Q&A with Carl Chrappa

The Alta Group’s Asset Management Practice Leader in the U.S.

This Q&A interview was conducted soon after the Equipment Leasing and Finance Association (ELFA) published the annual What’s Hot, What’s Not survey and following the ELFA’s 2018 Equipment Management Conference.

We asked Carl Chrappa, the leader of Alta’s Asset Management Practice in the U.S., what the survey findings mean for future business and also what he heard at the conference.

The annual What’s Hot, What’s Not report produced by ELFA and The Alta Group’s Asset Management Practice is available at the ELFA website at www.elfaonline.org/data/market-trends.

Q-What equipment types are likely to be hot in 2018 based on your research?

A- Construction, machine tools, trucks and trailers, containers, chassis and plastic rank higher in the future opportunities chart.  Telecom and printing were at the bottom on this chart.

High tech sales may be lower, but it continues to be a good equipment class for lessors who can manage high volume, low margin markets because it is such a large asset category with a high “stick” rate.

The automobile sector will cool a little. It is sensitive to credit and/or interest rates and it’s a driver for machine tools and plastics equipment commonly used in automobile manufacturing.

Q-What types of assets are maintaining strong residual values?

A-The construction category was the big winner for both residuals and business volume. The financing industry seems to be very comfortable with this segment because there is broad demand domestically and abroad as well as more basic designs. Federal legislation to boost infrastructure spending, if passed, could help ignite this asset class, and according to the government some 20 percent of the 313,000 new jobs created in February in America were in construction; that is very significant.

Q-What is the forecast for the trucks/trailers segment that tied for second in your listing of strong asset categories?

A-We’re viewing the trucks and trailer segment as a large market segment like construction. There is a lot information available on these assets, making it easier to value and set reasonable residuals. In the trailer market sales increased by 35 percent in 2017 to over 300,000 and in February 2018 sales continued strong at an annualized rate of more than 400,000.  New Class 8 truck sales fell slightly in 2017, but are currently booming, and seem to be only limited by the driver shortage.

Q-It seems the medical equipment segment is lower than in recent years. Can you comment on what is causing this?

A-All the changing federal and state medical insurance rules are having an effect. But in spite of this, medical equipment is often leased.

Q-Can you comment on the greater volatility this year in equipment class preferences?

In 2017 there were several large bankruptcies — the biggest one in the marine segment. This caused lessors to devalue the entire segment, which fell by 11 in the survey, though was previously highly rated.

The offshore segment is not doing well, but tank barges and open tops are picking up nicely.  Modern push boats which meet new standards are doing well, but this is not the case for older ones. The off-shore supply vessel market is very challenging.

Q-Your survey notes prices for used equipment fell in 2017 and you cite the influencing factors as: supply and demand, economy, over regulation, global trade, rise in interest rates and effect of quantitative tightening.

A-Used equipment prices slipped a little last year, but already prices are up in 2018 for most sectors. It was not a significant drop, but keep an eye on this throughout the year.  Hopefully people learned from the great recession. If you set a conservative residual value you won’t be taking major write-downs.

When the recession hit there was mayhem in a lot of markets and one of the problems was that residual values were set too high, especially for some vendor finance companies that had RVs in excess of fair market values.

Q-One of your bonus questions asked what respondents thought the GDP would be this year.  The consensus was 2.8 percent, do you agree? 

A-I think it is in the ballpark. Our estimate, published in our “Global Economic Outlook” in December was 2.6 percent.

Q-What do you think most people want to learn from this annual survey? 

A-I’d recommend that they look at Table 1 at the preference differences by equipment class, and anything with a number of 6 or higher are major moves. For example, the preference for that marine category dropped by 11 points year-over-year, while oil, gas and energy increased by 9. U.S. oil production recently reached 10.3 million bpd, the highest level since 1970. This has spurred demand for sand hopper rail cars which had been out of vogue for a few prior years, and now they are hard to find.

Containers and chassis preference rose 8 points because global trade increased, and it is expected to do so again this year. I’d also point readers to Chart 3 to look at the changes in residual positions by categories. On the residual part of the survey in chart 3 only five equipment types had net lessor increases, while 10 were lowered; (seven in a major way) minus 20 or greater. Printing had the worse residual score here for the past three years. 

Q-What was the sentiment at this year’s ELFA Equipment Management Conference? Are equipment managers optimistic? What do they think are the biggest threats to the industry this year?

A-People are generally optimistic. They approve from a business standpoint what the new U.S. administration is doing and I think they were pleased to hear in Shawn Halladay’s session that equipment leasing should generally do well under the new U.S. tax law.