Wednesday, March 26, 2014

BlueVault Partners' Non-Traded REIT Study: Even the Winners do Worse Than Traded REITs

By Tim Husson, PhD, FRM and Craig McCann, PhD, CFA

We have noted in our research and our posts that non-traded investments including non-traded real estate investment trusts (REITs), business development companies (BDCs), oil & gas and equipment leasing partnerships typically have extremely high upfront and ongoing fees. Because of these high costs, illiquidity, lack of transparency and conflicts of interest, these investments should underperform liquid, lower-cost traded investments with similar underlying exposures. For example, non-traded REITs should underperform liquid, low-cost traded REITs. Essentially, since non-traded REITs are in the same market for real estate that mutual funds, exchange-traded funds, and other real estate investments invest in, non-traded REITs can’t on average make up in returns what they take out in fees.

BlueVault Partners, LLC is an investment research firm focused on non-traded REITs and business development companies (BDCs). In September 2012, BlueVault and the University of Texas at Austin's Real Estate Finance and Investment Center issued a report that looks at the returns on a sample of 17 non-traded REITs. They then updated their study in November 2013 to cover 10 more non-traded REITs. While the 2013 study is not publicly available, a summary of their findings is available here.

On the surface, both the 2012 and 2013 versions of their study support our interpretation. The 2012 study notes:
Adding back a plausible estimate of fees leads to estimates of unloaded return that suggest that nontraded REITs perform fairly similarly to their [traded REIT] benchmarks in terms of their real estate portfolios’ returns.
Likewise, from the 2013 study's summary:
Removing the effects of a hypothetical 12% front-end load for all nontraded REITs in the sample, the average nontraded REIT achieved comparable returns to the FTSE NAREIT publicly traded benchmark returns.
Adding back in the 12% upfront fees, investors in the non-traded REITs covered by the Blue Vault study did about as well as traded REITs. More clearly, investors in the BlueVault REITs had holding period returns which were 12% lower than holding period returns in traded REITs.

However, the truth about non-traded REITs is likely even worse because the BlueVault study only considers the few REITs that had "provided shareholders with full liquidity" through a merger, liquidation, or public listing. These are likely to have been the best performing non-traded REITs; excluded were many of the non-traded REITs that have suffered huge dollar value losses -- for examples, Inland American, Behringer Harvard REIT I (a/k/a TIER REIT), and CNL Lifestyle Properties (a/k/a CNL Income Properties) were not included. Including only the 'full-cycle' non-traded REITs creates a conspicuous selection bias that overstates the returns to non-traded REITs as a whole.

The BlueVault study is analogous to comparing the returns to venture capital investment in social media companies to returns in the stock market but only considering the experience of venture capital investors in Facebook, Twitter and LinkedIn. Even with this selection bias, the Blue Vault study had to add 12% to the returns earned by investors in the non-traded REITs it covered to get them to equal the returns earned by investors in traded REITs over the same time periods.

By choosing only so-called 'full cycle' non-traded REITs, the BlueVault study presents a biased look at the market for non-traded REITs. By our estimates, BlueVault's sample reflects only about half of the capital raised by the over 100 non-traded REITs in the United States, and does not fully reflect what many non-traded REIT investors have experienced.

In upcoming posts, we will report on our analysis of returns earned by investors in almost all non-traded REITs, not just the winners included in the industry’s study.


  1. Blue Vault Partners produced the most comprehensive and complete study of the performance of nontraded REIT investments in the history of the industry, including all REITs that had provided full liquidity to their shareholders via full-cycle events. We updated the study last year to include the full-cycle events that occurred after our 2012 study, and we will update the study again in 2014. The authors are suggesting that our study “cherry picked” the nontraded REITs or somehow biased the results by the way we selected the events to be included. This is unfair and misleading. We believe the only way to accurately measure rates of return to investors in nontraded REITs is by looking at real cash flows. We state very clearly in the studies that actual investor returns cannot be measured until a REIT provides full liquidity, and full liquidity was objectively defined as the date when all common shares could be traded or sold for cash. To attempt to calculate returns prior to full-cycle liquidity events would require using published NAVs that are not determined by arms-length market transactions, and could introduce bias or inaccuracies in the results.
    Despite the front-end loads, many of the full-cycle REITs in among the 27 in our latest study outperformed their custom benchmarks which matched their portfolios to both publicly traded and privately managed real estate portfolios, and the majority (18 of 27) outperformed the S&P 500 over matched holding periods, with insignificant cross-sectional correlations of returns to that index. This suggests that nontraded REITs are a potentially valuable investment vehicle which can provide income (distribution yields averaged over 7% vs. the much lower yields on stocks or bonds over matched holding periods) as well as risk-reduction within a well-diversified portfolio. As with any risky investment, there were “winners” and “losers.” We reported the results based upon the full sample of full-cycle events available. We did not and will not bias our studies by choosing only the best performers. We are committed to accurately and objectively reporting results, providing transparency and third-party verification, free of bias or advocacy for any product or sponsor.
    If the authors choose to suggest that the performance of those REITs which have not yet had full-cycle events will deliver poor shareholder returns in the future, when those returns can be objectively measured using actual cash flows, that is their right. Our aim is to report results, not speculate on future performance. We showed in our studies that adjusting for a typical front-end load, the managers of nontraded REITs did produce portfolio returns that were, on average, in line with their custom benchmarks. Given the higher distribution yields and positive average capital gains for shareholders, as well as the low cross-sectional holding period correlations with other investment alternatives, these investments are not necessarily dominated by traded REIT alternatives as the authors suggest. Our regular reports show on a quarterly basis which nontraded REITs and which sponsors are delivering sustainable distributions and increases in portfolio values for their investors, allowing our subscribers to make informed decisions.
    It is not fair to Blue Vault Partners or our University of Texas co-authors to imply that we somehow biased the results of the full-cycle studies. We reported facts, and we will continue to report facts. Our reputation rests on objective and transparent reporting.

    James Sprow
    Director of Research
    Blue Vault Partners, LLC

  2. SLCG has gathered information on over 100 non-traded REITs - maybe not all the non-traded REITs ever in existence but the largest sample of non-traded REITs we are aware of anywhere.
    Blue Vault Partners (BVP) partially analyzed returns to only 27 non-traded REITs that became traded or merged with another REIT. BVP’s criterion obviously biases the results. We pointed out that this criterion is exactly the same as assessing the returns to early stage venture capital investments by only considering investments in firms that had an IPO. Alternatively, it is like concluding that the lifetime earnings of college basketball players is higher than of law school students by only considering college players who made it to the NBA.
    Mr. Sprow justifies BVP’s sample selection by saying the values non-traded REITs report in their SEC filings are not reliable. Good enough for the issuers to swear to in their SEC filings but not reliable enough to measure investor returns? This certainly seems like a strong argument against selling non-traded REITs.
    While a number of the non-traded REITs in BVP’s sample had returns which exceeded the S&P500 they fell short, on average, from traded REITs by the amount of their up-front costs. This fact and the availability of lower-cost, traded REITs, should be enough to make non-traded REITs per se unsuitable.
    The BVP study is not serious scholarship. The BVP study is not publicly available for comment and criticism. BVP’s studies are used by the industry to justify non-traded REITs to regulators and by brokers to sell non-traded REITs to unsuspecting investors. BVP sells the studies to brokers. We have tried repeatedly to purchase the study but BVP will not take our money.
    As part of our research we have developed extensive commentary on the BVP’s study which we will be posting to this blog over the coming weeks and which will then be distributed in a working paper posted to our website.
    Craig McCann, PhD, CFA

    1. The first study was published and is not hard to find. A quick Google search for the title gets the following link to the pdf ( The updated study results will also be made available. We are not aware of any in the industry who have used our study to justify non-traded REITs to regulators, and that is not why we produce our research. We and the co-authors at the University of Texas McCombs School of Business consider these studies to be serious scholarship which contribute to transparency and objectivity, and we welcome constructive criticism, since we are only interested in the facts, not in profiting from litigation.

    2. There’s some inconsistency between Dr. Sprow’s post and the prior post by his boss, Mr. Chitty. Are the 2012 and 2013 studies serious scholarship available for public comment and criticism or are they biased promotional materials only available to industry professionals trying to sell non-traded REITs to uninformed investors?

      As Dr. Sprow points out, the September 2012 study has been available on the McCombs real estate web site since October 2012, coincidental with its release. The October 2013 study, on the other hand, was announced with a press release on November 12, 2013 but, five months later, it is still not posted to the McCombs real estate web site. Mr. Chitty says the 2013 study is only available to people who pay for it and despite screening us out for the past 6 months will now allow us to purchase it. So, is it serious scholarship or marketing material for a dubious product?

      The Social Sciences Research Network ( is the standard location for scholarly research on the Internet. Dr. Sprow’s co-author, Prof. Hartzell is a respected academic with 25 scholarly papers posted to SSRN. See Prof. Hartzell’s scholarly publications at Prof. Hartzell doesn’t include either the 2012 or the 2013 BVP study with his scholarly papers on SSRN. Dr. Sprow has no papers posted to SSRN.

      Both Mr. Chitty and Dr. Sprow point out that SLCG is a litigation consulting firm. True enough but we also provide an enormous amount of free educational materials to investors, educators and industry professionals. We have published 19 papers in peer reviewed journals in the past four years and have several more currently under review. Our research has had a profoundly positive effect for investors. For example our paper on how average credit quality in bond portfolios was being measured incorrectly and overstated caused Morningstar and the industry to adopt our methodology. These papers are available on our website and on my SSRN author page at

    3. Sirs:

      I have not earned a Ph.D. and have not represented myself as "Dr." I have published articles in peer-reviewed journals and other publications. (see below) I do not question the value of the bloggers' research and have read some of their published articles and found them to be valuable. What I do question is their suggestion that we are not attempting to do serious research, and their use of terms such as "dubious" and "biased promotional materials." I believe it is unfair to ascribe motives to others who are trying with limited resources to provide transparency and objectivity within an investment environment that has historically lacked both. Our research is not perfect, but to suggest that it is intentionally biased or "promotional" is unfair. Hopefully the bloggers and their readers would agree that exchanging insults and ascribing motives is not constructive. We take our work seriously, as I'm sure the bloggers do. We support our research by means of subscriptions. So does the Wall Street Journal.

      James Sprow
      Blue Vault Partners, LLC

      “Returns in the Nontraded REIT Industry: Evidence from Full-Cycle Events,” Co-authored with Jay Hartzell, Jung-Eun Kim and Vee Kimbrell, in Real Estate Finance, December, 2012
      "The Theory and Practice of Finance in the 1990's," Co-authored with Glenn Petry, in The Quarterly Review of Economics and Finance, Fall, 1993
      "International Trends and Events in Corporate Finance and Management: A Survey": Co-authored with Glenn Petry, in Financial Practice and Education, April, 1993
      "Focus on Risk Measures": in Fidelity Investments Mutual Fund Guide, March and April, 1991
      "How Useful Are Popular Risk Measures?" Co-authored with Russell Fuller, in AAII Journal, January, 1990, pp. 11-13
      "Timing versus Selection Revisited": Co-authored with Russell Fuller, in The Institutional Investor Focus on Investment Management, F. Fabozzi, Editor; 1989, pp. 47-63


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