U-Haul - Q1 2020
August 8, 2019
Transcript
Operator (participant)
Good morning, and welcome to the AMERCO First Quarter Fiscal 2019 Investor Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today, today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded and the correct title is AMERCO First Quarter Fiscal 2020 Investor Calland Webcast. I would like to now turn the conference over to Mr. Sebastian Reyes. Please go ahead, sir.
Sebastien Reyes (Head of Investor Relations)
Good morning, and thank you for joining us today. Welcome to the AMERCO First Quarter Fiscal 2020 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 AMERCO's business and future operating results, please refer to Form 10-Q for the quarter ended June thirty, twenty nineteen, which is on file with the U.S. Securities and Exchange Commission. I'll now turn the call over to Jason Berg, Chief Financial Officer of AMERCO.
Jason Berg (CFO)
Thanks, Sebastian. Speaking to you today from Phoenix, Arizona. After a few minutes of prepared remarks, we'll open it up for question and answers like usual. Yesterday, we reported first quarter earnings of $6.76 a share, compared to $6.53 a share for the same period in fiscal 2019. Equipment rental revenues increased just over 4% at approximately $32 million. We saw an overall improvement in the number of transactions, along with revenue per transaction. Revenues from both the one-way and in-town markets increased, and these trends were similar for both truck and trailer. Compared to the end of the quarter last year, we had a modest increase in the number of independent dealers in our network, along with an increase of approximately 80 company-owned locations. U-Move revenue growth has continued into July.
Capital expenditures on new rental trucks and trailers were $561 million this quarter, compared to $440 million. Our truck purchase schedule is skewed heavier to the first half of the fiscal year. Proceeds from the sale of retired equipment decreased by nearly $29 million to $158 million in fiscal 2020. The decline in proceeds was a result of the pace of sales in the first quarter of last year being higher than usual, rather than there being any weakness in the resale market this year. In fact, gains from the disposal of rental equipment were flat for the quarter, while the number of units sold decreased by a few thousand.
The sales process is giving us an indication that we've made some progress on the equipment damage issues that we've mentioned here over the last couple of years. Storage revenues were up $12 million, or 14%. Average monthly occupancy throughout the first quarter of this year for the entire portfolio was 68%. To give you a sense of same-store occupancy performance, on this call last year, I reported to you that locations open at least three years had average occupancy of just over 87%. Looking at those same locations this year, they're up to 88.5%, so about a point and a half percent improvement. A large portion of the revenue gain came from the growth in occupied rooms.
The average number of occupied rooms during the first quarter of this year increased 40,100 rooms compared to the same time last year. If you look at just the end of June instead of the three-month average, the increase came in at just over 43,000. About a 70% improvement in the pace of net move-ins compared to last year at this time. We've continued to accelerate this pace now into July. Our real estate-related CapEx for the first quarter of this year was $218 million. That's just about what it was last year at this time. However, within those figures, there's been some reallocation. The portion attributable to acquisitions has declined, while the amount coming from construction and improvements has increased.
Over the last 12 months, we've added 5,780,000 net rentable sq ft to the portfolio. About 1.9 million of that came online during the first quarter. Operating earnings in the Moving and Storage segment increased from $1.5 million to $202 million for the quarter. Wanted to touch on a couple items here. First, depreciation expense on the rental fleet was up $8 million, while depreciation on all other assets, largely storage-related assets, increased by about $6 million. Gains on the sale of rental equipment were flat, and we did recognize a $1.6 million gain on the disposal of real estate. This was due to the condemnation of a portion of one of our properties out in Texas.
Personnel costs, property insurance expense, property taxes, and freight expense are four of the larger expenses that generated increases in the quarter. These expenses, in aggregate, were up approximately $31 million. Of note, we did see some relatively small decreases in fleet maintenance expense for the quarter. As of June thirtieth, cash and availability from existing loan facilities that are in Moving and Storage segment totaled $576 million. One last comment before we go to questions. As of April first of this year, we adopted- we were forced to adopt a new accounting standard for leases. The adoption resulted in nearly $1 billion of net property, plant, and equipment being reclassed to a new balance sheet item called Right-of-Use Asset Financing.
As of June thirtieth, twenty nineteen, the balance of this new line item includes rental equipment that we purchased under financing liability leases, or what I would call a capital lease. Operating leases, primarily locations that we're leasing the ground for moving centers, are included now in Right-of-Use Asset Operating. In our earnings release, we've included a non-GAAP table on the last page to help compare our PP&E from this year to previous years. I would certainly welcome any feedback from our investors on how to improve this disclosure related to the new standard. While this caused the geography of our balance sheet to change, there was no economic impact to our business from the adoption of this new accounting standard. With that, I would like to hand the call back to Nancy, our operator, to begin the question and answer portion of this call.
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. And our first question comes from Ian Gilson from Zacks Investment Research. Please go ahead.
Ian Gilson (Analyst)
Well, thank you, Jason. Revenue was up 4.5%. Revenue was up 3%, so we sort of squeezed the margins somewhere. And this is basically been happening over the past two plus years. When can we see a reversal, basically, of that trend?
Jason Berg (CFO)
Great, great point, Ian. We're working very hard right now to reverse that trend. On the equipment side, I would say that the first half of this year, we're increasing the fleet. From a timing perspective, it's gonna happen more in the first half, and we're gonna need to try to catch up to the fleet growth here on the transaction side, and that didn't happen in the first quarter. So utilization was down just a little bit. On the storage side, much of the focus in the organization has been on filling storage rooms. And I would say that in the first quarter, we had quite a bit of success in doing that. And from what I've seen in July, we've increased that pace even faster.
So our issue right now is utilization of the assets that we've invested in, and the financial performance is reflecting the fact that we're not fully utilized. I don't have a specific time where I can tell you in two years, this is all gonna be fixed. Some of it will continue to depend upon the pace of reinvestment. But I think it's important to understand that there's continued demand for renting the equipment, and we're seeing a good pace of filling these rooms that we're building. So at some point, we're gonna start seeing the payback for it. On the storage side, I think we're starting to turn the corner there.
Ian Gilson (Analyst)
Okay, on the depreciation at the line, in 2018, it was $126 million.
Jason Berg (CFO)
Right.
Ian Gilson (Analyst)
Twenty nineteen, a hundred and twenty-six, and then this year, a hundred and forty-one. Now, basically, you said, what, we have, eight million? So-
Jason Berg (CFO)
The equipment went up $8 million for the quarter compared to last year at this time, and everything else, which is largely buildings, improvements, and the equipment that we put in the building is up about $6 million for the quarter.
Ian Gilson (Analyst)
Should that stabilize looking forward?
Jason Berg (CFO)
We're gonna see depreciation continue to climb this year. With the amount of box trucks that we're buying, in particular, we're buying a lot of the 26-foot trucks, which is our most expensive truck. That's front-loaded at the first half of this year. Our dynamic depreciation on the fleet, we take the largest depreciation charges in the first year. So we're gonna see a depreciation on the fleet continue to increase throughout the year. And I think as we put more of these real estate assets online and we build out of them, we're gonna see that continue to climb also. So I don't think we're gonna see that number come down here in the near future.
Ian Gilson (Analyst)
So what I'm hearing you say, basically, is you, you are gonna continue to emphasize fleet purchase as compared to fleet leasing.
Jason Berg (CFO)
To us, it's one and the same, however we choose to buy it, but I'll say fleet acquisition.
Ian Gilson (Analyst)
Okay, and have the new accounting regulation changed your perspective on how to invest?
Jason Berg (CFO)
No, we haven't seen our lenders react to the changes to how they want to finance the equipment. So, most of what we're doing right now is capital leases. Those were on balance sheet before for us. So, again, I haven't seen anything where there's been an economic impact to us from that standard. It's just been a whole lot of work for the accountants.
Ian Gilson (Analyst)
... Okay, great. Thank you very much.
Jason Berg (CFO)
You're welcome.
Operator (participant)
And our next question comes from Jamie Wilen from Wilen Management. Please go ahead.
Jamie Wilen (Analyst)
Hey, Jason. In the last call, Joe talked about his most important figure in looking at truck rental was, it was the utilization rate. Obviously, that's down a little bit, but the utilization rate is a very simple number, the number of trucks out there and how many rentals we have. My question is, why don't we reduce that denominator? Why are we greatly expanding our truck fleet so much? I'd love to see U-Haul trucks on the road, but I'm really not in favor of when I go past the dealership, seeing 25 trucks sitting there. Why don't we try to optimize this truck fleet as opposed to maximize it, so we can optimize the utilization rate?
Jason Berg (CFO)
Our whole goal here is try to optimize that. So I would hope that when you see the 25 trucks, that's on a Wednesday, and not on a weekend, but I completely get your point. Where we're at today is our team sees opportunities that with additional fleet, when we get it distributed to the right markets where we think it's gonna be needed, I think we'll see utilization climb. Now, we saw that last year. We slowed purchases a little bit, utilization improved. This year, we wanted to go back and hit the fleet a little bit. We have a little bit of extra purchases this year in our largest truck, because Ford is getting ready to change over the model and have a new engine.
And for a whole number of reasons, including our ability to efficiently repair those units in the future, we're probably buying a little bit heavier than what we normally would buy right now. But it's gonna give us the flexibility in the future to do the kind of pivoting that you're talking about, that if we wanted to. The quickest way for us to adjust fleet size is through sales, not necessarily through on the acquisition side. You want a certain amount of new trucks coming in. At our current size, gross fleet spend a year is probably gonna be somewhere around $1 billion in order to maintain a fleet this much.
From what we can tell, we still think that we're gonna be able to get to that optimization point with this many trucks.
Jamie Wilen (Analyst)
Would you believe your fleet expenditures next year to be larger, equivalent to, or smaller than what you're going to do this year?
Jason Berg (CFO)
I think it'll be less next year because I don't think we're gonna have this little bit of displacement from the twenty-six-foot truck.
Jamie Wilen (Analyst)
Okay. And then as you look out on the self-storage side, you know, when do you reach that inflection point where you say, "Let's slow down our capital expenditures and just run with what we have to improve, again, the utilization rate of the self-storage operation as well as its profitability?" 'Cause as we know, the new ones we open don't really add to income. They detract for a couple of years.
Jason Berg (CFO)
Yes, and I think we're at that point, and it's probably not the easiest to see, but in the first quarter, we spent $218 million on acquisitions and construction, which is what we spent last year. But in that, the acquisition piece of that was down from $124 million to $73 million. So we bought fewer properties, and we've been trending down that way, and we've been spending more on trying to complete the projects that we have, so that we can start renting them and getting some cash flow out of them. So there has been a bit of a, I'll use the word again, a bit of a pivot to completing what we have and not bringing in new properties for that.
Jamie Wilen (Analyst)
So as you look out the next year, would you expect your capital expenditures on self-storage to be lower than what it's going to be this year?
Jason Berg (CFO)
No, I think if anything, maybe we have another year of high construction costs, which might fill in the gap for decreased acquisitions. But I view that as a good thing. We have this large group of less than productive assets on the balance sheet right now that you're talking about, and I've been talking about. And the sooner we can get those projects built out and finished and our guys renting them, the guys and gals renting them, the better off we're gonna be. So, on the acquisition side, that's kind of opportunistic, but I think we're a little bit more focused right now on finishing what we have versus finding a whole bunch of new stuff.
Jamie Wilen (Analyst)
Okay. The existing self-storage units, you mentioned that three-year figure. They've gone from 87%-88.5% occupancy rates. How are the rates on per sq ft that we're renting those facilities for?
Jason Berg (CFO)
There's a lot going on-
Jamie Wilen (Analyst)
How have they changed?
Jason Berg (CFO)
Well, there's a lot going on in the quarter. If I try to dig down into a same store rate to get a health, kind of a pulse of what the health is on same store rates, I think we're probably up 1% or 1.5% on rate. Overall, for the quarter, I think if you were to do the math, it would look like our average revenue per unit decreased a bit. I think we used our promotional special for you know one month free storage with the rental of a truck that was a little more prevalent this quarter versus the first quarter of last year, which probably affected the revenue per storage unit a little bit there. But otherwise, the underlying health of the storage rates...
has been fairly resilient for us, and we're seeing smaller increases, whereas we used to see maybe a 3% increase for the year. It's less than that, but we're still seeing some increases. And our asking rent for people who are moving in today are above where they're at before. Whereas some people are getting all of their revenue increases from in-place customers, we're still seeing some health at the asking rent.
Jamie Wilen (Analyst)
Okay. And in the new facilities, your leasing is going at, you mentioned July was a bit of an accelerated rate. How's the household market out there? How much additional discounting do you have to do to increase those occupancy rates?
Jason Berg (CFO)
You know, for us, what we've found is our people paying attention to the product. And the increased utilization of the discount from the truck rental, I think is a reflection of just us paying a little bit more attention, where we have a captive customer who's utilizing another one of our products, and we should be offering them storage in the process. And I think that focus now has resulted in us having a little more success in filling rooms faster. So I think that's a big part of what's happening here.
Jamie Wilen (Analyst)
Okay, and lastly, on self-storage, in the last year, how many of your units that were relatively immature have now crossed over to where they are positive cash flowing, as opposed to negative?
Jason Berg (CFO)
Great question. I don't have the number of units. I would say, in previous calls, and I think I discussed on the analyst meeting last year, we've been tracking the cash flow profitability of locations over the last, say, 18 quarters. And that number continues on a year-over-year basis to improve. So on those, say, 395 properties that we've been tracking here over the last four years, I think there's been about a $5.5 million improvement in NOI quarter over quarter here. So I think I'm looking at them in quarterly cohorts, and I think we've picked up two or three more quarters of acquisitions that turn profitable or turn positive, I'd say.
Jamie Wilen (Analyst)
Okay. Has Joe made any progress on changing the corporate name from AMERCO to the more well-known U-Haul?
Jason Berg (CFO)
I think he's out filling rooms right now, and that's a little bit down the list.
George Godfrey (Analyst)
Okay. All right, thank you, Jason. Appreciate it.
Jason Berg (CFO)
Thanks, Jamie.
Operator (participant)
The next question comes from George Godfrey from CL King. Please go ahead.
Jason Berg (CFO)
Hi, George. Are you there?
Operator (participant)
The next question comes from George Godfrey from CL King. Please go ahead.
Jason Berg (CFO)
Are you on mute, George?
George Godfrey (Analyst)
Can you hear me?
Jason Berg (CFO)
I can now, yeah.
George Godfrey (Analyst)
Oh, wait. Can you hear me now?
Jason Berg (CFO)
Yes.
George Godfrey (Analyst)
Okay. Sorry about that. I was on speakerphone, but usually I don't have that issue. Jason, I heard everything you said about the investments in the fleet and the, and the rooms, the storage facilities. If I look at net CapEx for FY 2017 and 2018, actually, the net CapEx was down due to strong proceeds from the sale of property equipment. But if I look at 2019, the year that we just completed, you know, net CapEx was up 90%. Listening to your comments and looking at Q1, the net CapEx being, you know, up again, another 90% in Q1, you're expecting a large net CapEx figure for 2020 relative to what we saw in the prior years coming into 2019, is what I'm taking away.
Jason Berg (CFO)
Yeah, it's gonna slow down over the next three quarters. This is gonna be the heaviest that we see, but yeah, it's still gonna be heavy.
George Godfrey (Analyst)
Okay, and then the pace of rooms being filled up, do you see the occupancy rate being at an inflection point here, 68.4% in Q1? Or do you think that still trends down as you're bringing on the square footage?
Jason Berg (CFO)
I look so little at that overall occupancy rate because it's affected by how good of a job we're doing by adding rooms into the portfolio and been doing a better job at adding rooms. I'll say that the spread between, you know, the percentage of rooms occupied and the percentage change in the rooms available, those two numbers have been coming together. So I think that's a good point. I don't think we're quite at that inflection point yet because, you know, it's easier to add rooms than it is to fill rooms.
George Godfrey (Analyst)
Right.
Jason Berg (CFO)
We've been doing a good job of adding the rooms. But those two numbers are coming together and, you know, whereas we were plus 43,000 here at the end of June, I think we got that number closer to, you know, plus 50,000 here at the end of July. So our team is really hard at that, and I don't think we're quite there yet, George, but I think we're getting closer.
George Godfrey (Analyst)
And you said you're having more success at filling up those rooms. Is there something that changed in the market that is leading to that greater success in filling up the rooms?
Jason Berg (CFO)
No, it's the same thing that's usually the issue for us on a performance basis. It's how much we focus on it and how we decide to actually get our act together and go at it. This summer, Joe has led the charge on focusing on filling the storage room. The organization as a whole has put most of their attention on that. You may see that in other areas, but right now, the storage program is certainly benefiting from that focus. I don't think that there's anything in the storage market. If anything, the storage market continues to be more challenging. This is just more of a reflection of when we put our minds to something. What can we accomplish?
George Godfrey (Analyst)
Got it. Then my last question. I'm looking at the slide presentation from last year's Investor Day, and I know the next one we're coming up here in a couple weeks. Specifically, the pipeline of self-storage, and it looks like it's about 11.8 million sq ft, the pipeline from a year ago. Do you happen to know what that is approximately as we sit here today?
Jason Berg (CFO)
Yeah. Well, the projects that we have active right now that we're working on is about 10.9 million sq ft. And then we have another group of projects that aren't as far along on the permitting or land use process. So I, you know, I can give you a number. It's about a little over three and a quarter million sq ft, but I can't give you a date as that's much more squishy as far as when we'll be able to start those projects. But the big decrease has been... I don't recall the specifics on that slide, but the pipeline of projects in escrow or that we're looking to buy, that number has come way down.
George Godfrey (Analyst)
It's okay, so that's what I was gonna follow. So the $10.9 that you just quoted there, is that, is that comparable to the under contract figure that you had in your slide from a year ago of $6 million?
Jason Berg (CFO)
No. I think the under contract is that the last column on the slide?
George Godfrey (Analyst)
Yes.
Jason Berg (CFO)
Yeah, that number is probably closer to, like, 1.5 million sq ft now.
George Godfrey (Analyst)
Okay. So the pipeline and under contract figures from a year ago have both come down to-
Jason Berg (CFO)
Yeah.
George Godfrey (Analyst)
When you... Got it.
Jason Berg (CFO)
We closed on most of the under contract, and that would have shifted up into the other numbers I just gave you. And then new stuff that we haven't bought yet but is under contract is what I just told you.
George Godfrey (Analyst)
Great. Thank you, Jason. Thank you for taking my questions.
Jason Berg (CFO)
You're welcome.
Operator (participant)
The next question comes from Craig Inman from Artisan Partners. Please go ahead.
Craig Inman (Analyst)
Hey, Jason, you there?
Jason Berg (CFO)
Morning, Craig.
Craig Inman (Analyst)
Hey, morning. I was curious about leverage and, with the CapEx build and the truck cycle being a little heavier, how do you feel about balance sheet flexibility? And specifically, should economic conditions change, you know, what kind of, How do you ensure we have enough liquidity to move through a down cycle doing the CapEx builds on the self-storage?
Jason Berg (CFO)
Sure. Well, we have a prioritization process on the storage side, where conversion projects are the top of the list because those are the easiest and the cheapest to complete and get up and running. And then we're a little more selective on which ground-up projects we choose to start, because those take much longer, are heavier from a CapEx perspective, and we usually have a little bit, well, quite a bit less invested in just the land. So it's a little bit easier to put those up on the shelf and get to them a little bit. So if something were to happen, we would immediately hit the prioritization thing and probably start benching a bunch of the ground-ups. And then we try to do our conversions in phases.
So there's points where we could stop and just try to fill what we have and not spend any more money yet on those until they're more self-sufficient. On the equipment side, we've certainly put ourselves in a position with the spending that we've done in the fleet, that we could go for a while without spending a whole lot on box truck. There's a certain amount of rotation that we need to do on the pickups and cargo vans each year. But that's fairly capital self-supportive. It's not a huge working capital spend for us. So...
And from a liquidity perspective, we've been very fortunate to have an excellent and broad lending group who buy into our business plan and have been very receptive to lending on our assets. So we've tried to bring back some liquidity from assets that we purchased that aren't stabilized yet, but are certainly on their way to stabilization. And we've had good success with terms and rate on bringing in some cash in the interim on those.
Craig Inman (Analyst)
Okay. Yeah, that makes sense. What about depreciation? I can get kind of close to this figure, but I'm curious if you could talk about it. Depreciation as a percentage of the figure that's tied to real estate, how would you think about that number?
Jason Berg (CFO)
You know, I guess I haven't thought of that number in that relationship before, so I'd have to think about that and maybe get back to you. I haven't really looked at that.
Craig Inman (Analyst)
Okay, and then Ryder called out. I know their trucks are different, you know, weakness in the used market in terms of pricing. Are you guys seeing any of that in the vans, trucks, or even the U-Box?
Jason Berg (CFO)
On the box trucks, no, not so much. I mean, we've done some things where we're selling the equipment a little bit differently, so we probably have the gains on the box truck sales have decreased a bit, but that's such a small piece of the overall sales picture. Our big thing is the pickups and the cargo vans, and that market is still been strong.
Craig Inman (Analyst)
Okay. And 1% change in utilization is still about, what is it, $5 million in revenue for the self-storage?
Jason Berg (CFO)
I think we're at, like, $5.3 million right now.
Craig Inman (Analyst)
Okay. Okay, that's all I have right now.
Jason Berg (CFO)
Thank you, Craig.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Jason Berg (CFO)
Thanks, Nancy. First, I'd like to thank everyone for, for participating in this call. Thank you. I want to remind you that on August twenty-second, here in a couple of weeks, as George said, we have a few important meetings for shareholders. So at 9:00 A.M., call it Arizona time, on the twenty-second, we're gonna start off with our annual shareholder meeting. Once again, this is gonna be a live video feed broadcast over the internet, so everyone can participate in this meeting. And then, about two hours after that, at 11:00 A.M. Arizona time, we're gonna do our virtual analyst and investor meeting. Joe Shoen, our CEO, is gonna be moderating both of these meetings, and we're gonna have some key executives for some brief presentations and then questions and answers.
So please feel free to start submitting your questions to Sebastian ahead of time. Last year, we had great participation from those who submitted their questions early. I think we had more questions than we could even get to. But this does allow us to get to as many of the questions as possible, and it gives us the chance to prepare better answers for you. So I look forward to speaking to you all in a few weeks. Thank you very much.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect and enjoy the rest of your day.