James D. Husband, who founded railroad equipment finance professional services firm RailSolutions LLC in 1997 and served as President until January 2019, recently transitioned to Senior Consultant. Here, with President Mike Mahoney, he discusses his long, distinguished career and offers his observations about the market with Railway Age Editor-in-Chief William C. Vantuono.
First, some history: Jim Husband’s career in the railroad industry began in 1974, when he was hired as a financial analyst at the United States Railway Association (USRA), the quasi-government agency tasked with reorganizing Penn Central and other bankrupt eastern railroads. “This was a great experience in understanding freight railroad economics, the regulatory environment at the time, and the size of investment needed to return the reorganized railroad to profitability,” he recalls.
Railroad equipment financing “had always been pretty simple throughout most of the 20th century, with most railcars and locomotives financed by equipment trust certificates and conditional sale agreements issued by railroads,” Husband notes. “In the mid-1970s, approximately 80% of all equipment was owned by railroads, which had a regulatory common carrier obligation to provide railcars to all shippers, with the exception of tank cars and highly specialized equipment. In the mid-1960s, commercial banks were granted regulatory approval to enter into single-investor and leveraged leases. For the first time, financial institutions recognized the need for independent appraisal and asset valuation services.”
Husband’s next stop was Conrail, where he designed and implemented the economic limit of the repair program used to cull out the thousands of aging, bad-ordered and obsolete railcars that should have been retired years earlier, but were still in storage. In addition, he was tasked with developing discounted cash flow ROI (return on investment) guidelines as a part of the capital budgeting process, which included railcar and locomotive acquisitions. Equipment retirements and acquisitions required the use of sound appraisal and valuation methodologies. A large part of Conrail’s equipment investments in the late 1970s involved large AAR Rule 88 rebuild programs, which were financed by leveraged leases.
“In the early- and mid-1970s, the industry experienced a severe shortage of boxcars, which led to several artificial incentives to build new railcars,” Husband recalls. “In the mid-1970s, several leasing companies were formed, among them National Railway Utilization Corporation (NRUC) and Brae, that specialized in leasing free-running boxcars sold to individual investors as a tax shelter. The boxcar shortage rapidly turned into a surplus. As it turned out, these investments were good tax shelters—and really bad investments.”
Husband joined NRUC in 1979. His role was to provide remarketing and appraisal services to financial institutions. More significant, he worked with Rob Blankemeyer, who 33 years later joined him at RailSolutions LLC as Senior Vice President and still serves in that capacity. In 1980, Husband moved on to First Atlanta Corporation to manage its investments in several railroad equipment leveraged lease portfolios which were ultimately sold at attractive gains.
“The railroad equipment market suffered through a downturn that lasted for most of the 1980s,” Husband reflects. “The most noteworthy event of the 1980s was the passage of the Staggers Act in 1980, but the benefits of deregulation did not become apparent until later in the decade. Staggers allowed railroads and shippers to enter into confidential freight transportation contracts, and railroads were allowed greater flexibility to abandon unprofitable rail lines and unprofitable services. Both features were instrumental in allowing railroads to shed fixed costs that had burdened the industry for more than a century.”
Under Staggers, shippers and railroads were able to enter into freight transportation contracts in which they could set rates and terms. Shippers had the option to supply their own railcars, which resulted in lower rates. The railroad could then price its transportation services and lock in the rate operating margin for the term of the contract. This triggered an acceleration in railcar ownership by shippers and leasing companies that reduced railroad railcar ownership from 80% in the 1970s to about 25% currently. The number of operating leasing companies, lenders and investors increased dramatically between 1992 and 2000, and the number appraisal clients increased at a similar pace.
Husband joined transportation consulting firm R.L.Banks & Associates in 1991 and grew the firm’s appraisal practice. “During this period, the number and size of appraisal requests grew, and activity in the leveraged lease market increased,” Husband notes. “Since these are highly structured transactions, appraisal findings presentations became more lengthy and more complex.”
In 1997, Husband formed RailSolutions LLC. In addition to offering appraisal services on a project-by-project basis, then firm provided consulting services to a significant number of investors who previously had relatively little experience with the railroad industry. These requests led to initial publication of The Investors’ Guide to Railroad Freight Cars and Locomotives in 2000 and the RailSolutions Railroad Equipment Historical Database in 2012.
For the rail equipment financing market, the Great Recession “had a significant impact on the leveraged lease activity market as debt sources essentially dried up between 2008 and 2010,” Husband recalls. “While several railroads and large lessees closed capital lease transactions between 2009 and 2012, the leveraged lease market never recovered. Since 2012, most of the growth in demand for large-ticket valuation services has been focused on portfolio valuations and ABS transactions. These appraisal requests typically call for income approach valuations in which we take into consideration the value of existing committed leases and projections of net cash flows over the remaining life of the equipment appraised. We’ve developed a propriety discounted cash flow model in which we project supply and demand considerations by car type, and maintenance and fleet management costs to determine our best estimates of fair market value. We also provide traditional collateral appraisals for our portfolio and ABS clients and other more standard appraisal requests.”
RAILWAY AGE: You spent some time in finance (First Atlanta Corp.) in between rail industry assignments.
JIM HUSBAND: I’m really glad I didn’t spend more than 12 years in banking. A lot of that is all the compliance issues, and so on, that bankers have to deal with these days after the Great Recession. I don’t think I have the patience or the demeanor to be in the banking world these days. But most of our clients are banks or some kind of financial institution. I feel their pain, and all the compliance, and so on, they have to put up with these days.
RA: At R.L. Banks, you worked closely with founder with Bob Banks.
JH: Bob was a great guy. I had all the respect for him that you could possibly have. In fact, he had offered me a job in 1979, but that’s when I went in to banking. When I was ready to get out of banking 1991, I called Bob and said, “Hey, you remember the job that you offered me in 1979? Are you still interested?” And he said, “Sure!” So we didn’t have to go through a very long interview process.
RA: Talk about your start at the USRA. How did you land there? You were in the thick of the Conrail formation.
JH: I was a starving student, working on a Ph.D at the University of Maryland. And the registrar forgot that I existed and they weren’t paying me what they were supposed to. The dean knew that I was getting a little bit frustrated. He said, “Look, we don’t usually do this for our graduate student instructors and lecturers, but we had a request from this place called USRA that needs a financial analyst, primarily just a number cruncher.” The finance department at USRA, set up the interview. I went down there and they hired me. It went from part-time job to a whole full-blown career in a period of about a year. And after the final system plan was adopted, there was a transition team at what became Conrail. I started on the transition team in 1975, on the economic analysis group, which had to analyze all of the capital expenditures for the next several years and had a big capital budget back then, as you can imagine.
I was very lucky. I had a lot of responsibilities for a young guy. We had to submit the economic investment analysis, which was centered on a capital budget for each and every project. We would rank them best to worst, and whichever ones met the hurdle got put in the budget. A lot of those were equipment acquisitions. So, I got a crash course in profitability by car type and which models of locomotives we needed to acquire, that sort of thing. I was at Conrail for about five years. We went from seeing some not-so-great financial results in the early years, million-dollar-a-day losses and that sort of thing. But it was kind of interesting to watch the projects unfold: “Hey, look, if we reconfigure this part of the new Conrail system, then it’ll save time, and money here and there and all over the place. Seeing all those investments come to fruition was very satisfying.
RA: Railcar ownership transitioning from the railroads to the leasing companies, which then lease them out to the customers: When did you start to realize that this was someday going to be the predominant form of equipment acquisition?
JH: I didn’t know it at the time, but the trigger was the Staggers Act. That changed everything. The railroads really didn’t take full advantage of being able to cut their investment in rail cars until the early 1990s. But by the late 1980s, some railroads started looking at establishing confidential freight transportation contracts with shippers that didn’t have to go through the Interstate Commerce Commission. They didn’t have to go through the ICC, and the bureaucracy that went with it, to get rate increases.
The railroads had all along known that they were bound by a whole bunch of fixed costs, investment in rail cars being one of them. And they needed to try to shed those fixed costs or turn them into variable costs. So, by the late ’80s, they were saying, “We have all these freight transportation contracts, with specific terms. If we can lease rail cars for X a month, we can do cost analysis on the rest of the move and whether it’s profitable or not.” They could then lock in a profit margin, which they never could before. As a result, they started leasing cars for the same term as the freight transportation contract. If the contract wasn’t renewed, they didn’t have to renew the lease. But they really didn’t take full advantage of that. Nothing happens all that rapidly in the industry. I think it would have been pretty unusual for them to pick up on it as early as, let’s say, 1985, because, before 1981, they really weren’t able to enter into freight transportation contracts.
In the early ’90s, we started seeing some of the operating leasing companies become active. GE Capital, for example, didn’t really get big into the operating lease business until then. That’s when things really started to take off. If you take a look at a graph of car ownership then, the railroads owned and controlled 70% to 80% of all the railcars in service. By 1995, it was down to maybe 35%. All the rest of that went to leasing companies, primarily. For the railroads, those cars came off their balance sheets.
RA: No one seems to be able to find an easy solution to the cyclicality of the railcar market, which remains on a rollercoaster. It has taken very steep dives at least three times, where it fell off a cliff into a starvation diet of producing 5,000 to 10,000 cars a year, to all of a sudden, back up to, say, 80,000 or 90,000. What needs to happen to stabilize the market? Can it be stabilized? Or at least get to where it’s not a rollercoaster, but gently rolling hills?
JH: I was afraid you were going to ask that question! Yeah, the ups and downs have been pretty obvious. But how you fix it is really the question. The same characteristics come up every boom to bust; the same things happen. Traffic volumes go up. A lot of overbuilding. If the traffic volumes always stayed stable, that’d be fine, but nobody can control that. The environment we have now has a lot of passive investors, as opposed to companies like GATX, which knows its customer base, and has people with railroad experience and better insight to say, “Okay, wait a minute. This market may be getting a little bit overheated. Let’s back off.” Passive investors may not have practical railroad industry experience. I would encourage them to do a little bit of homework, and get some cursory insight into what that industry is all about, before they get into making big investments. Sometimes it’s difficult for them to see a downside.
MIKE MAHONEY: If you’re looking at orders, that’s boom/bust cycles like crazy. The OEMs are very competitive. The whole industry overbuilds, and then everything dries up. But as far as the financing of railcars, you have all these financial institutions willing to finance, to lend 80 cents on the dollar against a railcar. And that only works if financing doesn’t dry up and go away for a few years and then come back and have people lending at crazy margins. It’s much more stable than that. It’s much different from the order book. The reason that financial institutions can do that is because they have faith that the value of these railcars as 40- or 50-year assets. They will maintain their value through the cycles. So, it’s the appraisers, really, that are kind of the lubricant of that industry, providing values that are supposed to be over the long term, not “What can I sell this rail car for right now?” And right now, you can’t even sell a frac sand car. But overall, the cars maintain their values, and part of the function of the appraisal industry is to provide comfort to investors.
RA: How do you define a passive investor? Can you give me an example?
JH: We deal a lot with private equity investors who also finance aircraft, and so on. A lot of commercial banks, even though they’ve been dealing in rail equipment, or find rail equipment acceptable and have been doing rail equipment loans for years, are still bankers first. They can be experts on the railroad industry; they’re invested in the industry—but their heart and soul may not be in it. They may look at a railcar more as a commodity, purely from a financial standpoint.
MM: True, they’re not operators. They do serious market analysis, but they’re not always out there talking to people about whether they’re willing to pick up a railcar when it comes off lease. They have to hire somebody to do that.
RA: You’ve said that there is no market for railcars as a whole, but rather, many markets for different car types and specifications. Each submarket has its own drivers and market forces that can make it over-supplied, as we’ve just talked about, or with strong demand. You’ve also said the ability to anticipate market developments distinguishes successful investors. Expand on that.
JH: In the introduction to The Investors’ Guide to Railroad Freight Cars and Locomotives, we say that we’re not trying to give you a big economic overview about when the next downturn of the next big boom period is going to occur in the railroad industry. The factors that influence values of one car type are very different than those factors that influence other types. The best example I think I can think of is grain hoppers. That market is influenced by mother nature. It’s not directly related to any other standard economic indicators—certainly not the same ones that would affect coal cars. You need to get down into the weeds on a car-type-by-car-type basis. You can’t sit back and look at general statistics and so on, and be able to tell whether or not investment in railcars is worthwhile at any particular time.
RA: The blanket statement I’ve heard so many times is that freight rail traffic is a bellwether of the economy. So, if the traffic is going up, it means the economy is going to follow. If it starts to go down, the economy is going to follow. I’m not so sure if that blanket statement is accurate anymore. You have any thoughts on that, especially in light of what you just said that there are so many different markets and there are so many different economic indicators.
JH: That sounds like something Warren Buffet would say. He always wants to know what’s happening in rail traffic. But then you look at things like coal. It’s been decreasing for years; it’ll continue to slide down. That’s a function of getting our power supply from different sources, not anything to do with economic activity. Sand is falling off a cliff. That’s a function of change in the sand that’s used, and less fracking. So, I’d say it’s probably been more accurate in the past.
We try to be consistent and relatively conservative. Most of our clients are of equipment buyers, investors in equipment. They’re not sellers. So, the last thing we want to do is say, “The market is hot right now. Go spend your head off and buy lots and lots of rental cars. Everything will be okay.” We recognize there are going to be some ups and downs in the market. The one thing that worries me most about people investing in railcars is that they tend to forget that if they’re in it, they need to keep their investment out there for a long time. There’ll be some ups and downs, and so on, but we don’t want to get their hopes up too much by saying, “Oh, this is great. Five years from now, your car is going to be worth X.”
RA: It has often been said railroading and gets in your blood and you never truly retire. There’s just too much to do and it’s too much fun, frankly. It’s too interesting. What’s next for Jim Husband?
JH: Now that Mike is on, I’m going to start cutting back my hours. My daughter Katie is with the firm, so we’re well-staffed, but I’m still going to be active. I love doing this stuff. I don’t want to get out of it entirely. And as long as RailSolutions is busy, I’m hoping to have some influence and keep working on evaluation projects.