Legacy Housing Corporation (LEGH) Q3 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Legacy Housing Corporation Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker for today, Mr. Curt Hodgson. Please go ahead, sir.

Thank you for joining the call today. My name is Curt Hodgson, Executive Chairman. 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 Security 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 third 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 $56.5 million in the third quarter representing a 29.1% improvement over the third quarter of last year. This revenue increase came from both volume and price increases. We experienced strong improvement in our income from operations for the quarter, which increased to $17.6 million from $10.8 million in the third quarter of last year. While managing ongoing supply chain challenges and inflationary cost pressure, we were able to increase our unit deliveries by selling to finished goods inventory and realizing better gross margins as we offset cost pressure with systematic and regular price increases. We will continue to focus on opportunities to protect and grow margins and leverage our SG&A footprint. Net income of $14.7 million for the quarter was a 74.4% increase over last year. Earnings per share grew to $0.61 per share in the third quarter compared to $0.35 per share last year. This is the metric that I followed the most as many of you know. Legacy delivered an 18.9% return on book value on a rolling 12-month basis. We are pleased with our continued success in delivering value to both our customers and our shareholders. Overall, market demand orders in our loan portfolio are very strong. Of great importance to our future success, which is not reflected in our GAAP basis outcome are the strides we have taken in our mobile home communities under development. During the third quarter, we secured water rights as well as cleared other development hurdles on our 400-acre projects in Ambassador County near Austin, Texas. Our strategic real estate portfolio of mobile home communities will be populated by Legacy build houses and will serve to reinforce the demand for our homes for years to come. We see this as a major competitive advantage over our peer group and a key to our continued success. At this point, I'll turn the call over to Tom.

Thank you, Curt. Following up on Curt's comments regarding revenue, total revenue for the third quarter of 2021 was $56.5 million, a 29% increase over the third quarter of 2020. Product sales accounted for more than 90% of the revenue increase, and that was achieved while originating leases for 71 homes in the third quarter. Interest revenue from the company's retail and commercial loan portfolios expanded to $7.3 million for the quarter, which represents a 12.9% increase over the prior year. Compared to September 30, 2020, the retail loan portfolio increased by 12% to $121.6 million while consumer loan portfolio decreased by 22.7% to $100.1 million due to a customer prepaying a portion of its balance. Looking back on the quarter, the big highlight is that we successfully navigated a difficult commodity market through effective management of both purchasing and pricing while deepening our long-term position as a provider of choice for key customers. Further, we continued to keep our thumb on spending while making prudent investments. With that, I'll hand the call back over to Curt for final comments and any questions.

Well, thank you, Tom. I don't have any further comments, but you all are welcome to ask whatever question you have.

And your first question is from Mark Smith of Lake Street Capital.

I've got a handful of questions here. But first, I just wanted to look a little bit at kind of price increases versus mix in kind of average selling price of homes and how that trended?

Well, this is Curt. I don't have that debt in front of me, but we do follow it on a weekly basis in our management report. So I think I've committed to memory what you're asking. It kind of depends what period we're looking over. If we're looking at third quarter last year versus the third quarter of this year, our pricing metrics are up 25% to 30%. However, if you're looking at product mix, it's been really hard to track. We had a huge increase in double wides for the first half of this year. And recently, we're coming back to single wides. And when we track metrics, we really track the number of floors we've built as opposed to the number of houses that we sell. So our floor volume is pretty stable from one year to the next. But because there's more single lines being built out than there was previously, our number of homes sold has actually gone up and hence, the comment that we increased production. I'm happy to report that production is back to pre-COVID levels. And in the case of Georgia, we're setting all-time records in the amount of our product we're producing on a daily basis. We're now building a solid 16 floors per day, which I think in the company's perspective is about as good as it has ever been in the history of the company. That may give you a little bit of -- we have a little room for growth in deliveries from our current plants. I would say no more than 10% volume capacity left over. And that's only if we can harness the material and labor shortages that we've encountered this year, which I'm sure everybody has been talking about.

No, no, that's helpful on the price side. As we look at kind of channel mix, it looks like strong results in direct sales as well as retail store sales continuing to trend the right way. Can you just talk about kind of how you feel about kind of that channel mix and how that's trending today?

Well, we are retailing slightly more. We've added some very recent management to that part of our business. As you may remember from when we went public, it's our intent to be more and more retailers and less and less wholesaler. It's just hard to turn down a backlog of your good customer you've had for years and they're calling even asking you for your help and satisfying them. So we've got -- we have production challenges. Even our own lots have to compete for production slots. So they're a little challenged and their sales then because of our own production limitations. It's not just us, it's true industry-wide. All of our backlogs are so far out there, they are not even worth talking about, it's a year plus for us in our backlog. So we just have to kind of pick and choose who gets the product and who doesn't. I don't know when that supply imbalance will be closed in the industry. But I suspect we have another year or so of pretty clear selling. We can sell anything we can build. The question is do we sell it to one of our long-standing community relationships or do we sell it to one of our own retail locations or do we sell it to an independent dealer. I don't make those choices myself. I've delegated it to people like general managers. But I wouldn't want to be in their shoes and have to figure out who gets the production and who doesn't. It's a difficult decision on a daily basis. Again, that doesn't answer the question directly. I'm just saying that our retail sales are somewhat limited by our production capacity issues, if you follow me, Mark.

No, no, that helps. As we kind of look at price increases that you guys have taken, how do you feel about the competitive environment? Do you still have pricing power? And are the price increases that you've taken enough to fully offset inflationary pressure?

Each time we have a price increase, we kind of offer our customers a chance to back out. This year, we've had 13 price increases and I bet we haven't lost 1% of our backlog. So, I don't know where the end is. Because from an old timer like me perspective, I can't believe we're now selling single wides for more than we used to see double wides, but we are. We're getting $50,000 for our basic house, our 3 bedroom and 2 bath, that's our #1 seller. A few years ago -- a few years ago, that was $30,000. So price increases are just amazing to me, and it's not just us but our customers. We have vendors to us, the obvious ones are lumber and steel. But you could take it further and talk about sheetrock or windows any other thing, any of our Chinese imports. We don't get a 2% price increase from our suppliers. We get a 40% or 50% price increase. Now our customers understand that. I don't know where the end is. And I can tell you, our average payment on loans that we originate is up 25% in 24 months, and it doesn't seem to stifle demand. I don't know where the end is. We're still inexpensive relative to the counterpart by a wide margin. And that's our #1 calling card in the industry.

Okay. And the last one for me. I just wanted to look a little bit at this big repayment that you had in your MHP portfolio right at the end of the quarter. Kind of the impact on that going forward? And is there anything else to read into that as far as continued partnership with this kind of partner? Is there anything that we should be reading into given that big repayment?

Well, I was kind of open to somebody else should take one of these questions. But this one -- this is probably -- there are 4 questions. This is the one I mostly certainly would. This has been our #1 customer, a very well-heeled customer all along. We knew this prepayment was coming for quite a while, we get a lot of forewarning. But they're still buying from us and they're still buying from us on a finance basis. But let me just translate what you asked to a numbers point of view. So when we finance somebody, we generally make a 5% delta between our cost of borrowing in our price that we financed for. Sometimes it's even more than 5%. So you could do the math and figure out if we're unable to replace that $45 million prepayment what that would potentially do to our bottom line a year out. The fact of the matter is we do replace it with other things, including sales to that very entity that paid us off directly. We have plans on the horizon to once again take our loan back up to the $50 million, $60 million mark, so we get some leverage on our financial statement. And on leverage, we still be pretty good from an ROE point of view, I think you would agree. But when you have a good customer and you're trying to lend money to them, let's just say 7% and he has an opportunity to pay it off early and get a 3% loan, we're not going to compete with that source of capital. It just -- it doesn't make sense for us. And we're going to be under those kinds of pressures for a good while longer. That's why we have to find ways to keep our margin spread on what we're selling the product for versus our cost healthy. I think we are roughly 30% this quarter, which is very healthy and from a gross margin point of view. As long as we can make money on the product, we're going to still be able to deliver the ROE that you're adjusting to.

Next, we have Alex Rygiel from B. Riley.

Great quarter. Curt, a couple of questions here. Let's start with the community development program. So you mentioned Austin. First on Austin, when should we expect homes to start to be delivered to that property? And then what is your longer-term view on liquidating that asset?

Well, as you may know, Alex, I live in Austin, so it's pretty much in my backyard. In an ideal world, you wouldn't liquidate -- you milk the cow for the rest of your life. But the slowness in development where our projects is spread throughout the United States. It's just hard to get government regulators and contractors to do much in 2021. Couple that with the fact that we really don't need the orders. It's hard to get really excited about developing that project at the risk of notifying my neighbors who broke ground in the third quarter. So I would expect that we can be -- we can be up and running as far as product sales within 12 months. Whether we might not do that just so we don't have the manufacturing capacity, but the project itself is doing extremely well. It's a very exciting project, only a few miles out of the new Tesla facility. So it's -- it's in the same -- we also have another 2000 spaces besides those that are under predevelopment. I think we have about $20 million, Tom can answer that. Land and improvements in the company that have been sitting dormant from an ROE point of view that are just incubating for the right time and place to turn them loose. That's coming on the one in south of Austin. I would say in the calendar year 2022, it's going to happen -- we're spending millions of dollars building roads and putting water system into the right now. So as far as the exit strategy it's going to be tempting to sell it to one of the REITs because they're paying top dollar for their spaces. So it will be a contest between what we think is best for the company long-term and what's obviously best for the company short term. But long term, ideal landlord should own it forever. Short term, it's hard to turn down 2 or 3 exit plans put together in it . So -- we'll see when that time comes.

And then next question, are there any other strategic initiatives or activities that are ongoing right now, either as it relates to your Georgia plant or as it relates to the type of home you're building, the size of the home you're building or geography that you're in.

We think we're the most innovative company on the planet. And what you're asking, I can answer with a word, yes. But I really don't want to give you a lot of details that would preannounce what we're doing to our competitors. But yes, we're having our big show this weekend. There will be 250 attendees, it's the biggest kind of show in the industry. [indiscernible] from a product point of view for the next year. And then as far as strategic initiatives, I'm just not going to go down there. It's a question I don't really want to answer. So I'm sorry, Alex.

Fair enough. Nice quarter.

All right. Anybody else?

Next, we have Michael Chapman from Aviance Capital.

Just a couple of follow-ups on the homes leased, 71 increase. What's the total number of homes you have leased now in the portfolio?

Tom, do you now take the question will you?

Yes. I believe my schedule tells me 398 is our total count. That's what I got in front of me.

Okay. And then given that you're kind of capacity constrained is how do you decide what goes into that? Obviously, you put that in at cost. I'm assuming there's plenty of demand there. Lease rates don't seem to be that great on that. So what's the decision to -- how do you decide whether you put more into that as opposed to sell them to third parties?

I can answer that one. We kind of left the decisions of who gets what to the General Manager level. It keeps upper management out of the politics and it seems to be more satisfying. So that General Manager is flying, whether or not it's a lease or it's a sale for cash or it's a finance sale or it's even a sale to our own lot. He might be blind to that. He's looking to maximize his production number of floors. That's the #1 priority. #2 priority is to look at the customer and decide whether or not that personality, that situation is going to be long term or whether it's just appeared because of the imbalance between supply and demand. So we don't really recognize that. But to embellish on something that you already observed, I think I can mathematically tell you something that will be of interest. The lease rate that we're getting is close to 2% of the bases we have in that property on a monthly basis. So those 398 leases will be paying dividends in the form of earnings and top line for many, many years to come. And on top of that, these are not closed-end leases, they're open-end leases where we get the residual and the residual has gone up in value markedly since most of these leases were put in place. So it's one of many hidden gems in our balance sheet. While we might be showing it at X, the actual cash flow and residual value of that X is probably closer to 2x or maybe even more.

Okay. And so on those, do you get inbound calls from investors wanting to buy those from you and you just hold on to them because of the basically annuity that you guys get on that and the increased kind of residual value?

Well, the only interest we have in getting us out of it is the unless he sells. He calls and says okay, where is my cash at. And thus far, when we do a cash analysis on a return on investment, they think they're going to get a discount from the original invoice price, but it's just not that way. Between the rate of return we get on lease payments and what the expected residual value, if anything, they've increased, they've appreciated since they first went. It'd be like buying a car for $30,000 and 3 years later, it's worth $40,000, you know its used. I mean that's kind of the market that we're in right now.

Right. Okay. And then just kind of on capacity. It sounds like you're kind of tapped out on capacity in Texas. If you didn't have the labor constraints that you do have. Is there the possibility in those plants to run more than 1 shift or run on weekends?

We've looked at that possibility several times before. And of course, those decisions that were made 10 years ago aren't necessarily the same decision you would make today. But historically, no plan has succeeded that I know of in running multiple shifts in one geographic location. The cost of building is not that material. So if you weren't there to add that type of capacity and you had a little lead time, you're probably better off building a sister plant right next to it, the workers want to come back to their home environment with their tools just where they left it and when they can pick up where they left off the day before. That's my sense. We've never tried a double shift. But when we looked at it in prior imbalanced situation between supply and demand, we came to the conclusion after a lot of thinking and analysis and discussion among the old timers that it just wasn't going to pay. We found sometimes the tenth little home or the ninth little home out of the plant is actually unprofitable. There's a sweet spot in these plants. If we can get the labor shortage stabilized, so the people that stay here for at least 12 weeks before they find the next gig, then I think we have about a 10%, maybe 12% capacity. We don't have a geographic problem. We got a revolving door when it comes to labor as everybody is out getting the last guy, and so everybody is new. We have the same [indiscernible] Fort Worth, we have the same core 120 workers and then we'll have another 100 that are showing up for the first time, it seems like every day. And then we have the same -- we have another problem and that attendance is not that good. So nobody works for 5 consecutive days anymore. It's kind of hard to run an assembly plant if you don't know who will show up tomorrow.

Yes. I mean, so that must be systematic across the industry. I mean, do you think that a lot of the pricing you're getting is just capacity constraints industry-wide in production? And everybody is kind of assuming that, that's going to be consistent unless there's some change in either the work ethic or the ability to bring in outside workers .

I think its worldwide and everywhere. When you got boats going around in circle out in the Pacific because they can't land at a port and unload, there are systemic problems in everything that I think would just take something to get that back to a stabilized deal. When I talk to the very head people at my suppliers, and I'm begging them for shingles or I beg them for refrigerator. They apologize, they say, I'm sorry, I'm sorry, I'm sorry. I know this doesn't mean any sense, but we can't sell. So we don't have the steel, we don't have the asphalt or something like that. So we have worldwide issues in supply management and our staff spends more time begging for their product than they do negotiating the price. When will that change? I don't know, I could be asking you that question, you might be able to -- you might be more right than I will be. It won't be this month. It might be next year sometime.

Okay. And so the number of floors that you guys can do is pretty well tapped out right now, even if you had the ability -- if there is demand pull, I'm assuming there's demand pull out of the Georgia plant, where you do have the ability to add some production facilities, you can't add the production facilities because you don't have the workers that would fill that production facility. So it's kind of like an infinite loop until something loosens up. Is that fair to say?

I feel like if we build a plant right next to the one we have in Fort Worth, we couldn't build any more houses because we've employed everybody that knows how to rough or how to do electrical work within a 5-mile radius as it is. So I mean the capacity problems aren't physical as an industry. They're people and materials. These buildings aren't that hard to build. You can put up a manufacturing facility in 24 months for, say, less than $10 million. It's the staffing and the materials and the systems that we have in place, it's hard to duplicate. We're all sitting there. There aren't many plants in the United States that are actually in construction at least in our industry. I do understand the RV industry has got quite a bit on the construction in Indiana. But in our industry, you could probably count the number of new plants under construction in one hand in the entire United States, even with the imbalance between supply and demand.

[Operator Instructions] And next, we have DeForest Hinman from Walthausen and Company.

Somewhat new to the name, just to get a little bit more color on the comment on the valuations for developed parcels. I believe you were referencing the UMH call, they put out a number. I think it was in excess of $100,000 for developed path. Is that the type of number you're referencing? Or is that something different?

That's an excellent question. First time has ever been asked. The number you're hearing is the market value what they're trading at. They're trading at -- upper 5 digits is where they're trading at. The actual replacement cost, and I hate to burst the UMH's bubble, but you can buy the land and put the improvements in and fill it up for let's just say under $50,000 a space. So there's an imbalance between market value and replacement value in the space business, a significant imbalance. And even in our best properties, we're intending to be all in for less than $50,000, all including holding costs and everything. So I mean in some cases, we're going to be -- we can be in for $30,000, $35,000 of space. So there's a big imbalance between market value and replacement cost. The REITs think that there's a limited supply of land that can be developed into mobile home spaces. Here at Texas, which is the #1 state in the United States, I've lived here for most of my life, and I've been in this industry for over 41 years, that's just not the case. I mean all you have to do is have a 4-year plan, in politic you'll find the entitlements, and you can put thousands of spaces here. That does take 4 years from beginning to end, but there's not a barrier to entry that people think of in Oklahoma space. So if you want to compete in that space, you still have to find a good location, a good school district within commutable distance to an employment center. We can't just put it out in the middle of nowhere, but I think that if you're following the REITs, you've asked probably the best question I've heard, I don't understand why they reach your price to 2 or 3x replacement costs, but they are. So here you go. That's -- some of those people are my customers, but it is what it is.

Well, my short uninformed answer is people are very impatient so if the asset is there and they don't have to deal with the 4 years of development pain, they pay that premium. But more specifically, on your locations that you've disclosed in the queue. I believe you have 7 parks that are disclosed. Can you just help investors understand where those parks are in that timeline that you just described are 2 parks placing units right now or 1 park's done. I mean any color you can provide there, I think, would be very helpful for shareholders to just really get a better understanding of what you have done and what you're hoping to accomplish and how much revenue stream those developments are currently providing at this time.

I can give some color on that. All of those locations are already entitled to develop manufactured housing unit in communities or parks, I mean subdivision of parks. We don't have any entitlement barriers whatsoever. There's a little engineering barrier between the water supply and the electric supply, contractors and getting the tax filed. But there's no entitlement barriers to any of those. So part of it is the slowness of the systems during the COVID era. And the other part is it's hard to press forward and create even more demand for our factories than we have now. So I guess we're kind of incubating them until we need them. But the other question I want to answer because it's a follow-up to your first question, is just doing the math a little bit in my head, I believe our land cost is somewhere around $4,000 or $5,000 per space of all the different lands that we own. We're in that range, $4,000, $5,000, $6,000 of the outside is the land cost per space. So any additional cost per space is strictly development like roads or water. That may help you look at it, and we're active in most of the major markets in Texas, and we have feelers out not only do we own those 7 things, but we provide financing to key developers that are in this space, we make loans. I think we have another, I don't know, close to $15 million or $20 million out in loans to people who are developing manufactured housing communities in other states besides Texas. They're our customers, if we make money lending money, we make money building homes. So I'm pretty familiar with what's going on in our market all the way from South Carolina to New Mexico. And I'm not pretty familiar with the ones that are on the drawing boards and what their expected development cost is. There isn't that many that are breaking ground because they couldn't get product even if they build them. But they're all -- I would say there's -- I don't know if I was picking a number, $20,000, $30,000 spaces that are pretty far along on the drawing board in our markets in the Southern United States, maybe a little more than that. It is significant but not as significant.

No, that's very helpful. And then if we look at those 7 parks that you have discussed right now, is the math for pads per acre. Is that a number that makes sense or is that off base?

There's kind of a fork in the road. If it is a subdivision where we're selling the land, it's probably 1-point-something per acre, less than 2 because they're usually a septic system environment in that case. If it's going to be a rental community like Austin, or like say Venus, we have 1 there. Then we try to get around 5 per acre, you can do 6, but it's better if you do 5 because no one wants to live on something where they can -- where they don't have new land. Part of the advantage of living in a mobile home is a place for your kids to be on a swing set, for your dogs to live, it's better than an apartment. If you take that away, then you kind of miss the part of your competitor advantage. The #1 developer that we are financing, and we have millions out with this developer, he believes that they should be about 5,000 or 6,000 square feet per pad, and he's netting something less than 5 per acre with that development scheme. We're a little bit smaller in what we're doing ourselves. So we're probably between 5 and 6 per acre, a little closer to 5% and 6%, I'd say.

Okay. That's very helpful. And then just kind of maybe last question on the development side. Can you just talk about how you envision capital? And I know you said you can't build a park and -- it doesn't make sense to build a park and not put units on it. But in terms of what mathematically would it cost to kind of build out the parks, the way that you envision them from just a ballpark dollar expectation? Not in 1 year, but just in total, how much money would it cost to close out all those parks?

Well, all in if we were to develop everything that we have on the drawing board, we're probably looking at $100 million. Now where does that money come from? Well, apparently, we're making about $14 million or $15 million a quarter, we got to find some place to put it. So it's -- it shouldn't be hard to grow it through organically. As far as the availability of money to develop, it must not be that great because we're providing a bunch to some pretty experienced people. So I'm glad we don't have any real cash needs or we might be [indiscernible] a lot of money is in chasing finished product, but there's not much money chasing developments that I know of any way out there.

Okay. That's very helpful. And then just really big picture. At some point, hypothetically, maybe some of the demand for units falls from the 3 customer groups that believe you laid out retail dealer and then the big park owners, REITs, et cetera. I mean, do you envision transitioning these high levels of production over to our own parks to fulfill their needs? And then having said that, is this a period of time where you're thinking about 2 or 3 plus years of very high levels of production.

Well, I think it's going to be at least another year. Ultimately, the industry has to stop being Jim Walter's homes and start being Pulte Homes. We have to be more integrated, providing places for the cars and a place for the kids to play at sidewalks and so on and so forth. And I've been pounding that table for years that unless the industry becomes competitive with subdivision build by the major homebuilders that were kind of a boutique industry. So that's what we're doing. We're just trying to be more integrated and give the consumers a more finished approach to what we're doing. And now whether we sell it or we rent it. Right now, there's a big trend of renting houses. So in today's market, you think about renting these things for $1,200, $1,300, $1,400 per month. But historically, homeownership is preferred to rentals. So I don't know if I'm dancing around your question, but I think the development philosophy of Legacy is fixed because of the lack of do-it-yourself in the end user -- I mean people don't know how to build their own cardboards anymore like you did when you were young. I think you got to be prepared to give them a more complete package or we're going to be just a very boutique industry. We can still compete with Horton and Pulte on a heads-up basis, but we can do it just selling the house itself. We've got to be more comprehensive than and that's our move. We're going to be more and more comprehensive whether we take to the bottom line rent to dollars or sales dollars and all that is relevant. The philosophy is to be more complete, more comprehensive, more like a true home builder.

I appreciate that color, and I'm a young guy, but I do remember Jim Walter homes. So that's a good comparison. I guess just in terms of educating shareholders at some point, does it make sense to do something on, you know, an investor deck where we kind of talk more about the development projects, maybe some pictures to help people visualize what you guys are doing and what you're trying to accomplish. I mean is that something that makes sense.

We created opening in our Investor Relations department. You guys can figure out -- we're not very good at Investor Relations, but I meant to weave in a factor that I'm 67, Kenny turned 63 recently. We do have a succession plan that's starting to develop. But we both grew up in very, very small rural environments that were basically farmer -- in farmer environments. And we do know how to make hay while the sun is shining, which is, of course, what you're seeing in not only our financial reports, but other people went in to import well. But we also know what to do when the sun doesn't shine. And that's where the LEGH will really show up. And we had a great week. I don't know what happened in the industry, but it was probably the best week we've ever had. But our better weeks on a comparative basis will be if the sun stops shining, then you'll really see how we can perform with our value systems. For those of you that are more long-term oriented than your investments. I mean, we've never lost money. We've always made a double-digit return on equity ever since we've been in business. So I don't -- I'm not worried about the churn of events that could be negative. Like sometimes, I just wish it were to hurry up and happen, so I could prove this point I had been making for several years.

Well, we are shareholders, and I don't want you guys to shortchange yourself. I mean I can certainly follow up and give you guys some ideas that we would have in terms of describing what you're doing because...

We'll try to be more transparent on some of these things. It's just -- if you have your choice between talking about it and doing it, then we're doing it. And that's kind of where I'll leave it. I mean, it's -- I know I've done most of talking on this because these questions fall right in my daily book. If we had talked about retail with McKinney, we can talked about ratios all the time, but you keep asking questions that are within Hertz daily wagon. We're going to do this fine for definite future, and we'll -- and comparatively, we'll do extremely well if there is a downturn. We keep talking about the downturn, we are talking about for years. I mean who would have guessed that COVID would have lasted 2 months from a [indiscernible] . I certainly didn't have that analysis. So I would have been wrong on that. But our backlog has never been better. Our margins are good. Our relationship with our customers is good, and we continue to innovate. We're doing things at the show in this week that are mind-boggling as far as the product comes on.

Okay. Well, I look forward to learning more. The strategy makes a lot of sense, and I'll circle back with the team, and we'll have a detailed conversation. I appreciate you taking the calls and keep a good work.

Next, we have Brian Glenn from Olcott Square Investment Partners.

I have a question. This goes back to -- I know you guys are huge proponents of lending. I know you view it as a strategic asset. This goes all the way back to letter you wrote to Cavalier when you guys were shareholders with that entity at the time it was selling its lending arm. And I'm sure years before that, all through your time in the industry. I wanted to see if you could walk through plain English the structure that you do with dealers, with your third-party dealers in terms of that preferred return in terms of the split on the residual. And then I know there's that gross margin hold back. Is that part of that dealer incentive liability? Or is that separate? And I guess, I know when I talk to people, they view the loan side is particularly risky and I think it's something that's just misunderstood. I know it's spelled out in the K. But I just want to see if you can walk through that a little bit, because to me it is an interesting structure that you guys do on the risk mitigation incentive side?

We have 4 significant lending arms and you're hitting on one of them. So if we sell to an independent retailer, and he wants to avail himself of financing, retail financing through us, then we give him 80% of his profit upfront, and then he participates -- he kind of owns 20% of the backside profits. So far, that arrangement has meant that we've sent out over $6 million worth of participation checks to our dealers. No one has lost money in that arrangement. Of course, it's been mostly an upmarket for this period. So it might not be great analysis. We get real down payments. We have credit analysts that do their job and more importantly, we have an 8-person bilingual collection team so that our delinquency rate right now is at an all-time low. And part of that is because no one's upside down on what they bought 5 years ago. In fact that they want to replace it, they might have to break it 3 times, which is certainly a whole lot of product. So the existing portfolio of $133 million of retail paper is solid now as it's ever been and yield to team or yield to joint venture is somewhere in the 13% to 14% range. We are lucky that we are selling the biggest ticket item probably in the world where the end user is able and willing to pay 12%, 13%, 14% rates of internal rates of return on the debt. So not only do we make that on the product, then we make a margin on the product, and we make a service and the retailer. So that's -- I'm not going to tell you what it brings to our bottom line because I'm not sure I would know, but it's a significant number in our earnings because of the fact that we're in the retail finance business.

And there are no further questions at this time. I will now turn the call back to Curt Hodgson for closing remarks.

Well, thank you all for attending. I know we didn't give you much notice in the earnings call [ technical difficulty ] on that, and I appreciate. It's probably the most questions we've had and I got some new faces on the line. I appreciate you all being there for us. The more following we get, the better off we are. So we'll have another earnings call in 3 months. I appreciate you all. Good day.

This concludes today's conference call. Thank you all for your participation. Enjoy the rest of your day, stay safe and you may now disconnect.