Vintage Years

When I think of vintage years and investing, I think of venture capital or private equity deals.  It is my opinion that the concept of vintage years evolved as a way for managers (and marketers) to explain away poor performance.  They created an excuse to blame bad deals and weak returns on the year in which a fund made its investments, rather than lousy investment decisions.  I have never really heard it widely applied outside the VC world, but its a concept that needs wider application.   Some real estate sponsors can make a strong case to play the vintage blame game. (And can't equipment leasing sponsors blame every year on the vintage?)

I have always been aware of vintage issues related to real estate investments, or, really, any pooled investment that raises and invests money over a particular time period.  This idea solidified when I was recently reviewing the performance of two, large non-traded REITs, both with identical objectives, acquisition philosophies and management, that were issued by the same large real estate sponsor, and that raised about the same amount of investor equity.  The only difference was when the REITs raised and invested capital.  From a performance perspective, the two REITs are Jekyll and Hyde, night and day, black and white.  The REIT that raised and invested money in 2006 to 2008 is having troubles and the REIT that raised and invested money in 2009 to 2010 is looking solid. The first REIT is not alone, as many REITs that were raising money over the same time 2004 to 2008 frame are facing a difficult environment.

I always thought of REITs, even non-traded REITs, as open-ended corporations with infinite lives that had the ability to actively buy and sell property, and that would eventually have a a mix of real estate, bought over different periods.  I did not pay too much attention to the years when the REITs were buying property, as I thought it would all even out over time.  Now I don't believe this.  When a REIT buys its initial portfolio will make a big difference in its long-term performance.  While you can't predict with certainty how current markets will relate to the future or what the future will bring, it is clearly an issue that needs consideration.