Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sun Communities Conference Call to discuss the acquisition of Safe Harbor Marinas. A presentation detailing the transaction is available for your reference on Sun Communities' website. To inform you that certain statements made during this conference call, which are not historic facts, may be deemed forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward looking statement are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved.
Factors and risks that could cause actual results to differ materially from expectations include the effects of the COVID-nineteen pandemic and others detailed in today's press release from time to time and in the company's periodic filings with the SEC. The company undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances after the date of the release. Having said this, I would like to introduce management with us today, Gary Shipman, Chairman and Chief Executive Officer of Sun Communities and Baxter Underwood, Chief Executive Officer of Safe Harbor Marinas. After their remarks, there will be an opportunity to ask questions. I will now turn the call over to Gary Shifman, Chairman and Chief Executive Officer of SED Communities.
Mr. Shifman, please go ahead.
Thank you, operator, and good morning. Thank you for joining us today to discuss Sun Communities acquisition of Safe Harbor Marinas, the largest and most diversified marina owner and operator in the country. It's a very exciting day for all of us as we welcome the industry leading Marina platform to the Sun organization. Safe Harbor brings a high quality rental revenue stream, adds diversity in terms of geography and customer base, as expected to further enhance Sun's earnings growth potential. Sun has a long and successful track record of strategically Expanding, diversifying and enhancing our portfolio, having added more than $5,800,000,000 of high quality assets, including private companies since 2010.
The transaction with Safe Harbor Marinas is a continuation of our forward thinking Strategic positioning and represents a very compelling growth opportunity. The aggregate price for Safe Harbor is $2,100,000,000 which includes the assumption of $808,000,000 of bank debt and certain existing owners of Safe Harbor are expected to become investors in Sun by rolling approximately $100,000,000 of the purchase price into Sun common and preferred OP units. The balance of the transaction will be financed with a combination of cash on hand, draws on the corporate credit facility and a new $750,000,000 unsecured We expect this transaction will close in the Q4 of this year and will be accretive to 2021 core FFO per share. Pro form a for the transaction, Safe Harbor Marinas will account for 15% of our annual rental revenues. At this time, I'd like to provide a brief overview of the Marina industry and why we were drawn to expand our platform into the Marina space.
Similar to manufactured housing and RV resorts, marinas produce a predictable recurring rental revenue stream. Additionally, the industry is fragmented with high barriers to entry and primed for consolidation similar to our current portfolio where we have demonstrated much success in consolidating the manufactured housing and RV Industries. In the U. S, there are approximately 4,000 marinas generating more than $5,000,000,000 in annual revenues and the top Five operators account for less than 5% ownership of total marinas. We believe this fragmentation, Along with Safe Harbor scale, Sun's cost of capital and structuring expertise provide us with a combined to achieve meaningful external growth over time.
We are also attracted to the favorable supply demand dynamics in the industry. On the supply side, there are very high barriers to entry, including stringent regulatory hurdles for new construction and limited availability of land along desirable protected waterways. On the demand side, Population trends offer attractive tailwinds that align with Safe Harbor's core member base. Since 2004, Split demand has steadily increased, while at the same time, there has been virtually no new Marina development in the U. S.
If ever there was an asset class with tougher barriers to entry than manufactured housing, marinas are it. These attractive industry characteristics compelled us to reach out to Safe Harbor several years ago And we began a dialogue to pursue mutually beneficial goals. Scale and quality are both extremely important in this business and we are pleased to achieve both with our investment in Safe Harbor. We have been very deliberate in researching and understanding the marine industry and develop a collegial dialogue with Baxter Underwood, CEO of Safe Harbor and his team. During our conversations, we learned Safe Harbor's external growth, much like SUNS, is dependent on fostering and maintaining relationships with private owners, many of them family businesses.
These owners have long term relationships with the marina members And when Safe Harbor acquires marinas, they retain the former owners and their team to ensure the continued success of their investment. Safe Harbor is without a doubt a best in class marina platform. In addition to its irreplaceable assets, we are pleased to welcome its experienced team of industry executives who are supported by a highly professional and talented bench. This team will continue to run day to day Marina operations. Baxter is on the call with us today.
And before I further detail the merits of the transaction, I thought it would be helpful for Baxter to provide a brief history and overview of Safe Harbor Marinas. Baxter?
Thank you, Gary. Let me begin by saying on behalf of the entire Safe Harbor team, we are elated to be joining Sun Communities. At Safe Harbor, we are passionate about our business and have built the largest and most diversified portfolio of owned and operated marinas in the world. In fact, our portfolio is larger than the next 3 largest Marina owners combined. While scale is important, More significant is the quality of our assets comprising our one of a kind boating network.
Safe Harbor has approximately 40,000 contractual storage customers that we refer to as members who provide us with predictable Recurring rental revenue from moorings, slips and storage. Our customers value convenience and quality, And we have a differentiated platform with irreplaceable properties that offer on-site maintenance, repair and services. We have resort quality amenities and a strong brand recognition within the boating community. Approximately 3 quarters of our annual gross profit is recurring revenue coming from vessel storage and various commercial leases. The balance comes from ancillary services like boat maintenance, fuel sales, boat rental and on-site food and beverage sales.
93% of our wet slip income is from customers mooring their boats at our marinas on an annual or seasonal basis. Our focus is on superior service and it contributes to the retention and stickiness of our revenues. We have an average customer tenure of more than 8 years. We have a very talented team with significant Marina experience. In fact, the counterparties in several of the transactions that gave rise to Safe Harbor's current portfolio were some of the Marina Industry's most recognized pioneers and operators.
Names like Marshall Funk, Jack Brewer and Reeves Potts have been prominent in our asset class for as much as half a century. And those individuals continue leading the way as an important part of our team today. Our operational approach is similar to that which Sun employs. We task and empower experienced and capable professionals to consistently deliver with excellence in customer service and in all areas of our business. We built the industry's most productive M and A machine and have acquired and successfully integrated more than 100 marinas over the Our dedicated M and A team, including the industry pioneers referenced a moment ago, maintain an expansive ongoing dialogue with private Marina Owners.
This discipline has produced a deep and high quality pipeline of acquisition opportunities. We are impressed with Sun's best in class operating performance in their legacy asset classes, and we truly believe the combination of our complementary platforms will deliver ongoing growth for Sun's shareholders.
Thank you, Baxter. Identifying and acquiring high quality portfolios is one of SUNS' key competencies. We strive to deliver strong consistent growth through Economic cycles and the Safe Harbor Marina portfolio adds an additional avenue of similar growth for the company. In summary, there are 3 important attributes of the Safe Harbor investment that bear repeating. First is diversification.
As marinas add a revenue stream from new customers and broaden our total addressable market, while also diversifying the company's geographic footprint. 2nd is earnings accretion. This transaction is expected The addition of an existing and well run platform that is uniquely positioned to enhance future earnings growth. Industry aggregation is a common core competency for both Sun and for Safe Harbor. This acquisition provides us with a platform to consolidate the highly fragmented Marina market.
Importantly, Given our ability to issue OP units and other forms of tax advantaged sun currency, we can offer an attractive option for Marina owner operators Potentially looking to accomplish their own estate planning and transition objectives. We have enormous confidence in the Safe Harbor The transaction further enhances Sun's distinct and compelling investment thesis With additional scale advantages, growth opportunities and the ability to deliver superior results for all stakeholders. Both Sun and Safe Harbor have talented and committed teams. I'm optimistic we can deliver and realize both the internal and external growth opportunities inherent in the combined portfolio. And at this time, operator, We'd like to open it up for questions and answers.
Thank Our first question is from John Kim with BMO Capital Markets. Please proceed.
Thanks. Good morning. Just couple of
industry questions. Can you provide some more color on why the regulatory hurdles of developing marinas are so high. It just doesn't seem like it would have the same NIMBYism as manufactured housing.
John, thank you and appreciate the question. There are a number of regulatory agencies that we deal with. They vary from region to region and municipality to municipality. And then of course, there are federal regulatory agencies that we deal with as well. So the number of regulations required To expand an existing facility and certainly to permit a new facility are just very high, Principally because there are so many different agencies involved.
And Baxter, do you mind just Why you decided to sell the Sun at this time? What other extra strategies you considered and how competitively did this transaction was?
There were some events taking place in our shareholder group That made it the right time for them to look for liquidity. And we did consider numerous options. The team was careful in selecting Sun. We believed it was both the right form of capital for this asset class And we also believed it was the right cultural fit. Sun has shown the ability to operate assets The class is similar to ours with excellence, and we view them as a great Partner to carry the business forward.
It's been discussed before about potential consolidation in this Why do you think consolidation will expedite going forward under the Sun and Bella? I I'll go back to Gary or Baxter.
Yes. I think we can share it because we're both so excited about it. Obviously, Availability of capital on the scent side, the use of various securities to defer taxes. We've had a dialogue with Safe Harbor going for some time now, thinking about With Safe Harbor going for some time now, thinking about how we can address the needs The sellers who, as we indicated, are more or less mom and pop family owned. So they have Big potential tax burdens.
They're not looking to necessarily exit the day to day Operations, but certainly want to do some estate planning and tying things out for the future. And I think that Baxter can share the excitement that he has to be able to use those tools going forward and continue Consolidating as their track record is shown.
I'll just add, we are very excited as an entire company, and particularly our acquisitions Which as I mentioned is very evolved and sophisticated for this asset class to have access To that unique structure, we really believe it will be a competitive advantage.
Final one for me. Can you discuss The impact, Gary, on leverage on a net debt to EBITDA basis as well as the increase in G and A that you anticipate?
Sure. Karen is with us, so I'm going to turn to her.
Hi, John. So as you've seen us do in the past with Other large transactions, leverage will be elevated while we examine more permanent financing structures. So using SUNS June 30 debt and EBITDA and then adding Safe Harbor's trailing 12 month estimated EBITDA And the current capital structure for the transaction, net debt to EBITDA will be approximately 6.7x. I think we have Proven time and time again that there were good stewards of our balance sheet and that we'll examine all available capital sources and choose the appropriate capital sources at the appropriate time. We've expressed numerous times our comfort at 6x net debt to EBITDA based The stickiness of our revenue and the other characteristics of the asset class.
But we do like the strength and flexibility we have in our balance sheet and we'll certainly work to keep it that way. The other one what was the other side of your question, John?
The impact of G and A.
Oh, G and A. So we have not Underwritten any G and A savings to Safe Harbor's current run rate into the transaction Due to the fact that Safe Harbor will be operating as an independent subsidiary, We estimate their G and A load to be about $19,000,000
Okay. Thank you very much.
Our next question is from John Pawlowski with Green Street Advisors. Please proceed.
Hey, thanks. Thank you for the comments, Bector. Curious, I understand there's regulatory constraints for Expansions and getting new marinas built. Curious what's led to negative supply growth. I know modestly negative, but still supply declining on Absolute basis over the years.
Is that just obsolescence or is there anything else going into that kind of churn?
Great, John. Thanks and nice to meet you. The principal reason for that is that waterfront property, particularly Coastal waterfront property, particularly proximate to major MSAs is very valuable. And from time to time, developers will acquire Marinas as a waterfront development and they will use the parking required for the marina from a permitting perspective to facilitate other uses such as retail or multifamily, maybe mixed use. And so we are often approached by developers wanting to Redevelop our assets and some sellers do sell to develop mixed use multi Family, etcetera, developers.
So that's the principal one.
Okay. And
could you give us
Go ahead, John.
Yes. And I'm not fully through the filing, so apologies if this is in plain sight. Could you give us a sense for what Safe Harbor's Kind of stabilized NOI growth track record on more like a same store basis has been over time? And what are the worst years look like and what are the best years look like? So we get a sense For the range around the average?
Yes. So we have provided, I think, a fair So pretty comfortable.
And What are the toughest years look like for the Marina business? What was the performance in the GSE to give us a sense for the kind of the trough?
So the portfolio on which we have data for the GFC, which comprises roughly half of the assets That we currently own today, saw a peak to trough decline of about 11% at the top line.
Great. Thank
you.
Our next question is from Sameer Khanal with Evercore ISI. Please proceed.
Yes. Good morning, everyone. I guess, Gary, can you provide some color around sort of cap rates on the transaction and maybe just sort of cap rates that you're seeing kind of in the Marina segment out there?
Yes. I can share with you Our underwriting with regard to this transaction, then I'd probably turn it over to Baxter to share a little bit of color and what he's seen historically and go from there. But based on our underwriting, which We had to adjust based on how acquisitive Safe Harbor is. So we included full year contribution for recent acquisitions And trailing 12 month numbers for From as of sixthirty, we wound up underwriting this at a 6.7% cap rate. As far as moving forward, Baxter, do you want to share a little bit of color on how you view Historically, what the world's been cap rate wise?
I caution when speaking about cap rates To generalize because the asset class includes multiple regions, geographies and subsets in the business lines. So hesitant to provide specificity with respect to that question. But I
will say
that We have been in the high single digit cap rate on a historical basis. It's not necessarily the way that I would Expect to see those work in the future.
Okay. Thanks for that. I guess my second question is around I don't know if you can maybe for Back to here. Any color around kind of impact you've seen with sort of the COVID-nineteen pandemic and we've You said a lot of impacts on different sectors and just trying to get a sense of what you've seen in the marinas.
Great question. Thank you. So the organization is performing above Our 2020 plan, which was finalized in November of 2019 before anyone on our team heard the term COVID-nineteen. And we're very pleased with that. I would add that due to government interventions In several of the states in which we operate, we were like many businesses forced to close for a period of time Entire marinas and or subsets such as food and beverage or fuel, we saw as much as an 18% In revenues relative to our plan on a monthly basis, and nevertheless, we're able to deliver On plan returns and even exceed them year to date.
And the reason for that is much of the revenue Declines were in ancillary business lines, which are not a large contributor to net income for us.
That's it for me. Thanks.
Thank you.
Our next question is from Joshua Dennerlein with Bank of America. Please proceed.
Yes. Hey, Gary. Hey, Baxter. Couple of
questions for me. I guess, first one, maybe how do you
think about internal growth opportunities across the Marina space or within your Safe Harbor portfolio today?
I'll start it out and I'll take a look at Baxter. When we look at The same core, same community data on the marinas, it tends to Function very similar to what Sun has been able to exhibit both in its manufactured Housing and RV Resort platform. They have a very impressive capital investment program where they get low digit Double digit, I'm sorry, returns on their investments similar to what Sun is able to accomplish with its expansions. That being said, they don't have the abundance of opportunity to expand the slips And everything are highly regulated and controlled by factors that are outside their control. So good solid core growth that as I indicated in my remarks, Look to be able to provide growth and accretion in a range of, I will call it, Mid to high single digit growth above consensus in 2021.
However, that consensus, obviously, the company doesn't have any guidance, but best barometer I could suggest is mid to high Reval accretion from the internal growth.
I would just add, Josh, that our internal opportunities For capital improvement have been as much as 15% to 25% in a given year as our acquisitions pipeline. And we have, as Gary said, delivered low double digit unlevered returns On those investments and as Gary said, expanding the properties is one of Sun's core competencies, one of ours is reconfiguration of the product mix To better match with the demand.
Josh, the other thing that I would add this is John. Some of the growth is attributed, frankly, to just the remarkable team that exists at Safe Harbor. I mean, as we've shared on our calls before, We've talked many times. The level of service that's provided ultimately builds a guest sales force, which is an advocate for the brand, which grows into occupancy. So that's again a very big similarity that we discovered very early
on. Okay. Thanks guys. And then is there any difference between maybe the saltwater and the freshwater portfolios and or marinas and how they performed over time?
The primary difference that I would point you to is that the saltwater assets are linked typically by water. And so you have the ability to retain customers moving their vessels Throughout the network in these saltwater assets. It's not to say that the freshwater marinas don't also benefit from the network effect, they do, but they have to get on a They do, but they have to get on a plane or drive in order to do that, whereas the voters in the Saltwater assets will utilize the network simply by moving around through it.
Okay. And then when I think about External growth. Maybe could you walk us through your underwriting on Baxter? And then Out of that 4,000 marinas in the country, like what would you say kind of fit your underwriting criteria?
So what I would say is that the history of the organization as I laid out when we were speaking a moment ago Is that we have acquired a little bit over 100 marinas in 60 months. And we believe that we have A machine that can continue to perform. I see this transaction Action as doing nothing but giving us tailwinds in terms of our conversations with Marina Owners. Of course, I don't know what our acquisitions pace or volume will be. But I do believe strongly in our team, our performance historically and the combination of our platform as SUNS, It seems to be a very powerful one to me.
All right. Thank you. Appreciate it. I'll yield the floor.
We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.
Well, on behalf of Sun Communities, it's a very exciting day for us as we described. The entire team will be available for any follow-up Today and over the next several days. So we welcome the opportunity to speak to Anyone who has any follow-up questions. And right now, I'll close on behalf of Sun. We're really pleased to be able to Welcome the Safe Harbor team and group into the organization and look forward to I'm providing more updates as time passes on.
Thank you, operator. Thank you for attending, everyone.
Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day.