Legacy Housing Corporation

Good day, and thank you for standing by. Welcome to Legacy Housing Corporation Quarter 1, 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Duncan Bates, CEO. Please go ahead.

Good morning. This is Duncan Bates, Legacy's President and CEO. Thank you for joining our first quarter 2024 conference call.

max afric legacies general counsel will read the safe harbor disclosure before getting started max thanks duncan before we begin i will remind our listeners that management's prepared remarks today will contain forward-looking statements which are subject to risk and then certainties and management may make additional forward-looking statements in response to your questions therefore the company claims the protection of the and any projections as to the company's future performance represent management's best estimates as of today's call.

Thanks, Max. I'm joined today by Jeff Fiedelman, Legacy's Chief Financial Officer. Jeff will discuss our first quarter performance, then I will provide additional corporate updates and open the call for Q&A. Jeff. Thanks, Duncan.

Product sales primarily consist of direct sales, commercial sales, inventory finance sales, and retail store sales. Product sales decreased 12.5 million, or 28.8%, during the three months ended March 31, 2024, as compared to the same period in 2023. This decrease was driven by a decrease in unit volume shipped, primarily in direct sales, mobile home park sales, and inventory finance sales categories. The decrease was offset by increased sales at our company-owned retail stores. For the three months ended March 31, 2024, our net revenue per product sold decreased primarily due to a shift in product mix to smaller units into a large sale of homes from our leased home portfolio to a mobile home park customer at a lower average price than our typical new home. Consumer MHP and dealer loans interest income increased 2.9 million or 38% during the three months ended March 31st, 2024 as compared to the same period in 2023 due to growth in our loan portfolios. This increase was driven by increased balances in the MHP consumer and dealer loan portfolios. Between March 31st, 2024 and March 31st, 2023, our MHP loan portfolio increased by $28.2 million, our consumer loan portfolio increased by $17.9 million, and our dealer finance notes increased by $2.1 million. Other revenue primarily consists of contract deposit forfeitures, consignment fees, commercial lease rents, service fees, and other miscellaneous income. and decreased 0.1 million or 3.1% during the three months ended March 31st, 2024, as compared to the same period in 2023. This decrease was primarily due to a 1.0 million decrease in dealer finance fees, a 0.2 million decrease in commercial lease rents, partially offset by a 1.1 million increase in forfeited deposits. The cost of product sales decreased 8.5 million, or 29.3%, during the three months ended March 31, 2024, as compared to the same period in 2023. The decrease in costs is primarily related to the decrease in units sold. Selling general and administrative expenses increased 0.5 million, or 8.8%, during the three months ended March 31, 2024, as compared to the same period in 2023. This increase was primarily due to a $0.3 million increase in warranty costs, a $0.1 million increase in legal expense, a $0.2 million increase in professional fees, and a net $0.2 million increase in other miscellaneous costs, partially offset by a $0.3 million decrease in loan loss provision. Other income expense increased 0.4 million or 29.9% during the three months ended March 31st, 2024 as compared to the same period in 2023. There was an increase of 0.6 million in non-operating interest income offset by an increase of 0.2 million in interest expense. Net income decreased 7.0% to 15.1 million in the first quarter of 2024 compared to the first quarter of 2023. Basic earnings per share decreased five cents per share or 7.5% in the first quarter of 2024 compared to the first quarter of 2023. As of March 31st, 2024, we had approximately 0.6 million in cash compared to 0.7 million as of December 31st, 2023. The outstanding balance of the revolver as of March 31st, 2024 and December 31st, 2023 was $11.8 million and $23.7 million respectively. At the end of the first quarter of 2024, Legacy's book value per basic share outstanding was $18.46, an increase of 13.1% from the same period in 2023. In November, 2022, our board of directors approved a share repurchase program to authorize the repurchase of up to $10 million of the company's common stock. We repurchased 91,187 shares for 1.9 million in the open market during the three months ended March 31st, 2024. Between April 1st and May 9th, 2024, We repurchased 170,342 shares for 3.5 million in the open market. As of today, we have a remaining authorization of approximately 4.6 million.

Thanks, Jeff. I want to add some color on the market and provide other corporate updates. As discussed, sales were down during the first quarter. but they also are improving as housing affordability remains at a multi-decade low with no signs of changing. First, on the dealer side, our current business is heavily dependent on dealers. Seasonality impacted dealer sales during the first quarter, but started to accelerate late February. Reorder rates are still lower than we would like due to higher inventory carrying costs. Sales at our company-owned retail stores are also improving. To drive dealer sales, we launched a new special this week that includes concessions on popular home models. Initial feedback has been positive. On the community or park side of our business, our park business is slower and has been impacted by high interest rates similar to other real estate asset classes. Rates have driven M&A transaction volume down and cooled new development. We are gaining momentum in the park sales with smaller units, 400 to 600 square foot tiny homes and small HUD code single wives. Low monthly payments through our financing program allow park customers to make money renting these homes in nearly all markets. We held a spring show in Eatonton, Georgia in late April for dealer and park customers. It was our first show in Georgia since 2020. We are still rounding out orders, but the show was very successful. Over the past 18 months, we've spent a tremendous amount of time improving product quality at our Eatonton plant. The houses look great and the changes were well received by customers. The show allowed us to clear finished goods inventory at the plant and build a nice backlog. Despite lower volumes during the quarter, we carefully managed factory overhead and expenses. Product gross margins were higher than average during the first quarter due to a large sale of leased homes to a community owner. We continue to monitor product gross margins closely and see manufacturing efficiencies improve when we ramp production. For corporate updates, since our last earnings call, we repurchased over 260,000 shares of common stock at an average price of $20.56. Repurchases were limited by trading restrictions and a narrow open window between year end and first quarter. We utilized 54% of our $10 million repurchase authorization. The board will increase the authorization as needed. Legacy's business fundamentals have not changed. The market is slower but improving over 2023. There was confusion with our fourth quarter numbers and the stock traded down to liquidation value. We will continue to repurchase shares aggressively when this happens. We've continued to add team members in key areas of our business. The land developments are progressing, and we are evaluating proposals to sell or partner on some of the properties. There is significant value to unlock on our balance sheet. Driving earnings growth and realizing this value is management's top priority. Operator, this concludes our prepared remarks. Please begin the Q&A.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Alex Reigel from B Reilly Securities.

Thank you. Good morning, Duncan. Hey, good morning. So it sounds like heading into the second quarter, unit volumes going to be picking up from the first quarter. Is that a fair conclusion to come to?

Yeah, that's fair. We're shipping a lot of houses right now. Excellent.

And then as it relates to sort of inventory on the yard, where does that stand?

Yeah, you know, we've struggled with that at our Georgia plant for a few quarters now. And that was one of the key reasons for having a Georgia show, which was the first show that we've had since 2020. And so we're starting to ship that product now. And the goal is to have most of it cleared out by the end of the second quarter.

That is super helpful. And then a little bit of directional guidance on the consumer and MHP loan interest. It stepped up in the fourth quarter, kind of stepped down in the first quarter. What's sort of the normal run rate there at the moment?

Yeah, you know, there's some key... I mentioned the confusion in the fourth quarter. Obviously, we don't report fourth quarter numbers, but I think when investors backed into... The fourth quarter numbers, they were surprised by, you know, some moving around of revenue from the loan portfolios. And so it makes it a little different or difficult to compare. But, you know, right now, I mean, we're over $10 million. I think we'll pretty consistently be over $10 million in interest revenue a quarter for all of 2024. moving forward. Excellent. Thank you very much.

Thanks, Alex. Thank you. One moment for our next question. Our next question comes from the line of Mark Smith from Lake Street.

Hey, Duncan, guys. I wanted to start just on the loan portfolio. Can you just give any more detail on that, the default loans and litigation happening with the one borrower within MHP? I know some of those move to current assets. Any additional insights into that?

Yeah, look, this is obviously active litigation, and it's with a long-term customer, and so We've got a disclosure in the file, but I'll summarize that for you right now. We have a park customer that we've worked with for over 13 years, and he's built a nice portfolio of communities into which we financed over 1,000 mobile homes. And we accelerated a large portion of these notes just due to slow payment or non-payment. And as you can imagine, it's taken a lot of my time and the team's time to work through this situation. I think this is a situation that can be resolved outside of the courtroom, but our duty as officers of this company is to, you know, to protect our collateral. And so we're pursuing the collateral right now. You know, the collateral is comprised of over 1,000 mobile homes where the principal outstanding is, you know, 50% or less of the replacement costs. And that's excluding, you know, equity for... for the setup and building the pads. We've also got first liens on several mobile home parks in this portfolio, and there's limited outstanding debt. And the notes are cross-collateralized and personally guaranteed by multiple individuals, some of which have pretty significant net worth. and can be held joint in several liability for these debts. And so we've spent a ton of time on this with our auditors. We valued all the collateral, and we think that there's a significant amount of equity into this portfolio. And so we haven't, although these notes are in default, And when we accelerated them, they're accruing interest at 17.5%, most of which has been offset by an accrual. But our goal is to resolve this relatively quickly. But ultimately, if we've got to go take all the collateral, we're currently taking action to do that. And you'll see another disclosure where We actually, during the first quarter, foreclosed on one mobile home park that I think at the price that we're into it, there's significant upside value. And so we'd like to resolve it, but if we need to take everything, we'll do that and protect our shareholders and our investment.

Okay. Okay. You know, the MHP portfolio has always been, you know, really solid and safe, I think, viewed from the outside. You know, has anything changed fundamentally within that portfolio, or is this just kind of a one-off situation with this one borrower?

Yeah, you know, I think it's a unique situation, and obviously, you know, the size is unique, but... Nothing's changed in that portfolio. We've had situations over the last few years that we've worked through, and we've been able to recover all of our principal outstanding, and in most cases, the accrued interest as well. I don't see this as any different than those other situations, except for it's a larger chunk.

Looking at product sales, you just talked about univolumes looking better here in the Q2. I'm curious on kind of selling price and mix. Are you seeing the mix shift back to some higher-priced homes, or is it still staying at some smaller, lower-priced homes?

Yeah, I'd say it's still at lower-priced homes. We seem to be really competitive from a price standpoint on the smaller homes. And I think just housing affordability, whether it's stick built or it's factory built, it's a problem. And we're selling, it's not only on the park side where we're selling smaller units, we're also selling a lot of smaller units on the dealer side of our business. And, you know, it's an area where we're really competitive. It doesn't help our average selling price, but I think that, you know, we'll continue to be able to drive volume. And, you know, on both sides of the business, we've had sales, whether it's at the Georgia show or the dealer sale that I just mentioned, you know, that will drive volumes kind of throughout the year. I mean, we're expecting a better year this year than last year, but it's, you know, it's a tricky market. And so we're just, we're managing it closely and we're adjusting as we need to and watching our expenses. And, you know, we're just going to take it one quarter at a time.

Perfect. Last question for me. You brought up the backlog in your commentary. Just curious, any additional insights on kind of where the backlog is today and kind of your comfort level with that?

Yeah, I mean, you know, our goal really is building our backlog. You know, we've held production, you know, at pretty consistent rates for the last two quarters, but they're, you know, they're well below where we'd like to be. And the goal has been, you know, build a backlog and you can start ramping production because we don't want to, you know, we don't want to ramp too early. And we've made that mistake before. So, you know, we're a few weeks out across all plants. You know, in an ideal world, I'd like to be, you know, eight to ten weeks out. But we're, you know, we're not there yet. But I think first quarter and just given that the dealer side of the business is stronger, we saw the impacts in the first quarter of the seasonality. And as we get into the spring selling season, that should improve and that combined with some you know, with some sales and concessions, you know, we're hoping to build the backlog and, you know, and ultimately ramp up production where we can get some efficiencies on the manufacturing side.

Excellent. Thank you.

Thanks, Mark.

Thank you. One moment for our next question. Our next question comes from the line of Jay McCandless from Wedbush.

Hey, Jay. Thanks for taking my questions. Hey, Duncan. So kind of following on the last question, with the downward price mix you're seeing at this point, is it possible you think this year that you guys could sell more products but still be down in revenue just because of that sales mix? Or are you thinking that dollar revenue is going to be up year on year for 24 versus 23?

You know, I think I'll add better insight into that. next quarter. You know, we're trying to sell as much as we can. I mean, sales are the top focus right now, and we're pushing the team pretty hard. You know, we have seen, you know, a move to, you know, toward our smaller products. So it certainly, you know, could be the case where you sell you know, more units, but your revenue is down. You know, that said, I really feel like from an internal sales sentiment standpoint that sometime, you know, kind of like last summer, you know, end of last summer really felt like the trough for me. And it's been, you know, we've hit some air pockets. I mean, we felt like we really had sales moving after, this show last October, and then you start to see, you know, the park customers back up where, you know, they're having challenges with utilities or with municipalities, and it delays shipments. But, you know, it feels like things are smooth. Sales are below where we want them to be, but we've made some adjustments that, you know, we should start to see the benefits of in the second quarter.

Okay, great. And really good performance on the gross margin this quarter. How sustainable do you think that is and anything that we need to be mindful of either from a lumber price increase or anything of that nature?

Yeah, gross margins were, product gross margins were high this quarter and they were impacted by, you know, we've got a leased portfolio where we actually lease homes in mobile home parks. We don't offer that program anymore, but we had a sale of a large chunk of leased homes to that community owner in the first quarter, and so that skewed gross margins to the upside. You know, I think our goal is to hold them. I mean, we watch it very closely. But this quarter was, you know, significantly higher than the last few. So I think we'll, you know, we'll revert toward the average of, say, the last four quarters. But if we can, you know, we can get production up, we'll pick up some efficiencies. And, you know, we still haven't used the price lever yet. we've held prices at the detriment of volume and used financing concessions. You know, but if we do need to use the price lever to, you know, to drive volume, that'll have an impact on gross margins, but it won't be, you know, won't be drastic. I think it'll be offset by some manufacturing efficiencies where we're, you know, currently not absorbing all the overhead and pushing that through cost of goods sold.

But actually it was going to be on the next question, Duncan. I was going to ask you about have you been able to hold price? Sounds like you have. I guess if you're holding price, what are you seeing from some of your competitors that can build maybe not all the way down to some of the prices you guys can do, but in that lower price single section home arena, what are you seeing out of them?

Yeah, I think the guys without a balance sheet and without much of a backlog, mainly independent players, we've certainly seen price decreases there. I think just given the consolidation in the industry, we've got rational competitors that But we've seen some lower pricing here within the past two weeks that surprised us. I think, or I know, we're really competitive on the tiny homes and the smaller single wives. As you get into the larger product, especially at the dealers, our you see the impacts of us holding prices, I think, compared to other competitors that have dropped them. Um, but you know, we're, we're monitoring in that very closely. I mean, we'd like to get, we'd like to get our volume up. Um, and, and that's, that's the key goal right now is, you know, get, build a backlog or continue to building the backlog and, um, and get volume up and, and, but shipments during the second quarter, you know, we're looking pretty strong so far.

Good to hear. Um, so could you talk about in the consumer book, we did see an increase both sequentially and year on year for, for delinquencies there. Um, you know, that's, that's not uncommon. We're seeing that in the stick belt world too, but maybe could you talk about what type of stresses you're seeing on that portfolio and, if we do stay in this hire for longer environment, kind of what are some of the worst levels we've seen in that portfolio, you know, like beginning of COVID or something like that as a frame of reference?

Yeah. And look, we think internally a little bit different about, you know, delinquencies compared to, you know, the accounting for delinquencies. And so, You know, when we think about our retail loan portfolio, you know, we look at what percentage of the portfolio have we not received a payment in 30 days. And, you know, we started, we brought this servicing in-house, you know, around 2012. And at that time, you know, over 30 was running close to 6%. And then you've seen us work that down to, you know, 2021, it was close to, you know, 1.3%. So just, you know, we've got a great program and we've got a great team that services this. You know, I know that delinquencies have, you know, defaults, problematic accounts have increased slightly, but they're still well below the national average. And, you know, there's certain elements of our retail financing program that, you know, contribute to this outperformance. You know, one of them, I mean, we take real down payments. I mean, we have across the board, you know, we have a minimum down payment and we've seen some of our, you know, competitors bend on that And, you know, it seems like a race to the bottom. We also, we don't finance, you know, a lot of extras. We don't finance decks or septic tanks or storage sheds. And so, you know, a lot of those items, right, you get, you know, they're added on to the loan, but you don't collect much from them. And finally, you know, we... With our retail finance program, we have a hold back with our dealers that gives us some additional cushion. I think all of those items contribute to the outperformance and we're monitoring it closely. You'll see that the reserve actually came down in the first quarter on the retail finance side of the business. And the reason for that is, you know, we do a look back when we calculate the reserve and, you know, in many cases, we're collecting, you know, more on the repos than the outstanding principal balances, you know, for homes that were sold pre-COVID and paid on for a few years. And so, You know, I feel good about the team and the performance of the portfolio. You know, even if it continued to creep up, it wouldn't worry us. You know, I think if you started, you know, you got closer to 5% or 6%, that's where, you know, we really think there's a concern, but we're still well below that.

That's great. And maybe if we could update on Bastrop and some of the other parcels, land parcels.

Yeah, you know, we hired an internal team. We've been working through the properties. Bastrop continues to progress. We're putting in the roads now, you know, phase one. We've got phase two working as well. We've got a lot of utilities in there. We're building a water treatment plant. You know, so there is a lot of focus on Bastrop. you'll see us continuing to invest capital there. You know, some of the other properties I talked about, you know, on either the last call or the call before, you know, just working through where we are on those properties and, you know, and ultimately determining the highest and best use for them and, you know, from a shareholders standpoint. And so, you know, we've received some interesting proposals to sell certain properties or to partner on certain properties, and we're working through that now, and I think you'll start to see some movement during the second quarter on this.

Okay, that sounds great. Thanks for taking my questions.

Yeah, thanks, Jay.

Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. At this time, I would now like to turn the conference back over to Duncan Bates, CEO for Closing Remarks.

I want to thank everybody for joining today's earnings call. We appreciate your interest in legacy housing. And if you have any questions on the quarter, feel free to give Jeff or I a call or shoot us an email. Thanks a lot. Bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.