Earnings Call Transcript - UHAL Q3 2023

Operator, Operator

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 would like to remind everyone that certain 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 and 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 moves, we are experiencing a decline in average miles per one-way move and a decline in total one-way moves. 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 the trade-off I would rather not be making. At this point, I believe we are trading down. We have very modest input on what the 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'm very optimistic about our prospects. We are working to increase our service and value to the customer. This is achievable and I remain hard at it.

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 UHL.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 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. So 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, and 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. But half of this increase I would estimate to be attributable to inflation with the other half associated with an increase in trailer, towing device, and U-Box container production. During our last earnings call, I had reduced our forecasted gross fleet CapEx number down to $1.4 billion and further reducing this now to just under $1.3 billion. Proceeds from the sale of retired rental equipment increased by $56 million to a total of $527 million for the nine months. Sales proceeds from pickups and cargo vans have increased compared to last year, but we purposely slowed the sale of box trucks for now. Retail 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. And we currently have another 6.2 million square feet in some process of being developed right now across the 148 projects. And then we have an additional 153 or so projects where we own the land or buildings, but we haven't started actual construction that should account for somewhere around at least another 9.2 million square feet by the time we're done. On the new acquisition front, we're down to just under 60 deals in escrow. Last quarter when we spoke, we were somewhere around 100, so that number started to come down. In the moving and storage segment, expenses grew faster than revenues, resulting in a decline in operating results. Our operating earnings from moving and storage dropped by $99 million to $305 million for the quarter. This still marks our third best third quarter in the history of the company based on total operating income, and it showcases one of the best operating margins for this time of year. We are actively working on improvements. Operating expenses increased by $75 million, with $34 million attributed to fleet repair and maintenance. We are enhancing our internal capacity to manage more repair work ourselves, and our fleet is well-maintained as we head into the summer months. The rise in personnel costs slowed to a $13 million increase in the third quarter, and we even saw a slight decrease in December. However, there is still more work to be done. The next significant increase in operating expenses came from property level costs, including utilities, building maintenance, and property taxes, which rose by $13 million. We maintained strong cash and liquidity at the end of December, with cash and available credit from existing loan facilities in moving and storage totaling $2,895 million. Additionally, during the quarter, we invested $225 million in six months U.S. Treasuries to enhance our yields, though this investment is not currently reflected in cash as it occupies fixed maturities. During the quarter, our interest expense in moving and storage increased by $15 million, while interest income from our cash and short-term investments grew by $24 million. For the nine months, interest expenses rose by $43 million, and interest income increased by $42 million. Now, I would like to turn the call back to our operator, Gary, to start the question-and-answer segment of the call.

Operator, Operator

We will now begin the question-and-answer session.

Joe Shoen, Chairman

The purchasing cycle is important, and I am emphasizing the budgeting process, which is typical for management. We see potential to lower property level costs. In terms of our customer-facing staff, we will need to reduce the workforce to cut expenses. We have several initiatives that show promise, and as Jason mentioned, our finance team delivered excellent results.

Operator, Operator

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

Joe Shoen, Chairman

The demand for self-storage is quite strong. However, since storage is a market-specific business rather than a national one, we're carefully navigating the available opportunities to identify areas that may perform better than current market trends suggest. We have seen some success in this regard. While we approach every initiative with confidence, the outcomes don't always align with our expectations, yet overall trends support our strategy. I remain committed to expanding self-storage, which is a long-term investment. Even if the current downturn lasts a couple of years, in the context of a 30-year asset, that would not significantly impact our plans. Therefore, I am continuing to move forward with our expansion efforts.

Operator, Operator

And finally, CapEx for new trucks is moving up, but it seems management still wants to invest more in the fleet to improve the age. On a scale of 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 and then maybe Jason will try to give you a number. It's not actually the age we're working on, it’s a cost per mile. There's a trade-off that relates to accumulated miles on the vehicle and that kind of correlates to age, we have the same utilizations. This gets very model specific. 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. And I think if you just say, we're having more constraints, replacing our biggest trucks than our smallest trucks. So I don't know on the scale of one to 10, I haven't thought of it that way, I wanted to tell you. Jason, do you want to touch on the number?

Jason Berg, CFO

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

Operator, Operator

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

Operator, Operator

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

Steven Ralston, Analyst

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

Joe Shoen, Chairman

In the United States, customer expectations have risen over the past 20 years, and I anticipate that they will continue to rise. We've maintained what we've done in the past, but customers are now demanding more from us. My challenge is finding ways to meet these demands without significantly increasing costs. The way we manage our rotation fleet, which remains stationed at specific locations most of the time, is crucial. We've implemented new analytical tools that help determine the best truck locations based on local data. While this seems straightforward, it involves navigating a complex array of information. We've invested time in enhancing our analytical capabilities, and I believe we started to see some positive results from that in the third quarter. Overall, it's about addressing many small issues, similar to the corrections needed in football.

Steven Ralston, Analyst

Yes, blocking and tackling. I was impressed with that comment from Sebastien saying you had a step up in the operating margin in the third quarter, which is fiscal quarter, which is usually slower. And I look back and yes, the operating margin 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 is Jason. I would say it's probably two-fold. It has probably more to do with revenue, and we have this larger base of self-storage revenue, we have U-Box revenue. So our business and the margins, it's an economy of scale. So the more utilization we can squeeze out of our assets, the better that's going to look. So over a long period of time, if you look at our expense structure, I think we've done a good job of improving revenue without increasing expenses as much. In any small time period, compared to the last two years, for example, you see some large variations. But over time, we've done a good job of increasing revenue without a significant increase in expenses. There used to be a time where the third or fourth quarter we would dip into a loss period. And I think self-storage is a large component of why that isn't the case anymore.

Steven Ralston, Analyst

All right. Thank you for taking my questions.

Jason Berg, CFO

Thanks, Steven.

Operator, Operator

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

Jamie Wieland, Analyst

Hi, everyone. Clear, that’s U-Haul call now. First question regards the public announcements by public storage that they were trying to buy life storage for $11 billion. And life storage said that that price was too low. 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.

Jason Berg, CFO

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

Jamie Wieland, Analyst

So there were at 80 million, whereas 78 million, is there anything different… In their facility. 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 in their publicly held information versus our self-storage operation?

Joe Shoen, Chairman

Well, this is Joe. I thought that Uncle Bob's had a good purchase of life. I believe that decision didn’t receive a strong reaction from shareholders in the short-term as I remember it, but it was a significant improvement. They established a brand name that they can leverage, whereas previously they had no brand presence at all. I think they have done a credible job in advancing that. I don’t have access to a lot of their facilities, and they don't provide specific information about them. However, my impression is that the life storage team has increased the ratio of Class A to Class B storage in their organization since they moved away from Uncle Bob, and they have been putting in a lot of effort since then. So I think they have done a decent job in that regard. Recently, it seemed like they mentioned they would still maintain rates. I cannot confirm that, but that’s my perspective.

Jamie Wieland, Analyst

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

Joe Shoen, Chairman

I believe it's the same situation. If you look at a 30-year-old asset, it's clearly not what you would design today. We typically review these projects, analyze and determine the characteristics we want in a facility, and then evaluate how they stack up against our current standards. We're constantly investing in improvements where necessary. However, I don't often get the chance to visit other sites; I do have some opportunities, but it's not as straightforward since operators tend to be selective. We definitely have a long-term strategy in place and I believe we're enhancing security. Overall, while it's a modest investment, I think they have managed things reasonably well.

Jamie Wieland, Analyst

Has public storage ever approached us?

Joe Shoen, Chairman

Yes, in about 1988.

Jamie Wieland, Analyst

Okay.

Joe Shoen, Chairman

Nice covers, the point of use.

Jamie Wieland, Analyst

Given that they want to do a stock for swap for life storage, it would be an interesting thing if you would consider a stock swap for our self-storage to 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 UHOL. If we could get stock for it and then distribute those shares to shareholders or pretty tax-efficient way to create liquidity and secure value for that operation. And we would still have our entire truck rental operation basically for free, if we could do that with. 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

I haven't closely examined that recently. Essentially, our strategy is to move away from the typical self-storage REIT model and focus on the U-Box business, something that was previously explored by the public sector but ultimately exited. We're also in the truck rental market, which the public sector does not engage in. I believe Extra Space and Life have a few locations offering their own truck rentals, but our physical strategies have diverged, and I don't expect any significant changes in that regard. Our strategy's outcome is uncertain. As Jason mentioned, self-storage has likely alleviated the need to adjust our workforce seasonally as we did 15 or 20 years ago when we had to make significant reductions in the fall due to excessive seasonality in the truckload business. We've implemented various strategies, including U-Box and enhancements to our storage and fleet rotation, which have contributed to more predictable revenue during winter. While I cannot predict whether the public sector or Life will succeed in their approaches, it's intriguing that they have slightly different strategies. They could each potentially argue against the other's approach. From what I've observed, Public does an excellent job maximizing their NOI and gaining investor respect. Many of our competitors have struggled recently, but Public appears to attract better investor support for their rental revenues, which could work in their favor. However, when it comes to operations, both are strong performers.

Jamie Wieland, Analyst

Okay. Joe, I apologize.

Joe Shoen, Chairman

Go ahead.

Jamie Wieland, Analyst

Joe on the truck rental side, one of the things you said in the past is the main metric that you really look at is fleet utilization. Now I realize we have to upgrade the age of the fleet, but I look as 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 adjust our numbers a bit. We've been somewhat surprised by three years of strong usage, but the average miles per existing unit has mainly increased. Average miles is a better measure of cost per mile. Additionally, we have about 2,000 more trucks down for maintenance today compared to a year ago. As anyone with a vehicle knows, maintenance has many details to manage, and that takes time, which results in a less productive fleet. We've invested in adding personnel to help streamline this process. If you compare our current number of vehicles to last year, you should take off about 2,000 since they are not in service. I agree that we need to consider letting some older trucks go. The aging fleet makes it harder to maintain high utilization due to the maintenance intervals disrupting operations. We worked hard this winter to ensure the fleet is fully maintained heading into spring, and we've just reached that point. Now, I need to observe how customers will respond. While I see encouraging signs, overall, one-way transactions are down. Without those transactions, we won't need as many trucks, and I completely agree with that point.

Jamie Wieland, Analyst

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

Joe Shoen, Chairman

It's an example of the evolving technology and changing consumer preferences, with more people seeking low-contact transactions. Many customers prefer to conduct transactions during the hours that Walmart operates, rather than when U-Haul is open. Recently, there has been a new transaction at 9 PM, but we haven't been able to staff for that yet. Our 24/7 truck rental program has seen success, with a higher percentage of transactions occurring at dealers compared to our centers. This is largely because our centers operate seven days a week, while dealers typically operate five days a week. This approach has helped offset a slight decline in overall demand by enhancing our service, which customers have responded positively to. There is still much room for improvement, and we are actively working on that. For example, at our company-managed location in Park Slope, Brooklyn, the management has effectively streamlined the transaction process, allowing customers to complete nearly everything on their phones before they arrive. We only need to verify their driver's license and ask a couple of questions before they take the keys and drive away. Most of our locations have the trucks coded for tracking, enabling us to direct customers accurately. That's a clear example of our productivity enhancements, and we recognize the need to expand this. While progress has been slower than anticipated, we have seen good acceptance of this program. Year to date, I estimate we're up about 14% to 15% in these types of transactions compared to last year.

Jamie Wieland, Analyst

Okay. Thank you, Joe. I appreciate it.

Operator, Operator

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

Joe, I want to thank you for being on the call. As you can see, we're working on improving our communication with investors. I also appreciate Steve and Zach being here. Last time, I mentioned that I'd like to have another organization follow us, and we're trying to make that happen. However, I've learned that this process isn't a quick one; it takes time. Therefore, I won't announce anything until we have concrete details, but we are actively working on it. Again, I appreciate it and look forward to our next call.

Operator, Operator

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