While investing in the North American railcar market is risky right now because the market is so uncertain, Europe and India are among the places where there are "attractive' opportunities to invest in railcars, officials with railcar lessor GATX (NYSE: GATX) said on the company's second quarter earnings call on July 18.
"The best risk-adjusted return at GATX right now is in Rail Europe. That traditionally hasn't been the case, that's something we've really come to a conclusion [about] in the last few years," said GATX chief executive officer Brian Kenney.
Kenney explained how there is a manufacturing backlog in Europe, with a major European manufacturer sold out this year and sold out between 50 percent and 90 percent in 2020, and that the backlog is driving a "very high renewal success" of lease rates as well as customer desire for fleet renewal.
The European industry also has an aging fleet that will need to be replaced, and there is a public policy push to move traffic from the roads to rail, Kenney said.
"All that's driving growth in Europe and we're seeing very attractive lease rate factors and returns," Kenney said. "So, no evidence of a weaker European economy that's showing up in the railcar fleet, at least ours, in Europe. And we're seeing very attractive investment opportunities."
In India, GATX is seeing a fast-growing fleet that is 100 percent utilized, with a fleet total estimated at almost 3,700 cars and $140 million in investment. With an average lease term of 90 months and attractive leasing rates, the market looks promising, Kenney said.
"It's tempting to call [the India market one that is a] higher risk-adjusted return, but the market is so new, I can't do that yet. At least right now, it's going very well – as we expected – and it's a decent return. But time will tell about the risk-adjusted return there. But certainly, the investment opportunities are there," Kenney said.
Meanwhile, the North American market might not be the most attractive investment market because of lower railcar leasing rates, Kenney said. Longer term, though, railcar portfolios could be up for sale, especially as the industry is seeing more financial investors checking out the markets in the last five to seven years, he said.
"The lease rate environment in 2019 continues to be consistent with our expectations from most car types," said GATX director of investor relations Jennifer McManus. Tank car lease rates have been solid but freight car lease rates have been relatively weak, she said.
The North American market is also exposed to the transition to precision scheduling railroading, (PSR) an operating model that has been adopted by all the Class I railroads except BNSF (NYSE: BRK). PSR, which seeks to streamline operations and schedules and better optimize a railroad's assets, is having a greater impact on high-mileage railcars like coal and intermodal boxcars, according to GATX chief financial officer Thomas Ellman.
GATX fleet hasn't experienced as much exposure because the bulk of its fleet consists of lower-mileage tank cars and specialty hoopers, Ellman said. But in the second quarter, GATX's boxcar fleet's utilization fell from 95 percent to 94 percent in part because of PSR and other factors such as adverse weather conditions and flat loadings for packaging materials. GATX's total income for the first six months of 2019 was $109.5 million, or $2.97 per diluted share, compared to $115.1 million, or $2.99 per diluted share, in the prior year period. The company reiterated its full-year 2019 guidance.
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