UPDATE: Apollo Group Enters Sale-Leaseback For Headquarters

Apollo Group Inc. (APOL), the nation's largest for-profit college by market capitalization, sold its 600,000 square foot headquarters in Phoenix for $170 million to a privately-held real estate company.

Under a sale-lease back agreement, the company will continue to occupy the sprawling campus that is home to three mid-size office buildings and two parking facilities. The deal comes as Apollo continues to shave costs amid student enrollment drops at its college campuses and pending regulatory changes. The deal also reflects rising demand for sale-lease back transactions from companies who don't want the cost burden of operating and maintaining their real estate, but want to stay as long-term tenants.

According to a securities filing, Apollo agreed to sell its headquarters to a unit of Cole Real Estate Investments, a non-traded real estate investment trust based in Phoenix. Apollo then will lease the properties back at an annual rental rate of $12 million, with 2% increases each subsequent year. Apollo expects $28 million in gains on the sale, to be realized throughout the life of the lease. The lease, with an initial term of 20 years, has four five-year renewal options.

"We are taking many steps to optimize the structure of our current real estate portfolio, and we will continue to execute on opportunities to improve our space utilization and market leasing terms," Apollo spokesman Manny Rivera said in an emailed statement.

Apollo, whose schools include University of Phoenix, has been trying to cut costs as its student body shrinks and marketing expenses increase. The company tightened its admissions standards after it and peers were criticized for lax practices and poor student-loan repayment rates.

Apollo also is facing higher advertising costs and more competition in attracting high-quality students who stand a chance of completing the programs. In January, Apollo reported fiscal first-quarter new-student enrollment tumbled by 42.4%, with overall enrollment off 3.8% to 438,100.

Apollo reports fiscal second quarter results on Tuesday.

"It's a very attractive deal from our standpoint [because it's] a strong tenant [with] built in rental growth," Tom Roberts, head of real estate investments at Cole, said in an interview. He added that Cole, which owns over 42 million square feet of commercial real estate across the country, plans to make $3 billion worth of acquisitions of office, industrial and retail properties this year. Such acquisition volume is $500 million more than the firm made in 2010.

Roberts said rising values in commercial property is fueling deals like the one inked with Apollo. "We think there will be a lot more product in the market," this year, he said.

The Apollo purchase marks Cole's largest property in Phoenix to date.

-By Melissa Korn and A.D. Pruitt, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

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