UHAL - Amerco

[Jurgis]

Sales and earnings look OKish, though not very hot.

 

What I am concerned about is that they consume all OCF (and more) on capex and I don't see much results coming out of that:

 

https://www.sec.gov/cgi-bin/viewer?action=view&cik=4457&accession_number=0000004457-18-000016&xbrl_type=v#

 

I.e. sales growth is anemic. They did ~1.4B capex and got ~200M sales growth.

Perhaps as someone said in the past, they have underinvested into their fleet replacement and now they are catching up?

[Spekulatius]

UHAL has been adding roughly $900M to their property plant and equipment net for the last several years. This isn’t all Self storage either, they put roughly $600M property, but also sold an about equal amount. They only added about 30M/year in self storage revenues and they equipment investment does not seem to generate much incremental revenue either. Their self Storage  occupanccy went down - this shouldn’t happen either , because they have a lot of storage facility maturing, which should improve their occupancy.

 

FEIW, I added a few shared today at $321, but I think I will watch this closer, the trends are not encouraging.

[chesko182]

Few things to note here.

The results were lousy, imo. Above valuation does not take into account the net debt ( one needs to start with EV rather than market cap), which adds about $2.8B.

I used P/FFO for the self storage space which is the typical valuation metric for REITs and it's a proxy for whats available for distribution to equity shareholders, therefore equity value is considered. I could use an EV metric too by adding roughly 1.5bn of storage debt (the rest is moving segment debt) and add back interest rate to come up with an EBITDA proxy and I'm sure we'd get to a similar place by looking at industry average multiples and back-solving the value. I don't have those with me now. The 20X P/FFO is just that, an average for storage REITs.

 

They're maintanance CapEx is roughly 450-500mm so the extra 600mm or so is being invested in expanding their self storage portfolio mainly as well as expanding their truck fleet (which they said today in the call that for now they don't intend to expand but rather focus on increasing utilization). Most of the storage investments in the last two years has been on buying land outright and building the property as well as converting properties to storage space vs. buying existing storage facilities. They have acknowledged this market is frothy and are seeing better opportunities in building it themselves. What this means is twofold: this is a longer time horizon investment, 1) it usually takes 3-4 years for the property to get to a decent occupancy level (70%+) and 2-3 more to get to a mature level (90ish%), so revenues take longer to come in. 2) All this time they are incurring all the expenses associated with these properties and margins are depressed, as these properties normalize occupancy all the revenue goes straight to the bottom line, and this is where a lot of the margin expansion will come from in the next 5+ years.

 

I also found interesting that management was asked about buybacks today in the call given how cheap the stock is, the CFO said that it's being discussed in their capital allocation decisions... we will see, I would certainly like that. This company hosts one of the more pleasant earnings call to hear. Short and sweet and a lot of back and forth questions given how little analyst coverage it has.

 

Link: https://seekingalpha.com/article/4178634-amerco-uhal-ceo-joe-shoen-q4-2018-results-earnings-call-transcript

 

[Spekulatius]

I went with Chesko182 suggestion and read the CC. I agree it is quite interesting, not just because what was said, but also because of how they stated it.

 

1) This is clearly run a private company and we are just along for the ride as minority shareholders.

2) They don‘t sweat quarterly or even yearly earnings numbers too much.

3) Their strategy is to improve their service /equipment and probably build market share and use the cash from the moving business to build a self storage empire

4) They don’t seem to control the finances very tight (either decentralized decision making or the owner makes it up). See 2).

5) I don’t even think the owner and management cares too much about the stock price

 

I agree it is undervalued, but maybe due to above, it deserves a discount. Dividend payments are small as all the cash is recycled within the company. I don’t think that stock buybacks are likely either, because trading volumes are way small to do a $0.5B stock buyback. They would need to do a tender offer, but I am not sure they get much done without paying a big premium over market prices. I am guessing they will just build more self storage, if they have excess cash.

[villainx]

I think the fractured family control is a big issue.  Joe has the rein now, but who knows what happens if. 

 

 

 

 

[chesko182]

Here's my write-up and valuation updated with 2018 numbers.

 

Any feedback or comments appreciated and encouraged.

 

Thanks

UHAL_Writeup.pdf

[Jurgis]

If you were in their position, would you invest into self storage? There is some synergy with the transportation. But is it good enough business to invest into? Isn't it pretty much commodity and subject to overbuilding?

[bci23]

Here's my write-up and valuation updated with 2018 numbers.

 

Any feedback or comments appreciated and encouraged.

 

Thanks

 

5% WACC just seems too low. Might be worth doing a sensitivity table with WACC ramping up to 10% to show implied valuation at each.

[Packer16]

There a 2 adjustments that I see need to be addressed.  In your WACC, you need to use the market value of debt & equity.  This would result in debt/invest cap of around 35%.  Second, you should change the debt rate to reflect a LIBOR plus 150bp being paid.  If we use a 5-yr LIBOR swap rate of 2.8% it results in debt rate of 4.3%.  If we plug these into WACC, we get a WACC of 6.4%.  This should be the mid point of your senstivity analysis.

 

Second, you need to remove the storage & insurance EBITDA from you DCF base as you are valuing them seperately.  The insurance is small around $40 million.  I do not know how, beyond making assumptions about storage margins that you can pull storage out of the consolidated numbers.

 

You also have to have some type of conglomerate discount based upon capitalizing corporate expenses.

 

Packer

[Saluki]

In researching this company, I read a couple of books about the history of Uhaul. 

 

A Noble Function talks about the first 20 years of Uhaul and how the founders LS and Anna Shoen built a company that, as Peter Lynch says, is so good that even an idiot could run it, because eventually one will run it.

 

Birthright talks about the transition from being run by the founders, to the takeover by the family members. LS married 5 times (4 wives) and had 12 kids.  There was infighting, law suits, actual fist fights, arson, a couple of unsolved murders and lots of finger pointing. It definitely wasn't the Brady Bunch. I would seriously consider reading this book before investing in Uhaul.  I'm not comfortable entrusting my money to people with a history of self-dealing (see the printing contracts issued to the CEO's printing company, and the self-storage facilities sold to one of the family members at cost plus capex and managed by Uhaul) and hostility to minority shareholders which are a matter of public record. See:

 

https://www.nytimes.com/1994/10/12/business/company-news-shareholder-group-awarded-1.47-billion-in-u-haul-suit.html

 

If this wasn't family controlled, I would definitely be interested because it's something that an activist shareholder or leveraged buyout operator could make a fortune on. But I'll pass on this.

 

 

[DanielGMask]

http://www.bloomberg.com/news/2013-12-05/hidden-u-haul-billionaire-emerges-with-storage-empire.html

 

Hidden U-Haul Billionaire Emerges With Storage Empire

 

Here’s a different point of view! https://www.forbes.com/sites/luisakroll/2016/02/10/inside-u-hauls-rollercoaster-ride-from-nastiest-family-feud-to-market-dominance/#2b1fa3573bb5

[Spekulatius]

Time to revisit, as the price has come down again. I rebought some just today and last week when it dropped to $340.

 

My quick numbers - they own 38.2M sqft of self storage now

Growth as follows

+5.3M sqft (2019)

+3.7M sqft (2018)

+3.4M sqft (2017)

+3.6M sqft (2016)

+2.1M sqft (2015)

$390M storage revenue (2019)

 

They have purchased land and are building  10.9M more sqft of self storage at the present time and mentioned that they slowed down acquisitions of new properties and then have permits for ~3M sqft more. last year, they spent $1.09B in Capex on Self storage alone and it looks like based on the pipeline, that there are going to be at least 2 more Capex heavy years. It’s kind of crazy. I. Read some CC transcripts and it is clear they are talking down their own business and couldn’t care less about the share price. Make of it what you will.

They added almost $2B in equity and $2B in debt since 2015. Shares are flat since. Either it was overpriced than it is underpriced now.

[mjm]

Spekulatius if you do not mind sharing and i know you are familiar with LAACZ, how would you compare the two as they are both somewhat familiar-- smaller cap, underfollowed.

[Okonomen]

i really like a lot of things about this business.

 

1) They have a lot of reinvestment opportunities especially in storage

2) founder led. however somewhat controversial family

3) very moaty (U-Haul has a huge moat and storage is sticky)

 

However, the main reason i havent bought is

 

1) Meaningful FCF seems to be far out in the horizon

2) That U-haul fleet... just demanding crazy capex levels each year?

3) Price doesnt seem that attractive despite it being a quality business

[Spekulatius]

I don’t think that LAACZ is comparable to UHAL. LAACZ is simple self storage and real estate play that generate good cash distributions and some organic growth with little leverage. It’s straightforward and low risk Limited partnership.

 

UHAL is owner Operator like LAACZ and is much higher levered, because most of the self storage buildout is financed by debt. Contrary to LAACZ, they aren’t minority shareholder friendly, don’t pay a meaningful dividend and no buybacks, but I do give them them are not actively trying to screw minors shareholdrs either. I have difficulty putting a value on their self storage operation and how much value is created here and as I mentioned before, it’s like a snake that is still munching a big meal and it will take about 2-3 years if pot. Worse looking financials before the cash flow hopefully comes out. That’s a long time to wait even for patient shareholders.

 

I have added and subtracted to my shareholding opportunistically (last sale was ~$380) and I think there is decent, but not great value here. My conviction in LAACZ (to which I added recently) is much higher than in UHAL and my weighing reflects that.

 

UHAL may be interesting in 2 years or so, when the self storage either works out or not. By that time, the cash flow should be visible and hopefully the debt load will be manageable. I think they will another $2.0-2.5B investment in Self storage to build out the properties they have acquired.

[mjm]

thanks for your thoughtful analysis

[Spekulatius]

UHAL Q4 2019 results are a disaster. Both rental and self storage results are weak. I calculate that  their self storage revenue/ sqft is down ~2.5% YoY (~17% growth in sqft, 14% growth in revenues). They added ~$150M in debt last quarter alone it seems and cash is a bit down too.

 

They simply can’t fill all that self storage space they are building and overall markets are soft, based on what other operators are communicating and still mire supply hitting the market.

[chesko182]

UHAL Q4 2019 results are a disaster. Both rental and self storage results are weak. I calculate that  their self storage revenue/ sqft is down ~2.5% YoY (~17% growth in sqft, 14% growth in revenues). They added ~$150M in debt last quarter alone it seems and cash is a bit down too.

 

They simply can’t fill all that self storage space they are building and overall markets are soft, based on what other operators are communicating and still mire supply hitting the market.

 

Certainly results were not positive, but I wouldn't call them a disaster. We knew self-moving had tough comps from a really strong last year on corporate accounts/last mile (basically AMZN, Fedex and UPS renting out trucks for deliveries which didn't repeat). Mgmt had stated they didn't expect this to continue and this drove y/y sales to a negative 1%. Core residential moving was actually up y/y, as it has been pretty consistently over the past decade. I will say margin execution here has been soft and mgmt has been very upfront about it, we'll see how much time it takes to normalize.

 

Self-storage is another story though IMO, 14% revenue growth is basically what they've been growing here, and given the type of investments they've been doing here (building from ground up or conversions vs. acquiring existing units) it takes time to fill these new properties and causes a lag on revenues vs self storage sqft that comes on line. They've ramped this up pretty quickly and I think investment should start to level off (it was already down y/y in terms of real-estate capex) going forward as revenue comes in with basically all the costs already in-place so it should drop straight to the bottom line and see some nice margin expansion. They know many markets here are very competitive and they've been targeting those where they think they can have a good return, additionally the self-moving business is very complementary to self-storage which differentiates them from competitors.

 

For sure all of this has taken more time than I originally expected, but these guys have one of the longest time horizons I've seen and I think it's the right way to think about, and they seem to have attracted the right shareholder base as well.

[Spekulatius]

^ Yes, UHAL’s Management certainly has  a LT focus, but they are just not good operators. The cost issues are persistent and their operating results have peaked 5 years ago, despite the business growing substantially since. Self storage buildout is a huge gamble, as they are taking on substantial debt. I calculated that they need another ~1.5B-2B to build out the properties they have acquired so far and they are still acquiring more. This yer there is going to be a bit more than $800M in self storage Capex, which means that the binge is going to last another 24 month at least.

 

I could look past many things, but the huge and growing debt load concerns me. If they can’t make money in this economy, what will happen if we hit a soft patch or even a downturn?

[ander]

Any thoughts on the operating performance of UHAL in a Covid-19 environment? Maybe they will peel back on their aggressive FCF?

[chesko182]

I expect all operating segments to keep chugging along, moving and storage are essential businesses and during downturns a lot of people are forced to move and downsize their homes, which benefits U-haul as the low-cost moving option and offering self-storage for your extra stuff. That's not to say revenue will grow, but I don't think it's gonna fall substantially either.

 

Agree they may pullback on some CapEx and RE investments which may end up giving them positive FCF this year.

 

 

Here's some info on what they're doing

https://www.uhaul.com/Announcement/?utm_campaign=prnewswire&utm_source=pressrelease&utm_medium=scanandgo

[Gopinath]

My latest write up on Amerco:

 

http://valuealert.blogspot.com/2020/06/owner-operated-business-at-attractive.html

[chesko182]

Published a write-up on UHAL earlier today.

 

Enjoy and happy to discuss.

 

https://sleepwell.substack.com/p/is-america-ready-to-move-again

[diamondtrap]

Chesko, interesting write up. Thanks for posting. Where did you find the stats on 3/4 of movers being DIY? And also for the UHAL market share being 50% in DIY? 

[dwy000]

Good writeup Chesko.  Thanks.

 

There were a number of questions that immediately came to mind as I read it (and I haven't read the 10k's or done any other research).  Would love to hear your thoughts.

 

- there appears to be a massive long term headwind in that the move rate has declined steadily for 40 years.  Why do you see that changing (other that short term covid related)?  The market share gains are great but probably just offset the market decline.  Unless this turns around you are constantly fighting an uphill battle.

 

- why is everyone else of scale getting out of the business if it's so attractive ?  You mentioned Budget has been shrinking fleet for years while Penske and Ryder are shifting to commercial.  What do those companies know that UHaul doesn't (or vice versa)?

 

- Isn't storage an increasingly saturated business?  It's about as low barrier-to-entry as they come and you're basically competing on price.  I get it for movers who are full service and they will only take your stuff to their facility, but if you're DIY, you can literally call around to 20 places and take the lowest price.

 

Finally, this isn't a question as much as an observation but I always thought UHaul's value was almost entirely in the non-local space where you could rent a trailer in city A and drop it off in city B.  If you're local, you're competing against anybody with a truck to rent (you can get them at Home Depot super cheap).  Why are the returns so low given they are almost the only company out there where you can do that?

 

Please don't take this as a slight to the analysis - it's more a piquing of interest prior to doing any other research.  The 10-12% ROIC is a bit scary for a high capital business in a competitive market.  

Edited June 11, 2021 by dwy000