Transcript
Good morning, ladies and gentlemen, and welcome to the Legacy Housing Corporation First Quarter 2021 Earnings Conference call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Curt Hodgson, Executive Chairman of the Board. You may begin.
Good morning, everyone. Thank you for joining our call today. I want to remind our listeners that management's prepared remarks will include forward-looking statements that involve risks and uncertainties, and management may also provide additional forward-looking statements during the Q&A session. Thus, the company seeks the protection of the safe harbor for forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Actual results could differ from management's current expectations, so we encourage you to refer to the detailed discussion of risks in our annual report filed with the Securities and Exchange Commission. Additionally, any forecasts regarding the company's future performance reflect management's estimates as of today’s call. Legacy Housing does not have an obligation to update these projections in the future unless required by law. Now, let’s discuss our first quarter performance and provide some corporate updates. After that, I’ll pass the call to our Chief Financial Officer, Thomas Kerkaert, to delve into the financial details. This quarter, Legacy continued to achieve strong financial results. Net revenue reached $39.9 million in the first quarter, marking a 4.4% increase from last year. This performance is even more impressive considering our ability to build and deliver homes was severely affected by the February weather event across the Southeastern United States. For the first time ever, our Texas operations were closed for an entire week, disrupting our ability to deliver homes and receive raw materials company-wide. Despite this, we saw an increase in our income from operations, rising to $10.7 million from $10.6 million last year. Production costs have risen sharply, and we have implemented strong measures to protect our bottom line, including price increases and a 14.6% reduction in SG&A spending. We will keep focusing on ways to safeguard and improve margins while continuing to decrease our SG&A expenses. Our net income for the quarter was $9 million, reflecting a 10.2% increase from last year if we exclude the one-time settlement recognized in the first quarter of last year. When excluding this unique event, our earnings per share increased to $0.37, a 10.1% rise over the first quarter of 2020 after adjusting for the one-time settlement. Legacy achieved a 16.5% return on book value per share over the past 12 months. We are pleased with our success in providing value to both our customers and shareholders. Overall, market demand, orders, and our loan portfolio are performing well. Importantly, our advancements in creating and developing land for mobile home communities are not reflected in our GAAP-based results but are crucial for our future success. In the first quarter, we acquired an additional 233 acres in the San Antonio area and secured wastewater permitting for our land outside Austin in Bastrop County. Our strategic real estate will be filled with Legacy-built homes, reinforcing demand for our products for years ahead. We see this as a significant competitive advantage and a key to our ongoing success. I will now hand the call over to Tom.
Thank you, Curt. Following up on Curt's comments regarding revenue, total revenue for the first quarter of 2021 was $39.9 million, which is a 4.4% increase over the first quarter of 2020. Product sales accounted for 65% of the revenue increase. Looking back on the quarter, the bright spots are that we overcame a fair amount of operational challenges and ended the quarter with a shippable backlog. Further, our fleet of revenue-generated leased houses continues to grow and income revenue from our loan portfolios represents a reliable source of revenue for years to come. Interest revenue from the company's retail and commercial loan portfolios expanded to $6.6 million for the first quarter of 2021. This represents a 3.3% increase over the first quarter of 2020. Compared to March 31, 2020, the commercial loan portfolio increased by 35.8% to $140.3 million, while the retail loan portfolio increased by 7.6% to $113.7 million, net of allowances. In combination, this amounted to a 21.6% increase in the book portfolios over the past year and is a conduit for growing interest revenue into the future. As Curt previously stated, we had modest improvement in income from operations despite the challenges we had during the first quarter of 2020. Our ability to reduce SG&A expenses without significant detriment to the top line was the key factor in achieving this result. We saw substantial savings compared to the first quarter of 2020 in warranty costs, loan losses, and legal expenses. Also, our ability to pass along commodity inflation was vital to the good quarter we just reported. With that, I'll turn it back over to Curt for final comments and any questions.
Okay. We'll now open it up to questions that you all have.
Your first question comes from Alex Rygiel with B. Riley.
Nice quarter. Curt, a couple of questions here. First, did the company fully catch up from the severe weather in February? Or is there some revenue or cost carryover into Q2?
I started to quantify this in the call, but the February weather event probably impacted top line by maybe $2 million, maybe even $3 million. So that was quite a factor. And of course, it similarly impacted the bottom line. It was the worst cold spell on record in Texas, and the damage and the carnage was incredible. The entire state was shut down for at least one week, and then it carried over to the weeks that followed to the point where we couldn't even get our yard shipments because we didn't have the shipping capacity to recover from that. So we had a higher ending finished goods inventory than we would normally have. And if this finished good inventory is sitting in the yard, it also impacts revenue. Now as of now, probably by even the end of the quarter, I would say that we're fully recovered. We had some damage in one of our plants that allowed us to only run at partial capacity, but that plant was Fort Worth. Recently, it's now back at near record production levels. So I think we're recovered. What's causing production challenges now are the shortages, shortages in materials, and it's not just lumber. It's lumber. It's steel. It's resin. It's glue. It's laminates. It's across the board, shortages along with price increases in building materials. And then labor, with us having to compete against the federal government for labor, we just don't have the applicant pool coming in the door for our $15 an hour jobs that we would normally have. So we're challenged in production, which means we're also challenged in top line. We're still not producing at capacity from a plant point of view. We are, if you look at the staff. The staff is working their tails off, and we're getting out of them everything they could give. But it's hard to find people to work on a production line in this environment. And I think it's not only a problem for us, but within the industry in building and construction generally and beyond. When I go to restaurants, the restaurant is half full, but it still takes forever to get a meal. So I think there's just capacity problems throughout the entire economy. I don't know if that answers your question, but I think it hits the highlights.
Definitely. As it relates to your price increases, what do you think your price increase was from Q1 this year versus Q1 last year? And how do you look at your price increases versus the material cost inflation and labor cost inflation? Are you ahead of the curve, in line, or lagging behind?
That's a very good question, and I've spent a lot of time reflecting on it. The price fluctuations have been so rapid and severe that it's hard to keep up using a computer model. To provide some context, we estimate that, as of today, our prices are up 21% year-over-year, with an additional increase of around 2% set to take effect next week. Combined, this means that as of mid-May, our prices have increased by over 23%. I've also heard anecdotal stories about lumber prices tripling and steel prices rising by 40%. However, as a percentage of sales, our materials are currently at a normal ratio. While we keep that information proprietary, our margins on materials remain steady. Of course, there have also been increases in labor costs; we used to pay $12 an hour and are now paying $25 an hour, and even administrative staff require financial incentives to stay. This marks a reset in pricing that I don't foresee reverting back. It’s worth noting that some competitors implement significant price hikes, but our approach is gradual and consistent. Sometimes we may lag slightly, but we avoid shocking customers with large increases at once. Instead, we prefer to distribute smaller increases over time to prevent them from fixating on the exact production date of their house. We do not honor previous prices, and neither do our vendors; when we ship a house today, it's priced at today's rate, regardless of when the order was placed—this has become somewhat of an industry standard. I believe we will be able to sustain our gross margin. In fact, if you look at our statement, our gross margin this quarter was nearly the same as in prior quarters, indicating that we've effectively passed on our cost increases to maintain our margins. We haven't had a single canceled order due to price adjustments so far.
And lastly, how should we think about volume over the next sort of 3 quarters? Volume in the first quarter looks like home sections sold was down about 15%. Looking into the second quarter, how should we think about that volume of 720 sections sold in Q1 growing in Q2? And then how should we think about sort of the cadence of that throughout the year?
Another excellent question. We have some favorable comparisons coming up here. So the second quarter of last year was the first full quarter under the pandemic, and almost all plants around the country had some outages or even shutdowns because of that. So I think as an industry, you're going to see fairly significant gains on a year-over-year basis in the second and third quarter, and that's also true at Legacy. As far as our production at our plants, year-over-year comparisons, I would guess, up at least 10%, maybe 15%, in part because we've been able to increase production recently, but also in part because we decreased production a year ago in response to the pandemic. So that's where we're at from a number of units point of view. That caveat, last year, we were buying a product from two different companies that were private branding from us because they didn't have any orders and we went ahead and seized that opportunity. And now because of their backlogs, we're only buying from one of those companies. So the top line will be up on what we produce ourselves and slightly down on what we buy from outside manufacturers for resale. So net result, if I was picking a number, I feel real comfortable with 10% or better top line gains in sales and an increase in total production as well. So it should be a good second quarter, and it would probably be a good third quarter as well.
Just to clarify that second-quarter number. So that 10% growth in Q2 is a volume number. Then we should be layering a price on top of that?
As far as the Texas production and the Georgia production, I think we'll be up in quantity 10% year-over-year, tempered a bit by our lack of buying from one of our competitors up in Indiana. Price-wise, you're going to see these numbers be up solidly on a per unit basis. Not probably just us, but by the industry as a whole, 20% or more year-over-year increases on the average price per unit. I'm sorry, did I say 10%? I meant 20%, 20% or more price increases Q2 of '21 versus Q2 of '20. So some of our competitors have been more bold in taking advantage of their backlogs, and I think they might be up 25% at this point.
Your next question comes from the line of Mark Smith from Lake Street Capital.
First question for me is just following up on pricing a little bit. It looks like average selling price was up pretty big here during the quarter, but maybe you got a little bit of benefit from mix. Can you talk about kind of the mix of homes and what you're seeing from a demand standpoint today?
We assess production based on the floor, while you evaluate it by unit sales. I considered the anomaly you mentioned, but I don't have a definitive opinion on it. It appears that we're selling more double wides this year compared to last year since our sections have increased as a percentage more than our homes. I believe we are seeing an increase in multi-section units compared to a year ago, but I can’t say whether that’s a positive or negative trend. Generally, the margins tend to be slightly better for double wides than for singles, but the difference is noteworthy.
Okay. And that kind of leads to the next question is what you're seeing out there in your markets as far as demand for affordable housing. Obviously, the housing market is a bit crazy right now. But within your specialty and manufactured housing, what you're seeing from demand as far as people moving from urban locations out into suburbs? And how many people are looking at your products today?
Kenny, are you on as a participant?
Yes, I'm on it, Curt.
Go ahead and handle that question, please.
Yes. There are still issues in retail. I've heard from dealers in larger cities like Dallas, Fort Worth, Austin, and San Antonio that customers are looking to leave the cities and move to smaller areas. However, there are still challenges because they don't want to settle in the communities that are available. They prefer to move to locations with some land since many are working from home again and plan to continue doing so. It remains a challenge to sell many of these properties due to these issues.
Sure, let me address that. If you were to fly a small airplane into Dallas or Austin, you would see neighborhoods being built everywhere. However, I'm not aware of any new mobile home parks or communities of any size being constructed in Texas. We are really falling behind when it comes to addressing this issue. From our company's viewpoint, it's difficult to get excited about starting new developments when we already have a 10-month backlog. We prefer not to increase this backlog by starting early development, so we tend to take our time with our own projects for practical reasons. Nevertheless, we do have plans for around 4,000 spaces for which we own the land, representing a couple of years' worth of supply in Texas. We're internally working to address this issue and can likely initiate development whenever we decide to move forward.
Okay. My next question is about the pace of development on your projects. It seems like you may have slowed it down more than before due to permitting issues and difficulties in working with local governments to move things forward.
Yes, we are three years into the project in Bastrop County, and we keep anticipating that we're just a week away from the final plot necessary for construction to begin. However, this expectation has persisted for six months. The process is hampered by virtual meetings instead of in-person discussions, leading to significantly longer permitting and plotting times than usual—potentially double or even triple. Despite these delays, I oversee the Bastrop County project personally, and we expect to commence construction soon, as the site is close to the new Tesla facility and is an excellent piece of land. We plan to start the construction, regardless of our immediate production needs, with the goal of beginning no later than this summer. This project is substantial for the company, featuring over 1,200 sites in one location.
Perfect. And then the last question for me is just if you can talk about kind of your rates that you're charging on MHP loans, kind of your mix of float, any that have gone to fixed and kind of how that has trended in your outlook.
You likely observed that our interest revenue increased slightly year-over-year, while our overall business growth was more significant. This indicates that, since we have no nonperforming loans, we have had to adjust the interest rates we charge to communities, which is a significant part of our portfolio. Currently, our rate stands at 6.9%, compared to about 1 point higher last year. For consumers, the rates we now offer are 2 or 3 points lower than before, even with decent margins at higher prices. However, we are reducing our interest rates because the market has lowered theirs to remain competitive, particularly in the parks. If someone owes us $10 million, we won't lower the interest rate to be more competitive. We expect to get that $10 million back prepaid and need to know how to reinvest it at 6.9%. So, we typically advise them to keep the loan with us. We anticipate pressure on interest rates as long as the Federal Reserve maintains its current approach, which I find perplexing. For example, my daughter can borrow for 30 years at 3%, which is an exceptional rate. As a result, charging 6.9% seems high to some, but those loans usually have no alternatives. We are part of the chain of title, and at 6.9%, our clients often lack income to demonstrate their repayment capability, meaning we're not in competition with banks, just other hard money lenders. At this rate, we've never incurred losses from mobile home park loans throughout our history, which has been a significant aspect of our strategy. We were pioneers in this space well before our competitors, who are now beginning to mimic our approach.
Have the new agreements remained at a floating rate, or have you switched to more fixed terms for some of these MHP loans?
Yes. MHP, we were prime plus 4 with the floor to ceiling. There was some pushback on that. So we're basically doing a 5-year lock on the interest rate and then floating after that. And because of higher prices, we've gone out 2 years in the total financing package. We used to be 10 years. We're now 12 years for those MHP. Our prices have gone up faster than they've been able to increase rents, so their margins are struggling. They thought the Buck Mobile Home Park itself would continue to go up in value, and they'd be able to increase net rents. But I get complaints all the time from mobile home parks that say, 'My gosh. I'm paying more than I'm getting in rent,' and to which I respond, 'Well, you might want to increase your rents because we can't lower our prices and make money.' So we're still selling a lot to communities. Now what has picked up percentage-wise, and I think Kenny would support this, is the ratio of sales from traditional distribution, such as independent retailers, is increasing relative to parks. Parks are probably flat year-over-year, and so this increase in demand is happening from the independent retailers. Our own lots are really healthy for the economy and supportive of, I think, your first question is what are they doing with the houses. I think people are buying second houses or hunting cabins or stuff to put in their own backyard their relatives are going to live in. So even though the population of this country is not necessarily increasing, the number of housing units or households, to be more particular, is increasing, a lot of people living alone or in much smaller families than they lived in 20, 30 years ago. So we have an increase in households even without a corresponding increase in population. Do you understand?
Yes.
We have a follow-up question from Alex Rygiel with B. Riley.
Curt, could you quantify the amount of product you have rented out in the market, maybe ballpark the annual rental income there and talk about sort of the future of this opportunity?
I'm going to let either Jeff or Tom quantify it. But before I do that, it's a very interesting anomaly in GAAP accounting. If we lease it to somebody from a tax point of view, we are taking advantage of CapEx and deferring that tax. But GAAP requires that all of those deferred taxes be expensed the very first time we do that. So you're seeing the expense side of our income statement not getting the benefit in GAAP that it gets in tax accounting. Well, what does that mean? That means that while we're not showing from a GAAP point of view the income now, as these leases go on, we will be having all that income in the future, even though there's no real corresponding expense. So it's a really big plus 4, 5, 6, 7, 8 years down the line when we're leasing these units. I don't know how many we've got out there. Jeff, do you know? Or Tom, do you know how many leased units we have out there?
Yes. We have 339 units on lease at the end of the quarter. Assuming no additional coming on the rest of the year, that would generate $1.6 million in lease revenue.
There you go, Alex.
From what I've seen, which line item does that get captured in the revenue segment?
That is in the third line on the income statement, in the other category.
I'm showing no further questions at this time. I would now like to turn the conference back to the company.
Well, thank you all for attending. I know that the times are turbulent out there, to say the least, but we're selling houses, and business is great. In fact, I haven't seen it this great since the Rita and Katrina days back in '05. So the industry is doing just fine. The only problem we have is producing what we've got sold. And we're all trying to do our best to get that done. So you all have a good day, and thanks for attending. Bye.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.