Equipment Management’s Growing Role

Continuous change from multiple directions keeps markets hot and equipment managers hopping

Find yourself flummoxed about experiential retail? Wonder whether to finance robot dogs that can work construction? Believe it or not, these are real issues in today’s business environment, and equipment-management professionals know how to find the answers. As change becomes the operative word in so many aspects of equipment finance, these experts have made multi-tasking and multi-focusing into their own rich brand of science.

“It’s not all about asset values,” assures Liz Jaramillo, Vice President-Asset Management/New Business Support at Key Equipment Finance in Superior, Colorado. “It’s about keeping up with new technology; with trends in equipment; with regulations, both current and pending; and with the overall health of the industries you monitor. This is a job that requires constant research.”

Jaramillo describes 2019 as “challenging, due to the variety of assets and complex structures that we saw.” At the same time, however, she characterizes equipment markets as “solid” and thinks 2020 will hold more of the same. “I expect the uncertainty we see in industries like trucking and healthcare to continue into 2020,” she says. She looks for more uncertainty caused by the risk of recession and this year’s presidential election. “But I think we’ll still see some hot markets in the part of the energy sector devoted to new equipment that saves energy, increases efficiency and adds to sustainability,” she says.

Markets with Staying Power

LED lighting systems, automated controls and similar upgrades will “remain hot,” Jaramillo predicts, and an uptick that started last year in small trucks used for last-mile deliveries will continue. She also sees opportunity in distributed assets: small-ticket items such as mobile phones, tablets and laptops. “We think this will be a big area of growth for financing, not necessarily because of the cost of these items but because so many companies provide these assets to their employees, and they have short replacement cycles,” she says.

Key Equipment Finance is also monitoring 5G (fifth-generation cellular wireless) technology. Although the largest U.S. carriers rushed to launch some form of 5G in 2019, authorities including PC Magazine say early rollouts “are more like public beta tests than final products,” and that big, reliable networks boasting awesome speed and enormous capacity won’t be available for another year or so. Says Jaramillo, “We don’t yet know if 5G will bring new financing opportunities or what those opportunities might be—but we’re paying attention.”

Rick Pierman, Chair of ELFA’s Equipment Management Committee and Senior Vice President-Strategic Operations for Crestmark Equipment Finance in Troy, Michigan, says his company is also gearing for growth in the green-energy space and that there’s an increased focus on equipment management generally. “We experienced record volume in 2019, having expanded asset classes across the board and gaining new opportunities as a result,” he says. “We saw big growth in alternative energy, mainly on the coasts where electricity costs are high.” Although the federal investment tax credit for solar installations shrinks this year to 26% from 30%, Pierman says project costs are also getting smaller, allowing profits to inch up. What’s more, solar panels are lasting longer than expected and can be recycled once they do start to deteriorate. “The issue now is energy storage,” says Pierman. “Battery storage installations can be huge, but we’re seeing rapid advancements in both the size and useful life of batteries.” The changes suggest continued growth in solar even as the tax benefits dwindle.

Trends Changing Healthcare

Rob Herb, Vice President and Global Asset Manager for Healthcare & Clean Technology at DLL, observes that the healthcare market “is better guarded against a possible recession than other industries” because of an unflagging need for healthcare. But he notes several trends making finance companies work harder than ever to lease equipment. One is the healthcare industry’s move toward value-based care.

Unlike the traditional fee-for-service model in which an insurer pays for each procedure performed, value-based care rewards healthcare providers with incentive payments for their quality of care as measured by patient outcomes. “The impact of this on the equipment industry is that we’re seeing more of a push for managed services,” says Herb. “Hospitals are looking to transfer some of their equipment cost and performance risk over to providers of the equipment.”

DLL already rolls in service components to make operating leases more attractive. But because a longer equipment life span is now so important to customers, Herb says asset managers have to sharpen their pencils to make sure leasing is more advantageous than buying. They must also be sure to take an appropriate residual. “But with interest rates so low, our biggest competitor now is cash,” he says. “Hospitals are earning so little on their money that they may still decide to finance a purchase.”

Influences on Values

Although sources for this story agree that equipment values generally remained strong near the end of 2019, they also agree that they’re now exercising particular care setting residuals. Pierman says Crestmark Equipment Finance is focused on ensuring that all evaluations are made on a linear basis instead of on a specific period of time. “We’re being disciplined and paying attention to the historical cycles of equipment values,” he says, “and we’re looking at collateral for what we expect to be a downturn in the next few years.” Specific care is being given to collateral crossover, he adds, to be sure that any time it exceeds loan balance, the crossover period is based on transaction credit quality.

Meanwhile, Jaramillo sees strengthening ties between equipment values and government guidelines, prompting even greater scrutiny of regulatory activity. “New regulations can have a drastic impact on equipment values that have been steady for years,” she notes. As an example she cites tank rail cars, whose values sank dramatically upon enactment of a rule requiring new standards for cars transporting certain hazardous materials.

More recently at issue is IMO2020, a ruling by the International Marine Organization requiring all shippers in international waters to lower emissions by converting to low-sulfur diesel fuel by Jan. 1, 2020. “Regulations and equipment values are increasingly connected today,” Jaramillo says. “A regulation may not pertain to an exact piece of equipment, but it could impact an entire industry and downstream, affect the value of that equipment.”

Complicating matters further is the fact that each deal can be unique when setting residual values. “You have to look not only at how the equipment will be used and for how long, but at whether there’s been a bubble in the market that needs to be considered for the future values,” explains Jaramillo. And because each market is subject to different regulations, she adds, “You have to regularly monitor industries to keep abreast of any pending changes, and which of them will affect your company’s markets.” 

How Technology Helps

Although equipment managers also spend time tracking technological changes in new equipment, they sometimes harness technology themselves to make their jobs easier. DLL, for instance, is investigating AI (Artificial Intelligence) to see how it can be used to better understand customers and thus make more granular decisions. “With AI, you extend your brain power without adding a lot of staff,” says Herb. As technology and business models using AI evolve, he says DLL’s goal would be to replace simple value curves with more complex predictive models figuring in customer behavior.

Pierman talks about the growing use of Electronic Logging Devices (ELDs) for equipment values and transaction pricing. “You see this a lot with trucks and trailers and construction equipment,” he says. ELDs monitor “who’s using it, who’s abusing it, and how it’s being used,” he adds, providing helpful data to manufacturers, maintenance professionals and equipment managers.

Jaramillo says the use of electronic documents and signatures continues to change the way Key Equipment Finance interacts with customers on the front end, and that electronic portals enhance interaction with customers and vendors on the back end. Of course, developments in technology also result in the creation of new equipment and new uses for existing assets. Says Jaramillo by way of example, “We’ve seen drones used in Colorado recently to examine roof damage caused by hail and ice.”

On Tap for 2020

Drones, robots and electric trucks are likely to figure among the equipment presented for financing this year. Quantum computers for business and AI-as-a-service applications could also make appearances. Along with new equipment and services, Herb expects a growing trend toward sustainability. “DLL has worked with manufacturers to develop equipment refurbishment plans for several years,” he observes. “The increasing importance and urgency around sustainability will push more manufacturers toward refurbishment in 2020 and will increase buyer demand for these refurbished products.”

Developing a yardstick to measure the sustainability achieved is still a challenge. Now that large accounting firms are taking an interest and becoming involved in the effort, though, Herb thinks sustainability measuring standards will continue to mature in 2020. The trend may be further advanced by sustainability summits like the one DLL held two years ago in Europe, attended by vendor partners across all of the company’s verticals. “They teach each other about their efforts and learn from it,”says Herb. “Despite being in completely separate industries, they realize they face the same challenges in moving to circular business models.”

Pondering 2020 from an economic standpoint, Pierman looks for continued margin compression. But he believes overall yield will improve as long as the Federal Reserve refrains from making further cuts to the prime interest rate. Pierman also hopes for an uptick in construction and expects continued stability in other markets, but he takes nothing for granted. “Everything is doing well in most categories of equipment, but that won’t be the case if we head into any kind of recession,” he reminds us. “Being disciplined with valuations and paying attention to historical cycles of equipment values are ways to prepare.”