Cindat Capital Management, the private equity affiliate of one of China’s big four “bad banks” closed on a $571 million hotel joint venture this week that gives the Chinese investment firm a majority stake in seven Manhattan hotels.
NYSE-listed REIT Hersha Hospitality Trust sold the stake in the portfolio of mid-range hotels to Cindat, and will remain the operating partner for the properties, according to a statement by the two companies.
The transaction is the latest cross border investment deal for Cindat, which first gained global attention with its $304 million acquisition of an office tower in Chicago in 2014 and has since built a portfolio across three continents that includes properties in New York, London and Sydney. Now the mainland investment firm says that the hotel joint venture could be a vehicle for further investments in US hospitality assets.
The deal is also the third major acquisition of US hotel properties or brands in the last three months, following investments by Anbang Insurance in March, and HNA Group during April.
Buying Chevrolets Instead of Cadillacs
Cindat, which received financial backing in the deal from China Cinda Asset Management plus mainland insurer Taikang Life Insurance and its affiliate, took a 70 percent stake in the joint venture and is the senior preferred partner, according to a statement from Hersha and Cindat. Hersha will retain a 30 percent equity interest, as well as a $37.0 million preferred equity interest in the venture at a 9.0 percent fixed coupon.
The transaction also was supported by $285 million in senior acquisition financing from a syndicate led by Natixis Real Estate Capital, and the joint venture received $50 million of mezzanine financing from an affiliate of Oaktree Real Estate Finance.
Cindat’s investment is bringing it a total of 1,087 hotel rooms spread across three Holiday Inn Express hotels, three Hampton Inns and a Candlewood Suites hotel at Times Square for $571.4 million, including closing costs and funds for capital improvements.
The deal works out at $526,000 per key for what are called in the industry, select service hotels or limited service hotels, referring to the limited dining options and amenities offered. The Holiday Inn Express and Candlewood Suites properties are all managed under brands belonging to the Intercontinental Hotel Group, which also owns the Holiday Inn brand, and Hampton Inns are managed under the Hilton Hotel group umbrella.
“Limited service hotels in Manhattan, in our opinion, offer steady cash flow with relatively low volatility, and hence, good risk-adjusted investment returns,” Cindat CEO Greg Peng commented.
All seven of the hotels are in central areas of Manhattan that attract frequent tourist and business traffic, including three hotels near Times Square, one near Wall Street and one at Herald Square.
Joint Venture Bets on Riding Tourism Wave
While many observers are speculating that the Manhattan luxury residential market may be reaching a peak, Cindat’s investment rests on the growth prospects of the travel industry, not with the property cycle.
“Reaching the top of the market is a concern for luxury condo projects, as they have big pressure on sales now. But this is not a condo project, instead this is an income asset with solid cash flows.” Allan He, a senior partner at Cindat told Mingtiandi. He went on to add that, “As long as Manhattan still attracts business and leisure visitors, then acquisitions like this can be recession resistant to the real estate market.”
Cindat’s joint venture comes less than two months after China’s Anbang Insurance acquired Strategic Hotels and Resorts from Blackstone Group for $6.5 billion. The mainland insurer’s purchase of that 16 hotel portfolio represented a bet on the high end of the tourism market, while Cindat sees value in mid-range properties.
“This is an economic buy, it’s not a trophy buy. It’s not the same,” He pointed out. “Steady cashflow, a strong partner that stays in the deal to operate the company, and Cindat is the preferred partner. It’s simple.”
In terms of the type of hotels represented in the deal, Cindat’s investment has some parallels to an acquisition by Chinese travel conglomerate HNA just one week ago. HNA bought Minnesota-based Carlson Hotels, which manages more than 1,400 hotels on four continents under the Radisson and Country Inns and Suites brands.
Unlike the Carlson Hotels acquisition, however, Cindat is buying real estate, not a hotel management firm. “That’s a different business – it’s an operating business,” Cindat’s He commented.
A Hotel Business With Room to Expand
While the joint venture includes only seven properties at the moment, both sides appear to be leaving the door open to future expansion.
Neil H. Shah, Hersha’s President and Chief Operating Officer noted that the trust will, “look forward to capitalizing on future opportunities within this venture with a sophisticated and strategic long-term partner.”
Hersha already owns 56 hotels totaling 8,892 rooms in New York, Boston, Philadelphia, Washington, DC, and Miami as well as some properties on the west coast of the US.
All of these sites could grow increasingly attractive in light of the current boom in Chinese travellers. The mainland sent more than 120 million visitors overseas in 2015, up by 12 percent over the previous year, according to official government statistics. And those tourists and business people spent more than $104.5 billion – up by 16.7 percent from 2014.
“This is something we are looking at for the future. We are interested in buying hotels which could be supported by Chinese tourists,” He noted.
Is Cindat Moving on From the Residential Market?
For Cindat, this hotel joint venture sees the cross-border private equity real estate player moving away from a string of residential developments into a different asset category.
In 2014, Cindat gained global attention when it teamed with Chicago’s Zeller Realty Group to buy the 65-storey office building 311 South Wacker Drive along the windy city’s lakefront.
After that single office deal, however, the company has largely focused on residential developments – a business that Cindat believes is now becoming more challenging, at least in the New York market. “We’ve started becoming cautious on the residential market as we feel it’s heated up. So now we’re focusing on income-earning assets,” He told Mingtiandi.
The $304 million Wacker Drive deal was followed by an investment in the 36-storey 9 West Walton Street luxury condo project in Chicago. Cindat has also invested in a 235 unit luxury condo project in Sydney Australia, led by mainland developer Yifang, as well as joining with fellow mainland shop Citic Capital to jointly take a 70 percent stake in a London residential project by Brockton Capital which has been valued at £600 million ($874 million)
By far the biggest market for Cindat, however, has been New York. The company maintains an office in Manhattan, in addition to its locations in Beijing and Shanghai, and has a partner based in the city.
In early 2014 Cindat joined with China Vanke and Houston-based Hines in taking a stake in New York developer Aby Rosen’s 100 East 53rd Street luxury project in Manhattan, back when it was still being referred to as 610 Lexington.
More recently, in January of this year Cindat took a $135 million equity stake in a Renzo Piano-designed condo project at 565 Broome Street in Manhattan
The mainland private equity firm also has invested in a $340 million HOK-designed mixed-use development at East 86th Street and Lexington Avenue in Manhattan that is being jointly developed by Ceruzzi Properties, Stillman Development International and Kuafu Properties and was announced in January.
Cindat also has an undisclosed stake in 5 Beekman Street in New York, a late-1800s vintage 51-storey hotel which was renovated and reintroduced to the market in February as a combined hotel and condominium property.