U-Haul Holding Company

Q4 2023 Earnings Conference Call

5/31/2023

spk04: All participants will be in a listen-only mode for the duration of the call. And should you need any assistance today, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. And to withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Sebastian Reyes. Please go ahead, sir.
spk03: Good morning, and thank you for joining us today. Welcome to the U-Haul Holding Company fourth quarter fiscal 2023 year-end 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 discussion of the risks and uncertainties that may affect a company's business and future operating results, please refer to the company's public SEC filings and Form 10-K for the year ended March 31, 2023, which will be filed with the U.S. Securities and Exchange Commission this week. I'll now turn the call over to Joe Schoen, Chairman of U-Haul Holding Company.
spk06: Thanks, Sebastian, and thank you for joining us on the investor call for fiscal year 2023. As in prior times of declining consumer confidence, we have seen U-Move rentals shift to less mileage and relatively more in-town than one-way rentals. The year-over-year decline in U-Move transactions compared to last year is comparing an outstanding year with a not so outstanding one. So in short, last year may not have been as good as it seems and this year is not as bad as it seems. Last mile delivery rentals have declined as these companies adjust to the present realities. I do not foresee a comparable year-over-year decline going ahead. We continue to have considerable competition in the truck rental business, but I believe we are more than holding our own. New truck acquisitions continue to be limited by OEM capacity. This is still driving repair expenses. Self-storage occupancy and the rate of rent-up are still solid, although below last year's highs. We continue to build and buy self-storage locations. I believe this is a good long-term deployment of capital. I have our management focused on blocking and tackling. We are holding our point-of-sale retail teams together in increasingly contentious retail environments. I look forward to meeting with you on our Q1 investor call. I'll turn it over to Jason.
spk01: Thanks, Joe. Yesterday, we reported fourth quarter earnings of $38 million. That's compared to $87 million for the same quarter last year. And our full year earnings were $923 million compared to $1,123,000,000 for fiscal 2022. This was our second highest annual earnings in the company's history next to last year's results. Similar to what I did during the third quarter call, I'd like to provide some context to you regarding our equipment rental revenue results. Comparing the fourth quarter of this year to last year, we experienced a $43 million decrease. That's about 5.5%. Last year at this time, we had reported a year-over-year increase in the fourth quarter of $79 million. And the year before that, $172 million increase for the fourth quarter. So if you compare our results this quarter to our last, I'll call it pre-COVID fourth quarter, which was March of 2020, we've increased our fourth quarter equipment rental revenue results by over $208 million, or if you were to average that out over the 12 years, it's about 12% a year. What we've seen this year, and in particular the fourth quarter, is a decline in transactions and the amount of miles driven on average per transaction. And as Joe mentioned, we saw a decline in the last mile delivery rentals during the year, with the largest variances in the third and fourth quarters. During fiscal 2023, we have invested $1.3 billion on new rental equipment compared to $1.1 billion for the fiscal year 2022. Much of this increase is attributable to inflation, along with increases in the number of new trailers, towing devices, and U-box containers that we produced. For fiscal 2024, we are projecting gross fleet capex of just under $1.5 billion, which would help us improve the pace of our fleet rotation a bit. Proceeds from the sales of retired rental equipment increased by $86 million to a total of $688 million for fiscal 2023. Sales proceeds from the sales of pickups and cargo vans have increased compared to last year, We sold more of these units in fiscal 23 versus the previous year, and sales prices, while historically strong, have steadily declined over the course of the year. We purposely slowed the sale of box trucks this last couple years, but we expect that trend to reverse in fiscal 2024. Similar to last quarter, self-storage results remain strong, with some moderation showing through in speed of rent-up. Storage revenues were up $28 million, that's a 17% increase for the quarter, and $127 million, or 20%, for the fiscal year. We experienced a nearly 9% growth in average revenue per foot. Looking at our occupied unit count at the end of March, we had an increase of 52,000 occupied units compared to the same time last year. During that same timeframe, we added 72,000 new units. It's this differential that led to our average occupancy ratio during the fourth quarter coming down by about 1.4% to 81.2% year over year. The moderation in occupancy can also be seen in our same store grouping of these properties, with an occupancy decrease of about 1.5% to 94.2% for the quarters. We included a new self-storage disclosure in our press release this quarter, and I'd appreciate any feedback you might have. During fiscal 2023, we invested just over $1.3 billion in real estate acquisitions, along with the development of new self-storage and UBOX warehouse space. That's a $337 million increase over the previous year. Over the last 12 months, we've added 6 million new net rentable square feet. We currently have about 6.7 million new square feet being developed actively across 155 projects. Then we have an additional 163 or so projects where we own the land or buildings, but we haven't started the actual construction yet. That's up 43 projects from last year at this time. That should result somewhere north of 9.6 million new net rentable square feet by the time we're done with that over the next couple of years. We have somewhere around 40 additional deals currently in escrow. That's a little less than half of what we had in escrow last year at this time. Operating earnings at the moving and storage segment decreased by $39 million to $95 million for the quarter. And for the year, we were down $181 million to $1,396,000,000 for the fiscal year. This is also the second best result that we've ever posted. Operating expenses increased $38 million for the fourth quarter. We saw fleet repair and maintenance lead the way again, up $32 million. We continue to increase our internal capacity to do more repair work ourselves. We also expect to increase the rotation of older trucks out of the fleet this year. That will certainly help. And we're in good shape with the fleet going into the summer months. Personnel costs increased $24 million. If you exclude comparisons with fiscal 2022, personnel costs are not out of line in relation to revenue compared to other years. Other expenses, including accident liability costs and the cost of freight and shipping experience decreases during the quarter. But we continue to have strong cash and liquidity. At the end of March this year, we had cash along with availability from existing loan facilities at the moving and storage segment of $2,499,000,000. In addition to this amount, we had another $225,000,000 invested in six-month U.S. Treasuries that mature in June. Those are included in the investment line of our balance sheet, not cash. During the quarter, interest expense at moving and storage was up $13,000,000, while our interest income on earnings from these short-term investments increased $25,000,000, and for the year, Interest expense was up 57 million, while interest income was up 68 million. In our press release this quarter, we also included some additional information related to our debt. Our 10-K filing with the SEC, our 10-K report with the SEC should be filed no later than this Friday. With that, I would like to hand the call back to our operator, Joe, to begin the question and answer portion of the call.
spk04: We will now begin the question and answer session. Again, to ask a question, you may press star, then 1 on your telephone keypad. And if you're using a speakerphone, please pick up your handset before pressing the keys. If you'd like to withdraw your question, please press star, then 2. At this time, we will pause just momentarily to assemble our roster.
spk03: Joe, while we aggregate the live questions, I'm going to ask a few questions or share some comments from Craig Inman. of artists and partners who couldn't join today. The first comment is, appreciate the updated disclosures on self-storage and leverage. On the real estate secured debt, can you disclose any metrics to give us a sense of the leverage levels there? Are those assets levered 80% or 20% as an example?
spk01: Sure. This is Jason. When we go out to the markets, Kevin Hart, our assistant treasurer that oversees real estate financing, On stabilized deals, he's typically going out looking for something around no higher than 60% loan to value. I would say the overall portfolio is going to be somewhere south of that, probably closer to 50% levered effectively. And if you were to mark the portfolio to market, we're going to be well underneath that percentage.
spk03: The second question, is there a leverage level at the business level which would raise concerns for the board or management?
spk01: Well, this is Jason again. Our key measurement for that is debt or net debt to EBITDA. And that's one of the measurements that we've now included in the press release this quarter. On a gross basis, so not netting out cash, We look to keep that below five times, and I think we're actually well below four times right now.
spk03: And finally, it looks like some of the cost pressures outside of repair are leveling out. Is that true? Or are we seeing lower costs due to moving slowing? Any update on looking at the cost base excluding the need to execute elevated repairs while waiting to refresh the fleet?
spk06: This is Joe. Of course, we're looking at the cost base. We've been through this drill before. There's always more costs that can be eliminated. In other words, waste. We're trying to ferret out waste. At the same time, personnel, which is a big cost for us, is likely to continue to be just as big a cost as it has been. as a metric of personnel cost to revenue and we're about at historic levels and I think we're very, we're struggling to keep it at that level. I think would be the fair way to put that. You all are familiar with what's happened with retail employment. It's still very much in turmoil. There's very much a shortage of personnel and we continue to try to access that pool of human beings to keep our stores and our dealerships running.
spk03: Operator, we'll turn the Q&A session back to you.
spk04: Thank you. Our first question here will come from Steven Ralston with Zax. Please go ahead with your question.
spk02: Good morning. I want to dig a little deeper into those operating expenses. I'm trying to get a handle on it. Just looking biopically at the fourth quarter, I saw that the operating expense line was actually up 13%. But the operating margin, which includes all the other operating expenses, the margin was very respectable for the fourth quarter, since it's seasonally strong. It was at 9.3, and the year was 24.6. which is solid. Could you just get a little deeper into that operating expense line and why it was up in the fourth quarter?
spk01: Steve, this is Jason. So the main drivers continue to be repair and maintenance and personnel. Those are the two largest increases that we saw. So I would say of the four quarters that we had from an operating margin variance perspective, the fourth quarter was If you just look at operating expenses to revenue was not one of the better ones. Repair and maintenance is running over historical levels and for the quarter personnel expense ran over the historical average for the year we were kind of right in line with it. So I would say that the quarter was a little bit worse. The overall overall operating margin that you're measuring may take into good cost of goods sold and we had a good fourth quarter for cost of goods sold. There's a couple things that go on at year end and quarter end, including, you know, truing up your inventory for physical counts and then also the adjustment for LIFO. And the adjustment for LIFO this year was not nearly as negative as it was last year. We've seen some of the inflation on cost of goods sold slow down a bit.
spk02: Thank you. Another line item on depreciation popped up a little in the fourth quarter. Was that a reconciliation for the year, or is there something operational when you said that you're acquiring more new vehicles?
spk01: It should be just more new vehicles.
spk02: And, of course, net income has doubled since the first quarter, and you mentioned that is due to the Treasuries. Are you going to be more aggressive in cash management? There seems to be some easy low-hanging fruit there.
spk01: Our funds are invested primarily in government money market funds, which are capturing much of this increased yield. We also have $300 million, about $275 million with our banking partners, and that's largely indexed to interest rates. Those have been going up, and then we did allocate $300 million to this Treasury investment program where we're able to go out 12 months. Right now, it's only been making sense to go out three months and six months on those in order to capture a little bit of extra yield. So, yeah, we've been aggressive in trying to get as much out of that as we can. If we had a time where to hold excess cash for investment – Now has been a decent time to do that.
spk02: And last question. I noticed just looking at the variability of the self-moving business, and I'm talking about the trailers as opposed to the vehicles, and looking at your other revenues, basically UBOX, they seem to be tracking with the same – directionally, I'll say, but the magnitude of the other revenues is larger. In other words, there's more volatility in the UBOX business. Is that an accurate perception?
spk05: This is Joe. We don't really know how the UBOX business is going to track.
spk06: Right now, we do more long-distance moves relative to short-distance moves if you're comparing U-Haul to UBOX. And so while we saw a flattening of UBOX in the third and fourth quarters, I think it's going to recover quicker than trucks because as soon as the longer-term users start to come back, they're going to come back in UBOX. That's what I think. This is all a business subjective judgment. We don't have enough big UBOX revenues to compare and forecast on that sort of thing. It's still operational. All the signs I see are that it's starting to turn more paws, that we have a slowing flow. For maybe five months this winter, it slowed down. And I can't tell you that that's a trend or not a trend. I think it's going to pick back up. I think it'll outpace truck rentals over a five-year period.
spk05: Thank you for taking my questions. As another reminder, if you have a question, you may press star then one to join the queue.
spk04: Our next question here will come from Jamie Weiland with Weiland Management. Please go ahead with your question.
spk00: Hey, fellas. Can you give us some flavor on the April and May results in your businesses?
spk01: April and May are continuing to on the equipment rental business are continuing to trend down compared to last year at this time which was relatively strong so again I'm trying to keep things in perspective we haven't come close to giving back all of the gains that we picked up over the last couple years but we're certainly giving back some of what we had last year
spk00: Okay. I love the detail on self-storage. And you go into the revenue per square foot. How does that relate to the profit per square foot in those various geographies?
spk01: Well, once you open up the facility, most of the costs are pretty well fixed. So much of that is going to run through to the bottom line. It's probably somewhere north of 80%. Okay. So as...
spk06: Let's look at Texas and California, big spread. Okay, I used page six of Jason's, and 1439 in Texas, 2066 in California. Everything in California costs 30% to 40% more if you're just tight as hell. And on the other hand, Texas has more proliferation of product, which, of course, holds revenue down. So there's a... We're going to be in both markets, Jamie, just because we're U-Haul. But don't look at this and just say, oh, hell, you ought to be building in California. When you see your expenses in California, you may just choke. But we are building in California, and we have these properties that Jason talked about that are unbuilt. We probably have 10 of those in California. I expect every one of them to be profitable, but we're going to probably have to get more than $20.66 a foot to make them profitable. Hopefully, we pick the markets where we'll get those rates.
spk00: As opposed to targeting specific markets, you're basically going to grow everywhere.
spk06: I think we are. Jason's team doesn't work up on every potential acquisition. We do a forecast and try to accommodate what we think the rate environment is, what we think the rate environment is going to be going ahead. Also, what's the the mix of storage product in the area, because there's more gradations of storage product than you might think. And so if we can get the right mix, we can pretty much predict where we're going to go. All these projects are being hit by the cost of capital. Of course, we have some low-cost capital right now. Jason's loathe to let us change our expected returns. because, of course, he's going to be faced with having to refinance with higher-priced capital. So we take a, I think, still a conservative approach, but we're going to expand, I think, in every market. I'll say, except maybe New York City. New York City is a... Certainly Manhattan is a tough number now, and I don't know if anybody's making any money there or not. But you see us in Missouri, Indiana. Of course, we're just in all those markets, and my field PhD opportunity, and if the financial model validates what they believe is going to happen, we're going to go ahead.
spk00: Okay. Now that you've broken up your various states with occupancy and revenue per foot, can you contrast this with some of your major competition as you look in that area of where you stand occupancy-wise and rate per foot?
spk06: We look at it. That's number one, I'll tell you. Of course we look at it. I think that, again, when we look at it, it has to go down by comparing recent product with recent product or recent product with old product. And these markets run all over the place. Public storage is massively strong in California. It also has a ton of older product in California that they're getting a rate off, which is very impressive to me. Because I don't see us getting quite that rate on older fraud. But they seem to from the numbers we see. You know, I think when we look at this, we look at the competition in a geographically constrained area, not the income for the whole state. So we'll look at a project in California. We're going to survey the facilities within what we think is the market area. We're going to attempt to be always in the upper third on rate. Some places we have to be in the upper 15 or 20% as in California to get a new project to go.
spk00: So as you move forward, are you going to try to... Is the main goal to drive that occupancy percentage higher and... keep the revenue per foot in the same ballpark or will we see revenue per square foot declining a lot as you drive occupancy? What's the modus operandi you're going to favor?
spk06: We're not a drop revenue per square foot team. We're not a big discount team. Everybody has different strategies. A lot of people go in and they're 30 or 50% off for the first year. We don't do that ordinarily, Jamie. We pretty much stick to a rate. We also are different than I think all of our significant competition, we publish a rate, we post it. Most of our competition is more like the hotel business. Their rates will change several times a week. So we're not doing that. We post a rate. Everybody believes their system is better. I'm not going to go crow about it, but I think our system has worked out well for us over years.
spk00: And you have purchased existing facilities from time to time. You just bought one in Lansing. What kind of multiple of EBITDA are you paying for these facilities? And are there always some synergies to every acquisition so that you're actually paying a little bit less than that?
spk06: I'll let Jason try to answer that.
spk01: So over the last year, I would say the pricing has gotten a little bit better for existing self-storage. I think we did a little over a million square feet. this last year that we purchased of existing self storage. I believe the stabilized cap rate on that on those average somewhere just under seven, whereas the year before that we were probably closer to six. I think we did maybe seven or 800,000 square feet the year before. So pricing, you know, we don't do enough of it to get a real good flavor of that because you can have that big of a variance in cap rates just depending upon where you're buying it at. but it would seem that cap rates are starting to inch their way back up.
spk00: But you'd still prefer to develop as opposed to purchase?
spk01: Well, I'll stick my nose in first and just say from a financial perspective right now, we have better projected returns on conversions and ground-ups than we do existing storage more often than not.
spk00: Okay. And lastly, the initial lease up of newer facilities had gone a lot quicker. Have they slowed down to the more historical rate so it will take three to four years to reach that stabilized level?
spk05: I'm not going to totally agree with that.
spk06: I think we're still leasing up at better than historical rates. It's not over until you're up in the 90s somewhere, and so typically you get gains up to 60% pretty quick. And then, depending on a lot of different factors, you may struggle to go from 60 to 85. If we've executed our plan right, we don't want to see the projects hit some sort of an invisible wall there, but that can happen if you aren't careful. I think we're still leasing up faster than we did five years ago in, let's say, kind of halfway comparable situations. I think we're doing a better job of leasing up. And I think there's demand out there still. There's still, depending, you know, it's geographically specific. Jamie, it's not, anytime you try to generalize across a market like Phoenix, you're just, it's just hot air because some parts of town are just, you've got a big opportunity other times that very, very competitive. So we're trying to sort those things out.
spk01: For properties that we've opened in the last three years, on average we've picked up about 12 points of occupancy, more than what we traditionally did in the first year, about 16 points the second year. Then it starts to come back down to more normalized numbers after year three. Okay.
spk00: And lastly, within some geographies, there's a bit of a moratorium on building new self-storage. Do you see the industry expansion slowing because of that, creating more opportunities for you, or it's just more lip service in a couple areas?
spk05: All the end use is a battle. I can't think of...
spk06: a place where there's not a battle for land use. And the absolute moratoriums stick out, but there's de facto moratoriums in several markets. They just grind you to a halt. They slow you down.
spk05: We've got a real nice property in... That one big one we bought in LA, it's in what's the park? It's called the...
spk06: Huntington Park. Huntington Park. It's a historically industrial area. You'd think this would be a slam dunk. They've fought us for a year throwing everything they can at us because basically they want someone to come in and put in residential on this property and obviously we're not a residential builder and so they've just thrown everything at it. This is historically they were storing sea containers on it when we bought it if that gives you an idea. This is not a place you'd put residences but The cities have their view of it. So they don't have a voted-on moratorium, but to say they're hard on self-storage is to put it politely. And that repeats. That just happens to be an expensive piece of property, so it's front of mind for me. But this is pretty much across the country, and I think it's experienced by all users. We may be at a somewhat disadvantage because if they like self-storage, they don't like trucks. If they like trucks, they don't like self-storage. You know, so we kind of have to morph our presentation depending on what we think the proclivities of local land use is. But we have some places we only do truck rental and we have some places we only do storage, but we believe that the combination is considerably more economical than the stand loans. And so that's the way we bring it to most land use controversy.
spk00: Given the difficulty of adding new product, would you expect occupancy rates could see a little increase because of not as much of an increase in supply as has happened over the last several years?
spk06: Well, that's my everlasting hope. But there's so much money out there, Jamie, and so many hustlers. People are building storage projects just to beat the band. And amazingly, the market has absorbed this for the last 40 years. Will it continue to have strong absorption over the next five years? I have no way to know. When we first did our estimate of the market, we estimated at one square foot per person. I mean, that's like embarrassing. And so today, many markets are 20 square foot per person. And so where is the real end of this? The Storage Association does some statistics that they are real proud of, and they think something like 11% of households are currently using self-storage. Well, I'll guarantee you, the only thing I'll guarantee you is 11% won't hold market to market. Does that make sense? So there's got to be some markets where it's 20%, and there's going to be some markets where it's under 5%. We're trying to hunt out the 5% markets, obviously, and get in there and then hope we get a rate.
spk05: All right. Excellent, fellas. Thanks. And this concludes our question and answer session.
spk04: I'd like to turn the call back over to management for any closing remarks.
spk06: Well, I just thank everybody for being here. You know, we have a good team in place. We're dug in for the long haul. I think we're going to be happy with our results over any Extended measurement period, tough for us to tell you what's going to happen this year for sure, but I can guarantee you we'll be on deck and working hard. So thank you for your support.
spk05: Look forward to seeing you next quarter call. The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.
Disclaimer

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