AGB 2023.6 - U-Haul Holding Co. (UHAL)
Long Reinvestment Runway for Self-Storage
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U-Haul
U-Haul is the leading truck and trailer rental company for do-it-yourself moving in North America. The company started in 1945 by renting moving trailers that customers hitched to their cars. By 1959, U-Haul rented trucks to customers through a network of independent dealers and opened its own retail locations by 1973. As of March 2023 (fiscal year end), the company operates the largest network of rental locations including 2.2k company operated stores and 21.3k independent dealers. U-Haul is also one of the largest self-storage operators in the U.S. with over 56M sq. ft. of rentable storage space. The company groups these two segments together in its segment reporting under Moving and Storage, which represents 95% of revenues and 97% of operating earnings.
Customers rent a truck or trailer from U-Haul at its many locations for either in-town or one way moves. In-town moves represent a little more than half of all moves. Reservations can easily be made online or through the mobile app. Customers are typically charged a price determined by a combination of days and miles driven and rates can differ by location, size of the truck and whether it’s an in-town or one way rental. As the customer is going through the reservation process, U-Haul sells additional products and services like damage insurance, moving equipment rentals or sales, professional moving help and self-storage at the destination.
U-Haul competes on factors such as price, availability, service and convenience. The company’s many locations for pick up and drop off provide an advantage vs. the competition since customers don’t have to drive as far, which may end up saving them money and time. This is especially important during one way moves as U-Haul will likely have a drop off location (company owned or an independent dealer) at the destination. The company estimates that 57% of the U.S. population lives 5 miles from a U-Haul owned location and 90% including the company’s dealer network. The company’s 23.5k rental locations are more than 9x times Penske and Budget, which have 2.5k and 2.8k locations respectively. The company’s rental fleet of over 375k trucks and trailers are also nearly 12x the size of Budget’s.
Growth in the moving business can be broken down to three factors: the number of rental units, change in pricing and improvements in utilization (miles driven or days rented per rental unit) of the fleet. The number of trucks/trailers has grown +5.1% annually over the past decade with relatively consistent annual growth rates aside from fiscal 2021 due to Covid and 2017 and 2023 due to supply issues. Revenue growth for the moving segment was +8.2% annually during the same period, implying that the remaining ~3% annual growth was due to pricing and improved utilization. On the company’s Q4 2019 earnings call, CFO Jason Berg stated that improvements in price and increases in volume were roughly 50%/50% in contribution to growth.
U-Haul’s trucks, trailers and towing devices have grown consistently throughout the past decade in lockstep with the number of company owned and dealer locations. Dealers get a commission based on a percentage of sales for every rental booked on their property. Dealers are typically independent owners of retail locations with a parking lot. Autobody shops, self-storage locations and gas stations are common. Dealers collectively account for ~50% of the moving revenues (this stat may be dated as it is from a 2014 industry conference) and commissions are close to 20% of the sale. Dealers are less efficient than company owned locations because many of these locations are not open on Saturdays and Sundays, which tend to be the 2nd and 3rd busiest days of the week.
The company has recently improved utilization at its dealers with the company’s launch of U-Haul Truck Share 24/7, which allows customers to pick-up and drop-off without the help of an employee. Dealers that aren’t open on the weekend can now be utilized as a pick-up and drop-off location.
The company’s moving segment generates a lot of excess cash and U-Haul has reinvested the majority of that cash into self-storage units around the U.S. Self-storage is a natural extension of the moving business with many synergies between the two. Customers of U-Haul’s moving rental equipment can conveniently store their excess home goods at a storage unit. The trucks can then be returned at the storage location as well. U-Haul’s storage locations are typically large structures that have enhanced security and some even offer climate controlled units.
As of March 2023, the company owns over 56M sq. ft. of rentable storage space across its many locations. Over the past decade, the company has increased its self-storage square footage by +13.7% annually. Revenues for the storage segment has increased by +17.2% during the same time period, implying rent increases of about ~3.5% annually. Through its affiliate program, the company also offers customers access to almost another 25M sq. ft. of storage space.
The self-storage market is fragmented, with the top 5 players commanding 31% market share. U-Haul is the #5 player in terms of square footage with 3.8% share. The other top storage companies are Public Storage (10.1%), Extra Space (8.8%), CubeSmart (4.4%) and Life Storage (4.4%). Companies compete on price, convenience, location and security and every local market has different competitive dynamics. For U-Haul, access to customers of the moving business and brand awareness should help with win-rates.
While square footage growth is what’s required to grow the storage business, occupancy is what will determine profitability and returns on capital. As a general rule, the company says that 70%-75% occupancy gets them to breakeven and 80%-85% gets to acceptable returns. U-Haul’s disclosures on occupancy rates have not been that useful (though it’s getting a little better recently) since the company only provides a company average. The main issue with this is that U-Haul had shifted to more conversions for its new self-storage units (repurposing department stores, industrial complexes, etc.) starting in 2017, which start with 0% occupancy. This suppressed the average occupancy number, leaving investors concerned about the ultimate returns for the high amount of capex spend on the storage business.