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Good day, and welcome to the AMERCO Second Quarter Financial 2020 Investor Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would like to turn the conference over to Sebastien Reyes. Please go ahead, sir.
Good morning and thank you for joining us today. Welcome to the AMERCO’s second quarter fiscal 2020 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 September 30, 2019, 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.
Thanks, Sebastien and good morning to everybody. I appreciate you being on the call. I assume you've all seen the numbers. Our moving equipment utilization did not keep pace with moving equipment fleet growth for the first half of the year. I'm focusing on that and would expect to see some improvements by fiscal year-end. The big economic opportunity for U-Haul is to have the always moving fleet positioned geographically evenly relative to demand. I believe we could have done better. Overall, our fleet capacity is considerably less than demand. However, the seasonal, periodic and geographic nature of demand makes the match-up tricky. Of course, this is our business and we should know it.
Self-storage continues to be a growing segment both for U-Haul and others. As I have cautioned in the past, ready capital will encourage oversupply from time to time or place to place. I believe our team can hold the increased pace we are operating at. We have a supply of empty rooms in many good markets. I look for us to do our job and rent these units up. We're well in excess of 20 years. U-Haul has maintained its own proprietary database of self-storage rates and supply in all 50 States and all Canadian provinces. We try to soberly approach the market, although we have made mistakes from time to time.
These storage assets are 20 to 50 year assets. Historically, oversupply has healed itself with growth in demand. There is a substantial supply of new empty units in many markets. I am not certain that time alone will heal them all. Of course, U-Haul must manage its costs. We are showing strong depreciation increases, which do not bother me. I continue to look for vehicle maintenance expenses that are unnecessary, personnel has run up a bit and I need to be thoughtful there. Overall, the U-Haul business correlates with consumer confidence. U-Haul is graphically widely dispersed operation.
I'd expect to benefit from operational improvements in an overall growing economy and look forward to talking with you in the future. Jason, do you want to go through the number?
Thanks Joe. Throughout my presentation this morning, all my comparisons are going to be for the second quarter of this year compared to the second quarter of fiscal 2019 unless otherwise noted. Yesterday, we reported second quarter earnings of $7.97 a share compared to $8.35 a share the previous year. Equipment rental revenues increased 3% or approximately $23 million. Transactions and revenue were up in both our one way and In-Town markets. These trends were similar for both trucks and trailers. Our footprint of company-owned locations continues to expand. Since September of last year, we've added over 90 new company-owned retail locations.
Capital expenditures on new rental trucks and trailers were $1,037 million for the first six months of fiscal 2020. That's up from $787 million the year before. Our truck purchase schedule is skewed heavier to the first half of the fiscal year, meaning this pace will slow over the next six months. Proceeds from the sales of retired equipment decreased to $397 million for the first six months from $428 million last year. As you may recall, at this point in time last year, sales were a bit higher as we were still recovering from delays stemming from manufacturer recalls. Sales this year are meeting our expectations.
Storage revenues were up $13 million was just under 15%, the majority of the revenue gain came from growth in occupied rooms. Looking just at our occupied room count as of September 30, we had an increase of 47,000 rooms compared to the same time last year, that’s a 75% increase in pace year-over-year. Since last September, we've added 127 new locations with self-storage at them. From an occupancy standpoint, we continue to add new units faster than we're filling them, although that spread is narrowing. Our all-in average monthly occupancy throughout the second quarter of fiscal 2020 was 70%. This quarter we took a look at facilities that had occupancy over 80%. At September 30 of this year, we had 744 locations or about 63% of all of our owned storage locations that were over 80% occupancy. Compared to last year at this time, that's an increase of 59 locations. The average occupancy at these locations was 91%, up just slightly from where it was last year.
Our real estate related CapEx for the first six months of this year was $423 million that’s compared to $481 million last year, however, within these figures is some reallocation. The portion attributable to acquisitions has declined while the amount from construction and improvements has increased. From October 1, 2018 through September 30, 2019, we added 6,076,000 net rentable square feet, or about 73,100 storage units, to the portfolio. About a million and a half of that square feet came online during the second quarter.
Operating earnings in the Moving and Storage segment decreased $7 million to $229 million for the quarter. I'd like to touch on a few of the more significant items. Depreciation expense associated with the rental fleet increased $17 million as we've continued to add new equipment to the fleet. Meanwhile, gains on the sale of rental equipment increased $6 million. Depreciation on all other assets, primarily storage location assets, increased by $8 million. Outside of depreciation, personnel costs represented the largest single increase in operating expenses. These costs increased at a rate greater than our revenues.
Other costs including property taxes, insurance expense and freight costs are three of the other larger items that generated increase. These four types of expenses in aggregate accounted for approximately $26 million of the operating cost increase during the quarter. In August, we declared a $0.50 per share cash dividend that was paid in September. As of September 30, 2019, our cash and availability from existing loan facilities at our Moving and Storage segment totaled $559 million.
With that, I'd like to hand the call back to our operator to begin the question-and-answer portion of the call.
We would now begin the question-and-answer session. [Operator Instructions] The first question is from George Godfrey with CL King. Please go ahead.
Hello.
Hi, George.
Hey, there. Joe, I was wondering if you could expand on your comments about, I'm sure you know exactly where I'm going, the number of units in the storage building out and just thinking over past calls about your desire to increase that capacity and now you're not sure that time will fill that up. Have you done more analysis proprietary for yourself and the industry that suggests that perhaps we're at an overcapacity state that isn't going to be corrected anytime soon? I just want to get an understanding of what your comments imply. Thanks.
No, I don't think we're in an overcapacity because there's no such thing as a market, that's the problem. So – but in the past people have added units and while it's always kind of surprised me, I've been in this business a while, it's always surprised me, but yet demand is always kind of caught up to it after five, six years. There's so much going on right now. Every estimate that I see of new construction, I believe is below what's actually occurring by as much as 50%.
Now that's seems like an awfully big error, but that's my opinion, okay. We don't have good data on supply increases by year, they’re really very accurate. But of course our job is to make sure we don't put product in those markets and pretty mostly we've avoided that. So I don't think we're particularly vulnerable to that, in other words putting something that's going to be a barking dog indefinitely, but we'll have as much as we've got going. We'll end up with some short-term barking dogs, that's for sure.
The other thing is our product is a lot different. Most of our product is a lot different than what you see in the market out there, George, because we do this in conjunction with the truck and trailer operations, and that's just a little bit different. We get a little – quiet a little bit different customer than most of our competitors. Again, it's hard to generalize because there's so many subtleties, but we have – we kind of cater mostly to our U-Haul customers and not just to customers in general. And that gives us a tiny little bit of an edge if we do a good job.
So I'm not concerned that we have stuff out there, but it's – I see what you see and you see tremendous amount of new supply coming online and it's – a lot of it's pretty good product. The other thing when you look at supply is, is that there's various types of product out there. So a general statement of how many units or how many square foot they want to market, it doesn't really tell the story because your standard drive up is much different from interior, interior climate-controlled, and the markets, while there's certainly overlap, the markets are different. And so demand is just going to reflect a little differently. So I'm not – but I don't want you in any way to think I'm trying to run on the market. I don't think so at all. But I think we got – we'd got to have some exciting times up ahead and, of course, my opportunities to try to make all this be an opportunity for U-Haul, and I'm committed to these assets going ahead.
As I said, these are 20 to 50 year assets. We have a number of assets that we've now had out there for 40 years and I don't think anybody could have predicted 40 years when we first put them in. But the fact of matter is that the customer has indicated they want this sort of a product and they want it all across the country. We are much more geographically dispersed than anyone else in the market. I don't have a way to say it exactly, but if we're – I would say we're at least twice as dispersed as anybody out there, who's a major name.
And so when things slow down, they'll kind of slow down market-by-market, which means we won't be stuck entirely of slow markets or we won't be blessed by entirely fast markets, but we'll – we'll kind of be able to pick our way through the situation. It should be able to do good. So I'm very excited. We'd had a good room, good last 12 months on room roundups. Of course we needed it since we put a bunch of new product out there and needed to ramp up, but it has and so that doesn't discourage me at all. I'm very positive on the self storage business and obviously I'm very positive on the truck and trailer business.
Understood. Thank you for that clarification. I'll get back in queue.
The next question is from Ian Gilson from Zacks Investment Research. Please go ahead
Good morning, Joe.
Good morning, Ian.
I have few questions. We had a significant gain again in the other revenue category. Could you sort of go through what is driving that revenue?
Hi. Ian, this is Jason. The majority – the vast majority of that in the moving and storage segment is associated with our U-Box product. So we're still seeing double-digit percentage growth in U-Box, both shipping of the boxes and then storage of the boxes.
Okay. When do we going to break that out as a separate line item or are you going to break it out?
Well, Ian, this is Joe. Of course, I want to show as few cards as possible, but there's some accounting rules that relate to this and well before we trip them, we will of course break it out. It's still is a relatively modest part of the whole mix, but its part of the future we're building and of course the – what we need to do is do a great job with these customers and they'll tell their friends and we'll have more customers next year. So what I can tell you is we're doing a better job.
As you know, I list my phone number all over the Internet and so I get a lot of customer calls and this and that, and we're far from perfect. But we're steadily improving our execution with that product and steadily increasing our footprint. And so we're active from Halifax, Nova Scotia to the Texas border down there, border with Mexico.
So we're active with that product all across the deal. And this is a good market and it's speaks to a lot of changing demographics or people that at least they assert their changing demographics with millennials and blah, blah, blah. So I think it's a good product for us. I'm very optimistic about it. It – we're not – it's not costing us to be in the business and as long as we can grow solidly and not cost us to be in the business, I'm for keep jumping into it. So the simple answer is I'm not going to disclose it till it gets pretty close to, I have to.
Okay. Okay. That's fine. On the – moving in the storage – on the store inside, again, both of the last two quarters, in fact both of the quarters of this fiscal year, a naive calculation of revenue per square foot and revenue per room show a slight decline. Is that a trend or just coincidental?
Are you saying with our numbers?
Yes. I'm looking at your numbers.
Yes. I think what you're probably seeing is our Free Month Moving. We've had a few more takers in that and that as you're expanding rooms, of course if the percentage of free moves stays the same or expanding free movements, okay. And so those kind of have to churn and they typically take about three months to work themselves out. But the good news is we're continuing to grow, move in, so we continue to have some of these free rooms and they kind of dilute the rental rate the way you're calculating it. I don't think there's any dilution in the rates were actually charging.
And Mr. Jason, are – do the group of properties that, that we manage are essentially kind of the same store portfolio and they're seeing about 2% improvements in your-over-year rate.
It’s just to give you a sense of how we're growing, something that would be close to the same store measurement.
Okay. Last...
Ian, in general word loath to cut rates, okay. That we were kind of just – we're just loath to do it and as long as I'm here, I intend to stick with that plan.
Okay. And last year we had a significant gain in the third quarter from the corporate accounts, do you have any idea how FedEx, UPS and VH and so on, are positioning their fleets? Or we likely to see that account to grow again?
Ian, if there is a lot of flux there they’re growing their fleets, but of course they're adding their own vehicles at a tremendous speed. I don't have access to any of their internal data, but they source vehicles from people we source vehicles from. So we have kind of an idea that they are out there strongly adding fleet. I would expect our business from them might be flat or down a little bit this year. It's still too early to tell, but I'm kind of guessing the November 1st which just passed is kind of the day they start running in here. So I don't have a clear enough picture. I have a lot of anecdotes and my anecdote is that they're going to be a factor, but they may have brought on enough of their own fleet that there'll be less of a factor. That's just a guess, I mean, all we need is my wife to start buying more junk and they're going to rent more trucks.
And finally, so you’re warning us possibly a continuation of a slower growth period. You adjusting your expenses to make that slightly lower expectations?
I don't think we've adjusted them enough, so I've got work to do there.
Okay, great. Thank you very much.
The next question is from Jamie Wilen with Wilen Management. Please go ahead.
Hi fellows, on self storage, could you give us a shot at that – those stores that are operating over 80%, I assume that's a solid existing base. What the same store sales levels are on those stores.
Jason, I'm going to let you try to give an answer to that.
Jamie, I guess I don't – what I was looking at was the occupancy figures for those, I don't have an estimated NOI or a revenue number for those right now.
The revenue ought to crack occupancy is not enough?
Yes. So on those occupancy at all of our locations that were greater than 80% was about flat at 91%, but we added 59 new locations that were under 80% last year. So I guess I don't have exactly the answer to that that you're looking for right now, Jamie.
Got you. And if you could help us look at the full long-term strategy of self storage, if you put a $5 million investment into building a self storage facility five years ago, could you track what it would be over those five years? Initially you got a lot of depreciation and amortization and you're not making any money yet. When you get two, three, four, five we're probably not spending a lot of money to redecorate the cinder block walls. But we’re still depreciating it over a straight line basis I would assume. So the cash flow by year-five should be significant. I was wondering if you could walk us through a model for what a $5 million investment would be from year-one through year-five?
Well Jamie, I guess I'll start by going through the actual occupancy figures that we've been seen for our properties that have hit five years in maturity here, and we've been averaging, in the first year we get to about 40% occupancy, then it gets to 60% year three, 70% and then it starts to – well it starts to slow down in year three and then year four were somewhere around 77% to 80% and then year five 80% to 85% is what we've been averaging. I think then if you look at the outliers on the median, we're probably running closer to 89% to 91% at year five. So the cash expenses that we have up front is the property taxes and a lot of these deals, if it's a conversion, we have the utility costs and then we do open up the shop and we have some personnel expense.
Those – that the personnel may increase a little bit over time. By the time we open up the storage product where typically in year one, we're starting to get new box revenue and truck and trailer rent revenue, then sales of retail products. On the facilities that we've been tracking here over the last about five years, typically we're cash flow positive in year three. And then I don't have a common size measurement on what the – by year five, I guess I don't have a specific number I can give you on a $5 million investment. I'd have to think about that and get it back to you.
Okay. That's an interesting number. What that stabilized number is that you're going to be returning over an extended period of time once we hit that 80% level? Certainly we'd love to have that. On the truck and trailer rental side, it seems we've – Joe you've always said your main target is fleet utilization, yet fleet utilization is a function of number of trunk rentals by number of trucks we have out there. We seem to have over-expanded our fleet. And I was wondering as you look forward, will we keep our fleet the same size as the market grows or actually shrink our fleet a little bit so we can increase that utilization and profitability number?
I don't think we'll shrink the fleet much. It's a little bit – it's not a totally simple answer to give you. I think we have location problems or location issues that are more telling in results than total truck issues. The problem is that, its trucks that are available point in time that tells you whether you have too many. We obviously have had too many at some points because we haven't been able to rent. But at the same time, I've been out of trucks.
Wednesday, middle of the week many markets in California, I'm out of trucks. Not Saturday, Wednesday, so I have under fleeted California, but the problem is we can't just quite add them in California. And there's other market just like that. Chicago would be an example where we're chronically short. So my opportunity is to tune us up in distribution and I started initiative on that probably two or three months ago. And those things take a little time to bear fruit, but I'd expect to bear a little bit of fruit. Of course you don't really see the good results until spring because kind of, due to the cyclical nature of our business, we kind of have an oversupply. But still in our uptick L.A. and Chicago, both those towns you could call mid-week and you might have trouble getting the truck right now. So if we can get the equipment into those markets, we'll pick up a little teeny bit of utilization.
I don't think our – the total trucks is where we should react. So I guess the answer is I don't think it's going to go down and kids go down a little bit just because of different models age out. I'm still struggling with the big truck getting the right numbers. We spent a ton of though on them over the last 12 months. And I still don't have the right amount of them, but it's kind of like swallowing too bigger chunk right now to just pour those things on again. So we're going to – we're kind of holding on that a little bit even though the market would support more of those units, but they're a big financial commitment.
So I don't think you'll see us shrink the fleet, although the demand dwarfs our fleet. The problem is can we do our job and have it where it needs to be? It's about that simple. Demand dwarfs our fleet. Now, it's not – the demand is not 365 24/7. The demand is very periodic and very cyclical, but we could have done a better job, I believe. And I believe we'll do a better job. I've been focused a lot over the last 24 months on driving stories. I'm getting some results in storage. And I think I just need to drive a little bit more on the truck rental. I think I can squeeze a little bit more utilization out.
Okay. You guys know truck rental better than anybody else in the world because you've been doing it for longer than anybody else. The phenomenon that there's more trucks rented in California and Chicago and it's hard to keep up. It should be an easy thing for you guys to understand and put your capital there. We spend a billion – you spent $1 billion on trucks and trailers in the first six months of the year. One would think this is more of just Joe deciding where the truck should go. We should have incredibly sophisticated modeling for what's the best utilization for trucks, where should we have the most and how much money we should spend to get the most effective return on our capital dollars?
Absolutely. And to a certain extent, we can do that. What happens with this one way business, and we've put – I don't have a dollar and we've put a lot of new one-way trucks started in California. But they get one rental to Dallas and they're just out of commission. That makes sense. We’re one rental to Boise. And you can basically stand in LA and see the people going to Dallas and Boise. You can make your own opinions why they're leaving California. So getting that truck back, there's a little bit more of a trick. Rate alone won't do it. You can have a disparity of rate of a multiple disparity. In other words, I could charge twice as much leaving California as going in and that would not even out demand. So the demand is pretty profound there for reasons that you just are.
So – but we have other ways to wiggle on that. And like you said, this is our game. We ought to know our game. So I think we could have done better. And we've taken steps already in the fleet that just might work a little bit. So we're hard at it. And I think I'm guilty of not being focused – this time last year I wasn't as focused on that as I am right now. And the organizations, our organizations like any, I could ask people to juggle so many balls and then all of a sudden they start dropping balls.
So I have to kind of be a little bit careful on that. And I drove everybody pretty hard on room – storage unit rentals. And we’ve got a little bit of result. And that might actually have a little bit to do with why some people lost focus. So I'm back focused on it. I would expect we should see some movement. I don't know if it will show up in the money by fiscal year-end, but I'll be able to see way deeper than the money and I'll have an opinion whether we're making progress by them.
Okay. And lastly, Joe, as far as the rate of capital expenditures as you look down the next 12 months in self-storage and in the expanding the truck fleet, what kind of numbers would you expect them to be similar, more or less than what you're spending today?
Well, storage may just trail off a little bit. It's difficult, as Jason said, we're spending more on construction and conversion than we are on acquisition. And so that's a little bit discretionary. In other words, I can acquire a piece of property then just decide not to build it. Okay. And so, I can just postpone. If you get one of these things, it’s probably seven to one on what the improvements are compared to the land acquisition. It varies, but it's – the improvement is the big amount of the deal. So all the land acquisition is obviously carried on our balance sheet, and you see it in interest and property taxes. When we get into construction, the money kind of pours out and it’s hard to get real good deals in construction right now because everybody is building stuff, so you can't just say it's kind of a seller’s market as far as construction services. So if it looks like it's going to go soft, we'll put a project off. It's about that simple. But we have enough stuff teed up. We could run real close to this rate and not run out of sites. Okay.
So I don't want to mislead you. We have plenty of stuff teed up, but there's a many points of time in there, which you can turn it off. And if it looks like it's appropriate, we'll back off on those expenses, hopefully retain the properties and keep them in inventory building out two years later. What we have done a fair amount of this phasing construction where we've gone in and put in the first, maybe 50% of the expense that held-off on that because that gives us enough room to rent for year and a half, two years, held off on it, figure as it feels, we'll spend it. And I think that'll – that's kind of helping us to modulate this a little bit better. But I wouldn't look for the construction to fall a heck of a lot, but – or the real estate expenses to fall a heck of a lot, but they may taper off. They've kind of tapered off a little bit. The fleet likely will be a little bit less. Jason, I don't have a specific number on that.
It's still a little early for projecting the next year's fleet plan. But the first versions of what we've been thinking about would be somewhere, let’s say, maybe $75 million less, but that's very preliminary.
We're getting hit by a bunch of price increases from the manufacturers. They have a lot of additional content due to this, these sensors and all the stuff that they're readying for autonomous vehicles, and they're building that into the architecture of the vehicles and it just simply raising costs without providing much benefit. In other words, there's not a lot that I can extract from my customer for wiring that they're not using. So we're suffering a little bit of that. And then we're having a round of that. And of course, we're pushing back real strongly. So we're not getting a smoking deals on equipment right now, but we're going to buy fewer of the big trucks and we are already started to buy a few of the big trucks and that they cost twice what a small truck costs roughly. So that'll have a little effect too.
Okay. Thanks fellows.
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Well, again, thanks to everybody, I appreciate you’re asking questions. We’re red hot and running as far as business in general. Of course, we got to get that to filter through to the bottom line, which is part of my opportunity. I look forward to talking to you all in another 90 days. Jason, any closing comments?
Nope. We'll talk to you at the end of the third quarter.
Sebastien, do you have legal remarks?
We'll talk to you [indiscernible]. Thanks.
All right. Thank you again.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.