Marine-industry mergers and acquisitions have increased since the Great Recession, and the marina space is leading the charge with two companies that have rapidly acquired independently owned facilities during the past two years.
Suntex Marinas, which first secured outside equity in 2015, now has 20,000 wet and dry slips among 45 marinas in 13 states and expects to have 53 locations by 2018. Safe Harbor Marinas has 65 locations across 15 states with a total of 30,000 slips, plus several sites under contract.
The companies’ portfolios now include noteworthy operations: Safe Harbor Marinas acquired the iconic Brewer Yacht Yards and its 10 New England locations this year, and Suntex Marinas bought 11 Loggerhead Marinas to become the largest marina operator in Florida.
A confluence of factors is attracting investors to marina acquisitions, including the consistency in slip revenue during economic downturns, the less cyclical nature of the marina space, compared with other marine segments, and changes in real estate investment trust, or REIT, tax codes that can help investors multiply returns.
In addition, it’s just “so darn difficult to build another marina,” as Safe Harbor Marinas CEO Baxter Underwood puts it, making existing facilities attractive investments.
Many in the hands of fewer
“Arguably one of the most interesting things about the industry, as an investor, is that it’s very difficult to build through supply,” Underwood says. “Boat sales are cyclical, but if boat sales go down, it doesn’t hurt a marina’s performance, or not as much as you might think. Even as boat sales are going up and more boats are entering the market, the supply of slips is not going up [because] it’s so difficult to build a marina. That limitation on supply, from an investor standpoint, is a very positive thing.”
Underwood’s description could be an alarming prospect for an industry that 10 or 15 years ago was worried that slip access would all but disappear as marina owners sold out to condo investors looking to make a quick and large return on investment.
“So what happens if these marinas are consolidated into the hands of a few, and what if slips are taken out of the water to build hotels or condos?” Underwood asks. “Theoretically to boaters that’s a bad thing because there’s less slip space. For those left owning slips it’s a great thing because there’s more demand for fewer slips. With regulations being what they are in the water around the country, I don’t see that changing.”
Underwood emphasizes that Safe Harbor has a long-term investment approach that is focused on acquiring and keeping slips. “I don’t foresee us selling those off,” he says. “But industrywide I do think it’s a very real consideration.”
Dockominium and condo investors a decade ago were looking to achieve different results than those buying and reinvesting in marinas, says Bryan Redmond, principal and chief investment officer at Suntex Marinas.
The dockominium development model was only viable in “select unique pockets” such as Miami, Redmond says. “There’s little pockets where it’s always going to be a little different, but in general you wound up with a lot of companies … where it just didn’t work.
“I’m not saying that business model wouldn’t return, and I can see where people would have that concern, but I bet if you looked anecdotally at all those marinas, a lot of them don’t have the type of properties where you would actually own the bay bottom,” he adds. “It’s owned and controlled by a governmental body that you lease from.”
Because of access fears in the past, Florida and other areas have become more vigilant about ensuring that marinas and waterways are accessible to the public, Redmond says. And building new marinas is a difficult process.
“That’s why you’re not going to see lot of marinas sold off as fee-simple ownership and made private,” Redmond says. “With the combination of all those things, I think we’re very unlikely to see all the marinas go away.”
One in every market
Texas-based Safe Harbor, backed by the American Infrastructure MLP (AIM) Fund, declared in 2016 that it was the largest marina operator in the country, with plans to deploy more than $500 million of capital in acquisitions through equity and debt commitments. The fund had made a number of investments in 2015 after spending years researching marina profits and losses, Underwood says.
“We’re sitting at 65 properties, we have several more under contract and are well capitalized to continue to acquire,” Underwood says. “We’re not going to get irresponsible on values, but we will be patient and grow the company to be a nationwide platform in every boating market in the U.S.”
Suntex, also based in Texas, raised more than $200 million of equity commitments in a series of private-placement transactions in fall 2015. At that time it also acquired the assets and personnel of Suntex Waterfront Advisers, a manager of marina properties, giving it more than $500 million of buying power to put toward marina acquisitions.
When it seeks freshwater marinas, Suntex focuses on cities and municipal areas that encompass Army Corps of Engineers lakes. In inland and coastal properties “typically we’re looking for areas of 800,000 or more people in a certain radius that want to experience boating,” Redmond says. “We also look for opportunities to partner with local government bodies in private-public partnerships; we’ll often lease from them.”
Right now, 25 of the properties Suntex owns and manages are on fresh water, and 20 are coastal. Those numbers are expected to jump to 32 in fresh water and 21 in salt water by the end of the year, Redmond says. Then in 2018 the company plans to slow the pace of buying and instead reinvest in several of its newly acquired properties, such as the 11 Loggerhead Marinas it bought from Seven Kings Holdings in April.
“The thing we’ve found is, to go into a new marketplace it has to be something of real size,” Redmond says. “To talk about it by slips, 400-plus slips is where you’re typically talking about assets that do north of $5 million in revenue on an annual basis.”
Watching the companies’ approach to opportunities moving into 2018 “will be interesting,” Redmond says. “Our strategy is going to be heavily focused on reinvestment.”
Meanwhile, Safe Harbor plans to stay focused on growth through acquisition. “There remains an enormous amount of assets that are owned and run really well,” Underwood says. “I think we have years ahead of acquisitions growth — many years.”
Slips and storage
Because slips are such a limited commodity, marinas that were not over-leveraged proved more resilient to the most recent economic downturn, which devastated other sectors.
“The reason we’re so attracted to the marina industry is the storage revenue component,” Redmond says. “During the downturn … that one revenue stream in particular, it didn’t have huge growth, but it was relatively flat. We believe that revenue stream is one of the most recession-resistant income streams out there. That’s why we’re so attracted to the space.”
Ancillary revenues, such as fuel sales and service, tend to be more volatile during a downturn. “You can’t count on those, but they’re also the lowest-margin revenues,” Redmond says.
Safe Harbor is looking at properties that will generate about $1 million of income annually from slips, but the real mission is to expand its footprint where it already is and to expand into new boating markets.
“Not all income is equal to us,” Underwood says. “What we’re really into is slips and storage.” Wet-slip and dry-storage revenue stayed consistent during the downturn — “particularly wet, especially on the larger end,” he adds.
Rentals also fared decently through the Great Recession. “It’s almost the staycation effect that hotels talked about during the recession,” Redmond says. “I don’t think people traveled as much. They didn’t fill boats up and go on big trips, but they were still looking for good entertainment experiences. There are some income streams that still do well during downturns — one of the keys is you don’t want to find yourself in a position where you’re over-leveraged.”
Tax benefits attract investors
Investors began noticing marinas after the Internal Revenue Service decided in 2013 that slips leased to boat owners constitute real estate assets for purposes of the REIT rules, according to Shearman & Sterling LLP, a firm with about 850 lawyers that advises global corporations, financial institutions and governmental organizations.
“The IRS has expanded the definition as to what qualifies as real estate,” Redmond says. “I think lots of industries can benefit from that, as well as our industry.”
REITs, which have special tax status under federal income law, were enacted to promote widely held investment in real estate portfolios, Shearman & Sterling wrote in a 2013 report. Equity REITs invest in and own properties. Revenues come from leasing space — in this case, slips and dry storage — and are distributed as dividends to shareholders. A REIT is allowed a dividends-paid deduction, so it generally is not subject to U.S. corporate tax, provided that each year it distributes to its shareholders an amount at least equal to its annual taxable income.
Traditional assets that have been held by REITs include office buildings, shopping centers, multifamily residential properties and health-care facilities, according to the National Association of Real Estate Investment Trusts. In the 1960s, for example, community shopping centers were a focus of REIT investment, evidenced by the disappearance of mom-and-pop stores in favor of larger, more generic chains and malls. In the mid- and late 1980s, similar dynamics occurred with self-storage facilities and suburban office parks.
After the 2013 IRS change that designated slips and storage as real estate, marinas fit right into the REIT vehicle. At least 75 percent of assets became real estate assets; at least 75 percent of income came from items related to real estate, such as slip and storage fees; and at least 95 percent of a REIT’s gross income came from real estate or certain passive investments.
In December 2016 the U.S. Treasury Department adjusted regulations again in a way that benefited investors looking to utilize REITs or similar vehicles.
“That clarification does further enhance the ability to look at marinas inside that type of tax structure,” Underwood says. “I don’t know that those U.S. Treasury regulatory changes were as much of a watershed as they might be viewed.
“If you look out over the last 20 years, you’ve seen a number of assets that were once misunderstood have come into the mainstream as asset classes that institutional investors believe they understand and will pay lower cap rates because they view them as safe,” Underwood adds, pointing to public storage and senior or student housing.
When firms such as AIM invested time and resources to understand untapped industries such as the marina sector, and those segments in turn began to attract investors, they also began to capture the attention of more mainstream capital markets.
“What’s interesting about that is it benefits not just that one company, but others will be able to find money where they weren’t previously able to get it,” Underwood says.
Maintaining each marina’s soul
One side effect of REITs has been the rise of generic, cookie-cutter establishments that look the same no matter where they are.
“They drove down costs for consumers, but they also took away some of the soul of those retail shops,” a change consumers reacted to negatively, Underwood says. “You don’t want to have to look out your hotel window to see what city or state you’re in.”
Now some hotel chains are seeking to rebrand various locations so they possess a unique character and seem unaffiliated with a larger chain — while at the same time preserving the customer benefits of that affiliation.
“Even as we’re bringing in more professional systems, processes and a better overall experience at a lower cost and more value to the boater, you’re putting yourself at risk for having that institutional feeling in an industry where the whole attraction is having that personal experience,” Underwood says. “We’ll see how it plays out, but I think an institution that loses touch with the local nature of these businesses will fail. I just don’t think boaters are going to spend time and money to be in a soulless environment.”
When Safe Harbor bought Brewer Yacht Yards in January, it played down the acquisition as a partnership to maintain Brewer’s long-standing reputation.
“We wanted to be thoughtful and careful about protecting their identity,” Underwood says. “Jack [Brewer] built an incredible culture there. His family had owned that Mamaroneck [N.Y.] location since 1879. It had been a hardware store and boatyard for most of those years.
“Living through all those different generations, the culture of his family and ultimately the culture he spread throughout New England was dedication to craftsmanship and dedication to taking care of customers,” Underwood adds. “Safe Harbor is a much larger, institutionally owned vehicle, but several of us on the board and management team want to make sure we preserve and protect that, and even grow it.
“It’s such an interesting question to me,” Underwood says. “I want to get up in the morning and do something I’m proud of instead of just make an economic return.”
An aging market
One thing investors dislike about long-term marina industry prospects is the rising age of boaters — a trend that could work to the overall marine industry’s benefit if marinas can find ways to attract and retain younger boaters. The venues are uniquely positioned to become access points for water enthusiasts who have never owned a boat.
Suntex Marinas is planning a campaign called Circle of Boating that’s designed to reach younger demographics in saltwater and freshwater markets.
“We believe we’re one of the first marina operators to do this,” Redmond says. “We’re looking to leverage our assets and offer up the ability to come in and rent a boat as a first step into boating. Then we’ll try to graduate you through that and encourage you to join a boat club, which is more membership-based and where you have access to an array of boats. Hopefully later we can graduate you to buy a boat and become a long-term member with us at the marina.”
Ideally, the initiative would cultivate and retain customers from their younger, single years through their family phase of life and into the empty-nest age, Redmond says.
For now, Suntex offers rentals at 23 locations, 10 of which also have boat clubs.
“We’re looking to create that everywhere,” Redmond says. “It will be a little different at every location. Some will do just rentals, some will offer rentals and clubs and some will do houseboat rentals, so it’s more of a vacation destination.”
Safe Harbor Marinas has relationships with the Carefree Boat Club and Freedom Boat Club and has discussed boat-share programs using a peer-to-peer model similar to Airbnb’s.
“We’re sort of looking at ways to market to and become appealing to non-boaters” by reducing costs for first-time boaters, helping eliminate the knowledge barrier and providing access, Underwood says. “I think a major challenge boat sales and storage will face over the next 20 years — and right now there’s still some tailwinds from boomers moving into their boat-buying years — but at some point, we’re going to have to appeal to different demographics.”
This article originally appeared in the December 2017 issue.