U-Haul Holding Co

NYSE:UHAL

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, and welcome to the AMERCO Third Quarter Fiscal 2022 Investor Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Sebastien Reyes. Please go ahead.

[Sebastien Reyes, Director, IR]

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 as 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 that 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, that's 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 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. That cohort of properties 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 that 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 somewhere close to 100 properties that we own, but we have not yet started building on. And we have somewhere 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 $116 million.

Our 2 largest operating expenses, personnel and fleet repair and maintenance accounted for about 2/3 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 third quarter of last year was one of our better third quarters ever. Several other of our 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 you can reasonably attribute to COVID. Not what you would hope or plan for, this is a risk when 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 cost 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 Instructions] The first question will come from Steven Ralston with Zacks.

[Steven Ralston, Zacks]

Looking at the quarter, we know that third quarter -- fiscal quarter is seasonably weaker than the others. But this has been just in line with in the past, especially last year, which you pointed out was unusually strong. So it seems like the underlying fundamentals being the strong demand and the pricing of the rental equipment and vehicles is still quite strong. Is that a proper deduction?

[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, Zacks]

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. And 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 is essentially shortening their useful lives and the way you bring 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 operations. So they'll be highly stressed as soon as we get access to or 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, Zacks]

And even though you're doing this blocking and tackling in the rental business, how much more time are you spending -- management's time in expanding the storage facilities because I've seen it's been quite active?

[Joe Shoen, Chairman]

I've committed a lot of management time to that, and we're the balance is working out so far. Of course, I have to be careful I don't distract them from our moving customers, same people do both functions as soon as you get geographically specific. So we're doing okay. We have -- 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 Instructions] The next question comes from Jamie Wilen with Wilen Management.

[Jamie Wilen, Wilen Management]

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. I look at that -- you have to break it up into a couple of different pieces, right? So we have a portfolio of properties that are still trying to stabilize. They don't see quite the rate activity on those, and then you have the properties that are stabilized. So on stabilized properties, our average revenue per foot for the 9 months -- or I'm sorry, for the quarter is probably up close to 6% compared to last year. If you look at asking rents what we're on average charging a new customer this year versus last year, that's also probably about a little over 6% up.

[Jamie Wilen, Wilen Management]

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, 3 years.

[Jamie Wilen, Wilen Management]

Okay. And when I look at similar competitors in the self-storage business, I look at the Life Storage that 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 key questions, Jamie. And right now, what I'm driving on is getting more products so we can put a cap rate on more project, I'm kind of selfish that way, okay? But there is -- your question is a good question. It's a question that is regularly discussed at the Board level, and we're trying to figure how to do that. And hopefully, we'll have some news for you before the year is out, but we'll see. We're -- my time gets spent almost entirely of just driving up the business and these other questions are little bit more this long-term strategy. It's a little bit more what we work at the Board level. So I don't consider myself an expert on what's going to determine our market cap. But we're moving it. We're going to -- I like moving and I'm a shareholder like you are so I'd like to see our market cap up.

[Jamie Wilen, Wilen Management]

Okay. On the U-Box front, when -- I think we had close to 50% growth this quarter, if I read it correctly, versus last year, 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 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 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 on how we're allocating costs.

It's been challenged this year with a big component of that business is 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, it's 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, Wilen Management]

Got it. And I'd like to go back once more to the value disconnect because on marketing your truck rentals, on marketing your self-storage, and marketing your U-Box, if I had to rate you on a scale of 1 to 10, I'd give you something north of 12. But on marketing the stock on a scale of 1 through 10, I would give you somewhere in lower double digits. And there's -- when I look at the company, we've earned over $50 a share in just 9 months. I think it's really time to start instituting a regularly quarterly dividend. Certainly, at least several dollars a share on a quarterly basis. And our trading volume is somewhat limited. We are a $600 stock. I see no real reason why it would be inappropriate to do a 5-for-1 stock split and we'd still be trading north of $100 and create a little bit more trading liquidity within the markets. And I do think it's time to change the corporate name to the world recognized U-Haul that you've built so well. And I think these are just very easy, prudent steps and the time is right to take these steps to create some more value for all of us as well as your family and mine as U-Haul shareholders.

[Joe Shoen, Chairman]

Well, I'm hearing you there, and you may be penetrating my -- sometimes competitive feedback works. So I'm taking this seriously. Okay?

[Jamie Wilen, Wilen Management]

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 look forward to more tomorrow.

[Operator]

The next question comes from Craig Inman with Artisan Partners.

[Craig Inman, Artisan Partners]

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, 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]

Presently, there is no product out there that work for us. That's number one. There's a lot of talk. Of course, we follow the talk and visit with these people. There's tremendous political momentum behind it, but not quite as much mechanical reality. So at some point, this very well may get developed to the point where you can do it. My suspicion is, is that we'll see a long period of a mixed fleet. And I think you'll see that in the whole country with the long period of a mixed fleet. And so we'll have time to do that.

But of course, the end result is there's more capital investment. In electric vehicles, basically, you spend more upfront and you regain it on the fuel. Well, our opportunity is we're not buying the fuel every time. So we're not quite as eager to become an early adopter of it is, say, maybe a local UPS delivery man because they know their route. They've got it. I don't know about -- I'm sure they've got it down within 20 minutes a day. They know exactly how their routes are coming in, they know the mileage. They can manage electric vehicle much more realistically.

So we're letting people go down the highway. It's a little -- the technology just isn't there yet. So we're monitoring it very closely. We don't have a great push from our customers to offer that. I think our customers at the point it becomes technologically and economically feasible, I think our customers will certainly accept it, but they're -- there's no drumbeat at the consumer level, why don't you have an electric truck for us to rent. And if they did ask, the answer is there is no electric truck. There's a lot of concepts, there's some prototypes, but there really isn't something that you would want to put into the hands of you and my wife and encourage them to even move 50 miles. So until that comes, we're not going to do it.

But when it comes, it's going to take a big capital redirection and also in infrastructure. The electrical infrastructure is totally different than the gas and diesel infrastructure. There's a whole bunch of timing issues that are totally different. Our fleets don't typically come back to a home base every night, like, let's say, again, I'll use UPS because I think they're real group of people managing their fleet. Well, they can bring the vehicle back to its home base and they have some idea of what its condition is going to be. And so they can then provide a strategy for how they're going to refuel these batteries, which is it's not a 7 or 10-minute operation like it is with the gas engine. So there's a lot of uncertainties. It's very muddy, but we're monitoring it and we're speaking with as far as I know, most of the likely prospects. We have some small number of electric vehicles circulating in our technical center. And so we're keeping our eyes wide open.

But nothing is going to happen now other than it's muddy. Normally when we buy a truck, a big truck, you're looking at a 7 to 10-year lifespan minimum. And so I kind of have to try to peer into that 7 to 10-year cycle to what are we going to be refleeting with, with the trucks I buy today, what would I be refleeting with, and that's very, very uncertain at this time. Unfortunately, that's about as specific as I can be. When it happens, we're going to be there, but it's not happening yet.

[Craig Inman, Artisan Partners]

Yes. That's great color. And so as part of the -- you're not seeing the issue on the getting the trucks is not at the level where the OEMs are committing more resources to the electric now, which is hurting their ability to produce for you all. That's -- those aren't colliding at this point in time.

[Joe Shoen, Chairman]

I don't really think I have a view of that. I suspect that, but I don't know that. Of course, when you get to the level of Jim Farley or somebody at Ford, he's very, very focused on the electrification, very, very focused. Now he has a whole another cadre of people actually run the plants and buy the parts and everything. So far, they've kind of still -- they're still focused on the present products, but this is going to change. There's going to be conflicts and that's just normal. So I don't think that's necessarily affecting us today. But at the very high level, I'm not the personal interfaces with Mary Berra for our company. But again, at her levels, she is very, very focused on this electrification. There's tremendous political pressure on her and she is responding to it. So at her level of resource commitment, I'll bet we are getting shorted. But that's not -- she's not resource committing yet at the parts and labor point of view or the plant specific point of view where it's impacting us.

[Craig Inman, Artisan Partners]

Okay. And I know a few years ago, the fleet obviously was in the newest be shape it's ever been, and you haven't been able to buy up to the level you've wanted on replacement. I mean is it still ahead of average? I mean, is it still in a position where you've -- obviously, you're pushing out buying the trucks, which puts pressure on you later, but from a customer experience and a management ability, it's still in good shape?

[Joe Shoen, Chairman]

Well, I looked at this as a long walk. And where we are right now, we've about burned off the excess fat, not getting down. We better -- we have a caloric input that's required to continue. And we're -- it's everything we can do to keep doing that. And I'm very eager for the OEMs to come online. And then we know we would build back some of this fat or whatever you want to call it, back into our physical system. As I feel a lot more comfortable, it's very fortunate we had it. No one knew these COVID disruptions were going to come, but I'm kind of one of those people who is always trying to put away something for a rainy day. And we've had a rainy day as far as buying vehicles and then coupled with expand the demand, which was not -- that wasn't the scenario we ever thought that I ever thought through.

I always thought of if the demand would fall, if we had a problem like that in this particular instance for poster reasons demand rose. So we've pretty much, I would say we're not carrying a lot of fact or unused capacity in our fleet. But you're right, four years ago, we had a lot and I was putting more in. But for the last now almost 24 months, we've been able to do that. In fact, we're replacing it a lower than the replace -- required replacement in our judgment. Now there's some -- you can push that a little bit with repair obviously and we have a big repair network and we've ended up and everybody is on high alert. So we're holding our own, but I really -- I would really like to see some relief from the OEM with by the fall. And there's some prospect, they'll have some by that time.

[Craig Inman, Artisan Partners]

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 escrow is 90 to 95. Is that the right?

[Jason Berg, CFO]

Yes.

[Craig Inman, Artisan Partners]

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

[Jason Berg, CFO]

No.

[Joe Shoen, Chairman]

No, no. But land uses problem and I'm sure you know that better than I. Land uses is totally unpredictable and so we're at various stage the land use, which is all very frustrating to me because it just -- it is a very well process. And in fact, these cities have used COVID as excuse to not actually process -- literally not process building permit, which is kind of a you can't go anywhere. Some few cities will let us hire private process for them or and we do a lot of Zoom meetings, but the ability to just walk into the building department and talk over a set of plans isn't existing right now in most jurisdictions. In our prior experience, you could always do that. You could iron some simple things out pretty quickly. So it's just become more time consuming.

[Craig Inman, Artisan Partners]

Okay. And those -- Yes. And those properties that are behind the development pipeline there, they're all about a similar size. So you could think about them or are they 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 is 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 or halfway thoughtful and so 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 property has gone up. And couple 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, Artisan Partners]

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 kept the same hurdle rate unless we make a conscious decision on a property-property basis as we'll take a high dive on this one because we think we can straighten it out during the 10-year period that most of our financing encompasses, we think we can get it straightened out in anticipation that we may not have such a favorable rate environment in the future. So that's kind of a big statement. That's the truth.

We're not -- a lot of our -- well, I would say, 98% of our competitors -- purchasing competitors for buying storage have already taken the plunge. They're there. They're at -- they're assuming 3 or so percent interest income for the life of the project. That's not my expectation. Now watch me be wrong and then be right, okay? So -- but that's not my expectation. Our planning is that we're going to see rate bump certainly within the next 10 years to a different level. But it's all puzzled me, none of it is done, what I was taught when I went to school. So I could be wrong. I thought the rates would go up multiple times over the last 5 years and they haven't. So maybe there's some miracle stay low. But no, we haven't dropped our forecast rate, and that has kept us from buying -- making some acquisitions that other people haven't. Okay, that was our strategy. That's about all I can tell you, with a slightly different strategy. But I don't want to miss every opportunity.

[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.

[Sebastien Reyes, Director, IR]

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]

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.