Douglas Elliman Inc.

Welcome to the Douglas Elliman's third quarter 2023 earnings conference call. This call is being recorded and simultaneously webcast. An archived version of the webcast will be available on the investor relations section of the company's website located at investors.elliman.com for one year. During this call, the terms adjusted EBITDA and adjusted net income 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 EBITDA and adjusted net loss are contained in the company's earnings release, which has been posted to the investor relations section of the company's website. 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 risk 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 Securities and Exchange Commission filings. I would now like to turn the call over to the Chairman, President, and Chief Executive Officer of Douglas Elliman, Howard Lorber, please go ahead.

Good morning, and thank you for joining us. With 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. Before turning to our results for the third quarter, we wanted to address the current litigation in the residential real estate brokerage industry. Given that we are talking about active litigation against Douglas Hellman, we are not going to comment extensively on that litigation and potential outcomes. I will make some brief comments and do not intend to comment further or take questions on these issues. Last week, a jury ruled in favor of the plaintiffs in a Sitzer Burnett lawsuit in federal court in Missouri and awarded $1.78 billion in damages, which is subject to being tripled under the law. We expect that the defendants, which include the National Association of Realtors and several other residential real estate franchisors and brokerages doing business in Missouri, will appeal the verdict and that the case will take a substantial period of time, possibly years, to be resolved. Douglas Elliman is not a party to that lawsuit, but we have been named in two new separate cases involving customary real estate business practices and the National Association of Realtor Rules that were the subject of the Sitzer-Burnett lawsuit. We believe the lawsuits against us lack merit and we intend to challenge them. We have retained counsel to advise and represent us. We do not anticipate these lawsuits will result in any changes to our business that will significantly disrupt the agent-buyer relationship. In the meantime, we believe that Douglas-Sellman has two competitive advantages if our industry landscape evolves. First, Our agents specialize in high-end home sales across the markets we serve, in which the greater average transaction size makes expert home brokers a necessity. Second, our Douglas Elliman Development Marketing business, which represents high-end developers in the sale of such homes, continues to perform well. We will continue to keep a close eye on industry developments and adjust our strategy if and when needed, but we are confident we are well-positioned to succeed. Now turning to Douglas Elliman's financial results for the three months ended September 30th, 2023. Please note that all numbers presented this morning will be as of September 30th, 2023, unless otherwise stated. We are pleased that Douglas Elliman continued to outperform many of its competitors in the third quarter of 2023, despite ongoing industry-wide headwinds that continue to impact our results. We attribute our solid performance to three factors. stable pricing in our luxury markets where buyers are more immune to interest rate pressures, the competitive advantage provided by Douglas Elliman's strong development marketing business, and our world-class agents. For the third quarter of 2023, Douglas Elliman reported $251.5 million in revenues compared to $272.6 million in the third quarter of 2022. However, in Florida, one of our largest markets and our strongest market during the pandemic we experienced a 20% increase in revenues in the quarter. We believe the best markets tend to emerge first from any downturn and view Florida's strong third quarter as a positive leading indicator of future performance across our luxury markets. Net loss attributed to Douglas Edelman for the third quarter was $4.9 million or $0.06 per diluted share compared to net loss of $4 million or $0.05 per diluted share in 2022. Adjusted EBITDA attributed to Douglas Sullivan was a loss of $3 million compared to income of $124,000 in the 2022 period. For comparison purposes, our real estate brokerage segment reported an operating loss of $2 million this quarter compared to operating income of $1.5 million in 2022. And adjusted EBITDA to the segment was approximately $1.5 million compared to $5.1 million in 2022. Adjusted net loss attributed to Douglas Elliman was $4.7 million, or $0.06 per share, compared to adjusted net loss of $4 million, or $0.05 per share, in 2022. Now turning to Douglas Elliman's results for the nine months ended September 30, 2023. Douglas Elliman reported $741.4 million in revenues for the nine months ended September 30, 2023, compared to $945.8 million in 2022. Net loss attributed to Douglas Edelman was $27.7 million, or $0.34 per diluted share, compared to net income of $12.8 million, or $0.15 per diluted share, in 2022. Adjusted EBITDA to Douglas Edelman for the nine-month period was a loss of $23.2 million, compared to income of $32.1 million in 2022. Our real estate brokerage segment reported an operating loss of $20.3 million for the period compared to operating income of $37.6 million in 2022. Adjusted EBITDA attributed to the segment was a loss of $9 million compared to income of $47.2 million in the 2022 period. Adjusted net loss attributed to Douglas-Sulliman was $26.4 million or $0.32 per share in a nine-month period compared to adjusted net income of $12.2 million or $0.14 per share in 2022. Now we will discuss our outlook on the current operating environment for Douglas-Sulliman as well as trends we are seeing in the residential real estate marketplace. We have previously discussed the cyclical nature of our industry. The last six quarters have been a difficult part of the cycle, as historically high mortgage rates have driven sustained listing inventory shortages across our luxury markets. While we expect these industry-wide challenges will continue to impact our results for the remainder of 2023, we remain encouraged by some improvements in trends we are seeing, specifically Our average sales price per transaction increased to 1.57 million this quarter, up from 1.49 million in the third quarter of 2022. Revenues in the third quarter of 2023 declined 7.7% compared to the third quarter of 2022. The year-over-year decline narrowed from the first and second quarters of 2023, which saw declines of 30.7% and 24.3% respectively from 2022. We believe this signals that the market is beginning to adjust the interest rates. Our commission receipts in October improved on a year-over-year basis, the first time since May 2022. Total listing volume also improved in the third quarter, up 6.2% from the 2022 period. Due to our solid financial position and cost reduction strategy, Douglas Thurmond is well positioned to successfully navigate near-term industry challenges. Douglas Elliman's strong balance sheet underscores our long history of profitability and managing various market conditions. We maintain ample liquidity with cash and cash equivalents of approximately $126 million, or $1.43 per common share, and no debt. In the third quarter of 2023, we continue to adjust our cost structure to benefit our business, including additional headcount reductions, cutting costly sponsorships, streamlining advertising, and commencing a program to begin consolidating office space. Our cost reduction efforts have been judicious, and the results of our strategy are beginning to flow to the bottom line. Compared to the year-ago period, our real estate brokerage segment reduced its operating expenses, excluding commission expense and restructuring by $7.8 million in the third quarter of 2023, representing a decline of 10.5%. On a sequential basis, Our real estate brokerage segment reduced its operating expenses, excluding commission expense and restructuring by $4.1 million this quarter compared to the second quarter of 2023, representing a decline of 5.8%. We expect the impact of our cost reduction efforts will continue to create a more nimble Douglas Salmon without significantly impacting the agent experience. We are proud to share that our agent retention rate stands at 90%, and we continue to attract the industry's best talent. Looking ahead, we remain focused on continuing to capture market share by leveraging our key strengths, which include our world-class network of 6,900 agents and our development marketing business. Our development marketing business is creating a foundation for long-term value as transactions close over the next several years and provides a competitive advantage, especially considering the limited inventory of existing homes available for resale. For the 12 months ended September 30, 2023, our development marketing business signed and brought to market new projects with $5.1 million of gross transaction value, including $4.6 million of gross transaction value added in the 12 months ended September 30, 2023, in Florida alone. In summary, Douglas Hellman continues to meet the current macroeconomic challenges, and we believe our differentiated platform and the underlying strength of our business positions us for long-term growth and success. Our proven management team has a successful history of navigating many economic cycles and applying financial discipline that balances the importance of maintaining revenue and managing operating expenses to create long-term stockholder value. Looking ahead, in addition to driving operational efficiencies, we are focused on strategic market expansion, continued recruitment of outstanding talents, and further adoption of innovative solutions to empower our brokers. With that, we will be happy to answer questions. Operator?

At this time, if you'd like to ask a question over the phone, please press the star and one keys on your telephone keypad. Keep in mind, you may remove yourself from the question queue by pressing star and two. Again, if you'd like to ask a question today, please connect over the phone and dial star and 1. We'll take our first question from Dan Fannin with Jefferies. Please go ahead. Your line is open.

Thanks. Good morning. Wanted to follow up on, I guess, more of your latter comments there, just in terms of reevaluating your market footprint. Clearly, Florida seems to be doing well, but are there areas or markets that you're subscale that you might be looking to exit? Or on the opposite side, potentially in this type of environment, areas you're looking to expand and maybe take market share? Sure.

Well, obviously, there are markets that are not performing as well as they've had in the past, New York being one of them, although New York has picked up considerably. It's interesting. It's much more of a downtown market now than it was years ago when everyone was going uptown to the Upper East Side. But it's OK. It's not terrible. I mean, I think probably one of the not so good markets for everyone is California. And that's basically because of what's going on in California. Not that some of it's not going on in New York, but they also put in a new tax, which really is hurting the realtors because of the additional tax for the buyers and the sellers. So that is a soft market. On the good side, we've looked at a couple of markets who were, one of them being in Nashville, We think that's a good market. And when I say it's a good market, it's also a good market for us because there's a lot of new development projects starting. And we'd like to go into a market when we have a new development signed up or almost signed up, and we know that we'll have a bit real business starting from day one. We're trying to stay with, no surprise, the low tax or no tax states. Las Vegas is doing okay. We have there in a short time, I think we have about 90 to 100 brokers. We have a couple of new development projects signed up, so that's good. And New York, we also have a couple of new ones we're working on. Miami through all of South Florida, I should say. because we're on the West Coast now. We've opened a bunch of offices on the West Coast. We just opened in Sarasota. So we're doing well there, and that is a really robust new development marketplace. So that's really helping.

Okay, that's helpful. And then you mentioned October receipts. improved year-over-year so you just expand upon that and then also inventories are you seeing you know as any change or sustained changes you look at you know what's happening here in October November versus what has been happening here obviously in recent months hey dad that's Brian Kirkland October receipts were up about two and a half percent from October 2022 and that was fairly evenly distributed

So we feel really positive about that. We do think that buyers are now starting to adjust to the mortgage interest rate environment. And then your next question was?

Just as whether inventories are also showing similar signs, it's showing some continued improvement.

And we're also seeing across the board, I think our listing inventory in the third quarter was up 6% from a positive sign that's been a trend that has been continuing the entire year last year obviously there was a solar strike now that's returning where the markets really opening up and this will be gradual but we're very positive on the long term okay great and then just lastly just the developed marketing development marketing business in general you mentioned

some specifics. Seems like that is picking up. I guess, is there any higher level comments you can talk about in aggregate versus the regions and or I guess thinking about prospectively, is there a sign that that has continued momentum as you think about this quarter and next year?

Yeah, look, it has quite a bit of momentum. I can give you examples, but I don't want to brag so, uh, not going to do it, but I mean, we've opened projects, you know, in, in actually Miami, um, where we were shocked how quick they sold and the prices that, uh, that we're getting for them. And, um, I think that's also, um, true all the way, pretty much in all of South Florida. It's sort of robust. And I think part of the reason is the fact that you were asking about the inventory. If there's really no resale inventory, the only inventory or the biggest inventory on the market is the new development. And realistically, you know, when I speak to people about it, I think it's pretty simple. You know, if you're worried about interest rates, the good news about new development is you don't pay up front, you don't close, you put down deposits over the period of time that the building's started and being built, and probably you end up having cash of about 40% to 50% by the time it's ready to close. And when it's ready to close, which is usually, let's say, two to three years after we started sales, you are sitting with a probably, if you're going to mortgage it, probably lower interest rates. We would assume so two or three years from now. And also with inflation still around, you're going to own something that you couldn't build again for the price or couldn't buy again for the price that you bought it at, you know, two or three years before. So that's sort of an interesting way to look at it, which I think is like one of the reasons that market is so strong.

Great. Thanks for taking my questions.

We'll take our next question from Sam Bonsley with BTIG. Please go ahead. Your line is open.

Hey, good morning, guys. Hope you're all doing well. I guess first one on the industry headlines, I know you're not commenting there directly on the cases, which I understand, but I guess, you know, you guys are in somewhat of a unique position in that you have some experience navigating some class action lawsuits in your Liget business. So I guess, is there anything that you can draw from your experience just going through that And are there any parallels that you see in the cases that are being brought against the brokerage industry today?

We don't really want to comment on it. I mean, you know, obviously we have a long experience in it, and we're hoping that that experience is going to help us navigate this. And if it turns out as good as the other one, the last one, the last big one we did, then we'd be pretty happy.

Okay. And then on the new development side, you know, it definitely feels like a differentiator, right, just because the lack of supply and, you know, because developers need that service. I guess, can you just give us a sense for how large that business is today and then, you know, how much more can you scale that business up going forward? So, thanks for that question. So, that business has been gradually growing throughout the year.

We do, and you can go back to prior conference call scripts and you see every quarter we're giving more numbers coming into pipeline over the last year. So right now we have about 21.5 billion in pipeline that's currently on the market. That doesn't include many other projects that are coming to market. And that number is up from about 20 billion last quarter. 20 billion, excuse me. So 21.5 billion in the pipeline.

And just to give you some additional info, I think probably about 13 or 14 billion of it is in South Florida. That's about right. Yeah, 13 or 14 billion in South Florida.

And so is there any way we could sort of get a sense for like when this volume should start trickling into the P&L, right, over the next couple of years? Is there any sense? Because I mean, that seems pretty meaningful there if you just apply that volume against some sort of commission.

Yeah, BK is gonna answer that, but I will tell you, every time we think when it's coming, it's usually delayed. Whether it's building or permits or financing, I won't put it in development, but go ahead.

And Howard, I don't know what else I could add to that. All that being said, it will come into revenue over the next four to five years. It will be more gradual. But the point about this business is it has great inertia and it keeps building on volume. So it almost becomes a residual.

Yeah, that's right. Okay. And then just on the share repurchases, I know, you know, the two-year anniversary of the spin is coming up. So that sort of, you know, gives you an ability to sort of unlock that. Obviously, a lot of uncertainty right now with the lawsuits. But, you know, is there any thought being given to putting a plan in place, even if it's just to send sort of a message to the market here where the stock's trading?

Yes. So you're correct. The two years comes up in 50 days from now from the spin-off. that's going to be a board decision. Obviously, the board meets every quarter. It deliberates well on these matters, and we are very confident for it.

We'll make a decision. We're surely going to talk about it in great detail and then make a decision.

Okay. And then just last one, Brian, on your run rate operating expenses, X the commissions, you know, what's a good ballpark to assume sort of over the next few quarters? And then can you just talk about any opportunities to lower that run rate just in 2024? Because it seems like we're sort of going to, you know, probably hit a flat market on transaction volumes, but we could be higher on ASP. So just, yeah, anything there.

And we're very proud of what we've done on the expenses. And we're proud because we have been. because we're taking a long-term approach. As Howard mentioned earlier, our operating expenses, excluding commissions and restructuring, we're down $7.8 million versus the last year quarter. That was comprised of about $3.6 million of personnel costs, and we have reduced about 60 employees over the last year, reduction of $2.2 million in advertising and sponsorships, another $1.8 million in just general type expenses, and $400,000 in travel. On a sequential basis, quarterly expenses were lower from second quarter by about $4.1 million. About $1.3 million of that was personnel, where some of the cuts we made earlier in the year are now starting to come in on a full quarter. And also million three on advertising and administration and $250,000 in travel. We've been very mindful of spending judiciously and not being penny wise and pound foolish and not taking any cuts that would impact the agent experience. So you know rent expense is one of our big numbers. $34 million a year. There's another $10 million of other costs associated with the leases. So that's about 22.5% of our non-activity-based expenses. We'll start to see runoff of that before January 25, starting in 23. It reduces about $8.25 million over that two-year period. And after then, we start running off about $3 million of lease expense a year.

Our plan really is to, unless it's a specific location that we really need and it's really being used, it's to basically not renew any leases and consolidate where we have other offices.

Right. And when we get those numbers, obviously that's just our pure expense. That's not what we will save by doing that. Right.

So just on the run rate to understand, so we should assume like personnel and those line items sort of stay flat from here on, but then where you would really see sort of declines is on the rent side. Is that fair for over the next few quarters?

We're evaluating our expenses going forward and we'll continue to analyze expenses across the board. We're hopeful that we can achieve more savings, but stay tuned.

Great. All right. Thanks a lot, guys.

And ladies and gentlemen, those are all of the questions that we have for today. Thank you for joining us on the Douglas Elliman Quarterly Earnings Conference call. We hope you have a good day, and this will conclude our call.