Executive Summary / Key Takeaways

• Legacy Housing Corporation operates a vertically integrated model encompassing manufacturing, distribution, and financing of affordable manufactured homes and tiny houses, primarily targeting households with incomes below $75,000.
• Despite recent softness in product sales volume due to market uncertainty and strategic pricing decisions, the company's loan portfolios continue to grow and generate stable interest income, contributing significantly to overall profitability and cash flow.
• Strategic initiatives, including product line simplification, modifications to financing programs, and investments in land development projects near high-growth areas like Austin, are aimed at improving manufacturing efficiency, broadening the customer base, and unlocking significant balance sheet value.
• Management maintains a positive outlook for the remainder of 2025, anticipating increased production, continued strength in retail finance originations, and improving momentum in the community business, supported by potential regulatory reforms favoring manufactured housing.
• Key risks include the impact of high interest rates on customer affordability and transaction volumes, potential material cost inflation, ongoing litigation related to a significant borrower, and the need to address identified material weaknesses in internal control over financial reporting.

The Foundation of Affordable Housing

Legacy Housing Corporation, tracing its roots back to 2005, has built a business centered on providing affordable housing solutions through a deeply integrated model. The company manufactures a range of homes, from compact tiny houses to larger multi-section units, at its facilities in Texas and Georgia. This manufacturing capability is coupled with a robust distribution network comprising independent dealers, company-owned retail stores, and direct sales to manufactured home communities. Crucially, Legacy differentiates itself through its in-house financing operations, offering inventory financing to dealers, retail financing to consumers, and commercial financing to mobile home park owners. This vertical integration, spanning manufacturing, sales, and financing, is a core strategic pillar designed to control costs, streamline the sales process, and provide tailored solutions that make homeownership accessible to a target market often underserved by traditional housing.

The company's operational model, particularly its manufacturing processes, serves as a key differentiator. By producing many components in-house and employing high-volume production techniques capable of averaging approximately 70 home sections per week across its plants, Legacy aims to maintain cost efficiency. While specific, quantifiable technological advantages in manufacturing speed or material utilization compared to peers are not detailed, the integrated approach inherently offers benefits in supply chain control and potentially faster delivery times compared to competitors relying heavily on third-party logistics. Recent strategic adjustments to simplify the product line – dramatically reducing floor plans, color choices, and options – are explicitly intended to enhance efficiency in the plants and allow the team to focus on core products, demonstrating a commitment to optimizing this operational foundation.

In the competitive landscape, Legacy Housing operates alongside larger national players like Skyline Champion (SKY) and Cavco Industries (CVCO), as well as other manufacturers and community-focused entities like UMH Properties (UMH). While LEGH holds a smaller market share, estimated in the 5-10% range, its vertically integrated model provides distinct advantages. The ability to offer in-house financing, for instance, is a significant competitive tool, potentially increasing customer conversion rates, particularly in the affordability-focused segments where Legacy concentrates its efforts. This contrasts with competitors who may rely more heavily on third-party lenders. However, larger competitors like SKY and CVCO benefit from greater scale, which can translate into superior purchasing power for raw materials and potentially more efficient manufacturing processes, leading to higher gross and net margins compared to Legacy's recent performance. Legacy's strategy of holding pricing, even at the expense of volume in certain periods, also contrasts with some competitors who may have lowered prices, impacting comparative growth rates and margins. Despite trailing some peers in metrics like ROIC and ROE, Legacy's lower debt levels offer a degree of financial resilience.

Performance Reflecting Market Headwinds and Strategic Adjustments

Legacy's recent financial performance reflects the challenging market environment characterized by high interest rates and housing affordability constraints, alongside the impacts of specific strategic decisions and one-time events. For the first quarter of 2025, total net revenue decreased by 17.5% to $35.7 million compared to $43.2 million in the first quarter of 2024. This decline was primarily driven by a 21.2% decrease in product sales, which fell to $24.3 million. The decrease in product sales volume, particularly in mobile home park and retail sales categories, was a key factor. Interestingly, net revenue per product sold increased by 23.1% in Q1 2025, largely due to a shift in sales mix towards higher-priced retail units and away from lower-priced wholesale units sold to mobile home parks.

While product sales faced headwinds, the company's financing segment demonstrated resilience. Consumer, MHP, and dealer loans interest income remained relatively flat at $10.7 million in Q1 2025 compared to $10.6 million in Q1 2024. This stability occurred despite growth in the consumer and MHP loan portfolios over the past year, suggesting a balance between portfolio expansion and potentially changing interest rate dynamics or portfolio mix. Other revenue saw a significant 59.2% decrease in Q1 2025, primarily due to a large decrease in forfeited deposits compared to the prior year period.

Profitability metrics were impacted by the lower sales volume and mix shift. Gross profit margin on product sales decreased to 29.2% in Q1 2025 from 33.6% in Q1 2024. Management attributed this decline partly to being under-absorbed on labor given the lower production levels during the quarter. Selling, general, and administrative expenses increased by 6.9% to $6.3 million in Q1 2025, influenced by higher legal expenses and loan loss provisions, partially offset by decreases in warranty expense and payroll. Overall, net income decreased by 32.1% to $10.3 million in Q1 2025 compared to $15.1 million in Q1 2024.

Looking back at the full year 2024, total revenue decreased slightly to $184.2 million from $189.1 million in 2023, primarily due to a 10.9% decrease in product sales volume. However, interest income from loan portfolios increased by 10.1% in 2024, reflecting portfolio growth. Other revenue saw a significant 106.3% increase in 2024, largely driven by land sales, including properties acquired through the settlement agreement with a significant borrower. This settlement, which involved the conveyance of mobile home parks and refinancing of debt, also contributed to a substantial increase in other income in 2024, leading to a 13.2% increase in full-year net income to $61.6 million despite the revenue decline. The company's book value per basic share outstanding has shown consistent growth, increasing by 13.9% in 2024 to $20.40 and a further 13.1% by the end of Q1 2025 to $20.87 compared to the same period in the prior year.

Liquidity remains a strength for Legacy. As of March 31, 2025, the company held $3.4 million in cash and had $50 million available under its revolving credit facility, which had a zero outstanding balance.

Management believes current cash flow and credit availability are sufficient to fund operations and growth for the foreseeable future. Net cash provided by operating activities in Q1 2025 was $4.9 million, lower than the $10.8 million in Q1 2024, reflecting the decrease in net income and changes in working capital. Investing activities used $2.0 million in Q1 2025, primarily for property development and issuing notes, while financing activities used $0.7 million for stock repurchases.

Strategic Focus and Forward Outlook

Legacy's management is actively implementing strategic adjustments to navigate the current market and position the company for future growth. A key focus is on revitalizing product sales volume, particularly in the park and dealer channels. The simplification of the product line is expected to improve manufacturing efficiency and appeal to customers. Modifications to the MHP financing program aim to broaden the customer base by accommodating park owners who prefer to sell homes rather than solely rent them. The company is also investing in its sales team and increasing production, particularly in Texas, to build backlog and meet anticipated demand. Recent trends in retail finance originations, which were up significantly year-to-date through April 2025, are viewed as a positive leading indicator for the dealer business.

The community business, impacted by high interest rates slowing M&A and new development, is showing signs of improvement, with increased inbound requests for large orders. Legacy is also finding success selling HUD tiny homes to RV park investors, viewing this as a growth opportunity. The company continues to monetize non-core landholdings to unlock value and fund strategic investments. A significant focus remains on the 1,100-pad development in Bastrop County, near Austin, where Phase 1 roads and utilities are nearing completion, with lot sales anticipated in summer 2025. Phase 2 development is also underway. The operation of mobile home parks acquired through the settlement agreement provides an opportunity to increase occupancy and value before potential future monetization.

Management's outlook for the remainder of 2025 is positive, despite acknowledging ongoing market uncertainty. They anticipate increased production, continued strength in retail finance, and improving momentum in the community business. Gross margins are expected to normalize around 30% as production levels increase and absorb overhead. Interest revenue from the growing loan portfolios is expected to remain a consistent contributor. The potential for regulatory reform favoring manufactured housing, including less restrictive zoning and improved access to government financing, is viewed as a significant long-term positive catalyst for the industry.

Risks and Challenges

Despite the positive outlook and strategic initiatives, Legacy faces several notable risks and challenges. The broader economic environment, particularly high interest rates and inflation, continues to impact housing affordability and transaction volumes, potentially limiting demand for manufactured homes and affecting the performance of loan portfolios. While delinquencies remain low, their normalization towards pre-COVID levels warrants close monitoring. The company's ability to maintain gross margins is susceptible to increases in material and labor costs.

Operational execution is critical, particularly the successful implementation of product simplification and the ramp-up of production to meet demand and improve manufacturing efficiency. The company has also identified material weaknesses in its internal control over financial reporting, including issues with control design, documentation, qualified personnel, and IT controls. Addressing these weaknesses is necessary to ensure the reliability of financial reporting.

Legal proceedings, including the ongoing litigation related to the significant borrower and contingent liabilities under dealer repurchase agreements, pose potential financial risks, although management believes the risk of material adverse effect from current litigation is limited based on available information. The successful resolution of the litigation and monetization of related assets will be important factors to watch.

Conclusion

Legacy Housing Corporation operates from a strong foundation built on vertical integration and a focus on the affordable housing market. While recent market headwinds have impacted product sales volume, the resilience of its financing business and strategic adjustments aimed at improving operational efficiency, broadening the customer base, and unlocking balance sheet value through land development and asset monetization provide avenues for future growth. The company's positive outlook for the remainder of 2025 is underpinned by anticipated improvements in production and market conditions, coupled with the potential for favorable regulatory developments.

The core investment thesis rests on Legacy's ability to leverage its integrated model and financing expertise to capture demand in the underserved affordable housing segment, while simultaneously realizing value from its growing loan portfolios and land assets. Key factors for investors to monitor include the successful execution of strategic initiatives to drive product sales volume, the impact of the macroeconomic environment on housing affordability and loan portfolio performance, progress in addressing internal control weaknesses, and the outcome of ongoing litigation. Despite facing challenges, Legacy's strategic focus and balance sheet strength position it to capitalize on the long-term fundamentals of the manufactured housing industry.