While its bigger sibling struggles with operations, Herc Rentals has a sunnier outlook for the coming year.
Spun off from Hertz Global Holdings earlier this year, the fortunes of Herc Holdings brightened after the presidential election. The newly formed company's headquarters in Bonita Springs is poised for employment growth.
When car-rental giant Hertz Global Holdings relocated its global corporate headquarters to Southwest Florida from New Jersey in 2014, few people expected the region would get a two-for-one deal.
But that's exactly what happened this summer when Hertz spun off its equipment-rental business into a separate publicly traded company on the New York Stock Exchange. Now, Southwest Florida is home to two corporate headquarters: car-rental operator Hertz Corp. in Estero and Herc Holdings, which operates through its Herc Rentals subsidiary in nearby Bonita Springs.
While most of the attention has focused on Hertz and its management and operating struggles, investor enthusiasm for Herc Holdings surged after the election on news that the government might spend $1 trillion during the next 10 years on construction projects. Herc Holdings' stock (symbol: HRI) rocketed by as much as 38% in the month following the election of Donald Trump.
“I think the whole market environment is pretty upbeat as a result of the presidential election,” acknowledged Larry Silber, the president and CEO of Herc Holdings, the parent company of Herc Rentals.
Herc Rentals is really not a new company. It has grown within Hertz for 50 years and rents equipment through a network of about 280 locations with 4,700 employees principally in North America. In 2015, when it was still a part of Hertz, Herc generated $1.7 billion in revenue from key markets that include commercial and residential construction, manufacturing, utilities, energy and agriculture.
But leading Hertz shareholders, such as New York financier Carl Icahn, had long agitated for a split, arguing that as separate entities each company could focus on its core business to the benefit of shareholders. On July 1, Herc Holdings completed its separation from Hertz and became its own publicly traded company.
Now, Herc's headquarters in Bonita Springs is slated to grow by about 50%, from its 230-person staff to 350 people next year. “We're in the process of looking at that right now and working with our landlord for additional space,” says Silber, a veteran of equipment-manufacturer Ingersoll Rand who was named to lead Herc in 2015.
When U.S. voters headed to the polls on Nov. 8, the stock of Herc Holdings closed at $30.82. On Nov. 9, shares closed at $35.65, up 16% in a single day. On Dec. 6, the shares closed at $42.46, a 38% jump from Election Day. Spurring Herc's stock and those of other construction-related industries was Trump's pledge to boost infrastructure spending by $1 trillion during the next 10 years.
Silber remains cautious about the expectations of a flood of money for infrastructure projects. He notes that the details haven't yet been spelled out. “It'll be quite some time before we see that funding trickle down,” he says. “There are not a lot of shovel-ready projects that would have an impact in 2017. The earliest there might be any impact to the marketplace is early 2018 and into mid-2018.”
The stock surge also exceeded many analyst expectations. For example, in a note to investors on Election Day, Barclays analyst Robert Wertheimer assigned a $33 share-price target on Herc's stock.
But veteran value investor Mario Gabelli, one of the company's leading shareholders, has been a big cheerleader for the stock even before the election. For example, Gabelli told Barron's in late October that Herc was one of his top four stock picks.
“It's an early stage turnaround,” Gabelli told Jack Hough, senior editor at Barron's in a video posted online on Oct. 25. “I think you've got an economic tailwind behind them. I think you've got a shot at doubling the stock.”
Although Herc only has six months of history as a standalone business, its most recent quarterly earnings show promise. Excluding currency swings and divested operations in France and Spain, revenue growth from rental equipment outside of the oil and gas industry rose 7.2%, and pricing improved 1.8% in the third quarter compared with the same quarter in 2015.
Silber says oil and gas used to be a more significant part of its business than the 16% it accounts for now. Despite some signs that oil prices may boost that sector, Silber says he expects stable pricing. “We're not predicting there will be a major rebound in oil,” he says.
Home in Bonita
Silber joined the company in 2015 after Hertz relocated its headquarters to Estero. “Had the business still been in New Jersey, we probably never would have moved it,” he says. That's because the company was unable to persuade many employees to relocate to Southwest Florida. “In the last few years it's been a rebuilding effort.”
That said, Silber says the company is finding qualified employees in Southwest Florida today. “Everybody said it would be a challenge for us, but we've had no difficulty recruiting talent,” he says.
What's more, Silber says the quality of life and entrepreneurial environment continues to attract talented people. “Florida has a wonderful economic environment and is attracting lots of (nonresidential) construction,” Silber says. “It's a business-friendly state, and we like that.”
Indeed, Lee County is considering $122,000 in financial incentives to help Herc grow, according to an administrative agenda item on an upcoming County Commission meeting. In an email statement, Lee County Assistant County Manager Glen Salyer says: “We are pleased the company recognized the opportunity in Lee County and placed its headquarters here. We see an opportunity for Herc to continue to grow its Lee County base.”
Silber says the most significant challenge of operating the business from Southwest Florida is the airport's limited service connecting the company to its 280 locations. “It's a bit challenging, quite frankly, at times,” Silber says. “We work around it.”
Filling the space
For Lee County's commercial real estate market, the spinoff of Hertz' equipment-rental business into its own publicly traded company called Herc Holdings was a welcome relief.
“If you recall that was the same time that Source Interlink filed bankruptcy,” says Randy Mercer, founding partner of CRE Consultants, a commercial real estate brokerage firm in Southwest Florida.
In June 2014, national magazine distributor Source Interlink announced it would cease operations, laying off 6,000 people including 240 employees at its headquarters at the Riverview Corporate Center in Bonita Springs. The company was a victim of the downturn in magazine publishing.
Source Interlink held enough office space in Bonita Springs to fill nearly two football fields. “Source occupied 95,000 square feet so that would have created a huge vacancy in the market,” Mercer says.
“All of a sudden in one week there was 200 Source Interlink people who had to leave the building,” recalls Mercer, who represents the landlord. “We knew Herc was looking for space, so I gave them a call.”
Working through Source's bankruptcy and the complexity of Herc's spinoff from Hertz made the deal to lease the space to Herc especially challenging. “A lot of late night calls, a lot of late night scrambling,” Mercer says. “The best thing is it worked. It was a remarkable time.”