REPORT FROM THE U.S.—When news about the InterContinental Hotels Group and Kimpton Hotels & Restaurants merger broke in December 2014, David Loeb said he saw two ways to look at the deal: the strategic rationale for the acquisition and whether it would work out.
Now a year later—the $430-million acquisition was officially completed in January 2015—the senior research analyst for Robert W. Baird & Company said the reasoning was a financial move and the merger appears to be panning out.
There were 65 hotels in Kimpton’s portfolio when IHG made the purchase, and while Kimpton lost seven of its properties in its home market of San Francisco in mid-2015 because of union issues, Loeb said he doesn’t believe that will hurt in the long run as the company will grow past what it lost and will prosper.
“If it weren’t for the noise in San Francisco, my comments would be entirely positive,” Loeb said.
Kimpton CEO Mike DeFrino, who took the reins last January when he moved into the position from COO, spoke of that positivity for the company.
Last year was one of Kimpton’s best years with six new properties signed and more than 10 under development, DeFrino said via email. There’s an appetite for the brand in major metropolitan areas, resort destinations and tertiary markets, he said.
“While we continue to grow and expand our boutique footprint, we’ve maintained our independent spirit within the IHG family,” he said. “Another big part of our success stems from continuing to run core operations out of our home in San Francisco, which allows us to retain our unique talent, hold onto our roots and continue to nurture the entrepreneurial spirit we are known for.”
Owners speak
DeFrino said every decision made is intended to further strengthen the relationships with guests, employees and owners. IHG’s owner network offers potential for Kimpton to grow, he said, and will allow Kimpton to leverage IHG’s scale while still having control over opening and operating new properties.
“We’re always striving to evolve our brand, and we can do that by teaming up with a global powerhouse who possesses vital pieces of the puzzle that were needed to take our brand to the next chapter,” DeFrino said.
KHP Capital Partners is a private equity firm formed in part by former Kimpton CEO Mike Depatie last year when the IHG/Kimpton merger was completed. The company acts as the fund and asset manager for the four KHP private equity real estate investment funds that own approximately 30% of Kimpton’s existing and pipeline properties.
Depatie, now managing partner of KHP, said there are four Kimpton hotels under construction for the company that are scheduled to open this year and next.
“We continue to be big fans of the brand,” Depatie said.
Depatie said he hasn’t seen any difference in the performance of Kimpton properties since the acquisition, and the revenue-per-available-room penetration is steady. Kimpton properties have performed well in their markets, he said, and his company has started expanding to secondary and resort markets.
“It plays there, it plays everywhere,” Depatie said.
Kimpton is in a quiet period before IHG releases its earnings from the second half of 2015, so the company could not share its data, such as occupancy or revenue, for the full year. IHG will release its earnings announcement in February.
Pebblebrook Hotel Trust measures its properties’ success team by team at the property level, according to Raymond Martz, executive VP and CFO for Pebblebrook. The company owns seven Kimpton hotels in markets across the country, and they’ve all done well, he said, though San Francisco has been a little bit of a challenge. All of the teams respond well, Martz said, and he believes that’s because Kimpton attracts a certain type of employee.
“We make sure the people at the properties exemplify that,” he said. “Overall they’ve done a good job.”
Global growth
One of the biggest markers of the acquisition’s success will be how quickly IHG can grow Kimpton, Depatie said, especially internationally. IHG has a major presence in Asia and is well known in Europe, he said.
Kimpton has made a name for itself as a domestic boutique brand, DeFrino said, and the next step is to take it global. While new to the company, the concept of international expansion is exciting, he said.
“We’re confident that we will be able to do this successfully based on our long history of developing independent styles of hotels that are relevant to each market,” DeFrino said. “We look at each market, the make-up of that location to design, market and concept a brand that fits. Global expansion will follow that model.”
The company announced in a news release Wednesday that it had signed its first European hotel, the Crowne Plaza Amsterdam City Centre. Following a full renovation of its lobby, restaurants, facilities and guestrooms, the yet-to-be-named hotel will open as a 270-room luxury Kimpton property in 2017.
A funny thing tends to happen to hotel companies when they have between 65 and 80 properties in their portfolio, Loeb said. At that point, it becomes more expensive to get bigger, he said, because they’ve used up their economies of scale and need more employees, units and locations as well as bigger operating systems and a more mature human resources department.
A number of management companies that reached that point in the past 10 years decided it was the time to sell or merge, Loeb said, citing Summit Hotel Properties and Noble Investment Group selling to Interstate Hotels & Resorts. Kimpton hit it right at 65, he said.
“They described a situation almost verbatim from Noble and Summit,” he said. “It made sense for someone with another system to help them get bigger. IHG loves the culture, style, customers and owners. They said, ‘We want you guys to keep growing that. We will continue the back-office stuff.’”
A Kimpton culture
There’s concern about a change in culture at Kimpton, Loeb said. It’s difficult to grow under a corporate giant and not end up looking like it, he said, but at the moment, there’s been no hard departure from Kimpton as people have come to know and love it. It would make sense for IHG to handle all the corporate issues and let Kimpton do what it’s been doing, he said.
“You can own, support and supervise without integrating,” he said. “With some brand acquisitions, that’s exactly what’s needed.”
There has been thoughtful planning to determine what gets integrated and what stays unique to Kimpton, DeFrino said.
The demand for boutique and lifestyle brands continues to grow, DeFrino said, and Kimpton will continue to provide “ridiculously personalized experiences and heartfelt care” for its guests.
There’s a certain subset of the traveling public that wants something more highly designed and more personal, Depatie said. Once the big brands realize that, they’ll want to add it, Depatie said. He added that it takes more than design to make a property unique; it takes local flavor.
“They’re in a sweet spot of where demand is aggregating in boutique space,” Depatie said.
One of the biggest concerns after learning about the merger is whether Kimpton would change from all the things that made it great, Martz said. His company likes Kimpton’s teams because they’re smart, creative, easy to work with and responsive to ownership, he said, and the two companies shared aspects of their cultures.
Only time will tell how IHG plans to integrate Kimpton, Martz said, and he hopes IHG keeps Kimpton separate. The average Kimpton customer doesn’t associate him or herself with an overall brand, he said, and it’s actually a turnoff for them. Those customers don’t respond well to the Holiday Inn view or IHG, he said.
“They’re all a little unique in a different way,” Martz said. “They provide great, different experiences to the local markets. It doesn’t fit into a brand box.”