The $1.95 billion sale of New York’s Waldorf Astoria hotel, announced on Oct. 6, is mostly framed as the 2014 analogue to Japan’s Mitsubishi Estate Co. buying Rockefeller Center—the moment that removes any doubt that China, and Chinese investors, are for real. Yet it’s remarkable for two less noted reasons, too: the incredible speed with which the deal got done, and the way it increases Blackstone Group’s (BX) already record-breaking paper profit on its 2007 purchase of Waldorf Astoria owner Hilton Worldwide Holdings (HLT).
Only a month ago, real estate investment bankers at Eastdil Secured were putting together a selling memorandum about the Waldorf for Hilton and Blackstone’s head of real estate, Jonathan Gray. Anbang Insurance Group, a 10-year-old Chinese insurance company, meanwhile, had been looking for a major real estate investment in New York, and caught wind that the Waldorf might go on the market. Anbang approached Blackstone on a preemptive basis and Gray decided to give the Chinese insurer the pole position on the sale not only because it was willing to pay a full price, but also because it was amenable to renovating the hotel and hiring Hilton to manage it.
The chance to buy the Waldorf coincided with the Chinese government’s recent decision to allow Chinese insurance companies to invest 15 percent of their capitaloutside China. Anbang assembled a big team and moved swiftly, managing to hold off two other buyers—one from the U.S.; the other from the Middle East—to sign the deal less than a month later. “It was very impressive when they put the full weight of their team behind it,” Gray says.
Incredibly, even though $1.95 billion represents 32 times the Waldorf’s adjusted Ebitda of $61 million, Anbang may not be overpaying—at least not by the metrics used to gauge other recent sales of luxury hotels in Manhattan. The price equals almost $1.4 million for each of the Waldorf’s 1,415 rooms and suites, in line with the recent prices paid for the Standard Hotel ($1.2 million per room), the Langham/Setai (also $1.4 million per room), and the Park Lane Hotel ($1.1 million per room). “The price is reflective of Anbang’s upside opportunity,” Hilton’s chief executive officer, Chris Nassetta, tells Bloomberg Businessweek. “This is a full city block in Midtown Manhattan. It’s an iconic asset.”
Anbang, which has made a $100 million deposit on the sale, has also committed to a major renovation of the Waldorf—which was badly in need of updating—as well as of the suites and apartments, which for years have been home to visiting world dignitaries. Speculation has already started that Anbang will turn some of the Waldorf suites into condominiums and sell them off. Nassetta thinks Anbang has the opportunity to make a substantial return on its investment after the renovation and that the sale is consistent with Hilton’s so-called “capital-lite” strategy of managing hotels, for a fee, that are built and owned by others.
As part of the deal, Anbang has agreed to a separate contractual agreement with Hilton, under which Hilton will continue to manage the Waldorf for—get this—the next 100 years, guaranteeing that although Hilton will no longer own the landmark hotel, it will continue to run it and the property will continue to be known as the Waldorf Astoria. At closing, which is expected by the end of December, Hilton will pay off the hotel’s existing $525 million mortgage and use the remaining proceeds from the sale to buy other hotel properties in order to take advantage of a provision of the tax code that allows taxes on the sale to be deferred. (This tax benefit is not unlike the one afforded to homeowners who can defer capital gains taxes on the sale of their home as long as the proceeds are quickly used to purchase a new home.)
The sale looks like another major win for both Nassetta and Blackstone, and follows on the heels of Blackstone’s September announcement that it intended to sell another 90 million of its shares in Hilton, following its June secondary offering. (If the secondary is completed, along with the sale of the underwriters’ overallotment option, Blackstone’s ownership of Hilton would be reduced to 55.4 percent.) The combination of the high price Anbang is paying, the lengthy management contract it is giving to Hilton, the debt reduction, and the use of the cash proceeds, in a tax-efficient way, to buy other, newer hotels in need of less capital is yet another example of how Hilton and its backers at Blackstone continue to cash in on the deal. (As noted in our recent cover story, Blackstone’s 2007 leveraged buyout of Hilton is already the most successful private equity deal of all time, returning to Blackstone and its myriad investors a profit of $12 billion on its $6 billion equity investment.)
No one seems to be complaining about the Waldorf deal, either. Once upon a time, such a development might have gotten the attention of the mayor of New York, among other politicians. Not this time. Gray says he’s heard nothing from Bill de Blasio or any other politician about the sale. Maybe that’s because, when the sale is complete, New York City will get a check for almost $60 million, equal to the 3 percent transfer tax paid on real estate transactions.