Earnings Call Transcript - UHAL Q3 2022

Operator, Operator

Good morning, everyone. Thanks for joining us today. Welcome to the AMERCO's Third Quarter Fiscal 2022 Investor Call. Before we begin, I'd like to remind everyone that certain of the statements during this call, including, without limitation, statements regarding revenue, expenses, income and general growth of our business, may constitute forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain factors could cause actual results to differ materially from those projected. For a discussion of the risks and uncertainties that may affect AMERCO's business and future operating results, please refer to Form 10-Q for the quarter ended December 31, 2021, which is on file with the U.S. Securities and Exchange Commission. I'll now turn the call over to Joe Shoen, Chairman of AMERCO.

Joe Shoen, Chairman

Thanks, Sebastien. We have another quarter of good financial results. I continue to work on our customer experience. My workforce is long since ready for the COVID mandates to cease. They are unnecessarily stressed. Demand, fortunately, is still strong for both our moving and storage products. As you are well aware, there are disruptions in the vehicle pipeline that impact our repair and CapEx budgets and will likely do so for 2 or 3 years. While the OEMs are working hard to resolve this, any relief for this summer is very unlikely. Like many life insurance companies, Oxford has suffered actuarially unpredicted insured deaths. However, assets and liabilities are well matched and we will work through this. I appreciate your support and encourage your use of our services. We are only as good as our next customer interaction. With that, I'll turn it over to Jason to walk you through the numbers.

Jason Berg, CFO

Thanks, Joe. So yesterday, we reported third quarter earnings of $14.35 a share compared to $9.33 a share for the same period in fiscal 2021. Throughout my presentation, my comparisons are going to be for the third quarter of this year versus the third quarter of fiscal '21, unless otherwise noted. Regarding equipment rental revenue, you may recall, last year, we reported a very strong third quarter, posting an increase of $187 million. As you can see from yesterday's filing, we were able to build upon that this quarter with an increase of nearly 21% or approximately $167 million. Within the one-way rental market, we continue to see improvements in transactions and, to a greater extent, revenue per mile rate. Improvements for our in-town markets continue to be a good mix of transactions and revenue per transaction. Even with some headwinds in January, and when we say headwinds, I quite literally mean poor weather, we have seen growth in U-Move revenue continue into the next month. New equipment continues to flow into the fleet, just not at the rate that we would like to see it. Capital expenditures on new rental equipment were $809 million for the first 9 months, compared to $547 million in the first 9 months of last year. In response to the pace of new acquisitions and customer demand, we've slowed the number of units that we retire and sell. This has resulted in growth of the rental fleet this year. Our expectation for net fleet CapEx in fiscal 2022, so this is gross purchases less sales, has been reduced to approximately $495 million for the 12 months. But even with this essentially being an estimate of just the next 3 months, there is a degree of uncertainty surrounding this due to the availability of equipment for manufacturers. Proceeds from sales of retired rental equipment increased by $41 million to a total of $471 million in the first 9 months. Sales volume for the third quarter was about even with where it was last year. However, used truck sales prices have been unusually strong. I would estimate that somewhere close to $2.35 of our $5.02 quarterly EPS improvement came from the sale of retired fleet. Demand for self-storage has not weakened. Our occupied unit count at the end of December increased by 94,000 units compared to the same time last year, and that trend continued into January. Revenues for the quarter were up $36 million, which is about a 30% increase. Our all-in blended occupancy rate for the quarter experienced an increase from 73% in the third quarter of last year to 84% this year. The subset of these facilities that have stabilized, and I'll define that as locations that have been at 80% occupancy or better for the last 2 years, increased 320 basis points to an average occupancy of 95.7%. We also had 81 more properties fit that definition this year versus the same time last year. We've seen increased revenue per foot indicating improvements to our average rates as well. Capital expenditure spending related to real estate was $783 million for the first 9 months. That's up from $365 million last year. Spending in the third quarter was our second largest quarterly investment ever, demonstrating the success we've had at increasing the pace of investments. We currently have approximately 7.2 million square feet in development actively across about 146 projects. We have around 100 properties that we own, but we have not yet started building on. We also have around 90 to 95 properties in escrow, totaling $227 million in purchase price if we elect to close on all of them. Operating earnings at our Moving and Storage segment increased by $140 million to $404 million for the quarter. Within that, we saw operating expenses increased by $116 million. Our two largest operating expenses, personnel and fleet repair maintenance, accounted for about two-thirds of that increase. As a percent of revenue, both ran almost even with the third quarter of last year. Keep in mind that our operating margin in the third quarter of last year was one of our better third quarters ever. Several other categories that increased to a lesser extent were shipping costs and property taxes. As Joe mentioned, operating earnings at our life insurance company were down $5.1 million for the quarter. This is largely due to mortality losses that can be reasonably attributed to COVID. Not what you would hope or plan for; this is a risk with issued life insurance, and we expect those effects to diminish over time. We continue to improve our cash and liquidity position in anticipation of impending investments and to lock in our borrowing costs for this next development cycle. As of December 31 of this year, we had cash and availability from existing loan facilities that are Moving and the Storage segment of approximately $2.344 billion. During the quarter, we entered into another note purchase agreement to issue $600 million of fixed-rate senior unsecured notes in a private placement offering. The weighted average interest rate on those is 2.71%, and they funded in January. Our intended use of these funds will primarily be to expand our presence with new locations and self-storage and warehouse space in support of our U-Box program. With that, I would like to hand the call back to our operator, Carrie, to begin the question-and-answer portion of the call.

Operator, Operator

The first question will come from Steven Ralston with Zacks.

Steven Ralston, Analyst

Looking at the quarter, we recognize that the third fiscal quarter is typically weaker than the others. However, this aligns with past trends, particularly last year, which was unusually strong. It appears that the core fundamentals, including strong demand and pricing for rental equipment and vehicles, remain robust. Is that an accurate assessment?

Joe Shoen, Chairman

Yes, this is Joe. Absolutely. People are still moving for a tremendously wide variety of reasons, and we're getting our fair share of that business.

Steven Ralston, Analyst

And it seems like you're managing the difficulty in acquiring new vehicles pretty well, upping your maintenance expenses. And I know it's a foggy outlook, but you say that it might take at least 3 years to resolve this. Can you add any more color to this because it really seems like you're managing through it as best you can?

Joe Shoen, Chairman

Well, I think we're working very hard at it. But what happens is when you don't buy, you basically have an amount of miles you believe you can run on a piece of equipment. If you run on it, you're basically at the end of its life. So we're running a little bit more miles on the equipment, essentially shortening their useful lives and the way you bring in more useful life is to bring in more equipment. So if we undershoot by 5,000 trucks this year, next year, we need 5,000 more trucks in addition to those that we are normally wearing out. So at a point, it becomes difficult just physically to get that addition done. Right now, we're not getting it done because of problems with the OEMs, but we build the boxes on about 70% of our box trucks, and that's quite a little manufacturing assembly operation. So they'll be highly stressed as soon as we get access to our chassis from the OEM. So I've been through this before, and it takes a couple of years to kind of work the bubble out; that's the problem. We understand it. We're working at it.

Steven Ralston, Analyst

Even though you're focused on the rental business, how much additional time is management dedicating to expanding the storage facilities, considering it has been quite active?

Joe Shoen, Chairman

I've committed a lot of management time to that, and the balance is working out so far. Of course, I have to be careful I don't distract them from our moving customers; the same people do both functions as soon as you get geographically specific. So we're doing okay. We just about have this thing ginned up. I want to replace this stuff or add stuff quicker than we have in the last 24 months, and we're getting close to being able to deliver that.

Operator, Operator

The next question comes from Jamie Wilen with Wilen Management.

Jamie Wilen, Analyst

Another phenomenal quarter, fellas. A couple of questions. First on self-storage. Can you quantify the rate increases you've been able to achieve over the last 12 months percentage-wise?

Jason Berg, CFO

Sure. This is Jason. You need to break it down into a few different parts. We have a portfolio of properties that are still in the process of stabilizing and aren't seeing much rate activity. Then we have the properties that are already stabilized. For those stabilized properties, our average revenue per square foot for the quarter is up close to 6% compared to last year. If you look at the asking rents, the average amount we are charging new customers this year compared to last year is also up by a little over 6%.

Jamie Wilen, Analyst

Okay. And given the rapid increase in occupancy rates and rate increases, what is your time frame for a new unit to reach stabilization now? I know it used to be 4 years, but what is it going down to now?

Jason Berg, CFO

Well, when we're mapping out the investment in one of these, we're still assuming 5 years. However, I think in today's environment, we're seeing some of these ramp up in 2.5 to 3 years.

Jamie Wilen, Analyst

Okay. And when I look at similar competitors in the self-storage business, I look at Life Storage, which has really a similar footprint to what we have as far as owned units and managed units. And they have an $11 billion market cap, which is almost equivalent to our entire market cap, yet self-storage only represents 10% of our revenues. How do we close this value gap in that if 10% of our revenues are worth almost what our entire company is trading for? And we obviously have a rather nice truck rental and U-Box business as well.

Joe Shoen, Chairman

I think those are important questions, Jamie. Right now, my focus is on acquiring more products so we can apply a cap rate to more projects. I admit I'm a bit self-interested in this approach. However, your question is valid and is frequently discussed at the Board level as we work to find solutions. We hope to have updates for you before the end of the year, but it's uncertain. Most of my time is dedicated to business growth, while these other inquiries pertain more to long-term strategy, which is typically handled at the Board level. I wouldn't call myself an expert on what will influence our market cap, but we are making progress. I enjoy being active in this process and, as a shareholder like you, I also want to see our market cap increase.

Jamie Wilen, Analyst

Okay. On the U-Box front, I think we had close to 50% growth this quarter, if I read it correctly, when does that become its own segment? And how are the profit margins in U-Box enjoying the incremental volume relative to the rest of the company?

Jason Berg, CFO

This is Jason. From a management perspective, it kind of is being overseen separately as any of our other large segments are. From the financial statements, no one else reports their portable Moving and Storage business publicly. Our requirement is, I think, when it becomes 10% of revenue for a 12-month period, we would do that. We're not close to that right now. Regarding margins, we have estimations of what these programs look like on a stand-alone basis, but it's really hard. We've talked about this for the Storage business; to break that apart from some rough estimations internally, it's a positive program and it's very close to the overall operating margin. I would say that we have had some quarters in the last 1.5 years where it operates at the overall margin. Otherwise, it's within 1 point or 2 of it based on how we're allocating costs. It's been challenged this year with a big component of that business being the one-way move business, which is shipping these boxes across the country, which has a component of freight costs, and freight costs have been up. Freight cost as a percent of the revenue that we're collecting is not out of historical bounds, but it's at the higher end of what we've paid over, say, the last 10 years.

Jamie Wilen, Analyst

Got it. I'd like to revisit the value disconnect. When it comes to marketing your truck rentals, self-storage, and U-Box services, I would rate you above 12 on a scale of 1 to 10. However, for marketing the stock, my rating would be in the lower double digits. Looking at the company, we've earned over $50 a share in just 9 months, and I believe it’s the right time to implement a regular quarterly dividend, ideally several dollars per share. Our trading volume is somewhat limited, and with our stock valued at $600, I see no reason why we shouldn't consider a 5-for-1 stock split, which would still keep the trading value above $100 and enhance market liquidity. Additionally, I think it's time to change the corporate name to U-Haul, a name that is well recognized worldwide. These steps seem simple and sensible, and now is the time to take action to create more value for all of us, as well as for your family and mine as U-Haul shareholders.

Joe Shoen, Chairman

I understand your perspective, and I recognize that sometimes competitive feedback can be effective. I am taking this seriously.

Jamie Wilen, Analyst

Very good. And nice job on managing a business. It's been remarkable how you've grown this business in a prudent manner and the profitability you're able to enjoy today, and I look forward to more tomorrow.

Operator, Operator

The next question comes from Craig Inman with Artisan Partners.

Craig Inman, Analyst

One I'd throw in there, Joe, you mentioned the migration of combustion engines in the press release to electric. And I hadn't really thought much about that. How do you all think about that in terms of the business, the evolution, and the OEMs committing more resources to the electric? How your fleet would operate if that becomes more of a product to use? Any thoughts there would be great.

Joe Shoen, Chairman

Currently, there are no products available that meet our needs. While there is considerable discussion and political support for electric vehicles, the practical aspects have not yet developed sufficiently. I suspect we will see a prolonged phase of using a mix of vehicle types across the country, giving us time to adapt. The larger investment required for electric vehicles typically involves higher upfront costs, which can be offset by savings on fuel. However, since we don’t purchase fuel frequently, we are not as inclined to adopt electric vehicles early compared to businesses like UPS, which manage specific routes efficiently. Our vehicles often do not return to a central hub each night, making it more challenging to utilize electric vehicles whose charging requires longer periods compared to conventional fuel refilling. While we are closely monitoring the electric vehicle market and maintaining communication with key industry players, our customers have not expressed a strong desire for electric rental trucks. There are concepts and prototypes but nothing that we would feel comfortable offering for practical use. Until viable electric options arrive, we will not proceed with adoption, as it will require significant capital and changes to our infrastructure. Typically, our trucks are expected to last five to ten years, and predicting what we will be using in that timeframe is highly uncertain. Unfortunately, that's all I can specify. When electric options become available, we will be prepared, but for now, the situation remains unclear.

Craig Inman, Analyst

Yes, that's great insight. Currently, the issue with obtaining trucks isn't stemming from the OEMs investing more resources into electric vehicles, which is affecting their production capabilities for you. These factors are not clashing at this moment.

Joe Shoen, Chairman

I don't really have a clear perspective on that. I have some suspicions, but I can't say for sure. When you consider someone like Jim Farley at Ford, he is extremely focused on electrification. He has a team managing the plants and sourcing parts. Currently, their attention is still on existing products, but that is likely to change. There will be conflicts, which is normal. I don’t believe this is affecting us right now. As for my interaction with Mary Barra, I am not the main point of contact for our company. However, she is very focused on electrification, facing significant political pressure, and is responding to it. I suspect that, at her level of resource allocation, we may not be receiving enough attention. But so far, the commitment of resources from her side regarding parts, labor, or plant-specific issues hasn’t begun to impact us.

Craig Inman, Analyst

Okay. A few years ago, the fleet was in the best condition it's ever been, and you haven't been able to replace it at your desired level. Is it still performing above average? Is it still in a good position even though you're delaying purchases, which may create challenges later, in terms of customer experience and management?

Joe Shoen, Chairman

I see this as a long journey. Currently, we've managed to eliminate most of the excess, but we still need a certain level of input to keep going. It's challenging to maintain that. I'm really looking forward to when the OEMs are back up. Once they are, we can start to rebuild our capacity. I'm relieved we prepared for this, as no one anticipated the disruptions caused by COVID. I'm someone who always plans for unexpected challenges, and we've certainly faced one with vehicle acquisition being affected and demand increasing in ways we did not expect. Four years ago, we had a surplus, but now, for nearly two years, we've kept our fleet from becoming overloaded. In fact, we're replacing vehicles at a rate that is lower than what we think is necessary. While it's possible to extend vehicle life through repairs, thanks to our extensive repair network, we are staying on top of things. However, I would really appreciate some assistance from the OEMs by fall, and there is potential for that to happen.

Craig Inman, Analyst

Okay. And then in the self-storage side, just so I got this right, 7.2 million feet in development, and then there's 100 properties owned but not started building. And then on top of that, escrows of 90 to 95. Is that the right?

Jason Berg, CFO

Yes.

Craig Inman, Analyst

Okay. So that 100 properties isn't in the development number?

Jason Berg, CFO

No.

Joe Shoen, Chairman

Land use is a significant issue, and as you might know, it is quite unpredictable. We find ourselves at various stages of land use, which is very frustrating for me because it tends to be a slow process. In fact, some cities have used COVID as a reason to halt the processing of building permits, which really puts us in a difficult position. A few cities allow us to hire private processors, and we conduct many meetings via Zoom, but the opportunity to walk into the building department and discuss plans in person is almost nonexistent in most areas. In the past, that was always possible, and it allowed us to resolve simple issues quickly. Now, everything has become more time-consuming.

Craig Inman, Analyst

Okay. And those properties that are behind the development pipeline are all about a similar size. So you could think about whether they are getting bigger or smaller in terms of average.

Joe Shoen, Chairman

Well, commercial properties not at the moment. Most of this commercial property. My experience is commercial properties were 100% over 24 months ago. So if you were paying $10, you're paying $20. If you were paying $20, you're paying $40. It's gone to the moon. Now that's only a component of the cost of the facility. But I don't know that the size is going up with the dollar is going to go up. So maybe not the size, and of course that has to all be predicated on what we believe the rate we're going to attract the time we're actually open, which is a little bit of a guessing game. But we have people who have been doing this for 30 years, and we're trying to be very judicious, of course, Jason as always. Analysts look at these projects, and we are attempting to be judicious and not do on the economic things, but the property has gone up. And a couple of places we're just going to have to pay up, and then we're going to figure out how we're going to get the way out of the customer.

Craig Inman, Analyst

And with the financings with the private placements and obviously, the rate is favorable, more favorable than you all had at other points. Does that lower your cap rate going in? Does that allow you to bid more aggressively? Or do you all keep kind of the same hurdle rates?

Joe Shoen, Chairman

We maintained the same hurdle rate unless we decide differently on a property-by-property basis because we believe we can improve the situation during the 10-year financing period. We anticipate that future interest rates may not be as favorable. This is a significant point. The reality is that most of our purchasing competitors in storage have already committed and are assuming around 3 percent interest income for the duration of their projects. However, that isn’t my expectation. I could be wrong, but that's not what I foresee. We're planning for potential interest rate increases within the next decade. It’s perplexed me; things haven't unfolded as I learned in school. I expected rates to rise several times in the past 5 years, and they didn’t. There could be some unexpected reason for rates to remain low. But we haven't adjusted our forecast rate, which has hindered us from making certain acquisitions that others have pursued. That was our strategy, and while we have a different approach, I don’t want to miss out on opportunities.

Operator, Operator

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

Operator, Operator

Well, I appreciate everyone's attention today and the questions, and we look forward to speaking with you after we report our year-end results in May. Thank you, everyone.

Operator, Operator

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.