Escalada (RLH Properties): “Spain is going to be the country that grows the most in the luxury and ultra-luxury hotel segments”
By @pmartinez-almeida @luis manzano
RLH Properties is a hotel company dedicated to the luxury and ultra-luxury segments with presence in Mexico, where it is listed on the stock market, and in Spain. Owner of the Rosewood Villa Magna and the Bless Hotel Madrid, they continue to look at our country with potential, especially in beach areas, such as the Costa del Sol. Borja Escalada, CEO of the company, points out that Spain will be the country that grows the most in the luxury hotel sector and denotes the potential of Madrid.
Additionally, he points out that sophistication is on the rise but, above all, younger generations are investing much more in travel experiences rather than material possessions. Allocating more of their income to live experiences than to own things.
Escalada considers that the luxury segment is growing not only because there is more and more people with high purchasing power, but also because there is more people with less income who allocates more of their salary to experience this.
What is RLH Properties and why was it founded?
RLH Properties is a hotel company committed to the luxury and ultra-luxury segments that is totally dedicated to the acquisition, construction and operation of luxury hotel assets and residential businesses, in partnership with hotel assets.
What is this trend of building hotels and homes at the same time?
Many of our hotel assets include an attached residential business. Although it is a trend that has been going on for a long time, the recent COVID pandemic has accelerated it even more. They are residences operated by the hotel itself but owned by individuals. When the owner does not use the residence, it is managed as a hotel as one unit and this generates more community, which produces more fluency and therefore also consumption of food and beverages for the hotel. It brings about more capacity for the hotel to be able to meet more demand and provides a type of accommodation that is increasingly in demand and that is something a little more than a hotel room or suite: it is a residence, with everything that entails.
For example, the One&Only Mandarina hotel has 55 residences, and the owners not only can use the entire resort, but also, when they are not in use, the hotel rents out the villas. This is also done at the Rosewood Mayakoba and Fairmont Mayakoba, with a concept that goes even further, that includes co-ownership scheme that are later incorporated into a program where accommodation weeks can be exchanged with others resorts around the world.
Increasingly companies are betting on the luxury home co-ownership model
It is a trend that has been going on for a long time and that comes to satisfy both parties. On one hand, owners who want to have a home or a villa, in our case very exclusive, but who do not want all the responsibility that comes with owning and maintaining a residence. Therefore, the hotel takes care of absolutely everything when you are away from home, and during your stay you have all services and amenities. On the other hand, there is an increasing demand for hotel rooms and villas, however people are looking for a space that goes beyond a hotel room, they are looking for fully operational villas that offer more space and functionality.
After COVID, the demand for larger social spaces have improved and stays have been longer. If you add the home office variable, etc., it means that the demand for residences has grown exponentially, both for owning and renting. In general, luxury has been a segment that has been growing for some time, especially due to differentiation. As time goes by, people have developed a more sophisticated taste, nevertheless, what is happening is that the youngergeneration is investing much more in travel experiences than material goods. Allocating noticeably more of their purchasing power to living experiences than to having things.
While in previous generations they focused first on having what is supposed to be essential: a house, a car, etc. and then start spending on experiences. Today, it is popular to see a young couple celebrating in a high-end restaurant who are probably living in a rented residence, and who are allocating much more of their purchasing power to living experiences and generating memories.
Are individual villas more in demand than hotel rooms after COVID? What is more demanded?
I would say that the demand in both is increasing. What happens is that, if you compare it proportionally with the previous demand, the one that has accelerated the most is the one for villas. Both are at a time of particularly important demand, and we are not still noticing enough demand in Europe because we haven’t finished yet coming out of the pandemic, and then the current geopolitical situation also complicates it. But in places where more people are starting to travel, as is the case of Mexico, hotel demand has grown very significantly, but what has grown even more proportionally is the demand for residences. People want larger spaces, they want to be able to enjoy the amenities of a hotel, but also with the advantages of having more privacy and more space. As I mentioned, right now privacy is something that in my opinion, people are beginning to value the most and a villa offers you that, without having to give up to the advantages of being in a resort. When you want to spend time with people you have this option, but if you want to be with friends and family, you can do this too.
How does the hotel-villa business work?
It operates exactly like a hotel room. You have your key in the same way as you would in a hotel: cleaning service, etc. It sells the residence at the corresponding daily rate and there is a 'revenue share', that is, the income shared between the owner and the hotel.
Why did RLH Properties arise and why in 2013?
It was founded because the need is to try to satisfy or cover what we believe to be a niche in a traditionally or very stable segment, which is the luxury and ultra-luxury hospitality business. We do it convinced that there may be a slightly different way of operating these assets, and that has been changing quite a bit in recent years. Normally, the owners of this type of asset were financially focused investors or even families that delegated 100% of the operation to hotel brands. We, however, were convinced that we could make a good team with the hotel brands, being very active in the daily management of the properties. For this, we have an Asset Management team, a revenue management team that collaborates side by side with the hotel operator, for example, in the case of Villa Magna with a hotel brand, we have a hotel Management Agreement that operates on a day-to-day basis, but we have a significant role in that operation. Thus, we complement the experience of the brand with our own experience in hotel management and, mainly, with our knowledge of the places in which we have presence. Therefore, changing things up to how traditionally you would invest in these types of hotels. Above all, convinced that there was no global platform for exclusive investment in luxury and ultra-luxury assets that specializes in this, without necessarily being linked or committed to any specific brand but incorporating what we consider to be the best brand for each of the asset.
As to why in 2013, it's probably more circumstantial. 2013 is a time when the shareholder who created the company, had some land developments. The opportunity arises to start the project by buying an emblematic and very premium asset in Mexico, which is the Four Seasons in Mexico City. In the end, I think that what this segment has is its entry barriers, because developing a Villa Magna is very difficult and buying a property like this one is as well, complicated. So, creating a portfolio in the end is complex. In return, it has the advantage that when you have one of these assets, you usually have a brand with which you have regional exclusivity. A maximum of 8, 10 or 12 brands compete. Therefore, you know what the maximum supply can be with a demand, however, that is growing. As I was saying before, the luxury segment is growing not only because there are more and more people with high purchasing power, but also because it is growing from below. There are more and more people with less purchasing power who allocate more of that income to live these experiences, which means that the target audience is growing, with a relatively contained demand.
What investment forecast do you have for this year and successive ones?
I would tell you that possibly for the next two years, just with what we have planned, we are going to invest more than 200 million dollars. But obviously, if an opportunity appears that we believe fits well, that will make our investment grow exponentially.
We do not have any investment objectives. I believe that the success of RLH is that we always have the support of our shareholders when we understand that there is a good opportunity to grow, but we also do not have an obligation to grow because these obligations in the end can lead you to make investment decisions that may not be exactly 100% what you're looking for. We are permanently looking at opportunities and those that we believe fit exactly into the strategy that I was telling you about creating a diversified portfolio of true premium assets, since we access capital, either through our shareholders or with third parties, and then we invest.
Today we do have important investments in the pipeline. We have just started the construction of the Rosewood Mandarina, which is going to be a significant investment. We are currently remodeling the Fairmont Mayakoba Hotel, where we also have a strong investment allocated, and we have just completed the expansion of the Banyan Tree Mayakoba, where we opened 41 new beachfront hotel rooms.
Where could RLH be in Spain?
RLH has a need for growth in Europe and of course in Spain. We are a hotel company listed in Mexico, we were born in Mexico, we expanded throughout Mexico and now we have a very clear vocation to internationalize the company. Obviously, our natural destination was Spain. Once we arrived in Spain and we have done with the purchase of spectacular assets such as Villa Magna and Hotel Collection Madrid, we want to continue growing in Europe and of course in Spain. Where? there are many areas that we would love. The Costa del Sol is an area of Spain that we believe has a lot of potential. It has the ideal weather and air connectivity characteristics to establish an asset. Choosing a beach destination, a resort in Spain, already having two incredibly good options in the city, would undoubtedly be a very natural step for us, but as I say, we will see what happens in the future.
Spain is the country that is going to grow the most in terms of luxury and ultra-luxury tourism. Look at the number of new openings that are taking place in Spain and specifically in Madrid.
How has the pandemic affected the company and the hotel sector?
It has affected us all greatly. It has been the most impactful crisis in recent decades. For a sector like ours, which has been forced to close operations in Mexico and Spain, since both countries made the decision to suspend operations of all non-essential activities. We closed the Villa Magna and Hotel Bless. We took advantage, to the extent that the regulation allowed us, to accelerate a remodeling process that we had planned for Villa Magna which was going to be held over an extended period to reopen as Rosewood Villa Magna.
For us, 2020 was an extraordinarily complex year where shareholders had to bet heavily on the company and support it. But honestly, today I think we made the right decision. We are proud that our entire team is still with us, that they took care of themselves, that we took care of them, that fortunately we had a team that has suffered, of course, the illness and some losses, but in a very restrained way and that today we are receiving more guests that we received in 2019.
What profitability is the company having on average?
This business has two types of profitability. The profitability that we generate year after year and the revaluation that the assets are suffering. Fortunately, we are a very long-term company, where our goal is to preserve assets. Therefore, this revaluation in many cases is going to be more theoretical than practical because our calling is not to sell the assets. But all our investments have had returns, where we are meeting our expectations both in terms of occupancy and rate. Obviously, we have suffered a major crisis, as I was saying, with two very affected years. In 2020 we were one of the few companies that obtained a positive operating result.
It has been a mixed year with perhaps very good performance in our coastal goods and suffering much more in city assets. However, in 2022 we clearly see it starting to pick up. Hopefully, Europe enters greater stability and that allows cities to recover sooner. Mexico City is certainly recovering faster. The tacit revaluation is going to take place, as it is already taking place, and I hope that we continue to create value for our shareholders.
In which other European countries would you like to have a presence?
Europe is a destination that we clearly want to continue growing and now we have presence in Spain. Italy and Portugal are also a natural expansion for any company in Europe and in our
segment. In the case of Portugal, it has a similar situation to the one we mentioned before in Spain, where it is developing or trying to capture part of the luxury destination in cities such as Lisbon, Porto or in coastal destinations, such as Comporta, which I believe are destinations that are about to be exploited for luxury travel. Therefore, any of those destinations would fit us, but unfortunately, we have not found anything interesting yet.
In the case of Italy, well, Italy is a country that has traditionally embraced the hotel sector in a spectacular way, with very high rates and in many cases with products that are good for
renovations. A natural destination for any company that wants to duel in luxury and ultra-luxury is Italy. We have analyzed some opportunities in Lake Como, Milan, or Rome. But we have not yet found the asset that fits our portfolio.
We get a lot of calls from buyers for our assets. Honestly, today we have not considered any of the offers
Do you entertain the idea of disinvesting in hotel assets?
We are a company that does not rule anything out, but our vocation is not to disinvest. We are not an investment fund that buys, has a certain life span, and must sell the assets. Our vocation is to create a large, diversified, complementary portfolio that creates value for shareholders and to be the largest luxury and ultra-luxury hotel company.
Have you received interesting purchase offers?
We get a lot of calls from buyers for our assets. Honestly, today we have not considered any of the offers, we have had offers that on paper are very attractive or at least at prices much higher than what we bought them for. But today, we believe that having a larger and more diversified portfolio creates more value for the company and therefore for our shareholders.
What do you look for when buying a real estate asset?
We make sure that it has something special, that it is difficult to replicate, that it can offer a different experience to the guest. If you look at our most recent transactions, Villa Magna has, and I say this with all humility, the best location in Madrid. It is an asset with enormous potential in a sector that has not been exploited to date. And look, it's an asset that has been open for almost 50 years, but the hotel's outdoor areas, which are an oasis right on Paseo de la Castellana, have never been sufficiently exploited.
How do you see the hotel sector this year?
2022 will still be a year of transition. Coastal assets have recovered very quickly. In all of them we are operating above 2019 and yet the city assets are taking a little more time. Perhaps the rhythm of business travel is not fully recovered yet. That means that city destinations that have a greater business component have not picked up the pace. We are on the right track, but 2022 is still going to be a year in which the pandemic is still being felt and is being felt quite a bit in Europe as a whole.
Regarding the war in Ukraine, the perception is different in the American continent, since the war seems very far away, although it is followed with great interest and with concern for the humanitarian suffering that it entails. But it is seen as a war in Europe, between Russia and Ukraine. That means that many decisions to travel to Europe are being postponed or slowed down, and that is affecting hotel occupancies.
I am confident that the situation will recover in the coming quarters, especially in the third and fourth quarters. I expect an incredibly good year in 2023. Spain was the second most visited country in the world before the pandemic and it will be again. There are many people wanting to come to Spain and I am convinced that we are going to have a flood of visitors. What you must be is ready so that when that happens, we can receive them in the best viable way.
What room for growth does the hotel sector have in Spain in terms of investment? 2021 was one of the best years in investment history
2021 was a year of record investment. It is the best sign that we are doing things right. We are convinced that it is the country that is going to grow the most in terms of luxury and ultra- luxury tourism. Look at the number of new openings that are taking place in Spain and specially in Madrid. Still, of course, there is a lot of room for growth, not only investment, but particularly in the development of this segment. When we bought the Rosewood Villa Magna, I remember that in an interview they asked me about the rates. I said that rates in Madrid had a long way to go, because if you compared them, even in equal purchasing power parity with other European capitals, we were far below. That is already happening. The city of Madrid is pushing its rates so that the value of what it is offering is recognized. Therefore, what I see is a huge demand to invest in Spain. Investors, both national and foreign, are all attentive to Spain and delighted to make investments here.