LOS ANGELES—Executives at KHP Capital Partners know Kimpton Hotels inside and out. While they plan to get even cozier with the brand they nurtured for a dozen years, venturing outside the Kimpton brand family for the first time isn’t out of the question.
KHP was created after InterContinental Hotels Group closed its acquisition of Kimpton Hotels & Restaurants for $430 million in January. At the time, Kimpton’s controlling entity owned 30% of the existing portfolio via its Kimpton Hospitality Partners fund series.
KHP Managing Partner Mike Depatie said the company’s first priority is to enhance its portfolio of 17 hotels—all of which have names affiliated with Kimpton, including Hotel Monaco and Hotel Palomar. KHP is the largest owner in Kimpton’s system of 60 hotels; the owner also has four projects under development.
“It’s all good with IHG. … We’ll do a lot of Kimpton hotels,” Depatie said during a break at the recent Meet the Money Conference. “Early on we’d like to be known as the largest investors, developers and owners of boutique, independent-style hotels. Over time we can build a substantial hotel real estate investment company.”
Depatie, who was Kimpton’s former CEO, declined to reveal the exact size of KHP’s war chest or if it will raise more capital. However, he said its structure will provide the company with plenty of investment opportunities.
“We have capital left to continue to do Kimpton hotels,” Depatie said. “Going forward, we anticipate broadening that.”
Depatie said IHG’s acquisition of Kimpton will benefit the brand.
“Over time, it will be enhanced in terms of brand power,” he said. “They have big plans to put these hotels all over the world.
“It will evolve and grow up. It was going to do that anyway. It will just happen faster with IHG,” he added.
But Depatie admitted the Kimpton brand might lose a little of the identity it has cultivated over the past 20 years.
“In 10 years customers will say, ‘It’s not quite the way it was, but it’s still got a great value proposition,’” Depatie said, specifically pointing to IHG’s distribution channels as the biggest benefit. “But you still want to have a value proposition with the customer that’s more than just getting points.”
KHP will look beyond the Kimpton family tree for its growth. Depatie said he’s convinced there are plenty of opportunities in the boutique space, even as big chain-backed brands such as Autograph Collection (Marriott International), Curio (Hilton Worldwide Holdings) and the Tribute Portfolio (Starwood Hotels & Resorts Worldwide) have entered the market.
“The business is changing a lot,” Depatie said. “There are new ways to play in the boutique-affiliation space without taking away the unique flavor of an independent hotel.
“We’re looking at hotels that can be converted to perhaps the Kimpton brand, or an Autograph or another of the up-and-coming boutique companies like Viceroy (Hotels and Resorts) and Denihan (Hospitality Group),” Depatie said.
Adaptive reuse is key
KHP’s bread-and-butter play will be to acquire buildings and create hotels through substantial renovations and repositionings. The hotel typically will include a chef-driven restaurant.
“Adaptive reuse is something we like a lot,” Depatie said. “We can take a run down, decrepit building that is obsolete for what it was originally built for and convert it to a high-end hotel with a chef-driven restaurant, a rooftop bar and commercial space on the ground floor. Generally it not only reinvents the building but it also re-energizes the area around it as well.”
Depatie said a perfect example of that is the Hotel Monaco Philadelphia, which is housed in the former Lafayette Building that KHP bought in October 2010 for $11 million and received $11 million in tax credits.
“We reconfigured it to create a very special irreplaceable location with an irreplaceable asset,” he said. “That’s what we really like our projects to be like.”
Depatie said dealing with the National Parks Service—the governmental agency that oversees historic tax credits—can at times be a challenge, but it’s worth the effort.
“We’ve had the best returns from adaptive reuse of historical buildings,” Depatie said.
A typical KHP project will be a 200-room hotel of which the company finances between 60% and 65% of the value. It will invest the other 35% to 40%.
“The smaller hotels are not very economical,” Depatie said. “Bigger hotels get too big where you have to have meeting space and the meeting space is not what most people stay at a boutique hotel for.”
Depatie said that while he was at Kimpton the company derived about 25% of its business from small group business.
KHP—which was carved out of a provision that assigned contracts to executives including Depatie, former Kimpton CFO Ben Rowe and former Kimpton chief investment officer Joe Long—also will consider some ground-up new development, according to Depatie.
The key for success is finding the right operational partners, he said.
“We’re in the process right now of vetting management companies that can operate these types of hotels,” Depatie said.
With national brands, KHP would prefer management companies that have experience working brand systems. For independent hotels, it is looking for management companies that specialize in guerilla marketing.
“In the boutique space, it’s all about experience,” Depatie said. “A lot of people think it’s about design, but design is just the price of entry.”
Depatie’s biggest challenge for KHP is the same one he encountered while at Kimpton: finding good projects at appropriate values. He said the company has hired a full staff of experts in acquisitions, construction and finance to help secure projects.