For McLarty Auto Group, The Sale-Leaseback Option Unlocks Capital

When you have a company the size and scope of RML Automotive, you’re looking for advantages to improve profits in a sizable manner, not incrementally.

Little Rock-based RLJ McLarty Landers Automotive Holdings (RML) has 35 automotive franchises and three Harley-Davidson motorcycle dealerships across eight states. RML is the largest African-American owned automotive franchise in the U.S. and ranks 19th on Automotive News annual list of “Top 125 Dealerships.”

With all of those engines, RML President and CEO Franklin McLarty was looking for a way to harness that horsepower in a more meaningful way.

His solution?

Sell the real estate of the properties RML controlled, lease the property back from a landlord only interested in the real estate business, and use the freed-up savings – and attention – to invest in operations and expansion.

“We saw the opportunity to take the equity out of the real estate and redeploy it in other ways through acquisition and growth,” says McLarty, whose background and connections in commercial real estate brought the idea to fruition.

A sale-leaseback involves an investor purchasing a property, which is currently owned and occupied by a user. The two parties agree to become landlord and tenant. The landlord only has to worry about the real estate itself, while the tenant can focus on the operations of the business.

In RML’s case, it partnered with a heavy hitter in the real estate management world, W.P. Carey, a publicly-traded real estate investment trust (REIT) that manages an investment portfolio of nearly $16 billion worldwide.

W.P. Carey focuses on the real estate management and derives its profits from those operations. RML manages its dealership operations and spends little time worrying about land maintenance, property repairs, and land use issues.

“It didn’t really make sense for us to try to be real estate managers,” McLarty says. “We have too much activity in the operations side of the business.. . A sale-leaseback typically allows operating companies to unlock the value of their real estate to allow that capital to be put to some other preferred use.”

In a role-reversal, the McLartys experimented with the idea a few years ago when publicly-traded Asbury Automotive Group bought the family’s North Point auto dealerships in central Arkansas. Asbury continued to be a tenant and the McLartys managed the properties.

With their current properties, they’ve flipped that equation. RML owned the land on seven of its 35 dealerships and earlier this year – through a competitive bid process – selected W.P. Carey to manage the real estate on those properties.

It freed up “substantial” capital that led to RML being able to quickly move to acquire a new Toyota dealership in the Dallas metro area.

McLarty sees the opportunity to leverage future transactions to generate more growth.

“All they want to be is a landlord, and we’re just a tenant,” he said.