U-Haul - Q3 2023

Transcript

Operator (participant)

Good morning, and welcome to the U-Haul Holding Company Third Quarter Fiscal 2023 Investor Conference Call. 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's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Sebastien Reyes. Please go ahead.

Sebastien Reyes (Director of Investor Relations)

Good morning. Thank you for joining us today. Welcome to the 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.

Joe Shoen (Chairman)

Good morning. Thanks for being on the call. I am not satisfied with our third quarter or our 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 served during the boom? Of course, I intend that we do. In New 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 re-renting 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 affect 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 figure 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?

Jason Berg (CFO)

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 our new class of UHAL.B Series N non-voting 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 the what's called the two-class method under GAAP accounting. This disclosure is included in our Form 10-Q as well as our earnings release. Let me start off with our equipment rental revenue. As you may recall, last year during this third quarter, we reported a $187 million increase in U-Move revenue. The year before that, we had reported a $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 three 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 nine months of this year, we've invested just over $1 billion on new rental equipment. That's up from $809 million for the first nine 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. I'm 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 nine 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 nine months of this year, we've 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. We currently have another 6.2 million sq ft that's in some process of being developed right now across 148 projects. 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 sq ft 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. That number started to come down.

In the moving and storage segment, we saw expense growth outpace 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 third best third quarter. Still represents one of our best third quarters in the history of the company, based upon total operating income. 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. Actually, the month of December, we saw a small decrease. 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 and storage totaled $2.895 billion. During the quarter, we invested $225 million in 6 months, 6-month U.S. Treasuries to increase our yields.

That 225 is not currently reflected in cash. It's in investments 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. For the nine 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 (participant)

Pardon me. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.

Joe Shoen (Chairman)

Budgeting cycle. 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 costs. In our customer base and personnel, we're going to have to reduce the work in order to reduce the workforce expense. We have several initiatives that have good promise there. Of course, as you can see from Jason's comment, we had some great results from our finance team.

Speaker 6

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

Joe Shoen (Chairman)

As far as desire, the desire is real high. 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. 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. I think we're showing some success at that. You know, 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. I'm continuing to have a desire to expand self-storage. It's at least a 30-year asset, and I don't know how long this present dip will go.

If it goes a couple of years, well, on 30 years, that's not that big a disturbance. I'm still going ahead on that.

Speaker 6

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 one to 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.

Joe Shoen (Chairman)

I'll touch that. Maybe Jason will try to give you a number. It's not actually the age we're working on, it's the cost per mile. There's a trade-off that relates to accumulated miles on the vehicle. That kind of correlates to age if we have the same utilizations. On a scale of one to 10, I think we're probably in the best shape on our small trucks and the worst shape on our biggest trucks. I think if you just say we're having more constraint replacing our biggest trucks than our smallest trucks. I don't know on a scale of one to 10. I haven't thought of it that way. I don't know what to tell you. Jason, you want to touch on a number?

Jason Berg (CFO)

I still think we're about a year behind as far as truck purchases go. You know, that all won't happen in one year. It's going to be spread out over several years. It'll 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 a dent into that. 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?

Operator (participant)

We do. The first question comes from Steven Ralston with Zacks. Please go ahead.

Steven Ralston (Senior Analyst and Director of Research)

Good morning. I'm sorry, I was disconnected. I went star one, I don't know if this question has been asked yet. I was looking at it more that it was a real tough comparison quarter. I thought you sort of indicate that, you 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, 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?

Joe Shoen (Chairman)

You know, generally in the United States, customer expectations have increased over the last 20 years, and I expect that they'll steadily increase. Everything we've done in the past is applicable, but the customer is looking for us to do more, and my challenge is how to do more without just driving up relative costs. 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 at the local level are to attempting to decide should be at the truck be at location A and B or C and D. 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 or better analytical tools, which I think will help that. I think we saw just a little bit of that effect in the third quarter. That's about it's just a whole bunch of small things. It's kind of like playing football. It's just a whole bunch of small things executed correctly.

Steven Ralston (Senior Analyst and Director of Research)

Yes, blocking and tackling. I was impressed with that comment from Jason saying you've had a step up in the operating margin in the third quarter, which is fiscal quarter, which is usually slower. I look back and yes, the operating margin almost consistently stayed below 20%, and here you came in at 23%. Has there been a structural change in the cost structure?

Jason Berg (CFO)

This Jason. I would say it's probably twofold. It has probably more to do with revenue. We have this larger base of self-storage revenue. We have U-Box revenue. Our business and the margins, it's an economy of scale.

The more utilization we can squeeze out of our assets, the better that's gonna look. 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, you know, compared to the last two years, for example, you see some large variations. 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. I think self-storage is a large component of why that is. That isn't the case anymore.

Steven Ralston (Senior Analyst and Director of Research)

All right. Thank you for taking my questions.

Joe Shoen (Chairman)

Thanks, Steven.

Operator (participant)

The next question is from Jamie Wieland with Wieland Management. Please go ahead.

Jamie Wieland (Portfolio Manager and President)

Hi, fellas. Glad it's a U-Haul call now. First question regards the public announcements by Public Storage that they were trying to buy Life Storage for $11 billion. Life Storage said that 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?

Joe Shoen (Chairman)

Jason's looking the number up. For owned square footage, we're just over 55 million sq ft, including managed, we're at about 78 million.

Jamie Wieland (Portfolio Manager and President)

They're at 80, we're at 78. Is there anything different-

Jason Berg (CFO)

$79 million.

Jamie Wieland (Portfolio Manager and President)

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 their publicly held information versus our self-storage operation?

Joe Shoen (Chairman)

This is Joe. I thought that when Uncle Bob bought Life, didn't get a good response from shareholders on the near-term. In my recollection, I think that was a real step up. They got themselves where they had a brand name they could possibly leverage. Before that, they had no brand presence at all. I think they've done, you know, a very credible job in moving that ahead. I don't know. You know, I get to see a lot of the facilities, but they don't publish information specific enough. My impression is that the Life Storage team has increased the ratio of Class A to Class B storage in their organization since they did the move away from Uncle Bob, and they've been working pretty hard at that.

I think they've done a decent job of that in my mind. 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.

Jamie Wieland (Portfolio Manager and President)

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

Joe Shoen (Chairman)

Well, I think it's the same mix. I mean, you know, if you have a 30-year-old asset, very simply just not, it's not what you would build today. 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, and we do a review. Where does it fall short of what we would build today, and is there a way to do that? There you see us spending money in what we call, I think, improvements in on-rent lists of some euphemism for it. 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 get some, but they're not as open with that. You kinda gotta have to fib a little bit to the operator to do that. I think we've got more as a long-term strategy. I think we have arguably better security. Other than that, you know, it's kinda. It's a little bit muddy, but I think they've done a decent job personally.

Jamie Wieland (Portfolio Manager and President)

Joe, has Public Storage ever approached us?

Joe Shoen (Chairman)

Yes, in, about 1988.

Jamie Wieland (Portfolio Manager and President)

Okay.

Joe Shoen (Chairman)

Nice conversation with Wayne Hughes.

Jamie Wieland (Portfolio Manager and President)

You know, given that they wanna do a stock for swap for Life Storage, you know, it'd be an interesting thing if you would consider a stock swap for our self-storage to kinda crystallize the value that you have created in self-storage, given that 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, a pretty tax-efficient way to create liquidity, and secure value for that operation. You know, we would still have our entire truck rental operation basically for free if we 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.

Joe Shoen (Chairman)

You know, I haven't looked at that real hard for some time. 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 it exited. Okay. That we're in the truck rental business, which Public has flirted with, but wants no part of it. I think Extra Space and Life still have some few locations that they offer their own truck rental. We have kind of a different... I think our physical strategies have diverged, but that's probably not something that I would expect any real movement on. That'd be my opinion. It's... You know, again, you never know how a strategy is gonna turn out. We have somewhat divergent strategies.

As Jason says, the self-storage has probably made it so we don't have to seasonally adjust our workforce as hard as we had to 15 or 20 years ago. 15 or 20 years ago, we'd have cut to the bone in October, September. There was too much seasonality in the truck rental business. We've done a lot of things, part of it U-Box, a bunch of it storage. We've done a tremendous amount. The size and the location of what we call our rotation fleet. All three of those have combined to give us more predictable revenue in the winter months. I have no idea if Public and Life can make this happen. I have no idea who wants to do what.

I'm not privy to anything there. It'll be interesting if they because they have slightly different strategies. Combining them, I suppose they 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're doing a great job in the marketplace, and they have the respect of a lot of investors. I think, all the other REIT competitors have struggled from the numbers that I've seen. I haven't seen anything in the last 30 days, but we look at that stuff, and Public seems to just do a better job of getting investor support for a given amount of rental revenue. Maybe that will make that deal work. As far as just being operators, they're both great operators.

You know, I don't-

Jamie Wieland (Portfolio Manager and President)

Joe, Sorry.

Joe Shoen (Chairman)

Go ahead.

Jamie Wieland (Portfolio Manager and President)

Joe, on the truck rental side, you know, 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, you know, I look is with volumes declining a bit, yet fleet size increasing, how does this coincide with your objective to optimize fleet utilization?

Joe Shoen (Chairman)

We need to do a little bit of truing up. We've been, I think, kind of a little bit shell-shocked, three years of very strong utilization. The average miles per existing unit has 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. You see, as you probably know from just maintaining your own vehicle, there's a whole bunch of prelude to it and then sequel. You got to get it to maintenance, you got to get it back out of maintenance. This burns up time and basically makes the fleet kind of non-productive.

We've done a fair amount of investing and adding personnel to try to streamline that process a little bit. 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 is what we would have seen a year ago. I agree with you. We're just getting right where maybe we need to trim some very model-specific. We need to let some trucks go. Even the fleet, the older it gets, just as you could logically 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 be going into the spring here with the fleet fully maintained. We crossed that line probably in the last 6 weeks to where we're at where we want to be. Of course, I then need to see how the customers are going to respond to this. It's not altogether clear. You know, I see all kinds of positive signs, overall, as I indicated, one-way transactions are down. If we don't have the transactions, we don't need the trucks. That simple. I agree with you 100%.

Jamie Wieland (Portfolio Manager and President)

Okay. 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 failures of that and how that's changed the dynamics of your business?

Joe Shoen (Chairman)

It's an example, of course, of the changing technology, but also of 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 maintains their stores. There's people who want to do a transaction at 9:00 at night, and we've not seen an ability for us to staff to that. What we call 24/7 truck rental has been a success. It's as a %, we have a little bit more of it at dealers as a percent of total transactions than we do at centers. That is because our centers are seven-day-a-week operations, and the dealers pretty typically are 5-day-a-week operations.

This has allowed us to mitigate some maybe, you know, modest decline in total demand with an increase in our service. The customer has responded. It's been a success. There's still a great deal of room for improvement. We're hard at improving that. We have a location in Park Slope, Brooklyn Park Slope. There, you know, it's a company managed location. It's a big location. There, the manager's done a very good job of getting the customer literally to complete the transaction, all but the keys. The customer comes in, they're on their phone. They've already basically agreed to everything. We need to see their driver's license, you know, ask them one or two questions, hand them the keys.

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. I'll take Park Slope. They just walk out to the truck and drive away. That's an example of a productivity enhancement, and we simply need more of that, and we're very aware of that. We're working on it. It hasn't come as fast, but we have good acceptance with 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.

Jamie Wieland (Portfolio Manager and President)

Okay. Thank you, Joe. Appreciate it.

Operator (participant)

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

Joe Shoen (Chairman)

No, 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 Steve 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. I'm not gonna say we have something till we have something, but we're working on it. Again, I appreciate it. Look forward to talking to you next call.

Operator (participant)

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