Description

Summary and Thesis:

UHAL is a very well-known company and a fairly well-known investment thesis. I’d refer readers to previous write-ups for Company background and overall thesis structure.

At current levels we believe downside protection is extremely strong and upside potential is substantial. Specifically, we believe that the self-storage business may alone be worth close to the current stock price and that there is massive value and optionality beyond that.

Moreover, there are specific reasons why both the self-storage and equipment rental businesses have pressured consolidated margins over the past few years, and that dynamic has now stabilized and we expect material improvement over the next few years.

We’re strained to see fundamental downside below current levels and believe that there is a path to a $600+ share price over a reasonable time frame.

Self-Storage:

-        UHAL’s self-storage business generates $400mm of run-rate revenue. EXR and PSA trade at approximately 17.5x run-rate revenue. That implies $7bn of value for the self-storage business.

-        UHAL’s SS facilities are woefully underutilized because so many are so new (i.e. ground up development). As of the last quarter, occupancy stood at 68.4%. These facilities will eventually run at 90%+ occupancy. Every 100 bps of incremental occupancy is $5.3mm of revenue. That’s another $115mm of revenue or roughly $2bn of potential value.

-        Over the last 12 months, UHAL has spent $1bn on SS CapEx, much of which isn’t reflected in the Company’s square footage because it isn’t online yet.

Adding that up yields $10bn for UHAL’s SS business. UHAL’s current EV is right around $11bn.

So $10bn is our bull case for SS but we acknowledge that number may be high. UHAL’s facilities are generally not in as desirable of locations as EXR’s and PSA’s and accordingly deserve a discount. On the flipside, we believe UHAL is much better positioned than PSA and EXR to buy massive amounts of (very cheap) shuttered retail real estate and convert it to profitable SS real estate. UHAL’s equipment rental business acts as a customer acquisition tool and enables UHAL to operate SS facilities in locations that PSA and EXR would have much more difficulty. It’s hard to quantify the value of that but we believe it will be significant over time.

Downside case: at last quarter end UHAL had 38.2mm SF of SS. Let’s assume $14.75 of revenue per occupied SF and 90% occupancy. That is $510mm of SS revenue. 60% NOI margins – substantially below PSA and EXR – yields $305mm of NOI. Let’s cap that at 6.5% vs. the 4.25% cap-rates EXR/PSA trades at. Plus 75% of LTM CapEx and we’ll call $5.5bn the downside.

Critically, UHAL has turned the corner with regards to newly built SS product hurting margins – the development properties that have entered the portfolio over the past few years are now generating more cash flow than the new development properties coming online are burning. So new product is still diluting margins but the path to recovery has commenced.

Other sources of value:

Equipment rental + accessories:

This business continues to grow mid-single-digits and it holds a dominate position. On a run-rate basis the business is generating >$1bn of EBITDA and >$500mm of EBIT. Margins are depressed because the Company continues to work through issues relating to getting repair and maintenance expenses under control. Additionally, higher fleet utilization represents a major opportunity for margin expansion. At the Company’s August investor Day management highlighted improved equipment rental fleet utilization as the biggest lever for earnings improvement. Higher SS occupancy was second.

Between top line growth and margin optimization we think earnings from this business could grow very nicely over the next few years. We view the financing of trucks in this business as an operating expense so prefer to value the business on a net income basis: allocable debt is currently $2.1bn and interest expense is $75mm, resulting in $425mm of EBT and $320mm of net income (assuming a 25% tax rate while UHAL has historically paid a much lower cash tax rate).

We consider $2.5bn (8x $320mm) the downside case and $5bn (12x $400mm) the bull case.

Other assets:

-        Self-storage property management that generates $30mm of EBIT.

-        2 insurance companies with combined tangible book value of $600mm.

-        $500mm of cash on the balance sheet.

We value those assets at $1bn to $1.5bn.  

Other thoughts:

UHAL is ‘frustrating’ because despite sitting on assets worth demonstrably more than the current share price, the Company is focused on the long-term and takes no steps to get its share price up in the near-term. That is both the source of opportunity as well as a difficult to quantify risk. Over the long-term management has done an excellent job running the business, but share price appreciation has come in fits and starts.

In our view, the biggest risk facing UHAL is the inevitable transition to autonomous vehicles. We have no convicted or differentiated view over what time span that happens. We also don’t know what it does to UHAL’s business. We’d argue that the unquantifiable risk is offset by these unquantifiable options:

-        UHAL’s fleet and real estate portfolio put it in a very interesting positon to play a pivotal role in last mile delivery. To date, the Company has been only a passive participant (i.e. people rent its trucks to carry out last mile delivery). But maybe the Company (or an outside party) gets smart and figures out a way to take advantage of last mile in a broader way.

-        For the same reason UHAL is well positioned for last mile, it is well positioned as a large scale fleet operator of self-driving trucks.

-        UHAL has an incredible brand. It gets free advertising from people driving its trucks. It’s been in countless movies, TV shows, etc.

-        As mentioned previously, UHAL is as well positioned as any company to buy shuttered retail real estate, reposition it as cash generating SS and perhaps one day it’ll be worth a lot more. There is likely a lot of value in that and we know that very large real estate investors are trying to figure out a way in.

Valuation:

Presented below is our summary valuation. To simplify the cases, we think current level is roughly downside, base case is $500, and bull case is $600.

Catalyst

- Improved SS margins from improved occupancy

- Recovery of equipment rental margins from improved utilization and/or reduced expenses

- Valuation + others (see above)