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2:36

Breakdowns is a series of conversations

2:38

with investors and operators diving deep

2:40

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2:43

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2:45

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2:47

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2:54

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3:21

I'm Zach Fuss and today we're breaking

3:24

down the US marina industry. In

3:26

the US, there are more than 11,000 marinas grossing over 6

3:28

billion in

3:31

sales. To break

3:33

down the industry, I'm joined by

3:35

David Chesner, co-CEO of GrovePoint marinas,

3:38

and Josh Koppelitz, the managing partner of

3:40

Thayer Street Partners. Today,

3:42

there is a 12 to 1

3:45

ratio of registered boats versus the

3:47

supply of rentable wet slips and

3:49

dry storage spaces. Zoning

3:51

regulations lead to limited supply growth, which

3:53

has led to a sustained backdrop of

3:56

strong profitable growth for the industry. The

3:59

industry grew. marinas

26:00

creates not immaterial maintenance,

26:02

kept backs, but when you have

26:04

a hurricane, tornado,

26:08

whatever the natural disaster is,

26:10

it creates boat and marina

26:12

damage and you

26:14

need insurance. And if you're institutionally owned, you

26:16

definitely need insurance. And if you have a

26:18

lender, they're going to require you to have

26:20

insurance. As you have

26:22

scale, there are real advantages. So we're seeing on

26:26

every insured dollar, we're seeing

26:28

costs rise as the insurance

26:31

market frankly hardens for

26:33

coastal assets and in some cases

26:35

lake assets. But if you have

26:37

a large portfolio, you can work

26:40

with the insurance carriers or frankly

26:42

go directly to the reinsurers and

26:46

spread your risk across locations

26:49

and be a little more sophisticated which

26:52

could dramatically lower your cost of insurance.

26:54

And insurance is not an immaterial expense.

26:56

We see insurance as 10, 20%

26:59

of the cost structure of some of these assets. And

27:03

if you look at some of these

27:05

natural disaster events that happen with hurricanes,

27:07

who wears the risk in that you

27:10

see these horrible depictions of boats piled

27:12

up in waterfront areas.

27:14

Is that something that the marina is

27:16

responsible to help compensate for? It

27:19

depends. So in

27:21

an ideal manner, both the boat

27:23

owner and the marina owner are

27:26

insured. And so things

27:28

that relate to the structure

27:30

of the marina, the marina owner unequivocally bears

27:32

the risk for. If there's

27:35

something that is completely idiosyncratic related to

27:37

the boat, obviously that's

27:39

going to be the boat owner. There's some

27:41

gray area in the middle and

27:45

everyone will turn out okay

27:47

if they're adequately insured. The scarier thing

27:49

that we see is that there are

27:51

a lot of one-off marine

27:54

owners that are relatively

27:56

underinsured and they

27:58

may not be monitoring. the insurance

28:01

of their customers. And so when

28:03

you have dynamics like that, you

28:05

could have a perfect storm of

28:08

major liabilities. And

28:10

we've seen people move to have to

28:12

sell their business because there ends up

28:14

being cash crunch as a result of

28:16

it. So we think that all marine

28:18

owners are going to be more conscientious

28:21

of this over time, definitely lenders and

28:23

lenders will probably drive this. But

28:27

so long as this remains an issue, the

28:30

bigger guys are going to win because they're going to be

28:32

able to spread their risk. And

28:34

so when you think about growth for

28:37

these businesses, and obviously Sun discloses the

28:39

growth of their marine business, there's both

28:42

inorganic and organic growth, inorganic

28:44

via acquisition, organic via whatever

28:46

incremental services and slips and

28:48

pricing that you can take

28:51

for providing better service. How

28:53

do industry participants grow

28:55

their businesses? So I

28:58

think there's two ways we have observed. One

29:01

is as simple as

29:03

rate. So we see

29:05

marine owners

29:07

and operators raising rate in

29:10

line or in excess of

29:13

prevailing storage and other

29:15

forms of rental rates

29:18

in that local area. I think

29:20

the second way is adding

29:23

additional features and sources of revenue

29:25

on a site. As

29:27

David mentioned, the larger you are, the more

29:29

centralized resources you have, the easier it is

29:32

to implement that. And that could be adding

29:35

additional storage slips. That

29:37

could be other revenue features

29:39

that could be upgrading the site

29:42

or upgrading slips so you could store

29:45

larger or longer boats. So

29:48

it's a combination of site

29:51

improvement and then also inflating

29:53

revenue. David, what did I miss?

29:56

Yeah, I would say specifically to

29:58

target what Sun's few

32:00

in a given year that are built. But at

32:02

the same time, you have these incredible

32:05

waterfront locations where

32:08

there actually are parties who see that and they say,

32:10

oh, instead of a marina, I'm going to build

32:13

a hotel or a condo. And

32:15

so the net effect of that has been

32:17

a shrinking supply of marinas at the same

32:20

time that demand is growing. And

32:22

that has led to a tremendous

32:25

amount of waitlist

32:28

activity. And it doesn't mean that every

32:30

marina in the country has waitlists, but

32:33

broadly speaking, there are many,

32:36

many, many, many that do. I would

32:38

just add that David's talking

32:40

in terms of averages, there

32:42

are marinas that we've come across and David

32:45

and his team have come across. They don't

32:47

have waitlists at all. In fact, they have

32:50

occupancy that is materially below

32:52

the 90s. Typically

32:54

that correlates with one

32:57

of two things. One, you're observing some

32:59

sort of economic weakness in that area

33:01

or net migration

33:03

out of that area. The second

33:05

is usually an

33:07

overlay to that, which is the owners

33:10

have not adequately

33:12

maintain the site. So slips

33:14

are dilapidated, things may be

33:16

broken, service experience is weak,

33:19

and that material deferred capex

33:21

has led to weak asset

33:23

occupancy. This may be

33:25

somewhat of an obvious question, but given

33:28

just the perpetual shortage

33:30

of space, in

33:32

some ways, isn't the business just underpricing

33:35

its product? Probably.

33:38

If you think about it in some

33:40

ways, a component of marinas, at least

33:42

the storage side, is a

33:44

ultra leopard that on

33:47

population growth plus regulation.

33:49

So it's either underpriced today,

33:52

or you'll be able to push price

33:54

in excess of those growth factors over

33:56

a sustained period of time. So you

33:59

should see. in the terminal value. So

34:02

if I think about acquisition of

34:04

these assets, how do you guys think

34:07

about financing and valuing them on an

34:09

asset by asset basis? Sure.

34:11

So generally speaking,

34:15

we're seeing these assets being valued on

34:17

a cap rate basis. So based

34:20

on net operating income, conversely,

34:22

that could translate into a multiple of

34:24

EBIT damn. But historically,

34:28

we're seeing smaller assets trade

34:31

at between a 7% and 8% cap

34:33

rate based on in-place cash

34:36

flows, where larger assets will trade

34:39

closer to a 6%, maybe greater.

34:41

In terms of scaled portfolios,

34:43

we're seeing those trade at

34:46

somewhere between a 5% and a 6% cap rate. Public

34:48

REITs that have this ton

34:52

of exposure imply

34:54

a similar trading value

34:56

as those scaled portfolios. And

34:59

just to put it in context, very

35:01

similar range is manufactured housing, which right

35:03

now trades around solid half percent cap

35:06

rate publicly and self storage, which is

35:08

in the high fives as well. In

35:10

terms of financing, we have

35:13

historically seen assets get

35:15

dead on them to the tune of 50 to 60% loan

35:18

to cost or loan to value. Most

35:21

recently, there was a big public announcement

35:23

that Sun Tech and Centerbridge through

35:25

a JV were able to raise $600

35:27

million facility with Wells Fargo. Our

35:30

understanding is the advance rate is in that

35:32

range. And that's for true senior

35:34

debt price like senior

35:36

asset based debt. You also

35:38

see a number of regional banks, or

35:41

super regional banks that are active

35:43

in the market. And in spite

35:45

of some choppiness in the regional

35:47

banking market and choppiness in the

35:49

lending environment, still see more

35:52

than a handful participants continue to actively

35:54

lend to the space on a single

35:56

asset basis. But it does have

35:58

a fairly local focus in that. is

38:00

actually on 25-year wait lists. So

38:03

it's almost a full generation until you can get

38:05

your boat into

38:07

one of these slips. And of course, not

38:09

every market's identical. But broadly speaking, people tend

38:11

to stay for a very, very long period

38:14

of time, and attrition is very low, because

38:16

it's an important component of

38:18

these people's lives. And

38:21

there's just not many opportunities to

38:23

have a place to put your boat. And

38:26

what do the contracts look like?

38:28

Are they monthly, annual, multi-year? For

38:31

the marinas that we acquire, the

38:34

vast majority of contracts are annual.

38:36

There are also occasionally some monthly

38:38

contracts and often a few slips

38:41

that are set aside

38:43

for transient stays, which while

38:45

more fleeting on a per day

38:48

basis, actually, you charge a significantly

38:50

higher rate. And so

38:52

when you evaluate the industry itself,

38:55

obviously you've got an aging population,

38:58

you've got using the

39:00

parlides of cars, you've got a boat park that

39:03

is growing at 12 to one relative

39:05

to the demand for slips to the

39:07

supply of boats. Clearly,

39:10

there's steady pricing costs

39:13

are somewhat predictable. What

39:16

are the key risks in evaluating the

39:18

industry that you guys have to be

39:20

conscious of? I would say

39:22

number one, and we touched on it before,

39:24

is just climate risks that can lead to

39:26

more frequent and severe weather events, which

39:29

can damage marinas and boats and there's

39:31

changes in water levels and

39:33

droughts in certain regions, not in any

39:36

of the regions we're actually in, but

39:38

broadly speaking, that does exist. But

39:40

to mitigate that risk, we've made

39:42

sure to be properly insured and

39:44

geographically diversified. And so at any

39:47

one time, we think the

39:49

impact from such type of

39:51

events should be minimal. I'd

39:53

say another bullet point on the bear

39:55

case would just

39:57

be that consumers may cut discretionary spending.

40:00

during economic downturns, and

40:03

that might include recreational activities such

40:05

as boating. And then, broadly

40:07

speaking also, lots of marinas in

40:10

the US have aging infrastructure,

40:12

and therefore, they

40:15

might require significant investment for maintenance

40:17

and upgrades, and there's

40:19

a cost associated with modernizing a

40:21

facility. And I'd

40:24

say the Michigan here is for a

40:27

buyer or owner, is

40:29

to just make sure that we

40:31

or whoever is the owner does

40:33

significant diligence to make sure that

40:35

they're understanding that the requirements are

40:37

financially feasible and able to

40:39

get a return on. Typically, our concluding

40:41

question in these conversations is lessons that

40:43

you guys have learned through building this

40:45

business that can be applied as

40:48

you evaluate other investments and build other

40:50

businesses, maybe from each of you, what

40:52

you've learned through this and where you

40:54

apply those lessons elsewhere. Yeah,

40:56

obviously, when anyone's in the trenches spending

40:58

25 hours and eight days a

41:02

week building a business, you'll learn tons of

41:04

lessons. And I honestly

41:06

mean sincerely in saying, I think

41:08

the very first thing that any

41:11

business owner or manager should focus on

41:14

is working hard and

41:16

having good values and treating people properly. That

41:18

should be basic for anything in life, but

41:21

I certainly believe that really applies to building

41:23

a business. And then I think

41:25

most founders would probably

41:27

say the same thing here as well, which is just

41:30

luck favors the prepared. So prepare as much

41:32

as you can for every scenario and do

41:35

as much diligence as you

41:37

can in every situation. And

41:39

you're still going to be surprised on

41:41

a daily basis with something

41:44

that happens at a property with

41:46

personnel and the more prepared you are

41:49

and the more ready

41:51

you are to adapt to change, the

41:53

more able you'll be to respond well to it.

41:56

So on my side, I think

41:59

the takeaways based

42:01

on our success today working with growth

42:03

point have been a

42:06

few fold one is nailing

42:08

the business model and the partner

42:11

is key I'm hopeful we can continue to

42:13

do other investments or find other investments at

42:15

Nayer Street that have touch

42:17

on business models equivalent to or at

42:19

least close to as good as the

42:22

marina model and then

42:24

I think for roll

42:27

up or asset aggregation plays I

42:29

think the big takeaway that we've

42:31

seen from the team has

42:33

been one really

42:35

nailing your value add formula

42:38

quickly so even

42:40

when it's just a couple assets that

42:42

you have underway refining what the playbook

42:45

is to owning that

42:47

asset once acquired and what

42:49

the highest priority value

42:51

enhancement initiatives are that you need to

42:53

tackle and refining that and teaching that

42:55

to the rest of the team and

42:58

making that very repeatable is critically important

43:00

but I think the other area

43:02

that we appreciate more than ever before is

43:04

when you're buying

43:06

assets from families and

43:09

that asset may have some

43:12

emotional linkage to their

43:14

legacy the family history memories the

43:16

local community having a lot of

43:18

integrity in the way

43:21

you interface with potential

43:23

sellers the way you transact the

43:25

way you manage those assets after the fact

43:28

has a really compounding effect on your

43:30

long-term success so we've seen David and Taylor

43:33

and the rest of their team get

43:35

a lot of benefit from doing

43:38

right by the sellers and building on

43:40

that reputation so now there are

43:42

folks that are interested in selling and

43:44

give growth point a first lock or

43:46

an extra hard lock because

43:49

they appreciate how their family legacy will

43:51

be treated and sometimes that's

43:53

easy to forget when you're sitting in an

43:55

office building behind an Excel spreadsheet but it

43:57

actually makes a big difference David,

44:00

Josh, this is really a fascinating business.

44:02

I presume that given how in the

44:04

weeds you are of the day-to-day and

44:06

operating these things, you could talk about

44:08

it for a couple hours. But I

44:10

think this is a great summation. Obviously,

44:12

to the extent that people are following

44:14

the story within Sun and its public

44:16

peers, there's a lot of information and

44:18

we appreciate it. Thanks

44:20

for having us. Thanks, Zach. It was

44:23

an absolute pleasure and we had a great time. To

44:26

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