Monday Q&A: ‘Apple is playing games’

applereitA California investment fund just did the financial equivalent of calling a bluff by a fast-growing Richmond REIT that has been telling investors in one of its funds that their shares are worth the same as when they were issued.

But in obscure world of non-publicly traded REITs, there is not clear sense of what a share of an Apple REIT fund is worth, exactly, because buyers and sellers are not regularly trading.

The broker for Apple REIT, David Lerner Associates, has been telling investors that shares in Apple REIT Eight are worth $11 each. A federal regulator said that was misleading and sued David Lerner for failing to mention that the hotels in Apple REIT Eight are not making money.

Meanwhile, an investor group wants to get shares of the REIT on the cheap, and offered far less than what David Lerner says they are worth. Chip Patterson, the legal counsel for MacKenzie Patterson Fuller, the firm making the $3 offer, chatted with BizSense about why his firm is trying to invest in Apple REIT. Below is an edited transcript.

Richmond BizSense: What does your fund do?

Chip Patterson: We buy discounted real estate securities such as REIT shares. We buy all kinds of different REITS. Apple is one we followed for a while. We saw they just recently had trouble redeeming shares. [More people wanted their money back than the fund was willing to accommodate.] We make no bones about it: If we think the stock is worth $5, we pay $3.

Maybe in year two, there is a lift, or it gets sold or merges. And we get our $4 instead of $3.

RBS: Are you looking at the hotels themselves in some sort of corporate raider style?

CP: No. We buy and hold. We are not a threat to the company. We do not want to take over hotels or operate hotels. We are interested in making an investment in the company. We are trying to buy out shares from people who need to get out.

RBS: What do you base your price on?

CP: We take a look at information filed on the SEC website. We have their financial reports and look at net operating income and capitalization rate. We take out fees payable on liquidation to David Lerner and Apple REIT. And we come up with a share price of what we think it’s worth.

RBS: Have there been any nibbles from Apple’s investors?

CP: It hasn’t been mailed yet. Apple is playing games. Under securities laws, they are required to mail the offer for us or give us a list of shareholders so we can mail it. They were required to respond to us by Friday. They delivered that list yesterday. And when we got the list, we were surprised to see one shareholder: David Lerner.

RBS: The hotels in Apple REIT Eight are not profitable right now, so the company is paying the dividend with borrowed money. That can only go on so long. Are you worried about that stream of cash?

CP: Things will improve, or they’ll stop the dividend. The fun has low leverage, and they can safely borrow more money. We’re not worried about it. We think operations are stable enough to support that at this point.

RBS: So how did you come up with your value of $3 per share?

CP: For shares to be worth $11, they’d have had to made money since 2007 on real estate holdings. I don’t know anybody that has. Not to mention … for every dollar put in ground, there is only 88 cents to invest. [The other 12 cents is going to David Lerner for selling the stock and to Apple for fees.] So how does 88 cents go back to a dollar? It’s next to impossible for that to be correct.

RBS: Why might David Lerner say it’s worth $11 a share?

CP: They are basing the value on the fact that people are electing for dividend reinvestment. Because people are willing to pay $11, they figure it must be worth $11.

That’s faulty logic. People elected to invest dividends at the time they paid $11 at the initial offering. They haven’t bothered to change that.

RBS: Did you know the FINRA lawsuit against David Lerner, Apple’s main source of investor funds, was coming?

CP: No.

RBS: How would your fund make money on its investment?

CP: If we buy at $3 and it’s worth $4, down the line the fund may sell hotels and we get $4. Apple would distribute $4 to shareholders. In the past, REITS sold out to other REITS.

Remember, Apple does own these hotels. We have to trust that what is said in filings is true.

RBS: How many people do you think will take you up on your offer?

CP: We can never know how many, but I wouldn’t anticipate it’s oversubscribed. We’ve never had an offer be oversubscribed. We offered to buy 5 percent of it.

It would be a successful offer for us if half of 1 percent tendered.

Aaron Kremer is the BizSense editor. Please send news tips to [email protected].

applereitA California investment fund just did the financial equivalent of calling a bluff by a fast-growing Richmond REIT that has been telling investors in one of its funds that their shares are worth the same as when they were issued.

But in obscure world of non-publicly traded REITs, there is not clear sense of what a share of an Apple REIT fund is worth, exactly, because buyers and sellers are not regularly trading.

The broker for Apple REIT, David Lerner Associates, has been telling investors that shares in Apple REIT Eight are worth $11 each. A federal regulator said that was misleading and sued David Lerner for failing to mention that the hotels in Apple REIT Eight are not making money.

Meanwhile, an investor group wants to get shares of the REIT on the cheap, and offered far less than what David Lerner says they are worth. Chip Patterson, the legal counsel for MacKenzie Patterson Fuller, the firm making the $3 offer, chatted with BizSense about why his firm is trying to invest in Apple REIT. Below is an edited transcript.

Richmond BizSense: What does your fund do?

Chip Patterson: We buy discounted real estate securities such as REIT shares. We buy all kinds of different REITS. Apple is one we followed for a while. We saw they just recently had trouble redeeming shares. [More people wanted their money back than the fund was willing to accommodate.] We make no bones about it: If we think the stock is worth $5, we pay $3.

Maybe in year two, there is a lift, or it gets sold or merges. And we get our $4 instead of $3.

RBS: Are you looking at the hotels themselves in some sort of corporate raider style?

CP: No. We buy and hold. We are not a threat to the company. We do not want to take over hotels or operate hotels. We are interested in making an investment in the company. We are trying to buy out shares from people who need to get out.

RBS: What do you base your price on?

CP: We take a look at information filed on the SEC website. We have their financial reports and look at net operating income and capitalization rate. We take out fees payable on liquidation to David Lerner and Apple REIT. And we come up with a share price of what we think it’s worth.

RBS: Have there been any nibbles from Apple’s investors?

CP: It hasn’t been mailed yet. Apple is playing games. Under securities laws, they are required to mail the offer for us or give us a list of shareholders so we can mail it. They were required to respond to us by Friday. They delivered that list yesterday. And when we got the list, we were surprised to see one shareholder: David Lerner.

RBS: The hotels in Apple REIT Eight are not profitable right now, so the company is paying the dividend with borrowed money. That can only go on so long. Are you worried about that stream of cash?

CP: Things will improve, or they’ll stop the dividend. The fun has low leverage, and they can safely borrow more money. We’re not worried about it. We think operations are stable enough to support that at this point.

RBS: So how did you come up with your value of $3 per share?

CP: For shares to be worth $11, they’d have had to made money since 2007 on real estate holdings. I don’t know anybody that has. Not to mention … for every dollar put in ground, there is only 88 cents to invest. [The other 12 cents is going to David Lerner for selling the stock and to Apple for fees.] So how does 88 cents go back to a dollar? It’s next to impossible for that to be correct.

RBS: Why might David Lerner say it’s worth $11 a share?

CP: They are basing the value on the fact that people are electing for dividend reinvestment. Because people are willing to pay $11, they figure it must be worth $11.

That’s faulty logic. People elected to invest dividends at the time they paid $11 at the initial offering. They haven’t bothered to change that.

RBS: Did you know the FINRA lawsuit against David Lerner, Apple’s main source of investor funds, was coming?

CP: No.

RBS: How would your fund make money on its investment?

CP: If we buy at $3 and it’s worth $4, down the line the fund may sell hotels and we get $4. Apple would distribute $4 to shareholders. In the past, REITS sold out to other REITS.

Remember, Apple does own these hotels. We have to trust that what is said in filings is true.

RBS: How many people do you think will take you up on your offer?

CP: We can never know how many, but I wouldn’t anticipate it’s oversubscribed. We’ve never had an offer be oversubscribed. We offered to buy 5 percent of it.

It would be a successful offer for us if half of 1 percent tendered.

Aaron Kremer is the BizSense editor. Please send news tips to [email protected].

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John Scranton
John Scranton
13 years ago

Any Apple share holder would be a fool to sell their shares for $3.00. MacKenzie Patterson Fuller is no fool, he’s done his homework. He knows Apple Two’s $10.00 share sold to ING for $11.20 per share and Apple Five’s $11.00 share sold for over $14.00. He plays coy with the $4.00 and he’ll make a profit but in reality he’ll buy at $3.00 and then redeem at the $11.00 share price Apple 8 is redeeming at (and they are, check it out) or he’ll wait a couple of years for it to sell and pocket even bigger profits. There’s… Read more »

Ralph Kramden
Ralph Kramden
13 years ago

Dear Mr, Scranton, apparently, you’re incapable of reading an SEC filing, or you’re not an American citizen. Get somethhing straight: NO ONE who purchased real estate of any kind in the 2005 – 2007 time frame will come out even, much less ahead. Five hotels in Apple Eight are already in technical foreclosure. Two hotels in Apple Six, which should have been the least affected by the real estate meltdown, were sold at 40% less than what Glade Knight paid for them. Both are in Tempe Arizona, and these events are CLEARLY mentioned in the SEC fillings. Apple Eight recently… Read more »