KHP Capital Partners: The Goodland, Key Largo and Now DC

DoubleTree by Hilton

WASHINGTON, DC—Last month Orlando, FL-based Xenia Hotels & Resorts sold the 220-room DoubleTree by Hilton for $65 million. Xenia did not reveal the buyer but it has since been confirmed that San Francisco-based KHP Capital Partners was the buyer. With the deal now recorded,  it provides a good opportunity to look at a) what KHP has been doing for the last several months and b) how its Washington DC deal fits in with what is happening in the hotel acquisition market in general. Two Other Deals The answer to a) is straightforward. KHP has invested in at least two properties, based on what is available in public records:  The Goodland in Goleta, CA and Hilton Beach Resort Key Largo in Key Largo, FL. The Goodland traded for $40.1 million in September 2015 from Newport Beach, CA-based Makar Properties. Makar acquired what was once a Holiday Inn hotel in June of 2013 and reopened it as The Goodland in October 2014. When KHP picked it up the property was stabilizing and establishing itself in the local market, according to a prepared statement by Joe Long, managing partner of KHP Capital Partners, released at the time of the sale. “We are big fans of the Santa Barbara/Goleta area, its high barriers to entry and strong demand characteristics,” he said. The Hilton Beach Resort Key Largo traded for $82 million or $410,000 per unit from Blackstone in February of this year. The answer to b) is a little more complex. Booming Times At face value, the hotel investment sales market in Washington DC is experiencing a renaissance. There have been several sales in recent months, including the rumored report that Lowe Enterprises is selling the Washington Hilton for $315 million . But there is another side as well, not just for DC but for the national market. It is widely believed that the hotel market is at its peak. Revpar appears to be slowing for some hotel owners in the industry and in the bigger picture there are concerns about anemic GDP growth, which is linked to Revpar.  They are exceptions to this, of course, but the anxious mood underlying the industry cannot be denied. In Vornado Realty Trust’s Q1 earnings call, David Greenbaum, president of the REIT’s New York division put it bluntly:

A word about the hotel business in New York. While both domestic and international tourism remain strong, the hotel industry is in a down cycle, the victim of gross oversupply.

Bethesda, MD-based LaSalle Hotel Properties CEO Mike Barnello also thinks the acquisition market for hotels has gotten tougher for buyers, with fewer transactions posting in Q1 overall, largely as a result of the cost ofd debt as well as the amount of proceeds the buyer would receive, he said in his Q1 earnings call.

You have seen a huge change in what the change in spreads and the change of proceeds over the last 12 months. It’s gotten a little better debt wise over the last couple months, but not anywhere near as strong as it was, say, 12 months ago. I think it’s a little tougher for folks to be aggressive on the buy side right now, given the cost components for them as well as the outlook on where we are in the cycle.

Kimpton’s Private Equity Fund Unit KHP Capital Partners was launched last year by Mike Depatie, Joe Long and Ben Rowe to take over the private equity fund management business managed by Kimpton Hotels & Restaurants after the sale of the hotel management company to InterContinental Hotel Group. Depatie, Long and Rowe were the former CEO, CIO and CFO of Kimpton and had previously led the company’s private equity business as well as overseeing the hotel and restaurant management business. According to its website KHP’s targeted equity commitment is between $10 and $40 million, “but we will selectively invest in assets requiring both smaller and larger commitments.” Of the three acquisitions it has made, only one has fallen within that price range. KHP’s investment approach, according to its website, is aimed at the boutique and independent hotel segments. These particular hotel assets or types offer, according to the group, “some of the best investment opportunities in hotel real estate…for outsized performance improvement.” Its chief target are properties that could be improved because of “inexperienced owners and operators in this niche,” it said. Its acquisition of the DoubleTree by Hilton could fall in this category. Xenia said as it announced the sale that the property had untapped value that, with additional investment, could be realized. It just so happened that Xenia did not want to make that investment.  Indeed, after years of dormancy, the DC hotel market is rife with such value-add opportunities. KHP did not respond to an email and phone call from GlobeSt.com for comment for this article.