Kimpton Goes on Hotel Buying Spree
April 11, 2008

Amid tightening credit markets, Kimpton Hotels has closed a $246 million hotel acquisition fund.

This is the third discretionary fund raised by the San Francisco boutique hotel company, which expects to leverage the money into $800 million. The fund has already made its first two acquisitions: the Architects Building in Philadelphia, a 1929 office building that will open as a Hotel Palomar in 2009, and a new-construction Palomar in Chicago.

Kimpton CEO Mike Depatie said the company will use the money to acquire about 10 new properties through adaptive reuse of both non-hotels and existing hotels, as well as new construction in major American markets. Half of those new hotels will be either Palomars or Monacos.

"We want to go where it's really hard to build a hotel," Depatie said.

This fund will help Kimpton do that. "Our competitors who don't have committed capital will have a very hard time growing," Depatie said of how this fund sets Kimpton ahead in the near term. Many former competitors will be absent this time around, Depatie believes, since they historically have used more debt than Kimpton to buy hotels.

It succeeds the earlier Kimpton Hospitality Fund, which raised $157 million back in 2005 and invested in 13 properties. Kimpton's first such fund raised $122 million in 1997 and acquired nine properties.

"There's still a lot of money out there looking for a good, solid investment," said Bob Eaton, executive managing director of PKF Capital. Raising this fund "reflects the strength of underlying capital markets and also the strength of the Kimpton name and the Kimpton story."

What's unusual is not that Kimpton continues to attract institutional investors, but that it structures the money it raises from them as funds.

"There's a lot of logic in having a single fund you can go out and invest with because it simplifies the decision making," said Chip Conley, CEO of Joie de Vivre Hospitality. "Joie de Vivre tends to have a more diverse and unique set of assets, many not of institutional fund quality. The primary reason we've not done funds is to have flexibility in the kind of hotels we acquire."

Depatie believes that Kimpton's national primacy in the ever-growing boutique niche, where guests expect to find quirk and character, a one-off antidote to the comparatively bland sameness of most corporate hotel chains, make his aggressive growth plans attainable.

With 42 hotels open nationwide and 19 more in development, Depatie believes Kimpton is the first truly national boutique brand, and it can double its size over five years.

Depatie also is optimistic that any correction to the industry will be relatively minor, because there isn't a glut of new supply to throw things out of whack. Only about 1 percent or 45,000 of 4.5 million hotel rooms in the U.S. are what Depatie would term "boutique."

"We don't know what demand is, but we think it's a multiple of that. This is a big market," Depatie said. "There's a big mismatch between what we (Kimpton) do and supply. If we build it, they will come."

Already, those who do come like what they find. For the first time, Kimpton placed No. 1 for 2007 in Market Metrix's annual survey of customer satisfaction.