Transportation Investment Focus
What affects the performance of investment in transportation equipment?
Is it current market conditions, business confidence, and expectations? Or is it the ability of your lessee to make scheduled rent payments, the value of the equipment throughout it’s useful life (particularly at lease termination or early buyout points), the tax profile of the lessee, investor, and the possibility of tax law changes during the investment term?
Diversification is a basic investment principle. It reduces risk and increases returns. Lease portfolio investments include a variety of different lessees, different equipment types, and importantly, lease maturity profiles that span periods of economic downturns. Consider Air and Rail equipment. Both serve transportation markets. The first, air passengers and air freight, the second, heavy haul commodity transportation. In both markets equipment values are influenced by equipment design, supply, and traffic demand at the margin. For rail, commodity loadings (petroleum products, grain, sand, cement, plastic pellets, paper, scrap, finished steel, lumber, auto, coal and intermodal traffic); for air, passenger and air freight traffic demand. Looking at a single transaction, you make judgments about the ability of a lessee to make rental payments, the future value of the specific equipment, tax rates, general economic conditions and reinvestment risk. As you add transactions, the realtionships among these variables grows, diversification is increased, and overall risk is reduced. Why? Each individual leasee will react differently to changes in these macro-economic variables and financial events.
Traffic activity is tied to underlying economic trends and is a leading indicator of economic growth. What does it say about current and future economic growth? Moody’s recently revised their outlook for the health of the Class One Railroads to ‘stable’ from negative (year over year traffic comparisons are stabilizing, however, demand for rail equipment remains challenging). Air carriers use different equipment types, fly different routes, and serve different passenger and air freight markets. Moody’s expects airline profitability to weaken slightly in 2017, but the outlook for the global airline industry is ‘stable’. Tax benefits and lease terms and conditions vary by transaction. Changes in U.S. Government fiscal policy, credit market conditions (interest rates, inflation), consumer spending, tariffs, tax reform and regulation are all expected to spur economic growth (eliminating unneeded regulations is the equivalent of a massive tax cut). The bottom line? Understand how each of your investment transactions react to changes in these macro variables, and which are most significant.
Often, we are faced with the ‘investor’s paradox’; information overload. The incessant stream of ‘news’ results in irrational choices. The solution is to eliminate irrelevant or distracting information and focus on the most relevant. The challenge is not a shortage of information, but one of identifying opportunities that lead to higher investment returns and enterprise value. This requires focus. Defining your market, deploying investment in selected segments, and creating competitve value in these niches.
We understand demand sentiment and appreciate equipment supply dynamics. Disciplined long term investing requires short term tactical management and long term patience. It’s patience that drives profits. What really matters? A focus on business purpose. Focused purpose drives profits.
Want transportation investment solutions? Talk with the transport specialists. Call RESIDCO.
 Moody’s Global Credit Research, October and December 2016.
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