Local REIT fund sold in billion-dollar deal

The Apple REIT Companies headquarters downtown. (Photo by Lena Price)

The Apple REIT Companies headquarters downtown. (Photo by Lena Price)

In one of the biggest money deals of the year for a Richmond firm, a local REIT fund was sold Tuesday for $1.2 billion.

Apple REIT Six, one of the five funds that make up the downtown-based Apple REIT Companies, was acquired by BRE Select Hotels Corp. BRE is an affiliate of New York investment firm Blackstone.

With its acquisition, BRE gets Apple REIT Six’s portfolio of 66 hotels across 18 states with a total of more than 7,600 rooms. The REIT produced $260.1 million in revenue and a profit of $49.5 million in 2012, according to filings with the Securities and Exchange Commission.

Apple REIT declined to comment on the deal other than to say in an email Tuesday: “We are pleased that the merger of Apple REIT Six into BRE Select Hotels Corp, an affiliate of Blackstone Real Estate Partners VII, was completed today.”

This is the second billion-dollar-plus deal in Richmond this month. Markel closed May 1 on its acquisition of a reinsurance firm in Bermuda. That deal had a price tag of approximately $3.13 billion.

The BRE deal was announced in December and had several hurdles to cross before closing. Last week, Apple REIT Six shareholders approved the deal.

Apple REIT funds invest almost exclusively in hotels. They raise money for their acquisitions by selling shares to investors through a New York broker.

Funds for Apple REIT Six were first raised in early 2004. It acquired its first hotel that year. Shares of the REIT were sold to investors until 2006, after it raised $1 billion. Its closest property to Richmond was a Hilton Garden Inn in Fredericksburg.

Its nine-year lifespan wasn’t without bumps.

Apple REIT Six and three of the company’s other funds disclosed this year that they are being investigated by the SEC for issues related to the adequacy of certain disclosures in their regulatory filings beginning in 2008.

The “non-public” SEC investigation is also interested in the Apple funds’ internal review of certain transactions they’ve made, they disclosed in year-end 10-K filings.

The investigation is focused on Apple REITs Six, Seven, Eight and Nine. It does not involve Apple REIT Ten, the newest of the company’s funds and the only one that remains open to new investors.

Apple REIT Six said in a filing this month that it “intends to continue to cooperate with the SEC staff, and it is engaging in a dialogue with the SEC staff concerning these issues and the roles of certain officers.”

And last year, the New York firm that exclusively sells Apple REIT shares to investors was ordered by regulators to pay $12 million in restitution to certain shareholders. David Lerner, the head of David Lerner Associates, was also fined $250,000 by the Financial Industry Regulatory Authority and was suspended for one year from the securities industry.

Amid fallout from the Lerner situation, Apple REIT Six also got wrapped up in a class action lawsuit in federal court in New York. The suit was dismissed in March, but the plaintiffs are appealing that decision.

In the deal with BRE, shares of Apple REIT Six are being converted into the right to receive $11.10 per share from BRE. That amount consists of $9.20 in cash and a share of BRE preferred stock. BRE was created by Blackstone specifically for the deal.

Those preferred shares carry a 7 percent interest rate and can be redeemed after 7.5 years. BRE has the power to redeem the shares at any time. The dividend rate jumps to 11 percent per share if they are not bought back within five years.

Richmond law firm McGuireWoods acted as legal adviser to Apple REIT on the deal. It used Wells Fargo Securities as its financial adviser for the deal.

Apple REIT Nine, meanwhile, is preparing for construction of a $30 million, 210-room hotel on East Cary Street in Shockoe Slip.

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