Decoding the Market: Equipment Lease Considerations

As any lease finance professional will attest, there are numerous factors to consider when establishing lease terms, rates, and residual values for potential customers.  Many of these factors are specific to the customer and their business, whereas some factors pertain directly to the equipment under consideration.  Although not all-encompassing, there are four key elements to evaluate as it relates to the equipment itself:

  • Product characteristics
  • Asset characteristics
  • Market liquidity
  • Economic cycles

Asset managers often struggle to find ways to solve for these efficiently.  A clear understanding and a full view of information is a critical component of risk assessment and sound decision making.

In this update, Rouse addresses these needs with a self-service solution for the lease finance community.

Product Characteristics

As obvious as it may seem, a clear understanding of key product characteristics will go a long way in establishing a view on residual risk.  Lessors should be sure to evaluate the manufacturer, the specific model, the year of manufacture (model year), and the geography of lease.  Each one of these will serve as the foundation to the underlying value of the asset in question.

For example, a good understanding of the brand recognition of the manufacturer can drive the acceptance of their products in the market and, in turn, the marketability and recoverability of the asset at end of lease term.  Likewise, the model range (product class) will provide an indication for the popularity of the specific product versus any edge case / specialty nature to the product.

Asset Characteristics

As one might expect, not all models are created equal.  Within any product line, models can be configured quite differently.  Highly configured assets can drive material differences in value versus those with only the “base” options.

Allowable usage (meter reading) during the lease term is another critical factor that effects residual value.  Similarly, lessors should assess the application for which the equipment will be used and their experience with the particular customer in order to determine the condition of the asset they might receive at the end of the lease.  Heavily used and worn assets (cosmetically and mechanically) will oftentimes yield a meaningfully lower value at resale.

A good understanding of asset characteristics can minimize any unwelcome surprises during the asset recovery stages of the lease life.

Liquidity

At the end of the lease term the asset must be remarketed if not purchased by the customer.  The channel of sale can yield differing sales results:  how regularly does the product trade in the open market across retail and auction channels? It is critical to have a solid view of total market liquidity across all key channels of sale in order to develop an appropriate risk assessment and residual value.

Economic Cycles

Perhaps the most elusive characteristic for most lessors is a good handle on economic cycles and peak-to-trough movements in equipment values.  Knowing current economic conditions will be helpful but limiting in terms of establishing a view on residual values several years into the future as markets move.

However, visibility into peak conditions as well as recessionary conditions – in comparison to the current environment – can help lessors develop a clear view on where to peg residual values for new leases.

 

Only Rouse’s Residual Value toolkit unlocks the potential to holistically study the market from these critical angles.  Bringing reliable information together in one place empowers lessors to efficiently make accurate and educated decisions on residuals.

Contact Rouse today to learn more: residuals@rouseservices.com

Know the Value: Taking the Guesswork out of Residuals

After years of service in providing current equipment valuations in the form of appraisals in support of lending facilities and remarketing support for rental companies, contractors, and dealers, Rouse is pleased to announce the latest offering to stakeholders: Rouse Residual Values.

By leveraging its vast pool of equipment fleet and sales transactions, Rouse delivers estimated residual values via a customer-facing self-service portal across a wide range of equipment including aerial work platforms, telehandlers, heavy earthmoving, cranes, trucks, and trailers.

Rouse collects over $14 billion in new and used equipment sales transactions annually and, by leaning on historical sales observations, generates estimated residual values for equipment up to eight (8) years into the future.

The tool set is ideal for lease finance institutions who are looking for a single source that arms them with all the information they need to make intelligent underwriting decisions.  Likewise, for equipment owners, this tool serves as a reliable source of market intelligence for assessing fleet management decisions.

Rouse provides its users with access to asset-specific values that consider the key factors to valuation, including:

  • Product type characteristics
    • Manufacturer,
    • Specific models, and
    • Year of manufacture (age)
  • Asset-specific characteristics
    • Meter/Usage (current and future estimated)
    • Configuration, and
    • Geography (region specific within the US and Canada)

This, combined with the ability to stress-test the residual values according to varying economic conditions, provides the best source of information for those looking structuring lease deals or to those looking to make fleet management decisions.

Lease finance institutions can use the current values provided in the tool to evaluate existing leases both as a matter of periodic portfolio monitoring exercises and to determine appropriate pricing to facilitate remarketing as leases come due.

Additionally, Rouse aggregates publicly available sales transactions and provides them in one centralized location within the portal.  This arms users with a streamlined source for analyzing market data.

Rouse will be presenting this unique offering during ELFA’s annual equipment management conference in Orlando, FL from February 24th – February 25th, at exhibit booth #35.  For further information please contact info@rouseservices.com

Transaction Trends

The strong economy of recent years has brought increased growth to the equipment rental industry. Increased preference for rental over ownership (i.e., higher degree of rental penetration) has contributed to this growth. The industry has also experienced a high degree of acquisitive growth via consolidation of local, regional, and national companies.

Like many other highly fragmented industries, the equipment rental industry has been primed for consolidations.  Since United Rentals acquired RSC in 2011, the industry has witnessed a significant amount of consolidation in both landmark deals and smaller bolt-on acquisitions.

Let’s take a closer look at the transaction environment since 2011, highlighting the transaction multiples observed across the various industry verticals.  Rouse has evaluated more than 120 transactions between equipment rental companies from 2011 to 2019 to showcase their patterns and outcomes.

The common metric for deals in the sector is purchase price as a multiple of trailing 12 months’ EBITDA, or the EV/EBITDA multiple.

Across the industry, the average transaction multiple in the North American market (US and Canada) is 7.1x, with nearly 70% of deals trading at multiples between 5.0x and 8.0x.  Within the European market (including the UK) the average is a little bit lower, at 6.4x, with the majority of deals trading at multiples between 4.5x and 7.5x.

Rouse sees companies that operate in a specialty vertical (traffic solutions, tanks/pumps, etc.) trading at higher multiples, in some cases reaching as high as 9.0x.

Many transactions take place outside the ranges stated above.  Rouse has observed that transaction multiples can vary for a number of reasons, including strategic value, target profitability, and expected synergies via acquisition, as well as situational characteristics such as bankruptcies and market cycles.

No matter the circumstances of a sale, stakeholders across the industry should have a good understanding of the observed transaction multiples.  This becomes important for business owners (buyers and sellers), asset-backed lenders, private equity owners, and corporate finance advisors.

For more information about transaction trends, please contact Raffi Aharonian at Rouse Services (Raffi.Aharonian@rouseservices.com).

Acquisition Accounting and Fair Value

Like many other highly-fragmented industries, the equipment rental industry continues to experience frequent consolidations.  Although consolidation presents many opportunities for acquirers and sellers, there are challenges that naturally arise as a by-product of these transactions.

One such challenge is undertaking the accounting end of the acquisition, most notably adherence to the guidance offered by the financial accounting standards – in this case, FAS 157 and ASC 820.  The acquiring companies need to assign an appropriate “fair value” (not to be confused with the similar-sounding “fair market value”) as they bring those assets onto their balance sheets.  But it’s not so easy – accounting standards can often be confusing, oftentimes leading financial teams to consume time and resources only to find out that their application of the rules does not pass auditors’ requirements.

First, a little bit of background on the accounting principles:

Fair Value is measured and calculated in line with the financial reporting standards as established by the Financial Accounting Standards Board (FASB).  Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

In considering the fair value of the assets owned by the company, it is important to consider both the core valuation criteria as outlined by FAS 157 and FASB ASC 820 (amendments to FAS 157 issued by the ASC), including:

  • Measurement Date: this should coincide with the closing date of the transaction.
  • Market Participants: Fair Value should be considered from the perspective of the company and considers the price other similar equipment rental / dealer companies might pay for those same assets.
  • Orderly Transaction: Fair Value is derived assuming there is no undue pressure or inclination to sell the assets.

So how does one apply the accounting principles into practice?

Much like a traditional retailer who acquires inventory and applies a mark-up for resale, equipment rental companies purchase fleet assets (their equivalent of inventory) for purposes of renting that equipment to their customers.  As a result, it is not uncommon for rental companies to purchase assets at a wholesale price point (i.e., a discount to retail prices).

In turn, this phenomenon can make it challenging to arrive at a fair value measurement in the context of an acquisition of used fleet. It takes an experienced partner and a rich source of market observations to accurately assign fair value that will stand up to the accounting guidance and ultimately the auditors’ acceptance of a company’s financial reporting.

As a result of its extensive network of participants, Rouse receives over $1.5 billion in wholesale equipment sales transaction data annually and analyses these values (on a monthly basis) at a make / model / spec / year level to drive the Fair Value analyses needed by its clients.  Rouse’s rental and dealer clients provide Rouse with detailed transaction data on all the equipment they sell. This transaction data is routinely updated in Rouse’s database, providing a comparable-backed appraisal source for fair values.

Count on Rouse to deliver the most accurate fair value reports, supported by true market reference points and extensive experience.  Contact Rouse for a free consultation on your fair value needs.

Know the Value: Reconditioning Your Machines

For any equipment rental operator, there is the necessary struggle of managing asset life cycles in order to optimize the balance for customer satisfaction, reliability, and cost control.  This often comes hand in hand with a company’s asset replacement strategies – namely disposing older assets and replacing them with a fresh machine.

Over the course of the last 15 years, the notion of rehabbing assets has taken hold as a mechanism for extending rental useful life at a reasonable cost.  However, along the way, the idea of investing in your assets has taken many forms and with the use of a wide range of vocabulary: refurbishment, repair, remanufacture, recondition etc.  It can all become confusing when the terms may or may not have different meanings and when they are used interchangeably.  The range of outcomes can vary from fresh paint / tires to a complete overhaul of the machine inclusive of a new engine and extended warranty.  In this report, we will study the current accepted standards for reconditioning along with the added value these programs can bring to rental companies.

Firstly, what is it?

In the current state of the market, Rouse recognizes the term “reconditioning” as the generally accepted standard for overhauling a machine for extended life (sometimes termed “second life”).  Although reconditing is observed for a wide range of products, this practice tends to be most commonly seen in aerial work platforms, namely telescopic booms.  Rouse looks to the leading original equipment manufacturers (OEMs) of boom lifts as the benchmark for reconditioning work performed on these machines.  The scope of work that the OEMs undertake tend to be the richest scope and meet their respective standards.  This stands in contrast to work that might be performed at a third-party repair shop who may not otherwise undertake the full extent of the typical work order.  The typical work orders for an OEM may include:

  • Disassembly of the machine to its core
  • Replacement or rebuild of the major components
  • Boom inspections / repairs as needed
  • Fresh paint consistent with new manufacturing standards
  • New tires, new hoses
  • New or rebuilt engine
  • Full safety testing
  • New warranty

With all of that working having been performed, the next logical question is, how does this add value?

There are certainly some interest value propositions offered by the reconditioning programs.  For instance, a rental company can send their equipment for reconditioning (or buy already reconditioned units out of OEM stock) for a price point that can be significantly below the cost of acquiring a new machine.  In many cases, a reconditioned machine can be utilized for 3-5 years beyond its original recondition date without material repair or maintenance needs.  Because the OEMs offer warranties as long as 36 months, this gives rental companies comfort in knowing the product is fully covered and supported by the OEM.  In turn, this translates into an extended rental life where by the rental companies are earning rental revenue streams on the same asset.

Although there are many good reasons for investing in reconditioning programs, rental companies should be aware of the impact on secondary market values for their reconditioned equipment.  Over the course of several years, Rouse has had the opportunity to collect and evaluate a deep pool of data for reconditioned assets that have been put into rental fleets and subsequently sold into the secondary market.  This information comes to Rouse via its relationship with over 150 rental and OEM dealer customers, all of which provide Rouse with their detailed fleet data.  From this fleet data, Rouse has had the opportunity to identify reconditioned assets, validate the nature of the recondition work performed, and analyze the sales observations for purposes of assigning values to these machines.

What is observed is that the average premium that is earned by a reconditioned asset, in comparison to an equivalent make-model-year asset that has not been reconditioned, starts high but erodes fairly rapidly in the first three years.  After approximately four to five years into its “second life”, the market attributes little if any incremental value to reconditioned assets over their un-reconditioned counterparts.  In part, this is explained by the fact that market participants are unlikely to know if an asset was reconditioned to begin with, and in the cases where it is known, the assets may not look or operate materially differently from those that have not been reconditions.  The below chart is a pictorial representation of the average premiums observed from recondition date to the point where the premium erodes.