U-Haul Holding Co (UHAL) 2023 Q3 法說會逐字稿

Good morning, and welcome to the U-Haul Holding Company Third Quarter Fiscal 2023 Investor Conference Call. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Sebastien Reyes. Please go ahead.

Good morning, and thank you for joining us today. Welcome to U-Haul Holding Company Third Quarter Fiscal 2023 Investor Call.

Before we begin, I'd like to remind everyone that certain of the statements during this call, including without limitation, statements regarding revenue, expenses, income and general growth of our business may constitute forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain factors could cause actual results to differ materially from those projected. For a discussion of the risks and uncertainties that may affect the company's business and future operating results, please refer to Form 10-Q for the quarter ended December 31, 2022, which is on file with the U.S. Securities and Exchange Commission.

I'll now turn the call over to Joe Shoen, Chairman of U-Haul Holding Company.

Good morning, and thanks for being on the call. I am not satisfied with our third quarter or year-to-date numbers. Clearly, the post-pandemic easy top line growth is going away. We knew it would. The question now is, will we maintain the new customers we serve during the boom. Of course, I intend that we do.

In U-Move, we are experiencing a decline in average miles per one-way move and a decline in total one-way move. In in-town transactions, I would expect us to begin to stabilize. Our third quarter decline in in-town revenue is a bit misleading as while we saw last mile delivery business income decline, we have also increased our transactions with our reliable individual consumers. Self-storage is tightening up for everyone in the sector, and we're not immune to that. However, we are still rerenting rooms as customers vacate and getting a fair rate. Self-storage is very local market dependent. Of course, this is not news and a great effort is being made to add storage in an opportunistic as well as a strategic manner.

Personnel expense is up. We are running a bit more personnel than our revenue justifies. We need to effect some productivity improvements before this will flatten out or come down.

Rental equipment maintenance is up. The difficulty in purchasing enough new vehicles and the resulting trade-off of lower depreciation for increased repair expense is a trade-off I would rather not be making. At this point, I believe we are trading down. We have very modest input on what original equipment manufacturers are willing to produce and sell until their appetite increases and unless we can trigger out a better solution, this will be a drag on us. We have experienced this before, and it does not fix very fast.

Overall, I am very optimistic on our prospects. We are working to increase our service and value to the customer. This is achievable, and I remain hard at it. Jason?

Thanks, Joe. Yesterday, we reported third quarter earnings of $199 million compared to $281 million for the same period in fiscal 2022. In November, we issued a new class of UHAL.B [Series A] nonvoting shares to our existing shareholders. This issuance, along with the dividend policy that we put in place for these new shares requires us to now report our earnings per share in accordance with what's called the 2-class method under GAAP accounting. This disclosure is included in our Form 10-Q as well as our earnings release.

So let me start off with our equipment rental revenue. As you may recall, last year, during this third quarter, we reported $187 million increase in U-Move revenue. And the year before that, we had reported $167 million increase. For the third quarter of this year, now we're showing a $77 million decrease.

If you were to look at our last third quarter pre-COVID, which was the third quarter of fiscal 2020 and calculate an average growth rate over those 3 years we're still up 13%. The decrease year-over-year in one-way transactions that we saw begin to develop last quarter continued into this quarter. Along with that, we then had a decrease in overall in-town transactions this quarter as well due in part to a decrease in the last-mile delivery rental business.

During the first 9 months of this year, we've invested just over $1 billion on new rental equipment that's up from $809 million for the first 9 months of last year. About half of this increase, I would estimate to be attributable to inflation, with the other half associated with an increase in trailer, towing device and U-Box container production.

During our last earnings call, I had reduced our forecasted gross fleet CapEx number down to $1.4 billion and further reducing this now to just under $1.3 billion. Proceeds from the sale of retired rental equipment increased by $56 million to a total of $527 million for the 9 months. Sales proceeds from pickups and cargo vans have increased compared to last year while we purposely slowed the sale of box trucks for now.

Resale values on pickups and cargo vans, while historically strong have been coming down from levels seen last year at this time.

Performance of self-storage remains strong, although as Joe mentioned, there's some moderation that's beginning to show through. Storage revenues were up $31 million, which is a 20% increase.

Looking at our occupied unit count at the end of December, we had an increase of 55,000 occupied units compared to the same time last year. In addition to the increased occupancy, we experienced close to 9% growth in average revenue per foot. Our occupancy ratios across the entire portfolio of storage locations decreased 70 basis points to 83% year-over-year. The moderation in occupancy can also be seen in same-store groupings of these properties where they saw an average occupancy decrease around 80 basis points to 94.6%.

On the expansion front, for the 9 months of this year, we have invested just over $1 billion in real estate acquisitions, along with the development of self-storage and U-Box warehouses. That's up from $783 million last year.

Over the last 12 months, we've added 77,000 new units. That's right around 6.2 million net rentable square feet. And we currently have another 6.2 million square feet that's in some process of being developed right now across 148 projects. And then we have an additional 153 or so projects where we own the land or buildings, but we haven't started actual construction that should account for somewhere around at least another 9.2 million square feet by the time we're done.

On the new acquisition front, we're down to just under 60 deals in escrow. Last quarter when we spoke, we were somewhere around 100. So that number started to come down.

In Moving and Storage segment, we saw expense growth outpaced revenue growth, leading to a decrease in operating results. Our operating earnings from moving and storage decreased by $99 million to $305 million for the quarter. This still represents our best third quarter -- still represents one of our best third quarters in the history of the company based upon total operating income. And it's also one of the best operating margins for a third quarter. This is not to say that we're not working on improvements, though.

Within the operating expenses, we saw them increase $75 million. We highlighted in the press release the $34 million attributable to fleet repair and maintenance. On that front, we're increasing our internal capacity in order to do more of the repair work ourselves. And the fleet is in good shape going into the summer months as far as preventative maintenance.

The increase in personnel costs slowed in the third quarter to a $13 million increase. And actually, the month of December, we saw a small decrease, but there's still much more work that we can do here. The next largest operating expense increase was a combination of what I call property level costs that include utilities, building maintenance and property taxes, combined, those were up $13 million. We continue to have strong cash and liquidity at the end of December. Our cash and availability from existing loan facilities at moving to storage totaled [$2.895 billion].

Also during the quarter, we invested $225 million in 6-month U.S. treasuries to increase our yields. That $225 million is not currently reflected in cash. It's investment fixed maturities. During the quarter, our interest expense for moving and storage was up $15 million, while interest income on our cash and short-term investments increased $24 million. And then for the 9 months, our interest expense is up $43 million, while interest income is up $42 million.

With that, I would like to hand the call back to our operator, Gary, to begin the question-and-answer portion of the call.

(Operator Instructions)

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And of course, I'm just putting more emphasis on budgets. And I think that's standard management. We have, I think, some opportunity at property level cost in our customer base and personnel, we're going to have to reduce the work in order to reduce the workforce expense. And we have several initiatives that have good promise there. And of course, as you can see from Jason's comment, we had some great results from our finance team.

The second question is, with self-storage moving rates coming down and occupancy following in the industry, are there any changes to the desire to expand self-storage?

As far as desire, desire is real high. So -- but of course, what we're trying to do, storage is a very market-specific business. It's not a national market in my experience. So we're trying to pick our way through the opportunities to find stuff that will run a little bit better than what the macro market is reflecting. And I think we're showing some success at that. Of course, we pro forma everything and have a lot of confidence when we start out, but they don't always work out as expected, but in a macro sense, they are. So I'm continuing to have a desire to expand self-storage. It's at least a 30-year asset. I don't know how [long] this present dip will go. If it goes a couple of years, we're on 30 years, that's not that big a disturbance. So I'm still going ahead on that.

And finally, CapEx for new trucks is moving up, but it seems management still wants to invest more in the fleet to improve the age. On a scale of 1 in 10, how far behind is the company where it wants to be with regard to the age of the fleet? Any color on how much management needs to spend to bring the fleet back to good standing would be useful.

I'll touch that, and then maybe Jason will try to give you a number. It's not actually the age we're working on. It's a cost per mile. There's a trade-off that relates to accumulated miles on the vehicle, and that kind of correlates to age if we have the same utilization. This gets very model specific.

On scale 1 to 10, I think we'll probably the best shape on our small trucks and the worst shape of our biggest trucks. I think if you just say. We're having more constraint replacing our biggest trucks than our smallest trucks. So I don't know on a scale of 1 to 10. I haven't thought of that way, I've been able to tell you. Jason, you want to touch on a number.

I still think we're about a year behind as far as truck purchases go. So that will all be -- that all won't happen in 1 year. It's going to be spread out over several years, so it will be elevated spending over several years. I would say that so far this year, we haven't been able to, on the box trucks, make much progress in putting the dent into that but we're kind of just treading water with the number of new larger trucks that we're getting.

Gary, do we have any other calls on the line yet?

We do. The first question comes from Stephen Ralston with Zacks.

I'm sorry, I was disconnected. I went to Star-1, and I don't know if this question has been asked yet. But I was looking at it more that it was a real tough comparison quarter. I thought you sort of indicated that, and we were trying to retain the customers that you gained during COVID. You also mentioned that you've been in this situation before. Could you talk around what you did in the past? And will you be doing the same thing this time? Or is there something more additive that you'd be doing to try to retain those customers that you got during COVID?

Well, generally, in the United States, customer expectations have increased over the last 20 years, and I expect that they'll steadily increase. So everything we've done in the past is applicable that the customer is looking for us to do more, and my challenge is how to do more. We're not just driving up relative cost. The positioning of our -- what we call our rotation fleet or the fleet that basically stays at a location most of the time is a critical step. I think we've introduced new analytical tools that give greater certainty to people who are at the local level or attempting to decide should be at the truck at location A and B or C or D. And that sounds like it's a simple matter, but it's quite a blizzard of information. We've spent some time and got new analytical -- better analytical tools, which I think will help that.

And I think we saw just a little bit of that effect in the third quarter. And that's about -- it's just a whole bunch of small things. I kind of like think football. Just a whole bunch of small things executed correctly.

Yes, blocking and tackling. I was impressed with the comment from Sebastien, saying you had a step-up in the operating margin in the third quarter, which is fiscal quarter, which is usually slower. And I look back, and yes, the operating margin can almost consistently stay below 20% and here you came in at 23%. Is there -- has there been a structural change in the cost structure?

This is Jason. I would say it's probably twofold. It has probably more to do with revenue. And we have this larger base of self-storage revenue. We have U-Box revenues. So our business and the margins, it's an economy of scale. So the more utilization we can squeeze out of our assets, the better that's going to work.

So over a long period of time, if you look at our expense structure, I think we've done a good job of improving revenue without increasing expenses as much in any small time period compared to the last 2 years, for example, you see some large variations. But over time, we've done a good job of increasing revenue without a significant increase in expenses. There used to be a time where the third or fourth quarter, we would dip into a loss period. And I think self-storage is a large component of why that isn't the case anymore.

The next question is from Jamie Wilen with Wilen Management.

Glad it's U-Haul call now. First question regards the public announcements by public storage that they were trying to buy Life Storage for $11 billion on Life Storage said that price was too little. Just by way of reference, Life Storage has about $80 million of owned and managed square footage. What is our current square footage in self-storage for owned and managed?

Jason is looking at the number up.

So for owned square footage, we're just over 55 million square feet. And then we -- including managed, we're at about 78 million.

So they're at 80. We're 78. Is there anything different in their...

79.

Okay. Pretty much the same thing. Is there anything different in their facilities or occupancy rates or rental rates or growth trends in their business as you see the publicly held information versus our self-storage operation?

Well, this is Joe. I thought that Uncle Bob (inaudible), I thought of that move was -- didn't get a good response from shareholders in the near-term in my recollection. I think that was a real step up. They got themselves where they had a brand name that can possibly leverage and before that, they had no brand presence at all. I think they've done a very credible job in moving that ahead. I don't know that.

I get to see a lot of the facilities, but they don't publish information specific amount. But my impression is that the Life Storage team has increased the ratio of Class A and Class B storage in their organization since they did the -- move away from Uncle Bob and they have been working pretty hard at that. So I think they've done a decent job of that. I don't know that they're.

Most recently, it sounded like they said they were having a little [trouble] maintaining rates. I don't know that for a fact I'm not experiencing that. I'll say that.

You called them Class A and Class B rates. What would you characterize the U-Haul self-storage asset?

I think it's the same mix. I mean if you have a 30-year-old asset, it's very simply just not -- it's not what you would build today.

Now we as a normal thing go back through these projects, refigure and says, okay, well, we have a whole list of what the characteristics we would like to see in a facility and we take a facility to do a review and where does it fall short of what we would build today. And is there a way to do that? And so there you see us spending money in what you call, I think improvements in non-res (inaudible) euphemism for it.

So we're constantly doing that. I couldn't tell you. I don't get a lot of opportunities to walk through other people's sites. I guess some, but it's not -- they're not as open with that, you kind of going to fit a little bit to the operator to do that. So I think we've got for us a long-term strategy, I think we have arguably better security. But other than that, it's kind of -- it's a little bit of [money], but I think they've done a decent job personally.

Has public storage ever approached us?

Yes, in about 1988 (inaudible).

Given that they want to do a stock swap for Life Storage, it'd be an interesting thing if you would consider stock swap for our self-storage to kind of crystallize the value that you have created in self-storage given that $11 billion is not that far from our full market cap for U-Haul. If we could get stock for it and then distribute those shares to shareholders -- pretty tax-efficient way to create liquidity and secure value for that operation. And we would still have our entire truck rental operation basically for free if we could do that. Would you ever entertain a scenario like that? It seems like an interesting way to build value in a very tax-efficient way for shareholders and your family?

I haven't looked at that real hard sometime. I think that really the fact that our strategies diverge from the standard self-storage REIT and that we're in the U-Box business, which at one time public was in and exited, okay?

We're in the truck rental business, which public has (inaudible) part of that, I think Extra Space and life still have some few locations that they offer their own truck rental. But we have -- I think our physical strategies have diverged, but that's probably not something that I would expect any real movement on. That would be my opinion.

Again, you never know how strategy is going to turn out. We have somewhat diversion strategies. As Jason said, the self-storage has probably made us so we don't have to seasonally adjust our workforce as hard as we had 15 or 20 years ago. 15 or 20 years ago, we had cut to the bone in October, September because we just didn't have -- there was too much seasonality in the truck rental business.

And so we've done a lot of things. Part of it is U-Box, a bunch of it is storage -- and then we've done a tremendous amount of how we -- the size and the location of what we call our rotation fleet. And all 3 of those have combined to give us more predictable revenue in the winter months.

So I don't -- it's going to be real. I have no idea if Public and Life can make this happen. I have no idea if the -- who wants to do what I'm not privy to anything there, but interesting because they have slightly different strategies and combining them, I suppose they're both can argue the other guy's strategy is no good. So I don't really know. Public does a great job of getting value for their NOI. And I think they've done a great job in the marketplace, and they have -- with respect to a lot of investors.

And so I think all the other REIT competitors have struggled in the numbers that I've seen. I haven't seen anything in the last 30 days, but we look at that stuff. Public seems to just do a better job of getting investor support for giving them our rental revenue. So maybe that will make that deal work. But as far as just being operators, they're both great operators. Go ahead.

Joe, on the truck rental side, one of the things you said in the past, is the main metric that you really look at is fleet utilization. Now I realize we have to upgrade the age of the fleet. But I look with volumes declining a bit yet fleet size increasing. How does this coincide with your objective to optimize fleet utilization?

We need to do a little bit of truing up. We've been, I think, kind of a little bit shell-shocked but 3 years of very strong utilization, but the average miles for existing unit is mainly crept up. And average miles is a better indicator of cost per mile, okay? And also availability I'll be a little wrong, but we have roughly 2,000 more trucks down for maintenance today than we did a year ago because you see -- as you probably know from just maintaining your own vehicle, there's a whole bunch of prelude to it. And then (inaudible), you've got to get it to maintenance, and you got to get it back out of maintenance. And this burns up time and basically makes the fleet kind of nonproductive.

So we've done a fair amount of investing and adding personnel to try to streamline that process a little bit. But we're -- if you took our top line number of vehicles compared to last year, I'd say take 2,000 off because they just aren't in service, 2,000 additional what we would have seen a year ago.

And I agree with you, we're just getting right where maybe we need to trim some -- but we have to do a very model specific. We need to let some trucks go, but even the fleet -- the older it gets, just as you could [largely expect], it's difficult to maintain the same amount of utilization just because of these maintenance intervals, jamming things up. We worked real hard this winter, as Jason alluded to, to be going into the spring here with the fleet fully maintained. We cross that line probably over the last 6 weeks to where we're at where we want to be. Of course, I then need to get -- see how the customers are going to respond to this. It's not altogether clear. I see all kinds of positive signs. But overall, as I indicated, one-way transactions are down. And if we don't have the transaction, we don't need the trucks, that's simple. I agree with you 100%.

Okay. And then lastly, with technology a few years ago, you initiated a program where people can rent a vehicle without having to go into a store and do it 24 hours a day. Could you talk about the success and failure of that and how that's changed the dynamics of your business?

It's an example, of course, of the changing technology, but also consumer desires. There's more people who want to do some version of a very low contact transaction. And there's people who want to do transactions at the hours that Walmart maintains their stores instead of the hours U-Haul maintain these stores. So these people want to do transaction 9:00 at night, and we've not seen an ability for us to staff to that.

So the -- what we call 24/7 truck rental has been a success. It's as a percentage to a little bit more of it at dealers as a percent of total transactions than we do at centers. And that is because our centers are 7-day a week operations and the dealers pretty typically a 5-day a week operation. So this has allowed us to mitigate some maybe modest decline in total demand with an increase in our service and the customer has responded. So it's been a success.

There's still a great deal of room for improvement and we're hard at improving that. I would take a location in Park Slope -- Brooklyn Park Slope . And there, company managed location, it's a big location. The manager has done a very good job of getting the customer literally to complete the transaction, all with the keys. So the customer comes in on their phone and they're already basically agreed to everything. We need to see their driver's license, and I'll ask 1 or 2 questions, hand them the keys. And then the trucks are all -- we have (inaudible) we have most of our locations coded, so we can identify where the truck is located at any given point in time, we can direct the customer to it. And I'll pick Park Slope, they just walk out to the truck and drive away.

So that's an example of the productivity enhancement, and we simply need more of that, and we're very aware of that. We're working on it. It's not -- it hasn't come as fast, but we have good acceptance with the -- that particular program. I can't quote the number of transactions year-to-date very thoughtfully, but I think we're up about like 14% or 15% in those kind of transactions year-over-year. It's a number like that.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

It's Joe. I just appreciate you being on the call. As you can see, we're attempting to learn how to do a better job in communicating with investors. I appreciate [Steven with Zacks] being on the phone. As I mentioned last time, I'd like to get another organization to follow us too. We're attempting to do that, but it's not -- as I am now learning, it's not a 30- or 60-day process. It takes a little while, and so I'm not going to say we have something until we have some but we're working on it.

Again, I appreciate it and look forward to talking to you next call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.