As we continue to try to build your understanding of rent-to-rent and how it's different than rent-to-sell, I want to focus on a few key areas. First and foremost, a rent-to-rent fleet requires an investment, and in many cases this is why dealers haven't really moved forward very aggressively in the marketplace because they're a little hesitant about the investment. Maybe it's the size of the investment, maybe they don't exactly understand how and when they're going to get their money back, but it's different than the rent-to-sell fleet because the rent-to-sell fleet is often on a manufacturer's floor plan of some description, and it may be completely underwritten and there may be no carrying costs or it could be a real low interest program that enables the dealer to rent it for a certain period of time or up to a certain period of time, and then he needs to roll it out of the fleet. So when we talk about rent-to-rent, it's not only just the mechanics of the different nature of maybe more frequently renting equipment and maybe to broader customer base and so on. It really has a lot to do with the investment dollars and the financing required to put together a rent-to-rent fleet. Secondly, profitability is a key piece of rent-to-rent because in the rent-to-sell business, we're primarily trying to show profit at the end. When we sell the machine, we're looking for gross profit at that point. During the owning and operating period, let's just say for the first 6, 12, 18 months, maybe 24, in the rent-to-sell business, we're really not trying to show near-term profitability. We're going to make that up when we sell it. In the rent-to-rent business, however, it's different. We are looking for near-term margin. We are looking for profitability, and so that's a very distinguishing characteristic. Thirdly, we are trying to create a pipeline of used equipment. In the rent-to-sell business, our primary goal is to move a few specific pieces of equipment that maybe they happen to be not competitively priced, and so we're working to try to get the price down into a price point that a customer would be interested in. In the rent-to-rent business, what we are trying to do is we are trying to have a broad group of used equipment over time, and so the first year in putting together a rent-to-rent fleet, you're not going to have anything to sell, maybe not even at the end of the second year. It starts to become interesting for you and the customer in years 3, 4, 5, and 6 because now we have gotten some good use out of the equipment. We've written it down on the books. We've made near-term profitability, and our margins are going to be considerably better than when we started the process, and we will have this used equipment year over year. Fourthly, a rent-to-rent fleet that's financed correctly should also create positive cash flow, and the point there is that most companies could use additional cash reserves, and so if I am renting out a piece of equipment for $4,000 a month and my payment on that is $2,000 a month or maybe $2,500, I'm actually creating cash flow that will help me run my business, and so that should be a key function of a well-organized rent-to-rent fleet. We also have time-based depreciation, and that's in contrast to revenue-based depreciation. We talked about that a few slides back, how in the rent-to-sell business, we're usually not charging ourselves any depreciation if the machine is just sitting there, but when we do rent it, then we take a percentage of that and we charge ourselves and we write it down on the books. Most of the time, that's a very aggressive approach to depreciation. In the rent-to-rent business, we are taking a time-based depreciation, which means that every month, we book depreciation on that machine according to a schedule, and it really doesn't matter whether that machine rented that month or not, because it has nothing to do with income. It has everything to do with time, and so time-based depreciation is a key attribute of rent-to-rent. Lastly, we are touching new customers with our effort in rent-to-rent. We are trying to find customers that maybe don't use our products right now. Maybe they prefer a different brand, but when they're searching for a rental machine, they would consider using an alternative brand, and so rent-to-sell customers oftentimes are people that already like our brand, and maybe they already own some of our other equipment, so it's a group of customers that are closer to us for rent-to-sell, and typically for rent-to-rent, we get to touch new customers. So I'd like to give you a basic understanding of depreciation, because whether you are a salesman, and you are selling equipment, and you hear people talk about the book value and the difference between book value and market value, or you're a rental coordinator, or potentially a rental manager, if you're the rental manager, the depreciation that you're going to see on your operating statement is probably going to be the biggest expense item that you'll see. I'll say that again. Depreciation is your biggest expense item. It's an internal charge against, if you will, the deterioration of your fleet, and so as a rental manager, for you to make money in the rent-to-rent department, you're going to have to outrun that depreciation charge. You're not going to be allowed to just have the equipment sitting there by the fence and eat this expense every month. You're going to have to create income against that. So I want to show you the basic principle here of depreciation. So up in the top left-hand corner, you can see that we've got a blue line, and it says $112,000. The idea here is that this particular machine, let's just say it's a brand new backhoe, and it's got a street value if I was to sell it brand new for $112,000. The red line in the point that shows $100,000 would be my dealer net. I'm buying it for $100,000. I'm putting it on the books for $100,000. If I sold it today, I could make potentially 11 or 12% gross profit margin, the difference between my cost and the retail price. Pretty straightforward. What I want you to see is how over time, the market line changes, and so the first year, I'm going to suggest to you that the street value on that particular machine would drop potentially between 20 and 25% just the first year. So it no longer would sell for $112,000, it might sell closer to $90,000. And then at the end of the second year, it's down around the $73,000 or $74,000. And then you can continue to track that number, and you see that it starts to slow down. The first two to two and a half years is pretty rapid decline in value, and then it starts to stretch out. So now let's take a look at the red line. The red line means this is how we are going to treat depreciation. This is how we're going to charge ourself during this holding period. In the next more advanced rental course, we'll talk about different strategies for depreciation, but the basics are that you can either do it time-based or you can do it revenue-based. And you can either stretch it out over a five-year period or seven years, or you may be able to do it with a combination of five years with a residual value. So what you're seeing here on the red line is that what you see is we chose a five-year period going to a 10% residual. The $10,000 there means that I'm writing that down until it gets to 10%, and then I'm not going to depreciate anymore. Because if the machine at least cranks up and runs, most likely I could sell it for a minimum of $10,000 at the end of year five or six. But what I want you to see is how the spread gets better the longer you go. So the first year we could make $12,000 on it, $112,000 versus $100,000. If you'll look at the end of the first year, we actually couldn't make as much as we could the first year, day one, because now we could only make about $10,000. Because the market value is dropping faster than what we're depreciating it on our books. But then at the end of the second year it starts to open up. So everything in between those lines, the blue one and the red one, is unrealized gain. That means that that's profit margin that we are anticipating being able to claim at whatever point in time we decide we want to sell that machine. It's at that point that we recognize the gain, and it's at that point that we would have to pay the taxes. So there's different strategies for depreciation, you just need to understand the concept of there's a market price that's changing out there, and then we have taken a choice internally on the books of how we're going to make this internal charge against a rental machine.

Rent-to-rent

Rent-to-sell

Equipment rental business

Profitability

Used equipment