REEOBs (Real estate-enabled operating businesses): A look at self storage, FBOs, and marinas
By Josh Kowitt
At Emko Capital we are focused on industrials, manufacturing, and aerospace / aviation. Most of the businesses we look at investing in fall into two main categories: (1) A manufacturing business that makes something, whether it be a part of an airplane or a machine to measure the hardness of metal, or (2) A service business that fixes, distributes, or generally keeps running (maybe via software) part of the industrial / manufacturing economy. These are great business, and companies at the size we consider (typically $10–50m in revenue, the “lower middle market”) are the life blood of the American economy and in fact encompass over 1/3 of all US employment!
I have noticed a third category of business that is an interesting hybrid — I’m calling this the real estate-enabled operating business (REEOB). These are businesses that have fixed locations (e.g., real estate), are open and available to serve almost anyone with the relevant need (fueling, storage, parking, etc), and most importantly, have a operating / service business that can drive value and draw-in customers. I realize this is not a novel concept by any means — and frankly any infrastructure-like business has these types of traits whether it be gas stations, parking lots, or even the much-hyped coworking spaces (surely they provide a service beyond the real estate). Self storage facilities are all the rage today. FBOs were the rage 10 years ago, but still do well pumping fuel, servicing, and hangaring private jets. There is another REEOB, marinas, that may share some of the positive qualities of both self storage and FBOs and has been ignored by most institutional investors.
So what are typically qualities of REEOBs?
Diversified customer base — think of a self storage facility or marina, you have hundreds of different customers, you are not at risk of any single large customer
Recession resistance / steady demand — when the economy is good, you have extra stuff to store, when the economy is bad, you downsize your house and need storage. Same with marinas, you can’t just sink your boat! You also see consistently high occupancy rates at self storage and marinas (80%+ and many well over 90%).
Limited supply additions — FBOs and Marinas are hard to get built. They require gov’t approvals. This helps keep occupancy rates high and creates effective barriers. Self storage is easier to build (it’s just commercial real estate).
Value-added services — at many FBOs, you can get your airplane fixed, you can charter it out to defray the cost, you can even have someone manage your pilots (or teach you how to fly). Likewise, at marinas, boats are stored and fixed, sailors are fed at dockside restaurants, and supplies are sold at a ship store. Some marinas even have bed and breakfasts.
EBITDA margin — These can vary significantly depending on occupancy or airport location, but are typically strong and consistent
Valuation — Varies significantly. See chart below. Appears to be correlated with EBITDA margin which is not a surprise
Fragmented market — Marinas are highly fragmented with 3 consolidators owning 2% of all marinas, Self storage and FBOs are more consolidated but still fragmented.
Let’s look at how each FBOs, self storage facilities, and marinas stack up against these factors:
Takeaways:
I think there are investment opportunities in all 3 of these REEOBs, however, the least “picked over” market is Marinas. This is likely because of the typical seasonality and operational complexity associated with what many see as a real estate investment (but in fact has a significant operating component). Given this, there could be opportunity in the space.
For FBOs, the strategy needs to be more than consolidation. What about MRO? What about charter or aircraft management? Again, the typical consolidate and drive both efficiency and quality is done (thank you Signature and Atlantic)
For self storage, there is still plenty of consolidation left to do given the size of the market and the number of mom/pop players. What makes the market difficult today, though, is that most facilities are full and thus owners are hesitant to sell for a reasonable price. To be clear, of the three, self storage is the simplest and highest margin.
Risks:
Given these businesses are real estate-centric, they are limited in their demand upside based on a geographic catchment area (e.g., you don’t fly to a different airport to get fuel). There may be ways to mitigate this with more regional-focused offerings like great service or authorized OEM service-center relationships (e.g., you are the only place to get XYZ boat or plane brand fixed). Of course the downside of this “ceiling” creates an effective local barrier to entry, particularly for FBOs and Marinas where permitting and governmental approvals can be difficult.
Scale benefits may be limited, especially for self storage and marinas where there are few corporate customers who value a “network” of locations. On the cost side, there is certainly back office scale, but nothing like a single large manufacturing plant!
I would love to hear your thoughts. Are there other REEOBs that are interesting? What does disruption look like in this space?