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Coming Clean on the Car Wash Industry

(Adapted from an article by Marc Rapport published April 26, 2021, in Millionacres)

In the city where I live, it seems when a smallish piece of vacant land along main drags of commercial real estate gets developed these days, it will most likely be one of two things: self-storage or a car wash.

If you’ve noticed that in your neck of the woods, too, it’s probably not your imagination. We regularly chronicle the continued popularity of self-storage. Car washes are enjoying many of the same dynamics powering their growth.

Coming Clean in a Fragmented Business

From the direct-investment perspective, car washes share some characteristics with self-storage businesses: relatively low cost of entry and management expenses, for starters, and car washes take up even less ground space.

But while specialized REITs [real estate investment trusts] and large private equity companies play a major role in the storage space, they don’t in the car wash biz. According to the International Carwash Association (ICA), most car washes in the United States are owned and operated by small to medium-sized independent companies.

As for the car washes themselves, there are three main types: the conveyor style that pulls the car through, the in-bay types where you sit there while mechanical brushes do their magic, and the totally self-serve ones.

The ICA says companies of five or more locations own only about 15% of those conveyor locations, with the largest operator owning only about 2%.

“Fragmentation is even more significant in the self-service segment, while convenience and petroleum retailing organizations typically control larger networks of in-bay automatic locations,” the ICA says on its website.

Cars are Uber-Popular in America. So is Washing Them

In car-crazy America, car washes have been a growing business for decades. “In the United States, the percentage of drivers that report most frequently washing their vehicle at a professional car wash has increased from approximately 48% in 1994 to more than 77% in 2019,” the trade group says.

In early 2020, the trade group determined that there were 62,668 total locations in the United States, comprising 28,999 in-bay automatic operations, 17,487 conveyor operations, and 16,182 self-service operations.

The business also has proven to be profitable, by and large–with retail sales of about $15 billion a year, the ICA says–and apparently recession-proof, even as people stayed home during the pandemic. (Cars gathering dust and pollen in the driveway need to be cleaned, too.)

Exit Strategies Abound

One strategy is the fee-simple, triple net leases that have become increasingly standard for car washes, which “mean little risk for landlords and lots of benefits, including through their taxes,” the Commercial Observer says in an April 21 article titled, “Car Washes Shine as CRE Investment Coming Out of COVID.” Triple net leases, of course, are a popular feature for REITs, passing the responsibility for property taxes, building insurance, maintenance, and utilities on to the tenant. The Commercial Observer article says car wash leases also tend to be 15 to 20 years in length, with rent coverage ratios at least two times EBITDA [earnings before interest, taxes, depreciation, and amortization].

IPO

Taking a portfolio public is another exit strategy of the car wash industry. Note this 2021 article from PYMNTS.com titled, “Mister Car Wash Goes Public With $15-Per-Share IPO”: Mister Car Wash announced the pricing of its initial public offering (IPO) on Friday (June 25), with the nationwide chain of car washes offering 37.5 million shares of common stock at $15 per share.

According to a company news release, 31,250,000 of those shares are being offered by Mister Car Wash, while another 6,250,000 are being sold by selling stockholders. The shares began trading on Friday on the New York Stock

Exchange under the ticker symbol “MCW,” with the offering expected to close on June 29.

MarketWatch reported that the IPO values the company at $4.44 billion. Mister Car Wash raised $468.8 million through the sale of its 31.2 million shares, while selling shareholders raised another $93.8 million by selling their shares.

Underwriters have a 30-day option to purchase up to 5,625,000 additional shares of common stock from certain selling stockholders at the IPO price, minus underwriting discounts and commissioners. Bank of America Securities, Morgan Stanley, Goldman Sachs, and Jefferies LLC are servicing as joint lead book-running managers for the offering.

Mister Car Wash, which owns and operates more than 340 car washes across 21 states, filed to go public earlier this month. According to its SEC filing, the company washed 59.6 million cars between April 2020 and March 2021. The company also operates a monthly subscription program—the Unlimited Wash Club—which had 1.4 million members at the end of the first quarter of 2021. Those subscriptions made up 62 percent of total wash sales in the latest period and 68 percent of total wash volume.

“Getting your car washed is fun, and the sensory experience within our tunnels creates a magic, feel-good moment,” the company said in its filing. “We often refer to our stores as the stage and our tunnels the show, where all our people play a part in an interactive and dynamic experience.”

Portfolio Private Sale

Private equity firms are itching to get their hands on car wash portfolios. Due to the current fractured nature of the industry, they are unlikely to be able to find such a large portfolio purchase that fits their return criteria. Note this excerpt from Car Wash Advisory on this very subject…

Our most frequently conveyed point that is met with immediate disappointment over here at car wash advisory is with institutional, high net worth, and family offices, that contact us looking to deploy significant +$20MM sums immediately in the car wash space. While flattering for the industry, and inarguably long overdue in many ways, it is, unfortunately (to some), quite an unfulfillable ask. See, whereas car wash owners who do car washing correctly are making quite a living themselves, it’s a rarity that for expanded growth a capital partner needs to be brought on. Although far from never, and this most certainly does indeed happen in many circumstances, the car wash industry as a whole is simply too fragmented, too volatile in the way of long-standing operators, and quite frankly too profitable when done properly, in order to have an abundance of readily actionable and fairly priced institutional investor opportunities. That’s not to say there aren’t any, and we do have a handful of private and closed larger scale (+$20MM) buyout processes occurring but in summary–these opportunities are far less plentiful than one may think when initially looking into the car wash industry.

Another obvious attribute of the car wash business is that it’s immune to e-commerce. No one’s washing the family people-mover online. All these factors combine to make a successful car wash business what the Commercial Observer article calls “an unusually durable commercial real estate asset.”

The bottom line is the car wash industry is poised to be the next big player in the real estate investment world. As usual, we at PassiveInvesting.com are ahead of the game and have already begun to build our car wash portfolio. If you missed our last offering, be on the lookout for many more.