An affiliate of private equity investor Alpha Wave Investors LLC in San Juan Capistrano will buy a hotel in Redmond, Ore., this month, its second purchase this year after one in Colorado Springs, Colo., in May.
The deals bring its investment in hotels and apartments to $80 million over the last two and a half years.
Both hotel buys are niche plays—smaller, under-performing sites that will be renovated and repositioned as indie boutiques in smaller but growing areas, said Chief Executive Ken Cruse.
“We want to offer a distinct alternative in those markets,” said Cruse, a former chief executive at Sunstone Hotel Investors Inc. in Aliso Viejo, a large hotel real estate investment trust.
Cruse wants to buy 20 hotels in the next two years, likely under $10 million apiece and with “three to four in each market.”
He runs Alpha Wave with principals David Sloan, Lindsay Monge and Jordan Fisher.
Sloan and Monge had also worked for Sunstone, as senior vice president, general counsel and senior vice president of corporate finance, respectively. Fisher runs a private investment fund that owns 300 apartments.
Catch a Wave
The Sunstone alumni left the hotel REIT in 2015 and 2016 to form Alpha Wave and capitalize as owners in a downturn they see coming to the hotel industry, which will make under-performing hotels available to buy.
The name “Alpha Wave” couples “superior” buying with “business cycle timing,” and at its founding Cruse told the Business Journal the idea was to buy distressed hotels as the next down cycle approached.
“I believe the election bought us a few more years of growth,” he says now and, “once the next downturn occurs, we’ll shift focus back to those distressed properties.”
Sunstone is likely to be a strategic, opportunistic buyer as well but as a public company with many major institutional backers its targets are typically much larger than what Alpha Wave has bought.
“Our strategy is distinct,” he said. “We’re looking for smaller hotels that need ‘deep-dive’ renovation.” He also brings in “smaller investors, maybe one institutional buyer,” deal-by-deal, compared with Sunstone.
He said working for public companies, including three and a half years atop the OC REIT, saw “large deals, big investors, top banking talent—a great education” and Alpha Wave can apply that to smaller properties.
The group has considered bigger buys. It tried twice to buy the 109-room Pacific Edge Hotel in Laguna Beach, which sold in June for $57.5 million—to a big New York-based buyer backed by Morgan Stanley.
Small is Beautiful
Alpha Wave saw an upside at Pacific Edge in room upgrades, food and beverage growth and repositioning—“quite a bit of value-add,” Cruse said—but was outbid.
Highgate’s purchase worked out to $527,000 per room.
Alpha Wave affiliate AWI Pikes Peak LLC bought the Colorado Springs hotel on May 18 for $3 million—$17,000 per-key for the 176-room property, excluding a $4 million renovation that begins in November.
Alpha Wave affiliate AWI Deschutes LLC will close on the Redmond, Ore., hotel on July 20; the price is about $1.95 million—$41,000 per-key for the 48-room property—with about $3.7 million for renovation and reserves.
Both hotels are in line for tax subsidies and other abatements—the Redmond hotel’s purchase price will come down to about $500,000 after $1 million kicked-in by the city’s redevelopment agency and $400,000 from a property tax abatement; Cruse will also apply for historical tax credits for renovating the 89-year-old hotel.
California—where Alpha Wave hasn’t bought anything yet—dissolved its redevelopment agencies in 2012.
Bad to Great
Alpha Wave’s first two hotels have potential, to say the least.
“The Colorado Springs property is massively under-performing due to poor management and prolonged capital neglect,” Cruse said. “The hotel [at] the Redmond property has been closed for 10 years.”
Portfolio Hotels & Resorts, based near Chicago, will run the hotels.
The Colorado hotel is now a Knights Inn, a Wyndham brand, and Cruse plans to “remove the brand and create a hip, retro boutique motel concept”—122 of the 176 rooms have external entry. He’s noodling naming options that include “Cosmo”—“Cos” from “Colorado Springs” and “mo” from “motel.”
Redmond is part of the Bend, Ore., metro area and looks to attract patrons of a fairground and expo center that hosts 400 events a year and travelers from an airport “growing at double-digit percentages annually.”
The property has first-floor retail and restaurants—what hip hotels want today is already there—so Alpha Wave will be a commercial landlord, too.
Apartment Strategy
It owns nine complexes, is under contract to buy three more, and manages another 25.
It will oversee about 2,500 by summer’s end, Cruse said.
All are small properties in outer markets in Arizona, Nevada and Utah.
Most of the properties have 30 to 60 units; the largest is 176; the smallest has 16.
Alpha Wave investor materials say it buys “B and C class multifamily properties in secondary markets” for repositioning “to increase competitive appeal to our target Millennial demographic.”
Debt is limited to 70% of a portfolio’s value, the materials say.
Alpha Wave’s Next Wave Property Management oversees its apartments; it has about 60 employees and $5 million in annual revenue.
The company has offices in Scottsdale, Ariz., and Las Vegas, in addition to Orange County.
Big for Small
Alpha Wave appears to be tapping several trends in hotel buying and operations.
Smaller, boutique, lifestyle properties have grown in appeal to new generations of travelers, including millennials but moving beyond demographics to decisions of what hotel to put where for which travelers.
Luxe property owners choose large metro areas or destinations over smaller cities partly because costs of building a high-end hotel can’t be recouped in the latter but boutique hotels can work there, said real estate website Real Views, run by Chicago-based commercial broker JLL.
Lauro Ferroni, JLL’s global head of hotels and hospitality research, said on the company’s website that chain-owned boutique brands are adding locations in “non-gateway” markets such as Nashville, New Orleans and Charleston.
A June article on website National Real Estate Investors added that developers “may be looking outside of the largest cities for the next opportunity,” and cited data from Tennessee-based hotel tracker STR Global that showed occupancy rate increases in secondary hotel markets.
Revenue per available room in Colorado Springs—the site of Alpha Wave’s first hotel—grew 17% year-to-date through May 31.
Cruse sees chain-owned boutique expansion into such submarkets as one exit strategy for hotels his group gets: As big guys grow into the niche, they can buy and reflag what Alpha Wave has built up.
“That’s the idea,” he said.
