Apollo’s real estate revenues soar 500%

In its second quarter results, the New York-based asset manager reported that revenue growth in its real estate segment had sextupled, largely from increased management fees, and also revealed a second closing for its latest real estate fund.

Apollo Global Management’s real estate segment reported earnings of $4.3 million during the second quarter of 2011, reversing a $6.1 million loss from the same period one year ago. The bulk of the net income—$4 million—came from its management business, while its incentive business—which includes carried interest income, profit sharing expense and income from equity method investments—accounted for the remainder.

The firm’s total revenues in real estate rose by more than 500 percent, jumping to $9.7 million during the second quarter from $1.6 million in the second quarter of 2010. The increase was primarily attributed to increased management fees resulting from Apollo’s acquisition of Citi Property Investors last November. Additional income during the second quarter included an $8 million gain for the reimbursement of previously incurred offering costs associated with the launch of Apollo Commercial Real Estate Finance in 2009.

Apollo, however, still finished the first half of 2011 with a loss of $1.1 million, although that is a marked improvement from the $9.9 million loss with which the firm closed the first half of 2010. Assets under management for the firm’s real estate business more than tripled, from $2.1 billion on 30 June 2010 to $7.6 billion on 30 June 2011.

Separately, the firm revealed in its second-quarter results that its AGRE US Real Estate Fund had held a second closing in June and, following the end of the quarter, had announced a joint venture with Driftwood Hospitality Management to acquire, renovate and rebrand full-service hotels in the US. The newly formed closed-end private investment fund, which will be focusing on real estate-related investments primarily in the US, held its first closing in January. AGRE currently has a total of $134.9 million in base capital commitments and $250 million in additional commitments.

Seeing 'big opportunities'

Apollo also said it was prepared to deploy capital into turbulent markets when it came to mainstream private equity investing and, far from panicking, the firm’s limited partners expect it to get busy finding deals. The firm had $9.9 billion in dry powder in its private equity funds as of 30 June.

Apollo's second quarter earnings call Tuesday was punctuated by repeated questions about the extreme volatility in the stock markets this week. The Dow Jones Industrial Average plunged more than 600 points Monday, the first trading session after Standard & Poor’s downgraded America's credit rating for the first time ever. Other markets around the world also felt the shock Monday, including Britain's FTSE 100 index, which was down 1.7 percent to 5,160, and Germany's DAX, which dropped 2.3 percent to 6,096.

“When markets are going up, we’re looking to do realisations; when markets are going down, we’re looking to deploy capital,” firm president Mark Spilker said during the call. “Our LPs look to us to deploy in this environment, and there’s a lot of work and dialogue going on.”

Apollo is seeing “big opportunities” in its capital markets and credit business and has been building out its capabilities in those areas, Spilker said. However, opportunities could evaporate depending on how long markets remain depressed.

Indeed, the market needs to stay down long enough for capital to be deployed, Spilker said. Similarly, in good times, the markets need to stay up long enough to make realisations. “If this is a blip and it stays down for a short period of time, it’s harder to get capital to work,” he said.

The environment so far is different than 2008, mostly because there has not been big strains on liquidity, Spilker noted. “We see anxiety about sovereign debt in Europe, anxiety about growth and re-pricing of markets – that’s different from what we were seeing in 2008, which was a credit crisis,” he said. “I’m not saying one couldn’t lead to the other, but we are seeing opportunities to put capital to work.”

Additional reporting by Christopher Witkowsky