“Marina Acquisitions and Industry Consolidation Continues; Markets Remain Strong but Face Rising Interest Rates”
In January 2019, Mia Overton of Marina Dock Age published a Q&A with Steven Ekovich (National Managing Director) and Brett Murphy (Investment Advisor). The interview covers topics from year-over-year comparisons to why owners are selling in today’s market.
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.
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.
Q: What geographic markets are performing well?
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?
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 amenities add value to a property?
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?
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?
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.
Q: What do you predict for 2019 and going forward?
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.
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