U-Haul Holding Co /NV/ Q1 FY2024 Earnings Call

Good morning, and thank you for joining us today. Welcome to the U-Haul Holding Company first quarter fiscal 2024 investor call. Before we begin, I would 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 the company's public SEC filings and Form 10-Q for the quarter ended June 30, 2023, which is on file with the US Securities and Exchange Commission. I will now turn the call over to Joe Shoen, Chairman of U-Haul Holding Company.

Good morning, and thank you for joining us today. We continue to struggle to post U-Move numbers as good as the prior two years. My experience says overall moving activity has contracted. We have seen this before in an uncertain economy. Of course, we're continuing to scramble for business. As consumers become more optimistic, the entire market will likely expand. Our repair spending on trucks and trailers continues to rise. Of course, there is always some waste and I'm working to eliminate the waste, but the fundamental drivers of repair are too few replacement units leading to increased mileage per unit and parts and labor inflation. We have not resorted to large-scale discounting in self-storage unlike some of our major competitors. We are continuing to build and buy at a rate above our rate of unit rent up. This doesn't disturb me greatly and I plan to continue adding units and drive on increasing the rate of room rent ups. In U-Box, our total revenue was down for the quarter due to decreased pricing. Freight costs finally went down and we lowered some rates due to that. Our margins, however, are holding. Transactions are up. This should continue to be an expanding market for us. I look forward to speaking with you at our upcoming Investor and Analyst videoconference. And Jason will now address the numbers in greater specifics.

Thanks, Joe. Yesterday, we reported first quarter earnings of $257 million, that's compared to $338 million for the same quarter of last year, representing our company's third best first quarter results. Looking at it from the perspective of earnings per share, we reported $1.31 for non-voting share this quarter compared to $1.68 for non-voting share in the first quarter of last year. Starting off with equipment rental revenue results. Compared to the first quarter of last year, we had a $92 million decrease, that's about 8.4% down. To put it into context, over the last four quarters, we've had nearly a $230 million decrease in U-Move revenue. In the eight quarters before that, so starting with the second quarter of fiscal 2021, we've experienced a $1.428 billion increase. So, in the last 12 months, we've given back a small portion of the gains. The trends that we've seen in the past several quarters continued; declining transactions and reduced miles per transaction. Revenue per mile growth has remained positive. And July results trended down compared to last year. Capital expenditures for new rental equipment in the first quarter were $454 million, that's a $103 million increase compared to 1Q last year. The majority of this increase is in our box truck fleet. And we have increased our fiscal 2024 full year net CapEx projection from $685 million to approximately $820 million. I would say about three-quarters of this increase is from the addition of more units onto our manufacturing schedule, with the remainder being projected decreases in sales proceeds from what we initially thought was going to happen. Speaking of, proceeds from the sales of retired rental equipment increased by $34 million to a total of $193 million for the first quarter. Sales volume increased while average proceeds per sale declined. Self-storage continues to be positive. Self-storage revenues were up $26 million, that's 15% up for the quarter. Average revenue per foot continued to improve across the entire portfolio, up nearly 6%. Our occupied unit count at the end of June was up a little over 42,000 units compared to the end of June last year. During that same 12-month timeframe, we've added nearly 64,000 new units to the portfolio. This differential led to the average occupancy ratio coming down for all of our owned locations by about 170 basis points to an average occupancy rate of just under 83%. This same moderation in occupancy was also seen in our same-store grouping of these properties. We saw about an average decrease again of 170 basis points, bringing the occupancy level to just over 95%. We continue to fine-tune our new self-storage disclosure in the press release. During the first quarter of fiscal 2024, we invested $294 million in real estate acquisitions along with self-storage in U-Box warehouse development. That's a $16 million increase over the first quarter of last year. During the quarter, we added just over 1.1 million new net rentable square feet, about 73,000 of that was in the form of existing self-storage acquisitions. We currently have just under 7.1 million new square feet being developed across 159 projects. Operating earnings in our Moving and Storage segment decreased $95 million to $387 million for the quarter. Operating expenses were up $28 million for the first quarter. Fleet repair and maintenance led the way with a $30 million increase. Work continues on increasing capacity, shifting repair work to company-operated shops and rotating the truck fleet, but we have fallen behind. Personnel costs increased $11 million, about half of that coming from increased health plan costs. Compared to the last two years, personnel costs as a percent of revenue are elevated. However, over a longer-term view, they're not out of line on a percent of revenue basis. Other expenses, including accident liability costs, the cost of freight and shipping and payment processing costs, all decreased during the quarter. We continue to place a premium on having access to cash and liquidity. At the end of June, cash along with availability from existing loan facilities in our Moving and Storage segment totaled $2.792 billion. During the quarter, interest expense in Moving and Storage increased $11 million, while interest income that we earned on our cash and short-term investments was up $22 million. During the quarter, we implemented Accounting Standards Update 2018-12, the targeted improvements to the accounting for long-duration contracts. This affects most of the products that we have on the books at our life insurance subsidiary. While this new rule has increased the amount of life insurance disclosures that you're going to see in our filings and it's going to lead to some additional earnings or comprehensive earning shifts between years, it does not have any effect on the underlying economics of our book of business there. With that, I would like to hand the call back to our operator, Dave, to begin the question-and-answer portion of the call.

We will now begin the question-and-answer session. The first question comes from Steven Ralston with Zacks. Please go ahead.

Good morning. Obviously, the self-moving equipment rental business is being driven by some macro-economic factors that are out of your control. But looking down deeper, it seems like the one-way market is being especially affected. I'm wondering how your effort to reposition the fleet from the situation that was created by COVID a couple of years ago given that slowdown in the one-way traffic business.

Okay, this is Joe. I'll speak to it for a minute. At least three times in my career, I've seen during this time of consumer confidence decreasing, people shorten the entire mileage that they move. And that also results in a shift of longer mileage one-way rentals into shorter mile rentals. The vast majority of our moves are driven by necessity, people's families grow or lifestyles change or people retire; these are life events. They continue at pretty even rates, but people's optimism and their willingness to undertake long-distance moves has declined, and I believe that's what we see going on here. Our fleet issues are that we're not able to purchase at the rate we would like to achieve the optimum balance of repair costs versus depreciation. Buying a car or truck is much like in your personal life; it's a trade-off between variable costs, repair, and fixed costs, capital costs. So, we would prefer to be heavier on the fixed cost today. Our experience indicates that this balance would favor profits, but we simply don't have availability for that many units yet. Does that answer your question?

I was more thinking about how the equipment has migrated, let's say, from New York and California towards Florida that the equipment is not equally dispersed.

Yes. Of course, we always have some equipment imbalances. Actually, Florida and Texas, which you would think would be buried in equipment, are not. We're seeing more localized dynamics, what we call unproductive areas more around retirement communities than any simple shift from the North and the East to the South. There are a lot of factors involved. Part of it is how well my team does. If they do better, we rent more equipment out. I think we have teams in Florida and Texas right now that, on balance, are doing a pretty good job, so they've alleviated that. However, we have other imbalances and this is just a constant juggling act.

Thank you. Looking at something more under your control, though not completely, are the expenses, the different components and some interesting dynamics in the different line items. But it looks like there's about 3.5% to 4% inflation through the costs. Can you mention anything specific that you're using to address these increased expenses?

Well, of course, we're trying to purchase more, but there is an end to that. Everything is inflating, from electricity to steel. We have seen a little catch-up, and there is probably a little more catch-up in wage rates as that's just the truth that the point-of-sale, which is where the bulk of our people exist, faces significant wage pressure, as you see with people in retail areas experiencing similar wage pressures. So, people are getting paid more, and normally you'd celebrate that, but it's inflationary, and that's going to continue. We don’t have any spin on the ball as far as controlling that. What we can control and work very hard on is simplifying processes and making them less labor-intensive. Truck rental is very physical. Trade rental is the same; there's a tremendous physicality to it. We have several initiatives; one would be our Truck Share 24/7, which I think just recently broke its 6 millionth transaction. Now that program has been operational for a while, so we're getting that process working pretty well. But it requires customer participation in some of these activities, reducing basically hours needed to work at the point-of-sale. That's not a perfect equation, but overall, it works. We're focused on driving efficiency, and I think this will continue to yield results for the next two to three years. There's a lot of room to refine that.

I have one final question regarding the self-storage sector. You mentioned that you observe a subset where the occupancy has stabilized at 80% for at least 24 months, and this trend mirrors the overall decline. I believe the intention was to indicate that this decline is consistent across most segments, suggesting it reflects a general industry trend rather than any specific issue to be concerned about, aside from a weakening market.

Yeah, that was the general thrust of that comment. It's Jason.

Yeah, thanks for the time, guys. So, first on the moving business being down 8.4%, it obviously includes locations that were added over the last 12 months. So, I'm just curious on a true like-for-like basis, what do you think it actually would have been down year-over-year?

I don't have that number, but it's a fair question. It's more complicated than just counting new locations since we conduct about half of our moving business through independent dealers. When we add a new location, we need to be cautious not to cannibalize those dealers. There has certainly been some cannibalization from these new stores. If they hadn't been opened, we would have still received that revenue. If you want to estimate there’s a 10% or 15% level of cannibalization, I don't have a firm figure on that since it varies by location. The rest would be new business. That might be a reasonable assumption. I don't know, Jason, if you have any additional details on that.

I don't think that's going to be a material part. I don't know if we would have seen a much bigger decrease on that, but that's an interesting question, Keegan.

I know, it's a super helpful way to think about it. I guess, shifting gears to storage. Obviously, occupancy was down 170 basis points, which makes sense to us just given the challenging market. I know in your opening remarks you said you're not lowering your street rates like the broader peer group is. But I'm curious what would it take for you to start lowering street rates?

Well, we analyze every location and room size by location; that's how we manage rates. So, you're unlikely to see us do something like say put it in a 10% rate decrease. If we did a rate decrease, it would more likely be in a certain size. So, let's say, 5x10 non-air-conditioned rooms or 10x15 air-conditioned rooms, or more specifically, 10x15 air-conditioned rooms on the upper floors. So, it's very, very specific. We don't have in our bag of tricks a normal maneuver to simply drop rates. And of course, you've probably seen the article in the Wall Street Journal recently that said anybody with a little bit of capital can get rich in self-storage. Well, it’s a little more complicated than that, as you might imagine. Mostly, I see people when they drop rates across the board because they are in a very uncomfortable situation. Once in a while, a competitor will literally move next door or across the street and drop rates as an introduction, which isn't uncommon. We lose tenants at that location because of that, but typically, we don't drop rates just because our competitor will come up with a rate increase 90 days later. Some of those customers will bounce back because now we'll be cheaper. In the meantime, it disrupts everybody to just drop our rate overall. So, that's our specific competitive situation. Our typical response is to hold tight and wait for them to get occupancy, and they'll increase rates greater than they decreased. That’s typically our strategy.

Got it. I guess on the topic of storage, just curious if you're seeing any change in your average length of stay? And then, how that helps you determine what sort of rate increases you're sending out to your existing customers?

This is Jason. I just looked at that this last quarter and compared to, say, like a year ago, it looks like each one of our duration stratifications has maybe moved out a percent. So across the portfolio, I'd say there has been a general move to a little bit longer stays.

And I would say, while that seems paradoxical, it's because a little bit less moving activity, a lot of the storage activity comes from people moving in or out, so they’re going to store for 30 days or 60 days, waiting for a place to be finalized or these kinds of timing difficulties in the overall moving declines. We see that real short stays aren’t as frequent.

Got it. And then just one final one here on the topic of storage. If we think about supply, in general, it’s often what causes storage to underperform over a short time period. You mentioned in the opening remarks you don't plan on stopping to grow your footprint right now. So, I guess, I'm just curious from the operational side of things; what would you need to see for that to change?

So, I'd have to be discouraged about the long-term prospects. When COVID broke out in March, I think for 2020, I got a little uncertain, so I stopped a whole bunch of projects. It took me at least 24 months to recover and regain momentum. COVID was a first-time deal for me. If I had the same event today, I wouldn't back off. I would say the US economy is going to roll through this with a little dip, but it’s better than being undersupplied. I was undersupplied the last half of COVID, which cost me opportunity. There is no certainty about overbuilding; certainly, I have said that for a couple of years. Of course, there's overbuilding. The beauty of it is the markets are local. It may be overbuilding in the northern suburbs and underserved in the southern suburbs. All these things exist. What’s also relevant is whether we can find locations that still need more supply. As you probably know, we operate in all 50 states, which gives us different choices than some competitors. Our strategy is to be present in all 50 states, so we'll be expanding in markets where competitors aren’t even present because they don’t see enough mass or have any interest in getting there. If I see conditions deteriorate, I will look for markets that we have great long-term confidence in but aren’t on the radar for most people since that market will never have five stores from one supplier. It will always be a smaller market, and we will do well in those smaller markets as our management structure works effectively for it. Some of our competitors may find it doesn't work well for them, which is a slight difference in strategy, not one being better than the other.

And one final one for me here. From a capital allocation standpoint, you guys are sitting on a lot of cash. I'm curious how we should think about the deployment of that over the next several quarters and years. Where are you currently finding the best risk-adjusted returns? Because it looks like it might be through short-term treasuries.

This is Jason. We were fortunate to lock in rates on a large piece of this cash going into this rising rate cycle, which benefited us. I mentioned the increase in interest income as we're in short-term government securities, and we've opportunistically purchased some treasuries here and there. I think our sense is that we are entering a credit tightening cycle. We've already seen anecdotal evidence of that within our own lending group. Since that is the primary way that we raise capital, sitting on cash provides us flexibility should we want to buy more trucks and find limited access to debt financing at that point in time. Our target goal for bringing cash down is probably closer to a $500 million mark, but it will take us a few years to get back to that level. However, we are looking at potential spending of up to $2 billion in development, along with increasing fleet purchases over the next several years.

The next question comes from Steve Farrell with Oppenheimer. Please go ahead.

Good morning. How are you?

Great, thanks. Appreciate you logging on.

Yes, thanks for having me. Quick question on that CapEx. Are we expecting the remaining spend to be spread out over the rest of the year, or weighted towards the next quarter or two?

It will be weighted a little bit heavier over the next two quarters.

And has it been easier to get supply from the manufacturers?

Yes, it’s loosening up, but at a snail's pace, and it has me biting my fingernails. It's a political question; you probably know as much about it as I do, which is trying to reconfigure the automotive industry, and that’s causing them challenges in their fundamental job, which is manufacturing automobiles. They have made progress, but global production continues to be short of demand, which I think will remain for a while.

And how do you think that affects the fleet moving forward? Should we be expecting a longer age of the fleet and less CapEx and turnover there?

Well, that may happen. If so, it basically increases our effective cost per mile. We're trying to manage that cost per mile, which is a trade-off between repair costs and fixed costs. With CapEx, you have a fixed cost. The balance is currently leaning too much on the variable cost side when it comes to repairs. We’re working on optimizing that; it's not our choice if we experience longer fleet age. We can manage through that as we have done in the past, but a more optimum trade-off would involve a larger number of annual replacement vehicles.

And how should we be thinking about the impact of the increasing CapEx this year and the effect that will have on maintenance and repairs and the timing of those benefits?

We can slow the increase, but it’s not enough to stop it, in my judgment.

And do you think the spend from the first half of this year will start to slow the pace more in the first half of next year or the second half?

Yeah, Steven, the pace of new acquisitions is coming in reasonably well. If we finish out this year on new acquisitions the way it looks, we could potentially pick up 2,500 units over a normal pace. However, we started the year about a year behind in rotation from the last few years, putting us over four years out from fixing that pace. The bigger piece is how fast we're taking the old trucks out which affects maintenance costs as newer trucks come in. Our team is feeling more confident that the new trucks will be available; however, we’re still at least a quarter behind in pulling older trucks from the fleet.

Thank you for that. Moving to self-storage: other self-storage REITs have reported significant price per square foot drops on move-ins versus move-outs. Are you seeing the same thing?

Our move-in rates are about 3% higher than they were last year, and we still have a positive differential between move-in and move-out rates.

Do you think that’s because U-Haul is somewhat insulated and not as heavily concentrated in the top 25 MSAs? Is that a benefit for you guys?

I'm not entirely convinced that it is. Our competitors often have strong months, and when that happens, they increase their rates by as much as 15%. They tend to be more aggressive on the upside, which makes them more likely to retreat. We usually set our rates, while our competitors do not; the next customer in line may get a different rate. Our strategies vary, and we have worked to set expectations with our customers, who generally understand our approach. Many customers recognize that a nearby REIT might lower its prices, but do they really want to move to save $15 a month? It could go either way. Therefore, I think they can gain more when rates are favorable and give up more when they are struggling, but neither approach is flawless; that is simply how we have established our customer relationships.

How do you balance rental rates versus occupancy rates when looking at pricing per square foot?

Again, we do it by location and room type. In Phoenix, Arizona, for instance, we have about 85 stores and many different REITs in the area. So, it’s much more discerning than just being in the Phoenix Metro. Our staff focuses on both occupancy and rent-up rates. Their effectiveness has been a bit lacking, and I have been dissatisfied with their performance for some time.

From an asset owner standpoint, blended locations definitely benefit our truck product line, equipment rental product line, and U-Box product line. The way a specific measurement works for determining what the storage margin might be, we do have many locations that are essentially storage-only. The costs allocated to those locations may appear to have a higher margin; however, they don’t have to split profits across multiple product lines. The best returning locations for us are those with the full product line available to customers. This looks quite different than a self-storage income statement.

Got it. Thank you. Last question is about the chart in the release regarding self-storage by state. Are the same-store numbers comparable year-over-year?

No, the same-store numbers represent what the same-store calc was at that time. There are a couple of different ways of presenting that. The way we presented it shows what the same-store pool looked like a year ago and two years ago versus taking this year’s same-store pool and carrying that back two years. We didn’t take that route.

Would it be possible to include both of them so that we could compare different subsets and look at a consistent group of stores?

I've received feedback since last quarter on that. I would say the comments asking for that have been fewer than the ones who are happy with it. We've tried to index this against what people are used to from our storage competitors, given the presentation we’ve found from them. However, it’s an open question, so I wouldn't say the book is closed.

Hey guys. Finally here live for once instead of sending in questions. I guess one of the things I was wondering about from a strategy perspective: obviously, moving in household formation is contentious with many macro questions, but interest rates on housing are a lot different now than two years ago, and we’ve seen that slowdown. I'd imagine that kind of moving in household formation puts pressure on the truck rental business. Can you comment on what that means for the business and your strategy?

Again, I would say the total drivers of moving are life events. When your family grows, you're looking for opportunity. There are many forces at work. One I've been focusing on most recently is the consolidation of the housing rental business and the emergence of large single-family dwellings renters, which is a significant change that may impact frequency. In most parts of the country, people moving into four and five-story multi-family apartment units are becoming a growing subset of movers. We're trying to understand their specific characteristics to tailor our products and services to fit their needs. This may have implications beyond interest rates over the next several years. Additionally, I think we can see what people are doing, which diverges from long-standing belief, and I can't predict how that will impact the overarching industry.

Is it too simple to think that decreased affordability combined with new sales being down puts a ton of pressure on the rental business?

I would agree that would be my conclusion, yes.

Okay. My question was a little too long-winded there. Sorry. I hadn’t thought about your strategy difference with REITs regarding rate dynamics over time, but how much longer do you think this trend will go on, given your structural operations? How far can you go there on rate gains as in-place ages?

That's a $64,000 question. My team still believes they have some running room. I might be wrong. My instinct warns me over the past 12 months; we’ve experienced increases at 30% of units. I'm not certain that number is correct, but my team has confidence in what they can manage over the next 30 days. I can't predict how far we will go, but as customers enter at full capacity, we’ll look to adjust our rates. If tenant classes fluctuate – some may be full while others sit at 80% – this information can help us assess whether changes need to be made.

Okay. I didn't catch your thoughts on liquidity. Is the $2 billion projection including development projects or just what's currently on the books?

That would be to finish all active developments we currently have on the books, not including escrow.

So, you're prefunding much of that development with cash, in case market conditions worsen? What about truck purchases within that thought process?

Yes, I think what we've learned from experience is that it’s better to have cash than not when it comes to the direction of the market. Our real estate spending has surpassed $1 billion over the last two years, and I see that continuing for the next couple of years at least, alongside increasing fleet purchases. The cost of the new units is higher than before due to rising prices; based on purchases this year versus last year, that's approximately $25 million of inflation. If we compare them to prices from two years ago, it’s over $40 million of inflation. Given those headwinds, we’re staying cautious.

Okay, lastly, on the app for company locations, you mentioned seeing over 6 million transactions. Can you provide color on the percentage of transactions happening in the app versus walk-ins?

Well, there are two aspects: our Truck Share 24/7 can go through the app or desktop. We’re transitioning users to the app and have seen strong growth there. I’d say that two weeks ago, we were in the top 10 travel apps on Google. We intend to push ahead with this growth. It’s hard to predict where it will go exactly, but monitoring key indicators is essential. The app's uptake among customers who prefer that method of doing business is increasing satisfaction. I’m all in on this effort and believe it will continue growing. I see this as a long-term trend, especially for younger customers who predominantly use handheld devices.

Lastly, filling 30,000 rooms a quarter was once considered good during summer; now we're consistently above 44,000. Have there been changes that improve your ability to fill rooms faster or is it just more availability?

We have more rooms and they’re thoughtfully placed. We have stores that are 20 years old and some that are 40 years old. So, is that location now as hard as it once was? You see, if we execute correctly, we have good room in newer stores. The online move-in process for these locations helps, and we have quality amenities that attract customers beyond our competitors. These elements may seem minor, but they add up for consumers. The percentage of new rooms, specifically those around 24 to 36 months old, in our portfolio has increased, positively affecting our rent-up rate for the company.

So it's predominantly a newer mix? No substantial shifts in marketing or key strategic changes?

Everyone is getting smarter about their strategies under capitalism. We learn from each other, compete, and strategize based on our findings. Nevertheless, our strategy is slightly different, focusing on truck and trailer rental as well. For instance, we operate in smaller markets to cater to specific needs. We have a unique set of strategies that includes continuing to execute well. Many tiny improvements and research into location viability count, ultimately shaping customer engagement and outcomes. The key is strong site selection; we spend considerable resources ensuring we have the right locations as they drive results.

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

Well, thank everyone for their support. As a reminder, one week from today on Thursday, August 17 at 9:00 AM Pacific, we will hold our Annual Stockholder Meeting. And then two hours later at 11:00 AM Pacific, 2:00 PM Eastern, we'll host our 17th Annual Virtual Analyst and Investor Day. Both events can be accessed on the web at investors.uhaul.com. Questions for the Q&A portion of our Investor Day can be sent prior to the meeting at [email protected] or submitted live during the event. We look forward to speaking with you next week. Thank you.

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