Description

Legacy Housing Corp. (LEGH) has been written up on VIC twice since its IPO in December 2018. The first was in 2019 and the second was in 2022, with share prices of $11 and $16 respectively. The company went public in December 2018 and shares have traded as low at $10 and as high as $28, in late 2021. Shares currently trade around $20 but are worth high $20s absent growth. Several levers for growth exist. The owner-operator duo who own about 8.3 million of 24.4 million shares, recently hired a banker with deal experience both from bank side and strategic side. The company has a track record of 15%+ ROEs and ability to reinvest to grow corporate equity. For the first time in more than two decades, the industry is seeing higher unit sales and the interest environment may continue this trend. 

Industry

Manufactured Housing, pejoratively called Mobile Homes, represent a low-cost alternative to home rental or home ownership. Various figures are thrown around – some erroneously include the land allocation (a site-built home includes land ownership and this is not always the case with mobile homes). Square footage at the median is roughly similar, with mobile homes ranging from 500 to 3,000 square feet while the median U.S. home is 2,500 square feet. Manufactured Housing Association cites Average Sales Price for site built housing of $$390,000 and $300,000 excluding the land allocation. This compares with double-wide average price of $108,000 and blended average (single and double) of $82,000 in 2020. This delta persists today and rising interest rates have further stressed the affordability of site-built housing. 

Mobile Home Industry unit sales peaked in the United States at 372,800 in 1998 and troughed in 2009/2010 at 50,000. The trend is partly attributable to falling interest rates which made monthly payments for site built housing increasingly attractive. In 2004, Buffett wrote to Berkshire shareholders than the industry “continues to reside in intensive care”. At the time, 131,000 home units were sold annually. Today, about 100,000 home units are sold annually, split almost 50/50 between single-wide and double-wide units.  

Berkshire’s Clayton Homes is about 50% of the market. Cavco and Skyline Champion approximately 15% each. LEGH’s ~3% market share seems inferior but this is a regional scale type of business, where products are often sold within a few hundred miles of their production location. Three large production facilities (LEGH) operating at full capacity can, locally, realize as much (or more) in scale economies as national operators. In various LEGH filings, the company has estimated it’s the fourth to sixth largest producer of mobile homes. 

Company Overview

Legacy Housing (LEGH) was founded in 2005 by Curt Hodgson and Ken Shipley. Today, Curt owns 5.3 million shares and has continued selling shares via 10b5 plan. Ken and his two brothers, William and Douglas, own 3 million shares each. The group’s ~14 million shares compare with LEGH total shares outstanding of 24.4 million. 

Through 3 production plants that total 615,000 square feet, LEGH manufacturers and sells manufactured housing or frequently known as mobile homes. Units are sold to the company’s 3^rd party dealer network and to a lesser extent, its own (13 locations) retail network. LEGH also sells to Manufactured Housing Park developers (MHPs). The company has also acquired land – 10,000 acres total across 7 Texas locations –to develop and rent housing units. LEGH has a lending unit where it lends to dealers (floor plan financing), retail customers (chattel loans) and MHPs. Retail loans yield ~13.5% according to the company’s 2021 10-K with an average LTV of 84%. There’s a very-aligned and unique structure to these loans where dealers receive a portion of profits but with a hold-back that ensures LEGH first receives principal and a double-digit preferred return. Lending operations have been highly profitable and losses minor (~1-2% of loans). This is partly due to the ability to repossess and resell collateralized units, not unlike subprime auto lending such as Credit Acceptance Corp et al. 

According to the company’s 2018 S-1, over the 2009 through 2017 period, book equity compounded at 25% per annum. Since its IPO, the company has compounded book equity at 14% per annum and averaged ROEs of 16%. While 2009 marked the nadir of manufactured housing unit sales in the United States, at 50,000 units, over the company’s life industry unit sales have fallen by about 30%, from 147,000 in 2005 to 106,000 units in 2021. 

LEGH’s two Texas production plants operate at capacity and its Georgia plant is roughly 50% utilized. The company reports that very minimal CapEx could increase capacity but, over recent years, mgmt. has stated hesitation to add capacity. Production plants are as follows:

•  Fort Worth Texas 97,000 square feet producing ~1,000 homes per year
•  Commerce, Texas 130,000 square feet producing 730 homes per year
•  Eatonton, Georgia 388,000 square feet producing 1,100 homes per year, approximately half capacity.

The company is vertically integrated, with its own fleet of delivery trucks as well as producing in-house cabinets, counters, and trusses rather than relying on 3^rd party suppliers. 

LEGH is the low-cost operator in an industry that is the low-cost alternative product. 

Accounting and Filing Issues

Immediately after its December 2018 IPO, LEGH had a delayed 10-K filing, ultimately publishing about a month late. To date, the company has shuffled through 4 CFOs as well as general counsel (hired in prep for the IPO, resigning 1.5 years after the IPO). Notably, the company’s long-time treasurer Jeff Burt – who was hired as CFO into the IPO and subsequently demoted – has continued employment with the company to date.  According to a former employee, Curt and Ken are demanding operators and it’s “get on the train or get run over by it.” CFOs to date have done very little in Investor Relations outreach and no sell-side conferences. 

Auditor turnover existed as well. In July 2019, Legacy changed auditors from Grant Thornton to BKD. In 2021, the company replaced BKD with Weaver & Tidwell. In Fall 2022, the company hired Daszkal Bolton LLP as auditor. In all cases, no adverse opinions, disclaimer of opinions, or qualified opinions were issued by any auditor.

On March 31, 2022, LEGH filed an 8-K informing the public that it would be late in filing its 10-K and that an ongoing review as in process. In May 2022, Ron Arrington was hired as CFO (taking over from Jeff Burt, who had stepped in – again – this time as Interim CFO). 

The company received several NASDAQ deficiency notices through early and mid-2022. 

In August 2022, LEGH filed a non-reliance notice but also said it estimated adjustments of $1.7 million related to Accountings Receivable and the timing of net income recognition. In magnitude, this was immaterial. More notably, the adjustments ultimately netted out over the 2021 and 2022 periods.

In June 2022, the company hired Board member Duncan Bates as CEO. Included in his hiring was two option packages. The first for the option to purchase 300,000 shares at $36/share and the second package to purchase 600,000 shares at $48/share. Both packages are 10 year terms, vesting one-tenth each year. Duncan first met Hodgson and Shipley when Legacy shopped for bankers to transition to public ownership. At the time, Duncan worked at Stephens at the time. Legacy ultimately went with B. Riley for its IPO but Duncan maintained contact with Hodgson and Shipley. Duncan joined the Board in late 2020. Investor enthusiasm was minimal, as Duncan was “too young” and also “just a banker”. Conversations with Duncan indicate he’s 1) sharp, 2) motivated, and 3) has been meeting with Ken and Curt since that initial road show. A positive for LEGH – which has plenty of profitability, cash flow, and balance sheet powder –Duncan has deal-making experience and was deeply involved in the tax-efficient separation of Arcosa (ACA) from Trinity Industries (TRN). ACA shares have increased in price from about $27 at time of separation to $61 today.  

LEGH shares traded as low as $12 in July 2022, during a period of delayed 10-K filing and accounting restatement. Today, shares trade around $20, the company is current in filing financials, its profitable, and the accounting issue proved to be immaterial. More importantly, during early 2022, according to a conversation with the company,  Legacy upgraded its accounting system, switching from Quickbooks to Great Plains (Microsoft). Indeed, Curt Hodgson and Ken Shipley built and ran a company with $200 million in sales, with lending and manufacturing operations, on Quickbooks. 

The published calendar 2021 10-K and restated financials, along with the subsequent 2022 10-Qs for quarters ending March, June, and September, showed the following:

•  The restatement proved immaterial
•  LEGH continued to be highly profitable, growing sales, margins, and earnings. 
•  LEGH shares, which traded as low as $12 and hovered around $13 during the “dark” period of delayed filings, were trading at 5x operating earnings and 6x net earnings based on the then-most-recent published financials. At this time, Summer 2022, the company had received to Delisting notices, was late on its 10-K and 10-Q, and was restating financials and changing auditors. It’s newly hired CEO had yet to speak on an earnings call. At $20/share, LEGH shares trade at 8x net earnings, hardly a rerate. 

LEGH trading multiples have increased only ~1-2x from Trough prices when the company was non-current with filings, restating financials, and suffering from CEO succession and CFO turnover issues. 

Valuation

•  Loan Book
  •  Legacy’s loan book consists of 3 different types of loan assets: lending to MHPs, lending to consumers, and lending to dealers for floorplan financing. Historically, loans have performed well, with both provisions and charge-offs less than 1% per annum. We assume this book has a market value of as high as balance sheet carrying value (it currently yields 10% annually) or $277 million and as low as $221 million assuming a 20% haircut reflective of elevated charge-offs of 2% per annum over the next 5 years owing to the environment. The LTV figures (mid to low 80%) and historical figures suggest $221 million is overly conservative and unlikely.
  •  Per share value at 24.4 million shares outstanding ranges from $9 to $11.30.  
•  Land – 
  •  Legacy has acquired 1,026 acres across 7 Texas locations over the past 5 years. Cost for this land totals $11 million or $10,700 per acre. Legacy made improvements of $4.8 million. Management has indicated between 5 and 6 housing units per acre, consistent with other developers, which implies 5,100 to 6,100 homes or more than 2 years of production from its facilities. This land has tremendous optionality, with the ability to more aggressively develop if blacklog shrinks and production demand for arms length customers (retail and MHP) slows. MHP REITs, such as Sun Communities (SUI) have been acquiring MHPs at ~$100,000 per unit. Legacy has indicate communities can be developed for less than $10,000 per pad plus their unit production costs (~$45,000 per home). Mgmt has indicate the land is worth 2x or even 3x when permitted. At all-in cost of $16 million to $27 million (2x land + improvements), per share value is minor but incremental, at $0.66 to $1.11. 
•  Manufacturing Operations. 
  •  Legacy owns its two Texas plants with 97,000 and 130,000 square feet. The two plants together produce about 1,800 homes per year. Georgia, a leased facility with 388,000 square feet, is half-utilized. The other half does not have production capability but could, with minor investment.  Georgia produces about 1,100 homes per year. For comparison, Buffett’s Clayton Homes, which represents roughly 50% of USA Mobile Home production, had facilities ranging in size from 87,000 to 194,000 at the time of their last 10-K as a stand-alone company (2003). Cavco’s facilities range from 79,000 to 341,000. 
  •  Legacy is currently averaging $20,000 in gross profit per home. This number was $12,000 before COVID. Rising prices have outpaced rising material costs. LEGH as well as industry peers SKY and CVCO have seen margin expansion. Bears point to a full or significant reversion. This is less likely to happen for several reasons. First, industry until sales toughed in 2009 and only slowly recovered thereafter. A 10 year lookback includes earlier years when industry operators were still suffering . Industry volumes have been growing and are up ~2x from 10 years ago. Second, home affordability is decreasing per rising mortgage rates, and data points suggest homes are undersupplied. Mobile homes provide a more affordable way to own a brand new residence. Third, specific to LEGH, the company is the low-cost operator in the industry, producing homes for an estimated ~$10,000 to $15,000 less than peers.
  •  At $15,000 in gross profit per home, and 3,100 units per year, minus $24 million SG&A overhead allocation, pretax income is $22.5 million. At a 10x, a reasonable figure for well-operated manufacturing operations, these operations are valued at $225 million or $9.20/share. At $20,000 gross profit per home produced, and 3,100 units per year, minus $24 million SG&A, pretax income is $44 million and a 10x multiple yields $380 million in equity value or $15.60/share. 
•  Consolidated business from the above parts = $19 to $28 with little growth ascribed (maybe the manufacturing 10x implies some level of growth) 
  •  Despite K and Q filing issues, Mgmt are good operators. The company has been profitable every year since formation. Margins are the highest amongst public peers. Cost per Home is the lowest amongst the same peer group. Duncan Bates indicated the company can play offense,  now that the accounting infrastructure is updated and filings are current. 
  •  LEGH has dry powder, and now leadership with deal experience, to opportunistically grow. 
  •  LEGH also has optionality on its land holdings, when to develop, how to develop (complete and flip or complete, rent, then flip or sell for a gain without fully developing)
  •  LEGH has optionality to expand existing production in its Georgia plant. Management has said that they prefer running a production line at a minimum of 7-8 homes per week. Below that, they say, becomes challenging to generate a profit given relatively fixed labor. This has been the consideration of when/if to expand Georgia. 

Exhibit 1 – Long-term Margins of Operators

Exhibit 2 – Peers

Exhibit 3 – Unit Sales 1976 – Nov 2022

Catalyst

• Continued 15% ROE's
• Increased float
• Turning on land productivity, buildout of valuable internal MHP community