The guest list for the China General Chamber of Commerce USA’s annual gala is a who’s who of Chinese and American business royalty.
In mid-January, Blackstone’s Steve Schwarzman, Brookfield’s Ric Clark, Bank of China’s Xu Chen and Chinese Ambassador Cui Tiankai — to name a few — rubbed shoulders at the Ziegfeld Ballroom in Midtown.
But the real star of the show was a man rarely seen on Manhattan’s black-tie party circuit: HNA Group’s chairman and co-founder, Chen Feng.
Sitting at the evening’s honoree table, dressed in a Chinese tunic suit, he listened to Schwarzman give a glowing commendation of his company and its charitable dealings. “Tonight, we celebrate HNA and its brand mission to bring peace and happiness to the world,” Blackstone’s top executive said.
Following Schwarzman’s speech and a video advertisement for HNA set to a bombastic score, Chen — a short, gray-haired man with a warm smile — stepped to the microphone. “I feel that I am welcome as a family member here,” he said.
Then he started to gloat.
“Years ago, if I mentioned HNA to you, you might not be very familiar. But now, if you come to China, you must know HNA,” Chen said, noting that his firm “has developed from a regional airline in South China into a global conglomerate.”
He touted its three-peat in the Fortune 500 ranking, saying, “this year we will undoubtedly make it to the top 100 companies”; its 430,000 global employees; and its massive fleet of planes.
“For purchasing airplanes, we are one of the biggest clients of Boeing, so I think the president of the United States should honor us for a prize,” he said to loud laughter.
The entire event was a celebration of HNA’s supposed wealth and success. But behind the scenes, Chen’s empire was already crumbling.
Barely two weeks after the gala, the New York Times reported that the firm — struggling under a $90 billion debt burden — had started asking its own employees for money in the form of thousand-dollar loans to be paid back with high interest. And early last month, news broke that HNA would put its most prized Manhattan trophy, 245 Park Avenue, up for sale.
The Chinese conglomerate had bought the Midtown office tower for a record $2.21 billion just nine months earlier. As the most expensive New York City real estate deal of 2017, it seemed to cement HNA’s status as one of the city’s most aggressive, and deep-pocketed, foreign investors. And when The Real Deal published a cover story on China’s regulatory clampdown in May 2017, a handful of industry players pointed to HNA as the shining exception.
But since then, the company’s downfall has been swift and dramatic. Now, as it looks to sell billions in real estate, observers wonder what the company can salvage from its recent acquisition spree in New York and other major cities around the world.
“I’ve never seen such a turn in the industry,” said Marcus & Millichap broker Eric Anton, referring to HNA and a handful of other Chinese firms that abruptly pulled out of the NYC market within the past year. “It was a surprise to almost everybody.”
From airline to skyline
HNA was always an outlier among the leading Chinese investors in New York real estate. There are financial firms like Anbang Insurance Group (which China’s government took control of in February), Bank of China and Fosun International, and there are major developers like China Vanke, Xinyuan Real Estate and Wanda Group.
Then there’s HNA, which started off as Hainan Airlines on the eponymous South Chinese island in 1993.
Chen, a devout Buddhist, reportedly pushed the drink trolleys on the company’s first flights. He later directed architects to build HNA’s Haikou headquarters in a shape that resembled the Buddha’s hand.
“I’m different from the other entrepreneurs in China,” he told the Hong Kong-based South China Morning Post in 2014. “I don’t drink, smoke, have banquets, go to karaoke or get massages.”
But as the company’s fleet and revenues grew, it went on a debt-fueled buying binge around the globe. Between 2015 and 2018, HNA spent more than $40 billion on overseas acquisitions, according to the Financial Times. It bought 25 percent of Hilton Worldwide for $6.5 billion, paid another $6 billion for the IT product company Ingram Micro and became Deutsche Bank’s single largest shareholder with a 9.9 percent stake.
And even before those massive deals, HNA had turned to New York real estate. Its first deal was the $274 million acquisition of office tower 1180 Sixth Avenue in partnership with Norman Sturner’s MHP Real Estate Services in 2011. The following year, it paid $126 million for the Cassa Hotel at 66 West 45th Street.
Then it all sat on the sidelines for several years. As companies like Anbang, Xinyuan and China Vanke spent billions on New York properties, HNA sat on the sidelines. But it returned with a bang around 2016, investing in Tishman Speyer’s Brooklyn office development at 422 Fulton Street and teaming up with MHP to buy 850 Third Avenue for $462.5 million. It also reportedly backed Tishman Speyer’s Spiral megatower near Hudson Yards and spent more than $900 million on three office towers in Minneapolis, Chicago and San Francisco.
“Generally, when groups come on the scene in a very strong way all at once, whatever is motivating them tends to be [more than] the pure economics of real estate,” said Woody Heller, a commercial real estate broker at Savills Studley. Often, there is another motivation behind the deal, he and others noted — whether it’s moving money overseas, making a name for oneself or simply the prestige of owning a trophy tower.
One New York developer, who asked to remain anonymous to protect his reputation, called HNA “one of the most reckless investors I’ve worked with.”
The Cassa’s seller, Solly Assa of Assa Properties, however, described the company and its CEO and co-founder Adam Tan, more specifically, as “smart and ambitious.”
“I think that’s evident in the brand recognition they’ve created for themselves in NYC since I first met them,” argued Assa, who said he was introduced to HNA through a mutual acquaintance.
As the firm grew its commercial real estate portfolio in NYC, co-founder Chen and his brother Chen Guoqing bought two condos at Extell Development’s ultra-luxury tower One57 for $47.4 million each.
Big-ticket deals and personal investments aside, Chen and his firm also made some smaller, slightly unusual acquisitions. In November 2015, HNA bought the Hudson Valley Resort — a small, dusty hotel in Kerhonkson, New York — out of foreclosure for $13.8 million.
Rochester Town Supervisor Carl Chipman told the Shawangunk Journal at the time that he had a meeting with an attorney representing an anonymous buyer, who asked if the property could be rezoned to become a retreat center and whether the buyer could build a heliport. “It wouldn’t be a simple thing,” Chipman said. “I suggested that they use Ellenville Airport instead.”
Then in February 2016, HNA bought the 450,000-square-foot Palisades Conference Center from IBM for $59.6 million. In a press release, the company said it planned to use the property near the New Jersey border for training sessions for its employees and to host “cultural and social events for its new neighbors.”
And in April 2017, HNA made what some see as its most unusual deal. Chen’s firm purchased a 25,000-square-foot townhouse on East 64th Street for $79.5 million through an affiliate, HNA Holdings Group New York, reportedly with plans to turn the property into a boutique office.
At about $3,180 per square foot, the building cost significantly more than the going rate for Class A Midtown office space.
“At that price I would have expected a residential mansion,” said Compass President Leonard Steinberg. “But these are unexpected times.”
245 Park to the rescue
Starting in November 2016, the Chinese government enacted a series of capital controls to curb risky overseas investments and stem capital outflows. Almost immediately, Chinese investment in the New York real estate market slowed to a trickle.
Yet HNA kept buying assets with the help of offshore financing and snapped up 245 Park and the East 64th Street townhouse. At a time when observers worried about Chinese buyers disappearing for good, investment sales brokers and industry optimists would point to HNA as a reason for hope.
But that didn’t last long, either.
In June, Chinese regulators began to investigate HNA, along with four other firms, for its use of leverage. Later that year, the company reportedly started delaying loan payments. Meanwhile, news reports increasingly revealed a company desperate for financing. Chen’s firm is now turning to private equity firms and recently pledged $396 million in shares as collateral to Pacific Alliance Group in return for loans.
The big question is whether HNA will suffer the same fate as Anbang, which the China Insurance Regulatory Commission seized for at least a year on Feb. 23 — saying it was a necessary move to prevent the company from collapsing. The action followed the indictment of the insurance firm’s chairman, Wu Xiaohui, who was charged with financial fraud, the Wall Street Journal reported.
Around $20 billion in HNA’s bonds are set to mature this year and next, and their yields have surged. Last month, S&P Global lowered the firm’s group credit profile from b to ccc+ — deep into junk territory.
“While we understand that HNA Group continues to have access to capital markets and appears to have the support of some banks, in our view it is unclear that this will be sufficient for the company to meet its upcoming obligations,” the ratings agency wrote.
To supercharge their growth, HNA and Anbang funded acquisitions with piles of loans, hoping that assets would increase in value and that their income would service interest payments. But the strategy is risky.
“When the debt gets ahead of you, it all stops,” said Al Tarar, founder of the advisory firm Arcis Capital and a former partner in PricewaterhouseCoopers’ Shanghai office.
But he said that HNA and Anbang are far from the only giant Chinese firms that binged on debt — they just happen to be two of the first to get into trouble.
“Many Chinese companies want to become like GE,” Tarar added. “But they want to achieve what GE did in 100 years in three or four years.”
HNA’s convoluted structure only complicates matters. The firm is reportedly owned by two charities, both named Cihang, and controls a web of 16 listed entities and many more private shell companies. Rupert Hoogewerf, who publishes an annual list of China’s richest people, told the Financial Times that he couldn’t include HNA’s co-founder in his ranking.
“We have been trying to get Chen Feng on there but we just can’t find any way to show that he’s got enough money,” he said.
Now, as HNA tries to avoid a total meltdown, it’s reportedly ditching much of its real estate in a sharp reversal. Last month, Bloomberg reported that the company plans to sell about $4 billion in U.S. properties, including 245 Park, 850 Third Avenue and the Cassa Hotel on 45th Street.
Within a week of the report, HNA and MHP sold 1180 Sixth Avenue to Northwood Investors for $305 million — $30 million more than the 2011 valuation. HNA also sold its Upper East Side townhouse to billionaire Len Blavatnik for $90 million.
But some observers are skeptical that the company will turn a profit with its other planned real estate sales, especially 245 Park. Two industry sources, speaking on condition of anonymity, said HNA paid about $100 million more than the next bidder when it bought the tower.
“They purchased the building significantly higher than what most sophisticated New York buyers would have paid, and the market for this type of product has treaded water at best since they bought it,” said Greg Kraut, a managing partner at the New York-based real estate investment firm K Property Group.
For HNA to get its investment back, majority buyer would need to target roughly the same average rent per square foot as SL Green’s new office tower One Vanderbilt (about $155) and still pay several hundred million dollars for upgrades, Kraut argued.
“[The 245 Park tower] is a great location, but it needs a complete makeover,” he said. “Who wants to spend the money for that type of risk when there are better and newer buildings that will be priced the same?”
Heller of Savills Studley argued that selling a property that expensive is always challenging because few buyers can afford it. “It’s a thinner market,” he said.
Even if HNA sells 245 Park for a decent price, a chunk of the proceeds will go straight to its mortgage providers.
The company financed the $2.21 billion purchase with a $1.75 billion loan from a group of banks led by JPMorgan Chase. The debt totaled nearly 80 percent of the purchase price, surpassing the industry average of 65 to 75 percent. The 21-story office building at 850 Third Avenue, meanwhile, has a $236 million mortgage from Morgan Stanley, and the Cassa Hotel is backing another $65 million in debt from the asset manager PCCP. And that doesn’t account for any potential mezzanine loans or offshore liabilities, which are not documented in city records.
“Very well connected”
One silver lining may be the company’s political affiliations. Chen and HNA’s other senior leaders are rumored to have close ties to Wang Qishan, who led China’s anti-corruption drive in recent years and is seen as a right-hand man to President Xi Jinping. Tarar called the company “very well connected” to Beijing’s leadership. And in stark contrast to Anbang, no HNA executives appear to have been locked up.
But Anbang may serve as a cautionary tale of how quickly things can change. While the China General Chamber of Commerce’s 2018 gala was all about HNA, Anbang’s chair was the star of the show a year earlier.
At the time, the company seemed at the pinnacle of its power — the proud owner of both the Waldorf Astoria and Essex House and reportedly in talks to buy a major stake in Kushner Companies’ 666 Fifth Avenue. Making a rare public appearance in New York, Wu shared the stage with Michael Bloomberg and gushed about his “good friend” Jonathan Gray, then Blackstone’s real estate head.
A year later, Wu and his company’s name were nowhere to be seen. Chen can at least hope that when the nonprofit hosts its next gala in January 2019, he’ll still be invited.
Eastern Consolidated broker Adelaide Polsinelli said it “wouldn’t be unexpected” if HNA ended up like Anbang. But even if the worst-case scenario happens — and Chen’s firm pulls back from the New York market completely — the retreat won’t necessarily be permanent, she said.
Take Mitsui Fudosan, for example. In the 1980s, the developer was among a handful of Japanese companies collectively investing billions in New York properties. Then, after Japan’s real estate bubble burst, it pulled back. But in recent years, Mitsui Fudosan reemerged as active investor in Manhattan and bought a 90 percent stake in Related Companies and Oxford Property Group’s $4 billion office project 50 Hudson Yards.
“I think you’ll see a lot of these [Chinese] firms reinventing themselves,” Polsinelli said. “We’ve seen that happen before. There are a number of firms that have come in from different countries to do the job they thought they could execute, find they could not, hit the reset button and then come back in a different form.”