McGrath RentCorp

NASDAQ:MGRC

Earnings Call Analysis

McGrath RentCorp posts solid growth amidst merger challenges

In Q3 2024, McGrath RentCorp reported a 10% revenue increase to $267 million and a 13% rise in adjusted EBITDA to $104 million. The Mobile Modular division surged, with rental revenues up 9% and sales revenues up 14%. However, the Portable Storage and TRS-Rentelco segments faced declines due to market softness, resulting in adjustments to capital spending. Looking ahead, McGrath expects 2024 revenues between $910 million and $920 million and adjusted EBITDA between $345 million and $351 million, indicating cautious optimism about improving demand as interest rates stabilize.

Resilient Performance Amid Challenges

In the third quarter of 2024, McGrath RentCorp demonstrated a solid performance with total revenues increasing by 10% year-over-year to $267 million. This growth is largely attributed to the robust performance of their Mobile Modular business, which saw an impressive adjusted EBITDA rise of 23%, totaling $71.4 million. The company's management maintained a focus on executing their growth strategies despite operating under the uncertain backdrop of a terminated merger with WillScot, a situation that spanned nine months.

Mobile Modular Leads the Way

The Mobile Modular segment thrived, with revenue growth resulting from a strong mix of rental and sales operations. Rental revenues grew by 9% while sales revenues increased by 14%. Both the education and commercial segments performed admirably, with education rentals up by 10% and commercial rentals rising by 8%. Additionally, rental margins improved from 59% to 62%, reflecting both revenue growth and better cost management.

Portable Storage and TRS Face Headwinds

In contrast, the Portable Storage and TRS businesses reported declines, with Portable Storage experiencing an 11% drop in revenue primarily due to decreased demand from the commercial construction sector. TRS-RenTelco also faced a revenue decline of 11%. The company has been proactive in managing costs, cutting new equipment capital spending in response to weaker demand conditions, indicating a disciplined approach to navigating challenging markets.

Financial Maneuvering Post-Merger

A significant highlight from the quarter was the receipt of a $180 million termination fee from WillScot, after incurring transaction costs of $39 million. This action resulted in a net income of $104 million, translating to $4.21 per diluted share. The firm's strategies post-termination focused on deleveraging; they actively paid down debt, bringing their funded debt to EBITDA ratio to a comfortable 1.75:1, well within their cap of 2.75.

Outlook for 2024: Cautious but Optimistic

Looking ahead to the fourth quarter and into 2025, McGrath anticipates a mix of challenges and opportunities. While they expect revenues from Modular rentals to increase slightly, the Portable Storage segment is expected to face continued softness, likely resulting in lower overall performance. Projections for total revenues from continuing operations for the full year are estimated to fall between $910 million and $920 million, alongside an adjusted EBITDA target of $345 million to $351 million.

Commitment to Long-Term Value

Despite the recent hurdles, McGrath RentCorp remains steadfast in its commitment to shareholder value through disciplined capital allocation, strategic investments, and an expansion of service offerings. The management team exudes confidence in the long-term potential of the business, particularly in the commercial and education markets, viewing these segments as essential for sustained growth in the coming years.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp's Third Quarter 2024 Earnings Call. [Operator Instructions] This conference call is being recorded today, Thursday, October 24, 2024.

Before we begin, note that the matters that the company management will be discussing today that are not statements of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the company's expectations, strategies, prospects, backlog or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected.

Important factors that could cause actual results to differ materially from the company's expectations are disclosed under Risk Factors in the company's Form 10-K and other SEC filings. Forward-looking statements are made only as the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements.

In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its Form 10-Q for the quarter ended September 30, 2024.

Speaking today will be Joe Hanna, Chief Executive Officer; and Keith Pratt, Chief Financial Officer. I will now turn the call over to Mr. Hanna. Please go ahead, sir.

[Joseph Hanna, executive]

Thank you, Jess. Good afternoon, everyone, and thank you for joining us on our call today. It has been quite an eventful. On September 18, we announced that we had mutually agreed to terminate our pending acquisition by WillScott. In accordance with the terms of the merger agreement, McGrath received a termination fee of $180 million. From the announcement of the merger in January 2024, we navigated a 9-month period where McGrath operated as a company anticipating being acquired. Needless to say, this stretch was an unfamiliar operating environment for our company.

We maintained our independent competitive positioning in the marketplace throughout this period. My direction to our teams was very simple. First, stick to our strategy and execute as we have always done; second, deliver our financial plan and keep the company healthy. Through the 9-month period across the company, we kept our teams together, found ways to reduce cost and to enhance revenue streams and supported one another throughout. I truly think it is a testament to our strong culture and the dedication and commitment of our team members to each other and to our customers that we lost very few people to turnover through this challenging period.

I could not be prouder of everyone's accomplishments during such an uncertain time. With that, we are back to normal quarterly earnings reporting and discussion. So let's turn now to our latest results. For the third quarter, total company revenues increased 10% and adjusted EBITDA increased 13%. The Modular business performed very well, while our Portable Storage and TRS businesses experienced market demand headwinds during the quarter.

Mobile Modular had a strong quarter with rental revenues growing 9% and sales revenues growing 14%. Both our commercial business and our education rentals grew during the quarter. The commercial wins we experienced were geographically broad-based and in a wide variety of market verticals, including government and technology.

Our education business benefited from modernization and growth projects and encompass both public and private school customers. We maintained our focus on solid execution. Our team actively managed pricing, fleet utilization and deployment of new fleet. Consistent with recent data and other macro indicators of construction-related demand, we experienced some delays and softness in the demand environment. Utilization dipped slightly year-over-year and ended the quarter at 76.5%. we still consider this to be a healthy range.

Based on quote volumes and bookings, we have opportunities to improve this number. In addition to our core rental revenue drivers, we also continued the expansion of our revenues in the services portion of our customer offerings. Revenues from Mobile Modular Plus, site-related services, and custom modular sales all grew in the quarter, and we remain excited about the opportunities these additional services offer our customers.

Turning to our Portable Storage business. Rental revenues declined by 11% in the quarter from a year ago. Recent ABI data and other macro indicators of construction-related activity reflect delays and softness in the demand environment. Less activity in commercial construction, driven by interest rate headwinds appears to be a primary factor driving our Portable Storage decrease. Shipments for new projects were below expectations and returns were higher than planned as projects completed and were not replaced as quickly. The effect was widespread across our geographies and not concentrated in any 1 area.

At TRS-Rentelco, rental revenues declined by 10% and with both our general purpose and communications rental revenues impacted. This reflected the continuing industry-wide slowdown in test and measurement equipment markets both at OEM and rental equipment providers. We took appropriate measures in the quarter to continue to keep the business on a stable footing. We sold excess equipment and scale back purchases of new equipment.

Shifting gears beyond the third quarter. I would like to take a moment now to comment about the Helene and Milton hurricanes. Our operations are secure, and we are up and running in all locations with negligible disruption. Despite the extensive regional storm damage in heartbreaking photos and coverage of these natural disasters, events like this are typically not a big needle mover for McGrath. Near term, the storms in some cases, could have a negative impact with delays to customer projects, either in the field now or planned.

Also, until recovery efforts reach further stages, we are not anticipating much in the way of new business opportunities for McGrath. Nevertheless, we are positioned to provide both space and storage for customers who need it. We will likely know more about any new storm-related demand in the months ahead as recovery operations continue.

Continuing to look ahead for the fourth quarter and beyond 2024, there is clearly uncertainty in the overall demand environment. Soft demand that we have been experiencing our portable storage and TRS businesses may continue into 2025. At Mobile Modular, our range of growth initiatives and positive pricing dynamics should remain positive and help to offset any market demand softness. With interest rates projected to ease in the quarters ahead, we are cautiously optimistic that demand conditions may improve, although that could take time, and we will likely be well into 2025 before we see results.

That said, long term, I could not be more positive about the prospects for our growth and continued execution of our strategy. Our efforts to grow our modular business both organically and by strategic acquisitions continue to produce encouraging results with our broader geographic coverage from our new branch locations and acquisitions, we have plenty of opportunities to make further fleet investments to serve customers. We have runway to continue to grow for many years ahead. Our pricing disciplines and processes are robust. And as the fleet turns over, we will have a revenue tailwind.

The initiatives that we started, namely Mobile Modular Plus, site-related services and custom modular sales are adding value for our customers and growing. We have a large, diverse and high-quality customer base across commercial and education markets. Our commercial opportunities are broad and include megaprojects, government infrastructure and data center growth. We believe our education business has a multiyear period of continuing school modernization needs, new construction to support shifting student populations and growth opportunities in private schools and charter schools, and we are well positioned to serve those customers across multiple geographies.

Our Portable Storage business not only has markets we are in, that we are early in their growth phase but also many new markets for us to enter over time, representing future growth potential. Our TRS business is a leading technology provider with the ongoing demands for more bandwidth and faster speeds in devices we use every day, we see a positive path ahead for the business to recovery.

In summary, we believe our multiyear opportunity to bring additional value to our customers through expanded service offerings and are committed to continuing to increase our customer base and geographic coverage. We remain committed to building long-term shareholder value through sound strategic focus, disciplined capital allocation and consistent execution. McGrath is on a strong footing as we emerge from the terminated merger agreement. Sometimes companies emerging from a terminated merger process are damaged. We are not.

Fundamental to our success is a culture that I am genuinely honored to be a part of. Our team members care about our customers and each other unlike anything I have seen in my 34 years of business experience. Their will to serve and lean in was the driver of our success through an uncertain period, and I'm quite sure coupled with our strategies and execution plans in place today, we have what it takes to move McGrath to another level of growth and performance. We will be focused on doing just that, benefiting our shareholders, customers, partners and team members along the way.

I would like to once again thank our team members and leaders for the outstanding job each of you has already done this year. We are focused as a team on a solid finish to 2024.

With that, I'd like to turn the call over to Keith, who will take you through the financial details of our quarter and our outlook for the full year.

[Keith E. Pratt, executive]

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered very good results in the third quarter, driven by the performance of our Mobile Modular business. Looking at the overall corporate results for the third quarter. Total revenues from continuing operations increased 10% to $267 million, and adjusted EBITDA increased 13% to $104 million.

During the third quarter, the company received a $180 million payment from WillScot Mobile Mini attributed to the termination of the previously announced merger agreement. The transaction costs incurred during the quarter due to the now terminated merger process, were $39 million. The proceeds received, partly offset by the transaction costs incurred and an increase in provision for income taxes resulted in a $104 million net income contribution during the quarter, or $4.21 per diluted share.

Reviewing Mobile Modular's operating performance as compared to the third quarter of 2023. Mobile Modular had an impressive quarter as we continue to make progress delivering on our mobile -- our modular business growth strategy. Adjusted EBITDA increased 23% to $71.4 million, and total revenues increased 13% to $191.4 million. There were increases across all operational revenue streams, including 9% higher rental revenues; 23% higher rental-related services revenues; and 14% higher sales revenues.

The sales revenues increase was primarily due to higher new equipment sales and demonstrated good progress with our initiatives to grow modular sales projects. Rental margins were 62%, up from 59% a year ago, primarily because of the rental revenue growth and the lower inventory center costs. We continued our disciplined fleet management on a larger fleet with 5% higher average rental equipment on rent and average fleet utilization of 77.1% compared to 79.9% a year ago.

Third quarter monthly revenue per unit on rent increased 18% year-over-year to $820. For new shipments over the last 12 months, the average monthly revenue per unit increased 16% to $1,191. Progress with Mobile Modular Plus is embedded in these data points and is an additional growth driver.

We continue to make progress with our modular services offerings. For the third quarter, Mobile Modular Plus revenues increased to $7.9 million from $7.6 million a year earlier, and site-related services increased to $12.8 million, up from $10.1 million.

Turning to the review of Portable Storage. Adjusted EBITDA for Portable Storage was $10.8 million, a decrease of 10% compared to the prior year. Demand conditions during the quarter were weaker, primarily because of lower commercial construction project activity. Higher sales revenues partly offset rental weakness, resulting in a total revenue decrease of 11% to $23.1 million. Rental revenues for the quarter decreased 11% to $17 million, and rental margins were 86% compared to 84% a year ago. Average rental equipment on rent decreased 12%, while average utilization for the quarter was 62.8% compared to 76.5% a year ago.

We responded to the softer market demand conditions by reducing new equipment capital spending and carefully managing operating costs.

Turning now to the review of TRS-RenTelco. Adjusted EBITDA was $18.9 million, a decrease of 10% compared to last year, and total revenues decreased 11% to $34.8 million. Rental revenues for the quarter decreased 10% as the industry experienced continued end market weakness. Average utilization for the quarter was 57.3% compared to 59.4% a year ago, and rental margins were 37% compared to 40% a year ago.

Sales revenues decreased 13% to $7.6 million and gross margins were 52% compared to 35% a year ago. To address the softer business conditions, we continue to reduce new equipment capital spending focused on sales of used equipment, reduced fleet size and carefully managed operating costs. Total fleet value based on our original cost of equipment was $357 million at the end of September, down $11 million from the second quarter and down $26 million from a year ago.

The remainder of my comments will be on a total company basis from continuing operations. Third quarter selling and administrative expenses increased $0.8 million to $49.3 million. During the quarter, the company determined that transaction costs totaling $39 million attributed to the terminated merger agreement were nonoperating and therefore, were excluded from selling and administrative expenses.

Interest expense was $12.6 million, an increase of $1.6 million as the result of higher average interest rates and higher average debt levels during the quarter. The third quarter provision for income taxes was based on an effective tax rate of 26.4% compared to 27.3% a year earlier. The decrease was primarily due to changes in business mix by state.

Turning to our year-to-date cash flow highlights. Net cash provided by operating activities was $338 million compared to $119 million in the prior year. The increase was primarily attributed to the $180 million payment received from WillScot Mobile Mini net of $61 million transaction costs. Rental equipment purchases were $167 million compared to $171 million in the prior year. New equipment purchases were primarily for the modular business as we reduced spending at TRS and Portable Storage in response to softer demand conditions.

In addition to investments in new fleet, healthy cash generation allowed us to pay $35 million in shareholder dividends. At quarter end, we had net borrowings of $609 million, and the ratio of funded debt to the last 12 months adjusted EBITDA was 1.75:1.

Finally, our 2024 financial outlook. For the full year, we currently expect results from continuing operations to be total revenue between $910 million and $920 million; adjusted EBITDA between $345 million and $351 million; gross rental equipment capital expenditures between $180 million and $190 million. Our outlook reflects the following expectations for the final quarter of the year. Modular rental revenues up slightly from the third quarter, modular rental-related services revenues at a level comparable to the second quarter. We expect fewer site-related services projects in the fourth quarter compared to the seasonally busier third quarter. Modular sales revenues, down slightly from the third quarter. Overall performance at TRS and portable storage below third quarter levels, reflecting demand market softness and seasonality.

Total McGrath selling and administrative expenses, excluding expenses related to the merger transaction, up sequentially from the third quarter. Interest expense of approximately $10.5 million to $11 million.

In summary, McGrath is on a solid financial footing. We remain committed to building long-term shareholder value through sound strategic focus, disciplined capital allocation and consistent execution. Despite distractions from the merger process and challenging end market demand conditions for 2 of our businesses, we have delivered strong year-to-date results, and we are fully focused on solid execution for the remainder of the year.

That concludes our prepared remarks. Jess, you may now open the lines for questions.

[Operator]

[Operator Instructions] We'll go first to Scott Schneeberger with Oppenheimer.

[Scott Schneeberger, analyst]

A few questions. I'm going to start in Mobile Modular with the end markets, commercial and education. You mentioned both were up in rental, and it sounds good. Could you give us a sense of the magnitude? I would imagine education is a good bit stronger, but can you give us a sense of the magnitude of how much each of them is up?

[Joseph Hanna, executive]

Sure. Scott, actually, it was pretty balanced for the quarter. There was not a big divergence there as far as how those -- both those segments performed. I think education was up 10% and commercial was up 8% for the quarter. So pretty balanced.

[Keith E. Pratt, executive]

That is correct.

[Scott Schneeberger, analyst]

Great. And could we speak to price versus volume with regard to that? It looks when we saw the charts in the deck, that you're still getting very strong pricing. I guess so there's 2 questions in this. One, do you anticipate strong pricing to continue into next year? It sounds like the demand environment is solid. And then how was the price volume split?

[Joseph Hanna, executive]

Yes. I would say -- I'll answer the first part, and Keith can follow up. I would say we are -- we have a nice tailwind there. Our pricing efforts have paid off for us, and we anticipate that same dynamic will go into next year.

[Keith E. Pratt, executive]

Yes. Scott, just in terms of price volume, pricing overall remains healthy. We've also been working hard, as you know, to add in additional services to contract. So that helps with the statistics on revenue per unit on rent, so we're making progress there. You'll see in some of our published statistics that the value of equipment on rent increased for the third quarter compared to a year earlier, it was up about 5%. Having said that, there is a dynamic as we churn the fleet and we introduce newer assets that are more expensive. Units on rent were actually down slightly year-over-year. So there's a lot of moving parts there, a lot of mix issues as well, but those are some of the dynamics that we saw in the third quarter.

[Scott Schneeberger, analyst]

Keith, just following on that, and then we'll move to another segment. But the -- how is your quoting activity and your deliveries there? I realize this time of the year for classrooms probably quiet until you get to the first quarter and also for commercial modulars. But what type of trends are you seeing there maybe on a year-over-year basis or however you care to comment?

[Joseph Hanna, executive]

Yes, Scott, actually quote volumes and opportunities resulting from those quotes were up very nicely in the quarter. I'm talking -- some of that was influenced by the addition of Vesta. But we're in the double-digit range very easily there. And so we were very encouraged and that has remained strong virtually the entire year so far.

[Scott Schneeberger, analyst]

Great. Appreciate that. Over in Portable Storage, obviously, a little bit more cyclically pressured. Could you answer the same question, please, either 1 of you on the quoting and deliveries? And specifically, I kind of missed it, Keith, you said something about fourth quarter, just now on the guide, portable fourth quarter versus third quarter. Is it expected to be down despite seasonal? I know you don't do a lot of seasonal relative to maybe some others in the industry. But if you could just speak to that trend.

[Keith E. Pratt, executive]

Yes. Just to start with your last comment, Scott. Yes, if you plot a chart and just look at the rental revenues of Portable Storage this year, they've actually gone down as we went Q1 to Q2 to Q3. It's disappointing. It reflects the very difficult demand conditions we've seen there. And at this point, we don't see any change around those demand pressures. So we think the fourth quarter most likely will see rental revenues lower than the third quarter and therefore, overall performance of that part of the business, we would expect to be lower than Q3. So that's sort of the first comment. We're not necessarily going into all the percentage detail. If you look at the drop in rental revenues in Q3, we saw similarly a reduction in quote opportunities, reductions in bookings, reductions in shipments. All the metrics were consistent with a difficult demand environment. And similar to some of the comments we made, I think, at the end of Q2. So difficult conditions and definitely what we experienced.

[Scott Schneeberger, analyst]

And just 1 more in that segment. Given everything you just said, how is the pricing environment? Just any elaboration on that topic.

[Joseph Hanna, executive]

Yes. Pricing has -- we've had to reduce slightly, but we've really worked to hold our pricing as much as possible. And so I haven't -- we haven't seen a significant deterioration there, Scott.

[Scott Schneeberger, analyst]

And then in TRS, kind of, I guess, Joe, for you, the standard questions. One, if you could speak to what you're seeing with regard to semiconductors in 5G? And then the last question on this segment would be this has been a pretty prolonged cyclical downturn. Could you speak to the duration of past downturns and how you compare contrast it, if possible?

[Joseph Hanna, executive]

Sure. As we reported earlier in the year, the weakness that we had first seen in the business was with semiconductor, computer and semiconductor part of the business. But that has actually spread a bit. It is now -- we're seeing slowness in the wireless part of the business, and that's mostly tower work and things like that, that the service providers are doing out on site, and we're just seeing less of that than we had anticipated.

Wired communications on the other hand, which is supporting all of the bandwidth requirements for data centers and things like that has actually been very strong. So we're seeing 2 different kind of mixes in that business. To address your question about longevity, this has been a longer downturn than typically we've seen.

And so we'd like it to turn. We think it will turn. One of the things notable in the business that I think is worthy of mentioning is that from a sequential quarter-over-quarter basis, the business has been performing in a very narrow band. So we really haven't seen a deterioration there as the year progresses. So I have to hope that we're in a kind of a situation right now where things have leveled out and that we have upside ahead of us.

[Scott Schneeberger, analyst]

And then last one for me is just on the $180 million cash inflow. Keith, you quantified it on the call as post your legal and other expenses and post taxes. I think it was $104 million leftover. How is that going to be applied across the business?

[Keith E. Pratt, executive]

Sure, Scott. And I just want to expand upon your comment. You're absolutely right with what we said regarding the third quarter results and the contribution that we got related to the $180 million reverse termination fee. But if you look at it more broadly and go back all the way to the fourth quarter when we began to incur transaction-related expenses, you may recall, we disclosed approximately $2 million of expense back in that quarter. And then we had additional expenses in the first and second quarter of this year. Really, the entire journey of the transaction process caused us to incur $63 million in expenses. If you take that number against the $180 million and then apply a tax rate to the sort of gain that we had, really, the net proceeds of McGrath are much closer to $86 million. So that's the first comment. Everything you said was right about the third quarter. I like to look at it in terms of the overall economic impact on McGrath when we look at the full journey that we've been on with the terminated transaction.

In terms of what we do with the money, a couple of comments. I think the first thing to keep in mind is we just got the funds slightly over a month ago, and we're assessing our options. If we look at the business, really, it gives us a little bit more flexibility in terms of our capital allocation choices. We routinely look across the business and look at all the normal areas for capital allocation. We start with organic investment in the business. We look at our M&A opportunities in the landscape that can complement what we're doing organically. Obviously, we have a long track record with our shareholder dividends and increasing those dividends. And then periodically, we will look to repurchase our shares. So any excess capital in the near term that is not immediately allocated to one of those areas is used to pay down debt, and that's what we did at the end of the third quarter. But we'll be looking at those normal areas of capital allocation as we go forward, and we will try to make wise choices that benefit the shareholder over the long term.

[Scott Schneeberger, analyst]

Great. And I appreciate your clarifying that over the life of the endeavor with WillScot now complete. So just a final question on that. Are all the costs that you anticipate to incur related to that done as of third quarter? Or might there be some trickle into the fourth quarter? And was that counted in your $86 million net?

[Keith E. Pratt, executive]

Yes. Substantially all the costs, we believe, have been incurred at this point.

[Operator]

We will move next to Mark Riddick with Sidoti.

[Marc Riddick, analyst]

I just wanted to follow up on the -- and I appreciate all the commentary you've already provided. I wanted to talk a little bit about the debt reduction that did take place. I wonder if you could sort of give us a little additional commentary around the magnitude and what was taken, I guess, very -- at the very end of the quarter? Or how should we think about the debt reduction from the end of 2Q to 3Q and maybe the timing and what we're looking at there.

[Keith E. Pratt, executive]

Yes. So we announced the termination of the merger process on September 18. We promptly received the funds per the merger agreement from WillScot, and that really came in just a few days after the announcement. And as I mentioned, we used the net proceeds to pay down debt in the third quarter, and that is reflected on the balance sheet. So if you look at where we are at the end of the third quarter, that's really net of all of that activity.

The only item if you look into the details, is that we will have some higher cash taxes in the fourth quarter. There'll be a few tens of millions there. But the fourth quarter is also a quarter where typically, we have much lower rental CapEx expenditure and generally higher cash flows. So if you want to sort of look ahead and look at debt levels for the fourth quarter and year-end, I would say they're going to be comparable to what we saw at the end of Q3.

[Marc Riddick, analyst]

Okay. And that sort of then brings me to the -- so sort of just general long-term thought process, maybe a reiteration of maybe how you guys have looked at leverage and comfort levels of ranges and things of that nature. How should we be thinking about things going forward? And then maybe you could talk a little bit about the potential of ramping up of acquisition pipeline, which was sort of you guys have been on the sidelines on that during this process. So wonder if you could talk a little bit about those opportunities maybe and the opportunity to start doing that again.

[Keith E. Pratt, executive]

Sure. And I'll let Joe comment maybe on the broader how we think about M&A work. But just in terms of leverage, we ended the quarter at 1.75. Keep in mind with our loan agreements, we have a cap of 2.75. So from a leverage point of view, we're extremely comfortable. We're very comfortable running the business in the 2s. And again, we look at that as we look at strategic opportunities and capital allocation. It's just one of the factors we weigh as to when we pull the trigger on M&A or any other big initiatives that are more sporadic in nature.

But very comfortable with leverage at the end of Q3. It really speaks to the fact the company is on a very sound financial footing as we exit this process that we've been through.

[Joseph Hanna, executive]

Yes. Marc, I can kind of comment on our M&A strategy. We're in the process of updating our priorities there. However, as in the past, our Portable Storage and Modular business will be the focus area for us if we do any M&A. We view that as a continuing viable option for us to either grow in areas that we are not present in or grow in areas that we have perhaps a newer footprint and could use an acquisition to help build out that area.

But we will follow the same guidelines that we have followed in the past. We get -- look for good quality businesses at fair prices. And that's exactly what our strategy would be moving forward.

[Marc Riddick, analyst]

Excellent. And then I was wondering if you could talk a little bit about having gone through this process, and I appreciate your commentary around the the strength and the culture and everything that your employees were able to sort of shoulder through this process. I want you talk a little bit about maybe sort of what you're looking at as far as internal hiring needs or any areas that you might want to be sort of relooking at or if there are any places that may be you may not have been active in during the course of the year that you'd like to sort of pick up as far as internal investment wise, whether it's technology spend or anything like that? Are there any sort of areas that we should be thinking about going forward?

[Joseph Hanna, executive]

Sure. We are -- there are some positions that we had put on delay essentially because of the merger agreement, and we're going to start hiring those. And that really varies across the business, some sales positions, some operational positions that we'll staff for. But nothing -- we haven't had a significant decrease at all in turnover or in the number of folks that we had lost during the process. And so it's not like we're operating from a deficit there. And so I think in terms of other investments that we make, we perhaps delayed some investments in real estate. We put some IT initiatives on a slower path and we'll get those projects going again, but nothing significant to report at this time.

[Keith E. Pratt, executive]

And Marc, just to help you with one of the comments that I made in the prepared remarks regarding SG&A being higher in the fourth quarter than the third quarter of this year. If you do think of things like hiring, it's a lot more difficult to make hiring or actually achieve hiring in a period where there's a pending acquisition. So if you think of where we were in January, we had a few positions we would have liked to hire over the course of the year to support business growth. And in addition, like in any normal year, we have some turnover. If you look at the net effect of that, we're running with open positions in the organization that we're not very actively filling. And it's not easier to fill them because we're clearly an independent company, and we're charting our future here.

So there's been a little bit of pent-up demand to do that, and that will be reflected on the expense side with some increase in that area, all normal for running the business.

[Operator]

Ladies and gentlemen, that appears to be the last question. Now let me turn the call back over to Mr. Hanna for any closing remarks.

[Joseph Hanna, executive]

I'd like to thank everyone for joining us on the call today and for your continuing interest in our company. We look forward to speaking with you again in late February to review our fourth quarter results.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.