Sixers owner sees bargain in scandal-plagued real estate

Sixers lead owner Josh Harris's multibillion-dollar investment firm, Apollo Global Management LLC, last week bought control of most of Jenkintown native Nicholas Schorsch's multi-billion-dollar business real estate and brokerage operations.

Apollo paid a premium of just $378 million in cash and Apollo stock, for 60 percent of Scorsch-founded AR Capital, which controls business real estate worth $19 billion. Apollo also agreed to pay $25 milion to buy Schorsch-founded, publicly-traded RCS Capital's wholesale brokerage operation, and to invest $25 million in new preferred shares of RCS.

The brokerage group "is one of the industry's largest networks" for selling "alternative" real estate funds, and "has thte potential to become a growth platform" for new real estate investments, Marc Rowan, who cofounded Apollo with Harris, said in a statement. The two founders and four allies will dominate the board of AR Global Investments LLC, the company they started to manage the business. Schorsch, his longtime lieutenant William Kahane, and two other AR executives will also hold seats and minority stakes in the firm. Kahane will run AR Global until a new CEO is hired, and will then continue as the group's Chief Investment Officer, Apollo said.

Schorsch and Kahane had built a formidable commercial real estate empire, including a series of closed-end, publicly-traded and specialized property funds, before an accounting scandal and earnings restatement at another Schorsch company, American Realty Capital Properties, last year drove down share values lower and forced Schorsch and some of his allies, including former Pennsylvania Gov. Ed Rendell, off the American Realty board. That firm has since changed its name to Vereit Inc. RCS shares also fell after the scandal disclosure and a deal to transfer assets between the two companies was cancelled.

While American Realty acknowledged it was the subject of federal investigations and shareholders have sued alleging the company did not properly report its troubles, no one has been charged with criminal wrongdoing.

Despite those share-value losses, Apollo said in a statement that Schorsch-backed funds associated with the public firms have been profitable for investors. Apollo, whose clients include Philadelphia's underfunded city pension system as well as state investment funds, hopes the formation of AR Global will allow the group to boost property purchases, investment sales and earnings using the brokerage network Schorsch and Kahane built in a series of acquisitions.

Critics say the difficulty of selling closed-end funds and the high fees brokers charge can make them inappropriate for individual investors.

Apollo is used to taking on turnaround situations. "Remember, this is the guy who also owns the Philadelphia 76ers," noted Robert Costello, owner of Costello Asset Management, Huntingdon Valley.