Douglas Elliman Inc. Q1 FY2024 Earnings Call

Good day, and welcome to Douglas Elliman's First Quarter 2024 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 An archived version of the webcast will be available on the Investor Relations section of the company's website located at investors.elliman.com for 1 year.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. Now I would 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. On today's call, we will discuss the current operating environment and Douglas Elliman's financial results for the 3 months ended March 31, 2024. All numbers presented this morning will be as of March 31, 2024, unless otherwise stated. We will then provide closing comments and open the call for questions. Before I turn to our first quarter 2024 results, I want to begin with an update on industry brokerage commission litigations. We are pleased to have recently announced a settlement agreement to resolve, on a nationwide basis, the pending class action litigation relating to real estate brokerage fees in the Gibson and Umpa cases pending in the Western District of Missouri, which will also resolve other similar pending litigation. This settlement agreement reflects our commitment to mitigating future uncertainties and limiting legal costs. It is not an admission of liability or the validity of any claim. Now we will discuss our outlook on the current operating environment for Douglas Elliman as well as trends we are seeing in residential real estate. As we have discussed, generationally high interest rates have driven sustained listing inventory shortages across our luxury markets for almost 2 years. These shortages have resulted in significantly lower transaction volumes during this time. While we expect these industry-wide challenges will continue to impact our results in 2024, we remain encouraged by recent improvements. First, although our commission receipts were down in March compared to the prior year, they were up from the prior year in January, February, and April 2024. This continues a trend that began in October 2023. We believe this signals that the market is in the early stages of adjusting to higher interest rates. Second, we are also seeing promising momentum in our Development Marketing business, a platform that further differentiates Douglas Elliman from our principal competitors. As a reminder, through its Development Marketing division, Douglas Elliman employs a hybrid broker model, where our top resale residential real estate agents work in tandem with our development marketing professionals and leverage their extensive industry relationships for the benefit of our developer clients. Our agents can market and sell high-profile developments that enhance their brands and provide additional commission potential for years to come, as they are often hired to resell or rent those very same units. We believe this model provides a competitive advantage to our Development Marketing business, while also increasing the attractiveness of the Douglas Elliman platform to current and prospective agents. Our Development Marketing division is sought after by well-known real estate developers and continues to create a foundation for long-term value over the next several years. This division has an active pipeline of signed and new projects of approximately $25 billion gross transaction value, including approximately $15 billion of gross transaction value in Florida alone. Further, approximately $5 billion of additional transaction value from our Development Marketing business is scheduled to come to market in the next year. We believe this bodes well for the future, as we will recognize commission income from these projects when they close in the future. Third, consistent with the trend we saw in the fourth quarter of 2023, total listing volume improved in the first quarter of 2024, up 6.7% from the 2023 first quarter, with gains in listings reported in California, the Hamptons, Florida, and Long Island, compared to the first quarter of 2023. This followed a 25% increase in total listing volume in the fourth quarter of 2023 compared to the fourth quarter of 2022. Because we recognize revenues when a sale closes, we expect that we will begin to see the impact of increased listing volume in the second half of 2024. Consistent with the increase in listings, our average sales price per transaction remained an industry best, $1.595 million in the first quarter. Over the past 3 quarters, this remained flat, and was $1.58 million for the first quarter of 2023. We believe the consistency in average price per transaction reflects the strength of the luxury markets we operate in as well as Douglas Elliman's reputation for offering the finest properties and client experience in real estate. Finally, our cost reduction efforts have been judicious, and the results of our strategy are beginning to flow to the bottom line. Over the past year, we have continued to adjust our cost structure to benefit our business, including additional headcount reductions, cutting costly sponsorships, streamlining advertising, and commencing a program to consolidate office space. Our Real Estate Brokerage segment reduced its operating expenses, including commission expenses, litigation settlement expenses, restructuring, and other noncash expenses by $5.4 million in the first quarter of 2024, representing a decline of approximately 7.6% compared to the prior year period. Over the last 12 months ended March 31, 2024, our Real Estate Brokerage segment has reduced its operating expenses, excluding commission expenses, litigation settlement expenses, restructuring, and other noncash expenses by $18.9 million or 6.6%. We believe these efforts enable Douglas Elliman to meet industry challenges head-on 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. Now turning to Douglas Elliman's financial results for the 3 months ended March 31, 2024. For the first quarter of 2024, Douglas Elliman reported $200.2 million in revenue compared to $214 million in the first quarter of 2023. Net loss attributed to Douglas Elliman for the first quarter was $41.5 million or $0.50 per diluted share compared to $17.6 million or $0.22 per diluted share in the 2023 period. Net loss attributed to Douglas Elliman in the first quarter of 2024 included a $17.75 million litigation settlement charge, of which we have agreed to pay $7.75 million by June 12, 2024, and up to two additional $5 million contingent payments between December 31, 2025, and December 31, 2027. Adjusted EBITDA attributed to Douglas Elliman in the first quarter was a loss of $18.2 million compared to $17.6 million in the 2023 period. For comparison purposes, our Real Estate Brokerage segment reported an operating loss of $32.8 million this quarter compared to $17.3 million in the 2023 period, which included the $17.75 million litigation settlement charge in the 2024 period. Adjusted EBITDA attributed to the segment was a loss of $14.2 million compared to $13 million in the 2023 period. Adjusted net loss attributed to Douglas Elliman in the first quarter was $23.7 million or $0.28 per share compared to $16.8 million or $0.21 per share in the 2023 period. Douglas Elliman has maintained ample liquidity, with cash and cash equivalents of approximately $91.5 million or $1 per common share and no debt. In summary, despite industry-wide headwinds, we are confident that Douglas Elliman is positioned for long-term success with its differentiated platform, continued cost reduction efforts, and strong luxury brand. Our proven management team has a successful history of navigating many economic cycles and applying financial discipline that balances the importance of maintaining revenues 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. Operator?

Our first question will come from Soham Bhonsle with BTIG.

Look, I know it's a tough market out there, especially with rates just being so volatile and inventory being so tight. But we could be here for a while just depending on where inflation ends up and how the Fed reacts. So can you maybe just talk about your desire to get the business to breakeven or even modest profitability if we sort of hang around these levels for a little longer?

Well, that's what we're doing in our cost cutting. We're not going to sit here and just keep it the way it is now and hope that the market changes quicker than it may or may not. And we're also trying to do it judiciously, not doing everything at once and spreading it out, and also making sure that we're not affecting the experience, our customers' experience. Obviously, our customers to us are our brokers. So that's really what we're working on.

Okay. And then, Bryant, I guess, on expenses, can you maybe just talk about how we should think about the run rate for the various OpEx lines as we go through the year? And any items that we should be thinking about?

Well, I mean, as you know, this is a seasonal business at times, so expenses move from quarter-to-quarter in a different way. However, we have cut expenses $18.9 million over the last 12 months. About $3 million of that was advertising. The majority of the remainder was in personnel, sponsorships, and travel. We're continuing to look at that. We did eliminate 100 positions in 2023. We're continuing to look at ways to deliver excellent customer service to our agents more efficiently, and we'll be updating you on that in future quarters.

Okay. And then if I could just squeeze one more in. It looks like - just if I look at unit share this quarter, at least on a national basis, it was down. But I know you guys aren't in all the markets across the country. So can you maybe just talk about your share in some of your core markets like New York, Florida, and California? Any other trends we should be sort of thinking about?

Our market share in New York has decreased slightly. However, Florida has performed very well, largely due to our new development business. It's impressive how the source of our top new development marketing revenue has shifted from New York to Florida, where it's significantly higher than in New York. In California, there isn't much new development since it's not really known for high-rise construction. I believe the issue is that when people move from a house to a condo, they want to save money. For instance, they might sell their house for $10 million but would need to spend $15 million on new construction, which isn't appealing. As a result, we are focusing strongly on new development in Texas, which is a promising area for such projects. We also have a couple of projects in Las Vegas that we opened in the last few years, so we feel good about our positioning in these regions.

Yes. The proportion of our revenues from the southern and western regions, specifically Florida, Nevada, California, and Texas, increased from about 50.5% of revenues from our existing home sales to 54% over the past three months compared to the same period last year. This aligns with the decrease in mortgage rates in the fourth quarter, as those markets are more sensitive to mortgage rates than the New York market, which mainly consists of cash buyers.

Yes. And then if I could, just one more, Bryant. On the commission split, 79%. It's trended up a little higher. So what should we expect going forward? And maybe just talk about some of the trends within that number, some of the drivers?

That's a great question. We are closely monitoring commission splits along with all expenses. Management is keeping a close eye on this. We are different from some of our national competitors due to our limited number of markets. The three factors that influence our commission splits are new development, which has the highest margin, New York and Long Island, which offer higher margins than Florida and California. This quarter, we saw a 189 basis point decline in gross margin, attributed to a 45% shift in the mix of existing home sales in Florida and California, increasing from 50% to 54% of our revenue. Additionally, we only recognize revenues on development marketing when the earnings process is complete, which means we are currently not recognizing significant revenues despite receiving substantial cash from deposits. The homes that would typically be closing now are those that started construction in 2020 and 2021, a period when the entire country was closed. This also impacted commission splits, leading to a reduction of about 145 basis points. However, when we compare regions, the commission splits remained consistent from the first quarter of 2023 to the first quarter of 2024, indicating no competitive pressures.

We'll take our next question from Peter Abramowitz with Jefferies.

Yes. I would like to revisit some of the comments made. You mentioned that total listings have increased year-over-year compared to the first quarter of '23. I want to explore that further. Does this suggest that despite the rise in total listings, your transaction volume has decreased significantly? Does this indicate that the decision-making process for buyers and sellers is occurring at a slower pace? I would appreciate more context and understanding of this situation.

Yes, I believe that the number of listings may have increased, but there's a shortage of buyers. Typically, someone looking to buy also has something to sell, which creates a dilemma. If they're willing to purchase at a higher rate, the property they intend to sell likely has a lower rate because they've owned it longer. This situation complicates their decision-making and affects whether they choose to move forward.

And that we are more immune to that pressure than some of our competitors because we have such a high percentage of our sales are ultra-luxury and cash. However, what I think you're seeing is with the 25% increase in the fourth quarter and a 7% increase in the first quarter, is that you're now starting to see the markets loosening up. People didn't have to do anything for 2 years after 2021 when mortgage rates were at historical lows and then went to generational highs as we know. Now we're seeing people have reasons to move and they're going to list their homes, and that will create more volume for us in the future. Our average sales price continues to be very strong at almost $1.6 million per home. So we have a lot of competitive advantages in this area.

Okay. That's helpful. Do you have a breakdown of what percentage of the buyers within transactions that you're involved in are all cash versus using financing?

That's more difficult to say because many times, people will make a cash offer and actually use financing when interest rates are low. But in New York, it's clearly still a significant percentage and also in the ultra-luxury in Florida because you have just a different character of buyer.

Yes. In these markets, in the high-end markets, you don't have people making offers subject to mortgage contingencies because the seller doesn't want to see that. They don't want to hear about that, okay? Because that's troublesome. So we really don't have an idea, and I agree with what BK is saying is that many people just say, make an all cash offer, but then they're financing it outside of that.

Got it. And then last one for me. I know you're still working on some of these operational improvements and improving the cost structure. I guess just trying to think about the timing and trajectory of when you can kind of get the brokerage segment back to breakeven positive territory from an EBITDA perspective. Is it kind of a trajectory of rates? Is it an absolute level of transaction volume that you need to see? And I guess just any comments around the possible timing of when you expect that to happen?

The speed at which rates decrease will really indicate how quickly changes will occur. However, we don't focus solely on that because there's a possibility that rates could remain stable or fluctuate without significant impact. Our priority is to ensure the business generates profits for shareholders rather than fixate on current volume levels. Ultimately, we are committed to continuing to optimize the business until further trimming is no longer feasible. We've initiated a new round of cost reductions and are pleased with the progress, and we will maintain this approach in the foreseeable future.

And with a strong balance sheet, we do have time to do this right. We're not going to be under pressure from debt covenants or from historical losses because of our strong balance sheet.

Right. I guess just one more as a follow-up then to Howard's comments. I mean, in terms of what rates mean for transaction volumes, say they are stable but high on an absolute level. Do you think that stability would be enough to kind of see the market start to loosen up? Or do you think rates need to be going down for that to happen?

I believe people are beginning to accept these rates, and trust in external predictions is low. A few months ago, there were expectations of 6 or 7 rate cuts this year, but now it seems there won't be any cuts. There are even discussions about the possibility of just one cut. However, we can't run our business based on these fluctuations. While we monitor the situation and hope for cuts, we aim to position ourselves so that regardless of how things unfold or if they remain the same for a while, we will still be profitable.

Ladies and gentlemen, those are all the questions that we have for today. Thank you for joining us on Douglas Elliman's quarterly earnings conference call. We hope you have a good day. This will conclude our call.