Equipment Management: Hard Assets Get a Hard Look

Equipment managers say shortages, surging prices and new uses are changing how they view certain assets.

Remember all those coal rail cars you heard were sitting dormant around the country? How about those off-lease delivery trucks with a healthy number of miles? Well, a lot of coal cars are now being converted to grain cars, and others have become steel scrap that sells for top dollar. And used trucks in decent condition? ELFA sources say they’re selling for about 30% more now than just six months ago.

Laura Grill, Vice President, Asset Management at Truist Equipment Finance Corporation, paints the big picture: “Because of ongoing supply-chain issues, orders for new equipment are so backlogged that some now extend into 2023. We are continuing to see market pricing dislocation and inflation. The availability of used equipment is low across virtually all markets. For example, used inventory for aircraft is at an all-time low, with 3.5% availability of aircraft in the secondary market. Currently, aircraft ask and sale prices are up 25% to 35% from a year ago.”

These trends are changing the way customers are dealing with their equipment, notes Grill. “Our customers’ end-of-term disposition decisions have shifted, and we’re seeing more month-to-month and firm term renewals as well as re-financings. With the liquidity in the market, we are also seeing more purchases than returns.”


Another big challenge? Manufacturers in the transportation industry are waiting for micro-chips, says Tom Monroe, Senior Vice President of Asset Management at ATEL Capital Group and Chair of ELFA’s Equipment Management Committee. “Because of the shortage, delays in delivery of new equipment are forcing many lessees to hold onto their fleet equipment longer.”

New Environment, New Behaviors

Equipment managers interviewed for this story say shortages caused by supply-chain disruptions are their top concern and main issue. They further say that for some equipment types, new uses are evolving and prompting reviews of values as well as prices. 


But not all of this is due to scarcity. Environmental concerns and technology also play a role. “A lot of companies are trying to lower their carbon footprint,” says Grill. “One transportation company decided to discontinue its LTL (Less Than Load) trucking business because of their new footprint goals and the continuing driver shortage. Other over-the-road transportation companies are starting to use marine because of its lower emissions. An increasing number of tugboats have been converted to use Liquified Natural Gas, and others are being considered for battery-powered cells. These are some of the factors changing the way equipment managers look at and value assets.” 

Accordingly, a session at the upcoming Equipment Management Conference & Exhibition will address this issue and how it’s playing out at equipment finance companies and with customers. The February 13-15 conference, to be held in Tucson, will also feature an off-site equipment tour and sessions on transportation, rail aircraft and planning a career in asset management, among others. Says Monroe, “Since last year’s conference was virtual, this year’s gathering will be a great opportunity for equipment managers to reacquaint themselves with what’s going in the market and to renew relationships. Many of us are really looking forward to it.”

Phil Houser, Director of Asset Management at CIT, which just merged with First Citizens Bank, will speak at the conference on material handling, and says he is seeing greater use of multi-purpose equipment. “The cost to make changes to highly engineered and customized equipment would be high,” he says. “But with increased use of assets built for multiple purposes, everybody wins: manufacturer, financer and user.”

Houser sees other trends that he calls “a pivoting” in customer equipment-acquisition strategies. “We find that customers and dealers are building their own used-equipment fleets,” he says. “We’re also seeing them pick up multiple units, new when available, or used if necessary, to meet current demand and to plan for future needs.” 

In addition, he says some customers want to negotiate higher annual hourly usage at the front end of their lease agreements. “They want to build it in at the onset to account for increased productivity and output. Often, they lease two units with the plan of putting lighter usage on each,” he says. 

Andrew Pace, COO at Asset Compliant Solutions, a commercial asset management company specializing in collections and repossessions, says the frenzy in used equipment is making clients eager to get their collateral back as soon as possible so they can sell it at current prices. “We have clients with older assets that have been missing in their portfolio,” he says. “Perhaps a year ago these items wouldn’t have been worth pursuing. But now that values have increased so much now, they’re asking us to find them. They know that as long as the integrity of equipment hasn’t been compromised, they’ll be able to get some money back after costs and try to recoup these assets.”


Amid all the activity, Doug Simon voices a concern. “Technology is moving so fast now, and some of the challenges we’ve had with the pandemic, such as labor issues and supply chain, have highlighted situations and events that will accelerate some technologies even further,” says the Administrative Vice President and Head of Equipment Management for M&T Bank Corporation. “To keep up with values, I think equipment managers need to be in front of all new technologies, from hybrid and electric vehicles to battery-testing programs in marine and rail, as well as advancements in robotics. I don’t see anything big happening in terms of investment in 2022, but we need to be paying attention.” 

Grill agrees. “Nothing else about my job has changed except how we look at assets and value equipment,” she says. “We don’t want to over-value or under-value anything, so right now, for example, we’re taking a deeper dive into lower-emissions and greener technologies.”

“Everything’s Hot”

Meanwhile, optimism about hot markets runs high. “I think the entire equipment market will get busier in 2022 because of the new projects that will start in the wake of the infrastructure bill,” says Grill. Specifically, she looks for rising demand in earthmovers, dredges and cranes, and other construction machinery. She also expects brisk business in over-the-road transportation, off-source supply vessels and aircraft.

Along with these markets, Pace anticipates opportunity in the cannabis market. “As more states legalize cannabis, the demand for centrifuges, evaporators, filtration skids and other equipment used in the industry should pick up,” he says. As of late 2021, 36 states had legalized medicinal use of cannabis and 18 had given the nod to recreational use. Pace also expects opportunities in other emerging markets like renewable energy this year. 

In the rail market, Simon looks for more car deliveries. “The last couple of years have been slow, so there is pent-up demand, plus the need to replace aging fleets,” he says. He also looks for greater opportunities in business aircraft. “It has potential—lasting driving factors—one being that some people now choose to fly private instead of commercial,” he says. “Although aircraft manufacturers are feeling same supply chain issues as other industries, I think orders this year will backlog.” Simon also expects backlogs in construction equipment and trucks and trailers to continue.


Over at ATEL Capital, rail earns another hot-market vote. “We had a lot of rail cars off-lease that we put back on in 2021,” Monroe says. “Covered hopper cars and box cars have especially been in high demand, due to the improving economy, and a lot of these types of cars had been scrapped earlier in the year.” 

Also hot is scrap metal, with steel from old rail cars bringing all-time high prices in 2021. “This is because many steel mills were shut down during the pandemic,” Monroe explains. “With supply of steel low, there’s now a huge demand for scrap steel, and many rail lessors have taken advantage.” 

Monroe is additionally tracking the growing use of lithium-ion batteries in manufacturing equipment. “We’re seeing some deals with forklifts powered by lithium-ion instead of lead-acid batteries,” he observes, adding, “The lithium-ion battery is a new technology for the material-handling industry, and it presents a challenge for asset managers to determine the future value at end of lease.” 

In a similar vein, Houser expects growth this year in material-handling, robotics and automation, pointing to demand for automated guided vehicles at distribution and e-commerce fulfillment centers. “The warehousing industry also is making more use of cloud-computing, data storage and the Internet of Things (IOT),” he added. “As companies build smarter supply chains, IOT will help greatly and security will become increasingly important as more objects are connected to the Internet.” Houser also thinks the drone market will expand in 2022 as the devices are used to examine pipelines, help perform inspections and make deliveries to remote areas. 

Vulnerable Residuals 

Clearly the volatile upward pressure on equipment prices has been a boon for remarketing and selling off-lease equipment, and values generally remain strong. But as Simon observes, “It’s not such an advantage when financing new equipment that’s selling at the top of the market, because it puts pressure on residuals. We try to be consistent and measure the swings, whether they be up or down.”

Indeed, the urge to raise residuals is strong because equipment costs are high. “But managers need to base residuals on a normalized market instead of on what we’re seeing,” Grill suggests. “We need to base them on historical data and not be overly aggressive during peak times.”

At CIT, Houser says the methodology for calculating three- to five-year residuals has not changed because the bank believes inflated values are temporary. “As we establish future long-term residuals, we think they’ll be more in line, not inflated,” he says.

But he admits that CIT has brought creativity and flexibility to bear on the current environment. “We’ve had to adapt, pivot and be very nimble to meet the needs of our portfolio, our customers and our vendor customers on acquisitions,” he elaborates. “But we’ve managed through the pressure and have benefited from it by offering customized solutions. We’re in a relationship industry, and that’s been no more evident than in the last year and a half. We’ve really raised the bar—and we’ve done it without a playbook.” 


At non-bank equipment finance companies, where the cost of funds is higher, pressure on residuals can be more intense. At ATEL Capital, however, Monroe says their residual methodology has not changed, either. “If the secondary market stays strong four to five years out, everyone will be happy,” he says.

Regulation F

With equipment management activity so dynamic and at times frenzied, asset managers may feel fortunate they have few regulatory changes to deal with now. But Pace says one pertaining to collections is important: Regulation F. “Regulation F, through the Consumer Financial Protection Bureau, requires debt collectors to provide certain disclosures to the consumer,” he says. “And because we do some consumer collections for clients with mixed portfolios, we abide by these laws and maintain high level of compliance. Regulation F somewhat revises the way debt collectors can communicate with consumers, so it requires many companies to make a few changes in their communications with customers.” The new rule became effective Nov. 30, 2021. 

And remember: ELFA’s Equipment Management Conference & Exhibition is “effective” Feb. 13-15, 2022. With so many aspects of the business changing, you won’t want to miss it.