Welcome to 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 An archived version of the webcast will be available on the Investor Relations section of the company's website located at investors.elliman.com for one year.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 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 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 Lampen, our Chief Operating Officer; Bryant 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 Elliman, 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 the 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 Realtors 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 Elliman 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 30, 2023. Please note that all numbers presented this morning will be as of September 30, 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 Elliman for the third quarter was $4.9 million or $0.06 per diluted share, compared to a net loss of $4 million or $0.05 per diluted share in 2022. Adjusted EBITDA attributed to Douglas Elliman 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 Elliman 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 for Douglas Elliman 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. Finally, adjusted net loss attributed to Douglas Elliman was $26.4 million or $0.32 per share in the 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 Elliman 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 to 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 Elliman 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 Elliman 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 totaling $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 Elliman 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 talent, and further adoption of innovative solutions to empower our brokers. With that, we will be happy to answer questions.

We'll take our first question from Dan Fannon 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 re-evaluating 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?

There are markets that are not performing as well as they have in the past, with New York being one of them. However, New York has improved significantly and has become more focused on downtown compared to years ago when everyone preferred the Upper East Side. It's not a terrible situation. On the downside, California is struggling due to local issues, including a new tax that is negatively affecting realtors for both buyers and sellers. On a positive note, we've identified a few markets we consider strong, one being Nashville, which we believe is promising for us given the numerous new development projects beginning there. We prefer entering markets where we already have new developments lined up, ensuring a solid business from the start. We're aiming to stick to states with low or no taxes. Las Vegas is performing reasonably well, and we currently have around 90 to 100 brokers there, along with some new development projects. We are also making progress in New York with new projects. In Miami, and throughout South Florida, we've opened several offices on the West Coast, including a new location in Sarasota, and this area is proving to be a vibrant market for new developments, which is beneficial for us.

Okay. That's helpful. And then, you mentioned October receipts improved year-over-year. So, can you just expand upon that? And then also inventories, are you seeing any change or sustained change as you look at what's happening here in October and November versus what has been happening here, obviously, in recent months?

Hi, Dan. It's Bryant Kirkland. October receipts were up about 2.5% from October of 2022, and that was fairly evenly distributed between existing homes and our development marketing. 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?

Are inventories also showing signs of continued improvement?

We are seeing that our listing inventory in the third quarter increased by 6% compared to the third quarter of 2022. We consider this a positive sign. This trend has been consistent throughout the year. Last year, there was a seller strike, but now the market is beginning to open up again. While this improvement will be gradual, we remain optimistic about the long-term outlook.

Okay. Great. And lastly, regarding the development marketing business, you mentioned some specifics. It seems like that area is picking up. Can you provide any overall comments about it compared to the regions? Additionally, looking ahead, is there a sign that it has continued momentum as we consider this quarter and next year?

It has gained significant momentum. I can provide examples, but I prefer not to boast. We've launched projects in Miami, and we were surprised by how quickly they sold and the prices we achieved. This trend appears to be consistent across South Florida, which is performing well. A key factor is the limited resale inventory; the primary market option is new development. From my conversations, the situation is straightforward. If people are concerned about interest rates, the advantage of new development is that there's no upfront payment or closing costs. Buyers make deposits during the construction phase, typically ending up with about 40% to 50% paid by the time the property is ready for closing. Usually, this occurs two to three years after sales begin, when we anticipate lower interest rates for mortgages. With ongoing inflation, buyers will possess an asset that wouldn't be replicated for the price they paid two or three years prior. This perspective is one reason the market remains strong.

Great. Thanks for taking my questions.

We'll take our next question from Soham Bhonsle 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 guys are in somewhat of a unique position in that you have some experience navigating some class action lawsuits in your Leggett 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 prefer not to comment on that. We have significant experience in this area, and we hope that this experience will assist us in navigating the situation. If the outcome is as positive as our previous major case, we would be quite pleased.

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

Thank you for your question, Soham. That business has been steadily growing throughout the year. You can refer to previous conference call transcripts where we've shared increasing numbers in our pipeline over the past year. Currently, we have approximately $21.5 billion in the pipeline on the market, which does not account for additional projects that are about to launch. This figure has risen from around $20 billion last quarter. So, we have $21.5 billion in the pipeline.

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

That's about right.

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 sort of...

Yeah. BK is going to 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 for the development. But go ahead, BK.

Right. And Howard, I don't know what else I can add to that. All that being said, it will come into revenue over the next four to five years. It will be more gradual. 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 the two-year anniversary of the spin is coming up, so that sort of gives you an ability to sort of unlock that. Obviously, a lot of uncertainty right now with the lawsuits. But 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 with where the stock is trading?

Yeah. So, you're correct, the two years come 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 the Board will make a decision.

Yeah, we're surely going to talk about it in great detail and then make a decision.

Okay. And lastly, Bryant, regarding your ongoing operating expenses excluding commissions, what is a reasonable estimate to expect over the next few quarters? Also, could you discuss any chances to reduce that rate in 2024? It appears we might experience a stagnant market in transaction volumes, but there could be an increase in average selling price. So, any insights on that would be appreciated.

And we're very proud of what we've done on the expenses. And we're proud because we have been judicious because we're taking a long-term approach. As Howard mentioned earlier, our operating expenses excluding commissions and restructuring were 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 million in just general type expenses, and $400,000 in travel. On a sequential basis, quarterly expenses were lower from the 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, $1.3 million on advertising and administration and $250,000 on 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, and occupancy costs just on the pure lease is about $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 run-off 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. So...

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

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

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 decline is on the rent side, is that fair, over the next few quarters?

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

Great. All right. Thanks a lot, guys.

Thank you for joining us on the Douglas Elliman quarterly earnings conference call. We appreciate your participation and wish you a good day. This concludes our call.

Thank you. Bye.