Good morning, ladies and gentlemen, and welcome to the Legacy Housing Corporation First Quarter 2021 Earnings Conference call. [Operator Instructions] 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, folks. 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, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. 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. Actual results may differ from management's current expectations. 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. 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. Now let me turn to a discussion of our first quarter performance and provide additional corporate updates. I will then turn the call over to our Chief Financial Officer, Thomas Kerkaert to discuss the financials in more detail. This quarter, Legacy continued its track record of delivering strong financial results. Net revenue increased to $39.9 million in the first quarter, representing a 4.4% improvement over last year. This result was stronger than it may seem, considering that our ability to build and deliver houses was severely impacted by the February weather event across the Southeast -- Southern United States. Our Texas-based operations were actually closed for the first time ever for an entire week, and our ability to deliver homes and receive raw materials was disrupted company-wide. In spite of this, we experienced improvement in our income from operations for the quarter, which increased to $10.7 million from $10.6 million last year. The inflation and the cost of production…

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 like interest 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 expense. 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.

[Operator Instructions] 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 2Q?

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 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 shipped because we don't have the shipping capacity to recover from that. So we kind of had a higher ending finished good 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 even at 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. And recently, it's now back at a 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 and 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 1Q this year versus 1Q 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, lagging behind?

And that's a very good question, and I spend a lot of time reflecting on that. The price fluctuation has been so rapid and so severe that you can't even keep up with it on a computer model. So a lot of it is just to see the bands flying here. To quantify it for you, we estimate that, as of today, we're up 21% in prices year-over-year in what we charge, and we have another price increase of 2-point-something percent to take effect next week. So if you combine those 2, as of the middle of May, we are up 23% plus in prices. And I have, of course, anecdotal stories about lumber being up triple or steel being up 40%. But as a percentage of sales, our materials currently are about the same ratio as normal. It's proprietary and I don't publish it, but we're keeping our margins on materials about the same. Of course, we are having corresponding increases in labor to people. We were paying $12 an hour or 2, we're paying $25 an hour or 2. And even the administrative staff is hard to keep unless you reward them financially. So it's a reset of pricing that I don't see going back down, and I want to expand on this a little bit. Some of our competitors will take huge leaps in prices. Our philosophy is gradual but steady increases. So sometimes we'll lag, but not very often because we don't want to shock somebody with a 20% price increase in one day if we can spread it over 10 price increases of 2% each, so they don't fixate on what day their house was produced. We don't honor yesterday's prices and neither do our vendors that we have agreements with. So basically, when we ship a house today, it's based on today's pricing, even if the order came in 6 months ago. It has now become kind of an industry standard and we're able to move it out. I think we'll be able to maintain the same gross margin. In fact, Alex, if you -- I mean, I know you're very analytical. But when you look at our statement, our margin -- our gross margin in this quarter was almost identical to prior quarters. And so we are -- so we have been able to pass through our increase in costs as far as our margin is -- and I think we're going to be able to continue to do that. Not one single canceled order yet due to price increases or price adjustments.

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 1Q growing in 2Q? 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 2 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 2Q 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.

[Operator Instructions] 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 measure production by the floor, and you guys measure it by unit sales. I looked at that anomaly that you're talking about, but I can't -- I don't have an opinion about it. It looked like that we're selling more double wides this year than we were last year because our sections went up -- or has gone up recently because I just looked at April's numbers. Our sections have gone up as a percentage more than our homes. So I do think that we're having an incline in multisection units relative to a year ago. I don't know if that's good or bad. Typically, the margins are a little bit better in double wides than they are in single, but it's significant.

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 kind of 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.

Ask that again. I'm sorry, Mark.

Yes. Kenny, just kind of what you're seeing from a demand perspective for manufactured housing today. Have you seen the increase and a little bit of the madness that we're seeing in the overall housing market? Or is it a little more tempered?

Yes. The retail is and it's -- there's still a place to [ put a ] problem for those guys. I mean I'm hearing from dealers, especially in these bigger cities, Dallas, Fort Worth, Austin, San Antonio, that customers are trying to get out of the cities and move to smaller areas. But then it's -- then there's a place to [ put a ] problem because they're not wanting to go into these communities that's available. They want to go outside and own some acreage because a lot of them are working from home again. So -- and continue to do so. Yes, it's -- I mean, it's out there, and it's just -- it's hard to sell a lot of them because of the place to put in problems.

Okay. Alex, let me follow up on that. If you were to fly a small airplane into Dallas or Austin, you would see subdivision after subdivision after subdivision under construction. But I'm not aware of hardly any brand-new mobile home parks or mobile home communities of any size under construction in the entire state of Texas. So we are really lagging on this place to put in problem. From our company's perspective, it's hard to get too excited about starting work on our developments when we already have a 10-month backlog. We don't need to add to it by having early development. So we kind of, I don't know, slow walk our own developments for selfish reasons. But eventually, we've got -- we have developments for some 4,000 spaces that we own the land for right now, which is a couple of years' supply -- production supply out of Texas. So we're internally solving this place to put in problem and can probably pull the trigger on that anytime we choose to do so.

Okay. And that was kind of my next question was just the development pace on your projects. Are you -- it sounds like you've maybe slowed that down a little bit more than before having permitting issues and kind of local government shutdown and having a hard time working with governments to be able to move those forward.

Yes. I mean we're 3 years into it in Bastrop County, and we keep thinking we're one week away from the final plot, which is required before you can start construction. But that thinking you're one week away has been going on for 6 months. They're still not meeting in their offices. When you have a meeting with them, it's all virtual Zoom meetings and stuff, and it's -- I mean, the permitting and the plotting time is much higher than it usually is. Hopefully, with all the vaccines and stuff, things will get back to normal. But getting things approved for construction at the city and county level is extremely slow compared to traditional time, maybe at least double the time, maybe even triple. But in Bastrop County, which is one I'm [ riding herd ] over myself, I mean, we're going to be ready to start construction soon, and it's not too far from the new Tesla facility. It's a real gem of a piece of land. And we're going to -- I think we're going to start on it even if we don't need the production. So we should be started -- construction in Bastrop County no later than this summer, I would say. Major, major project for the company. It's 1,200-plus 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.

Well, you probably noticed, because I know you're analytical, that our interest revenue was up nominally year-over-year, while our total book of business was up more impressively. And of course, what that's telling you is -- because we don't have any nonperforming loans. What it's telling you is we've had to do resets on the interest rates we're charging to communities, which is a big part of our book. 6.9% is where we're at, whereas a year ago, we were probably 1 point higher than that. To consumers, we're down on what we offer now, 2 or 3 points from before at higher prices with pretty good margins. But we're having to lower our interest rates because the world's lowered their interest rates in order to be competitive and not necessarily retroactively, especially in consumer, but a lot of times, the parks. If we don't -- if somebody owes us $10 million, we don't lower the interest rate to be more competitive. We're going to get that $10 million back prepaid, and we got to know where to go with it and make 6.9%. So we just go ahead and advise them to keep the loan on our books. I think we're going to be squeezed from an interest rate point of view as long as the Fed is keeping their pedal to the metal on the interest rate environment, which I don't understand why they are. But my daughter can borrow for 30 years at 3%, and that's pretty phenomenal interest rate. And so even when you charge 6.9%, they think, well, that's high. But those are loans that, typically, they don't have alternatives. We're in the chain of title. We charge 6.9%, and they don't have any income to prove the ability to pay back, so those loans are not competing with banks on that, just competing with other hard money lenders. And that was -- 6.9% is a fair rate at that. We've never had a loss because of the mobile home park loan in the history of the company. That's been a real big part of our plan. We were first to the party and then long before our competitors, now they're starting to copycat us one by one.

As you've reset some of these -- the new agreements still been kind of a floating rate? Or have you gone to more fixed terms on 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 in 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 making 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 is 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.

[Operator Instructions] 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 300 -- at the end of the quarter, we had 339 units on lease. And just on those units, 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, that's what -- which line item does that get captured in the revenue segment?

That is in -- yes, that's in the third line on the income statement, other sales or other -- is it other revenue? Other -- it's the other category.

[Operator Instructions] 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, 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 [ publicize ] as we can 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.