Coastal Marinas: Charting a Course for Growth

Greg Campion: As public and private credit markets continue to evolve and in many cases experience structural change, investors are on the hunt for new and differentiated strategies to generate income and long- term sustainable returns. As part of this, managers like Barings have evolved the special situation strategies of yesterday into more flexible so- called capital solutions strategies today. These are designed to provide opportunities throughout the ups and downs of economic cycles. But what do these opportunities and investments actually look like and how do they come together?

Zayd Hammam: What ultimately happened in Coastal Marinas, it started out as one opportunistic marina acquisition. Very soon it was obvious that there's a platform to grow here. In a sense, I know this world. I know what good support from a financial capital partner looks like as opposed to just here's capital, go figure it out. It's like here's capital and we have these enormous resources that we will bring to bear to help you.

Greg Campion: That was Zayd Hammam, Chairman of Coastal Marinas, and this is Streaming Income, a podcast from Barings. I'm your host, Greg Campion. Coming up on today's show, my colleague and Barings Head of Capital Solutions, Bryan High sits down with Zayd Hammam, Chairman of Coastal Marinas to discuss how the company has quickly become a dominant player in the business of owning and running marinas and how Barings has played a key role. This episode is part of our investing together series where we aim to shine a light on partners like Zayd and the Coastal Marinas team who are driving value in new and innovative ways. With that, please enjoy this conversation with Bryan High and Zayd Hammam

Brian High: Zayd, thanks for joining us. To set the scene for folks, we're in the Captain's Lounge of the St. John's Yacht Harbor in Charleston, South Carolina. Beautiful day outside. We're going to be talking today about Coastal Marinas a company that you're the chairman of Zayd and Barings knows very well, has been involved now for a couple of years. But before we get there, your career didn't start at a marina in Charleston, South Carolina. Tell me about your days investing in special situations as an asset class.

Zayd Hammam: Well, firstly, thanks so much Bryan, for giving the opportunity to talk about this. Certainly worse places to be chatting about an investment. So my background, I started broadly speaking public market special situations investing a little over 20 years ago, primarily on the equity side. I was buying private loans personally and on behalf of my family and family members starting in 2008. And then in 2010 I joined a firm called Atalaya Capital, which is a larger, much more successful fund. At the time, that team was in the relatively early stages of their development and was buying distressed loans. Started spending more time in Europe as the US opportunity diminished. And because the US emerged sooner from the crisis than Europe, spending more time in Europe. Around 2015 I left to buy notes on my own. I enjoyed more buying smaller size ones where you can get outsize returns as opposed to what the business had started to become in this non- traded world, which is buy a ton of loans, larger size, more IRR driven, less multiple of capital driven, still great investments, just not what I don't think I naturally gravitate towards. And then through that I continued to do stuff in Europe and one of the investments we made was we bought a nursing home business in a short sale. So it was a lender driven sale. So we bought the actual operating business, we call it care homes in the UK, and we had a two- year plan to fix the business. I say we again, I was in part, my partner Ryan essentially turned the business around and instead of taking two years, which is what we thought it would take to turn it around, he turned it around and just a couple of weeks. He just drove occupancy, was able to raise rates and so on. And so it became apparent this was a great business and so normally what we do is you'd sell it and take your return, move on to the next investment. But we thought about it and we said, no, this this is a great business. We can go buy more. And so that's been something that we've continued to drive. I got involved with, if you want, institutionalizing the business and helping Ryan do that, and all of a sudden your mind shifts and you just think in the back of your mind, it's not just that I can make an opportunistic investment, make money and move on to the next one. You start thinking about platforms and then what ultimately happened in Coastal Marinas it started out as one opportunistic marina acquisition. Very soon it was obvious that there's a platform to grow here.

Brian High: That's great. As you think about that transition from equity, special situations, credit investing, what do you think the skillset was that you developed over that period of time to ultimately get you to be able to take a look at sort of a bespoke asset and say, oh, this is interesting. And then wrap your mind around how you can make money in that type of an investment?

Zayd Hammam: Investing is so vast, there's gazillion ways to do it. You have quants who are just looking at millions and millions of data points and coming to investment decisions all the way to venture capital and so on. So really what you have to do is to be successful at it, I think you have to marry what your inclinations are and your proclivities are to succeed. And for me, my inclination tends to be, I want to say contrarian to a certain extent and also I would say primarily downside focus. So if you sit down and you're what do I like? I like things where you can make relatively small bets with capital where you think, how much money can I lose? And you're super comfortable with that side of it. And once you're comfortable with that, but can I also make multiples of my money. Or as time has gone on, it's not even multiples of your money as time goes on, it's how much cash flow over time can I build? So the hypothetical, you start with investing a million dollars and then you wake up five, six, seven, 10 years down the road and it's paying you a million in cash flow a year or two or three or four. So that's kind of the framework of how we do it. And in order to be able to do that, you have to somewhere along the way be creating lots of value and then hold onto the assets for the long run.

Brian High: Will you tell us about Coastal Marinas specifically? What was it? How did you first get involved? What attracted you to do this opportunity and maybe what were some of the early challenges that you identified?

Zayd Hammam: We'll start by saying what's the opportunity in marinas is I think that there's a multi- decade tailwind to marinas. It starts with that you are buying waterfront real estate in some of the most desirable places in America. So where we sit here right now at St. John's Yacht Harbor, you look out and it's on John's Island at the foot of a bridge, we're right across from James Island. This is some of the highest population growth markets in the southeastern US. It's a very desirable demographic. And by the way, they're not making more land to do these boats. Any supply increase is very modest relative to the demand growth. So putting our broad investment hat on where you say, oh, is this a great industry? Yes, it's a great industry with a multi- decade tailwind behind it. So then within that you start trying to find which investments and which assets and people and so on will help you optimize within that. But I broadly think that almost any marina investment you make in a marina almost anywhere in the United States will do well over the coming decades. And so we view it as a multi- decade opportunity.

Brian High: Any early challenges that you would call out?

Zayd Hammam: I would say that our challenge from day one and continues to be our early challenge because I also think we're still early in what we're doing, is managing growth. It started out with just the two guys and now where we are, we have a bonafide platform, we have six marinas, we have the wherewithal to continue to grow a lot thanks to our partnership. And so it's managing that. It's going from two guys to institutionalizing, to having a real platform where you can scale. I'm going to say flawlessly, of course that's not going to be the case, but it's managing growth, hiring the right people, making the acquisition process a lot more seamless in every aspect of the acquisition, integrating an acquisition and so on.

Brian High: When you were looking for a financing partner after you had started to accumulate some of these marinas, what made Barings the right fit for you? I know you have lots of connections in the marketplace. Ultimately we were able to get to a transaction that worked for both of us. What was it that for you worked?

Zayd Hammam: I think there's almost two phases of answers to that. The first phase is pretty simple, and that was you. We've had a long relationship. We were initially involved in a, when were we? Was it like two thousand and...

Brian High: 2010 maybe?

Zayd Hammam: Yes. I think it was 2010.

Brian High: It was down here.

Zayd Hammam: Yeah. It was down here. And that was the thing, the same investment that I said that brought me down to Charleston, we were in that credit together and we were accumulating a position as the, if you want, distressed buyer at the time. And there were a bunch of private lenders who were involved. And I think I would say that we got along, but I certainly respected you. I mean, you can think back how, we're not going to say how old we probably were at the time, but you're definitely younger than me and I thought you were the wisest of the group in knowing what mattered and asking simple questions and knowing what didn't matter and not worrying about it. And I always remembered that, and that's what I do as I go along. It's like you find people that you like, that you respect along the way. So I would say I've started, we've stayed in touch and talked about a lot of things over the years, but going back it was you. So that's what you start with. It's the one- to- one relationship. And then also when you came on board with your initial investment, the thing that worked was that we said, we wanted a long- term focus, going back to saying, " Hey, our goal is to grow cash flows over time. Our goal is not to create value and realize it as soon as possible and so on. Our goal is to build an entity that creates cash flow. We want to own this hypothetically forever because we think we've got something special going on here that we can grow. We have an incredible management team. There's an asset class that's a, has tremendous supply demand dynamics. We just want to keep growing it and grow cash flow." And you Barings have some vehicles that allow you to do that, whereas most people don't. And even if they do, they always want something near term. So that was the first phase. That was you and sort of the natural inclination was the first phase, which it was such a no- brainer to partner with you. But the second phase was as our growth continued and we're in the meat of it now, was all the resources that you've invited into us which we love. Whether it's on the capital market side, which has been incredible on the operational side where you have world- class, I want to call them consultants, but it's like people who can come in and help us solve specific challenges that we have as we grow the business so that we can optimize cash flows, whether it's general support at the board level and so on. I mean, it's just been terrific. And I speak not just for myself, but I know Mike Schuler feels that way. In a sense, I know this world, I know what good support from a financial capital partner looks like as opposed to just, here's capital, go figure it out. It's like, here's capital and we have these enormous resources that we will bring to bear to help you. So it's worth a lot to the Coastal Marinas partnership as a group. Everybody benefits. And I just want to stress, I don't run the business. We have an amazing partner in Mike Schuler who runs the business and we're extremely lucky to have him running the business because he would never say this, but we can brag on his behalf. He's probably the best marina operator in the United States, and there's a very good reason why. It's because to get the marina business to be as successful as it can be, it takes a confluence of various skill sets. One obviously of managing an operating marina, which is nominally in the storage business. You're storing boats, you have slips and you're collecting a fee for storing slips. But in addition to that, it's a real estate operation where you own land and you're maintaining the property. And usually with a marina, that's not just storage. You have a restaurant or you might even have some kind of hotel or servicing, but there's a whole other component that becomes real estate driven. That's important. And the third one, which is where our ultimate magic comes in is hospitality. You really are creating, or at least the way we look at the marina business, is that you're creating a recreational experience. And so you make it a place where people want to go spend time when they wake up on a Saturday, Sunday morning after work on a Wednesday that this is where they want to go and spend their time as opposed to the thousands of other things they can do. So combining all these things and his background is he'd been super successful in real estate and hospitality, he has a bunch of different businesses in those that have been super successful. So you have somebody who can really merge all these skills, which allows us to succeed in this business.

Brian High: Yeah, I think from our side of the table, I couldn't agree more. First of all, partnership and then getting the opportunity. I've heard you talk about Mike Schuler for years. I finally got the opportunity to see him operate. I call him the Mayor of Charleston, even though he's not a politician. He certainly knows his way around this market, and he's been very impressive in the way that he's handled numerous situations as we've grown this platform. We also thought from a permanent capital perspective, this really made sense in what you were trying to build, trying to get more cash flow yield out of an asset and institutionalize it with organization and expertise at the management level, and bringing a consistent approach to multiple marinas in a certain region, which just so happens to be one of the best boating communities in the United States, potentially the world. And the fact that they're not making more marshland that you can develop and you can develop on the marshland that exists that has marinas and you guys identifying that thesis and building on it, us starting to have conversations really during Covid and ultimately getting involved towards the back end of Covid. I think that it's been a very educational process for us. And I think that you're right. I think a lot of the skills on our teams that we've been able to bring to bear have married really well with what you guys have locally and what you do at the ground level from an operational perspective. And then you've been a phenomenal partner. You're very open to suggestions from us, even though you guys are the majority owner of these marinas and you've been willing to listen, which I would say isn't always the case. So I think the partnership aspect of this, and maybe that is 10 plus years of knowing one another and talking to one another that ultimately got us to that place. But it's been almost too easy, dare I say, and I'll knock on wood as I say that, in terms of our ability to work together to start taking your long- term vision of this and knocking down each little bit that we can step by step to try to build this into a world- class operation. So appreciate your partnership from that perspective.

Zayd Hammam: Well, I have a question for you now that you're saying this because something that I think about and I see it from the outside, but I'm curious on the inside, whenever we have a challenge and we're talking about it at the board level, and then you or Mike Searles or so on will say, well, " We've got this resource that can help you with this and that," and boom, how about a real world example? We have some senior debt and we say, " Should it be floating? Should it be fixed?" And then boom, we have an interest rates expert kind of guiding us through everything. And then ultimately the biggest value was saying to get good execution, do this and this and that. That stuff makes a difference. And we've been investing for a while, but what do I know about interest rate trading, so to speak? I mean, we're not interest rate traders, but we're trying to make a decision in these very volatile interest rate environments to optimize cash flows as we were talking about ultimately over the long run. So that's the kind of stuff we're like, wow. But it seems throughout Barings, this is my question for you throughout Barings, people are very willing to jump in. Is that just universal as an organization or are people responding to you or are they responding to the organization and that's just the culture?

Brian High: Of course, we operate flawlessly at Barings.

Zayd Hammam: Yeah, right.

Brian High: I do think that there is a culture of collaboration that we try to foster at the firm, and we do have a number of resources that we can bring to bear. You mentioned Mike Searles, he's obviously been key to this investment as well from a senior perspective, Charlie Schaffer as well on our team really digging in and thinking about it, not just on a quarterly basis at a board meeting, but as we're sort of talking about investments on a daily basis. What else can we do to be a good partner and to generate whatever little bit of return, whatever basis point we can bring to the table by bringing those resources to bear. And then, you talked about some of the, you called them consultants, but operating partners that we have on our team that have a lot of experience, have run companies, have been consultants, have tackled a lot of problems and or just set up organization in something like this, which is very entrepreneurial to your point. We didn't come in at the very beginning, so we got to see a little bit of the sauce being made and then ultimately come in and add whatever spices we can to the mix. Whether that's a compensation program or wherever we have experience and expertise and can come in and just provide that level of board direction that ultimately gets executed by your team. So I think it's a marriage. I think that Barings has, at least in my experience, have been there for 15 years, has been great at recognizing talent and then making sure that everybody's aware that that talent exists and then it's on us to ultimately come and ask them to help. And most people, you say, " Hey, do you want to go down to Charleston and help us on this investment?" That's a pretty easy incentive as well.

Zayd Hammam: So you should only focus on investments where people want to go? All right.

Brian High: It helps.

Zayd Hammam: That's actually not a bad investment thesis by the way.

Brian High: As we think about sort of growing our commitment to this investment, one of the things that we've really been excited about is all the potential for growth within Coastal Marinas. You've built some pretty interesting tack- ons to just the real estate aspect of what we're doing. Can you give us a sense without, I don't want you to overshare obviously, but whatever you're comfortable sharing in terms of the opportunities that Coastal Marinas has in the years to come?

Zayd Hammam: Yeah, the answer is every step we're laying a deeper foundation and base to continue growth. For Coastal Marinas, I think we share the view as you've described, that if you want supply and demand for marinas it's excellent, but we can go through and say you start with absolutely incredible real estate. And then you start creating these places that become the top recreation destinations locally by not just making them places, great places to store boats, but great places to spend time. And that drives cash flow. And we think that we are very good. When I say" we" we think that Mike and the team, it's not you and me, but it's Mike and the team, do a great job of creating cash flows and that probably they're better than most, if not anyone, at optimizing the cash flow at each of these marinas, which means that we're good buyers. I mean, we're in a very fortunate situation where we can go out and buy marinas probably for higher prices than most. And we like to say we're opportunistic and that we always want to buy for less than other people are paying. But how great is it that you can pay market and do better than other people. In the yield asset business that's like magic. I can pay X and for some people it's because I have a lower cost of capital. So if my cost of funds is 3% and everybody else's cost of funds is 4%, I can go out and make better loans and grow my business and so on. Well, this is a little bit of the opposite, which is, you buy an asset for a million bucks and you can generate a hundred thousand in cash flow, with grace, you could do a 10%. If I can buy an asset for a million bucks, but the way I operate, I can do 150,000 in cash flow. That gives me a competitive advantage to go out and grow the business, which is what Mike and his entire team have created. And so that's a long- winded way of saying stay tuned, more growth coming. And I'd say that one of the most interesting things that's come out of it is so far people don't really know about Coastal Marinas. We don't brand publicly as Coastal Marinas. Each one of our marinas stands on its own, and that's kind of how it is. So I would say industry- wide, people really don't know anything about us, which has been fine. But people start hearing about us, they know that we're really good, they see what we deliver, and we're starting to get inbound with people saying, " Hey, will you partner with us to buy this marina?" and so on. So I think that that's going to be an interesting decision for us to make over the coming months. I would expect that we will... We're open, we think we're great partners, and if we find other people who are great partners, we're certainly open to partnering with outside folks as we grow the business to buy marinas in various markets throughout the United States.

Brian High: I do think it's been interesting to watch. You intentionally from the very beginning, didn't necessarily brand yourself out there as a broad network of marinas, but I think locally, just given the consistent approach that you've taken and how you've reshaped each marina over time, people notice like, " Oh, this looks a lot like Sea Breeze. This look looks a lot like Old Village Yacht Club." I think that while not intentionally trying to brand, you guys have done a good job of building a reputation and then somebody walks in and there's an expectation of what it is just based on what it looks like when you walk in. So kudos to you guys in the way that, well really to Mike and team, in the way that they approach this. Again, it's not you and me that is executing on this front.

Zayd Hammam: I mean, I know you sort of touched upon it in various ways, but I'm just curious how you think about the Coastal Marinas investment in the context of your overall portfolios and how this fits and how you think about that.

Brian High: Yeah, I mean, I think that the way that we approach from a permanent capital perspective, those vehicles have some flexibility for creativity. That being said, I think we try to take a very vanilla approach. If you think about a bell curve in the middle, and then on the tail is where Barings can potentially differentiate themselves we try to do so, sometimes with platform investments, which I would categorize this as a platform investment. And you've been open to a flexible structure, which has allowed us to build it around what that vehicle needs from a returns perspective on a contractual basis, but also participate in some of the upside. And that's where I think it marries really well with what we're trying to do. And we can be patient. We know what the vision of Coastal Marinas is, and we believe in it, and I know that that takes time and capital in order to get it there, and we think we have the right partner to ultimately drive that. And the other thing that we like about it is there is a hard asset value that you've talked about from a real estate perspective. We're always focused on, from an investment standpoint, our attachment point and to what you referenced earlier, what's your downside? How do you define the risk of the risk return equation? And we really like the risk from this perspective and we think we're attaching here at a really attractive point. And there is a return profile that we've sort of built into the way that we've structured this transaction that works for our vehicle, but again, also allows us to participate in some of the upside. And your willingness to explore those unique structures with us has been part of the reason why we're sitting here today.

Zayd Hammam: What, as you look to the investment, do you look at and say, okay, this is your next big challenge and so on as you sit from your seat?

Brian High: For Costal Marinas?

Zayd Hammam: For Costal Marinas? Yeah.

Brian High: I mean, I think about retaining talent. I think we've built a good team here, and Mike's built a really good team here and making sure that we're retaining that talent and continuing this consistent approach. There's a lot of what we're doing on the construction side. Construction is always a big unknown to me, at least from my seat. I think Mike's more comfortable because he's dealt with it his entire career. But it just seems like there's always delays or cost overruns or something like that, that as I think about it from the boardroom where I tend to focus some of my questioning. But generally speaking, I think we're in a pretty good spot to what you said earlier, this community from a boating perspective, what we're building from a boat club and from sort of an operations perspective, it just makes a lot of sense. It fits the local demographic here, and Mike knows that better than anyone, and I think his vision is set on making sure that it is a recreational destination as you coined it, which I really liked. Just coming here for board meetings and seeing families coming, to your point, get off work. A small family goes and grabs a boat. It's already there, food, beverage sitting there. They just grab the keys and head out. I mean, that's a pretty great service to provide, and I think it makes a lot of sense and somewhat price and elastic. We'll see. I mean, we're maybe going into some tough times. We'll see how the community responds, but I feel pretty good about where we are. Well, listen, I really appreciate you taking the time to sit down with us and walk us through your background, but also Coastal Marinas and your willingness to partner with Barings and be open- minded. We're excited about where this is headed. As I said, we hold this in a permanent capital vehicle, so we think that we can enjoy this ride for a much longer time and are excited about the partnership going forward.

Zayd Hammam: Well, thank you so much, Bryan. I think that we certainly appreciate your partnership. Can only imagine that we're going to be able to collaborate on a lot of different things in the coming years. So thank you very much.

Greg Campion: Thanks for listening to episode number seven of season eight of Streaming Income and the second installment of our new investing together series. If you'd like to stay up to date on our latest thoughts on asset classes ranging from high yield and private credit to real estate and emerging markets, make sure to follow us and leave a review on your favorite podcast platform. We're on Apple Podcasts, Spotify, YouTube, and more. We publish a new episode every other week. And if you have specific feedback, you can email us at podcast @ barings. com. That's podcast at B- A- R- I- N- G- S. com. Thanks again for listening and see you next time.