The price of one in a series of 10 nontraded REITs sold exclusively through David Lerner Associates Inc. took a hit yesterday when management from Apple REIT Eight Inc. said that its book value was $7.57 per share at the end of March, according to a filing with the Securities and Exchange Commission. That's in contrast to the $11-per-share price that Apple REIT Eight posted last week in a separate SEC filing.
The price of one in a series of 10 nontraded REITs sold exclusively through David Lerner Associates Inc. took a hit yesterday when management from Apple REIT Eight Inc. said that its book value was $7.57 per share at the end of March, according to a filing with the Securities and Exchange Commission. That's in contrast to the $11-per-share price that Apple REIT Eight posted last week in a separate SEC filing and had consistently listed as an estimated share price on client account statements.
David Lerner Associates, with about 370 registered reps, has been on the hot seat over pricing of the Apple REITs since the end of May, when the Financial Industry Regulatory Authority Inc. filed a complaint against the firm in which it voiced concern over the fact that it had marketed shares in Apple REITS that hadn't been re-priced in years.
Finra said in the complaint that it was misleading to investors not to reflect the updated value of the REITs on the David Lerner Associates website, especially in those cases where the REITs were paying dividends with principal and borrowed funds instead of operating income.
David Lerner Associates allegedly violated Finra suitability rules selling the Apple REITs, according to the complaint, and could face Finra fines and potentially pay restitution to clients.
A David Lerner spokeswoman did not provide comment by press time.
Since 1992, David Lerner Associates has been the sole underwriter and distributor of the 10 REITs, most of them dubbed Apple REITs, that have issued $6.8 billion in securities, according to the Finra complaint. Investors have been attracted to the REITs' steady dividends of 7% to 8%.
According to yesterday's filing with the SEC, Apple REIT Eight took the step to restate its value in order to recommend to the owners of the REIT not to sell shares in response to a $3 tender offer by a series of pooled investment funds managed by Mackenzie Patterson Fuller LP, which buys illiquid real estate investments at deep discounts.
“The board of directors believes that the offer price represents an opportunistic attempt by the bidders to purchase units at an unreasonably low price and as a result, deprive the stockholders who tender the units of the potential opportunity to realize the long-term value of their investment in the company,” the company said in the filing.
Adding to the confusion over the value of Apple REIT shares, David Lerner client account statements report an estimated value of $11 per share, said Jake Zamansky, a plaintiff's lawyer in New York. He said that he had spoken with about two dozen David Lerner investors, but had so far not filed any complaints against the firm.
Meanwhile, an SEC filing on Apple REIT Ten Inc. yesterday stated that a member of the board of directors, Ronald Rosenfeld, resigned earlier this month. The board plans to fill his seat at a later date.
Accurate pricing of shares of the illiquid, long-term nontraded REITs has been an issue for almost two years. Before 2009, the common practice in the brokerage industry was to list the share price on client account statements at par value, or the amount at which the broker-dealer sold it, with the product typically priced at $10 or $11 a share.
In 2009, Finra told broker-dealers that they needed to adjust the prices on the investments more frequently. In a notice to members, Finra said that it was prohibiting broker-dealers from using information that was more than 18 months old to estimate the value of a nontraded REIT.
