GATX - Earnings Call - Q4 2020
January 28, 2021
Transcript
Speaker 0
Good day, everyone, and welcome to the GATX twenty twenty Fourth Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Director of Investor Relations, Sherry Hellerman. Please go ahead.
Speaker 1
Thank you, Ryan. Good morning, everyone, and thank you for joining GATX's fourth quarter and twenty twenty year end earnings conference call. I'm joined today by Brian Kenny, President and CEO Tom Ellman, Executive Vice President and CFO Bob Lyons, Executive Vice President and President of Rail North America and Gauthier Kazzel, Executive Vice President and President of REL International. Please note that some of the information you'll hear during our discussion today will consist of forward looking statements. Actual results or trends could differ materially from those statements or forecasts.
For more information, please refer to the risk factors included in our release and those discussed in GATX's twenty nineteen Form 10 ks and 2020 Form 10 Q. GATX assumes no obligation to update or revise any forward looking statements to reflect subsequent events or circumstances. I'll provide a quick overview of our twenty twenty fourth quarter and full year results, and then Brian will provide additional comments on 2020 as well as our outlook for 2021. After that, we'll open the call up for questions. Earlier today, GATX reported twenty twenty fourth quarter net income from continuing operations of $17,800,000 or $0.50 per diluted share.
This compares to twenty nineteen fourth quarter net income from continuing operations of $42,100,000 or $1.18 per diluted share. For the full year 2020, GATX reported net income from continuing operations of $150,200,000 or $4.24 per diluted share. This compares to net income from continuing operations of $180,800,000 or $4.97 per diluted share in 2019. The 2020 full year results include a net negative impact of 12,300,000 or $0.35 per diluted share related to the elimination of a previously announced tax rate reduction in The United Kingdom. The 2019 full year results include a net deferred tax benefit of $2,800,000 or $08 per diluted share related to an enacted tax rate reduction in Alberta, Canada.
These items are detailed on Page 13 of our earnings release. In 2020, investment volume was $1,060,000,000 which reflects higher year over year investment in Rail North America as well as our acquisition of TriFleet, the fourth largest global tank container lessor. And as noted in our earnings release, we currently expect 2021 earnings to be in the range of $4 to $4.3 per diluted share. With that, I will now turn the call over to Brian.
Speaker 2
Okay. Thanks, Sherry. Good morning, everyone. Thanks for calling in. As always, I'll give you the brief color on our recent performance, but more importantly, some more detail behind the 2021 guidance.
So let's go ahead and dive in here. As Sherry said, and as you saw in the press release, on a normalized basis and looking at continuing operations, we earned $4.59 per diluted share. You might remember that we suspended earnings guidance at the end of the 2020 along with most others due to COVID. You might also remember we sold our American Steamship business in May. So I realized that trying to analyze our 2020 financial performance versus that original guidance that we put out last January is pretty difficult.
It's also difficult for me to tell you with a high degree of accuracy what the financial impact of COVID nineteen was on GATX. But I can't talk qualitatively about it, and I think I need to because it's still having an impact today. So as far as that goes in Rail North America, COVID showed its impact really in three areas. Remember that entering 2020, the North American railcar leasing market was already in a weakened position. That was due to the dramatic oversupply of railcars.
But as the pandemic set in and North American railcar loadings fell to levels really beneath the bottom of what we saw in the February, we did see a further negative impact on what were already low lease rates. So it also had a temporary chilling effect on the secondary market. It also created inefficiencies in our maintenance network due to the frequent openings and closings of our facilities in an effort to keep the employees safe. Moving to Rail International, Europe and India, other than that secondary impact on foreign exchange rates, COVID resulted in delayed investment in both businesses, and that was due to the shutdowns and delays at the railcar manufacturers. And of course, COVID had its most profound effect on our aircraft spare engine leasing partnership with Rolls Royce.
That was obviously due to the dramatic decline in airline traffic around the world. So given that extremely negative environment, I think GHX's employees handled the challenges extraordinarily well. So for instance, we maintain our global railcar fleet utilization between 98 and a 100% depending on the jurisdiction. As an essential industry in North America, our maintenance employees showed up for work continuously from day one and helped us realize the cost savings of more fully utilizing our own network. Our international rail businesses have resumed their growth plans.
And even in RRPF, that joint venture is handling the wave of customer relief requests very efficiently. And that team is now identifying new engine investment opportunities as well. And lastly, speaking of new investments, at the 2020, you saw that we closed on GHCX's first adjacent acquisition in memory actually with the purchase of TriFleet. That's the world's fourth largest tank container lessor. And that's a company that we believe GATX will bring a lot of value to in the coming years.
So looking at us as we enter 2021, we have a strong balance sheet. We got great access to capital. And we're executing our strategy of investing in a down market at attractive prices. So let's turn to that 2021 outlook. And I'll say that our guidance assumes a gradual easing of COVID as we move through the year.
And despite the start of the rollout of the vaccines, that easing assumption looks pretty aggressive as we sit here today. So let me give you an example. COVID infections and secondary exposures of workers in our North American maintenance network peaked at the end of last year's at the highest levels yet. And they continue at a very high level, and that obviously reduces our capacity in our own network. I'm sure you're aware of the COVID lockdowns in Europe.
For instance, Germany and Austria where we're headquartered have recently extended their restrictions. They both say they see hard times ahead. And obviously, air travel remains about 50% of its pre COVID level. So while we're assuming that it gets slowly better as we move through the year, I'd say the possibility of COVID related volatility in the outlook remains high. Specifically by the segments, let's turn to Real North America's 2021 outlook.
So towards the end of the year in the fourth quarter, we started to see very early signs of a recovery. So examples, absolute lease rates were flat to slightly higher for the second consecutive quarter for many car types. Car loadings have steadily increased off the second quarter low we saw in 2020. In the fourth quarter, certain market segments actually showed higher quarter over quarter carloadings compared to the 2019. So despite those facts, industry oversupply continues.
And although we see similar lease renewal success and probably higher absolute lease rates versus 2020, we still think renewal rates will be below expiring rates as we move through 2021. So there's also some risk of fleet utilization. The market's extremely competitive right now, and that's really due to the significantly lower utilization in our competitors' fleets. So the net effect of all that is we expect lease revenue to decline in 2021 in the range of 35 to 45,000,000 at Rail North America. So let's talk about net maintenance expense for a minute.
I'll acknowledge that we've had difficulty in predicting it accurately recently. That's actually been a good news story as we've outperformed our expectations during the last two years by aggressively moving more work from those third party facilities into our own network and realizing the associated cost savings. So we do expect more of the same performance as we move through 2021, but the COVID related disruptions we're currently seeing are hampering those efforts. So at this point, it's a little difficult. We estimate maintenance spending will be within 10,000,000 in either direction compared to our 2020 expense.
And probably the last major factor to discuss for Rail North America is asset disposition income. As I said, secondary market at the beginning of the begin to pick up at the beginning of the second quarter a little bit, but investor appetite and inquiries picked up late in the year. We're expecting that improvement trend to continue as we move through 2021. There's some strong demand for the assets that we are taking to market. We've also seen scrap steel prices increase significantly since the December.
So we'll continue to optimize our fleet in 2021 through scrapping and the sale of railcars in the secondary market. And thus we expect that asset disposition income overall could be up significantly in 2021 given our current fleet plan. But again, we're gonna act economically as we always do, so our disposition plans could change with additional market volatility caused by COVID or other sources. So the net effect of all these factors is that we expect the negative lease revenue variance will be offset by higher disposition gains and continued cost control, and that drives our expectation that 2021 segment profit America will be essentially flat with 2020. Again, volatility in the market will determine whether it ends up up or down.
Moving to international rail, let's start with GATX Rail Europe. As I've discussed over the last two years, the European rail market pre COVID was extremely attractive, arguably more so than I've seen since we entered the market in the early 1990s. So we expect that favorable European market again in 2021. We've invested more into that market over the last two years. We're going to do it again in 2021.
We currently anticipate adding more than 1,300 new cars at attractive rates. So we also continue to realize small renewal rate increases in the existing fleet. We expect that to continue in 2021. So that new investment, the strong performance on the existing fleet, and hopefully less of that negative exchange rate movement we saw last year, is expected to result in an increase in Rail's Europe segment profit of at least $15,000,000 in 2021. At Rail India, although their 2020 fleet growth was constrained by manufacturing shutdowns due to COVID, the rail manufacturers have been back up and running for some time now, and we do anticipate significant growth in that Indian fleet this year.
In fact, we're currently expecting to add over a thousand cars to our fleet in 2021. So they also continue to diversify their car types, their product mix. And I think their growth is expected to increase their segment profit in the range of 2 to 4,000,000 in 2020 So combined with GRE, that means expected segment profit growth for Rail International in total is expected to be as much as $20,000,000 this year. So let's move to portfolio management. As I said earlier, the RRPF joint venture, that's that partnership with Rolls Royce, was hit hard by the reduction in global air travel.
And there's no forecast that we know of that foresees a full recovery of air travel in 2021. So you can expect that joint venture to be dealing with some severe impact on its customers through at least this year. We also expect lower remarketing income in 2021. You might remember 2020 was actually a big year for remarketing at RRPS, But that was due to that gain we highlighted in the third quarter that involved a large refinancing and sale of a group of aircraft spare engines. As we said, that's unlikely to reoccur.
So we expect our share of 2021 profit at this JV to be down 40,000,000 or more from last year. However, we do expect the lower segment profit at RRPF to be partially offset by spare engine investment that's made directly by GATX in 2021. So we mentioned the initial investment of this type in the earnings release. Let me expand on that for a minute. The RRPF joint venture has generally been self funding and it's been that way for several years.
For instance, they were able to invest over 900,000,000 in both '18 and '19 with little support from the partners. But due to the depressed market conditions in the airline sector and the resulting extremely high funding costs for aviation related companies, RRPF is somewhat constrained in its ability to invest at the same elevated level it was pre COVID. But as is typical in a down market, they are identifying very attractive investment opportunities. So to take advantage of these opportunities as well as be as helpful as we can to our partner who has other uses for its capital, we will invest directly in spare engine leasing transactions that we see as particularly attractive. So just in the past few days, we invested almost $120,000,000 for a group of engines on long term lease to two of the strongest airlines at very attractive prices.
And we do see more opportunities for this type of investment. And we'll keep you informed of this program as we move through 2021. So the net effect of portfolio management, we have reduced profit coming from the joint venture, new income coming from our direct investment, and segment profit is expected to decrease about 30,000,000 or more in 2021. So moving on to that recent Tri Fleet acquisition. Now, of course, we foresee the acquisition will be accretive.
But in 2021, we actually expect it to be dilutive by about 10¢ per share. And that first year dilution is primarily due to the accounting treatment for purchase price holdbacks and retention agreements that we structured into this transaction. And GAAP accounting requires that those payments be expensed as SG and A in 2021 if they are earned. So after 2021, we expect TriFleet to be accretive going forward. And speaking of that SG and A, we reduced that expense by about 5% in 2020.
That was general expense control, lower incentive compensation expense due to our 2020 results. And moving to 2021, we anticipate an increase of over $20,000,000 in SG and A. Now that sounds like a big increase, but over half of that $20,000,000 increase, in fact $11,000,000 of it comes from the increase from the addition of TriFleet. And half of that TriFleet increase is due to those transaction related expenses that I just mentioned. Again, those will not reoccur.
So apart from the tri fleet increase, the remainder of the increase from 2020 is spending associated with our assumption that business gradually returns to normal. And there's also increased growth related headcount and IT spending at Rail International. The last component to mention is the tax rate. It's projected to be about a point or so lower than in 2020, and that's due to a higher percentage of our income coming from non US entities. So the net of all this is our expectation that net income in 2021 will be down in that 10,000,000 to $25,000,000 range from last year.
That leads us to our guidance of $4 to $4.3 per diluted share and albeit with a lot more uncertainty than prior year's guidance. I do wanna pause for a moment, as I always do, to remind you that 2021 marks our hundred and third consecutive year of paying a dividend, and that's a track record that few companies can match. The GATX board actually meets tomorrow, and they will discuss our 2020 plans for the dividend. So obviously, we'll announce the decision at that time. I'd say the board certainly understands the importance of the dividend, and I think our century long streak is a great example of our record of success and our commitment to the shareholders.
So I'll close by saying, again, GHX employees did an outstanding job in 2020 executing our plan. And I'm confident that the investments that we're making right now in these difficult markets will prove to be rewarding ones for our shareholders going forward. So with that, operator, let's please open it up to questions.
Speaker 0
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, for any questions, please press star one now. We'll pause briefly for any questions.
We will take our first question today, and that is from Allison Poliniak with Wells Fargo. Please go ahead with your question.
Speaker 3
Hi, guys. Good morning.
Speaker 4
Good morning.
Speaker 3
Just turning to that overcapacity issue, it's something clearly you've been dealing with for a couple of years now. But as you look across your fleet, are you starting to at least see a little tightening in certain verticals? And if so, kind of where they would be that would give you a little bit more optimism that lease rate could maybe increase a little bit more there?
Speaker 5
Allison, it's Bob Lyons. I'll take that question. Good morning. There are certain pockets right now where we are seeing some increased demand and maybe some green shoots, as Brian had referenced in his opening comments. But broadly speaking, not enough to really lift overall lease rates and to provide a lot of momentum on that front.
I think customers still realize that the leverage is more in their favor than ours these days in terms of lease rates. And the other issue that you touched on is the manufacturing The footprint is still too large. In North America, we can still turn out too many more cars than are needed. So to the extent a customer had a sizable order, they still have the option of talking directly with one of the manufacturers and probably getting a fairly good response and they can use that to their advantage. So we need more tightening for sure.
Speaker 3
Got it. And then I guess that goes in line with lease rates, some improvement sequentially. Could you maybe discuss, would say broadly, just there is sort of your normalized lease rate that you have, and I know it's hard by car because there's so many different car types. But how far off that, I guess, whatever you perceive to be normal, do you feel we are today?
Speaker 5
Still pretty substantially if you look at kind of what we would view as our normalized rate for either tank or freight. You know, probably in the, you know, 25, 30% plus range versus normalized for tank and maybe even more on freight. You know, that said, sequentially, third quarter to fourth quarter, we did see some nominal improvement in both tank and freight, you know, kind of mid single digit type improvement quarter to quarter. So that's encouraging. It's a start.
Speaker 1
Perfect. Thank you. I'll pass it along.
Speaker 0
Thank you. And we'll move on to our next question, and that is from Justin Long with Stephens. Please go ahead with your questions.
Speaker 6
And good morning. Maybe to build a little bit on that last question. I think for 2021, you said you expect a gradual recovery in lease rates. Could you quantify the increase that you're expecting relative to where we sit today that's baked into the guidance? And then on the remarketing in North America, I know, Brian, you said it should be up significantly.
But I was wondering if you could help us with the order of magnitude there for 2021.
Speaker 5
Justin, it's Bob. I'll take both of those. So if we're looking at, first of all, the first question regarding lease rates and we think about what's baked into the budget for 2020 or the forecast for 2021 that we've provided, on the LPI, we're looking at a range of -five to negative 15%, somewhere in that zip code. The average expiring rate does come down in 2021 versus 2020, and we're expecting the average renewal rate to move up versus where we were in 2020. So the combination of those two factors will put us in that negative five to negative 15% range versus the negative 23.5% we experienced in 2020.
If we look at remarketing, as Brian mentioned in his opening comments, you know, we expect lease revenue to be down somewhere in the range of 35 to 45,000,000. And that's a combination of the current rate environment, the utilization challenges, the full effect of all the cars that were renewed at low rates in 2020. They have full year effect in 2021. So if you think about revenue being down in that range, remarketing would be up basically in the same range, 35,000,040 million dollars As Brian mentioned in his comments, those two essentially kind of offset each other, driving relatively flat segment profit at Rail North America in 2021.
Speaker 6
Okay. Very helpful. And one other quick one on the guidance, and then I have one last question. It doesn't sound like buybacks are getting factored in, but I just wanted to ask on that as well.
Speaker 7
Hey, Justin, it's Tom. So I'll take that one. As you know, we have $150,000,000 remaining on our current authorization from the Board. We did not buy back any stock in 2020 after purchasing $150,000,000 in 2019. We originally paused on our stock buyback because of the uncertainty around COVID, but we decided not to resume the program when markets stabilized because we anticipated investment opportunities across the market and in adjacent markets.
We've discussed some of those opportunities today, including the Tri Fleet acquisition and the direct investment in aircraft spare engines. We continue to believe that there will be further opportunities for investment. So we'll be thoughtful about reinitiating the buyback program. So we'll kind of take that as it comes.
Speaker 6
Okay. But could you clarify if that's something that's getting baked into the 2021 guidance? Or would any buybacks be upside to the range you gave?
Speaker 7
Yeah. So the real key there is it's definitely included in that range, the $4 to $4.3 that Brian provided. The magnitude of it is not that material.
Speaker 6
Okay, helpful. And maybe to just close, Brian, question for you on just the investment opportunities. It seems like there's a pretty sizable opportunity set out there in various different areas, and we've seen that with a couple of the announcements that you've made here recently. Where are you seeing the most attractive opportunities right now just from a valuation perspective and in terms of driving long term value for shareholders?
Speaker 2
Yeah, I think it's reflected in the two investments we recently made with the direct investment in spare engines, the Tri Fleet acquisition. And in general, Rail International is offering more investment opportunities that meet our return criteria than Rail North America right now. I think they're there in Rail North America, but to a large extent, Justin, it's like beating your head against the wall. I I don't think I think there are owners that want to get out of the business, but they haven't come to grips with the value of their fleet. And so we'll still work on it, but you haven't seen that stuff move.
And we, as you know, we're not going to overpay. So, you know, Bob and I are constantly working on this, but people aren't there yet.
Speaker 6
Understood. I appreciate the time. Thanks.
Speaker 0
Thank you. We'll move on to our next question, and that is from Matt Elkott with Cowen. Please go ahead with your question.
Speaker 8
Good morning. Thank you. Just a quick question on the guidance. The, $0.10 dilution from the acquisition is reflected in your guidance. Right?
Speaker 7
That's correct.
Speaker 8
Okay. And then my my next question, maybe a follow-up on the, net gains on asset dispositions. I I think the number for this year for 2020 is 41,700,000.0. That number, is it the same, adjusted for ASC, divestiture, or is it different?
Speaker 5
Well, I I think if you're looking at the remarketing income component, the most the the key thing to look at, Matt, is the Rail North America column, because that's how we're comparing '20 to '21.
Speaker 9
Mhmm.
Speaker 2
Yeah. Any any gain or loss on the sale of ASC is in discontinued operation. Yeah.
Speaker 8
Got it. But the the your remarketing income in 2020 must have been the lowest in at least the last five or six years. Is that correct?
Speaker 5
That's correct. And that's really that's a reflection of the fact that given all of the uncertainty in the marketplace, and all the challenges in 2020, we were really cautious about going to market with packages. As you know, we do that quite frequently. We didn't in 2020. And even as things began to improve a little bit in the back part of the year, we were still a little bit cautious about going out to market.
Keep in mind that you don't go to market and generate gains the next day. Things take time. We are in the market now with some packages, and we're seeing renewed interest for sure among the investor base for growing and adding assets again. So that gives us confidence, some confidence in that number coming into 2021.
Speaker 8
Got it. And and Bob and and Brian as well, you know, a lot a bigger picture question. The number of railcars in storage has declined from, I think, 526,000 in July to just over 400,000 in January, and the manufacturing backlog is now down to below 35,000. Are you surprised that lease rates have not reacted more quickly than they than they did? And, you know, what do you think needs to happen?
You know, how what what's the, you know, number of cars in stores need to go down to for lease rates to start reacting, you know, favorably more favorably?
Speaker 5
Sure. First of all, I'm not surprised that it hasn't had a bigger impact on lease rates. That's still a substantial number of cars in storage. You know, the most recent data was just over 400,000 cars, as you noted. That's 25% of the North American fleet.
And you would historically like, you know, see that number more in the 12% to 15% range before you'd really start to get meaningful momentum on that lease rate number or at least heading in that direction more aggressively. The orders in the fourth quarter, from our perspective, that's encouraging. Just over 3,000 cars ordered, really just a handful, a couple 100 on the tank side. So you have the backlog now down at 35,000. But again, keep in mind, the market essentially built it well in excess of replacement levels for about ten years.
So it takes some time for that to turn around.
Speaker 2
Yeah. That's also the macro view you're looking at. And the micro view is our competitors' fleets are still have very low utilization. So it's one thing about cars that haven't moved in sixty or ninety days. It's another thing when your competitors' fleets you know, they're really trying hard to put these fleets back to work.
Ours is at 98%. You know, it's not gonna get better until you start to see utilization improve, if it can, at those fleets.
Speaker 5
Yeah. One other factor I'd mentioned, Matt, that gives me some optimism here coming into the year is the fact that scrap rates have moved up so sharply here in the last two months. One thing we need to have happen, and we've said this for the last couple years, is that we need more cars to scrap out of the fleet. Scrap rates have finally moved, and they've moved pretty sharply here in the last two months. So we're optimistic that competitors will finally start scrapping out some of that old idle equipment.
We'll do the same to the extent it makes the right it's the right economic decision for GATX. We'll scrap some cars out, you know, more than an ordinary course. And we're hopeful that the industry does the same.
Speaker 8
Mhmm. And, Bob, within that 409,000 or just over 400,000 cars in storage, Isn't there a certain population that shouldn't really be affecting the, the lease rate, dynamic? Because, I mean, the you know, there might be 40 or 50 or 60,000 frac sand cars that are brand new, but, you know, the the the, the headwinds are very well documented on those, and they shouldn't be affecting the rest of the fleet. And I would imagine there's a good number of outdated, tank cars in that fleet that, you know, won't come back into service regardless of any type of market dynamic. I mean, is there any way to gauge what the real number, the the real relevant number of cars in storage is?
Speaker 5
Well, I I would agree with you, and I would say, you know, that's why I didn't say the number needs to go to zero from 25%. Yep. If if it goes to that 12 to 15% range, I think you'll see some real improvement in lease rates. There is some base load of cars that's always going to fall into that category because of the way the calculation is done, first of all. It's cars that have not had a loaded move in the last sixty days.
And second of all, yes, there is some portion of that fleet that's just obsolete. It's not going to come back to work. And the owners of those cars haven't come to the conclusion yet or faced their day of reckoning that those cars are not gonna come back, and they're not scrapping them out. So they stay in the idle count. Hopefully with scrap rates moving up, some of that equation changes.
Hey, if you're looking
Speaker 7
for a leading indicator, you know, as Bob pointed out, it's really hard to call the right number on those idle cars in storage. A thing you can take a look at is the length of time to get a new car. That is still pretty short. And when that starts to lengthen, that'll be your indicator that for more and more of those car types, that ready alternative is not available out of anyone's fleets. And that's when you'll start to see some more pronounced improvement in the lease rate.
Speaker 8
Yeah. That makes sense, Tom. And, you know, Tom and, you know, Bob mentioned that the order number was very low in q four. Do you guys have any kind of, you know, theory on that, you know, whether some of it might have been affected by all the political and pandemic uncertainty, and we may actually see, you know, opportunistic buying because pricing is still pretty low by some, you know, major lessors including yourselves. You know?
So I
Speaker 5
I would say I don't think there is any political element to it. I think there's a realization that there's a lot of excess capacity in the marketplace today, that some investments that people have made over the course of the last few years have not turned out the way they anticipated, which gives people pause on ordering. So I think it's more market elements that drove that number down to where it is. And, you know, we certainly were not disappointed to see the order number down where it's at. Other people's were.
So thanks so much. I Yeah. Appreciate You gotta take the long gotta take the long view, Matt. Right? So that's right.
Speaker 0
Thank you. And we'll move on to our next question, and that is from Bascome Majors with Susquehanna. Please go ahead with your question.
Speaker 10
Yeah. Thanks for taking my questions. Wanted to go back to scrapping given the, you know, incremental focus on that with with rates at multiyear highs, at least for scrap steel. Do you guys have a good sense in in your supply demand models of what North American railcar scrapping capacity could be if it were running full tilt? And and any sense of of however you measure it, where we might be running relative to that?
Speaker 5
Yeah. I can't give you a number specifically in terms of you know, it's probably up in the thirty twenty five, 30,000 car range, somewhere in that category. But you raised a very good point, which is just because scrap rates moved up sharply here in the last couple months doesn't mean everybody can rush to the door and scrap cars. It takes time. They have to be staged, oftentimes cleaned, shipped to the scrap the scrappers, they have to have the capacity to deal with it.
They don't get to ramp up immediately to handle that. So it will take some time for that to work its way through the system.
Speaker 10
And perhaps the other side of high steel prices and and with all the focus on scrapping and and the supply response, I mean, historically, high steel prices have led to high railcar prices and by definition or or or or derivation, higher lease rates on existing railcars. And I realize you kind of maybe tangentially addressed that earlier with the fact that lead times are still quite low at manufacturers. But are you feeling any inflation in steel prices helping you in your ability to command better lease rates, or is it is it really just an oversupply issue and and the rest of this is is somewhat circular with that?
Speaker 5
Well, there is certainly a correlation there, Bascome, but I would say we're in that very early stage of that right now. But if if scrap rates scrap rates continue to be as high as they are, steel prices in general continue to be high or move higher, yeah, it will work its way into car costs for sure, and that has to be recovered through lease rate.
Speaker 10
Last one for me. Any thoughts on any more than normal rebalancing of the North American rail portfolio via via acquisitions or dispositions this year? Thank you.
Speaker 5
Are you talking about the balance between tank and freight?
Speaker 10
You know, either between that or even within, you know, maybe some more narrow categorizations that you guys use.
Speaker 5
Well, there are definitely some categories of car types that we're most attracted to right now. For obvious reasons, I won't, divulge what those are, sitting here today on on a broad call like this. But there are definitely pockets of car types that we are very attracted to where we think there's excellent investment opportunities. And we're well positioned, very well positioned to take advantage of those, and we'll do so. But in terms of a significant change in the portfolio composition, I wouldn't look for anything on that magnitude.
Thank you.
Speaker 0
Thank you. And we will move on to our next question, and that is from Justin Bergner with G Research. Please go ahead with your question.
Speaker 9
Good morning, Brian, Bob, Tom, Sherry.
Speaker 4
Good morning.
Speaker 9
I wanted to start off on the issue of your fleet size and composition in North America. You referred to your fleet plan at the end of the call, and it seems like the dispositions that you're anticipating could, you know, semi materially reduce the size of your North American fleet. Are you committed to keeping your North American fleet the same size? Or, you know, if market conditions are right for dispositions, would you consider allowing it to to size down some somewhat materially?
Speaker 5
Well, having scale in the business matters, so we we do pay attention to that. But in reality, I'm we're trying to generate the best risk adjusted return we can off the portfolio, not have the most cars. I think others in the industry who have pursued that strategy have probably regretted it. So we are being, as we always will be, extremely selective about what we're buying and selling. So keep in mind, even if, for example, we scrapped or sold three, four, 5,000 cars in 2021, under our committed supply agreements, we're taking delivery of 3,000 cars.
And we're always in the secondary market buying cars. So the net fleet reduction would not be that substantial.
Speaker 9
Okay. With respect to the scale issues, is it assumed that you'll lose the maintenance opportunity when you sell a car, or is there the opportunity to maintain third party maintenance?
Speaker 5
We we, at this point, are not pursuing third party maintenance. We prefer, for obvious reasons, to have our capacity available to maintain our cars.
Speaker 9
Okay. With respect to the lease rates, I just it came at me a bit quick. Did you say lease rates were up sequentially mid single digit in the fourth quarter? Or was it low single digit versus the third quarter?
Speaker 5
Low, around four or 5%.
Speaker 9
Okay. And then my last question relates to the direct investment opportunity. This $120,000,000 outlay, was this actually purchasing engines from or purchasing leases from the JV? And should we expect, you know, additional outlays of this size in the coming quarters or or years?
Speaker 7
Justin, this is Tom. So this type of investment, you know, as alluded to in the press release and in Brian's opening comments, is attractive investment that this is the right time in the market. And we'll certainly look for additional opportunities to pursue that type of investment with Rolls Royce, the Rolls Royce JV as the manager of that investment.
Speaker 9
Got it. But to the to the car were the cars actually sold from the JV, or are you picking up sort of leases in the third in the external market? Or if I don't know if
Speaker 2
you're at liberty to say.
Speaker 7
Yeah. Yeah. I'm I'm sorry, Justin. But but, yeah, we're really it it's really, a question of looking at both of those avenues.
Speaker 9
Okay. Understood. That's it for me. Thank you.
Speaker 0
Thank you. We'll move on to our next question, and that is from Steve O'Hara with Sidoti Capital. Please go ahead with your question.
Speaker 11
Yes. Hi, good morning. Thanks for taking the question. Could you talk about the maybe the multiple on the TriFleet acquisition? Then what types of returns are typically seen in that market?
And then maybe how that compares to kind of a I'm not as familiar with that market, but I mean maybe you can compare it to the kind of high touch, high knowledge base needed in the railcar market versus other kind of pure cost capital markets?
Speaker 4
Sure. I'll take that. This is Gauthier. We don't look at EBITDA multiples, especially for leasing businesses. We utilize the discount cash flow methodology to evaluate the investment opportunity.
When we apply that methodology and assumptions, Triquet acquisition generates an attractive long term returns for GE Tech shareholders. And then if you look at how do we compare those returns and, you know, just let's say, to Rail Europe, the lease rate factors are definitely higher than our European railcar leasing business. But when we look at the risk adjusted basis, I think we'll need some more time to have first hand experience before I answer that question. But overall, our return projection suggests that returns to be comparable or slightly better than, railcar, leasing business in in Europe. And then, I think the question that you asked about, you know, what gets the returns, is it the full service component?
TriFleet does not provide directly maintenance services, but it does provide services in the form of technical advice. So they do that on maintenance repairs. They they do that on modifications, and then they also look into technical specifications for new orders. So it's a it kind of comp there's a highly complex fleet management that require because these tank containers are located all around the world. There are also local as well as global regulations.
So Tri Fleet definitely helps with the compliance aspect as well. So while it's not a full service lease product, definitely, technical, capabilities and customer service, plays a role, in this business model. And then finally, lower cost of capital definitely helps, which we think will bring to the picture and accelerate Tri Speeds growth.
Speaker 11
Okay. That's very helpful. And just moving on to going back to the RRPF or the engine direct investment. Can you just talk about the makeup of the engines? I know the RRPF portfolio, think, is kind of heavily weighted to wide body passenger aircraft.
And I mean, can you talk about maybe is there a different attack in terms of looking at aircraft types and passenger versus cargo, things like that within the direct investment?
Speaker 7
Yep. So all the engines that we invested in are part of the Trent XWB family, which power various configurations of the Airbus a three fifty. All the engines are relatively new, and they're on long term leases.
Speaker 11
Okay. And then just can you just remind me, does the RRPF report kind of real time? Or is there a delay in a quarter or something like that, like some JVs?
Speaker 7
So the RRPF JV reports on a real time basis. But just to clarify, this investment that you just asked about is outside of the JV, but it will show up in the same segment in the portfolio management segment.
Speaker 11
Okay. Okay. Great. Alright. Thank you very much.
Speaker 0
Thank you. And at this time, there are no further questions. So I'll turn the conference back over to Sherry Hellerman for any closing comments.
Speaker 1
I'd like to thank everyone for their participation on the call today. Please reach out to me with any follow-up questions. Thank you.
Speaker 0
Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.