U-Haul Holding Co /NV/ Q2 FY2025 Earnings Call

Good day, everyone, and welcome to today's U-Haul Holding Company Second Quarter Fiscal Year 2025 Investor Call. At this time, all participants are in a listen-only mode. Please note, this call may be recorded. I will be standing by if you should need any assistance. It is my pleasure to turn the conference over to Sebastien Reyes.

Good morning, and thank you for joining us today. Welcome to the U-Haul Holding Company second quarter fiscal 2025 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 the company's public SEC filings and Form 10-Q for the quarter ended September 30, 2024, 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.

Thanks, Sebastien. This is the time of the year that we try to lock down our moving truck and trailer CapEx. The big unknown for us is how successful the new administration will be in getting EV mandates turned around. If the vehicle manufacturers can gain some certainty, that will help us with our strategy. Rental income on moving equipment is up slightly. My teams remain focused on this measurement, but we've been getting very modest results. We are continuing to develop new storage products and bringing them online faster than we are filling units. The storage industry remains beset by unrealistic moving promotions. We are holding with our strategy, but we're watching this all the time. U-Box, which is our service that addresses both the time and the place needs of consumers, is still making progress. We have a significant infrastructure now in place that can reliably handle growth in our transactions, and I expect we're going to see some. I have a word on the update on the acquisition of U-Haul Holding Company shares by Trian Fund Management LP, Nelson Peltz. As you know, Trian filed a 13F with the SEC on August 14, regarding their U-Haul Holding Company stock holdings as of June 30. Since then, Jason Berg has met once with Trian representatives, and they have sent us a 31-page PowerPoint presentation. Trian has also communicated with other U-Haul Holding Company shareholders. Of course, Trian's reputation precedes them. We regularly consider multiple inputs and factors and will continue to do so. We have our business plans in place. There will not be any changes to our plans due to Trian's input. Jason continues to work to get accurate, helpful information to you as investors, and he will continue to do so. Many things are up in the air regarding consumer confidence. We look forward to the new administration positively contributing to this, which will just make our ability to see the future a little more accurate. With that I'll turn it over to Jason to take you through the numbers.

Thanks, Joe. Yesterday we reported second-quarter earnings of $187 million compared to $274 million for the same quarter last year. From an earnings per share perspective, this translates to $0.96 per non-voting share compared to $1.40 per non-voting share in the second quarter of last year. Earnings before interest, taxes, and depreciation, EBITDA at our moving and storage segment and for the rest of this year, I'm going to have to adjust to remove interest income from the prior year. That amount decreased by $18.1 million due almost entirely to operating costs that are unlikely to recur, and I'll touch on that further in a moment. Equipment rental revenue results, we had an $18 million increase, or about 1.7%, up slightly better than what our first-quarter improvement was. This is now our second consecutive quarter of year-over-year increases in equipment rental revenues, and it points to a likely trough. We should hopefully have a return to a more sustained growth trajectory. While we weren't able to generate increases in one-way moving transactions, we did see an increase in the average revenue per transaction for both one-way and in-town lows. Our in-town revenues on the trailer and towing fleet also increased during the quarter. October and the first week of November saw revenue continue to trend positively compared to the same time last year. Capital expenditures for new rental equipment for the first six months were $1.156 billion. That's a $182 million increase compared to the same six-month period last year. We've increased our fiscal 2025 full-year net CapEx projection, so that's gross spending, less sales. We've increased it from $1.90 billion to approximately $1.115 billion, and that's due to the availability of some additional equipment from our manufacturers that we can purchase this year. Proceeds from the sales of retired rental equipment were down $44 million to a total of $361 million. This is a combination of fewer pickups and cargo vans sold along with lower average sales proceeds on the units that we did sell. A portion of our depreciation increase that you're seeing is in response to the declining resale values of these models. Switching to self-storage, revenues were up $16 million, which is about an 8% improvement. Average revenue per occupied foot continues to improve across the entire portfolio, up about 1.6% for the quarter. If you look at our same-store portfolio, we were up just over 2%. Our occupied unit count at the end of September was up nearly 32,000 units compared to the same time last year. Now during the same timeframe, we've added 67,000 new units, and that's what's led to the differential in our average occupancy ratio down to about 80.9% for the whole portfolio. If you split out just the same-store portion, we saw average occupancy decrease 80 basis points to 94.1%. During the first six months of this year, we invested $734 million in real estate acquisitions along with development costs associated with self-storage and U-Box warehouses. That's a $101 million increase over the first six months of last year. During the quarter, we added just over 900,000 new net rentable square feet, about 860,000 of that was from newly developed locations. We currently have approximately 8.1 million new square feet being developed. I would expect to see the net rentable square feet deliveries increase next quarter compared to what we did this quarter. Our U-Box revenue results are included in other revenue in our 10-Q filing and are not large enough yet to break out separately, but this line item increased $7 million, of which U-Box was a major contributor. Operating expenses at moving and storage increased just over $55 million. As we mentioned on last quarter's call, the decline in fleet repair and maintenance was going to slow and it was down $5.4 million for the quarter. Personnel costs were up a little over $17 million. Liability costs associated with the fleet increased $7.6 million, and property taxes and building maintenance combined were up about $8 million. During the quarter, we had a $16.5 million cost related to our transition to a new cardboard box supplier for our moving supplies. While we expect this over time to result in improved service and lower cost of goods sold, we opted to expense this amount in the quarter. As of September of this year, at our moving and storage segment, we had cash along with availability from existing loan facilities of $1.775 billion. On our Investor Relations website, we posted some supplemental materials in addition to the earnings release and the 10-Q filing. I would encourage you to take a look at them. We hope that it would be helpful to you. With that, I would like to hand the call back to our operator, Leo, to begin the question-and-answer portion of the call.

Thank you. We'll take our first question from Steve Ralston of Zacks.

Good morning. I have two questions concerning the trends of the business in the self-moving rental business and also self-storage. In the rental business, you had your second consecutive quarter of year-over-year improvement, which is quite interesting because two quarters ago Joe mentioned that he expected slow, but modest improvement over the near term. I'm wondering if you have anything that you can foresee over the next two quarters. I know you mentioned that you might see a strengthening later on, but what's your feeling for the next two quarters?

I don't see any significant changes. We're okay with constantly making adjustments, but the results have been minimal. That doesn't mean we won't find something that really works. I believe the current issues in the country may settle down, leading to more predictable behavior from people, which I hope will increase our business. However, I have no insight into that at all. We plan to introduce an additional trailer model late in the fourth quarter, which could slightly impact our trailer rentals, but since we need to manufacture them, the ramp-up will be gradual. I expect that model to be a modest success. Beyond that, I don't have any visibility on whether demand will increase in the next 180 days.

Thank you for that. In the self-storage business, the year-over-year growth rate has been declining. It used to be a solid double-digit increase, but now it is in the upper single digits. Several factors contribute to this. I know you mentioned the growth of your portfolio, which plays a role, and you also referenced the pricing situation. Can you provide insight into that trend and your thoughts on when it will stabilize and improve?

We are currently adding rooms at a faster rate than we are filling them, which creates a basic imbalance. This situation varies by location, and there are instances where we are performing well in the low to middle 90s. However, with new product launches, some perform better than others. I believe that around 90% of our upcoming new products will be successful, and I expect them to outperform the industry. While I am hesitant to predict a return to double-digit growth before next summer, I think we will outpace our peer group. Achieving a balance between the addition of new products and filling rooms is not entirely clear at this moment. We are entering a relatively slow season, but there are still plenty of customers even during this time. Currently, I am addressing challenges on a location-by-location basis, rather than considering the situation from a macro perspective. This week, many of my senior managers are traveling across the country, focusing on strategies to increase room rentals at specific locations and identifying weaknesses in our sales approach. I believe that customers are present, but we are struggling to connect with them. Despite the less favorable results reported by many in the industry, I anticipated this situation and noted that many newcomers to the market didn’t fully understand the challenges involved. This has led to some disarray, but I expect to emerge from it ahead of my peers. We’ll see how that unfolds.

Just to talk out loud, I mean, that's one of the key attributes of U-Haul is that you build all this capacity, and you build it, and it will come. The demand occurs. Last time it was COVID. And then you have all the capacity and the leverage to benefit from that, but works both in the rental business and self-storage. Well, thank you for answering my questions.

We'll move next to Jamie Wilen of Wilen Management.

Thank you very much. My first question is about U-Box, and it appears you are capturing more market share in this area. As you develop new self-storage facilities, do you incorporate U-Box storage options into them? How significant is this as a competitive advantage for your business? Is this the reason behind your market share growth, or does it simply allow you to offer better pricing to customers or improved margins for your company? It seems you consider this a competitive advantage since you're including space for portable storage with U-Box in your new self-storage projects.

Yes. I'm going to let my son, Sam, who runs U-Box, speak to that for just a minute.

Sure. I'm happy to answer that, Jamie. I think the question was, is the storage component of U-Box a competitive advantage? No doubt about that. I'd agree with you. Now is it why we're gaining share? The answer to that is no. I would say if I would give us a grade on the moving segment of U-Box, I'd give us an A, and on the storage segment of U-Box, I'd give us a C, but it just gives us massive opportunity going forward to shine. I'd say the competition is doing a better job on that relative to us. But I can tell you storage at U-Haul, as you might imagine, is quite a focus. And so, I've got a lot of support resources to take that C to the A that we know it should and could be. So, thanks for your question.

Okay. And as we continue to build self-storage, will it always include an extra component for portable storage as well?

Not always. You need to plan this out, and likely the area covered by a U-Box location service is larger than the area served by traditional self-storage. We are taking the opportunity to expand our U-Box network as we build. However, if you look at our current projects, it's quite close, maybe eight out of ten. We are not aiming for a one-to-one ratio at all, as that would exceed our absorption capacity. But for now, I would estimate that in about eight out of ten of our new builds, we are adding more storage along with U-Box.

Okay. Next, I want to go to the value gap coherent between what U-Haul is trading for and what it's worth. When I look at competitors, say a CubeSmart, which has a similar revenue base than you, though it does not maintain your growth profile, because you have added so much more fresh space than they have. They've got a $10 billion market cap on their self-storage, and it seems like we're not getting that credit for it on our self-storage operation, which one would think our metrics for occupancy and rate are similar to theirs and margins are similar to theirs. So one would think our valuation for our self-storage would be similar to that. Can you talk about the value gap? And is that what is within a lot of Trian's PowerPoint presentation for how to close that value gap?

Okay. I'll talk to it for a minute. Of course, right now, excess capacity is a drag. I can't give you the number all the way, but it's a drag on earnings. Obviously, we own the stuff we're paying for it. Aggressive development is a drag, and both those things are just mathematically what comes out of that development, whether at the end of the day, this turns out to be a happy day or not is unknown until you get there; of course, I think it's going to, or I wouldn't be pouring resources into it. As far as Mr. Peltz, I don't like to speak for him and I don't like to have anything that is anything. I don't know. I could send you his presentation, Jamie. I don't know if that would work. I don't really want to speak for him.

Okay. You mentioned that in self-storage, we are creating more spaces than we are filling, which affects earnings in the short term. A positive aspect of COVID was that we increased occupancy rates at existing locations while our ability to open new ones was limited. This created a better balance recently between the costs of newly opened units and the occupancy of existing ones. Do you think we will eventually return to that balance, rather than focusing solely on the long-term prospects of ten years out while managing the immediate impact of aggressively opening new locations?

I expect things will fluctuate. There are still many opportunities, and one of U-Haul's advantages is our wide operational reach. We are actively present in Wyoming and Montana, even if some people overlook these markets. For example, we’re already operating in Gillette, Wyoming, and expanding there with additional products and services is feasible because it aligns with market demand. On the other hand, our storage competitors have no reason to enter Gillette since they lack the necessary infrastructure and would face challenges in establishing operations. In Northern New Jersey, many are eager to expand their offerings, yet I recently declined a product opportunity there because it seemed too labor-intensive and high-pressure, suggesting the returns might not justify the effort. However, I believe we have numerous expansion possibilities over the next two years and aim to position ourselves for long-term success. Inflation has significantly benefited the self-storage industry; when I first entered, we were offering space for $7 per square foot, which is now no longer viable. Rates have escalated, and units now fetch around $135 per foot in the same locations. While we currently face high entry costs, units are still commanding substantial prices in the secondary market, which may change in the future. We are committed for the long term and will enter markets we believe will yield positive results over time. However, there are challenges; if we stop investing capital in about 18 to 24 months, the financial statements will reflect that quickly, and things could change drastically.

I wonder if we should slow down the amount of capital we invest, leading to a lower percentage of new units. Additionally, regarding New Jersey and Wyoming, it’s easier to succeed as a large player in a smaller market than as a small player in a larger market. What are your thoughts on selling part of our existing mature facilities in New Jersey, considering the valuations, to free up capital for investment in areas with better profitability potential?

You could potentially manipulate the finances, but what we have done is establish most of these locations with U-Box and new U-Haul stores. It is possible to consider some partitioning and unconventional sales of partial interests. We have experience with a similar arrangement with W. P. Carey, which was finalized about a year ago. From my experience, it seems to provide a one-time boost. However, after that, those with financial interests and assets tend to extract every last dollar from it. At one time, I managed a hundred stores alongside others, and I ended up facing several lawsuits for allegations of fraud. The process of partitioning these assets is awkward, to say the least. Our strategy has focused on presenting a combined offering to customers. We have experimented with various approaches but haven’t found a way to effectively partition these assets that yields significant benefits.

Thank you for all this. Appreciate your time.

You bet.

It seems we have no more questions at this moment. I will now hand the call back to management for their closing remarks.

Well, thanks so much everyone for your support. We look forward to speaking with you after we report earnings in February. Thank you.

This does conclude today's U-Haul Holding Company Second Quarter Fiscal Year 2025 Investor Call. You may now disconnect your lines, and everyone have a great day.