Blackstone's Strategic sale to China's Anbang raises questions

Hotel del Coronado, San Diego.
Anbang Insurance Group Company appears to be poised to dramatically increase its U.S. hospitality portfolio after reaching an agreement to acquire Strategic Hotels & Resorts for $6.5 billion from US private equity firm Blackstone.

Blackstone completed its $6-billion acquisition of Strategic in December of last year, turning a quick profit of half a billion dollars.

“Blackstone is a very savvy investor that recognizes value and can take a long-term view,” said Daniel Voellm, managing partner at HVS Asia Pacific. “At the same time, they are known to exit an investment when the right opportunity comes, just like in the case of Strategic. Anbang appears keen to diversify further into trophy hotel real estate, contrary to what was anticipated after their first acquisition. Strategic is a high-quality portfolio that meets the requirements of Chinese institutional investors.”

For some, the deal raises questions.

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“The question here is, why would Blackstone flip the Strategic portfolio within such a short period of time?” asked Michael Chin, executive chairman of Hong Kong-based WT Global Hospitality Investment Company. “The deal is now only for 16 properties, versus the original Blackstone deal to acquire 18 hotels from the original Strategic Hotels portfolio. All big-portfolio buyers, especially private equity or real estate funds, will have a clear game plan prior to any acquisition. They will normally offload it a minimum of 18 to 24 months in order to get the best price, with profit between 30 percent and 50 percent. Otherwise, how do they face their limited partner, as they can’t just tell them they’re only providing agent services?”

For What Its Worth
The 16 properties in the Strategic portfolio include the JW Marriott Essex House Hotel on the south side of New York’s Central Park as well as the Hotel del Coronado property on San Diego’s waterfront. Anbang made a global name for itself in late 2014 when it purchased the Waldorf Astoria—also from Blackstone—for almost $2 billion.

Chin, whose company had considered the Strategic portfolio, questioned the likelihood of enhancing the portfolio’s profitability after acquisition.

“We had contemplated the Strategic Hotels deal last year,” said Chin. “During 2014, its net income was in the range of $330 to $340 million. It included two non-recurring items, namely income from discontinued operations and income from the acquisition of affiliates. Income from the acquisition of affiliates is basically a non-cash accounting gain arising from the incremental purchase of affiliate interests at a valuation higher than the book value of their existing interests at the time and may even be a result of overpaying for previous acquisitions.

“All in all, Strategic looks like a difficult one to work with, unless it has a globally seasoned hospitality player with a solid operating team that can take over this portfolio and its present very high management overhead, which is close to 40 percent,” he added.

Buy and Flip
The flipping of the Strategic portfolio by Blackstone, the world’s largest real estate private equity fund manager measured by assets, could embolden others to snap up high-end hospitality portfolios with the hopes of turning around and selling to Chinese investors.

“Exit has always been the focus of PE investors and this development of Chinese institutional money becoming more serious in the hotel real estate space is sure comforting,” said Voellm of HVS. “Then again, quality assets have often found a buyer, maybe more frequently so from the Middle East in the past years. As the Chinese institutional investors become more adept at executing due diligence and deals quickly the field will become more competitive. It will be interesting how that trend will impact yields across the globe.

"There is interest, of course,” Chin said of acquiring portfolios for quick turnaround sales to Chinese investors. “But new rules are making it harder for Chinese companies to wire large amounts of money out of the country."

These new rules, which could stifle big Chinese portfolio purchases abroad, were enacted by a Beijing government that despite encouraging overseas investment by its largest state-owned companies, is also concerned with large outflows of capital from China over the past year. Chin suggested that Beijing policymakers’ fears of capital flight could be overblown.

“Most Chinese investors will want to diversify their investment risks on divergent asset classes and countries if possible,” he said. “It is quite normal.”

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The operator, developer and investor has secured a loan through an environmental, social and governance financing structure for eco-friendly hotels.

However, investors are heading into the new year with caution because performance is expected to dip, according to a JLL report.

The transaction, expected to be consummated in the first half of 2020, is still subject to regulatory approval and other closing conditions.