THE BLUE SKY REPORT A KERRIGAN QUARTERLY. Third Quarter 2018 December 2018

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1 THE BLUE SKY REPORT A KERRIGAN QUARTERLY Third Quarter 2018 December 2018 Contact Erin Kerrigan: (949) erin@kerriganadvisors.com Contact Ryan Kerrigan: (949) ryan@kerriganadvisors.com Fairchild, Suite 150 Irvine, CA (949) Securities offered through Bridge Capital Associates, Inc., Member FINRA, SIPC

2 Kerrigan Advisors Opens East Coast Office Kerrigan Advisors is pleased to announce the opening of our first East Coast office in the Washington, D.C. metro. The addition of this office will allow our firm to better serve our clients nationwide. Washington D.C. Irvine Gabe Robleto Joins Kerrigan Advisors as Vice President Gabe Robleto joined Kerrigan Advisors in October 2018, heading the newly opened East Coast office. Prior to Kerrigan Advisors, Gabe served as Vice President of Acquisitions at Capital Automotive Real Estate Services, Inc., where he oversaw a portfolio of over $1 billion of auto dealership real estate. Gabe Robleto Vice President, Buy/Sell Advisory gabe@kerriganadvisors.com d. (703) Westwood Center Drive, Ste 110 Tysons Corner, VA (949)

3 THE BLUE SKY REPORT 3 DEALERSHIP ACQUISITION ACTIVITY 2018 will be the fifth consecutive year of over 200 buy/sells. Through the third quarter, buy/sell transactions increased 20% over 2017, making this one of the most active buy/sell markets on record. Chart I Number of Auto Retail Transactions Completed 2014 First 9 Months 2018 Source: The Banks Report and Kerrigan Advisors Analysis Note: Each transaction may include multiple franchises and dealerships. A transaction is defined as a single seller and single buyer Through the third quarter of 2018, dealership buy/ sell activity remains robust with 179 total transactions. Kerrigan Advisors expects 2018 to be the 5th consecutive year of over 200 buy/sells First 9 Months 2017 First 9 Months 2018 I will say this in regards to the market: it s extremely active. Bryan DeBoer, President & CEO Lithia Motors Third Quarter 2018 Earnings Call Underlying today s robust buy/sell market is the growing US economy. GDP increased 3.5% in the third quarter and wages rose 2.9%, the highest level since With the unemployment rate at 3.7% (the lowest level since 1969), consumer confidence hit an 18-year high in October. The strength of the US economy is sustaining auto retail s high sales levels, despite rising interest rates and tariff concerns. According to NADA, the average dealership has achieved record sales over the last twelve months (see Chart II on the following page).

4 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $ THE BLUE SKY REPORT 4 Chart II Average Dealership Revenue LTM, $ in Millions Average dealership revenue has increased 24% since 2013, driven by growth in fixed operations and new and used vehicle sales. $49.28 $52.95 $56.72 $59.59 $59.67 $ LTM Robust new industry sales, a slight decline in incentive spending and growing transaction prices are all indicators pointing to a resilient industry. Oliver Strauss, Chief Economist ALG - A TrueCar Company Press Release on October 2, 2018 Today s dealership business model is also benefiting from growth in higher margin business segments, namely fixed operations, which grew 3.1% year-over-year, and F&I (finance and insurance), which increased 2.1% per vehicle as compared to 2017 (see Charts III and IV on the following page). This growth is sustaining today s high levels of dealership profitability, even in the face of declining new and used vehicle gross profits. Though the average dealership s earnings declined 3.3% (year-over-year), earnings remain at a historically high level of $1.4 million per dealership through the third quarter of 2018.

5 THE BLUE SKY REPORT 5 Chart III Average Dealership Gross Profit by Department as a Percentage of Total Gross Profit LTM As new and used vehicle margins continue to decline, dealers have shifted their focus to higher margin areas of the business. Fixed operations and F&I now make up a combined 74.6% of average 60.0% dealership gross profit. 50.0% 44.8% 49.6% 40.0% 30.0% 20.0% 10.0% 20.2% 17.1% 17.8% 25.0% 14.6% 10.8% 0.0% LTM New (excl. F&I) Used (excl. F&I) F&I Fixed Operations Chart IV Average Dealership F&I per New Vehicle Retailed (PNVR) LTM Average F&I PNVR has increased $363 since 2010, reflecting a 49% increase. $742 $847 $905 $934 $984 $1,009 $1,042 $1,082 $1, LTM

6 THE BLUE SKY REPORT 6 We will continue to focus on the aspects of the business that we can control, specifically parts, service, used cars, F&I and overall expense management. David Hult, President & CEO Asbury Automotive Group Third Quarter 2018 Earnings Call As a result, buyer interest in auto retail remains high, buoyed by supportive capital markets which are attracted to the sustainability and resilience of the dealership business model. Both debt and equity investors are financing auto retail consolidation, a trend highlighted herein. These investors believe in the business case for consolidation and the benefits that will accrue to the largest industry players, particularly as technology becomes an increasingly critical part of retailing and scale improves profitability. I think the dealership is as relevant as ever over the next decade with high value add for consumers and for the manufacturer. And retailers have proven to be very adaptable and resilient and willing to embrace the changes. If I look at it, though, having scale and brand is a tremendous advantage more so today than ever. Mike Jackson, Chief Executive Officer AutoNation Third Quarter 2018 Earnings Call Buyers are also keenly aware of the rising pace of industry consolidation (see Chart V below) due to the increasing number of sellers coming to market, particularly dealership groups with less than three dealerships (see Chart VI on the following page). While the number of smaller groups shrinks, the number of larger dealership groups (greater than nine dealerships) has grown 50% since Kerrigan Advisors expects this trend to continue over the next decade, as the big get bigger and the small find the industry more difficult to navigate. Chart V Total Number of Dealership Owners in the US ,443 Since 2012, the number of dealers has declined by 780 or nearly 10%. Kerrigan Advisors expects the contraction in the dealer body to increase over the next decade. 8,201 8,022 7,861 7,715 7,751 7,

7 THE BLUE SKY REPORT 7 Chart VI Change in the Number of Auto Dealership Groups by Size 2012 vs % 50.3% The largest dealership groups (9+ dealerships) are growing at a rate five times faster than smaller groups (4-8 dealerships), while the number of groups with less than three dealerships has declined 12% since % Number of Dealerships Owned In terms of industry valuations, transaction pricing in the third quarter when including real estate remained at record levels, though average blue sky is down an estimated 10.3% from its 2015 peak (see Chart VII below). Considering rising interest rates and the changes coming to auto retail, Kerrigan Advisors finds sellers are more motivated today. They are also concerned current valuations may not be achievable again in the future. Many of these sellers are willing to accept creative transactions to reach their valuation goals, a trend discussed further in this report. Chart VII Average Dealership Blue Sky and Real Estate Values 2015 Q and Kerrigan Advisors Analysis $16.4 $16.9 $17.0 $17.3 $6.6 $6.3 $6.1 $6.8 $9.6 $10.3 $10.7 $11.2 Average dealership transaction values continue to rise, driven by increases in real estate values. Average blue sky value decreased by an estimated $200K during the first 9 months of 2018, while average dealership real estate values increased by an estimated $500K Q Real Estate Value Blue Sky Value

8 THE BLUE SKY REPORT 8 Interestingly, the increase in sellers coming to market has not yet tipped the scales in the buyers favor. Rather, the buy/sell market remains competitive, particularly for top franchises and attractive platforms. The growing population of buyers, especially those with financial partners, is matching the rising volume of sellers, creating a very healthy and robust buy/sell market. Today, buyers and sellers are agreeing on price and a large number of transactions are getting done. With this backdrop, Kerrigan Advisors sees the following trends shaping the buy/sell market for the remainder of 2018 and into Ø Generational transfers increase the number of sellers coming to market Ø A growing pool of financial investors support consolidation and growth Ø To reach pricing expectations, sellers accept structured transactions The Blue Sky Report is informed by Kerrigan Advisors experience representing our sell-side clients in today s active buy/sell market. Kerrigan Advisors is the most active, licensed sell-side advisor to auto dealers in the industry. In the past four years, our firm has advised on the sale of 76 dealerships, including five of the Top 100 Dealership Groups, representing over $2 billion of blue sky and real estate proceeds. Kerrigan Advisors works exclusively for higher value dealerships and dealership groups. We have had the pleasure of advising auto retail s leading families in determining the right time to sell and the most appropriate buyer for their dealerships. We do not take listings or maintain inventory, rather we develop a customized, professional sales approach for each client to maximize proceeds and achieve their transaction goals. Our team oversees and manages our clients sale process from beginning through a successful closing. In our view, dealerships are far too valuable to be sold any other way. We hope you find the information presented in this quarter s report helpful to your business. We look forward to answering any questions you may have regarding The Blue Sky Report, The Kerrigan Index or Kerrigan Advisors sell-side, capital-raising and consulting services.

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