Douglas Elliman Inc.

Welcome to Douglas Elliman Inc.' 's first quarter 2022 conference call. During this call, the terms adjusted net income and adjusted EBITDA will be used. These terms are non-GAAP financial measures and should be considered in addition to, but not as a substitute for, other measures of financial performance prepared in accordance with GAAP. Reconciliations to adjusted net income and adjusted EBITDA are contained in the company's earning release, which has been posted to the investor relations section of the company's website located at investors.elemen.com. Before the call begins, I would like to read a safe harbor statement. The statements made during this conference call that are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. These risks are described in more detail in the company's SecureNate and Exchange Commission filings. I would now like to turn the call over to the Chairman, President, and Chief Executive Officer of Douglas Elliman Inc., Howard M. Lorber.

Good afternoon, and thank you for joining us. Joining me today are Richard Lampin, our Chief Operating Officer, Brian Kirkland, our Chief Financial Officer, and Scott Durkin, President and CEO of Douglas Elliman Realty, our residential real estate brokerage business. On today's call, we will discuss the continued strength of the U.S. residential real estate market and how factors in the market contributed to our solid first quarter financial performance. We will then answer your questions before concluding today's call. During our last earnings call, we discussed why a brand name synonymous with luxury and a comprehensive suite of technology enabled real estate solutions positions Douglas Hellman to capitalize on the highly attractive dynamics in the US residential real estate market. During the first quarter, we demonstrated that this continued to be true. We saw an ongoing trend of strong demand for residential homes combined with low inventory, which continues to result in significant price appreciation, particularly across our luxury markets. These dynamics have propelled an increase in our revenues to $308.9 million for the three months ended March 31st, 2022, compared to $272.8 million for the first quarter of 2021. Our gross transaction value increased to $11.7 billion for the three months ended March 31, 2022, up from $10.1 billion for the three months ended March 31, 2021. And we reported $52.8 billion in gross transaction value or closed sales over the last 12 months. To date, our business has not been material impacted by higher mortgage rates, And we believe this is the result of our focus on our luxury markets, where a higher percentage of transactions occur in cash. We believe this momentum will continue for the residential real estate, an element in particular because of our strong presence in leading luxury markets. Also contributing to this momentum are factors such as the growing importance of millennial buyers, the return of international buyers, and limited supply due to underbuilding of new homes between 2007 and 2020. It is important to note that our luxury brand results in higher average sales prices versus our peers across all our markets. For the 12 months ended March 31st, 2022, Elliman had an average price per transaction of 1.62 million per home, substantially higher than our leading competitors outside of New York City. Our average price per transaction is approximately $1.5 million, which is well above the national average. We believe this creates a runway for us to continue to grow our business, not only in our existing markets, but in complementary markets as well. In addition to organic growth through recruiting in our major markets, we have significant opportunities to increase our market share in adjacent markets where the element name is well known and trusted. New York City remains our largest market with $17.3 billion in gross transaction value in the last 12 months ended March 31st, 2022. We also continue to be pleased with the strong performance of our South Florida market with $14.7 billion in gross transaction value in the same period and average selling price remained at approximately $2 million per home across New York City and South Florida. We also maintain strong market share in New York City and South Florida. For the last 12 months, our market share in New York City and South Florida was 21% and 20% respectively. We have also continued to expand our footprint across existing and new luxury markets. In Florida, we expanded to Vero Beach and Point Vedra Beach near Jacksonville in the first quarter. In Massachusetts, we opened a Nantucket office in April and recently broke at the highest price transaction ever in that market. We are opening two additional offices in Boston in the coming months. We also continue to aggressively grow our business in Texas. We are actively recruiting new agents in Houston, Dallas, and Austin. We believe Texas will be a major market for us in the future. Our residential brokerage is further differentiated and enhanced by our approach tech technology. In the first quarter of 2022, we continued rolling out refinements of our cloud-based MyDouglas agent portal by incorporating new features, including personalized distribution of data-driven videos for marketing and social media, a service designed to maximize our agents' digital presence, and our StudioPro agent concierge service. Concurrently, we continue to focus on reducing our expenses and rolled out two new packaged applications to automate our payment processing and streamlined escrow services. In addition to lowering expenses, these integrated applications will provide a more automated experience and superior service to our agents. Looking ahead, Element is focused on creating stockholder value through the expansion of our footprint, acceleration of our adoption of cutting-edge PropTech solutions, continued recruitment of best-in-class talent acquisitions, acqui-hires, and operational efficiencies. Before we discuss the financial results for the quarter, I'd like to express my deep gratitude to the Element agents and employees who work hard every day for our company and our clients. Our agents are consistently ranked among the best in the business and continue to power our company's success. With that backdrop, let us move on to Douglas Element's financial results. For the three months ended March 31st, 2022, Douglas Elliman reported $308.9 million in revenues compared to $272.8 million in the 2021 period, primarily driven by increased commission and other brokerage income in our luxury markets. Net income attributed to Douglas Elliman was $6.5 million or $0.08 per diluted share for the three months ended March 31st, 2022. compared to net income of 14 million or 18 cents per share in the prior year period. For the three months ended March 31st, 2022 adjusted EBITDA attributed to Douglas Elliman was 12.7 million compared to 16.4 million in the first quarter of 2021. For comparability purposes, Elliman began operating as a standalone public company in the first quarter of 2022. Expenses incurred by our public company operations are reported in the corporate and other segment, and the operations of our brokerage business are reported in our real estate brokerage segment. Therefore, for comparison purposes, our real estate brokerage segment reported operating income of $14.5 million for the three months ended March 31, 2022, compared to $14.2 million for the three months ended March 31, 2021. Our real estate brokerage segment reported adjusted EBITDA attributed to it of 17.7 million for the three months ended March 31st, 2022, compared to 16.4 million for the three months ended March 31st, 2021. For the three months ended March 31st, 2022, adjusted net income was 6.5 million or 8 cents per share compared to adjusted net income of 13.9 or 18 cents for share in the first quarter of 2021. Douglas Elliman also maintained a strong balance sheet with cash of $203.7 million at March 31, 2022. We believe this liquidity places us in a position of strength in the market. In summary, Elliman had a strong first quarter, and we believe we have a strong platform for continued growth. In addition, during the first quarter, we were pleased to begin paying a five cents per share dividend to our stockholders. It is our expectation the dividend will serve as a key component of our capital allocation going forward. With that, we will be happy to answer questions. Operator?

At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from the line of Ritwik Roy from Jefferies. Your line is open.

Yeah, hi, Howard and team. So when you guys discussed the resilience of sales relative to higher rates, you guys mentioned cash buyers. Do you guys by any chance have a percentage on that number?

Well, it varies from market to market, but the real fact is that in the higher end deals, there's less talk of mortgage. And that doesn't mean they're not ultimately getting financing on it after they purchase it, or if they deal with a private bank, they could be getting financing which doesn't have a mortgage on it from the private bank. But we don't really see interest rates having affected too much yet. And in fact, what I've seen in the past over the years is that as rates start going up, that brings people into the market quicker because they don't want to be priced out of the market. They start thinking back of what interest rates looked a long time ago and they're like, wow, they don't want to, they don't want to get to that point. So it sort of motivates some people to come into the market.

Understood. So that kind of ties into what I was going to ask after that. So you would basically say the higher end markets like New York city and Florida, Um, those are, uh, you know, relatively resilient against interest rate, um, against the interest rate.

You know, it could be, it could, it could be resilient, but it depends how much at some point it wouldn't, if we got back to these crazy rates that we had, you know, years ago, but we don't see that. And then also the taking into account inflation and look, people need houses. We're still millions of houses short in this country. And. Uh, according to all the data that we see. and you know people need and want housing and therefore they're going to do everything possible to do it as quick as possible because the way it looks now with inflation and supply problems to build new houses and rising interest rates there's no better time probably than right now got it um that was helpful thank you and if i may just a little bit on modeling um

So how should we think about growth and fixed costs for this upcoming fiscal year 2022 or this current year? Yeah.

Hey, Rick, how are you?

I'm doing well. Thank you. Good to hear from you.

Very good. So if we look at our costs, we put them into three buckets. We put them into activity based, which are advertising and discretionary compensation or bonuses. we put them into non-activity based and we put them into expansion. If you look at our cost in recent years on the general administrative line, our non-activity based have been reduced from 216 million to 194 million. That number has crept up as people have returned to the offices, but we will be taking initiatives to examine those costs as the year progresses.

Got it. And just for clarity, though, that reduction in G&A, that's referring to the total entity or just the brokerage segment?

Yeah. The G&A from 2019 over the last 12 months is roughly going from $252 million to $256 million. But most of that has been either through expansion of $13 million or... activity-based costs, which are the advertising and discretionary bonuses from $35 million to $49 million. And obviously, the activity-based costs are really contingent or they correlate to the business, and we've increased our business significantly since 2019.

Okay, understood. So, I guess taking away from that, with the return to office, expect some sort of

uh pick up potentially in gna but you guys are metering or you know monitoring the situation or i guess that scenario we're monitoring it very closely yeah when you said to return to office that was just part of it don't forget you know we had people on the furlough and you know layoffs and then all of a sudden when uh you know covet slowed down and the markets really started picking up in our in our primary markets we had our higher back people we had to find people and that wasn't that that easy i think that's on the negative side the positive side is the fact that we really, like most other companies that have lots of office space, we're not going to need all the space we have. So as leases start coming due, we're going to consolidate and save some substantial money on rent over the next few years.

Got it. That's good to hear. And then one last item. Maybe I missed this in the reporting, but did you guys get or do you guys have a number of transactions in the quarter? No, I don't. Do you have that?

Yeah, it's in the quarter. Just a minute.

Oh.

Rick, it's in the press release.

The number?

And, Rick, when we are giving expenses, we are providing the expenses at the real estate brokerage subsidiary. That does not include corporate costs.

Okay. Understood. Public costs. Got it. Got it. So that, yeah, it doesn't include the G&A entity there, Justin. Yeah. Understood. Okay, cool. I will take another look at the press release then for that deal count and appreciate your guys' answers.

Okay, thank you.

Thank you.

Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question comes from John Masoka with Lindenburg Salmon. Your line is open.

Good afternoon. Hi.

I'm curious where you feel you are in terms of broker count. Are you looking to kind of recruit still maybe in some of your core markets? I know there's obviously an initiative to expand in some newer markets in kind of in some adjacent geographies. But, you know, in markets like New York or South Florida, I mean, do you feel you're in a good place from a brokerage, a broker number, or do you think you need to add more agents?

No, no, no, no. We're always looking to add. We have some attrition. We try to keep our numbers going up, though, as far as agent count, especially on the good agents. We just hired a great agent, started a couple of days ago. We made an announcement about it. This was an agent that was doing a couple of million dollars a year in commissions. And that's what we're looking for. And then when you look at our newer markets like Texas, I mean, I think we hired 60 people in Dallas in the last month or two. So we are very much on the recruiting bandwagon. And everyone in the company, every executive in the company, one of their jobs is, including mine, is to recruit. And we spend a lot of time doing that.

Okay. And then as we think about growth, how much of that is really recruitment-driven and how much of that could potentially be M&A, particularly given the current kind of capital markets environment we're in today?

Well, look, M&A sounds better, but there's also a cost to it. And recruiting probably takes a longer period of time and is a little bit tougher than just going and buying someone. But on the other hand, you know, we look at the costs also. There's no simple solution. I mean, we want to recruit, okay? And we want to, you know, have acquisitions. But most of our acquisitions recently have been small companies, which we call sort of walkover deals, where, you know, there's maybe we just took over a group of 10 that had a small company. I think it was in Naples or outside of Naples. And, you know, so all of a sudden now we have a new office in Naples. So and we didn't pay anything, you know, up front for that. but they wanted our brand. I mean, that's what everyone wants. They wanted our brand. And one of the reasons they want our brand is because our agents, if you asked our agents where they get a lot of their business from, they're going to tell you from Douglas Ellman agents and other markets. And that's how we built the company. Florida people, New York people have Florida, Florida people go to Aspen in the, in the summer months, California, have been going to Texas and to Florida. So we have New York City people have been going to the Hamptons. We have so many markets. All our markets sort of connect to each other. And that's really how we want to keep growing the company.

And then just one kind of detailed question. You talked about the G&A. I mean, was there anything one-time-ish in one queue that we should watch out for or... is that maybe kind of a good run rate now that you're kind of, you know, public company and separate public company and then also given the amount of activity going on on the brokerage side?

As far as, and good afternoon, John. As far as general administrative at the public company side, we had 6.7 million of loss, about 1.7 of that related to stock comp. So of that $5 million, there was a part that was, one time, we believe the number for the year will be about $18 million. Okay.

That's very helpful.

And, John, one more item. Someone asked earlier about the number of transactions. In the first quarter, the number was 7,212, and over the last 12 months, it's 32,519. Okay. Thank you very much.

Your next question is from the line of Mike Nolan with JP Morgan. Your line is open.

Good afternoon. Could you discuss management succession now that you're independently traded?

Well, we think we have a good management team, but, you know, we've only been independently. This is going on three months into the fourth month and we're opening markets and doing a lot of recruiting. So we will have. put together a management succession plan at some point, but we're not ready for that at this point.

Okay, thank you.

Ladies and gentlemen, those are all the questions that we have for today. Thank you for joining us on Douglas Elliman's first quarter 2022 earnings conference call. This will conclude our call. We hope you have a good evening and you may now disconnect.