Lee Neibart, senior partner with Apollo Real Estate Advisors LP, is a guy who sticks to his knitting. He started in the mortgage loan business at the Prudential Life Insurance Co. in 1974, joining its real estate arm when it was formed. In 1989, he joined Robert Martin Co., a real estate development and management firm, and in 1994, he joined Apollo as a senior partner. Mr. Neibart is on the boards of several real estate development and operating companies and is also on the advisory board of the Real Estate Institute of New York University, where he also lectures. On Jan. 31, Apollo's second European fund, Apollo International Real Estate Fund II, closed at $600 million, more than 60% larger than its first European fund. It is also in the process of closing a $500 million domestic fund, which is half the size of its last two domestic funds. Mr. Neibart spoke with Pensions & Investments' Arleen Jacobius about the fund-raising environment for real estate funds, the globalization of the asset class and the firm's foray into hedge funds.
Q What were the returns of the first European fund?
A We held the final close in the summer of 2003 and to date we've returned 60% of the equity. We believe the IRR (internal rate of return) will be 36% and a two to three multiple on our first European fund. We called it international … because we made a few investments in Japan. Now, because we have a significant London office, we are satisfied we will concentrate in Europe.
Q What was the target size of the new European fund? Was it oversubscribed?
AYes, it was oversubscribed. We stopped marketing once we got to 10% over. There was a lot of other interest, but I did not take the meetings. We feel that $550 million over a three-year-period is enough equity capital that we can invest prudently and profitably. … We're also raising our fifth U.S. fund, which will have $500 million in equity.
Q What will be your investment strategy for the new funds?
AWe will be using the skills developed over the last 12 years. … We feel there is enough in the five asset classes: apartments, office buildings, industrial, retail multifamily/rental/condos and hotels. We have no trouble investing money in those five asset classes rather than in non-traditional real estate investing.
Q Are you seeing a convergence among private equity, real estate and hedge funds?
AThe way we look at it … the real estate investing we've done over the last five years has enough opportunities to fix broken assets from a strictly real estate standpoint. We don't get involved in the trading of mortgages in our real estate funds. As we stay with our core competency, we don't come into any conflict with our investing in terms of private equity and hedge funds.
Q Do you see any overlap between real estate and mezzanine investing?
AWe have raised a small mezzanine fund and a small hedge fund, and we are doing some of that investing. We are utilizing those vehicles to make mezzanine investments. We started a hedge fund early (in 2004) and a mezzanine joint venture with GMAC (the $107 million Apollo/GMAC Real Estate Mezzanine Fund LP closed in April 2003.) We made our fourth mezzanine loan in it, and we are very happy with the way that business is progressing.
AWe are able to service those real estate investments that are in our real estate core competency, such as condos in San Diego. Deals of that type, we feel able to underwrite them properly, underwrite the market risk.
Q What are your plans?
A Our strategy is very simple. Now we will raise our fifth U.S. fund. We raised our second Europe fund. We intend to grow our hedge fund business. ... We are confident that with those three businesses there will be no conflicts.
Q What is your investment strategy in the United States?
AWe will focus on the major cities. We will focus on those locations where we believe there is growth, primarily on the East and West coasts and in the Southeast, and that's where most of our attention will be spent. We are tracking interest rates very closely as to the pressure on various real estate assets. We make sure we invest in areas that are experiencing positive growth and that we believe will experience positive growth.
Q Why are you mainly interested in investing in major cities?
AThat's where tenancy and increases in values are occurring. Where you have a burden of increases in expenses without commensurate increase in rents, that's not where you should be investing. The pricing may be attractive, but without rental or an increase in sales value, it's not a good place to invest.
Q You don't subscribe to the secondary city idea?
AIt's not, on the whole, been a successful strategy for us. We reviewed our business over the last 12 years and we believe our biggest successes are where there has been growth. For an illustration, we bought rental property in Brooklyn and are in the process of converting it to condominiums. The gross value of the property has gone up 50% in a year. What that means is that we made a good acquisition and were very opportunistic. It also means the investing public sees Brooklyn as an area that still has room to grow as far as condominium prices. I don't see that available in any secondary or tributary city.
Q Do you think institutional investors are investing more in opportunity funds than they were in the past?
AMy own feeling is that the institutional investors are trying to convince the powers that be that opportunity funds and value-added funds are the places to be. It stands to reason if you can invest those types of funds where there is less competition for product and with an experienced manager, you could get very satisfying returns. I believe one has to be very careful in buying core assets when interest rates do go up and cap rates compress and, in the case of office, when demand does slow down. Holders could be faced with expenses such as re-letting and free rent, which are far in excess of what they underwrote originally. Because it is core does not mean that it is without risk. In New York, Los Angeles and especially San Francisco, core investments have seen wild swings in values.
Q Do you think there will be more corporate real estate for sale?
AFor the most part I think you can't make a general statement. But, in isolated cases, they have too much real estate on their books and they've decided to concentrate on certain areas which make other areas surplus property and they (then) decide to get rid of it.
Q Why did you select a career in real estate?
AUpon graduating from business school (at New York University), I did not have the slightest idea what I wanted to do, and so I answered an ad by Prudential in the real estate department. I began working on some of the biggest transactions in the country and I was bitten by the bug of putting together major development projects from New York to Hawaii that I never envisioned at (age) 24.