Issue link: http://read.dmtmag.com/i/280096
Industry Beat March 2014 | Construction Equipment Distribution | www.cedmag.com | 13 To help dealers plan a strategy to capitalize on the growing $24 billion rental market, GE Capital Equipment Finance brought together three rental industry experts to discuss the opportunities and threats surrounding a growing rental business in a webinar held on Jan. 29, 2014. Brian Battaglia, commercial leader of retail and wholesale programs at GE Capital Equipment Finance, led a panel that included consultant Frank Manfredi, president, Manfredi & Associates; Gary McArdle, executive vice presi- dent and COO, Rouse Services; and Garry Bartecki, AED's vice president of Finance. Reasons for Rental Growth and Impacts on Market In a rental market overview, Manfredi examined the reasons for U.S. rental market growth, and why it has become the "new normal" for contractors to choose rental over owner- ship. In addition to capital conservation, Manfredi said contractors are avoiding Tier-4 issues in choosing rental. Not only is Tier-4 equipment more expensive, but contractors are also protecting themselves from the risk that Tier-4 equipment won't hold its value on the used equipment market. Tax incentives no longer encourage equipment ownership. Manfredi also reported that rental is being used as a cost containment strategy among contractors who are now traveling longer distances to jobsites. Availability of even specialized equip- ment does not seem to be an issue for contractors, as the inventory of machines available for rent continues to grow. "There is almost always (rental) equipment available for almost any type of job," said Manfredi. Utilization, Rental Rates and Fleet Value Trends McArdle offered a perspective on the rental market based on historical and recent statistics gathered from the Rouse Database, which uses sales and rental transaction data from the nation's leading rental companies. "Utilization is running strong," he said. Physical utilization of the rental fleet aver- ages 69.6 percent across all product categories, while dollar utilization averages about 40 percent. There are seasonal dips in utilization due to cold weather, but in general, utiliza- tion has been growing. According to McArdle, there has been an increase in the average rental rate month on month and year on year since January 2011, but the pace of rental rate increases is beginning to slow. In 2013, the rates rose at an annual pace of about 4.5 percent. "As equipment costs go up, rental companies are going to try and drive rate increases," said McArdle. And despite significantly large fleet size, rental companies have been able to maintain a strong level of utilization. The appraised value of the rental fleet has continued to rise since it bottomed out during the recession The average retail value of the fleet has increased 23.9 percent since then, while auction values have increased 42 percent, near the prior peak in 2006. Fair market value is now 82.1 percent, while auction or forced liquidation value is 61.4 percent. Managing Rental Fleet Risk The financial implications of a growing rent-to-rent business was the topic of Bartecki's segment. He first explained the differences between rent-to-sell and rent-to-rent. "Rent-to- sell is a financial merchandising strategy focused on machine sales and building market share," he said. "Rent-to-rent is a solutions-based outsourcing business focused on lowering customer cost per hour while meeting a distributor's return on investment and return on asset targets." Bartecki offered dealers advice for managing the increased leverage and commitments that come with rental. "Balance sheet management is a must," he said. Calculating EBITDA monthly as well as on a trailing 12-month basis is necessary to see how cash flow to cover debt service is tracking. He also recommends using a depreciation rate that tracks orderly liquidation value. Educating bankers on the rent-to-rent market is also impor- tant. Bartecki advised dealers to equip bankers with Rouse reports and provide them with an annual appraisal for the rental fleet. "Rent-to-rent transactions need to be separated from rent-to-sell transactions," warned Bartecki. From a tax standpoint they are treated differently. It is also important for dealers to understand the significant impact rental rates have on cash flow. Dealers also need to be aware of tax issues affecting their rental business. Effective in 2014, a 3.8 percent tax on investment income takes effect, which can include rental tax profits if certain tests are not met. Bartecki also noted that moving forward aggressively into rental is likely to have a negative impact on a dealer's market share. "It is tough to purchase the same level of inventory as your rent-to-rent business grows," he said. (continued on next page) Opportunity? Sure, But Rental's Got Risks Dealers Must Control, Too GE Capital panel explains trends, explores how to seize opportunity without surrendering profitability. Frank Manfredi Gary McArdle Garry Bartecki