Vector Group Ltd.

Q3 2021 Earnings Conference Call

11/8/2021

spk01: Welcome to Vector Group Limited's third quarter 2021 earnings conference call. During this call, the terms adjusted operating income, adjusted net income, adjusted EBITDA, and tobacco adjusted operating 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 operating income, adjusted net income, and adjusted EBITDA, and tobacco and adjusted operating income are contained in the company's earnings release, which has been posted to the investor relations section of the company's website located at www.vectorgroupltd.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 or implied by forward-looking statements. These risks are described in more detail in the company's Securities and Exchange Commission filings. Now I would like to turn the call over to President and Chief Executive Officer of Dexter Group, Mr. Howard Lorber.
spk10: Good afternoon, and thank you for joining us on our third quarter 2021 earnings conference call. We are also excited to discuss Vector Group separating its businesses through the spinoff of Douglas Elliman. With me here today are Brian Kirkland, CFO of Vector, Richard Lampin, Chief Operating Officer of Vector, Scott Durkin, President and CEO of Douglas Elliman Realty, LLC, David Ballard, CTO of Vector, and Nick Anson, President and COO of Liggett Vector Brands. We also have Ron Bernstein, Senior Advisor to Liggett Vector Brands, joining for the Q&A portion of the call. During this call, we will review our third quarter consolidated financial results, as well as the financial performance for Douglas Elliman and Liggett. We will then discuss the exciting news of our intention to spin off Vector Group's real estate brokerage business, including Douglas Elliman and its cutting-edge PropTech investments, into an independent publicly traded company. Today we issued a press release announcing the spinoff and posted a presentation to the investor relations section of our website with more details regarding the proposed transaction. We will also file a form 10 with the SEC. All references to SPNCO on today's call refer to the independent publicly traded real estate brokerage company following the effective date of the SPN. We will then take your questions before concluding today's meeting. Let us start with financial results. At September 30th, 2021, Vector Group's consolidated balance sheet remained strong. We maintained significant liquidity with cash and cash equivalents of $524 million, including cash of $159 million at Douglas Elliman and $133 million at Liggett. We also held investment securities and investment partnership interest with a fair market value of $214 million at September 30th, Now turning to Vector Group's consolidated results from operations for the three months ended September 30, 2021. Vector Group's revenues were $652.6 million compared to $547.8 million in the 2020 period. The $104.8 million increase in revenues was the result of an increase of $125.7 million in the real estate segment partially offset by the decline of $20.9 million in the tobacco sector. Moving on to, excuse me, net income attributed to Vector Group was $48.9 or $0.32 per diluted common share compared to $38.1 million or $0.25 per diluted common share in the third quarter of 2020. The company recorded adjusted EBITDA of $116.5 million compared to $103.3 million in the prior year. Adjusted net income was $52.6, or $0.34 per diluted share, compared to $38.3 million, or $0.25 per diluted share, in the 2020 period. Moving on to the results for the nine months ended September 30, 2021, Vector Group's revenues were $1.93 billion, compared to $1.45 billion in the 2020 period. The $478 million increase in revenues was the result of an increase of $500.4 million in the real estate segment, offset by a decline of $22.5 million in the tobacco segment. Net income attributed to Vector Group was $174.2 million, or $1.13 per diluted common share, compared to $60.7 million, or $0.39 per diluted common share, in the 2020 period. The company recorded adjusted EBITDA of $355.1 million, compared to $240 million in the prior year. Adjusted net income was $194.3 million, or $1.26 per diluted share, compared to $106.9 million, or $0.70 per diluted share, in the 2020 period. Moving on to the results of the last 12 months ended September 30th, 2021, Vector Group reported revenues of $2.48 billion, net income of $206.4 million, and adjusted EBITDA of $44.8 million. I will now turn the call over to Nick to discuss our tobacco business.
spk11: Nick? Thank you, Howard. Turning to our tobacco business financial results, Liggett continued its strong 2021 performance during the third quarter, delivering an increase in both retail market share and operating income. Eagle 20s continues to deliver significantly higher margins while Pyramid, delivers both substantial profit and market presence. And we continue to be pleased with the performance of our price-fighting brand, Montego, as we expand its distribution into targeted geographies across the country. Based on Management Science Associates retail data, the discount category increased approximately 80 basis points in the third quarter from a year ago, now comprising 26.5% of the total market as compared to 25.7% for the same period last year. As the deep discount segment continues to offer attractive value propositions for the consumers, we expect down trading trends will continue for the foreseeable future. As such, we remain confident that our value-focused brand portfolio and broad distribution position us well to meet these evolving market demands and drive profitable growth. I will now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. For the three and nine months ended September 30th, 2021, revenues were $297.9 million and $895.9 million, respectively, compared to $318.9 million and $918.4 million for the corresponding 2020 period. Tobacco adjusted operating income for the three and nine months ended September 30th, 2021 was $91.8 million and $273.9 million compared to $91.6 million and $240.2 million for the corresponding periods a year ago. Through the first three quarters of 2021, tobacco adjusted operating income exceeded our full year 2019 figures, which was a record at that point in time. Liggett's third quarter earnings increase was primarily the result of higher gross profit margins associated with higher pricing and promotional spending efficiencies offset by lower wholesale volumes and higher master settlement agreement expense. As discussed in last quarter's conference call, we anticipated pressure on our third quarter wholesale volumes following significant inventory increase at the end of the second quarter, and we estimate approximately half of our year-over-year third quarter wholesale shipment declines relate to a reduction in wholesale inventories. In addition, significant reductions made to our net MSA expense in the third quarter of last year because of unusually strong third quarter 2020 industry volumes put additional pressure on our year-over-year earnings comparison. According to Management Science Associates, overall industry wholesale shipments for the three months ended September 30th, 2021 were down 11.8% compared to last year, while Liggett's wholesale shipments declined by 11.6 percent for the comparable period. As we regularly note, however, we believe retail shipments are a much better indicator of underlying industry trends due to varying wholesaler buying patterns. Liggett's retail shipments for the three months ended September 30, 2021, declined 6.1 percent from the year-ago period, while industry retail shipments decreased 7 percent during the same timeframe. As a result, Liggett's third quarter retail share increased to 4.22% from 4.18% in the corresponding period last year. Sequentially, Liggett's retail share increased by 13 basis points in the third quarter over the second quarter. In summary, we remain pleased with the operational and financial performance of our tobacco business. Finally, while we are always subject to industry, regulatory and general market risks, we remain confident that we have effective programs and infrastructure in place to keep our business operating efficiently and delivering both market share and profit growth from our value-based brand portfolio. With that, let me turn it over to Bryant to discuss Douglas Elliman's results.
spk02: Thank you, Nick, and good afternoon. Before Howard addresses the spinoff transaction, Turning to Douglas Elliman's financial performance for the three, nine, and last 12 months ended September 30th, 2021. For the three months ended September 30th, 2021, Douglas Elliman reported $354.2 million in revenues compared to $208 million in revenues in the 2020 period. Douglas Elliman reported net income of $25.1 million and adjusted EBITDA of $27.8 million in the third quarter compared to $11.8 million and $14.1 million in the year-ago period. For the nine months ended September 30th, 2021, Douglas Elliman reported $1.02 billion in revenues compared to $506.5 million in revenues in the 2020 period. Douglas Elliman reported net income of $82.2 million and adjusted EBITDA of $89.5 million for the nine-month 2021 period, compared to a net loss of $62.2 million and adjusted EBITDA of $5.3 million in the 2020 period. The net loss in the 2020 period included pre-tax charges for non-cash impairments of $58.3 million and pre-tax restructuring charges of $3.3 million. For the last 12 months into September 30th, 2021, Douglas Elliman reported $1.29 billion in revenues $96.2 million in net income, and $106.2 million in adjusted EBITDA. In addition, Douglas Elliman reported closed sales of $47.7 billion in the last 12 months ended September 30th, 2021. Douglas Elliman's year-to-date results were driven by strong continued activity in all markets. Both closed sales volume and revenues doubled from the comparable 2020 period. We are particularly pleased with the continued strength of South Florida market as well as the rebound of the New York City market during the first nine months of 2021. In addition, Douglas Elliman's gross margin, or company dollar, increased to $94.5 million in the third quarter of 2021, up from $58.9 million in the third quarter of 2020. For the nine months ended September 30th, 2021, Douglas Elliman's gross margin, or company dollar, increased to $274.1 million, or $154.8 million for the same period in 2020. And as Douglas Elliman's revenues and gross margin significantly increased in 2021, we have discontinued certain expense reductions, which were implemented in the second quarter of 2020. These include reductions to activity-based items, such as advertising and discretionary compensation. Thank you for your attention, and over to Howard to discuss the spinoff. And Howard will serve as Chairman, President, and CEO of the publicly traded Douglas Elliman while continuing to serve as President and CEO of Vector Group.
spk10: Howard. Thank you, Brian. I start with a reminder that we have posted on the investor relations section of our website an investor presentation that relates to the spinoff. We will be referring to pages in that presentation. Turning to page three of that presentation, the other members of Douglas Hellman's management team are presented. This team has substantial real estate expertise and a proven track record of driving growth. We are very excited about this team because we have combined a strong management team from Vector with decades of public company management experience and a strong industry team from Douglas Elliman, which brings decades of real estate experience. Moving to page four, let's discuss our plan to separate Vector Group's real estate brokerage business and its prop tech investments into an independent, publicly traded company. We are doing this because we believe Douglas Elliman, as a separate company, will leverage its comprehensive suite of real estate solutions, industry-leading brand name, PropTech investment arms, New Valley Ventures LLC, and talented team of finance, technology, marketing, and communication employees to unleash its growth potential. We are doing this now, especially given current trends in the large and growing U.S. residential real estate industry at a time when the size of our business has reached a critical mass, positioning us well to succeed in the market as a standalone company. And, of course, it will also be able to access the capital markets and widen its potential investor base, as well as use its pure play stock for M&A purposes and provide incentive opportunities for its key talents. We expect this transaction to create significant value for all of Douglas Settlement's key stakeholders, developer clients, brokerage customers, employees, agents, and stockholders. Our presentation today will discuss why we are different than our competitors. Specifically, we believe our presence in the most important primary luxury markets in the United States, our opportunities for continued growth, our diverse revenue streams, as well as our distinct approach to technology will afford us a higher earnings multiple. Moving to page five, this is planned as a tax-free spinoff of Douglas Elliman to Vector Group stockholders. Upon completion, the new company called Douglas Elliman, INC, will be a separate publicly traded company on the New York Stock Exchange under the ticker symbol Doug. Douglas Elliman, Inc. will consist of the brokerage New Valley Ventures LLC, DE Property Management, DE Development Marketing, DE Title, DE Mortgage, and Portfolio Escrow. The rationale for the spinoff is that Vector Group's two businesses, Tobacco and Real Estate, operate in distinct markets and possess unique growth prospects and investment profiles. As planned, Vector Group stockholders will receive one share of SPNCO common stock for every two shares of Vector Group common stock held. We also expect, subject to Board approval, that SpinCo will initially pay $0.05 per share of quarterly dividend to holders of Douglas Elliman common stock, and that Vector will continue its $0.20 per share of quarterly dividend. Doug's board will consist of Dick Lampin and myself, as well as five seasoned public and private company executives who bring technology, legal, and financial expertise. Ron Kramer, Wilson White, Lynn Mistel, Michael Leibowitz, and Mark Zychek. Now, let us turn to page six for an overview of Elliman's business. Founded in 1911, Douglas Elliman is one of the preeminent, cutting-edge residential brokerage companies in the United States. Douglas Elliman is a leading real estate brand associated with luxury service and forward thinking that operates in premier markets, primarily those that are densely populated international finance and technology hubs, as well as many of the second and third home markets which feed them. These markets offer housing inventory at premium price points. With a brand name synonymous with luxury and its comprehensive suite of technology-enabled real estate services and investments, Douglas Elliman is well positioned to capitalize on the highly attractive dynamics in the U.S. residential real estate market. As a standalone publicly traded company, Douglas Elliman will pursue profitable growth opportunities to create stockholder value through the expansion of its geographic footprint, adoption of cutting-edge PropTech and investments in PropTech companies through New Valley Ventures, continued success in its retention and recruitment of best-in-class talent, acquisitions, acqui-hires, and operational efficiencies. Douglas Hellman will also be able to directly and more efficiently access the capital markets and widen its potential investor base. Douglas Elliman has an attractive financial profile with a balance sheet strength of $200 million of net cash and significant operating leverage. Currently, Douglas Elliman has approximately 6,600 agents, and for the 12 months ended September 30th, 2021, it had gross transaction value of $47.7 billion, revenue of $1.29 billion, and adjusted EBITDA of $106.2 million. Turning to page 7, Douglas-Sellman is one of the largest residential brokerage companies in the New York metropolitan area, which includes New York City, Long Island, Westchester, and the Hamptons, and is sixth largest in the United States by sales volume, according to HousingWire. Note, this is sixth amongst brokerages such as Realogy, Berkshire Hathaway, and Compass, for example, all of which boast tens of thousands of agents compared to Element 6,600. Since 2013, Douglas Elliman has expanded throughout Florida, California, Aspen, and Snowmass, Colorado, Houston, Dallas, and Austin, Texas, and Massachusetts, including Boston, Cape Cod, Martha's Vineyard, and Nantucket. The company can leverage Douglas Elliman's brand equity and earns credibility to expand its presence in new existing and adjoining markets and recruit best-in-class agents who recognize and trust the Douglas Elliman name. all contributing to increased market share. An important point of differentiation for Element from Realogy and Compass is that the primary focus of our business is on the leading densely populated international finance and technology hubs where housing inventory is at premium price levels. This is unlike these two competitors, one of whom is a multi-brand national franchisor whose growth plans are less focused and include many markets through the country with these same demographics. This results in Elliman having an average price for transactions substantially higher than our leading competitors. This is important because the economics of the luxury market are attractive with commission rates strong, but also because we see the luxury market as more recession-proof with drivers to our markets, such as the continued migration to lower and lower-tax states, the prevalence of remote working, and the growth of millennials entering the housing market who are generationally inclined to buy them. We believe this creates a large runway for us to continue to grow our business, not only in our existing, but in completely complementary markets as well. Turning to page nine to review the investment highlights for SpinCo. The U.S. residential real estate market has highly attractive growth dynamics. Element's comprehensive suite of real estate solutions provides for multiple revenue streams and opportunities to monetize our agent relationships. Douglas Element is an industry-leading brand with a presence in most major U.S. luxury markets. We have cutting-edge technology which support agent recruitment, retention, and productivity. We have a strong platform for continued and sustainable growth. The standalone Douglas Elliman will have a balance sheet strength and significant operating leverage. And finally, we have a seasoned management team with substantial real estate experience and a track record of driving growth. Now I will turn it over to Dick Lampin, Vector's Chief Operating Officer, who will discuss pages 10 to 13 on the residential real estate market. Dick?
spk03: Thanks, Howard. Turning to page 10, which highlights the attractive characteristics of the U.S. residential market. Since the beginning of 2020, U.S. homeowner equity has grown 17.6% to $23.6 trillion. New and existing home sales in the U.S. are forecast to grow to approximately 7.4 million units in 2022, up from 6.9 million units in 2021 and 6.5 million units in 2020. This is occurring against the backdrop of low mortgage rates driving home sales, and even with some increase next year likely, still on a relative basis at very attractive levels. This is accompanied by increased mobility, driven by a number of factors, including the continued migration to low-tax jurisdiction, as well as COVID-related factors, such as greater remote work flexibility, leading to increased demand for greater space and second homes. Douglas Elliman increasingly refers to buyers wanting multiple primary residences, with their second and third residences having all the amenities and space they desire for a full-time residence. Turning to page 11, Another contributing factor to long-term demand in the residential market arises from millennials, the largest population cohort, entering the housing market in large numbers as they hit family formation and peak home-buying age. While making their first home purchases at an older age than prior generations, they now are an important and growing part of the demand, and we anticipate them to prefer a technology-focused firm like Douglas Elliman. This strong demand combined with low inventory has resulted in significant price appreciation in many sectors of the market, including in many of our luxury markets. And finally, agents continue to play a critical role in the purchase and sale of residential real estate. Notwithstanding various agentless models, like iBuying, they represent a very small piece of the market. and that approximately 90% of all residential transactions an agent is involved, as real estate transactions are complex and agents help to facilitate the successful completion of the transaction. Turning to page 12, Douglas Elliman's comprehensive suite of real estate solutions provide for multiple revenue streams in addition to our residential brokerage business. Our existing portfolio of ancillary real estate services allows us to enhance client experience and drive revenue and earnings growth with an opportunity to accelerate growth via investments and acquisitions. These other revenue streams include the Douglas Elliman Development Sales and Marketing Platform, which enhances Elliman's position in the luxury real estate segment. Headed by Susan DeFranza, an industry leader, DE New Development is sought after by well-known real estate developers as it offers expertise from project inception to close, including sales, leasing, and marketing for new developments in key U.S. markets. The firm ranks among New York City's and South Florida's most prominent marketing and sales firms, with 75 in-house development professionals overseeing a $40 billion portfolio of buildings, by such famed architects as Jean Nouvel and iconic brands including the Waldorf Astoria, the St. Regis, and the Ritz-Carlton. Through a strategic global alliance with Knight Frank Residential, the world's largest privately owned property consultancy, Douglas Elliman New Development benefits from immediate opportunities to market properties to international audiences. With new development sales and marketing, unlike our principal competitors, Douglas Elliman employs a hybrid broker model where our traditional residential real estate agents work in tandem with our Douglas Elliman new development professionals and leverage their extensive industry relationships with the benefit of our developer clients. Our agents are able to market and sell high-profile developments that enhance their brands and provide additional commission revenue potential. We believe this model provides a competitive advantage to our new development business while also increasing the attractiveness of the Douglas Elliman platform to current and prospective agents. Our premium residential property management business, Douglas Elliman Property Management, provides a full range of fee-based management services for approximately 360 properties representing about 56,500 units in New York City, Nassau County, Long Island City, and Westchester County. The buildings we manage provide an important source of referrals for our agents through our building specialist program, which allows designated agents to leverage the relationship trust developed by our property management team with building owners and tenants. DE Title Services provides a wide, a full range of title insurance services to real estate buyers and financial institutions in New York and Florida. Portfolio Escrow, a leader in the California escrow market, delivers all pertinent documents for recording to the appropriate county clerk's office that releases funds to the seller and any other agreed upon entity. We look over the coming year to expand our title and mortgages businesses into additional of our markets. With that, let me turn it over to Scott Thurken, the CEO of Douglas Elliman Realty, LLC, to discuss the Douglas Elliman brand, which we consider to be the leader in the luxury market.
spk07: Thanks, Dick. Turning to page 13, today we believe Douglas Elliman is the preeminent luxury brand in the U.S. with an established reputation for luxury and trust built over the last century. This is an important point of differentiation for us from our peers. We have successfully leveraged Elements brand equity to expand from our historical focus on the New York metropolitan area into new and adjoining luxury markets throughout Florida, California, Massachusetts, Colorado, and now Texas. Places where our clients often have primary, second, or third residences and where agents and clients recognize and trust the Douglas Elliman name. Our brand recognition and agent credibility lead to a large referral network amongst Ellenman agents who are provided ample opportunities throughout the year to connect in person at bespoke events including Art Basel, the Winter Equestrian Festival, and the Hampton Classic. These carefully curated events allow agents to develop personal and professional relationships and a mutual trust with each other's clients looking to invest in multiple markets. To build on this established brand presence, Douglas Elliman produces a tremendous amount of owned content on social media for its digital magazine, Elliman Insider, and its glossy print magazine, Elliman. The firm also generates earned media via important news organizations, including the Wall Street Journal, the New York Times, the Financial Times, and CNBC, to name a few. building a very high level of credibility in the real estate space as well as targeted exposure of brand initiatives, exclusive listings, new development projects, and closed deals. Such important press coverage resonates with our clients as it showcases element agents and executives, thought leadership, and contributes to a strong share of voice across all major markets in which we operate. As you can see from the chart on the slide, Elliman is number one in earned media in each of its principal markets, including New York City, Florida, and Los Angeles. And as a final point, we sponsor the Miller-Samuel Report, the gold standard of market research in the residential brokerage world. Jonathan Miller is the most quoted and respected researcher and analyst in our business, and our association with these reports builds a high credibility factor for our agents. Turning to slide 14, Elliman has a large and growing presence in most of the leading luxury markets in the United States. Our 6,600 agents across the country are augmented by our exclusive relationship with Knight Frank with its international network of approximately 500 offices and 19,000 agents. This is an invaluable relationship that is truly singular in the USA. residential brokerage community and provides our agents with unprecedented global exposure to important buyers from around the world. This is of particular importance today as our borders open to foreigners on November 9th. And as you can see from the charts, our significant and growing market share in our principal markets, and we are regularly one of the largest firms in New York. Our focus on the major U.S. luxury markets is reflected in Douglas Elliman having substantially higher average transaction value than any of our major competitors, approximately 1.6 million year to date, materially higher than Compass and Realogy. Now I will turn it over to David Ballard, Vector's Chief Technology Officer, who will discuss pages 15 through 17 and provide an overview of Elliman's technology platform. David.
spk08: Thank you, Scott, and good afternoon all. Starting on page 15, you'll start to see that our general approach to real estate technology is leveraging best of breed technology, leveraging proven technology around legacy investments, as well as leveraging new early stage disruptive prop tech companies from New Valley Ventures. This strategy gives our stakeholders access to fast and changing industry-leading technology while enabling Douglas Elliman to benefit from traditional valuation growth of breakthrough prop tech companies. Hiring technology talent to develop new products inside large companies such as Douglas Elliman is costly, takes longer to bring new technology to the market, and rarely generates most cutting-edge solutions, and then limits the value of the emerging product, to the company's own usage. Instead, we believe technology innovation is best fostered in smaller, purpose-built prop tech companies. We operate a very open architecture technology infrastructure that allows for plug and play environment where new features and functionalities can quickly be added for the benefit of our agents and their clients. This ensures our technology remains state of the art Vendor optimality is maintained and our costs are minimized. By investing in early-stage PropTech companies, Douglas Element can gain differentiation access into the innovative PropTech services while benefiting from expected growth and valuation of these firms without the need to build or fully acquire them. We anticipate that these investments will continue to provide us with unique access to cutting-edge, industry-leading technology providing us with valuable technology systems to improve the efficiency of Douglas Elliman's business while also capturing some of the most valuable created combination of experience between real estate industry and the prop tech companies for which we partner with. Our Douglas Elliman agent portal shown on this page, powered by invent.us, is built on a native cloud SaaS infrastructure foundation that is designed to rapidly adjust and incorporate new initiatives and solutions. The user-friendly portal incorporates automated and simplified workflows for our agents, interactions, expansive data-rich dashboards, and reports backed by artificial intelligence and integrated data assets. The technology is completely plug-and-play and enabled, which supports our ability to quickly adjust our solution in concert with the digital transfer information happening in the prop tech industry today. Turning to page 16, leveraging this solution, leveraging this strategy, we also can quickly incorporate innovative technology to meet our business requirements at a rapid pace. Example, in 2018 to 2020, on average, we were able to roll out about two to four major solutions needed to support our business, in addition to just small changes that were required for our existing solutions. Over the course of 2021, we've rolled out nine solutions and we target two more by the end of the year. Solutions like mobile-ready CRM, DIY marketing solutions, transaction management powered by ReChat and others, AI integration powered by Perlin, eSign, online notary, DIY robust video abilities, and expanding revenue opportunities by leveraging partners like Humming Homes for home services. Turning to page 17, our open architecture technology strategy allows access to fast-changing, industry-leading technology while enabling Douglas Elliman Realty to benefit from the potential adjacent revenue streams and valuation growth of the breakthrough tech firms. Elliman is bringing innovation, technology-driven prop tech solutions to Douglas Elliman Realty and the greater real estate community through its New Valley Venture subsidiary. The investment approach ensures that Douglas Element companies and its agents are on the cutting edge of the industry with new solutions and services that can easily be integrated into our technology foundation while keeping us asset light. This includes access to exciting, fast-growing sectors in the prop tech space, such as EV and green tech, which significantly align with our assets. The PropTech companies we invest in benefit access to Douglas Element's operating business and distribution to grow their own business while simultaneously driving Element's growth and competitive differentiation. Another additional revenue stream example would be our White Label homeowners engagement platform that supports long-term client relationships by providing clients lifetime access to services that include home management, moving, HVAC support, home insurance, change of addresses, and many more. Our access to leading industry technology also enhances agent productivity, earning potential, and satisfaction thus supporting effects to recruit and retain high-performing agents through the appeal of more creative offerings and to the increase of our market share. Now I return back to Scott to go through page 18 and 20.
spk07: Thank you, David. Moving on to page 18. Douglas Ellman has a strong platform for continued growth. This involves growth in existing markets and in markets adjacent to where we are today, as well as entrée into new markets. In addition to organic growth through recruiting in our major markets, we have a number of very significant opportunities to grow our market share in adjacent markets where the Elliman name is well known and trusted. Some clear examples, in New York where we have a significant presence in New York City, Long Island, and the Hamptons, we are working hard to grow our business in Westchester County, Greenwich, Connecticut, and in New Jersey. Likewise, we are focused on scaling our business in Boston and nearby summer luxury markets. In Florida, we are building on our strength in South Florida from Miami to Palm Beach to increase our presence on the west coast of the state and recently, for example, have had a significant growth in our Naples presence. And we have made a strategic decision to aggressively grow our current business in Texas. This past summer, we restructured our relationship with our partners and are fully integrating the business with the rest of our operations. We are actively recruiting top agents and talent in Houston, Dallas, and Austin. And we believe Texas could be a major market for us in the future. Texas is a low-tech state and growing in importance as a tech hub, seeing significant in-migration from California and other markets where we operate in. There are a number of potential markets where our strengths and the luxury segment could make these markets interesting. These include, as examples, markets such as Nashville, Scottsdale, Denver, Las Vegas, and San Francisco. These are also examples of markets where there is also potential for new development sales and marketing business, which can be a good way for us to enter a new market. In the aggregate, the 18 markets shown represent approximately $180 billion in transaction value, which would represent a 50% increase in our addressable market. In terms of growth of our new development sales and marketing platform, this is very important as a part of our business. Total revenues for this business were 66.7 million year to date, and our pipeline is very strong. We see a number of attractive opportunities to expand this business into new markets and are actively working to expand our presence in Texas. And as discussed before, we have a real opportunity to expand our ancillary services such as mortgage title and escrow to enhance client experience and stickiness as well as to drive profitable revenue growth. Turning to page 19, a final key to our continued growth lies in the retention and the recruitment of agents. We have a very high retention rate for our industry equal to approximately 90% of our revenue. And our agents are long tenured with 87% of our revenue coming from agents who have been with us for more than three years. While we have all the technological assets and leadership acumen of any major corporation, our agents and employees often describe our completely close-knit culture as family-like and proudly have agents who have called Elliman home for 10, 20, and even 30 years. Forbes has ranked us as one of the best places to work several years running. We are steeped in culture, rich in entrepreneurialism, and work closely with agents to help develop very unorthodox yet winning business plans that have led to some extremely successful initiatives that bring Elliman worldwide acclaim and recognition. Such examples include the shows Million Dollar Listing Los Angeles, Million Dollar Listing New York, and most recently, Kendra Sells Hollywood. Douglas Elliman, has many of the most successful and most visible agents in the U.S. We pride ourselves on our track record for many years of recruiting high-profile, best-in-class agents who are attracted to the strength of our platform and our brand. As David mentioned before, we will continue to invest in compelling prop tech opportunities that will help propel our growth and competitive differentiation, as well as enable us to benefit from growing adjacent revenue streams and the potential growth in valuation of breakthrough tech firms. With that, let me turn it over to Brian to provide a financial overview. Brian?
spk02: Thank you, Scott. It is very important for Douglas Elliman to have a strong financial profile that is commensurate with its luxury customers. This strong financial profile will enhance Douglas Elliman's growth prospects as it expands and seeks merger and acquisition opportunities. And related to valuation, we believe this position of strength should entitle Doug to a higher earnings multiple. Please turn to page 22. Page 22 provides a summary of the attractiveness of Douglas Element. Strong operating performance with impressive revenue growth. disciplined expense management led by seasoned industry executives, healthy margins, and limited capital expenditures that support strong future growth initiatives, and a quarterly cash dividend from a balance sheet with $200 million of net cash. Please turn to page 23. This slide shows our strong key performance indicators, a healthy number of principal agents, significant growth in transactions and transaction value, and most importantly, an average sales price of $1.55 million per home over the last 12 months, well above the national average. The reduction in principal agents from 2018 to 2021 is the result of cost reduction initiatives that began in 2019. As we demonstrated on page 20 of the presentation, our operating expenses excluding activity-driven items, such as advertising and discretionary compensation, have declined by about $25 million, or 12% since 2019. The fruits of our work from increasing revenues as well as expense reduction initiatives are demonstrated on page 24. In addition to a healthy EBITDA margin of 8.2%, there is a solid conversion to free cash flow with low capital expenditures. Please turn to pages 25 and 26, where the company's income statement and balance sheet are presented. Now turning to page 27, a summary of the investment and some highlights are presented, including Douglas Elliman operates in a highly attractive U.S. real estate market. Douglas Elliman is an industry-leading brand name that is associated with luxury. Douglas Elliman has a seasoned management team with substantial real estate technology and operating experience. Douglas Elliman's technology creates a strong platform for continued growth. Douglas Elliman's comprehensive solution for multiple revenue streams capitalizes on its monetization of its valued agent relationships. And Douglas Elliman has a healthy balance sheet with significant operating leverage for expansion. Thank you, and back to you, Howard.
spk10: In summary, we believe Douglas Elliman's strong leadership team, technology, and financial profile is commensurate with the profiles of its luxury customers. Being a separately traded public company will enhance Doug's strength, which along with Doug's runway for expansion, will increase its growth prospects as it expands and seeks M&A opportunities. We are pleased with our longstanding history at Vector of paying a quarterly cash dividend. It remains an important component of our capital allocation strategy, and following this spinoff is our expectation that our current policy of quarterly dividends of 20 cents per share will continue well into the future. Thank you very much, and we will be happy to answer questions. Operator?
spk01: Yes, sir? If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. And our first question will come from Ian Zephino with Oppenheimer and Company.
spk06: Hi, great. Thanks, guys. Congratulations. Definitely exciting news and exciting procedure. So congratulations. You know, a couple of questions here, kind of a lot to unpack. But, you know, maybe just give us kind of the highlights as far as, you know, is this 100% spin? Did this go through any type of sales process? And then also, what are the cost basis is? of the legacy Vector company, and how do we think about that going forward? And then I have a few follow-ups. Thanks.
spk10: Leo, let me start with that. As it relates to it, it's 100% spinoff. It's all the shares of the company being spun off to the Vector shareholders. And as it relates to having gone through a sales process to sell the company, you know, this industry has a lot of rumors, but we've never had a sales process to sell the company. And, Dick, you want to answer the other parts of the question?
spk03: Well, Ian, it was your question about, you were asking about the tax basis of the shareholder?
spk06: A legacy vector after the Doug spin is complete.
spk03: Brian, do you want to pick that up?
spk02: Yeah. Sure. All stockholders will retain their basis and vet their stock, and after the spinoff occurs, we will notify stockholders of the allocation of their basis between Doug stock and BGR stock.
spk06: Okay, but I'm assuming the assets themselves have a relatively low basis and they've been fully depreciated or pretty close to it, correct?
spk02: That is correct. But the question that was asked was, this is a tax-free spinoff. And as a result, stockholders will not recognize any gain or loss on the transaction. The basis fee is allocated between the two companies. And Douglas Ellison does not have any internal gains, or Vector does not have any internal gains.
spk06: Okay, good. And then if I just squeeze in two more questions. If we look at the pro forma EBITDA of Doug, how much cost should we expect to kind of creep back into the model once we get past sort of the whole cost cutting and optimization process? You know, how do we think about that? And then also any inter-party related agreements between the two entities? You know, I'm thinking that the real estate side appears to be staying with VGR. And if that's the case, it typically has some type of exclusivity agreements with Doug and especially on the pre-opening, the marketing, and the sales process, how does that all now work as two separate entities?
spk10: Dick, do you want to answer?
spk03: Yeah, sure. The, you know, there are a series of traditional agreements, intercompany agreements between, you know, between Vector and the spinoff entity that will, you know, that would be traditional in a spinoff. There will be certain sharing of, you know, corporate expenses, some leases and other types of things. I mean, as you are correct that the, real estate investments will remain with Vector, and if historically that has involved some new development and marketing activity by Douglas Elliman, those relationships will continue. I think as Brian mentioned, I think we're very proud of the expense reductions we made, and I know he referenced the $25 million of expenses that have been taken out. I think we've been very pleased that we think those expenses, you know, fundamentally have been, you know, are solid. Obviously, there are activity related expenses that are very, you know, correlated to volume and profitability. You know, examples being advertising and performance compensation. But, you know, I think we feel very good about the, you know, the work that was done last year to attempt to attack our expense structure and that, you know, we've seen those, you know, the fruits of that continue into this year and expect into the future.
spk06: Okay. Thank you very much. I'll let someone else hop on. Thanks.
spk01: Thank you. Our next question comes from Hale Holden with Barclays.
spk04: Good evening. Thanks for taking the call, and congratulations. I had two questions, I guess. The first one is you mentioned that Doug would be spun off with $200 million of cash that it has on balance sheet. Are there any intention for it to raise debt and do an intercompany cash distribution to VGR before the spinoff?
spk10: No. We have no plans. We feel that the $200 million is enough. We're profitable, quite profitable. We hope it will continue that way, and we have no intention of entering the public markets until we really need to for whatever the reason, whether it be a large acquisition or whatever. But right now, we think we're in good shape.
spk04: Okay, so DE will be effectively unlevered at spend is the way to think about it.
spk10: Unlevered, completely unlevered, yes.
spk04: Okay. My second question is, Why leave the real estate portfolio behind? Why not send it off with Doug?
spk03: Well, I think, you know, part of the concept was that the spun-off entity was going to be an asset-light entity. I mean, Vector Group has the existing interest structure that has supported those investments historically, and I think those were really the factors that drove our conclusion that, you know, it made sense to, you know, to maintain those at Vector where they historically had been.
spk04: Okay. And I guess, sorry, one last one. You guys seem very confident you'll get it done by year end, but that's coming up on us quickly. I just was wondering if there are any hurdles we should think about that might delay it.
spk03: Well, I mean, completion of it is obviously subject to final review by the SEC, among other, you know, that's really the key variant. And, you know, we remain hopeful and confident it will get done by year end. But, again, you know, we're not 100% in control of that process.
spk01: Great, thank you very much. All right, thank you. Our next question will come from David Levine with MidOcean Credit Partners.
spk09: Hi, thanks for taking my questions. First question, just around the unsecured bonds left at Vector, understand that I think Elliman guaranteed them So my question just around, you know, your thoughts around the step down there and if you're thinking about doing anything in conjunction with the spinoff.
spk10: Well, Elliman did not guarantee those bonds. So that's the first thing. And obviously we think Liggett on its own will be able to continue, obviously, paying the interest with its earnings. And, you know, we'll be available when time comes to refinance them.
spk09: Okay. Thanks. And then can you just clarify, I mean, it's a little bit confusing in the presentation. It says that the real estate assets will stay with BGR, but the New Valley entity will go with... Well, yeah. Yeah.
spk10: So there's two New Valleys, actually. There was New Valley Real Estate, which had the real estate assets, and then there was New Valley as it related to the PropTech investments.
spk09: Yes. Okay, so the New Valley that's going with the spin code is not kind of your investments. It's more the PropTech. No, that's New Valley.
spk06: Okay.
spk09: Correct. Okay.
spk10: Then...
spk09: Then I had some questions on the tobacco side. Can you guys just talk about like, you know, your margin obviously, you know, today is much stronger on the tobacco side than it was kind of pre-COVID. You know, obviously a lot of that's driven by top line. But can you kind of, how should we kind of think about kind of a more normalized like tobacco margin profile if we kind of think about you know, um, you know, top line normalizes more to, to pre COVID levels, you know, how much, how much of the, uh, of the cost take out there do you think is relatively permanent?
spk10: Yeah.
spk11: So, so as a reminder, it was back in, uh, in, in 20, 2018, back half of 2018 that we made the decision to move from a volume based strategy to an income based strategy. with our Eagle 20s brand, and that has been the primary driver and continues to be the primary driver of our margin increase on a quarter-over-quarter, year-over-year basis. We're certainly anticipating that to continue. As I mentioned in my prepared remarks, though, at the same time, we have launched Montego in various markets across the U.S., and the strategy for that brand is to complement Montego both Eagle and Pyramid, and shore up our market share in the U.S. market. And that's what we've been doing. So we're anticipating both stable and growing share, but also continue to deliver increased earnings through increased margins on our Eagle 20s brand.
spk05: Just to add to that, effectively 2021 has really functioned as a, you know, using your analysis, a post-COVID year. If you look, you know, last year, the industry was basically flat. This year, the retail market is down, as Nick presented, over 6% and wholesale is down over 11%. So the recovery from COVID in the industry has happened. And Liget has been able to maintain its gains that it picked up during the COVID period and extend them in 2021. which is a product, as Nick just explained, of the monetization of our Eagle brand.
spk09: Got it. So you guys think it's a little bit more permanent just in terms of the, you know, as you continue to take price, it's more a little bit of a permanent margin uplift for Liget. I just had one more question around Montego. You know, interesting to hear just the continued market share that Montego is is gaining, um, you got, you guys kind of highlighted it over the last couple of quarters, I think, um, percent, uh, yeah. So I, I, some more color around Montego would be pretty helpful. I think in the prior quarters, you've kind of given the share of Montego as a percentage of, um, of the discount sales. Is there any kind of color on the continued progress there? Cause I think that's an interesting story, obviously.
spk11: Sure. Look, uh, You know, with respect to both our market strategy and our brand strategy, you know, as we've always said, we take this opportunistic approach to the marketplace. And when opportunities develop, we need to take advantage of those opportunities and position LVB to get its fair share or more of that future growth. And we're seeing those opportunities in the low end, the low end, the deep discount category continues to grow. And so we're using Montego as our price fighting brand to take advantage of those opportunities. We're still in the early stages, but from a year-over-year perspective, it's increased from about 3% of the deep discount category to 7% of the deep discount category. Continue to be very pleased with the progress in the overall brand portfolio.
spk09: Okay. Thanks for answering my questions. Appreciate it.
spk01: All right. Thank you. Ladies and gentlemen, those are all of the questions that we have for today. Thank you for joining us on Vector Group's third quarter 2021 earnings conference call. This will conclude our call. On behalf of all of us at Vector Group, Liggett, and Douglas Elements, We hope that everyone remains healthy and well. Thank you all for your participation and you may now disconnect.
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