FEATURE: Business as usual

“There will be no change.” As Lee Neibart took the stage at the annual PERE Forum in New York last month, the audience was keen to ask questions about Apollo Real Estate Advisor's pending rebranding. Neibart answered it in one simple sentence.

The name change to Area Property Partners was simply that, just a name. Nothing else about the New York-based private equity real estate firm would be altered.

The move to shorten Apollo Real Estate Advisors' name to Area follows an agreement at the end of October with the buyout shop of Leon Black, Apollo Global Management.

Lee Neibart

In 1993, Black and William Mack collaborated on a real estate operation intended to take advantage of the savings and loans crisis in the US and the sale of assets by the Resolution Trust Corporation (RTC). It was known as Apollo Real Estate Advisors. Initially, Apollo Global managing partners helped manage the funds and exerted some managerial control, according to a US Securities and Exchange Commission filing. That affiliation ended in 2000.

Earlier this year, Black decided to expand his private equity shop into the real estate domain, hiring former Citi Property Investors president and chief executive officer Joseph Azrack to lead the activities. At the time, people familiar with the situation said Apollo Global would attempt to brand its real estate arm with the Apollo moniker.

Announcing the rebranding, due to take place from 15 January, 2009, Mack said in a statement that the move marked a “new chapter” in the history of the 15-year-old firm. “We have far exceeded the expectations we set for ourselves back in 1993.” Neibart added that Apollo Real Estate would continue to raise funds and expand its “geographic footprint” in the future.

It was something he reiterated at the PERE Forum. “We had a relationship with the private equity firm. Over the past seven or eight years, their model was focused on operating companies, ours was and is the principal asset model. [Apollo Global] has not been involved in our business for almost a decade,” Neibart said, adding: “We are developers, real estate guys and we will continue to do what we do. There will be no change.”

Indeed for Apollo Real Estate, today's market offers them an opportunity to return almost to their roots – to the distress of the RTC period of the 1990s.

As the former chief operating officer with the developer, Robert Martin, during the savings and loans crisis, Neibart understands distress only too well. However even for this real estate veteran, today's crisis has unique characteristics that should persuade investors to be more “prudent”.

Apollo Real Estate, he says, has plenty of dry powder available for investment. But, Neibart stressed, today's volatility meant the firm was going to be “extremely careful and prudent. We will probably not do anything for the balance of the year. We have done only selective transactions over the past two years”.

The lack of available credit is one reason for the hiatus. “It makes no sense to spend time on new acquisitions when you cannot go to the lenders and get 40, 50 or 60 percent financing.” The main one though is the uncertainty surrounding the current real estate – and wider financial – markets. “Our people are visiting every day with bankers, lenders, insurance companies to try to figure out what the story is,” Neibart says. “Something will happen and it will happen sooner rather than later.”

Apollo Real Estate has already felt the impact of the uncertainty in the markets. In one recent deal, the firm bought a Washington, DC office building leased to the US Department of Prisons. The acquisition was an attractive one. The lease was soon to expire but contacts said the General Services Administration (which coordinates all US government leasing activity) would renew. Apollo Real Estate bought the property in an all-cash deal for around $50 million, with two mortgage commitments in hand. Although the GSA renewed, upon closing Apollo Real Estate's lenders said they couldn't meet their financing obligations.

Neibart is philosophical about the deal. “This was and is a good deal, but imagine if someone did a deal like that that was more opportunistic. You cannot put your capital at risk until you understand all the components of the transaction. This is no time to be a cowboy,” he says.

For most GPs, now is a time to wait and assess the situation – and the opportunities. Few are in a rush to invest. As one senior industry professional added at the conference, he'd be reluctant to invest in today's environment unless he was presented with an absolutely “bullet-proof” deal.

When more clarity emerges though, almost all fund managers agree that – in the US – the opportunities will be in real estate debt.

Neibart says when Apollo Real Estate does start investing capital more significantly it will mainly be with larger banks and financial institutions eager to dispose of their real estate assets. This contrasts with “partners and brokers” in the past.

He stressed however the firm's focus would be primarily on major cities globally, not locations that might be classed as secondary, or even tertiary. That focus would see Apollo Real Estate concentrate on larger institutions, rather than regional banks that have primarily dealt with more local and regional real estate assets.

The scale of the opportunity is difficult to assess, Neibart adds, but it will no doubt be huge. He doubts though whether there is enough capital on the sideline to handle “what's out there”.

One thing the senior partner does understand clearly, however, is the need to really know your tenants. “We are in a new world where things have evolved in terms of understanding who your tenants are,” he says.

In 1986, Neibart led Robert Martin's development of a 100,000-square-foot office building in Westchester County, New York. The building was leased to the insurance company AIG, the lending and insurance company GMAC and the auto company Ford. Imagine leasing that building today. Whomever your tenants, a financial analysis of their viability is essential. “Investors today have to know and understand the people who are going to pay the rent,” he says. “The question is if you have a large portfolio with a lot of real estate assets and a lot of tenants, can you mine through all that analysis?”

If that portfolio continues to pay, everything will be fine. If fundamentals weaken further, buildings lose tenants, vacancies increase and new injections of capital fail to produce a satisfactory return on investment, Neibart says: “These are things that people have never really thought about. We [now] have to wait and see how [things] find [their] way through.”

And his advice to newer fund managers who might not have experienced such turbulent times? “If you haven't raised your money, be patient for the next few months. If you've raised your money be very, very, very, very careful and check the quality of your tenants that you are investing that money in.”