Shifting exchange rates between the dollar and the Chinese yuan combined with continued demand for U.S. trophy real estate among overseas investors helped Anbang Insurance Group Co. Ltd. reap a higher-than-expected return for a highly sought-after luxury hotel portfolio.
The Chinese insurer bought the former Strategic Hotels portfolio from Blackstone Group Inc. in late 2016 for a reported sum of $5.5 billion, as part of a lodging buying spree that also included the roughly $1.95 billion purchase of the Waldorf Astoria New York and an unsuccessful bidding war with Marriott International Inc. over the hotel operator Starwood Hotels & Resorts Worldwide.
After a sale process that reportedly included roughly six serious bidders, Anbang reached a deal to sell the portfolio to South Korea-based Mirae Asset Global Investments Co. Ltd. for more than $5.8 billion — a total that some observers called surprising, since Anbang has been under Chinese government pressure to sell assets, and the insurer's 2016 purchase appeared rich at the time.
In a note, Robert W. Baird analyst Michael Bellisario said the depth of initial buyer interest, with at least 17 potential bidders expressing interest at the beginning of the latest sale process, exceeded expectations. Currency dynamics also worked in Anbang's favor, with the value of the dollar rising sharply against the yuan over the period that the insurer owned the hotels.

While the dollar value of Anbang's purchase and sale prices alone implies a roughly 5.5% gain on the properties, excluding leverage, the return in yuan was likely more than double that: $5.5 billion dollars was roughly equal to 36.66 billion Chinese yuan on Sept. 26, 2016, the day Bloomberg News reported the purchase had closed, while $5.8 billion was worth 41.25 billion yuan on Sept. 10, the day The Wall Street Journal reported Mirae's purchase.
In Chinese yuan, then, Anbang's unlevered return on the portfolio transactions, not including the yield the insurer earned from hotel operations, is roughly 12.5%.
"I think everything they were trying to do, all the reasons they underwrote it, worked," Teague Hunter, CEO of the brokerage firm Hunter Hotel Advisors, said in an interview. "The yuan has collapsed and the dollar is strong, so if nothing else, it was a currency hedge, and I think it worked. They were very smart."
At the same time, the continued level of demand from global investors is striking, said Andrew Broad, a principal in the hospitality group at the brokerage firm Avison Young.
"On the surface, no domestic party in their right mind would probably pay what Anbang paid, nor what the South Koreans paid. But the South Koreans, maybe they're motivated by something," Broad said. "If I owned a luxury property today, I'd be popping champagne corks, because they just set the bar."
Stable values in luxury
The portfolio, which includes the J.W. Marriott Essex House in New York City; the Four Seasons Hotel in Washington, D.C.; and the Westin St. Francis in San Francisco, belonged to a publicly traded real estate investment trust, Strategic Hotels & Resorts, until Blackstone took that company private in December 2015.
The private equity giant paid roughly $6 billion for the then-16-hotel portfolio and agreed to sell the same properties to Anbang a few months later for roughly $6.5 billion. One property, the roughly $1 billion Hotel del Coronado near San Diego, was subsequently pulled from the deal after the U.S. government objected to a Chinese investor owning a property so close to a U.S. naval base.
The portfolio's market value appears to have risen over time, Bellisario wrote: Blackstone's original buyout valued the 16-property Strategic portfolio at $800,000 per key, while the 15-property Mirae deal, if completed, would equate to roughly $840,000 per key.
In another measure, Blackstone's initial buyout carried an implied capitalization rate, based on net operating income, of about 5.2%, while Anbang, in its subsequent purchase, settled for a slimmer yield of roughly 4.75%, Bellisario said. Capitalization rates, a measure of yield, typically fall as purchase prices rise relative to the amount of operating income the underlying properties generate.
Calculating a transaction yield on the new deal depends on knowing still-unclear details about the new owners' capital-improvement plans and the potential that property taxes on some of the hotels could rise, Bellisario said. In general, he added, all of those factors point toward income from the properties moving lower, which would depress Mirae's yield relative to the price it is paying.
Still, hotel operations may not be at the core of Mirae's strategy.
"The luxury market is not always about cash flow; it's about maintaining the value of that investment over time," Broad said. "They're effectively buying real estate that could arguably be some of the best real estate in the United States. … I'd have to imagine that the South Korean perspective on this is that this is iconic real estate that will always hold some value, and it's a way of buying dollars without buying dollars."
Even if hotel operations should falter, high land values in the areas where Strategic hotels are located add flexibility, Broad added. The Essex House, for example, is roughly one block on Central Park South away from the Plaza Hotel — where a past owner converted much of the building's space to condominiums.
Unique considerations
Some of the dynamics in favor of luxury hotels, including relatively stable property values, are also attractive to large asset managers like Blackstone, which recently closed a $20.5 billion real estate fund, the largest ever of its kind. The firm was reported to have been a serious bidder to buy back the Strategic portfolio, along with Brookfield Asset Management Inc. and others.
Even so, whereas the large North American asset managers can afford to maintain discipline on purchase prices, overseas investors may be more motivated to stretch for investments that appear stable. Though many observers believe U.S. property values are at or near a peak, the country's property markets appear healthier than in other parts of the world, Hunter said.
Overseas investors' cost of capital, which can be opaque, can also provide an advantage. Mirae is reportedly developing a structure involving six private vehicles to raise equity to finance the Strategic deal, with Mirae Asset Securities contributing $1.5 billion, Mirae Asset Life Insurance Co. Ltd. investing $420 million and Mirae Asset Capital Co. Ltd investing roughly $80 million.
Across the hotel space, property markets are "lumpy," Hunter said, with many sophisticated investors in selling mode, while motivated buyers — driven by their own unique situations or by circumstances particular to a given asset — continue to buy.
Given the unpredictability of buyer motivations, Hunter said he gives clients looking to sell properties a warning: "We'll do the deal, but your buyer is going to likely be someone you've never heard of before."
