Construction Equipment Rental
Date July 2016
By the numbers
- In May, Forced Liquidation Values of construction equipment dropped 9.0 percent year-over-year
- Values of equipment sold on the resale market declined 6.3 percent
- Industry revenues: $35 billion (heavy equipment rental)
- Significant rental companies: United Rentals, Hertz Equipment Rental, Sunbelt Rentals
- Significant manufacturers with rental units: Caterpillar, Komatsu, Volvo Equipment, Hitachi, Liebherr, Terex, John Deere
- Market share of top manufacturer: Caterpillar owns approximately one-third market share of all construction equipment in North America as well as the rest of the world
- Recent sales trends: Recent market consolidation and spin-offs have helped increase market penetration for rental houses as competition has increased. Hertz Corporation announced the planned separation of its car rental and equipment rental businesses under new names Hertz Global Holdings ("HTZ") and Herc Holdings Inc. ("HRI"). In addition, Sunbelt Rentals and sister UK company A-Plant acquired Portable Rental Solutions and One Source Cooling to serve as Sunbelt’s 18th acquisition for fiscal year 2016.
The rise of rental: The share of U.S. construction equipment owned by rental companies dipped slightly to 53 percent in 2015. This is up from around 40 percent a decade ago, according to the American Rental Association (“ARA”) Rental Penetration Index. The ARA released its second quarter outlook in June 2016, which projected continued domestic revenue growth of 5.6 percent in 2016 and 4.9 percent in 2017. Should these projections hold true, 2016 will be the seventh year of positive industry growth. Tightened lending conditions and lulls in development activity have slowed contractors’ spending in recent years. For many firms, that has meant shifting towards renting construction equipment instead of financing to own. According to Manfredi & Associates Inc., a market research firm that specializes in the industrial sector of the rental industry, nearly half of the construction equipment in the U.S. is rented – a figure that’s expected to rise. Revenue generated by equipment rentals is expected to reach a record $48.7 billion by 2019.
Purchasing construction equipment often requires significant down payments, diverting large portions of capital from operating expenses. Additional expenses include insurance, taxes, licensing, interest on loans and storage costs. Equipment owners are also responsible for transport from job site to job site. On the other hand, rental companies can get equipment to new work sites quickly and efficiently, using computerized maintenance programs and GPS systems to keep tabs on location, status and service needs. Rental houses also upgrade their inventories on a regular basis, offering access to the newest and most advanced equipment. This makes it easier for customers to comply with changing EPA emissions standards, including Tier 4, which is the strictest requirement for off-highway diesel engines. If something goes wrong, rental companies have the tools and expertise to make it right. Mechanics are dispatched promptly to fix malfunctioning equipment on site or replacements are sent. Renting equipment can enable younger companies to better compete for larger contracts as well.
Oil and gas downturn depressing values of some equipment: A booming oil and gas industry drove significant demand for construction equipment rentals post-recession. When oil prices dove in late 2014, however, utilization of rental fleets serving the fields dropped, causing a portfolio exposure for lenders. Nearly two years later, rig counts remain near record lows. While oil prices remain a top issue for many banks, most rental houses have adapted. Some trimmed excess inventory while others looked to alternate markets for growth. Most rental equipment used in oil and gas fields is not job dedicated and can be redeployed to other sectors. For example, home builders and municipal construction contractors have driven demand for equipment such as wheel loaders, loader backhoes and track loaders. Recovery for the energy sector is predicted over the long haul, but it will likely be slow. Look to appraisers evaluating rental equipment to consider the versatility of equipment and its impact on marketability and value.
Values down; pricing stable: EquipmentWatch, a resource that tracks critical heavy equipment benchmarks, reported that the general price index for construction industries fell slightly in June 2016 from the previous month; however, volumes increased year-over-year. This was in line with an expected seasonal decline. Fair Market Values of several of the most widely utilized equipment changed as follows:
- 4-Wheel Drive Articulated Wheel Loaders: -0.72%
- Compact Track Loaders: -0.08%
- Standard Crawler Dozers: -0.80%
- Crawler Mounted Excavators, Electric Scissor Lifts, Telescopic Boom Aerial Lifts, Rough Terrain Lift Trucks and Tractor-loader Backhoes: -0.23 to -1.19%
Year-over-year, Fair Market Values and Forced Liquidation Values dropped by 6.3 percent and 9.0 percent, respectively, in May. Auction volume was substantially lower, and the average age and usage of equipment coming to market was higher. The opposite was true in the resale market, where volume was up and average age and usage were down. EquipmentWatch expects values to fall modestly through September.
Contracts can be source of value: One of the key factors that must be examined in the valuation and liquidation of any equipment rental company is the existence of a significant residual rental stream. Companies of this type typically have both short-term and long-term rental contracts. Short-term rental contracts are characterized as contracts with a term of one to six months. Long-term contracts usually have terms in excess of one year and can run as long as four years or more. Long-term contracts can have significant unexpired terms as of a liquidation or valuation date, which can produce substantial cash flow. Those considering lending to equipment rental companies with long-term rental contracts should consider including the value of those rental streams. Look for appraisers with experience valuing contracts to conduct this type of analysis.