITs within the past year and most likely the primary focus of the article will be about how much money the industry has raised. Over and over again, we continue to see a significant amount of emphasis placed on this topic and are troubled by the suggestion that fundraising equals performance. In our opinion, that couldn’t be further from the truth. In fact, our most recent Full-Cycle Performance Study shows that the top fundraisers were rarely among the top performers, and many of the companies raising significant amounts of capital today have yet to show measurable full-cycle results.
As an industry observer and researcher, our focus is to provide transparency and the facts behind the industry’s true performance. We do that by monitoring each REIT’s financial performance on a quarterly basis and also by measuring the results of all full-cycle events on an annual basis. It is only through this type of analysis that we believe investors and the industry at large will have a real sense of how well these investments have performed. With that in mind, here are three important points we encourage our readers to consider:
- MESSAGE: Raising an estimated $20 billion during 2013 will be a significant milestone for the nontraded REIT Industry.
FACT: While we agree that this is a significant milestone for the industry, the part of the story that is often left out of these articles is “Why?” Is it because new investors are recognizing the benefits of nontraded REITs and are investing for the first time, or is it something bigger?
The real facts behind this figure include a conversation about the amount of money that is being recycled back into the industry, which is a direct result of the $16 billion in full-cycle events that have been completed during 2013. It is our estimate that without this return of capital to existing investors and their subsequent reinvestments, the industry would have only seen about $6-8 billion in new money from new investors.
- MESSAGE: The industry is growing at a rapid pace.
FACT: The industry is actually in a period of contraction in terms of the number of new product offerings and new product sponsors entering the space. During 2010 the industry saw 15 new offerings come to market, the most ever introduced in one year. Since then, the number of new offerings has declined on an annual basis, with only nine new product offerings having been introduced to date in 2013. Moreover, the number of sponsors managing nontraded REIT investments has also been declining. At the end of 2012, there were a total of 37 nontraded REIT sponsors. Our current forecast indicates that there will be only 32 active nontraded REIT sponsors remaining by the end of 2013.
- MESSAGE: It’s all about the dividend.
FACT: It’s not only about the dividend—it’s also about the total return. While we agree, and our Full-Cycle Performance Study supports the fact that roughly 85% of the total return to investors is made up of income, it is also important for nontraded REIT portfolio managers to add value for its investors by generating capital gains or avoiding capital losses via full-cycle events. Additionally, our performance analysis shows that for approximately 45% of the nontraded REIT portfolio managers who have completed a full-cycle event to date, on average, a higher portion of the total returns they have generated have come from either a capital gain or a capital loss rather than from dividend income.*
*Based on averages of all full-cycle events completed per sponsor.
Our firm has been using Blue Vault from the first year it was available.
We have found it to be a valuable tool to verify what wholesalers tell us and to dig deep into how the reported investments are really performing.
We appreciate that Blue Vault has expanded its services from initially covering REIT's to now also including BDC's.
Our clients also appreciate that we conduct this additional due diligence on their behalf.