Investors who want to redeem their shares in the Apple family of non-traded REITs marketed by David Lerner Associates Inc., which has become the target of a regulatory action, may be out of luck
Investors who want to redeem their shares in the Apple family of non-traded REITs marketed by David Lerner Associates Inc., which has become the target of a regulatory action, may be out of luck.
Redemption requests for nontraded real estate investment trusts normally are processed at the end of each quarter.
“I think there's a flood of redemptions coming in” when the second quarter ends June 30, said Jacob Zamansky, a plaintiff's attorney who said that he has had conversations with 25 of David Lerner's clients about the matter.
But the Apple REITs marketed by the firm have strict annual limits on the amount of shares that can be redeemed in any year, and a spokeswoman for the sponsor said there are no plans to change those limits.
Nontraded REITs such as these also have the option of suspending redemptions, as many did during the 2008 financial crisis.
One lawyer is skeptical about the chances of clients who are looking to sell their shares back to the sponsor.
“My suspicion is that if the Apple REITs have too many requests from clients, that could force a suspension of the redemption program,” said Daxton White, a plaintiff's attorney. He said that he has spoken to about 10 David Lerner clients who bought the Apple REITs.
Attorneys said that investors are anxious about selling their shares in the wake of charges brought by the Financial Industry Regulatory Inc. that David Lerner brokers recommended and sold more than $300 million in shares of the Apple REITs without performing adequate due diligence, violating the firm's suitability obligations.
Investors were attracted to the REITs, which held about $2 billion in assets and invested in extended-stay hotels and motels, because of their steady dividends of 7% to 8%.
The question potentially facing David Lerner and its 370 representatives is how the REITs were sold, and how much of the conversation between the broker and the client focused on how the REITs' underlying assets were performing in a troubled real estate market, industry attorneys and observers said.
Investors typically “are not aware that there are limitations [on redeeming shares], and they're not being advised” by David Lerner brokers about the issue, Mr. Zamansky said.
Mr. White said that he hasn't filed any arbitration complaints against the firm, but “the calls just keep coming.”
“I'm waiting to see what happens at the end of the month — whether or not they can get their money out or not,” he said.
Having such a cap on redemptions is typical for nontraded REITs, which are illiquid investments. When the real estate market began its slide during the financial meltdown, many such REITs cut back on their redemption programs and slashed their dividends as a way of conserving cash. The Apple REIT Ten, for example, limits redemptions to 3% a year of all outstanding shares.
The Apple REIT redemption programs will not change, even in light of potential heavy demand, a spokeswoman said.
“We currently have no plans to alter the unit redemption program,” Kelly Clarke, director of investor services for the Apple REIT companies, wrote in an e-mail. “We encourage shareholders to carefully review the unit redemption program as outlined in our prospectus and other filings.”
Another problem potentially facing investors is the value of the Apple REITs' shares, industry observers said.
DECLINING VALUE
The price of one of the REITs sold exclusively through David Lerner Associates Inc. took a hit last week 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 this month in a separate SEC filing and also had consistently listed as an estimated share price on client account statements.
According to last week's filing with the SEC, Apple REIT Eight restated its value in order to recommend that the owners of the REIT not 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.
“It would virtually be impossible for [Apple REIT Eight] to be valued at $11 per share,” Mr. White said. “Most investors are not aware this investment has declined in value.”
E-mail Bruce Kelly at bkelly@investmentnews.com.
