The Marina Industry: Building Moats, Storing Boats - [Business Breakdowns, EP.170]

0:03This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from, and we are here to bring them to you. To find more episodes of Breakdowns, check out joincollossus .com. All opinions expressed by hosts and podcast guests are sole their own opinions. Hosts, podcast guests, their employers, or affiliates, may maintain positions in the securities discussed in this podcast.

0:45This podcast is for informational purposes only, and should not be relied upon as a basis for Investment Designs. I'm Zach Fuss, and today we are breaking down the US Marine Industry. In the US, there are more than 11 ,000 marinas grossing over 6 billion in sales. To break down the industry, I'm joined by David Chesner, Co -CEO of Grove Point Marinas, and Josh Coplitz, the managing partner of Thayer Street Partners. Today, there is a 12 -1 ratio of registered votes versus the supply of rentable wet slips and drystore spaces. Zoning regulations lead to limited supply growth, which is led to a sustained backdrop of strong profitable growth for the industry.

1:29The industry grew through both the great financial crisis and the COVID pandemic. It's fragmented and is currently evolving from a largely local and independent model to one that is increasingly institutionalizing as an asset class. This is lowering the industry's cost of capital and helping to finance greater industry growth. To illustrate the unit economics, we discussed the largest players in the space, including publicly traded son communities, Safe Harbor Marine Business. We hope you enjoy this breakdown. All right, David and Josh, thanks for joining us to talk about the Maria business. I think today's conversation is going to be somewhat unique in that.

2:11We'll focus on the Marina business, the economics of it, why it's an attractive space to invest, and we'll loosely use some public companies to get the conversation in some of their publicly available financials. I think just to kick things off would be great to get a summary of who you guys are, how you know each other, the business that you've built together, and we'll go from there. Thanks, Zach. My name is David Chesner. I'm one of the two co -founders and co -CEOs of Grove Point Marinas. And we founded Grove Point in 2021 as a platform to acquire and institutionalize folks storage facilities.

2:51Today, we own around 20 marinas in more than 10 states. They're all in the eastern third of the country and our focus is to just continue to acquire more marinas, take an institutional approach to ownership, and at the same time we're very focused on always maintaining and being stewards of the legacy of the prior owners. Sitting next to me is Josh Copluets, who is the founder of Thayer Street Partners. I've had the pleasure of knowing Josh for many years, and he and his firm from the very beginning have been our partner in the formation of growth point. Hi, I'm Josh Calthowitz. By way of background, started my career almost two decades ago, working in an on -balance sheet investing group at Goldman Sachs where I started investing in financial and business services, founded Thayer Street about a decade ago, and today at Thayer Street were investing in very high recurring revenue businesses that are growing typically in the lower middle market in situations where we can partner with the company either through a minority investment or a majority investment to really help them grow.

3:59We got interested in the arena space around five, six years ago, marinas have incredibly high recurring revenue profile. There's great macro tailwinds. We had success in a earlier marina investment and became even more excited about this actor and decided to partner with David and Taylor around the beginnings of growth point coming out of that first experience. So Josh, maybe in broad strokes, just present what the Marina industry represents, how to think about these businesses, size and scale, and the market that you guys are addressing. Sure. So Marina industry big picture has around 10 ,000 marinas in the US, representing about $6 billion at revenue.

4:44And there's imperfect information in this segment, which creates some opportunity and makes it a little more interesting in our perspective. but average marina has plus or minus a hundred slips and could have a few million dollars revenue. The weed I think about marinas are there's really two primary components. One is effectively storage so storing boats in the water or outside the water maybe in cover barn or racks that are outdoors that looks and feels like a parking garage business or a high -touch personal or self storage business and the other component is probably more akin to a hospitality industry which may include a restaurant, a ship store, boat sales, boat rental, service and repair and other ancillary revenues fuel as an example.

5:35And so that side of the business may be a little more cyclical, it's definitely more seasonal, and the storage side typically is pretty steady and consistent. Ultimately, we think of the Marina industry as the boat storage industry. We also think of it as a differentiated sector within real estate. At the end of the day, the primary driver of the Marina business is renting out space in exchange for rental payments, like most other farms of real estate. But what's unique is that it's typically located on these incredibly desirable and also quite frankly irreplaceable pieces of land and water. In the one thing that I'd add is just that may not be obvious is the supply -demand dynamic is really compelling in the sector.

6:25So basically for every 12 registered voters, there's one merina slit. That dynamic in fact is only getting more pronounced. So on average, you have one to two percent of the Marina inventory Declined every year because that land is being redeveloped into something else. So it creates a really interesting Dynamic with Marina users and then you also have this captive audience to go and cross sell them One off or other recurring items if they're storing their vote in that location and And so if we were going to zoom into what a generic marina looks like and feels like from a revenue mix and margin perspective, can you present what the industry looks like?

7:13Norena is on average, have plus or minus 100 slips, so 100 slots to walk about. It will have a mix of revenue where somewhere between 30 and 80 % of the revenue generated will come from storage -related fees. So that could be an annual or seasonal subscription that their paying to park their boat there. And the balance of the revenues are going to come from those less recurring items such as boat reds or repair, restaurant, boat store, fuel, etc. Depending on your location, cost per slimp is going to vary tremendously and depending on the nature of the boats that are stored, I may have some variants as well.

7:58So average marine is generating a couple million dollars of revenue could be one to six million dollars of revenue and we're seeing these marias perform such that they may have a 30 to 40 % EBITDA margin that margins going to vary and may exceed or fall below the range based on the mix of revenue that they're generating at the site But yeah, so if you think about a storage focus, Marina, that storage revenue runs at 100 % gross margin, and then depending on the size of the operation, typically only require a few in personnel, maybe a general manager, and a few dock hands on the labor side, you of course always will have typical fixed real estate costs such as property taxes, insurance, utilities, and a little repair and maintenance.

8:51But what you're left with is a really stable high margin business that also grows nicely over time. You end up leveraging those fixed costs and growing your margins. Now when more of the sales are derived from these auxiliary services such as fuel or service F and B, etc. The margins are naturally lower. Now at a marina specifically, those businesses are, I think, better than those businesses are outside of a Marina because you have these captive customers in this ecosystem. A lot of fragmented industries with a strong legacy, there are operators who are aging and looking to sell. You guys are acquiring these marinas and presumably managing them exceptionally well and improving the operations of the businesses and vetting fitting from scale.

9:40Can you just explain how once you acquire these businesses, you can implement some best practices is to help create a stronger mode around what you're building. Absolutely, Zach. So this is us specifically. But first and foremost, when we take over a Marina, we work really hard to maintain the legacy that was created beforehand. The immediate ways to make improvements that clean up a Marina are, I would say, adding slips. Often you can add wet. You can build dry. And it's fairly easy to gauge based on wait lists and demand before acquiring arena. And then another thing we always do is update the obsolete.

10:25So that could be reorienting or increasing the linear fee in order to accommodate larger boats, which then command higher rental rates and also allow for a higher boat customer. And then generally speaking, we always increase the quality of the facility and the customer experience. So that would just be upgrading bars and restaurants and adding retail and restaurant spaces, upgrading the service offerings, beautifying the landscaping, adding in boat clubs. And just for an example, we have a large property in Kentucky where we upgrade it to high -speed five and installed wireless infrastructure so everyone to go off cable and into wireless.

11:11It required capital that the prior owner either didn't have the time or resources to invest into. This not only gave customers an upgrade to streaming services versus cable, but also became much more cost -efficient for us on a go -forward basis. Then just to give another example, we have a property in Alabama where we had some land that was available to bring in a new restaurant. And so we brought in a really renowned local restaurant operator to run it. And it just totally elevated the entire feeling and energy of the customer experience. I think you guys have done a good job highlighting the supply demand dynamics and why it's a compelling investment area.

11:55I guess I'd be curious from a build versus buy perspective. My guess is that it is not particularly easy to go find waterfront property and build a marina. Curious to the extent that you guys have had success pursuing such a strategy and if not, why is it such that all you can do is acquire and how do you think about the environment as a function of that? So today we have not done a ground up development. Opportunity we have evaluated them, but it just not seemed that the economics have made as much sense as buying already in place cash flows, or at least the risk reward on that has not seemed to make enough sense for us at this moment.

12:36But as far as the challenges associated with development, they're very significant between stringent regulation and limits on available land, environmental protection laws, and course, capital intensity. All of those factors make it significantly challenging to develop numeriness. Yeah, you also have an engineering challenge as well. not just any construction company can go and build a marina, particularly if you have in -water storage. There is some engineering specialization required. So you need a team that really knows what they're doing if you want to do it cost -effectively. And so if you think about your business model at growth point and some of the institutional competition, what are the other scaled platforms that are out there, how big is Sun in the space?

13:25my understanding is that they are a somewhat new entrant through their acquisition, but what is the competition look like to acquire some of these pop and pop marinas? So just for a little background on the competitive landscape, greater than 90 % of the marinas in the United States are not institutionally owned still. So it is the family owned bucket that is collectively the dominant market participant still. Sun communities historically was focused and still is on manufactured housing and RV businesses. And their third leg that they got into in 2020 was getting into marinas by buying safe harbor.

14:09Who is still by a considerable margin the largest institutional marina player. But even they only have 135 marinas out of we think over 10 ,000 in the United States. So they're the largest. They're now owned by a publicly traded gree, but still very small compared to the overall industry. Just to name others, there's loggerhead marinas, which is part of equity lifestyle properties, also a publicly traded gree, and then other well -known and large marina companies, worthy of mention here are SunTex, which is controlled by Centerbridge and IGY, who is now also part of publicly traded marine max, though IGY's operating model is different from the others as it is much more focused on transient boating.

15:03There's probably another handful or so of private institutional or quasi -institutionally back players that are aggregating marine as in the US. I think there's a bit of bifurcation in the types of marinas that these different groups are going after. So you see the larger guys focused on portfolios of marinas that may have been put together by more local entrepreneurs or smaller ventures. And they're also going after very, very large scale marinas that have 500 to 1000 slips. So these assets could be pricing in the tens, if not hundreds of millions of dollars range. and most of those deals are broker.

15:42If you have north of a $50 million asset, there is likely a well -brokered somewhat efficient process. There's another walk -in in the market, which is more of where I'd say, group -point is focused on, which includes some assets that are smaller. They're actually probably the majority of the assets in terms of count in the country, but they're smaller. and because there is in a very developed, pure playing arena broker industry when there are limited numbers of arena bankers, grow void in some of their competitors have to go out and build relationships and find these on their own. So you see a bifurcation in terms of the industry players that are aggregating.

16:25Our view is that if you look out five years from now instead of having two players that are public, that are Marina assets. There's a decent scenario where you can have four or five. And we know of a few that have plans of tapping the public markets in the next couple of years, assuming they continue to scale. You've alluded to the benefit of the real estate from a tax perspective and the attractiveness to REITs. Was there something that changed there? Or was it just the institutional nature of the asset class kind of evolving from mom and pops towards real asset owners. I think it's a confluence of both.

17:04So the few skilled institutional players went through a legal confirmation process around treatment of marine assets in azuretes in the last five or so years. So that's become widely accepted by the regulatory and legal community. In addition to that few players that actually have been able to scale under the radar. And as they saw liquidity of their own, the institutional markets are to get educated on the space and become relatively interested, particularly because of the low volatility of many of these assets, particularly marinas that are focused predominantly on storage. So given the only real scaled and Marina Business and the public markets is part of Sun, obviously, equi lifestyle and Marie Maxx have their own.

17:59If you could look at what they've done today, can we just spend time talking about what they've built there and how they continue to grow the platform? Yeah, so Sun Community's acquisition of Safe Harbor was in 2020, but Safe Harbor had been really almost at the market to itself for a decade or more. They had been acquiring marinas one off and then also did several portfolio transactions, which together created the largest marina consolidator in the world. And one thing that really stands out is just that they have very high quality assets, but in addition, they have a very high quality and experience management team led by Baxter Underwood.

18:45Second, they're the largest participant from an institutional holder, respected by a wide margin. So it gives them the ability to potentially get very meaningful synergies on the expense side. So that could be through sharing services, higher and retain the best regional managers that are most optimally utilized and other operational cost synergies. And while it's only called it 30 % of the revenue mix, it appears to be the fastest growing part of their business. And we would probably surmise that they'll be able to grow the revenue on a high single digit basis and maybe cash low and low double digit basis organically.

19:27And frankly, their best position to be great acquires of smaller portfolios and one off large assets. I think the other thing that's interesting to note is not dissimilar from a lot of other great assets in the industry safe harbor marinas I think this stat is 90 % of them radars have a Multiger way less for members to join so you have a loyal customer base that has approaching a 10 -year duration They can actually do interesting things to service the same customer across multiple different marinas Which is unique we're not aware of other marine platforms that do that and they can use some of the structural impediments that exist in the street to their advantage.

20:12And if you evaluate the cost of capital of average of being scaled to the space along with some of the ostensible network effects, should you have marinos in highly sought after waterfront areas, what types of advantages does scale into these businesses? The most obvious that's pertinent in today's market is debt. So if you are a scale player, you have a multi -billion dollar value portfolio. Big banks will take your call. Bankers will work with you to do a syndicated debt deal or ABS or over time we think more sophisticated credit facilities. And you're going to be able to tap the debt capital markets in a more efficient and robust way, more consistently over time.

20:58We see tremendous benefit to growth point, but a company that's as large as Safe Harbor with roughly 140 Marina network sees it even more so. And if you own a single Marina, it might not be beneficial or economical to dedicate time and resources towards high quality software, aggregating data on software. But with scale, you can afford to spread these costs and investments amongst a diversified asset base. and that ends up leading to the ability to improve the customer offering and also providing attractive ROI. And so with the platform, we think certainly seeing an art experience that business works and runs better.

21:43And for example, we have shared managerial services, thing, regional management, accounting and finance, payables management, contract organization, human resources. It enables us to see my capital investments and improvements and expansions that might maybe hinder the first year or two of cash flow but greatly enhance it in later years. Also, I think technology. So as a scale platform, we've taken the opportunity to migrate all properties onto a single Marina software management tool. It's called common amongst our marinas, which enables more organization around our storage spaces and all of our auxiliary businesses as well.

22:31It enables us to have more sophistication around our data. It enables us to have more fluidity amongst the marinas interaction with one another. We have an over 20 -person team, a management team that has these great skill sets across operations, finance, and accounting, and we leveraged those skills onto businesses that were historically family owned with different sources. So there's really huge benefits to scale and diversity. And I guess one thing that I also want to touch on is for sons, say, Arbor specifically, as the largest and most experienced operator. In addition to everything I just mentioned, they also have this great network of reciprocity amongst their marinas, which I think is really nice for the customer experience.

23:19I think the last one to hit on, which is less obvious as insurance. So erosion, weather damage, Israel on marinas creates not immaterial maintenance kept backs, but when you have a hurricane tornado, whatever the natural disaster is, it creates boat and marine damage. And you need insurance. And if you're institutionally owned, you definitely need insurance. And if you have a lender, they're going to require you to have insurance as you have scaled their real advantages. So we're saying on every insured dollar, we're seeing costs rise as the insurance market, it, frankly, hardens for coastal assets, and in some cases, lake assets.

24:07But if you have a large portfolio, you can work with the insurance carriers or, frankly, go directly to the re -insurance and spread your risk across locations and be a little more sophisticated, which could dramatically lower your cost of insurance. And insurance is not an immaterial expense. We see insurance as 10%, 20 % of the cost structure of some of these assets. And if you can look at some of these natural disaster events that happen with hurricanes, who wears the risk in that you see these horrible depictions of boats piled up in waterfront areas, is that something that the marina is responsible to help compensate for?

24:49It depends. So in an ideal manner, both the boat owner and the marina owner are insured. And so things that relate to the structure of the marine owner, the marine owner, unequivocally bears the risk for if there's something that is completely idiosyncratic related to the boat. Obviously that's going to be the boat owner. There is some gray area in the middle and everyone will turn out okay if they're adequately insured. The scarier thing that we see is that there are a lot of one -off marine owners that are relatively underinsured and they may not be monitoring the insurance of their customers.

25:34And so when you have dynamics like that, you could have a perfect storm of major liabilities. And we've seen people move to have to sell their business because their ends up being cash crunch as a result of it. So we think that all marine owners are going be more conscientious of this over time. Definitely lenders and lenders will probably drive this, but so long as this remains an issue, the bigger guys are going to win because they're going to be able to spread their risk. And so when you think about growth for these businesses and obviously Sun discloses the growth of their arena business, there's both inorganic and organic growth, in organic via acquisition, organics, whatever incremental services and slips and pricing that you can take for providing better service.

26:24How do industry participants grow their businesses? So I think there's two ways we have observed. One is as simple as rate. So we see Marina owners and operators raising rate in line or in excess of prevailing storage and other forms of rental rates in that local area. I think the second way is adding additional features and sources of revenue on a site. As David mentioned, the larger you are, the more centralized resources you have, the easier it is to implement that. and that could be adding additional storage slips. That could be other revenue features that could be upgrading the site or upgrading slips.

27:15You could store larger or longer boats. So it's a combination of site improvement and then also inflating revenue. Data to what I miss. Yeah, I would say specifically to target what some communities has provided it's really four key drivers. It's contractual rent increases, which they've historically done in the mid -single digits. They say that they increased occupancy in the last 10 years from 93 % to 99%, which is obviously really impressive, and also a testament to just the demand for the product. And they've put in almost half a billion dollars in the last three to four years of capital investment in which they target double -digit returns and that's in the form of these expansions, rack additions that we talked about.

28:10And then I think their fourth tenant is converting transient to annual. They've historically focused a lot on that in their RV segment, which they've owned for a much longer period of time. But it's certainly an effective strategy on the marine side of the business as well. Well, and if you think about the ratio of boats to slips and the 99 % occupancy that sun advertises, is it fair to say that much of the marinas have weightless? Is there just so much demand for these spots at this point? It's really an interesting dynamic where the demand for leisure activities and boating In particular, has risen at a very high rate, and you have all these baby boomers who are retiring and want to be on the water as one of the activities that they're choosing, as their life changes, all sorts of reasons why people are moving to warm weather climates with lower tax rates.

29:10So that's part of it. But on the flip side, the supply of marinas, not only is it not growing, it's actually and so between permitting and environmental and capital costs and just the lack of availability of places to build marinas, there are so few in a given year that are built, but at the same time you have these incredible waterfront locations where there actually are parties who see that and they say, oh, instead of a marina, I'm going to build a hotel or a condo. And so the net effect of that has been a shrinking supply of marinas at the same time that demand is grown and That has led to a tremendous amount of weightless Activity and it doesn't mean that every marina in country has weightless, but broadly speaking there are many many many many that do I would just add that They did it, talking in terms of averages.

30:13There are marinas that we've come across, and David and his team have come across. They don't have weightless at all. In fact, they have occupancy that is materially below the 90s. Typically that correlates with one of two things. One, you're observing some sort of economic weakness in that area or net migration out of that area. The second is usually an overlay to that, which is the owners have not adequately maintained the site. So slips are dilapidated, things may be broken, service experience is weak, and that material deferred cat -backs is led to, we guess, an occupancy. This may be somewhat of an obvious question, but given just the perpetual shortage of space, In some ways, isn't the business just underpricing its product?

31:08Probably. If you think about it in some ways, a component of marinas, at least the storage side, is a ultra -laborate that on population plus regulation. So, it's either underpriced today or you'll be able to push price in excess of those growth factors over a sustained period of time. So you should see it in the terminal value. So if I think about acquisition of these assets, how do you guys think about financing and valuing them on an asset by asset basis? Sure. So generally speaking, we're seeing these assets being valued on a cap rate basis. So based on net operating income, conversely, that could translate into a multiple of EBITDAM.