In a clear win for David Lerner Associates Inc. and its clients, one of a series of nontraded real estate investment trusts sold exclusively by David Lerner brokers on Friday agreed to merge in a deal that would add slightly to the principal of the investors, who also collected distribution of 7% to 8% annually over the lifetime of the REIT.
Apple REIT Six Inc. said it had entered into a merger agreement with an affiliate of the Blackstone Group LP. The REIT was originally sold to investors from 2004 to 2006, with most shares at $11. Each holder of an Apple REIT Six unit will receive $11.10 in value, consisting of $9.20 in cash and $1.90 per share in preferred stock of the Blackstone affiliate, BRE Select Hotels Corp.
Investors will have an option to redeem the new shares after seven and a half years; the shares have a dividend rate of 7%.
In a news release, Apple REIT Six said it had paid about $7.29 per unit, or total distributions of $589 million. Adding those distributions to the per-unit acquisition price, a typical investor will see $18.39 per unit, or a return of 60%.
The total transaction value of the Blackstone deal, including debt, is $1.2 billion.
“This is terrific for our shareholders,” said John Dempsey, president of David Lerner Associates. “This shows what these [nontraded REIT] programs are designed to do: provide income and return the share value at their end.”
Joseph Pickard, the firm's general counsel, pointed out that each Apple REIT was being evaluated on its own and that no guarantee was made about their future.
The portfolio of Apple REIT Six consists of 66 hotels in 18 states.
Apple REIT Six is one of a number of nontraded REITs to cash out successfully for investors this year.
The deal comes at a good time for the firm.
For the past two years, David Lerner Associates has been on the radar of securities regulators over the sale of illiquid REITs. In May 2011, the Financial Industry Regulatory Authority Inc. filed a complaint against it over sales of Apple REIT 10. That suit alleged that between January and December 2011, the firm recommended and sold more than $442 million of Apple REIT 10 without performing adequate due diligence, in violation of its suitability obligations.
Last month, Finra said David Lerner Associates had agreed to pay $12 million in restitution to clients as part of a far-reaching settlement.
In addition, David Lerner, founder and chief executive of the Syosset, N.Y.-based firm, was fined $250,000 and suspended from the securities industry for one year, followed by a two-year suspension from acting as a firm's principal.