Boston-based AEW Capital Management has taken ownership of the 224-room Cypress Hotel in Cupertino by buying the property mortgage and acquiring title via deed in lieu of foreclosure.
The real estate company paid $30.7 million for a $40.7 million loan against the property, according to information presented to the San Francisco City and County Employees’ Retirement System at its May 11 board meeting.
The venture’s acquisition basis of $36.3 million amounts to $162,000 per room, the report said. That includes working-capital reserves and represents a roughly 40 percent discount to replacement cost. AEW made the investment for its commingled fund AEW Partners VI.
“We think that this hotel is a good property. Average annual occupancy now is in the low 70 percent range. We think that the property will perform better as the overall market and economy starts to improve,” said Mark Davidson, a managing director for AEW and a portfolio manager for its AEW Partners Fund series.
The property primarily draws business travelers, Davidson said. It is part of the Cupertino City Center development, which has offices, condominiums and a smattering of restaurants. The City Center is adjacent to the town’s City Hall and not far from the Apple Inc. corporate headquarters. Besides the one million square foot Apple campus, the electronics manufacturer has gobbled up hundreds of thousands of additional square footage in the area and is planning a second headquarters campus nearby. The Cypress is at 10050 S. De Anza Blvd. and is a Kimpton-branded hotel.
AEW is the majority owner of the property through a joint venture with the Rockpoint Group LLC, a real estate investment and management company with offices in San Francisco, and SCS Advisors Inc., a San Rafael company that also developed San Jose’s $100 million downtown Marriott. The companies bought the Cypress in 2007 and still hold a small ownership position. Rockpoint declined comment for this story.
The transaction is the first investment that AEW has made for AEW Partners VI. The entity has been marketed as an opportunity fund and will have a final closing for the capital raise on June 29. The total equity is projected to be $550 million, short of the original target of $750 million. This is a far cry from the heyday of opportunity funds during the mid-2000s when most capital raises were north of $1 billion.
AEW plans 50 percent to 60 percent leverage for the commingled fund, another major diversion from the historic practices of opportunity funds. During their big run from 2004 to 2007, many opportunity funds sported leverage as high as 90 percent. Davidson said the fund is defining opportunity differently. “We think it is more about the kind of deals you are investing in, like the hotel, when you are buying something at well below replacement cost,” he said.
AEW will look nationwide for acquisitions for Partners VI. The real estate manager will consider traditional property types of office, industrial, retail and apartments as well as some niche properties such as hotels, senior housing and land.
The San Francisco City and County pension board approved a $25 million commitment to Partners VI at the May 11 meeting. According to pension fund documents, the objective of the partnership is to provide investors with annualized average net internal rates of return of 16 percent to 18 percent.
AEW and its affiliates are expected to contribute 7.5 percent of the partnership’s total capitalization, or a maximum of $30 million. The investment period for Partners VI is four years, but it may be extended up to two years, subject to the approval of limited partners in the fund.
The management fee for Partners VI is 1.25 percent of invested equity. This falls to 1 percent for limited partners who have committed $100 million or more to the commingled fund. There are no acquisition or disposition fees.