Ask Asset Management: Why Invest in Car Washes
We sat down with EquityMultiple’s Asset Management Team to discuss recent top exits, including several car wash investments. Read on to learn more about why we think these assets were particularly appealing, and how our investors have seen opportunities for success with this niche asset class to date.¹
Q: Can you tell us more about car wash real estate for those who may be unfamiliar?
Car washes are a niche asset class that has gained popularity over the last several years but was identified by our Real Estate Team as an attractive asset class in 2019. We recognized there was an opportunity for investors to capitalize on the industry’s growth and market dynamics.
To give more background, within the past fifteen years, established owners and operators have acquired smaller stand-alone car washes – a recurring theme of consolidation throughout the car wash industry. Specifically, national car wash brands such as International Car Wash Group (ICWG) have purchased lesser-known competitors. Several private equity firms have also entered the industry, amassing car wash assets with the ultimate goal of executing portfolio sales.
The car wash industry is also employing more technology for revenue and expense management due to 1) rising demand, and 2) a recent influx of institutional car wash investors.
That said, the most significant recent change in the industry has been the expansion of monthly subscription models offering unlimited car washes to build brand loyalty and incentivizing more frequent customer visits. Today, the most successful car wash operators set themselves apart by delivering a high-end customer service experience that offers value, speed, and convenience.
Q: That’s interesting. Can you expand on how car washes specifically compare to other commercial retail verticals?
Sure. There are several characteristics that distinguish the car wash industry from other commercial retail verticals:
- Rising Demand – As discussed above, several industry trends and macroeconomic factors are currently driving increased demand for car washes.
- Low Construction Costs and Short Construction Timeline – The physical car wash structure and canopy are relatively inexpensive to build due to the industrial nature of the construction as well as the size (typically less than 5,000 square feet). In addition, the average time to construct a new car wash property is typically between five and ten months.
These factors translate to a few tangible benefits:
- Recurring Revenue – Operators who utilize subscription or membership-based programs are able to more accurately predict monthly revenue. Establishing partnerships with vehicle rental service companies or other similar businesses can create consistent revenue streams.
- High-Profit Margin – A significant portion of the operating costs of a car wash occurs as one-time fixed payments for equipment. Accordingly, ongoing operating costs are low and car washes generally experience 30-35% average operating expense ratios.
- Depreciation Expense – Nationally, car wash equipment comprises 20-30% of the total construction cost. Due to the rapid tax depreciation of this equipment, car wash owners also may participate in meaningful tax benefits.
The end result is an asset class that consistently demonstrates high cash yields and long-term stability when operated by experienced management. For more information about car wash real estate investing, please see this article.
Q: EquityMultiple exited from a few car wash investments not too long ago. Can you give us a brief overview of those assets?
EquityMultiple first offered investors a preferred equity interest in the ground-up development of an express exterior car wash in Pace, Florida.
It’s worth noting the strongest revenue increases in the industry have come from the express exterior car wash model in which the customer remains in the car during the conveyor operation. Furthermore, express exterior car washes typically have lower payroll costs than full-service car washes (professionals service your vehicle from start to finish). Note: this is tailor made for present circumstances: the pandemic puts “touchless” services at a premium, and because the market for unskilled labor is extremely tight, this mitigates risk for the operator.
Given high demand for this niche asset type, we later offered subsequent investments with this same Sponsor in other locations across Florida, Alabama, and Georgia.
Q: How would you describe the sponsor’s initial business plans?
The Sponsor acquired properties in locations with strong submarket demographics and partnered with a seasoned regional car wash operator. Their plan was to then develop exterior car washes (approximate 3,500-square ft), with all requisite equipment and administrative offices. Upon completion, the Operator would then work with the Sponsor to stabilize operations. Their intent was to exit through a sale or refinancing of the properties within three or four years.
Q: What were the projects’ timelines for completion?
In most cases, the target hold was 36 to 39 months. Construction was generally expected to be completed over a six to nine-month period.
For example, the Sponsor recently acquired a site in Tampa Bay, FL. Construction was expected to begin in Q1 2020. Their target was to complete construction and open the car wash in Q4.
The expected timeline for their project in Foley, Alabama was similar, with construction starting in Q2 2020, then completion and opening slated for Q2 2021.
Q: How often did you keep in contact with the sponsor?
During the construction phase, EquityMultiple’s Asset Managers kept in touch with the Sponsor and General Contractor on a weekly basis to monitor progress, handle change orders, and manage contingencies. Pay applications were provided monthly, which EquityMultiple thoroughly reviewed to ensure costs were in line with budget. During the first few months of operations, EquityMultiple maintained the same cadence of contact. As operations stabilized, reporting moved to monthly and quarterly cadences.
Q: Were there any particular challenges that came up between when the investments were posted, and when they exited?
There will always be some challenges that come up, although many of them can be anticipated from the outset. Here are a few of the most common for this type of investment:
- Pre-development: Acquisition can be particularly challenging as this asset requires specific zoning. In-fill locations and development sites that exist within a mostly built out market or urban areas, can pose challenges for permitting, which can be a lengthy process and plans may be challenged by neighbors.
- Development: Demolition, grading, sub-grading, installation of utilities, sewage, and water detention projects can be lengthy and may be delayed by inclimate weather. Having reliable, committed, and communicative contractors is essential to getting through these critical points in construction to manage delays and find ways to catch up.
- Operations: While it may require less active work to operate a successful car wash business than other types of real estate assets, absentee operators can make their sites vulnerable to vandalism/theft, poor maintenance standards, and unsatisfied customers. One of the most important aspects of operations is also marketing and visibility. The more visible and accessible a car wash, the higher its revenue potential. Operators who are proactive and involved in their respective communities generally find the most success.
Q: What was the end result? Are you able to provide any return metrics?
All offerings from this Sponsor exited with strong return metrics, illustrating the compelling nature of their initial investment theses. The equity multiple ranged from 2.0-3.0x, and IRRs ranged from 50.9% on the low end, to 208.8% on the high end*.
Q: Is there anything else you would like readers to know about niche assets more generally?
EquityMultiple is proud to source a broad range of investment opportunities across asset types and risk/return profiles. We recognize that diversifying across strategies can help investors build a stronger portfolio, particularly in times of economic uncertainty. That said, we encourage investors to consider their individual preferences and objectives.
If you are curious about the details of a particular offering, please feel free to contact Investor Relations.
Have a question for the EquityMultiple Team? Leave a comment or send us a note at firstname.lastname@example.org. We’d be happy to discuss car wash real estate, or any other investment opportunities on the EquityMultiple platform.
This document is for informational purposes only and is not an offer or solicitation to purchase or sell securities. Investing involves risks, including the potential for principal loss. There is no guarantee that the strategies and services will be successful or outperform other strategies and services. Certain assumptions may have been made in connection with the analysis presented herein, and changes to the assumptions may have a material impact on the analysis or results.
¹Past performance is no guarantee of future results. The investments discussed herein may be unsuitable for investors depending on their specific investment objectives and financial position. Investors should independently evaluate each investment discussed in the context of their own objectives, risk profile and circumstances.
All opinions expressed herein constitute the author’s judgement as of the date of this article and are subject to change without notice. Statements made are not facts, including statements regarding trends, market conditions and the experience or expertise of author are based on current expectations, estimates, opinions and/or beliefs. Such statements are not facts and involve known and unknown risks, uncertainties and other factors. Past events and trends do not predict or guarantee or indicate future events or results.
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