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From bonds to billions

Apollo Real Estate has turned a 1993 investment in property-backed bonds into a $1.3 billion New York City deal.

In today's market, where quick flips and hold periods of 12 months are common, it is rare to find an opportunity fund that has held a property for five years, let alone 13. Yet Apollo Real Estate's recent sale of 1290 Avenue of the Americas in New York City for $1.3 billion (€1.0 billion) has roots that stretch back to the early 1990s—or, depending on how you look at it, to the 1970s.

According to John Jacobsson, a partner at Apollo, the building at 1290 was once owned by Olympia & York, which refinanced a portfolio of New York City properties, including 1290, via a bond offering in the 1970s. When O&Y was going through bankruptcy in the early 1990s, those bonds were trading at around 50 cents on the dollar.

“Apollo bought as much as those bonds as we could,” Jacobsson says.

Eventually Apollo, which held approximately 40 percent of the bonds, took possession of two assets, 237 Park Avenue and 1290 Avenue of the Americas, along with the rest of the bond holders. Five years ago, the consortium sold off the Park Avenue building. And in 2002, Jamestown acquired the remaining asset for $745 million. In 1993, Apollo had originally valued the property at $300 million.

“In terms of an opportunistic real estate investment, [1290] had really run its course,” Jacobsson notes, explaining that the building was 97 percent occupied when it was sold.

Nevertheless, Apollo still felt there was more money to be made. So when Jamestown expressed an interest in bringing on a partner, Apollo obtained sign-off from the rest of the bond holders and took a subordinated position in the building.

“At the time, our offices were catty corner to 1290,” Jacobsson says. “And we had been involved for nine years so we knew that for a long-term, stable, core asset, this was a great building.”

Given their fund's opportunistic mandate, Apollo formed a completely separate partnership to make the investment, including the partners of the firm, high-net worth individuals, and one pension fund investor. Over the past four years, of course, there has been a substantial compression in cap rates and a huge run-up in prices in New York City. So what looked like a solid, core deal in 2002 turned into something much different when Hudson Waterfront Associates bought the building for $1.3 billion.

“We thought it would be a 12 percent, core-plus return,” Jacobsson says. “But it performed more like an opportunistic deal.”

Rockpoint sells in New York, buys in Boston
Opportunity fund manager Rockpoint Group is in the process of selling two properties in the greater New York area, including an office property in Midtown Manhattan, 522 Fifth Avenue, for approximately $420 million (€328 million) and an office complex in Long Island for $165 million. The two properties were part of a joint venture between Rockpoint and Stellar Management. Last year, the JV had purchased the Manhattan property for a total of $213 million and the complex on Long Island for $107 million, according to press reports. Last month, Rockpoint also acquired a Boston office building for approximately $40 million from Hypo Real Estate, which had reportedly foreclosed on the previous owner, Goldman Sachs. At the time of the Rockpoint acquisition, the building had a vacancy rate of more than 60 percent.

Goldman sells two hotels
Strategic Hotel Capital (SHC), a private company primarily owned by Goldman Sachs and investors advised by Prudential Real Estate Investors, has sold two separate hotels: the Park Hyatt in San Francisco for an undisclosed price and the Ritz-Carlton in Laguna Niguel for $330 million (€258 million). HEI Hospitality, through its $425 million fund, HEI Hospitality Fund II, acquired the property in San Francisco. The Ritz-Carlton was sold to Strategic Hotels & Resorts, a public REIT which was formed through the spin-off of 14 properties from SHC in 2004.

Morgan Stanley to build Atlantic City casino
The principal investment arm of Morgan Stanley has acquired a 20-acre parcel of land on the Atlantic City Boardwalk for $74 million (€58 million) with plans to develop a $1 billion casino on the property. According to press reports, Hard Rock Hotels is the leading contender to operate the casino. The Hard Rock Hotel in Las Vegas was recently acquired by Morgans Hotel Group for $770 million. Morgan Stanley's gaming group has been involved with other projects in Atlantic City, including providing Trump Entertainment Resorts with a $500 million line of credit during its bankruptcy restructuring.

JER acquires Jameson Inns for $370m
JER Partners, the private equity real estate investment arm of the JE Robert Companies, has agreed to acquire publicly traded hotel operator Jameson Inns for $2.97 per share, or a total of $371 million (€289 million) including the assumption of debt. Jameson currently operates 119 hotels in the Southeastern and Midwestern US, 111 under the Jameson brand and eight under the Signature Inn brand. Jameson will be operated by Longhouse Hospitality, an operator of extended stay hotels that JER acquired in 2005. JER closed its last private equity fund, JER Real Estate Partners III, on $823 million in 2004.