moats for leasing companies

[yadayada]

What are some possible moats for leasing companies? I am having some trouble understanding that. Some leasing companies get high return on capital, and others are barely doing better then break even.

 

some quick thoughts:

 

-average sale price of the units leased matters, higher better (but why?)

-How much resale value it has

-size of equipment leased

-possible services being provided next to the equipment that can make a difference

-size of total business, in case of shipping containers it provides free brand recognition

 

anyone know a good primer or book for this industry?

[jay21]

I thought this gave a pretty good model of leasing/corporate finance: http://brontecapital.blogspot.com/2008/06/whats-nice-girl-like-you-doing-in-place.html

 

 

[randomep]

 

Sorry but..... leasing what??

[premfan]

What are some possible moats for leasing companies? I am having some trouble understanding that. Some leasing companies get high return on capital, and others are barely doing better then break even.

 

some quick thoughts:

 

-average sale price of the units leased matters, higher better (but why?)

-How much resale value it has

-size of equipment leased

-possible services being provided next to the equipment that can make a difference

-size of total business, in case of shipping containers it provides free brand recognition

 

anyone know a good primer or book for this industry?

 

Leasing is a commodity business. The lowest cost operator compared to there peers is a competitive advantage. In leasing apt units there comes a point where operating leverage gets going. Each added unit's income goes almost fully to the bottom line.

 

What leasing business are you thinking of?

[bz1516]

Service companies have there own kind of moats.  What moat did H&R Block have in the classical sense of the term?

[Phaceliacapital]

I think most of the moat comes from the capital allocation skills from the management.

[yadayada]

i think with aircraft leasing it is reputation and capital needed. Seems that airliners wouldn't look at cost alone if there are safety issues involved as well.  There are like 2 big players in that industry eating up the small ones. When i read about AIQ when packer suggested it, it got me thinking. As I couldn't understand how their margins wouldn't be crushed to almost zero. They lease large medical equipment to hospitals btw.

 

And buffett seems to like railcar leasing.

 

I think size is interesting when it comes to moats, as it obviously allows you to be the lowest cost provider, but how they got there is interesting as well. And when does geography starts to matter, if the equipment is really  large and moving it is expensive? You could have a moat in some local state right?

 

Emeco is another interesting one, there you have size and safety issues. Looks that once they captured some local market, it will be harder for a competitor to move in, because of transportation costs of equipment, and some stickiness regarding safety issues and quality of equipment and services added. You dont switch to just any random competitor with large pockets that is a bit cheaper, because that has some risks.

[Packer16]

Their are two sources of competitive advantage I see in leasing companies.  First, there is the situation in fragmented industries where the leasing company is providing financing (similar to banks) with long-term contracts.  The moat can be dig deeper if you provide consulting services around the lease so you are providing a true outsourcing service similar to BPO.  This is what AIQ is providing.

 

The second is providing peak demand leasing.  The what Emeco and ATSG are providing.  This type of advantage is not as great as in the first case but can provide excess return.  The contracts are shorter term versus the AIQ type leasing.  There also may be some economies of scale in equipment purchasing leasing availability by location. 

 

In each case since you have a spread business, so access to cheap financing can also provide an advantage.  In AIQ's case there ownership by Oaktree helps in this regard.

 

Packer 

[HJ]

Seems like each specific leasing business has its unique aspects, and difficult to generalize.  But couple of things come to mind: 

 

In the case of aircraft leasing, it's some enterprising businessman saw, within a businesses that is essential to an economy (air traffic), but for whatever reason very difficult to manage (in this case, unions, high operating leverage on a down turn, etc.), that there is an opportunity to carve out a reasonable business sub segment that can somehow be shielded from those aspects that made the business difficult, and generate reasonable returns. 

 

Then in the case of container leasing / rail car leasing, there is some network / logistical advantage for different shippers to share equipment.  The back haul of empty containers from North America back to Asia, for example, and where do you place the empty containers, for example, can be managed much more efficiently away from any single shipper, and the maintenance / service aspect of the equipment may also be benefit from sharing.

 

Offshore drilling shields the business away from the dry hole risk, United Rental, Agrekko, even Hertz benefits from sharing and management of logistics.

 

 

[Ross812]

The only leasing I am familiar with is Aircraft leasing. For air leasing the age and models of the aircrafts can be a moat. Many airlines are not interested in leasing an old 737-400 when they can lease a larger, more fuel efficient 737 800 or 900. The make and model is very important to airlines as well. For instance, Southwest only uses Boeing 737's. Management and size is very important as well. A smaller leasor is not going to have the clout to order 125 Boeing aircraft on credit necessary to fill big contracts. 

[tiddman]

Well take Berkshire's CORT for example.  They buy furniture, lease it out for a while, and then eventually sell it (used).  Any of us could enter the same business and do the same thing.  I think the primary advantage you can get is scale and selection, i.e. enough of a critical mass of locations and inventory that you can appeal to a broad audience.  However being smaller can also be an advantage since you don't have to move your stuff around as much and can focus on fewer markets.  You must also be skilled at buying new furniture economically and selling used furniture at a good price.  I don't think any of these things are particularly difficult but probably just come down to execution.

 

Frankly I have always wondered what Munger's attraction to CORT was.  He paid $386M for CORT in 2000, and profits were $15-25M in 2006-2008 (return on investment of 4-6%) and a loss in 2009, and earning $18M in 2010.  To earn a 4.5% return on investment 10 years after the fact doesn't really sound too great.

 

XTRA is similar, they buy and lease shipping containers. One thing I heard about this business is that the price of shipping containers fluctuates a lot, and if you are disciplined, you can expand your business at a time when the containers are cheap.  But again this is not particularly different and is a business with low barriers to entry.  Probably when you achieve a certain scale you have an advantage but it is not impenetrable IMHO.

[premfan]

Franchisors are basically leasing companies for the franchisees. The franchisees lease the name, software, consulting, equipment and etc. The moat would be  achieving scale for the franchisor. The only moat a franchisee has is locking up a region.

[SharperDingaan]

Leasing is primarily a sales tool. It is used to move metal, & as a sales channel it does not have to be profitable.

 

Cost of funds & tax deferral is key; you get it by deliberately mismatching term, buying the assets in poor areas, & releasing them into richer ones where they will actually be used. There has to be no question that you can roll over your ST debt at will, & you have to be able to forecast run-off fairly well

 

Dead simple in theory, but difficult to execute as the salesforce & administration level. You cant just give someone a laptop with your model on it, & then expect them to sell the most profitable lease for the application; the minimum is constant training & oversight by large numbers of folks who know what they are doing. Its a small pool, & most often you will have to acquire another leasing coy to get those people.

 

Lots of very specialized niches, & it can be very profitable, especially if spread over many lessees.

Eg: Brewing equipment. It is usually stainless steel, not prone to obsolescence, & very long lived. Costly to buy so there is a preference for lease vs buy, but some of the lessees are not going to make it. When the equipment comes back it is simply re-leased to a new brewer at a reduced rate as some of the Capex has already been recovered. And when the same equipment can cycle for 40+ years ....

 

SD

 

[Phaceliacapital]

The only leasing I am familiar with is Aircraft leasing. For air leasing the age and models of the aircrafts can be a moat. Many airlines are not interested in leasing an old 737-400 when they can lease a larger, more fuel efficient 737 800 or 900. The make and model is very important to airlines as well. For instance, Southwest only uses Boeing 737's. Management and size is very important as well. A smaller leasor is not going to have the clout to order 125 Boeing aircraft on credit necessary to fill big contracts.

 

Yeah but the planes in portfolio are chosen by management right?