Q3 2022 Legacy Housing Corp Earnings Call
Speaker 1: Ladies and gentlemen, thank you for standing by and welcome to the Legacy Housing Corporation 3rd Quarter 2022 Earnings Conference Call. At this time, all participants are on 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 keypad.
Speaker 2: Please be advised that today's conference may be recorded. I would now like to turn the conference over to your speaker with the Duncan based President chipf Executive Officer. Please go ahead, sir.
Speaker 3: Thank you. Good morning, everybody. This is Duncan Bates, Legacy's President and CEO . Thank you for joining our call today. Before we begin, may I remind our listeners that management's prepared remarks today will contain forward-looking statements.
Speaker 3: which are subject to risk and uncertainties, and management may make additional forward-looking statements in response to your questions.
Speaker 3: Therefore, the company claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.
Speaker 3: Actual results may differ from management's current expectations.
Speaker 3: and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company's annual report filed with the Securities and Exchange Commission.
Speaker 3: In addition, any projections as to the company's future performance represent management's estimates as of today's call. Legacy Housing assumes no obligation to update these projections in the future unless otherwise required by applicable law.
Speaker 3: We're excited to share our third quarter 2022 results and discuss our business today. We look forward to hosting earnings calls on a consistent quarterly basis in the future.
Speaker 3: I am joined today by Kurt Hodson, Legacy's Executive Chairman, and Kenny Shipley, Legacy's Co-Founder and Executive Vice President.
Speaker 3: I will discuss our third quarter performance.
Speaker 3: provide additional corporate updates.
Speaker 3: I will then turn the call over to Kirk for final comments and questions.
Speaker 3: Net revenue increased to $57.3 million in the third quarter, representing a 1.5% improvement over the third quarter of 2021.
Speaker 3: The increase resulted from price increases implemented over the past year, offset by a decrease in shipments from our Eatonton, Georgia facility.
Speaker 3: During the third quarter, we delayed shipments and slowed production to improve the quality and consistency of homes manufactured in Edenton.
Speaker 3: We are now shipping the delayed homes in addition to our current production and plan to meet or exceed historical production levels by early 2023.
Speaker 3: Although this process impacted third quarter revenue,
Speaker 3: The changes will significantly benefit our customers and our business moving forward.
Speaker 3: Interest revenue from the company's retail and commercial loan portfolios was $7 million for the third quarter.
Speaker 3: slightly down from the third quarter of 2021.
Speaker 3: The reduction was due to large payoffs on the commercial loan portfolio.
Speaker 3: Both the commercial and retail loan portfolios
Speaker 3: continue to perform extremely well.
Speaker 3: Income from operations for the third quarter of 2022 was $16.9 million.
Speaker 3: an increase of 10% from the third quarter of 2021.
Speaker 3: This increase was primarily driven by seven price increases since the third quarter of 2021.
Speaker 3: lower cost of sales, and an increase in other revenue.
Speaker 3: offset by lower volume from Georgia and higher SG&A.
Speaker 3: We plan to continue holding firm on price while reducing our raw material inventory to take advantage of lower material costs over the next few quarters.
Speaker 3: We will also focus on ways to reduce sgna up this quarter due to increased warranty costs.
Speaker 3: salaries and incentive compensation, and professional fees.
Speaker 3: Net income of $14.7 million for the quarter was a 13.4% increase over the third quarter of 2021.
Speaker 3: Basic Earnings Per Share grew to $0.60 per share in the third quarter, an increase of 11.1% from the third quarter of 2021.
Speaker 3: Legacy delivered a 22.5% return on equity over the last 12 months.
Speaker 3: At the end of the third quarter, Legacy's tangible book value per share was $14.84.
Speaker 3: We took an important step in our capital allocation strategy this quarter by implementing a 10 million dollar stock repurchase program.
Speaker 3: we will consistently waste stock repurchases against other capital uses to drive long-term value for our shareholders.
Speaker 3: Lastly,
Speaker 3: We ended the quarter in a net cash position.
Speaker 3: with $11.3 million in cash.
Speaker 3: and no drawings on our line of credit.
Speaker 3: Driven by our in-house financing.
Speaker 3: Our backlog is strong across all manufacturing facilities and provides visibility well into 2023.
Speaker 3: As the economy slows, we believe investors will begin to see the value of our integrated business model with multiple recurring earnings streams.
Speaker 3: We are long-term focused and plan to be opportunistic from a growth standpoint as asset prices in our broader industry moderate.
Speaker 3: Now, I'll turn the call back to Kurt for final comments and questions.
Speaker 4: Kurt?
Speaker 3: online?
Speaker 5: I guess I had it on mute. Thanks, Duncan. It's nice to be back on an earnings call. 2022 has been full of distractions for our entire management team, including those of us that are on this call. We've had auditor challenges, accountant challenges, regulator challenges.
Speaker 5: this year more so than probably any year I'm familiar with in this industry.
Speaker 5: We spend entirely too much time.
Speaker 5: associated administrative tasks and not enough time running our business and selling our products and doing what we do.
Speaker 5: Moving forward, this is where I want our management team to get back to focus.
Speaker 5: There are so many things that we can improve in our business.
Speaker 5: managing inventory, reducing SG&A,
Speaker 5: And we have multiple ways to grow top and bottom line, land development, new products.
Speaker 5: some geographic opportunities.
Speaker 5: Now that we're through the distractions and I pray that we are through them.
Speaker 5: Kenny and I plan to work with Duncan on improving and growing the business.
Speaker 5: Our backlog is strong, probably as solid as anybody's backlog in the industry, and we're very optimistic about 2023.
Speaker 5: Back to you, Duncan.
Speaker 3: Thanks, Kurt.
Speaker 3: Operator, that concludes our prepared remarks. Please begin the Q&A.
Speaker 2: Ladies and gentlemen, if you would like to ask a question at this time, you will need to press star 1 1 on your telephone keypad.
Speaker 2: One moment please while we compile the Q&A roster.
Speaker 2: Now first question coming from the line of Mark Smith with Lake Street Capital U.N. is open. Okay.
Speaker 5: Perfect. Thanks guys. Good to have you back on a call here.
Speaker 5: First question from me is just, can you guys walk through a little bit more in depth what happened in Georgia, what kind of prompted the slowdown and focus on the operations there?
Speaker 5: Duncan, you want it or you want me to do it?
Speaker 6: Thank you.
Speaker 3: I'll let you take it Kurt.
Speaker 3: No, you take it. Alright, I'm happy to take this. Go for it, Kurt.
Speaker 5: I just got back from Georgia yesterday, so I probably have a better perspective. But.
Speaker 7: So...
Speaker 5: We were having some quality challenges in Georgia due to
Speaker 5: supervising our challenges.
Speaker 5: Now it's getting more and more obvious as the summer progressed.
Speaker 5: and we had decreased production and increased regulatory scrutiny.
Speaker 5: in the state of Georgia, who is our regulator there.
Speaker 5: in concert with our IPA, private regulator that we use in Texas, has been rebuilding our processes and our training systems. We slowed production down.
Speaker 5: to about half of ordinary.
Speaker 5: for the months of August and September and even October .
Speaker 5: And at the same time, we delayed shipping houses from Georgia while we didn't.
Speaker 5: of the product to make sure the quality was there. I don't have the exact metrics of what we shipped in Georgia for the third quarter July as part of the third quarter shipments were somewhat.
Speaker 5: normal then, but in August or September , shipments were probably 10% of normal.
Speaker 5: The good news is that shipments have restarted and we are shipping.
Speaker 5: I think another 14 today.
Speaker 5: We have a couple hundred houses in the yard that are almost all now ready to be shipped. So we expect to have our yard down.
Speaker 5: 2.
Speaker 5: normal levels by Christmas, probably even before, which will have the advantage of having a better than normal fourth quarter.
Speaker 5: production is about three per day in our normal production in Georgia before
Speaker 7: this slow.
Speaker 5: So we had about a 40% decrease in Georgia. But the other plans for this pretty solid five, six a day. And commerce is actually up to five a day.
Speaker 5: from four days. So we had an increase in some Texas production, mild increases in Texas production.
Speaker 5: but a decrease in Georgia production.
Speaker 5: I'm confident we've spent some money, we've hired independence consultants, we've spent some money training our Georgia personnel and kind of retooling that whole deal, maybe decreasing some options trying to keep it simple.
Speaker 5: Our backlog is solid, I believe we're at 804 backlog in Georgia.
Speaker 5: Even four per day, we've got literally a 200-day backlog in Georgia. Pretty solid orders, almost all that have deposits. 8 campaign
Speaker 5: So we hit bottom, I would say we bottomed probably in early October . Been working our way out of it, haven't been feeding a lot of details, cuz it's been changing almost on a daily basis. Because the reason that
Speaker 5: I think we're.
Speaker 5: you know out of the woods, but we still have some remediation to do on some products that got through, got delivered that probably do have some warranty issues. So our SG&A expense was up because we had to go out in the field and perform warranty that we didn't expect to have to do, mostly in Georgia.
Speaker 5: I hope that answers your question, Mark.
Speaker 5: Yeah, no, that is helpful. As we look at labor today, are you able to, you know, kind of get the people that you need and run as efficiently as you would like today? And then even if you want to talk about kind of cost of labor and what kind of inflationary pressure you've seen there?
Speaker 5: Labor continues to be a challenge. We're now, we track it per square foot. Our labor cost on the two factories that are running normally is approximately nine dollars per square foot all in.
Speaker 5: That's up from $4 a square foot pre-COVID. And it wasn't because so much a doubling of labor as it was a productivity slippage. We're now using more people to build the same number of houses that we did pre-COVID all at higher wages. And we're now using more people to build the same number of houses that we did pre-COVID.
Speaker 5: We have had.
Speaker 5: a lot more applicants the last 60 days than say the last year and I don't know if that's caused by Our industry or the housing industry or whatnot. These are carpenters that know how to use tools and as regular housing.
Speaker 5: slows down those people who come inside to get a job.
Speaker 5: our factories. This might be a good thing, housing slowing down. The number is down in the 400s today.
Speaker 5: which is not quite pre-COVID levels, but close to it, steals down 30% from its peak. So if the housing slowdown is real.
Speaker 5: That should help us with labor.
Speaker 5: it's just beginning to show up at our plants.
Speaker 8: Okay.
Speaker 5: One question just on the loan portfolio is as we look at the MHP notes, you know, we saw good sequential growth in that portfolio, but it looks like the rates were squeezed a little bit there, which surprised me just given that that you know a lot of this is floating rate and anything to speak to them.
Speaker 5: We just took a position that we weren't going to move rates up, maybe even give us some price discrimination on rates. But we also have not had one single price decrease where I think almost all of our competition has had that. So it costs the same per month to buy a house today through our finance arm, whether it's retail or wholesale, as it did literally six months ago or even a year ago. Thank you.
Speaker 5: Whereas, if you've had a price decrease...
Speaker 5: and you've had a corresponding rate increase.
Speaker 5: I think the actual cost per month to mobile home parks.
Speaker 5: and from our competitive product has gone up maybe 5 or 10%.
Speaker 5: even if prices have gone down. So we don't borrow hardly any money.
Speaker 5: We're using our own capital to do this.
Speaker 5: I don't know how long rates will be up, but we do not intend to raise rates and we've taken on some big customers that have.
Speaker 5: the power to borrow away from us at competitive rates. And what you're seeing is some of our bigger customers were able to negotiate
Speaker 5: That's what they've done to us in exchange for accepting our pricing strategy.
Speaker 5: probably more than half of our backlog is mobile home park.
Speaker 5: backlog. We actually have deposits on. It's not like we're selling to dealers without deposits. Almost, probably 70% of our backlog has a deposit in hand.
Speaker 5: Okay, good. Then just the last question for me, like the announcement of the buyback, but can you guys just talk about other uses of capital that you have, other opportunities and what you're looking at as far as maybe the next 12, 24 months where you would put cash to work?
Speaker 3: Yeah, I'm happy to take that one. We've been so focused on all these administrative tasks.
Speaker 3: over the past.
Speaker 3: six months and just getting caught up on the filings where we haven't published our formal growth plan moving forward.
Speaker 3: We've historically pumped the cash that this business has produced back into the loan portfolios.
Speaker 3: We can continue to do that at attractive rates of return.
Speaker 3: And, you know, the portfolios at this point are fairly self-sustaining, so we're not borrowing, you know, to loan.
Speaker 3: We have started to see more opportunities and Kurt and I have been working together figuring out, you know, what else can we sell.
Speaker 3: I'll tell you that there's similar products.
Speaker 3: that we could manufacture and sell, that have financing components.
Speaker 3: in our industry or around our industry. Something like getting into the temporary classroom.
Speaker 3: business.
Speaker 3: There are certain geographies that we want to be in. So we've got some interesting targets that would put us...
Speaker 3: in our current industry but in a geography that we have trouble hitting now. And I think we'd really be able to improve these businesses with our sourcing and with our financing.
Speaker 3: So, you know, new products, new geographies, you know, the 30 area, and I know Kurt had touched on this pretty significantly in prior earnings calls, I mean, we've got, you know, a significant land position in Texas.
Speaker 3: that is at various stages of development for communities.
Speaker 3: And even with the slowdown, if you look at where these communities are trading compared to the capital that we would need to deploy to actually get homes on them, there's significant upside. And that's something that Kurt and I are going to spend a lot more time on as we head into the end of the year. So a long way of saying we've got a lot of opportunities, but with the share price where it currently is.
Speaker 3: and the buyback program in place, we're going to weigh them against purchasing shares as well.
Speaker 5: Perfect. Thank you guys.
Speaker 9: Thanks.
Speaker 6: Thank you.
Speaker 2: Thank you. One moment please for next question. Our next question coming from the lineup. Say more of EF Hutton Group, your line is open.
Speaker 10: Thanks. Kurt mentioned the Georgia backlog of about 804 units.
Speaker 10: give us a sense of the overall backlog. Is it?
Speaker 10: six to seven months of possibly lower revenues from the Texas area to plants? Or is it probably less because Georgia got delayed a bit and lost some production for a while?
Speaker 5: I think it's six months.
Speaker 5: That's if anything a little bit conservative because I don't trust
Speaker 5: because I don't trust
Speaker 5: backlog that doesn't have deposits.
Speaker 5: that doesn't have deposits. I mean, and but I think that.
Speaker 5: We just had a couple of shows.
Speaker 5: We took several hundred orders at those shows.
Speaker 5: when you add those and there was mostly Texas orders.
Speaker 5: I think that we're.
Speaker 5: I think we can see our way through to.
Speaker 5: late spring and quite frankly with the natural flow orders we get anyway we probably knock on wood have 2023 pretty well
Speaker 7: spoken for.
Speaker 11: Great. That's wonderful here.
Speaker 10: One follow-up question I had was about the Georgia facility.
Speaker 10: It was nice to get the color around that and what happened in August .
Speaker 10: September and even October .
Speaker 10: If you put a revenue number on that with something like 100 units, I mean, because that would have been $6 million of sales, it got $7 million.
Speaker 10: pushed into the fourth quarter in maybe January .
Speaker 5: I'm pretty good with the arithmetic. I think we will ship 100 more in Georgia.
Speaker 5: I think we will ship 100 more in Georgia easily.
Speaker 5: in the fourth quarter than we would.
Speaker 5: if we didn't stack them up in the third quarter. I think that's at least 100, and your number of 60,000 per floor is pretty close. About 52, 53,000 per floor is the wholesale revenue associated with that inventory. So it's probably going to.
Speaker 5: list sales.
Speaker 5: 6 million more in the fourth than would be normal. But hopefully by January we'll be back at four or five a day. And
Speaker 5: And revenue will be back to our expectations. We're making it up another place with the company obviously.
Speaker 5: The earnings was there, book value increase was there.
Speaker 5: But this was a blemish that we announced in our queue from last time.
Speaker 5: We didn't quantify it because it wasn't quantifiable. And in the end it was because we were moving most of the properties from one quarter to another. We don't look at it as full.
Speaker 5: is significant.
Speaker 12: Bye.
Speaker 5: Bottom line is we decrease production by 50% during this era. And that's something we could never get back. So three months of 50% deal for the year.
Speaker 7: We will have lost
Speaker 12: Probably...
Speaker 5: I'll call it three per day for...
Speaker 5: 60 days, we will have lost 200.
Speaker 5: floors so we can't get back. So that revenue is lost.
Speaker 10: Thanks for putting revenue estimate around that. I think people understand that better now. What about just – I know you provided some commentary on labor. I was just trying to wrap my head on –
Speaker 10: How does the labor situation and shortages today compare to three plans compared to maybe the worst point earlier this year when there was the most shortages? I don't know if you're playing whack-a-mole and sometimes it's in Fort Worth and Commerce and Georgia. I don't know, but I'm sharing this.
Speaker 10: Is the labor situation overall an improvement from when it was really a shortage earlier this year?
Speaker 5: Well, this is just my gut feeling. I think that the.
Speaker 5: the labor situation will continue to get more expensive, even if we go into recession.
Speaker 5: I mean, the unemployment rate is 3%.
Speaker 5: No, we're not paying anybody less than we were today now that we were before.
Speaker 12: I think labor is a problem.
Speaker 5: Less and less people that want to work.
Speaker 12: be more generous.
Speaker 5: the most people to fill the houses. So I first work with them.
Speaker 7: Go up.
Speaker 5: down and so there will be it'll be offset by
Speaker 9: OK. No, that's...
Speaker 9: That's helpful.
Speaker 10: I know Duncan mentioned you are holding firm on it.
Speaker 10: Is there really not more sensitivity by home buyers and park operators because your competitors are still taking price increases lately and it's all kind of relative? Is that why you have confidence you don't have to decrease prices anytime soon?
Speaker 3: Well, the real reason for not decreasing the prices is because we also haven't raised the rates on the financing.
Speaker 3: And that's something that...
Speaker 3: You know the importance of the financing is something that I found you know really surprising about this business I think if you you know you look at backlogs across the industry and certainly in certain geographic regions You know they're not near as strong as ours, but it's really it's driven by the in-house financing
Speaker 3: If that person is not able to obtain financing from anybody else, but will finance them, they have less room to negotiate on the price.
Speaker 11: That's helpful. That makes sense.
Speaker 10: We were about to be getting into this earlier, but can you provide an update on the land development progress and does Horseshoe Bay near Austin have any homes up on it already? And just maybe if you can give us some color on.
Speaker 10: where you stand with sewer and water systems and the plan maybe as you look at it over the next year. If you can kind of give us some color on that, that'd be great.
Speaker 5: I'll take that one. We have a total of seven properties in the state of Texas, three of the Fort Worth area.
Speaker 5: two in the Austin area and then two in the San Antonio area. The three and four were have been essentially dormant during these distraction periods.
Speaker 5: The three and four were have been essentially dormant during these distraction periods because
Speaker 5: management was so involved in.
Speaker 5: and these other issues. And then the...
Speaker 5: in Austin, breaks down to Horseshoe Bay.
Speaker 5: We are very slowly making progress in Horseshoe Bay. I would say we have about a $6 million investment so far in Horseshoe Bay.
Speaker 5: We haven't really needed the production, so we haven't been focused in on it, but we are.
Speaker 5: very slowly adding a couple houses a quarter to it. I think we sold about four. We are opening a sales lot there in Marlboro Falls nearby. That will help. We've been three years trying to open that sales lot, getting through the city of Mort Marlboro Falls. I think we're 95 percent of the way through. We're building the entry entrance this week. That should help. The DelVal project, which is the pillar over 1,000 units. which is the pillar over 1,000 units. We have.
Speaker 5: virtually every permit we need finally from the electric people, the water people, the county people, the water treatment people. Kristen
Speaker 5: So entitlements have been difficult to the.
Speaker 5: to get politically, but I don't think there's anything that we need to do further construction there other than getting on getting on with it. We're probably
Speaker 5: 10% complete, we have water in and get part of it, rough roads in and a good part of it. We have water in and a good part of it, rough roads in and a good part of it, rough roads in and a good part of it.
Speaker 5: the electric has been paid in advance. Kind of funny how that works. They say, well we could prefer a contract. It'll take eight months for us to prepare a contract or you could just send us the money.
Speaker 5: So we're gambling with any electric company on 1.6 million dollars without even a contract That's just the nature of the way things are nowadays. So we're progressing there. Tune in San Antonio.
Speaker 5: One in San Antonio proper, over 300 lots. We now have all the titles that we need, all the entitlements we need, and we're moving towards getting that done. And one in Atkins, very small property, nice property. I play with the idea of selling it because I've got an appraisal on it. That's three times what we have in the land.
Speaker 5: I don't know that we'd be better off developing it into a mobile home.
Speaker 5: property as opposed to selling it for three times what we paid for it. So that's probably decision that we'll make this fall. So there's the update on the seven. Applause
Speaker 5: Texas properties, we don't own it. We don't own any other properties besides those seven.
Speaker 10: That's terrific. That was very helpful to hear. And my last question is really around your unique vertical integration advantages.
Speaker 10: You know, considering that this is such an affordable housing shortage in the U.S. and being compounded drastically, you know, the last.
Speaker 10: Two years with I don't know the average housing price up single-family up 40% 50% and higher interest rates. I'm just wondering
Speaker 10: Can you use this?
Speaker 10: economic environment to maybe take advantage of beefing up some of your vertical integration advantages and expanding into more things like possibly air conditioning or
Speaker 10: specialist building products or countertops? Do you think that those would make sense to get more vertically integrated on? Or is there anything that's jumping out at you?
Speaker 5: And a little bit of that, I mean, the one that I've looked at before is She-Rock manufacturing, but
Speaker 5: That's a pretty big business to get into but we're as vertical as anybody in the industry
Speaker 5: If anything during these decreases, it made sense for us to be in the trucking business if we could do it cheaper than other people. But when we moved 24 houses yesterday in Georgia, 20 of those were pulled by independent contractors. Win fore king
Speaker 5: quite frankly, at a cost below what we think our cost is. So some of this slowdown particularly caters to regular housing, like countertops, may be in a position to.
Speaker 5: than we ever have or better than we have in the last many years. Just through normal channels, if we'll say how much is it, will you, could you, if we say I'll take it, which is a whole other discipline. I have to retrain our emergency department. hel There won't be muchMT to associate with.
Speaker 5: We used to be at it, I mean, a year ago, we just say, send it to us, we don't care what the price is.
Speaker 5: Now, with inventory building and supply building, we got to get back to the basics of how to buy things competitively. I think everybody is going through that.
Speaker 5: That whole thing. Kind of fun.
Speaker 5: back to what you could hear as opposed to can you pretty please get it to me
Speaker 5: That's...
Speaker 5: a completely different mentality than it was just a year ago, or just eight months ago for that matter.
Speaker 5: Earlier this year we did have shortages. We were having to ship things without refrigerators, without dishwashers, with furnaces sometimes not being there.
Speaker 5: Now we don't have a single shortage in the entire company. Everything we put in mobile home, we have an ample supply of. Just all over the last six or eight months.
Speaker 10: That's terrific to hear.
Speaker 10: Nice to know that's not a bottleneck anymore and hopefully it stays that way. Well, it's been nice to see the enhancements in the accounting systems and the on-time reporting this month. So I really appreciate it and that concludes my questions.
Speaker 4: Thanks, Tim.
Speaker 2: Thank you. One moment please for our next question. Our next question coming from the line of Alex Rago with the Riley Financial. Your line is open.
Speaker 12: Thank you. Good morning and thanks for taking my questions here. Kurt, real quick, can you address the macro environment here? We've got mortgage rates that have increased significantly. We've got slowing demand at a very fast pace for stick built new You you
Speaker 12: housing. Clearly there's uncertainty about the economic outlook over the intermediate term. So maybe with that backdrop, can you sort of talk about...
Speaker 12: how that has, could, or could impact legacy and your strategy.
Speaker 5: Well, Alex, I was hoping you'd tell me. You know exactly what's happening.
Speaker 5: The site-built home builders are suffering because people don't want to buy houses at seven and a half or eight percent mortgage rates.
Speaker 5: In our industry, there hasn't been much increase in financing costs, not even among our competitors.
Speaker 5: So it will be interesting to see if.
Speaker 5: all boats rise and fall with the tide for whether or not there'll be a disconnect between the manufactured home sector and the tourism industry's nature?
Speaker 5: the site built in the home sector. I look forward.
Speaker 5: continued declines in the site of home sectors. It cost $100.
Speaker 5: In Austin, Texas, if you want to buy a starter house at today's mortgage range, you better make $150,000 a year or you're not going to be part of that market.
Speaker 5: That's up significantly from six months ago.
Speaker 5: I don't know what will happen to 30-year mortgage rates, but I don't think they're going to go back down to where they were overnight.
Speaker 5: So, I think the single-family housing market is going to be suffering for a while.
Speaker 5: We have people on our team that are looking into opportunities we might have picking up some scraps at below replacement costs. And we're looking at that. So there is going to be opportunities.
Speaker 5: how people selling things for below replacement costs in the not too distant future. How does that affect us? Well, earlier, Alex, we talked about our healthy backlog.
Speaker 5: I don't think that's necessarily across the board. Our competitors are not.
Speaker 5: working necessarily five days a week.
Speaker 5: They are not as integrated with us with financing. I think that's a significant difference
Speaker 5: So they are seeing some.
Speaker 5: some easing in their backlog.
Speaker 5: Statistically, the industry still shows record production as late as September . That's the last numbers we have, I believe 14% year over year. But October is not in yet and November is a third of the way through.
Speaker 5: I think there's going to be pressure in all sectors.
Speaker 5: This recession, if there is one, is going to be.
Speaker 5: Rarely significant.
Speaker 5: that normally higher interest rates are not bad for what we've built.
Speaker 5: We know you and I go back a lot ways.
Speaker 5: and we provided data.
Speaker 5: that the all-time high in 1982 when mortgage rates were 30%, it was a great year in the home business.
Speaker 5: I'd like to think that that's the same way it's gonna be this time, but who knows? We are nimble, we don't have a lot of commitments. We can get smaller if we need to. We have enough cash and the borrowing ability to buy anything, opportunities to get, I'd be surprised if.
Speaker 5: Our ever increasing book value will take a break during all this. I think you'll still see double digit increases in book value every year for legacy for the foreseeable future. I don't think that will be true in home building. And I don't think it will be true. Some of our principal competitors that are more committed to an ever ongoing model that may not come to pass.
Speaker 12: And then Duncan, as I sort of drill down on the balance sheet here, it looks like customer deposits, the balance and the balance sheet was about $12 million at the end of the third quarter. That's up quite a bit from like 5.7 million or 6 million a year ago. So what's changed there? Obviously understanding that there's a fair amount of homes that are sitting in the yard in Georgia that probably equates to some of that.
Speaker 12: But have you also increased the deposit requirement by the buyer? And has that provided you greater visibility in closing predictability or whatnot?
Speaker 3: Yeah, Alex, I may have to get back to you on the exact increase. To my knowledge, we have not increased the actual deposit amount. That said, George is a contributor and we also have a large customer that we are building a significant amount of homes for that put down a very significant deposit.
Speaker 3: for us to build homes over the next few years. So I think that's a big piece of it as well.
Speaker 12: And then lastly, either Duncan or Kurt.
Speaker 12: Consignment sales came down in the third quarter. I believe that's mostly sales to some of your independent dealers. How does inventory out in the channel look right now?
Speaker 12: And is there any risk that it could kind of go into your end? There's some sort of.
Speaker 12: slowed purchase activity because of elevated inventory or weakening consumer demand.
Speaker 3: Kurt, you want to take that one?
Speaker 3: Deal room to tour?
Speaker 5: I was a little distracted, but something to do with inventory. You're talking about what kind of inventory? Raw materials, finished goods, what kind of inventory?
Speaker 12: No, finished goods, finished homes. In the channel though, inventory out in the channel, inventory that's at your independence out in the yards.
Speaker 5: I think the company-owned stores across the board have ample.
Speaker 5: finish good inventory, especially relative to sales. I think everybody has put the brakes on filling up company-owned stores with more inventory, probably including us. So I look for...
Speaker 5: inventory to be stable, maybe a little bit on the high side, but I don't look for any.
Speaker 5: any positive impact by people adding to their inventories. On raw materials, I'm in touch with a lot of the raw materials people. I think inventories are being used to act up at all levels, including distribution. connecting seeds to result in a hydrogen ion bomb explosion.
Speaker 5: And everybody's gonna be crunchy inventory. I wasn't all that pleased with our financial statements
Speaker 5: which showed increased inventories of both raw materials and finished goods because we just got in the habit of being glad we could buy it on the raw materials side.
Speaker 5: And we have.
Speaker 5: way more inventory than...
Speaker 5: that we need. So I think inventories in general across the board on a macro level.
Speaker 5: are increasing and I think that the economy in general is going to have to come to grips with that in the very near future. I'm sure that's, you know, I haven't talked in six months or so, but I think you would agree that inventory levels are high in almost everything and growing. We're very conscious that our raw material inventory will be less in the next reporting period.
Speaker 5: hopefully by something significant our finished inventory will be
Speaker 5: home no bigger and maybe even down a little bit.
Speaker 5: tend to increase either finished good or raw material in Detroit between now and the end of the year.
Speaker 5: increase either finished good or raw material happens right between now and the end of the year.
Speaker 13: That's great.
Speaker 12: Nice to see you. I'm glad to call this quarter. Appreciate it. I'm glad to see you.
Speaker 12: this quarter. Appreciate it. Thanks Alex.
Speaker 2: Thank you. One moment please for our next question in queue. Our next question coming from the lineup Brian Glenn with All Cut Partners. Your line is open.
Speaker 2: Thank you. One moment, please, for our next question in queue. And our next question coming from the line of Brian Glenn with All Cut Partners. Your line is open. Hey, Brian .
Speaker 14: Oh, hey, sorry, it cut out. I didn't know if I didn't hear the name that was given. Hey Duncan, hey Kurt, how are you guys?
Speaker 13: Thanks.
Speaker 14: Duncan, for your first public call, it sounds like you've been doing this a long time. Congrats to both of you and your whole team on delivering what you said you were going to do.
Speaker 3: Thanks. I really appreciate it.
Speaker 3: It's been a long few months. One of our team members reminded me that we've done.
Speaker 3: a year's worth of public filings in a proxy in about 120 days.
Speaker 3: years worth of public filings in a proxy in about 120 days.
Speaker 3: We're excited to get past this point. Thank you.
Speaker 14: Kurt, nice job on the higher at the leadership level. I think I just have two questions. Yeah, I have two questions. I'll try to keep it quick. I guess the first is very broadly. If you look at your balance sheet for the company over the past two years, assets have grown 100 million. It's a big jump and that's funded strictly by organic growth and equity, right? Which has earned and it's an impressive number.
Speaker 14: Liabilities have come down a tad.
Speaker 14: When you got, is that strictly a byproduct of how the company is run? Is that a deliberate decision? You obviously don't need leverage when you generate 20% returns on equity. It's unnecessary when you put up metrics like that. So is that just geared up in case something happens opportunistically? Do you guys talk about that from a top-down level or it's just something that has happened over quarter after quarter? And here we are.
Speaker 3: Gert, you want me to take that one?
Speaker 13: Sure.
Speaker 15: Thank you.
Speaker 3: All right, you can fill in but
Speaker 3: You know this business has always been run extremely conservatively by Curt and Kenny
Speaker 3: And I think if you're walking around the office, they'll tell you that they've built legacy by making it and saving it and have always been extremely frugal and have continued and have been in the industry and not gone bust for longer than anyone. And so I think it's a conservative approach. From my standpoint, I think it's a conservative approach.
Speaker 3: We're excited about the next couple of years and potentially having a slowdown here because I think there will be opportunities to make investments in this industry and in surrounding industries at attractive prices because of our conservative nature and because of our balance sheet. But I can assure you that we're not going to go out and overpay for anything.
Speaker 5: So I'll stop there and Kurt, anything to add? No, I don't think there's a lot to add. I do think that we've kind of reached the point of equilibrium.
Speaker 5: and that unless we come up with a different industry, an investment, a different product.
Speaker 5: I do think you'll see our cash position grow and that's not what we want. We'd rather use a little bit of leverage. So we're hoping to find something that is a deal or some use of capital that allows us to. We're still borrowing money and so for plus two. So our borrow rate is extremely low, which we'd like to integrate with our other individuals is just there just hasn't been many opportunities. There was a recent acquisition that we're very familiar with.
Speaker 5: that we chased ourselves about a year ago, but this is not the time to buy by production capacity based on yesterday's metrics. Now, if you could base it on tomorrow's metrics, maybe, but.
Speaker 5: ago but this is not the time to buy by production capacity based on yesterday's metrics. Now if you could base it on tomorrow's metrics maybe but things are just but still.
Speaker 5: priced above replacement cost. If we were going to grow, organic growth is still probably where we would go. There's not really acquisition growth.
Speaker 5: laying at our feet right now. There may be, maybe things will disintegrate, and if they do, we'll be there with our powders like we always have been.
Speaker 5: We're hoping that occurs, but if that doesn't occur, we're going to have to look for opportunities in either this industry or ancillary industries to deploy cash and make better than SOFR plus two, which I think we can do. I think there's plenty of opportunities to do that.
Speaker 5: I mean, I'm not that pessimistic. The sky is falling. I think there's plenty of places to make an 8, 9, 10% return on investment capital. And if we could find some of those in this era, I think we will. I think we'll be doing that. There's a few we're looking at now.
Speaker 5: These seven developments are a great use of capital. All in, that's probably $50,000,000,000 worth of capital that would be deployed on a finished basis.
Speaker 5: And I'm cool with that because there's no doubt in my mind that places that put these things here would be hard to find in two or three more years and we're going to want all the lives that we can harvest.
Speaker 5: I'm cool with that because there's no doubt in my mind that places that put these things here would be hard to find in two or three more years and we're going to want all the lives that we can harvest.
Speaker 14: Thank you both, that's helpful. One of your peers brought up, and this is at the industry-wide level, not necessarily specific just to them, and you guys alluded to it, it was asked a little bit, but there was a contraction apparently in floor plan financing. And when you guys look at opportunities, and just educate me, is the space still so crowded that wedging into a third-party dealer network because you have your own financing that you can provide at the floor.
Speaker 3: consignment, you know, financing business for a long time.
Speaker 3: Curt and Kenny have put a lot of dealers in business across the South with their financing over the years. And so we have a really loyal, independent dealer network that sells our homes and we finance them.
Speaker 3: We've been going through a little bit of a change with our consignment business to get to more of an industry standard where we're actually selling the homes and financing them versus just like a sheer consignment agreement where they can give them back to us.
Speaker 3: And so, you know, that's a change that investors will see over the next couple of quarters as we continue to shift toward a true sale that we're financing with no take backs.
Speaker 3: And we're well on our way to doing that.
Speaker 3: we're well on our way to doing that. So I'll stop there.
Speaker 14: Okay, that's helpful. And I lied, I guess I'll ask a third question if you guys don't.
Speaker 14: Yeah, fire away.
Speaker 14: There's a, Duncan, you and I have talked about companies even outside of the industry, and so it's been fun discussions. And there's a company, it's based in Dallas, it's totally outside of your industry. It's a different business model. They do salvage vehicle auctions. But one thing that I've learned from them over 10 years is something that you can't buy necessarily is time. And I don't view the average person may say, a mobile home park.
Speaker 14: as a NIMBY aspect, and I think that's kind of a pejorative term. It's not NIMBY to the people who live there. That said, there's struggles, and you've alluded to them, in terms of getting the proper permits to build those seven and possibly more sites in the future. And if you look at this other business, one of their competitive advantages, besides other attributes that aren't similar to legacy, is that it's not a
Speaker 14: Is the fact that they have this pipeline and this wherewithal and in some cases to build a yard, it takes them. 6, 7, 8 years in terms of getting the required permits and you see a little bit of that with what you guys are dealing with. And it's something that. Is unique and it's tough to replicate for a competitor, especially ones with weaker balance sheets or a thinner network in terms of. National presence, but not a dense presence in any given region.
Speaker 14: Do the question there is do you guys see it that way as well? Is there some sort of strategic edge in having the wherewithal to wait two, three, four years where you're carrying that asset on your balance sheet regardless of how it's financed?
Speaker 14: The question there is, do you guys see it that way as well? Is there some sort of strategic edge in having the wherewithal to wait two, three, four years where you're carrying that asset on your balance sheet, regardless of how it's financed, to see it through to a finished product?
Speaker 3: Yeah, I think that is certainly the case. I mean, one of the largest headwinds in this business is where do you put them?
Speaker 3: Yeah, I think that is certainly the case. I mean one of the largest headwinds in this business is is where do you put them? and
Speaker 3: You know, Kurt and Kenny have done business in Texas their entire careers and know attractive areas very well and certain dynamics that would make for an attractive...
Speaker 3: community investment and we acquired this land years ago and it takes a long time to get it to the point where you can actually put
Speaker 3: homes on it.
Speaker 3: I think, you know, moving forward, we'll try to accelerate that, and we're always on the lookout for new opportunities.
Speaker 3: The other thing, the other factor though that I think helps us, you know, we'll continue to do our thing and we'll have flexibility around what we want to do with these properties.
Speaker 3: for the long term. But there's been a lot of institutional capital that's entered this space. And even in my short time here, I've heard from really large real estate investment firms that are dipping their toe in and developing communities. And so I think as you have more capital come into the space, hopefully if restrictions ease up.
Speaker 3: at all, which people have talked about, I think we'll have more places to put the homes. But it's still, that will be a challenge moving forward and it's something that with our community development, we're trying to get ahead of.
Speaker 14: Thanks Duncan, thanks Kurt, appreciate all the efforts.
Speaker 3: Yeah, thanks a lot.
Speaker 2: Thank you, and I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Duncan-Bates for any closing remarks.
Speaker 3: No, all I would like to say is I'd like to thank everybody for joining our call. We look forward to hosting this on a regular quarterly basis in the future. Thanks for your support.
Speaker 2: Ladies and gentlemen, thank you for your participation. It does conclude today's conference call. You may now disconnect. Have a great day.
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