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Favorable Pricing Conditions Seen as Lifeline for Struggling CRE Firms Pursuing Strategic Options

Publicly Held CRE-Related Firms Putting Themselves in Play
January 13, 2016
With prices for commercial property trading in excess of CRE-related stock values and private investment capital readily available for real estate deals, publicly held firms involved in managing, financing and occupying commercial property are seeking to capitalize on current high property valuations by putting themselves in play.

Three firms announced this week they are reviewing strategic alternatives, Wall Street-speak for entertaining potential offers. The firms include NorthStar Asset Management Group Inc., a global asset management firm focused on real estate assets, and American Capital Ltd., a publicly traded private equity firm that originates, underwrites and manages investments in real estate and structured products.

The third firm reported to be reviewing its options is Apollo Education Group Inc. While it does not directly own CRE assets, the company leases more than 6.8 million square feet of space in 246 properties for its for-profit universities.

The for-profit education industry is undergoing significant contraction due to new regulatory guidelines governing student loans issued by the U.S. Dept. of Education. The new rules took effect last summer and according to some reports, are putting about 1,400 college programs operating in as much as 35 million square feet of space at risk of losing eligibility for receiving federal student financial aid.

NorthStar Asset Management Hires Goldman Sachs

NorthStar Asset Management Group Inc., which has been the target of activist real estate investor Jonathan Litt, has hired Goldman Sachs to assist in exploring possible options to maximize shareholder value.

As of Sept. 30, 2015, NorthStar had $38 billion of assets under management. It also owns a 43% interest in American Healthcare Investors LLC; a 45% interest in Island Hospitality Management Inc.; a 50% interest in Distributed Finance Corp.; and has committed to acquire an 85% interest in the Townsend Holdings LLC Group Inc., a real estate investment advisory firm.

Litt, through his Land and Buildings Investment Management, called the company’s decision to hire Goldman Sachs a step in the right direction.

“We believe the decline in the share price is likely attributable, among other things, to investors’ distaste for externally advised REITs, the substantial compensation to be paid to senior management, as well as weakness at NorthStar Realty Finance,” Litt wrote. “With the strategic alternatives review process under way, it is particularly important and timely to add independent shareholder representatives in the boardroom to ensure a fair process that properly takes into account shareholder best interests.”

NorthStar manages NorthStar Realty, a publicly traded CRE debt originator.

American Capital To Solicit Offers for the Company or Business Lines

American Capital Ltd. announced it completed the initial phase of a strategic review of its business and now plans to solicit offers from prospective buyer to purchase the company or its various business lines. It has retained Goldman Sachs and Credit Suisse Securities (USA) LLC to field offers.

"Our business lines and assets have tremendous value, which is not reflected in our current share price, and we believe these actions will help realize that value,” said Malon Wilkus, American Capital chairman and CEO.

The global asset manager and private equity firm has several business lines. It originates, underwrites and manages investments in middle-market private equity, leveraged finance, real estate, energy and structured products. As of Sept. 30, 2015, the firm managed $23 billion of assets and directly owned $331 million of real estate assets and another $190 million in retail-related investments.

Apollo Education in Sales Discussions

Apollo Education Group also has decided to explore strategic alternatives while it continues to execute its ongoing business transformation.

The board is currently in discussions that could potentially lead to a change of control, the company announced, a move the company said could accelerate Apollo’s business initiatives, which include expanding overseas and the continuation of the transformationm plan for its University of Phoenix affiliate.

Apollo Education has retained Barclays and Credit Suisse as financial advisors and Sullivan & Cromwell as legal advisor.

The University of Phoenix reported first quarter 2016 enrollment in its degreed programs was 176,900 compared to 227,400 a year ago. The company said it thinks enrollment will bottom out at about 140,000 students.

The company reported an operating loss for the first quarter of $45.2 million, compared to operating income of $64.2 million a year ago. It is in the process of closing down 150 campus locations across the U.S., and is considering other options for reducing costs.

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