Mike Depatie on Kimpton Sale, Future of Hotels
Editor's Note: With the Bisnow editorial staff now covering 27 cities coast-to-coast, we're excited to launch—gasp—periodic longform stories. Today we present the third from national editor Billy Gray on one of the biggest movers and shakers in the hotel sector today. (In case you missed our first two longform reports, they can be found here and here.)
Mike Depatie, the hotel hitmaker who rebooted the budget chain formula, making La Quinta a household name—among other industry-changing innovations—is now six months into his post-Kimpton-sale life and hoping the past will repeat itself.
His day-to-day has changed, but his potential for continued success still depends on his capacity to look into the future and sense shifting lodging headwinds. He’s brought his keen eye for presaging looming industry trends to the helm of KHP Capital Partners, which spun off from Kimpton following the InterContinental Hotels Group’s December 2014 acquisition of the trailblazing boutique operator for $430M. Conceived by its parent company in 2004, KHP is a real estate investment firm that also scouts industrial or commercial buildings for hotel conversions by Kimpton.
The former Kimpton’s CEO is not divorced from the brand; his new role entails a focus on its boutique hotels’ continued expansion. There the industry’s future is uncertain. That’s especially true when it comes to the continued individuality of boutique hotel brands as the major players subsume them.
But uncertainty could be fertile Depatie territory. Indeed his four decades of work in the increasingly fractal hotel industry lend him a unique perspective as he tries to navigate the future of lodging in his new gig. “La Quinta was a limited-service hotel,” he told Bisnow in a recent interview. “Nobody exactly got what that meant. Sunterra was the first public timeshare. No one knew exactly what that meant. And again, with Kimpton: ‘Oh, it’s boutique.’ Back then it wasn’t really an institutional quality asset class.”
Insiders are eyeing Depatie’s next step. Can he continue his clairvoyance? No one’s likely to count him out.
“Mike is one of the more thoughtful, insightful leaders in the industry,” said Mark Woodworth, the president of PKF Hospitality Research. Woodworth noted the parallel timelines of Depatie’s career and the hotel sector segmentation he propelled.
The kickstart to Depatie’s career came in 1983 and had less to do with hotels than a Texas developer with a weird name. Depatie was a student at Harvard Business School, and Trammell Crow was speaking on campus.
“I went with a bunch of friends, just to see what a guy named Trammell Crow looked like,” Depatie said. “I had no interest in real estate. Back then real estate development was a place for entrepreneurs. It wasn’t really institutional.”
Crow’s eponymous development firm was cited throughout the ’70s and ’80s as America’s largest landlord. But the biggest impression the “eccentric but brilliant” Crow made on Depatie didn’t involve his extensive holdings, but how he’d acquired them. “Someone asked Trammell why he was so successful and he answered: ‘I don’t know…I think it’s because of love,” Depatie said, doing his best impression of a Lone Star State drawl.
Depatie and 13 of his classmates went on to work for Crow shortly after the mega-landlord’s animated visit to Boston. The large HBS contingent “was a sure sign that real estate was about to tank!” Depatie joked. Yet through booms and busts Trammell Crow thrived, with CBRE acquiring the company in 2006 for $2.2B. By then Depatie was long removed from Crow’s orbit and a star in his own right, having helped transform and popularize Residence Inn, La Quinta, Sunterra and, of course, Kimpton. All of those chains spread at a blitzkrieg pace during Depatie’s tenure, transcending niche status to become big players.
As had happened with Trammell Crow, Depatie’s interest in Residence Inn was piqued during his HBS days. He’d seen a prospectus for the small, Wichita, KS-based group’s latest lodging concept, in Grand Rapids, MI, and hoped to make it the subject of a field study. “I called this wild-ass entrepreneur from Kalamazoo [Depatie’s hometown, coincidentally] and asked if I could do some work for them,” he recalled.
Residence Inn had about five hotels under its belt at the time. It soon came into the fold of Trammell Crow Ventures, the company’s financing arm, and within three years grew to over 100 locations. In 1987, Marriott acquired the business. While Depatie’s initial attraction to the firm was academic, helping steer that kind of growth suggested a more organic fit with the hotel sector.
“I probably had a natural proclivity for it,” he said. “I like the service aspect and the real estate finance aspect. And, really, the hotel industry is about real estate finance.”
Real estate finance certainly looked favorably upon Kimpton before Depatie’s arrival in 2003. He described its 1997 investment fund as “unprecedented” for a company of its size—and history repeated itself, with Trammell Crow jumping into that pool. Another fund that kicked off shortly into his term raised $157M.
Consumer trends made it clear to institutional investors that Kimpton was a safe bet. In 1984, sufficiently recovered from their Studio 54 hangovers, Manhattan nightlife kings Ian Schrager and Steve Rubell opened Morgans New York, which many believe set the boutique template. (Kimpton claims its founder, Bill Kimpton, actually coined the phrase after debuting the brand’s first lodging, in San Francisco.)
But the boutique ethos—distinct design flourishes (or lack thereof in Morgans’ famously stark case) and a humane scale, perks long missing from generic chain hotels—really caught on a decade or so after Morgans’ founding. In a paradigm shift that mirrors the one now poised to remake the fast food industry, Americans began to drift away from the generic comforts of the big dinosaurs (Hilton, Marriott, McDonald’s) and toward the relatively personalized quirks of, say, a Kimpton or a Shake Shack. (The remarkable escalation of obsessive pet ownership on the part of the American consumer played no small part in Kimpton’s good fortune, with Depatie’s shop smartly setting itself apart from slow-footed competitors by being quick to coddle guests’ furry companions.)
By the late ’90s, the big boys were peering over their front desks, eyeing ways to copy the boutique formula of revenue generation. Marriott trotted out its Autograph Collection; Radisson rolled out its Blu group. And just last year, Hilton made its latest stabs at niche excellence by introducing the Canopy and Curio specialty lines.
Flattering as the imitation was, Depatie conceded that a goliath struggles to mimic David’s underdog charms. “The personal experience frays,” he said. “But from a customer value standpoint, there’s a lot about the boutique experience they want that they can get with their [existing chain] points, even if it’s not quite as customized or local as when it was smaller.”
Perhaps working with that logic, Depatie and his fellow executives had to be sold on the IHG sale. There’d long been whispers in the industry that various suitors were clamoring for Kimpton. “We’ve had a number of unsolicited overtures,” Depatie said. “As a matter of fact, in my first week on the job we got an unsolicited offer. And I thought, 'Oh my God, it’s over.' But it never felt like it was time to do anything. But pressure got so intense that the board started a [review] process with Goldman Sachs.”
Then it finally happened. “Quite frankly, we were reluctant sellers,” Depatie told the audience at the Americas Lodging Investment Summit in February. “It’s something we didn’t really want to do.”
As often is the case with such transactions, IHG made Kimpton an offer it couldn’t refuse—the $430M price tag was about 21 times Kimpton’s earnings. When Bisnow spoke with Depatie he seemed sanguine about IHG’s chances of having success with the takeover, even if he didn’t exactly bellow support from the sidelines.
The new ownership must “find a way to bring growth without diluting the personal experience," he argued. “It’s going to be really, really sensitive. It’s about culture issues. I think they’ll do a pretty good job. But of course over time it will probably change.”
Woodworth also sees huge potential in the acquisition and thinks Kimpton’s singularity can survive the change. “Thirty years ago hotel ‘uniformity’ meant rooms with identical heights, carpeting and finishes,” he said. “[Kimpton] is more focused on quality and finish through the design and feel, that speaks to the more local environment. The word indigenous comes to mind.” And that localism acts as a bulwark against the generic, he theorized.
Moving from hotel room to boardroom changes spurred by the IGH deal, former Kimpton COO Mike DeFrino (above) replaced Depatie as CEO. Depatie called him a very capable guy. “He’s keeping all his lieutenants,” Depatie said. “They’ll bring a better awards program to the table. I think they’ll do really well.” Kimpton also is positioned to benefit from IHG’s international reach. The company has a presence in about 100 countries, and Depatie said “a ton” of new hotel customers over the next 20 years will come from outside the US.
Kimpton Group Holdings will maintain its grip on the brand and management of its 65 hotels. And Depatie will steer KHP Capital, which he and other Kimpton alumni own. The firm will still invest for Kimpton and continue in its ownership of 16 of its hotels, with five in development. The financing emphasis should suit Depatie, who was particularly instrumental in accommodating the huge surge of lending to hotel firms.
Summing up the changes in his day-to-day real estate dealings, Depatie said: “A couple of weeks ago I had 10,000 employees, now I have two partners.” Ben Rowe and Joe Long round out the KHP triumvirate.
FINGER IN THE WIND
KHP looks to make wise bets on the lodging sector’s future. Competitors are watching what they’ll do, wondering about Depatie 2.0. Construction cranes dot the skylines of several prominent cities, harbingers of a spate of new hotels—and an urban future. Yet nationwide supply has remained fairly steady. The glut of ultra-luxe condo towers has made some residential pros fretful of froth. Could a bubble be forming in the hot spots? It’s certainly a cocktail hour question among insiders in New York.
Depatie reads the tea leaves. “Unfortunately, New York is not well-positioned,” he opined. “It’s the poster child for oversupply. There’s been so much turnover. And what the new supply is really doing is muting an increase in room rates.”
That said, he argued that sticker shock still dissuades many developers. And New York’s exceptional status with foreign visitors makes it uniquely vulnerable to a bulked-up US buck. On the other hand, San Francisco, where KHP is based, is prospering from “great demand trends” and a constrained supply that makes it, in Depatie’s mind, “the strongest market in the country.”
In all, Depatie thinks broad undersupply leaves hotels one or two years away from a correction. Woodworth agrees, saying the industry has “at least a couple of good years [to go] and a high likelihood of more. The theme of late is this whole notion of persistence at the peak. We’re just about at record all-time occupancy levels. And average room rates should finally recover by the third quarter of this year. We don't talk about hotels being ‘in recovery’ anymore. And demand should outstrip supply through 2016 at least.”
A day of reckoning may come sooner for REITs, which hinge to an unusual extent on interest rate fluctuations and (like hotels in world capitals) foreign tourists who for years have reveled in a neutered dollar, with the favorable exchange rate fueling shopping sprees and stays in plush hotel suites.
As for Airbnb, an indigenous threat to the established hotel order if ever there was one, Depatie kept calm. The industry veteran made his name through new sector trends that quickly ascended to the top tier. At this point though, the sharing economy doesn’t pose the sort of direct competition that would cut into the first rung’s bottom line, he believes.
“Its impact is more on the lower-end guys,” Depatie said. “I don’t think it will put anyone out of business. It’s more of a leisure than a business trend right now. If someone rents out his apartment on Airbnb for two weeks, well, he has to go somewhere, right?” (Of course, that Airbnb-er could stay with a friend, in another Airbnb unit, or perhaps at a nearby apartment not used as an alternative income stream.)
Still, Depatie didn’t hesitate to label Airbnb and like-minded sharing engines a destructive force. Depatie recalled giving a talk at HBS and asking “about 90 kids how many knew Kimpton. Maybe 15% to zero percent knew it. I asked if they knew Airbnb: Everyone raised their hand. Had they stayed at Airbnb? Nearly everyone raised their hands.”
Between IHG’s Kimpton acquisition, macroeconomic trends and a yappy crop of upstarts with a fast-growing currency bulging the pockets of many Millennials, one might imagine more seismic mergers in the hotel industry’s future.
Depatie, veteran hotel soothsayer, urged caution on those bets. “The big chains, they’re all looking to buy something,” he said. “I got a call yesterday: ‘I heard Marriott is looking to buy Starwood.’ I said, ‘Well, that’s very complicated.’ But some consolidation is possible. People feel we’re getting close to the top of a cycle.”