Marina Acquisitions and Industry Consolidation Continues; Markets Remain Strong but Face Rising Interest RatesPublished on January 14, 2019
Editor’s note: For this question-and-answer article, professionals in the marina brokerage business have shared their thoughts on how the marina market performed in 2018 and what the predicted trends are for 2019.
Jason Spalding is a licensed real estate broker with CBRE Marine Services. Steven Ekovich is national managing director with Leisure Investment Properties Group. Brett Murphy is an investment specialist in the marina division of Leisure Investment Properties Group.
Q: How did the marina market perform in 2018?
Spalding: The marina market performed well in 2018. Outside of Safe Harbor Marinas’ acquisition of the Old Port Cove Holdings portfolio in February, I believe we are nearing the endpoint of the large-scale portfolio transactions in the U.S. and Canada that have been transpiring since 2015. Most of the portfolio transactions have either already traded, or the ownership entities have tested the waters through quiet marketing initiatives and decided not to sell.
There are still a large number of investment-grade marinas and smaller scale facilities individually owned and operated that have decided not to entertain offers at this time or are being retained to pass down through family generations.
In addition, there are several regional entities actively pursuing their own acquisitions of marinas that either fall under the investment-grade criteria and/or are situated in secondary locations.
Q: How did 2017 compare to 2018?
Ekovich: Based on YTD [year-to-date] Q3 from 2017 to 2018, we are seeing more sales this year than last. We do our research and analysis after December 31, but to date it looks like about 20 more sales this year versus last.
Spalding: I would say there were overall more individual transactions that took place in 2018, but at an accumulatively less dollar amount than 2017, given that the Brewer Yacht Yards, Loggerhead Marina Portfolio and Parkbridge Lifestyle Communities Portfolio all transpired in 2017.
Q: Any surprises in 2018?
Spalding: The three things that surprised me the most in 2018, have been the continued interest from private equity groups trying to get up to speed on the marine asset class to see if it’s a niche sector that they want to participate in; the number of foreign entities looking for an initial presence in U.S. market; and the volume of boat and yacht manufacturers that have repositioned their businesses, sold off or acquired specific brands, and shifted their geographic footprint of facilities.
Q: What geographic markets are performing well?
Spalding: Under current market conditions the majority of the highest ranked vessel registration states (CA, FL, MI, MN, NC, NY, OH, SC, TX and WI) are performing very well. If a marina facility is well situated, is in proximity to ocean/gulf/bay access, is stabilized and properly managed, and either has existing or potential ancillary revenue sources, such as food and beverage outlets, office/retail space, then there will likely be multiple offers received for the property.
Ekovich: The geographic market performing the best is the Southeast. We expected this region to be the top performer moving into 2019 due to the concentration of larger owner-operators, smaller regional portfolios that are being built, and the desirability of year-round marinas in destination locations with high-quality amenities.
Q: Did this year’s extreme weather in the south and along the East Coast impact the market?
Spalding: The extreme weather affected several marina operations, especially within the Florida Panhandle and along the Outer Banks of the Carolinas, where both Hurricane Michael and Hurricane Florence hit. It is an unfortunate part of nature that owners and operators must deal with, and it seems to be happening on a more frequent basis. There is little anyone can do to stop the demolition of a drystack building or floating docks getting wiped out; however, every facility should take the precautionary steps as storms are approaching and have a well-thought out hurricane plan in place. It is worth noting that the markets directly impacted always seem to recover with time. I was recently down in the Keys and saw some of the rebuilding efforts firsthand since Hurricane Irma struck in early September 2017. The facilities that have decided to rebuild are doing a fantastic job.
Ekovich: Weather is always impacting the market, whether it be hurricanes or Nor’easters. With Hurricane Florence we saw severe flooding at marinas in North Carolina, as well as sunken boats, docks ripped apart, and marinas in need of extensive rebuilds. Hurricane Michael devastated the Florida Panhandle, proving the importance of drystack buildings being built to withstand high-speed winds and urging the importance for proper storage when a storm is approaching. Some deals were taken off the market in order to rebuild and only a handful of value-add investors are looking at those regions where properties could be discounted due to the significant cap-ex that may be involved. When we consider the devastation that Hurricane Harvey brought to the Houston area, it’s encouraging to see that there was about a 12 percent increase in attendance at the 2018 Houston Boat Show compared to 2017. This tells us two things: 1) people are still boating and 2) those boaters want better boats. The industry is in its seventh year of consecutive growth and marinas are staying full, which supports our optimistic outlook on the future and boating as hobby.
Q: What are marina and boatyard buyers looking for?
Murphy: Buyers are looking for deals that make financial sense. Cap rates must cover the cost of capital, yet in a market that continues to show more sales year after year, sellers are pushing for the high valuations. Although we are not going to get a fourth interest rate hike this year, we can expect three or four next year, which will make it tougher to underwrite marinas at the same cap rates as we are this year, unless NOI [net operating income] goes up to over the increased cost of debt. For every 100 basis points increase in interest rates, the value of commercial real estate goes down approximately 9 percent.
The rising interest rate environment is a function of strong economic growth that may or may not lead to higher cap rates and potentially impact returns. The marina asset class is much more appealing from a return standpoint than most core product types (i.e. multifamily, retail, self-storage) because those cap rates are much more compressed and any rise in interest rates affects the debt coverage ratio, which will drive those asset prices down first.
Spalding: A general rule of thumb is that no two marinas are alike, and no two buyers are alike. As a result, I would say it is dependent on the buyer. For the larger ownership entities like Suntex and Safe Harbor Marinas, they would prefer investment-grade marinas (200+ slips and/or in-place NOI > $1MM) in locations with a proven recreational boating customer base and facilities where pure dockage and vessel storage rates make up more than 65 percent of total revenue. Many of the regional owners are not afraid to take on smaller, value-added opportunities in secondary locations where they feel they can improve upon operations and draw additional boaters.
Q: Are you seeing any specific renovation/facility trends?
Spalding: Outside of the ongoing trend to reconfigure existing marina docks to accommodate larger vessels, as well as the standard replacement of dated construction with better quality docks for both longevity and performance, the two biggest trends I have seen lately are: 1) a push towards automated drystack facilities. Gulf Star Marina (Fort Myers Beach, Florida) is currently under construction with an automated facility to be completed in the Spring 2019, and two other transactions that I have been involved with, Virginia Key Harbour & Marine Center (Miami, Florida) and the Cordova Boat Club (Fort Lauderdale, Florida), are both redevelopment projects that are proposed to replace traditional drystacks with automated facilities of 750 dry slips and 237 dry slips respectivel; and, 2) the need for and interest in developing new facilities that can accommodate megayachts and superyachts. There are a number of such facilities in the works globally inclusive of the Seahaven Superyacht Marina (Dania Beach, Florida).
Q: What amenities add value to a property?
Spalding: In today’s world, the biggest value-add for any real estate property, inclusive of marinas and boatyards, is whatever you can afford to implement to improve the overall customer experience. Marina owners and operators should try to create experiences that resonate with the boating customer base over the long term and connect with them directly. A few that come to mind are: recreational rentals (bicycle, scooters, kayaks, SUP, etc.), concierge services (greeter welcome, pick-up, delivery, provisions), food services (rotating food trucks, small food hall, coffee shop), and any marine oriented branded retail.
Murphy: On-site restaurants (preferably leased) play a large part in creating the destination atmosphere of a marina because they cater to long-term slip holders, transients and locals in the area who may or may not be boaters. Ultimately, they are a great way to attract people to the marina and increase the likelihood of other amenities/services being used and potentially leading to boat ownership. This leads into the next amenity that adds value when we consider one of the largest challenges facing the industry, which is the aging demographic and obstacle of attracting millennials to the hobby. Having a boat club or boat rentals at the property are usually a top profit center for this reason, as they offer a more feasible way for individuals and families to get out on the water and spend time at the marina. These amenities are also top contributors to fuel sales because the boats are constantly being used when compared to how often a slip holder may use the boat. Offering fuel at your property may or may not make sense, depending on the competition in the market and the property’s location.
Q: Why are owners selling?
Spalding: The main reasons people have sold over the past year are the historical low cap rates that purchasers have been paying within the marina asset class, concerns that if they were contemplating selling at any point in the near term, we are close to the peak of this real estate cycle, and directly related, the ongoing rise in interest rates.
Murphy: There are lifestyle changes, (retirement, divorce, partnership break-up) and investment reasons, like taking a profit. We are in the 10th year of what is typically a five- to seven-year cycle, with sellers asking for top dollar.
When we consider the family-owned and operated facilities, most of the time those properties have been in the family for generations. Yet, we see those properties trade hands and typically one of the three following factors is involved: 1) they have no one to pass the business on to and they are ready to retire; 2) those that can succeed ownership of the property do not wish to; or, 3) ownership simply wants to do something else.
Equally important to consider is the number of owners who do not want to sell. When we look at consolidation, larger companies, such as Safe Harbor and Suntex, are actively acquiring properties, typically the larger, nicer facilities that fit their investment strategy. Yet over the last few years, smaller investors have entered the industry and began building their own portfolios of three to six marinas (usually focused in the same region). These owners, as well as other independent owners, are experiencing high occupancy, strong revenues, and nothing but positivity, so they wish to hold.
Q: What outside factors are affecting the market?
Spalding: Other than the potential volatility within foreign country relations and economies, the main three outside factors I see as a challenge to the market are: generational preferences (on-demand, rental, membership vs. ownership), tariffs (U.S. trade deals that have done little to ease concerns over aluminum and steel tariffs within the marine industry), and the ongoing rise of interest rates (everything that goes up most come down).
Ekovich: To name a few: interest rates, natural disasters and government regulation. For every 1 percent increase in interest rates, we tend to see property valuations decline 9 percent. In 2018, we saw three interest rate hikes and there are three or four more expected in 2019. This indicates that the economy is strong, but also that inflation will be kept in check.
Q: What are the current valuation/pricing trends?
Ekovich: Current valuations are still hot, but with interest rates rising. Marinas are being bought off of cap rates that range from 7.5 to 14% and cash on cash return depending on size, amenities, age, location, condition, NOI, upside, etc.
Spalding: The current valuation/pricing trends in 2018, by and large, remains unchanged and the same as they were in 2017. In general, I would base a marina’s value upon a sliding scale of 7 to 10% cap rates contingent upon a number of factors, including but not limited to: a thorough review of the P&Ls; the size of the facility; where it is situated (lake, river, ICW, inlet); the strength and stability of the customer base; if the facility is properly managed; historical employee turnover; the need to address capital expenditures; a full analysis of ancillary revenues streams; historical slip rates/market rate comps; available upland area for future development, etc.
Q: What do you predict for 2019 and going forward?
Spalding: Under the presumption that things remain status quo as far as the economy, I foresee a continued consolidation within the marina sector. Likely through some of the international portfolio owners entering the U.S. space, and vice versa with some of the U.S. portfolio owners expanding their footprints into international locations. I would not be surprised to see at least one or two large-scale portfolio transactions transpiring overseas. In addition, I believe there is the potential for a merger between one or more of the existing national or regional owners/operators as they reconfigure their existing geographical footprints to fill in the locational gaps.
Ekovich: We predict consolidation will continue as sellers look to move on from the property and do so for the highest price. Interest rates have been steadily rising over the last three years, reaching a targeted federal funds rate of 2.25%. We expect this trend to continue with three or four more rate hikes in 2019. Marinas are profitable and occupancies are high, which we believe will continue into next year. This excess cash provides owners with an opportunity to refinance and lock in a lower rate to put cash to use on renovations or additional amenities. Most of the larger owner-operators are putting significant capital into the facilities they acquired this year and in years past, which means that smaller marina operators need to upgrade to stay competitive.
We also predict the supply/demand issue with wet slips to persist, creating a very advantageous position for marina owners. They will have the opportunity to raise rates and increase revenues, as well as explore potential upland developments, whether that be a drystack building or dry land storage. Profits are increasing, and owners have more available cash to be put to use in those opportunities or for updating/renovating current amenities and facilities.