Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study

According to a study by The University of Texas at Austin McCombs School of Business and Blue Vault Partners LLC, most non-traded real estate investment trusts underperform compared to benchmarks. The study was released on June 1 and compared 17 “full-cycle” non-traded REITS that experienced liquidity events between 1990 and May 15, 2012 with two customized benchmarks. The benchmarks involved a portfolio of properties from the National Council of Real Estate Investment Fiduciaries and broad indexes of REITs that were publicly traded.

Per the study, only five of the REITs examined- Cornerstone Realty Income Trust Inc., Apple Suites Inc., Corporate Property Associates 10 Inc., Carey Institutional Properties Inc., and American Realty Capital Trust Inc.-outperformed the market indexes, meaning 71% of the REITs that were part of the study underperformed the customized benchmark. Only Apple Suites outperformed both. While the nontraded REITS made “respectable total returns”-10.3% was the average internal return rate-this was still 140 basis points below the two customized benchmarks, which both had returns of 11.7%. The study said that the main reason for this was fees. (With a standard 12% sales load or fee, the annualized return rate for the nontraded REIT goes up from 10.3% to 12.5%. That said, nontraded REIT fees could go as high as 15%.)

Even though the full cycle REIT sample on average underperformed their benchmarks, each REIT showed a positive total return to investors. A few of the other findings, according to the study:

• Non-traded REITs that had shorter time periods from inception to a full cycle event did better than ones that had longer holding periods.

• In looking at distribution yields to capital gains as a portion of total return, distributions made up 75% or greater of returns.

• When looking at “early Stage Investment Period” performances, about 1/3rd of nontraded REITs outperformed benchmarks based on NAREIT and NCREIF.

Nontraded REITS have been promoted to retail investors as investment vehicles that will allow them to purchase real estate that is institutional quality while having low volatility and greater than average current yields. That said, a maturation process caused by a number of big events has recently occurred, creating certain changes. Valuations of nontraded REITs have even gone down by 50%.

Unfortunately, many investors are not given a clear picture of the risks involved in non-traded REIT investments. This can lead to suspension of dividends, illiquidity, and huge REIT losses. Many investors of non-traded REITs were told they would be getting steady dividend income, as well as stock prices that wouldn’t fluctuate too much. That non-traded REITs are accompanied by commissions, larger broker fees, suspended buyback programs, and dividend cuts may come as a surprise.

Blue Vault Partners and The University of Texas at Austin McCombs School of Business Release Results from Performance Study of Nontraded REITs, PRWeb, August 28, 2012

Most nontraded REITs underperform market, Investment News, June 10, 2012

More Blog Posts:
Texas Appeals Court Says Letter of Intent for Sale of Fiduciary Financial Services of Southwest Stock to Corilant Financial is Not an Enforceable Contract, Stockbroker Fraud Blog, August 17, 2012

Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases, Stockbroker Fraud Blog, May 26, 2012

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012
If you have sustained financial losses from real estate investment trusts, contact our Texas REIT attorneys at Shepherd Smith Edwards and Kantas, LTD, LLP today. Our Houston-based securities law firm represent clients with losses involving publicly traded REITs.