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.
Why is it a good business?
As the leading rental equipment company for do-it-yourself moving, U-Haul benefits from scale advantages. For the moving business, the company’s large network of dealers and company owned locations make renting a U-Haul a better value proposition for the customer. A shorter distance for the customer to pick-up and drop off the rental is beneficial in terms of time and money. As mentioned before, 57% of the U.S. population are within 5 miles of a company location and 90% including the dealer network. It cannot be stressed enough how big of an advantage the dealer network is for U-Haul. And given the company’s size, reputation and systems in place, the company still signs up new dealers (albeit at a slower pace than in prior years) to the network every year.
Many competitors have tried to enter the moving rental business over the years after seeing U-Haul’s success and high margins, but most have failed. The scale that it requires to compete in this space is so much larger now than it was years ago. Even the number 2 and 3 players in the business, Budget and Penske, have only 2.8k and 2.5k locations respectively. The advantage is even more pronounced for one way moves as many truck rental companies don’t have national coverage.
Scale also allows the company to have some buying power against its suppliers. This is likely more pronounced on the moving supplies side of the business. For the supply of trucks, U-Haul purchases chassis mainly from General Motors and Ford. And while being a large customer does help U-Haul achieve some volume discounts, it’s uncertain how much of an advantage it is in terms of sourcing. In 2017 and over the past two years, U-Haul had been unable to source enough new trucks and the company needed to extend the life of its existing fleet to make up for the short fall.
And scale helps with advertising efficiency. U-Haul’s 345k trucks and trailers adorned with U-Haul branding and 673 storage locations are an effective and cost efficient form of advertising. The company spends the least amount on advertising vs. its large self-storage peers. In fiscal 2023, U-Haul spent 0.2% of its moving and storage revenues on advertising, much lower than 1.7%-2.4% for the storage peers. Even if you attribute all advertising expenses to the storage business, U-Hauls percentage is still lower at 1.5%.
The company’s unique combined moving and storage offering does result in synergies. One of the first things U-Haul does when purchasing a new storage facility is to immediately start renting trucks. This added operation does come with an extra cost and if the storage facility was a conversion or ground-up build, then margins do take a hit initially. But having the moving business at new storage locations does help the company fill occupancy faster. The company believes that one out of every three moves (statistic from 2017) are done using rental equipment. And one out of every four customers that use self-storage is using rental equipment for their move. Many of these customers end up storing their home goods at a U-Haul storage facility, more so than the competition.
Returns on incremental capital?
Over the past 10 years, U-Haul has spent 39% of its capital on its fleet of trucks (net of resells), 55% on real estate and 6% on other capex. U-Haul hasn’t made any large acquisitions during the past decade, and that’s likely because the company is spending almost all of its excess capital to grow the storage business. The company does spend capital on technology investments (not sure if that’s in SG&A expenses or other capex). In 2017, U-Haul launched Truck Share 24/7, which allowed customers to do pick-up and drop-off during any time with the mobile app.
For the moving business, maximizing returns on capital are highly dependent on two factors: fleet utilization and improving the cost efficiency of the fleet. Fleet utilization is tricky to measure because U-Haul doesn’t give out any of its internal metrics. The company has mentioned that utilization has improved almost every year according to internal analysis. Some that has to do with improved scheduling, availability and overall logistics.
The issue with achieving higher utilization every year is that there is a natural ceiling at some point because certain times will always have higher volume than others. For example, weekends have a higher utilization, as does the 1st and last day of the month coinciding with move-ins and move-outs. Spring and summer months will have more demand than winter. To help smooth out demand, U-Haul can implement dynamic pricing (with enough data analysis and technology back-end) but the customer may not be pleased with these types of nuances in pricing. The company rents out their trucks to last mile delivery companies during the holiday months to improve overall utilization.
Increasing cost efficiency is easier to measure and achieve. U-Haul trucks last 7-12 years before being sold in the secondary market. Newer trucks are typically sent on one way routes, where they are driven many miles per day. After a few years, these trucks are placed to do in-town moves and then eventually left at dealer locations (which have much lower volume than company owned locations) or used for mobile storage moves. Depending on the condition of the resell market and the cost to maintain the useful life of the trucks, sometime before 15 years of use, these trucks are sold. Many of the company’s truck boxes get repurposed as storage units as they has a useful life way beyond the truck.
During the life of the trucks, U-Haul regularly does preventative maintenance and minor repairs. Prior to resell, the company usually does heavy repairs to bring the trucks back to a sellable condition. The shortage of supply of new trucks in 2017 and in the past two years has put pressure on the cost side of the moving business. That’s because as there are fewer new trucks added to the rotation, the company needs to extend the life of the existing fleet by a few years. The cost of repair and maintenance is much higher at the end of the life of a vehicle than in the beginning. Furthermore in 2017, the company’s suppliers, Ford and GM, changed the structure of the chassis to some of the trucks, resulting in non uniformity vs. the existing fleet. This makes repairs more costly and less efficient. In 2017, the company estimated that they were behind 5k new trucks and in 2022 the company was behind by almost 9k trucks.
For the storage business, since the costs are mostly fixed, occupancy and price drive returns. Pricing will depend on the competitive dynamics within each local market but on average, annual increases for new tenants are +4%-5% for U-Haul. Lately pricing has become firmer at +7% for new tenants due to increasing demand. Other storage competitors have pointed out fewer discounts in 2022 and 2023 vs. the historical average.
For occupancy, U-Haul has a lot of experience starting from 0% since conversions and ground-up builds were ~80% of real estate capex spend since 2017. In 2015, 2/3 of the company’s new storage square footage was from existing facilities at 70% occupancy. The remaining 1/3 was brand new at 0%. Conversions and ground-up builds became at larger part of the mix in 2016 to 60% and in 2017 to 80%.
U-Haul has been able to hit occupancy targets much more quickly as of late. Historically, occupancy would be ~40% in year 1. By year 2 and 3, these new builds are usually at 60% and 70%. By year 5, the units are near steady state growth and get to 80%-85% occupancy. Now new units are achieving 50% occupancy in year 1 and getting close to 70% by year 2.
We estimate that U-Haul generated returns on incremental capital between 8%-18% annually over the past 4 years. In the 2 years preceding that period, the company experienced two factors that contributed to lower than average returns on capital. First, in the moving business, there was a shortage of new trucks available + the cost of maintenance increased for the existing rental fleet. Second, the company shifted the majority of its investments in the storage business into conversion and ground-up builds, which have a much lower runway to achieving greater than 80% occupancy, the rate at which returns are acceptable.
While the company rarely talks about its return objectives, U-Haul stated in 2013 that the company’s hurdle rate for returns is in excess of 10% over a 10 to 15 year period. Looking ahead, it’s likely that future returns will remain near the current range, given that the storage business has achieved the level of scale where conversions and new builds won’t impact overall occupancy rates as much as in prior years. That’s balanced by a slow down in the moving business as the company laps the surge of one way moves during the two years after the pandemic started.
Reinvestment potential?
On the moving side, the rate of growth and reinvestment will likely not be as high in the near future as it had been in over the past decade. However, the moving business will continue to require reinvestment both in the fleet as well as opening new stores. There will continually be new trucks brought on for one way moves and capital reinvested for the maintenance of the existing fleet. With the surge in demand for do-it-yourself moves after the pandemic, the company has been able to locate more underserved markets, which implies more U-Haul locations in the future. Existing stores will also be improved so that the company can sell self-storage or U-Box products.
U-Box is an extension of the moving business and has been growing nicely over the past decade. The company started to offer this service in 2008. A storage box is moved to a location of the customer’s choosing (usually their home) and their goods can be stored there. After the storage unit is filled, it can be kept at the original location or moved to a U-Haul storage location. This segment became profitable in 2016 and reached slightly below company average operating margins in 2021. The financials for this business haven’t been broken out, but U-Haul has mentioned that growth rates are double digits % above the moving business over the past decade.
As it relates to storage, reinvestment will continue to be high for the foreseeable future. While there will be pockets of saturation in certain markets from time to time, the overall demand trajectory is increasing in the U.S. When current CEO, Joe Shoen wrote his thesis on the self-storage market in 1973 (Harvard Business School), his assumption for the market was 1 sq. ft. per person in the U.S. At the 2022 Analyst Day, the company stated that number to be close to 8 sq. ft. per person.
U.S. household penetration of self-storage has also increased from 2.7% in 1998 to almost 11% by 2022. Certain geographies are further along the adoption curve like in the Midwest vs. large coastal city centers. That’s helping industry wide occupancy levels moving higher to the mid 90%s and price increasing nicely over the past 2 years.
Future M&A with a large self-storage operator is unlikely since the company doesn’t like paying high multiples on its acquisitions. U-Haul stated in 2014 that they were paying 12x-14x NOI for existing storage operations, which imply 7%-8% returns assuming no additional operating costs, netted by any improvements in the acquired assets. The low return profile of acquiring existing storage assets is likely the reason that the company has elected to do mainly conversions and ground-up builds since 2017.
With a reinvestment rate between 75%-95% and a return on incremental capital between 8%-18%, we estimate that U-Haul has increased its intrinsic value between 8%-13% annually over the past 4 years. The company’s reinvestment rate should remain high since most of the real estate capex is funded by operating cash flows. U-Haul’s net debt profile has remained steady, between 1x-2x EBITDA, not counting the investments, fixed maturities and marketable equities that are tied to the insurance businesses.
What else is important?
What about the insurance operations?
U-Haul’s other two operations are insurance businesses. The company’s P&C segment has some relation to the moving business. The company offers insurance programs for customers of its moving and storage products under brands like Safemove, Safetow and Safestor. The P&C insurance business is very profitable (35%+ margins) partly because policy holders are already customers of U-Haul through its moving and storage businesses.
The life insurance business was initially formed by U-Haul to offer this benefit to company employees. These days, the life insurance business is a separate entity, run by its own executive team. The company views the life insurance business as a financial asset that can be sold for the right price.
Ownership implications
U-Haul is a controlled company under NYSE standards. Joe Shoen, Chairman and CEO, and his brother Mark control more than 50.1% of the voting rights. The ESOP also controls another 4.3% of the rights. Given that the company has remained under control of the Shoen family since its founding in 1945, it’s unlikely that this will change going forward. This has historically contributed to the stock’s below average daily trading volume and analyst coverage.
U-Haul recently has taken a couple of measures to help improve its liquidity profile. In November of 2022, the company changed its name from AMERCO to U-Haul Holding Company (something that shareholders were asking for a while), split the stock 10:1 with 9 additional shares of non-voting stock, and officially instituted a dividend of $0.04/share.
The new class of non-voting shares (UHAL-B) started trading on November 10 and has underperformed the original voting class shares by 10% (15.6% vs 5.6%). This is likely because the new share class has allowed certain shareholders to reduce their economic exposure while still maintaining their original percentage of voting rights. Without a formal buyback in place for the non-voting shares, the disparity stock price performance could continue for a while. (Example: See Google before the official buyback of Class C shares).
Moving data vs. U-Haul’s transaction growth
U-Haul provides a chart of the U.S. census mover rate vs. company transactions going back to 1971. While the mover rate has steadily trended lower from 21% to 9%, U-Haul’s transactions have moved higher during that time. Some of this has to do with U-Haul’s buildout of its network and share gains vs. the competition over the years. Even in 2012, when the housing market was still in recovery, U-Haul only saw a shift from long distance moves to short distance. The company’s overall transaction count wasn’t really negatively impacted. U-Haul has stated that better macro data that have higher correlation to the company’s financial metrics are consumer confidence for the moving side and employment numbers for storage.
Optionality
U-Haul will likely continue to reinvest its free cash flow into the storage business for the time being. After the company has reached a certain size in the storage business, U-Haul will have to find other avenues of reinvestment to sustain its high reinvestment rate. Ancillary services or products like U-Box may get a higher level of capital investments in the future.
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No mention of valuation?
Good article. The only point of agreement that I have with you is that U-Haul's scaled dealer infrastructure provides tremendous barriers to entry. I think that you take the data of declining movers rate a little too lightly. Movement is often a result of major life events like marriage, a new job, birth of children, and sometimes death. Americans have been moving from one residence to another less and less over the years as a result of various factors. Just to name two that quickly come to mind:
1. lower marriage rates: ~80% of all households were comprised of married couples in 1949 vs. ~50% as of 2020. The less these events take place, the less movement will be generated as a result of marriages.
2. increasing share of women participating in the workforce: ~30% of married households in the U.S. were dual-income vs. 50% today. Moving decisions become incrementally harder to make when they affect two as opposed to one person.
Also, I'm not sure that COVID provides good indication of what the future of movement/migration might be. As remote-work accommodations gain greater acceptance amongst employers, getting a new job becomes less of a reason to move residence.
U-Haul has been able to grow decently over the years due to share gain and rental penetration. On a forward basis, it's worth thinking about how much of these two levers they've already exhausted before being squarely correlated to the actual number of moves that take place in the U.S.
Lastly, I'm not sure that scaled economies shared (you can track this by dividing rental revenue by gross equipment PP&E over the years - it's been declining, maybe intentionally?) is a sound formula to use in the face of structurally declining end-market demand. With ROIC of ~11% on avg. from 2012-2019, it's worth asking if that's an acceptable starting base from which to make projections. As businesses grow larger, the opportunity set shrinks. With the current capital allocation policy, I'm not sure that investors are being compensated for the risk of what's always an unknown future, though in U-Haul's case quite predictable.
Great article! Also, shares have moved nicely lately. Congrats if you participated in the move.