Michael Depatie, president and CEO of San Francisco-based Kimpton Hotels & Restaurants, which owns and runs boutique hotels, is intrigued by business concepts that fly under the radar screen. In the 1980s, as vice president of finance and development with Residence Inn Co., he helped grow the extended-stay brand from seven hotels to 100 before the company was sold to Marriott Corp. for $260 million in 1987. From late 1996 to January 1998, he was CFO of Signature Resorts, the first publicly traded firm to operate timeshare resorts.

Today, Depatie is at the center of the boutique hotel trend. In April, Kimpton announced it had closed on a $246 million institutional real estate fund, Kimpton Hospitality Partners II. The fund plans to acquire more than $800 million worth of hotels over the next three years and build new boutique hotels in select urban markets and resort areas in North America.

Kimpton has ownership interests in 16 boutique hotels, with another 19 in development. It manages 26 hotels for third-party owners. Kimpton's four-star properties include the landmark 183-room Hotel Monaco in Washington, D.C., and the 252-room Argonaut Hotel in San Francisco. NREI spoke with Depatie about trends in the boutique hotel sector.

NREI: How big is the boutique hotel industry and what is its potential for growth?

Depatie: There are about 4.5 million hotel rooms in the U.S. Boutique hotel rooms account for 1% of the supply, or about 45,000 rooms. My sense is the demand is a multiple of that figure. There is the potential for boutique hotels to account for 3% to 5% of all hotel supply over the next 10 or 15 years. That would be a huge opportunity for us.

NREI: Who are the investors in this fund, and what kind of returns can they expect?

Depatie: Ninety percent of the investors in the fund are college endowments, and about 10% are individuals that have been investing with us for about 25 years. As we look at individual assets to buy, we are looking for leveraged return on equity of anywhere from 15% to 25%, depending on the risk of the asset that we're buying. A development project is going to have a higher return. A seven-to 10-year hold would be a typical hold period.

NREI: What are the hallmarks of the Kimpton business model?

Depatie: Our model in the past typically has been to take an older, underutilized building in a major urban area — such as an office building, department store, warehouse — gut the inside, and put in its place a 4-star or 4.5-star highly designed boutique hotel paired with a chef-driven restaurant. That model has worked really well. Now the model has morphed to include new development and adaptive reuse and repositioning of underutilized hotels.

NREI: Which part of the business generates the most revenue for Kimpton Hotels?

Depatie: About two-thirds of our revenues come from third-party management contracts, the remaining one-third comes from hotels that we already have an ownership interest in.

NREI: What makes Kimpton a unique player in the boutique segment?

Depatie: Two guys on a cell phone can go out and buy a piece of land, hire a designer and build what they think is a boutique hotel, and maybe get someone to run a restaurant next door. What really makes Kimpton unique is the programs we offer, from being eco-friendly to pet-friendly. We have a 24-hour wellness channel with things like Pilates, yoga and meditation. We have a free wine hour every night. We have a caring group of people that run our hotel operations who have a way of connecting with our customers in a very authentic and meaningful way.