Rail equipment lessor and manufacturer GATX (NYSE: GATX) will be eyeing opportunities to acquire additional assets such as railcars as the industry faces uncertain macroeconomics brought about by the COVID-19 pandemic.
“In the Great Recession, we certainly had the opportunity to acquire some cars from people who decided to exit the industry. We’ll be looking for opportunities like that going forward,” said GATX Chief Financial Officer Tom Ellman during the company’s first-quarter earnings call on Monday.
Unlike competitors, GATX isn’t “as weighted” in the energy sector, making the company more immune to the recently volatile crude oil market. Under 2% of GATX’s fleet, or about 1,500 cars, is exposed to the crude oil markets, while cars for frac sand total about 2,300. GATX will be looking for opportunities among companies that could be more exposed to the energy markets.
“What we would always primarily be interested in is maintaining a diverse mix of cars overall. On a given transaction, we certainly have some flexibility to pursue what becomes available,” said GATX President and CEO Brian Kenney. “What will often happen, though, and what happened back in the Great Recession, is even if the few car types are what’s leading to the pressure on a given portfolio, that doesn’t necessarily mean that those would [be] the car types that will be sold. Then there is certainly an opportunity to … pick up attractive car types.”
While lease rates for tank cars are down by about 10%-20% from the start of the year, other cars’ rates are flat to about 10% lower amid a slowing market because of the pandemic. Lease rates are expected to soften in the second quarter, but “as North American scrapping activity continues, it should help move the supply-and-demand equation back into balance a little bit more,” Ellman said.
Meanwhile, renewal success rates have fallen to around 75% in the first quarter as customers send leased cars to shops to undergo maintenance, but customers continue to renew at relatively high rates so far, executives said. Renewal rates in the Great Recession went to as low as the mid-50% range in comparison.
“Even since the COVID crisis began, we’re north of 60%, which if you look historically [is a] pretty good number over the long term,” Ellman said. “We kind of generally average between two-thirds and three-quarters of the cars going on renewal. And importantly, the ones that are not being renewed are going back out with customers; we’re continuing to maintain that very high utilization [rate].”
GATX saw net income grow 11.6% in the first quarter of 2020 compared with the same period in 2019.
First-quarter 2020 net profit totaled $46.3 million, or $1.31 per diluted share, compared with $41.5 million, or $1.12 per diluted share, in the first quarter of 2019.
“GATX posted solid first-quarter results despite continuing weakness in the North American railcar leasing market and a deteriorating global economy,” Kenney said. “During this unprecedented time, our focus has been on ensuring the health and safety of our global workforce and serving our customers with minimal disruptions.”
By segment, GATX’s North American rail unit saw profit of $72 million, compared with $68.4 million in the first quarter 2019, on higher gains on asset dispositions, which were partially offset by lower lease revenue. Fleet utilization was at 99% at the end of the first quarter, compared with 99.3% in the fourth quarter of 2019 and 99.4% in the first quarter of 2019. The first-quarter fleet consisted of approximately 117,600 railcars, including more than 15,000 boxcars.
GATX’s rail international segment reported $13.9 million in first-quarter 2020 profit, compared with $14.8 million in the first quarter of 2019, on more cars on lease but offset by unfavorable foreign currency exchange rates. Fleet utilization for GATX Rail Europe was at 98.5%, compared with 99.3% in the fourth quarter of 2019 and 98.8% in the first quarter of 2019. GATX’s European fleet consisted of approximately 25,400 cars. Meanwhile, GATX Rail India was at 100% with its fleet growing to over 3,000 railcars.
As for GATX’s other segments, its Rolls-Royce and Partners Finance affiliates “produced favorable results, despite an unprecedented drop in commercial air travel in the latter part of the quarter,” while American Steamship Co. deployed seven of the planned 11 vessels in anticipation of lower tonnage due to COVID-19 impacts. The sale of American Steamship Co. is expected to close in the second quarter, GATX said.
“The challenges posed by the COVID-19 pandemic are extraordinary and unparalleled. However, GATX has managed through a number of crises and economic cycles during its 120-plus-year history,” Kenney said. “We entered the current crisis with a strong balance sheet, excellent liquidity and committed long-term leases that provide a source of stable cash flows — all of which we expect positions GATX to navigate through this difficult period and capitalize on attractive investment opportunities that may arise.”