As we close out the first quarter and tally up the numbers for May, the industry seems to move forward with a healthy stride. To learn more on what drove this past quarter to be a success and what we can expect for the remainder of 2018, Erin Kerrigan, Managing Director for Kerrigan Advisor joins Bridget Fitzpatrick and CBT News to talk details.
Bridget Fitzpatrick: Tell us how the Kerrigan Index fared for the month of May.
The Kerrigan Index did very well in the month of May. It outperformed the S&P 500. It was up 6% for the month, whereas the S&P was only up 2% in the month of May. We think that this great performance was really driven by a very healthy auto market. We had a SAR that was over 17 million. That’s a seventh consecutive month of a SAR over 17 million units.
Bridget Fitzpatrick: Talk to us about the buy/sell market in the first quarter of 2018.
The buy/sell market in the first quarter was also very strong. Actually, we just published our Blue Sky Report for the first quarter of 2018. You’ll see in that report that there were 39 transactions reported in the first quarter. That is down from the first quarter of 2017. However, if you look more closely, what you’ll see is that the size of those transactions is quite large relative to 2017. We had 14 multi-dealership transactions. That’s compared to 11 in 2017’s first quarter. The average transaction had well over two franchises, whereas in the first quarter of 2017, we only had about 1.4 franchises. The number of franchises that traded hands was about flat from the first quarter, meaning we had fewer transactions, but each transaction really did have more dealerships, more franchises. This is a trend we expect to continue throughout 2018. We are seeing larger groups and small groups going to market, realizing that maybe this is the best time to exit since they can sell multiple dealerships to a single buyer, usually a pretty sizable transaction.
Bridget Fitzpatrick: How do you characterize today’s buy/sell market?
Today’s buy/sell market is a pretty interesting one. What we’re seeing is that the dealer body is increasingly bifurcating into two camps, the buyer camp and the seller camp. There are very few dealers that we interact with that are just staying with status quo. I think this isn’t surprising given all of the news headlines about changes that may be coming to auto retail. It’s likely going to be less and less easy to be a single point dealer or to just have a handful of dealerships. What we find is that some are deciding, “We’re not interested in doubling down and doubling the size of our portfolio, so we’re going to exit our set of dealerships”, whereas others are very excited about the consolidation opportunity that exists in auto retail today.
Bridget Fitzpatrick: What are the trends that you’re seeing for 2018?
In this new environment where we’re seeing this bifurcation of sellers and buyers, what we see is the number of sellers is certainly increasing, but we also are finding the number of buyers is increasing. We have, as you’ll see in the report, a significant increase in the capital allocated by the public to US dealership acquisitions, not just from Lithia, who was the driving force of the public acquisition activity in 2017, but also you see Group 1, Asbury making acquisitions in the US this year. We expect that that will certainly be a trend for 2018.
We also see that private dealers are deciding that rather than use their own balance sheet exclusively to grow, they are tapping into a new equity source, private equity, family office, high net worth individuals, to support them in their growth efforts. Other people’s money, if you will, we think will be a big trend in 2018 and will certainly allow some of the private dealers to do transactions that are much larger than they would do just with the limitations of their own balance sheet.
Bridget Fitzpatrick: How do you expect blue sky multiples to change in 2018?
In this quarter’s report, we did not change any of the multiples. We did make some observations about some that may go up or down slightly, but in general, we expect multiples to be pretty darn steady throughout 2018. We see a market that’s at equilibrium. While there are more sellers coming to market, no doubt, we also again see more buyers, private equity investors, new entrants, international buyers, as seen with the AutoCanada transaction. We represented the seller in that transaction. We’re seeing all this new activity on the buy side that is resulting in an equilibrium even though we do have more sellers coming to market. We expect that’ll stay throughout ’18. It’s hard to say what happens in ’19, but I think we’re going to see some strong multiples throughout 2018.
Bridget Fitzpatrick: Are there any other trends that you’d like to touch upon today?
Yes, Bridget. There is one additional trend that we are seeing that we think is going to be something we all should keep a close eye on. That is the rising expense associated with real estate. Rent per new vehicle sold, according to NADA, has hit really high levels in the first quarter, over $900 per new vehicle sold. We haven’t seen that really since the recession. The challenge with rising rents is it adds expense of course to the dealership expense and also adds risk because rent is a fixed expense. It does not go up and down with the economic cycles. It’s particularly concerning as it relates to luxury franchises, which have a rent factor per new vehicle sold of over $1800.
What we’re seeing is that for a seller, their real estate is appraising at higher and higher values, which is terrific, but from a buyer’s standpoint, they start to get a bit concerned when they are looking at these large real estate values and often some sort of image upgrade. We think that the image programs that the OEMs are insisting upon with most franchises, it seems today, are going to becoming a more and more divisive issue in both buy/sells and just in the retail market in general.
Bridget Fitzpatrick: Erin, thanks so much for joining us and sharing with us the Kerrigan Market Update. We look forward to talking with you again next month.
Thank you again, Bridget. We really appreciate it. I hope everyone has a great month in June and lots of cars are sold.