Description

Mobile Mini's ("MINI") main business line is to rent 20' and 40' shipping containers to customers so that they can storevarious objects on site as opposed to renting more fixed space on site or renting storage space offsite.  You probably have seen 18 wheel tractor trailers hauling these things.  Or perhaps you have passed by large shipping ports (like Newark) and seen them stacked up in storage yards.  This is a good value proposition for individuals and companies that have a temporary need for onsite storage.  Typical customers would include retailers during the Holiday season in order to store extra inventory on their premises or builders so that they can store tools and supplies onsite during a construction project.  The average customer has the container onsite for about 20 months.  On their 2009Q4 conference call, they emphasized the highly attractive single unit economics.  They can buy a used container from a shipping or container leasing company for between $1,200 and $2,000 depending on supply dynamics.  Then they spend about $1,500 to transport the container to the proper location, remove dents and rust, repaint it, put the Mobile Mini sign on it and replace the locking mechanism with their proprietary locking mechanism.  The later makes the door easier to open and more secure.  On average, the total cost of these refurbished units has been about $3,500 a piece.

Each of these shipping containers can be rented out for about $100 a month which gives a refurbished container a gross revenue breakeven of about 35 months (at their average cost of $3,500).  They stress that a 25 year old container is just as good as a 10 year old container because of the durability of these ocean going containers.  As proof of the value retention of their containers, they show that over the past 20 years, they have been able to sell these containers at about 152% of their cost (2008 10-K p.6).  As a result of this durability, they depreciate these containers over 30 years to 70% of their initial value.  Obviously this makes the net income per container look much more attractive than a shorter depreciation life or a lower residual value.  For each incremental container they rent out, they say they can get an incremental 55% EBITDA margin (2009Q4 conference call transcript p.4).  From 1994 until the end of 2008, MINI was cash flow negative because they grew their rental fleet from 13,000 units to over 260,000 units.  Since the beginning of 2009, they have emphasized the cash flow positive aspect of their business which has allowed them to pay down their debt to the tune of about $20MM per quarter.  Additionally, they are increasing their cash flow by selling units to make up for what they spend on CapEx.

Since 1994, they have acquired about 200,000 of these ISO containers.  100,000 of them have been refurbished.  The last 100,000 containers which they acquired in 2008 have not been refurbished.  They obtained these containers by taking out their largest competitor (Mobile Storage Group) which provided them with 93,415 ISO containers and 21,387 non-core units.  

The bull case on Mobile Mini is predicated on the following:

• Once the economy turns, their current utilization of 56% will return to a historical norm of 80%.
• Cost synergies they gained from acquiring MSG (2008) and efficiencies in their operations will allow them to have a 55% incremental EBITDA as they rent out more units. Their current EBITDA ratio is 42.6%.
• Very attractive individual ISO container economics - 35 month gross breakeven
• Ability to pay off their debt through their high cash flow generation
• Ability to increase yield on their fleet by renting out higher priced containers and offices.
• A fleet of fixed assets which does not lose its value as it grow older. Think about a building that never needs major repairs and whose value never changes.
• As a competitor with a scale at least 5 times their closest competitor, they have the brand awareness, distribution and know how to compete at a cost advantage over their competitors.

The bear case on Mobile Mini - Can you guess where I fall out?

• Even though the Bunger family started this business in the early 1990's - their stock ownership is below 0.5% (167,860 shares as of 12/31/09)- and all of it from options that have been granted (Big vote of confidence from the founding family)
• The growth in the company has pretty much been fueled entirely by rolling up competitors. How many of these really ever work out other than allowing management to pay themselves more?
• Even though they emphasize the ISO container part of their business, they fail to mention that over 50% of their expenditures are for manufactured steel containers and offices and purchased wooden offices whose economics are much worse than re-furbished ISO containers. So bad in fact that they have stopped buying wooden offices (they now consider them as a non-core part of their business) and they shut down their manufacturing plant that made the steel offices and containers. They offered these products to their customers because they wanted to meet all their customer's mobile storage / office needs. Additionally they started out as a company that generated over 50% of their revenue by selling their manufactured steel offices and containers. Timber offices cost about $29,000 and the metal offices and storage containers cost a blended price about $8,000 to manufacture. Renting these higher priced units make their overall yield look more attractive but have worse unit economics. From their conference call - "Our plan is to continue selling off non-core rental assets like van Trailers in the US and timber units in the US but not to aggressively de-fleet our core rental fleet." (2009Q4 Conference call transcript p.3)
• The return on investment of this business has been atrocious. Their MSG acquisition was at the top of the market at a time that they though investors were still paying them to grow at the expense of making money or generating cash.
• As far as their cash generation of $20MM per quarter, that would disappear once they have to spend $1,500 per the 90,000 MSG containers they acquired. When they talk about the incremental yield on renting out containers, they fail to mention the extra Cap Ex they will have to spend.
• The Mom and Pop competitors can under-price MINI any day. They are buying these containers around $1,500 and renting them out for about $65 a month. Half the price but 65% of the revenue. Plus they don't have to go through the hassle of refurbishing them. I think in today's economy, the cheaper price will trump the branded container. A listing on craigslist has them at $1,200 per 40' container and he will paint them for $450. http://cnj.craigslist.org/bfs/1617065967.html (02/26/10) snippets of text follows: "I have a steady supply of 20 & 40 foot containers available, so if you need more than one, or you need containers on a regular basis, I can service your needs. 20' is $1150 and 40' is $1200. I can have my trucker deliver it and unload it at your location on a tilt bed trailer. Delivery charge for a 20 foot container anywhere in New Jersey is $250, and delivery of a 40 foot container anywhere in New Jersey is $350. Delivery of a 20 or 40 foot container outside NJ is $3.95 per mile with a $395 minimum. (out of NJ add $50 for tolls) You can put two 20 foot containers on one truck to reduce the shipping cost. The price of the lock box is $99.00 delivered by US Mail. My containers are all sold with the original paint job, serial numbers and logos. I can paint it for you if you request. The price to paint is $350 for a 20 footer and $450 for a 40 footer. I use the best quality, marine grade, oil based, rust inhibiting paint, made specifically for shipping containers. Containers that are painted with regular latex paint will crack and peal within a few months, making the unit a real eye sore."
• MINI has fired over 37% of its employees since it acquired MSG. Do they really think they can provide the same level of service once the economy turns and they have a higher utilization of 58%. They used to mention that one of their competitive advantages was having a local sales force. Now they are centralizing that function. Critical in this business is giving a customer a container when he wants it. This means you need to have a decent size fleet of trucks and operators to move these containers around. You also need a local presence so transportation charges are not sky high.
• If a building had a 56% occupancy rate, investors would run away screaming. Somehow this low utilization rate makes some investors think it can only go up. So far it has only gone done. I'm not sure that this business is not that different than the explosion of housing. There may just be too many containers around now. Also with global shipping way down, there is going to be a serious amount of cheap containers floating around for sale.
• I can't imagine that paying top dollar for any acquisition in 2008 would be viewed as a positive. Especially given that they booked $500MM of goodwill. In the end their cost synergies were shutting down yards and transporting containers to existing locations. With utilization dropping from 80% to 55%, I have to imagine they lost a ton of MINI and MSG customers. Shouldn't the goodwill be impaired? A 20% impairment would cut $100MM from their book value. Shipping these containers are also very expensive. This acquisition is the largest and most costly acquisition they have ever done. It also added branches in Europe which has to be a very different business model than the United States. There can't be any synergies there and I would not be surprised if they shut down or sold that business.
• Deutsche Bank is their asset backed facility lender. A competitor recently went bankrupt in a St. Louis. Their equipment which was appraised at $8MM 2 years ago just got reappraised at $4MM. There were a much higher percentage of van trailers in the mix but the ISO containers had their valuation cut by 40%. If the same were to happen to MINI they would have to take impairment on their fleet. Given that they have a fleet with a $1B book value, 20% would cut their book value down $200MM. From their filings "Mobile Mini also must comply with specified financial covenants and affirmative covenants. Only if the Company falls below specified borrowing availability levels, are financial maintenance covenants applicable with set maximum permitted values for its leverage ratio (as defined), fixed charge coverage ratios and its minimum required utilization rates. At December 31, 2007 and December 31, 2008, the Company was in compliance with its covenants. (2008 10-K p. 60)" On p.138 in the credit agreement (8-K 07/01/08) it states the minimum utilization ratio is 76%. I am not sure where they stand with this. Most likely, since it is a negative covenant it just restricts them from growing.
• This business model was predicated by a willing lending against over-valued assets. If you think about the non-agency Mortgage Backed Security market as well as most other Asset Backed Securities, you have to imagine DB is not so enthusiastic to have this loan on their books. As the annual appraisal comes in, the borrowing base will be decreased and the cost of their loan will go up. Management indicated the increased funding cost on their last conference call. They also have a fixed charge ratio covenant of 2.0 which simplified is consolidated EBITDA - capEx over interest payments. Since only part of their loans are swapped from floating to fixed rate, they are at risk of violating this covenant should rates increase.
• If you look at their income statement they have 3 line items for revenues (leasing, sale, and other (mostly transportation and setup costs) and 3 line times for costs (COGS, leasing, selling and general expenses, and Depreciation). Could the disclosure be any lower? Additionally they give no insight into their revenue line as far as the mix of the units. Strange since half the book value of their fleet (but only 25% of their units) determine the yield. They don't break out utilization between the ISO containers, manufactured steel units, and wooden offices. But if you look at one of the tables below, you can see standard container rental prices have pretty much gone down over the past 10 years and the average revenue per unit is determined by the higher priced units they are trying to get rid of.
• The 30 year depreciation schedule to 70% seems extremely aggressive. At an average cost of $3,500 per container, the residual value after 30 years is $2,450. So you can look at the cost to own the container for them at $35 / year ($3,500 * (1-70%))/30. They do state that maintenance CapEx is about 4% of lease revenue (2008 10-K p.27). This would be $15MM in 2008 or about $50 per unit per year. Maybe this is the case for their storage containers; I find it hard to believe that this would be the case for their wooden and steel offices.
• They depreciate their containers for tax purposes over 5 years to increase their cash flow but still owe the government the money. So they have a $150MM deferred tax line item. As long as they were adding containers, this worked. However, they are going to start having to pay these taxes so this will decrease their actual cash flow.

So in the end let's distill the analysis down to some simple facts.

• These guys have borrowed a ton of money so that they can roll up a bunch of competitors and buy some expensive timber offices and manufacture some expensive steel offices and containers. They spend a lot of money on refurbishing used ocean going containers. This business is extremely capital intensive.
• For the money they have spent, do they have an attractive return on investment? This business is asset intensive so I think Return on Assets is the best measure. Also is their return on equity higher than their cost of debt. Earnings is not a good measure since their depreciation schedule is next to nothing.
• So let's see how much money they have spent since inception and what have they spend it on. Going forward, assuming no additional acquisitions, what is the profitability of the business and how long will it take them to pay off their debt and return some money to shareholders?
• What is the economics of the business that they do not talk about (which happens to be 50% of their spending)?
• What is the stand alone economics of the massive $750MM acquisition of the Mobile Storage Group?

HOW MUCH HAVE THESE GUYS SPENT ON GROWING THEIR BUSINESS  AND IS THEIR RETURN GOOD?

• To simplify things, let's add the Gross Fleet Costs ($1.157B), PP&E at $128MM and Goodwill at $513MM. This totals to $1.798B. LTM net income is $22.3MM. LTM EBITDA is $147MM. LTM Cash flow from operations is $89.7MM. So Net Income / Total Spend is 1.24%. EBITDA / Total Spend is 8.17%. Cash Flow / Total Spend is 4.99%. These numbers don't look very attractive to me.
• Even if they were to get back to an 80% utilization, they are not going to get an incremental 55% EBTIDA ratio on their entire mix - this is just for containers. By way of example, if they were leasing out their entire fleet of just containers (100% utilization). 100,000 MINI refurbished ISO containers at $100/month and about 70,000 MSG group containers at $80/month, this only takes you to $187MM in annual revenue vs their LTM leasing revenue of $333MM. You can see the recovery of this business is dependent on their manufactured steel containers and offices and their wooden offices - both of which they are not too excited about anymore.

WHAT IS THE ECONOMICS OF THE BUSINESS THEY DO NOT TALK ABOUT - MANUFACTURED STEEL CONTAINERS AND OFFICES AND WOODEN OFFICES?

MINI only discloses breakout between storage units, offices, and van trailers so I had to go back through the financials since 1994 to derive the split between purchased and manufactured containers and purchased and manufactured offices.  As a result, they are only approximate.

For Per unit costs for ISO Containers and Wood Offices in 2008, I have excluded the units acquired from the MSG as these units are significantly different than the MINI units.  The timber units are probably worth 20% of MINI's and the ISO containers do not have the $1,500 upgrades installed.

• IF you just add up the cost they paid for wooden offices (2001-2007) and steel units manufactured (2001-2008) from the 2^nd table above, you get $477MM for 42,936 units which is $11,110 per unit. I did not included timber offices acquired in 2008 because of the MSG acquisition. You can see MINI was spending about $30K for the timber offices they bought in 2008 (non MSG units). In order to have the same economics for the $3,500 / rent for $100 containers, they would need to rent the blended manufactured metal and timber offices for $317 each month. And those economics exclude the additional maintenance CapEx you need for offices as well as the lower residual values. I have to think that the $200MM they paid for timber offices is a huge drag.

HOW DOES THE MOBILE STORAGE ACQUISITION LOOK STAND ALONE?

• This has been called a transformative acquisition. Given that they paid about $7,883 for each container before they add their $1,500 CapEx to move it and turn it into a MINI container, I see no possible way for this acquisition to ever be considered a positive one. They just way overpaid. Call it a 95 month payback period vs the 35 for their other units once they refurb the units.
• Given that they have such a low utilization right now (and it was 80% for both MINI and MSG right before the acquisition), they just have too many units. They are going to have to write down their goodwill for sure. Had they not done this acquisition perhaps their utilization rate would have been higher. Since their disclosure is so poor, I doubt we'll be able to get a handle on this. Only by looking at the stand alone foreign operation can we get some insight.

DO THE SALE PRICES REALLY HOLD UP FOR CONTAINERS THEY SELL?

• More smoke and mirrors here. This statistic is interesting in that they say the average cost per refurbished container is $3,500. On the units held less than 5 years (the majority of units sold), their average cost per units is $2,411. This would lead the skeptic to believe they are cherry picking units which they bought on the cheap or that there is a very high blend of non-refurbished units. I'm sure they show this to their bankers at DB to get the appraisals higher than they should be.

HOW HAVE RENTAL RATES HELD UP FOR THEIR CORE CONTAINERS?

• Not so well. You can see for the representative fleet that they show stats on, the rental rate has gone from $106 to $97 from 2001 to 2008. Yields have only gone up due to pushing the less profitable offices and manufactured containers. I can now see why they added these to their mix. Optically it makes things look better. The other rental rate ticked down in 2008 because the much cheaper units from the MSG. You can also assume these rentals are only for refurbished ISO containers because the rents are too low for their manufactured units. They show 68,810 sample units rented in 2007 but their ISO fleet was about 99,000 units. Since their utilization for containers wasn't 70% in 2007, you can assume they have also cherry picked units to make things look better.

Catalyst

CATALYSTS

• Valuation -> $820MM debt + $483MM (equity @ $13.59 * 35.518M ) + $147.4MM Pfd = $1.45B vs $144MM LTM EBITDA or 10.1X EV/EBITDA or $86.8MM operating cash or 16.7X EV/CF. LTM NI of $27.8MM or 17.4X P/E
• Problem with their lender on their asset backed facility. Appraisal comes in below value due to reduced valuations on fleet. Goodwill impairment decreases their book value. Negative covenants prevent them from needed Capital Expenditures.
• Incremental 55% EBITDA contribution never materializes as higher priced units put a drag on their EBITDA. Need to hire people once utilization comes back reduces potential upside.
• Investors get tired of the show me story that has always been obscured by their growth binge.
• The MSG acquisition ends up a very bad one and forces goodwill write downs and divestiture of the foreign branches.
• There are just too many containers for rent and the business continues to be challenged for a very long time.
• Given that Tangible Book is only 33% of their enterprise value and this business is asset heavy, any impairment in goodwill or revaluation of their fleet should have a significant impact on their stock price.
• For any of the other reasons I gave above.

TARGET STOCK PRICE

• P/E ratio of 8x LTM would put the stock at $6.25
• EV/EBITA of 8X would put the stock at $5.20
• EV/CF of 15X would put the stock at $9.43
• Average the above and you get a stock price of $7 or down about 50% from here