U-Haul shareholders to vote on REIT conversion

Al Harris
August 19, 2015

Shareholders of Amerco, the publicly-traded parent company of moving and storage operator U-Haul, will vote later this month whether to spin off part of the company into a real estate investment trust.

The proposal, submitted by Cambridge, MA-based company shareholder AFR Value Partners LP, would compel the company to: “engage an investment banking firm to effectuate an IPO and subsequent REIT conversion of the real estate and self-storage business.”

If approved, U-Haul would become the third largest public self-storage REIT, and the sixth overall. However, in its most recent proxy statement Amerco’s board of directors advises shareholders to reject the proposal, maintaining that such a conversion is not in the best interests of the company.

The vote is scheduled for its upcoming shareholders meeting on August 27.

Those In favor

AFR Value Partners is part of Applied Fundamental Research (AFR), an investment management firm that “utilizes a defined research methodology to identify, analyze and value fundamentally mispriced equity and credit opportunities.”

“This is a company that we believe is a solid company, but one that could derive significantly more benefit for all of its constituents—shareholders, managers and employees—by putting its real estate and storage assets into a REIT,” said Theodore Wagenknecht, portfolio manager and co-founder of AFR.

AFR Value Partners owns 1,917 shares of common stock in Amerco.

 Amerco's core business is renting trucks and other moving equipment.

Amerco’s core business is renting trucks and other moving equipment.

REIT advantages

“When we look at the REIT space for self-storage assets one can’t help but notice that, what I would call the three most comparable companies, Sovran, Extra Space and CubeSmart, trade at multiples of 25 times EBITDA,” Wagenknecht said, “Amerco as a business trades at the 7 to 8 times range.”

For that reason, Wagenknecht belives that U-Haul’s self-storage segment would be more valuable as a stand-alone REIT and would trade at a higher multiple once it is established as such.

In addition, Wagenknecht said that the spun-off entity would have a lower cost of capital that would generate greater returns on its acquisition and development activity.

Focused management

The separate entities would also have more focused management teams.

“The management of these different entities would be more aligned with the performance of their respective business, allowing shareholders to account for how these two units perform without those results being obfuscated into the earnings of a larger entity,” Wagenknecht said.

U-Haul generated $57.19 million in self-storage revenue during the first quarter of its fiscal year 2016, which concluded June 30. That accounts for about 6.5 percent of the company’s $884.8 million in revenue—mostly generated by moving truck and equipment rentals. The company also earns revenue from the sale of moving supplies and life insurance policies.

“Shareholders could choose which business line they would like to focus their investment capital in,” Wagenknecht said.

 Supporters of the spin-off say U-Haul's self-storage segment would operate more efficiently on its own.

Supporters of the spin-off say U-Haul’s self-storage segment would operate more efficiently on its own.

Company opposition

In the company’s recent proxy statement, Amerco said that over the years it has held discussions with “proponents of the REIT structure and analyzed the input.” As to the current proposal, the board concluded that the spin-off would not be in the best interest of the company.

“Success of the proposed REIT Transaction is uncertain,” Amerco stated in its proxy statement, “The proposed REIT Transaction presents numerous operational, tax and financial considerations, some of which are disadvantageous to our long term success.”

AFR said in a statement supporting the proposal that the benefits of the transaction would outweigh the costs of creating the necessary financial reporting infrastructure to prepare for an IPO.

Amerco cited a litany of reasons to oppose the proposal including conflicts arising over lease and contractual terms with the REIT, competing management objectives, the affect on affiliates, and the requirement that REITs distribute 90 percent of taxable earnings to shareholders. (The full list can be found here under proposal five)

Industry perspective

Marc Boorstein, principal of self-storage brokerage firm MJ Partners, said he couldn’t imagine why shareholders wouldn’t vote in favor of the proposal.

“The whole self-storage industry is on such a run right now. Demand is at an all time high with very little headwinds that is going to slow it down,” Boorstein said.

Boorstein said that as a separate REIT, U-Haul would be able to maximize its potential when it comes to operations.

As of its most recent quarter, the company owned 20.7 million square feet of self-storage space spread across 237,000 units. The company’s overall occupancy rate was 82.5 percent during the quarter.

“It makes all the sense in the world. I thought it would have happened years ago,” Boorstein said.

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