12% to 14% Cash on Cash Returns for Container Leasing: Wall Street Transcript Interview with Helane Becker of Dahlman Rose & Co.

Wall Street Transcript

67 WALL STREET, New York - January 24, 2013 - The Wall Street Transcript has just published its Staffing, Outsourcing and Rental & Leasing Services Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Workforce Flexibility Requirements - Growth in Temporary Staffing Demand - Secular Trend Toward Temporary Staffing - Strong Demand For IT Staffing - Growth in Equipment Leasing Adoption Rates - Consolidation Potential in Fragmented Industry

Companies include: Textainer Group Holdings Limit (TGH), TAL International Group, Inc. (TAL), CAI International Inc. (CAP), Aircastle LTD (AYR), AerCap Holdings N.V. (AER), Babcock & Brown Air Limited (FLY) and many others.

In the following excerpt from the Staffing, Outsourcing and Rental & Leasing Services Report, an expert in container and airline leasing equity research discusses the outlook for these sectors for investors:

TWST: I keep seeing recurring stories about containers sitting around. Is that reality or are containers still in demand?

Ms. Becker: Yes, containers are still in demand. Some older containers may not get redeployed as rapidly as newer containers, but in general, it's cheaper to buy a new container than it is to bring an empty container to one of the depots around the world that ship goods, because you can't just return your container to any port. There are only a finite number of ports where the containers can be returned, and most containers are on five year to six year leases. The container leasing company might still be getting paid even if the container is just sitting at an airport waiting to be deployed.

TWST: So even if it's not in use, it's being paid for by somebody?

Ms. Becker: Sometimes that's correct, yes.

TWST: What's going on at this juncture? What's the demand situation look like?

Ms. Becker: The fourth quarter and the first quarter are typically very strong in the north/south markets where South American countries are shipping fresh fruits and vegetables north. The refrigerator container market, therefore, peaks in the fourth and first quarter, and the dry container market peaks in the second and third quarter. Right now, the peak shipping season is over. We're heading into January, which is typically a weak month. There is also the potential for East Coast and Gulf Coast port strikes on January 31. As a result, we expect the first quarter to be relatively slow. It typically is as March is normally the strongest month of the quarter. The manufacturers tend to shut down for the Lunar New Year for two to four weeks, and so production may be strong in the first part of January to get ready to ship containers in February, but then they shut down from the end of January to the beginning of March and then business ramps up again.

TWST: What's the pricing environment in a period like this?

Ms. Becker: Most of the container companies price to a 12% to 14% cash-on-cash return. Since a dry container is just a steel box with a lumber floor, pricing is generally based on steel prices. The price of a new dry container is currently about $2,400. For the shipping company to lease a container at a 12% return would be about $0.80 a day. Pricing is down from the 2011 peak, but it's up from where it was four or five years ago because the price of steel is up from where it was four or five years ago.

The top China-based container manufacturers manufacture about 80% of all containers, and they don't manufacture containers unless they have specific orders for containers. There are approximately 30 million TEU in the world right now, and approximately 5% or 1.5 million TEU retire every year and another 1.5 million TEU is for growth. We estimate annual dry container demand is about 3 million TEU, but in 2011 and 2012, only about 2.6 million TEU was manufactured, so there is still a bit about container shortage going into 2013.

TWST: Why the shortfall?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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