Mike Depatie recalled a 79-year-old friend who advised him to continually consider first what is becoming clearer, and then what is now truly clear. For example, what was becoming clearer a year ago was Airbnb becoming a bigger threat than hoteliers had previously thought, and now it is accepted wisdom that Airbnb is having an impact on the hotel business. Something else that was becoming clearer was that supply was building up in major markets, and now Depatie said that is clearly the case. And one more for good measure: What was becoming clearer last fall was that U.S. REITs might be dropping out of the buyers’ market, and now it is very clear that they are out.
“You have to constantly think about what the market does not quite yet understand but is starting to think about,” said Depatie, co-founder of San Francisco-based KHP Capital Partners, the continuation of a decade-old hotel real estate private equity business started at Kimpton Hotels & Restaurants, which he and his partners sold for US$430 million to IHG in January 2015. That is one way KHP looks for its edge – thinking long and hard about what is becoming clear to take bets about what is going to happen next.
What is Depatie most clear about now? “It’s later in the cycle,” he told HOTELS’ Investment Outlook during a recent interview. That being said, he remains confident there are great opportunities in KHP’s sweet spot – the boutique segment that has chains looking over their shoulders and doing everything they can to join the party. “People want this kind of experience that we were successful with at Kimpton and now at KHP,” Depatie said. “And I don’t think that’s going away in the short term. So, I’m willing to continue to take that bet.”
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With 19 hotels in its portfolio (15 open and four under development) with an asset value of approximately US$1.2 billion, Depatie and partners Ben Rowe and Joe Long have their own “house view,” which they refine every quarter, and which has them primed to deploy their fourth US$210 million fund. They are eyeing value-add boutique opportunities in major North American markets, preferably for Kimpton hotels, Depatie said, but potentially with big soft brands and certainly with other preferred independent operators.
Of the open hotels, KHP is adding a new construction tower to the Anglers in South Miami Beach, Florida, while the recently acquired DoubleTree in Washington, D.C., and Hilton in Key Largo, Florida, are awaiting significant capital upgrades before converting to Hilton’s soft brand, Curio. KHP is on the cusp of opening two adaptive reuse projects, the Gray, a Kimpton hotel in Chicago, and a yet to be named project in Pasadena, California. Two more ground up projects in Hollywood, California (the Argyle), and West Hollywood (the La Peer) are also under development.
After these two new-builds, KHP is likely staying away from new construction for a while and will primarily consider renovation and repositioning opportunities, as well as adaptive reuse to take advantage of bigger upsides, especially with lifestyle plays. International growth is in KHP’s long-term plan, but the timing is not quite right.
Depatie said he is not sure how big KHP will get, but over time the ambition is to become the preeminent source of capital, equity capital for sure and a growing source of debt capital. “I think we have the opportunity to build a really substantial investment company,” he said. “We have a great track record, great access to capital, and we’ll probably stick with what we know right now, the boutique lifestyle space. But over time, we’d probably broaden that platform and broaden where we play on the capital stack – maybe even debt.”
Depatie added that while KHP has a three-year investment period with its fund, it could be extended to provide cautious flexibility. “I think you can still be opportunistic at this point in the cycle, but it’s certainly getting later in the cycle,” he said.