2023 State of The Union — Real Estate Blue Sky
First and foremost, I would like to acknowledge and thank all our Dealer Partners for what was a remarkable 2022. Legacy Automotive Capital (Legacy) successfully launched its latest real estate fund in May with a speciﬁc charter of buying the real estate associated with New Car franchised dealerships. Over the past seven (7) months we’ve had the opportunity and privilege to work with some of the most progressive Dealer groups in the country, maximizing the value of their real estate and through our unique perspective as Dealer Principals and Auto industry veterans, providing capital optionality that previously didn’t exist in the Buy/Sell space…for Dealers, by Dealers.
A Pillar of our investment philosophy is the entrepreneurship, tenacity and resilience of the Dealer body which fuels our business and will continue to drive growth for Legacy and its customers in 2023 and beyond. While the industry continues to evolve and electrify, we are undoubtably “long” on the necessity of the franchise new car Dealership model and believe in the long-term strength of the franchise system despite what Wall Street might have the broader public believe.
New Car franchised Dealers are the ﬁnal and most crucial connection point to communities, families and most speciﬁcally the drivers that they serve. Dealerships are critical outposts where customers are afforded a massive convenience along their way to purchasing, taking delivery, securing ﬁnancing and servicing their vehicles. The importance of last mile logistics, point of purchase and, perhaps, most signiﬁcantly, the service center go-between for Customers and the Factory cannot be understated and should never be devalued.
Where else can you ﬁnd a Car Wash, a Bank, an Internet Cafe, a Showroom, a State-of-the-Art Service Center and an Insurance Agency under one roof? The answer is most likely on the major thoroughfare in your hometown, at a four-way lighted intersection with ample parking and friendly faces waiting to help at all hours of the day, six or seven days a week.
This is what New Car dealers have “built” and what we at Legacy believe they should be properly compensated for. So how does Legacy impact this ecosystem? We’re all familiar with the concept of “Blue Sky”. Dealers and advisors trade in this currency every day and its importance has never been greater than over the last few years as both proﬁts and valuation multiples of earnings have grown. However, in most Buy/Sells there is little focus placed on what we call the REAL ESTATE BLUE SKY. This is where Legacy comes in.
From Legacy’s point of view, a generic appraisal in no way accurately identiﬁes the true value of the unique real estate that underlies a franchised New Car dealership. However, until now, Dealers have accepted appraised value as fair market value and have ignored the REAL ESTATE BLUE SKY that they have created, in most cases, over many years of ownership and adherence to Brand standards and Image Compliance. New Car dealership real estate is unique and should be treated as such.
To existing Dealers through sale-leaseback, or prospective Dealers via Buy-Sell acquisition ﬁnancing, Legacy’s program offers the opportunity to extract the maximum value of their real estate regardless of what the appraised value may be. We are more interested in you as an Operator; your sales effectiveness, ﬁxed coverage ratio, UIO and operational efﬁciency than we are in what the vacant building down the street sold for three years ago.
The New Car business has never been healthier and therefore the tenancy that dealers offer has never been more attractive to us. This fact is ignored during the discussion of a Buy/Sell and, on average, dealership real estate assets trade at a 20-40% discount to Legacy’s self-determined ‘fair market value’. This equates to an average of $2 – $5 Million Dollars of additional funds to the Dealer per rooftop!
Legacy believes that New Car dealerships have long been fundamentally strong real estate assets hiding in plain sight with super ‘sticky’ tenancy. In a Buy/Sell, these assets have always traded as part of a “package deal” at a valuation based solely on appraised value thereby leaving 20-40% of the real estate asset’s true value on the table. The sum of the parts is greater than the whole! This 20-40% margin provides tremendous ﬂexibility in the capital stack, and can, in many cases, represent the equity needed in the entirety of a Buy/Sell.
Legacy enters 2023 with ~$1.5 Billion Dollars to deploy into the New Car dealership marketplace. The market has already shown signs of correction and new market fundamentals will underline the importance of extracting maximum value from all aspects of the business… especially Real Estate.
Legacy is a Real Estate company founded by Dealers that at its core believes in the franchised New Car Dealership system. Our goal in 2023 and beyond is to support the Dealer Network as a ﬁnancial catalyst for growth and an option for all Dealers to identify and experience the true value of the REAL ESTATE BLUE SKY they have created in their businesses.
Happy Holidays from Legacy Automotive Capital!