U-Haul Holding Co

NYSE:UHAL

Earnings Call Transcript 2019-Q2

[Operator]

Good day, and welcome to AMERCO's Second Quarter Fiscal 2019 Investor Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Sebastien Reyes, Director, Investor Relations. Mr. Reyes, the floor is yours, sir.

[Sebastien Reyes, executive]

Good morning, and thank you for joining us today. Welcome to the AMERCO Second Quarter Fiscal 2019 Investor Call.

Before we begin, I'd 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 AMERCO's business and future operating results, please refer to Form 10-Q for the quarter ended September 30, 2018, 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.

[Edward Shoen, executive]

Thanks, Sebastien. U-Haul remains a very competitive business, both in the self-move and the self-storage part of it. We remain clearly the leader in the self-move business, yet it seems everyone wants to get into this business. So while there's a lot of people banging on the door, no one seems to be getting tremendous amount of traction.

We've done well in the truck and trailer business over the last several months. I suspect a lot of this is due to our participation in the economic boom ignited by the Trump administration. Inside of that, we have a lot of very specific management to do because our increased revenue to result a profit with the overall revenue gains, I think, are very much related to just the economic state of the country.

In self-storage, I continue to believe that a still increasing number of new entrants into this market will result in some unpleasantness in some specific markets in the not-too-distant future. I'm not clairvoyant. I can't tell you for a fact where, but all the signs are there. The self-storage business itself remains a very valid economic response to consumer wants and needs, and the long-term prospects remain good.

Finally, our truck sales operations are back on track. And the next year looks like it will be predictable, and things will march right on through.

With that, I'll turn it over to Jason to get into some specific numbers.

[Jason Berg, executive]

Thanks, Joe. Throughout my presentation this morning, all of my comparisons are going to be for the second quarter of this year compared to the second quarter of fiscal 2018, unless otherwise noted.

Yesterday, we reported earnings of $8.35 a share. That's compared to $6.36 a share from the previous year. I think it is important to remind everyone that the effective federal income tax rate for the second quarter of fiscal 2019 benefited from the Tax Reform Act, while the second quarter last year did not. Had this year's rate been effective for the second quarter of last year, it would have increased prior year earnings per share by $1.28, bringing bring them to $7.64 for the quarter.

Equipment rental revenues increased over 5% or approximately $41 million. For the quarter, the increase was primarily the result of transaction growth, combined with slightly better revenue per transaction. Both the second quarter of this year and the second quarter of last year both experienced hurricane activity.

Our continued focus on the sales of our Safemove and related protection packages has also resulted in revenue gains from broader penetration. U-Move revenue growth has continued into October at a pace slightly better than what we saw in the just completed second quarter.

Capital expenditures on new rental trucks and trailers were $787 million for the first 6 months of this year compared to $665 million for last year. Proceeds from the sales of retired equipment were also up to $428 million this year compared to $256 million for the first 6 months of last year.

As a result of our fiscal 2020 fleet planning, it looks like that we will be seeing some additional box truck purchases falling into the fourth quarter of this year, as such I've increased our projected net fleet CapEx for fiscal 2019 from $450 million to $590 million.

Regarding truck sales. Gains from the disposal of rental equipment were up a little over $7 million for the quarter and a little over $18 million for the 6 months. The sales volume continued to trend ahead of last year as did average sales proceeds per truck.

Storage revenues were up $11 million. That's just under 14%. Average monthly occupancy throughout the second quarter of this year for the entire portfolio was 71%.

Looking at just our occupied room count as of September 30, we had an increase of 27,300 occupied rooms compared to the same point in time last year. If you were to go back a year and look at the same statistic for September of 2017 versus 2016, the increase was 19,500. So this points to improved rent up velocity. We are continuing to see an improvement in our underlying revenue per square foot as well from increasing rates.

Our real estate-related CapEx for the first 6 months of this year was $481 million. That's up from $258 million last year at this time. Over the last 12 months, we've added a little over 4.4 million net rentable square feet, and about 1.2 million of that came online during the second quarter.

Operating earnings in the moving and storage segment increased $19 million to $236 million for the quarter.

I'd like to touch on a few of the more significant items here. Additional maintenance and repair that we've been incurring for nearly the last year now on the cargo van and pickup fleet is still up. For the quarter, our total repair costs were up just under $12 million.

It's worthwhile to note that in the month of September, we did see a decrease in these costs year-over-year. September 2017 was the first month where we saw a material negative variance in costs associated with the pickup and cargo van fleet. It's too early to extrapolate any meaningful trend from this information.

Depreciation and lease expense associated with the rental fleet increased $4 million, and depreciation on all other assets, primarily storage location assets, increased $2 million.

Property taxes, building maintenance and utilities are 3 of the larger nonpersonnel expenses associated with new properties that we've been buying. These costs were up about $13 million. Property purchase just over the last 12 months accounted for close to 1/3 of this increase.

A significant part of the improvement in operating earnings compared to last year, about $18 million of it, came from the lack of discretionary bonus compensation paid to our field management team during the second quarter. As Joe mentioned in the press release, it's likely that some of this could show up in our third quarter results, but the amount and timing of any such bonus has not yet been determined.

In August, we declared a $0.50 per share cash dividend that was paid in September. As of September 30, 2018, cash and availability from existing loan facilities at the moving and storage segment totaled $678 million.

During the quarter, we drew down $100 million from one of our corporate revolvers. And also, in October, we entered into 2 additional bank revolving facilities totaling $150 million of additional availability.

With that, I'd like to hand the call back to Mike, our operator, to begin the question-and-answer portion of the call.

[Operator]

[Operator Instructions]

[Jason Berg, executive]

Mike, if I could, 2 of our normal participants on this call are unable to be on the call today. Ian Gilson is unable to be on the call, and we hope that he feels better. And also, Jamie Wilen of Wilen Management, who usually asks a series of questions, was also unable to make the call. However, he submitted a few questions in advance, so I would like to go over those while we're compiling any potential live questions. The first question that Jamie asked was, as you look out over the next 3 years, do you see a point in time where we will slow the funds allocated to construction of new storage units? As you have articulated, it takes at least 3 years for these greenfield units to provide any cash flow, much less contribute to the bottom line. The pretax returns on our investments are being burdened by the massive increase in new square footage, which gives continued -- we continue to add each year.

So I think we're probably a couple of years out from seeing a significant turn. However, what I will say is that, I've mentioned in previous calls, we've been tracking our conversion and ground-up and existing storage acquisitions since the fourth quarter of 2015 when we really started to move more towards these 0 occupancy deals. And last quarter was the first quarter that the entire group was positive for NOI. And this quarter, we saw that happen again. We saw that 9 out of the 15 quarterly groups of properties are now cash flow positive before taking into account interest or carry charges. So I think we are approaching a point where we're beginning to see some underlying improvement, but we're still several years out before, I believe that they will meaningfully add or improve operating margin.

The second question he had was, with the large investment in self-storage over the last 5 to 6 years, a significant portion of our assets are in this area. I believe you stated that we are the third largest self-storage operator. Given that self-storage companies are highly prized and self-storage REITs highly valued, does it not make sense at this time to revisit forming a self-storage REIT with these assets?

[Edward Shoen, executive]

Jason, how about you let me grab that one real quick?

[Jason Berg, executive]

Sure.

[Edward Shoen, executive]

Jamie asked a follow-up question which was, would we ever sell some of our self-storage properties where we can continue to manage them for a 4% to 10% fee?

Perhaps this would enable us to get a full return on the value I've built and still retain the profit implication.

We have significant experience at this. At one time in the mid-'90s, we had over 100 properties under management. Today, we manage the properties that are held by various SAC corporations. And in both instances, I would say, in retrospect, that's not the best way to go for the corporation here. Now there's a lot of reasons you go there when you're capital constrained. I'm not saying we wouldn't do something like that should our access to capital markets deteriorate. But so long as we have access to capital markets, clearly, the net wealth maximization strategy is the retain them into your portfolio and manage it.

[Jason Berg, executive]

And his next question was, in our truck and trailer rental business, how much of the growth for the quarter is due to increased transaction and how much from rates?

So for the quarter, equipment rental income was up 5.6%. Our truck transactions portion of that was up close to 4%. Then we saw another increase from the sales of the safe products and the collision damage waiver, which was about 0.25 percentage point, and the rest represents an increase from a bucket that I refer to as revenue per transaction, which is a mix of mileage and rate. And my sense is that the majority of the increase that we saw during the quarter would be attributed to mileage.

His next question was, how much do we spend annually on the decals on the sides of our trucks and trailers to advertise cities where we do not get any reimbursement for this?

[Edward Shoen, executive]

I'll take that one, Jason. That's kind of a familiar tune. People want to know why don't we -- the follow-up question is, why don't we sell our trucks as billboards? Of course, we're not a billboard company. There's a lot more implications to that. A simple answer to the question is, how much do we spend? It varies massively depending on the amount of equipment we're adding. But to give you a frame of reference, I would say that at any point in time, if you took our trucks and our trailers, the display geographic-specific items on their side, we have between 55 million and 60 million of those in circulation at our cost just for the decal material, not the cost of applying them. So it's a considerable investment. And of course, we're very happy with it or we wouldn't do it.

[Jason Berg, executive]

All right. His next question was, are the capacity utilization rates different on trailers, trucks and vans? And where do we get our highest return on investment?

I guess, I would say that the capacity utilization rates are different depending upon how well we're managing each one of the fleets. If all were managed optimally, I think that we would be agnostic as to where the transactions would fall.

And then his last question, he didn't actually put it in his e-mail, but I'll answer it anyway. We don't have any plans to change the name from AMERCO to U-Haul at this point.

Mike, do we have any additional live questions?

[Operator]

No, sir. It looks like we do not have any further questions on this end, sir. If you would like to you can go ahead and conclude today's conference call.

[Jason Berg, executive]

Well, I'd like to thank everybody for getting on the call. I'm sorry that Jamie and Ian were ill today. We look forward to speaking with all of you in another 90 days. I think things are not in too great a disarray here. There's always things we want to improve, and I kind of always see the glass as half empty. But things are proceeding okay, and I see no terrible short-term threats. So I appreciate you being on the line and look forward to talking to you again in 90 days.

[Operator]

All right. And we thank you, sir, also and to the rest of management team for your time. Again, the conference call has now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care, and have a great day.