Welcome to Douglas Elliman Second 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 An archived version of the webcast will be available on the Investor Relations section of the company's website located at investors.element.com for one year. During this call, the terms adjusted EBITDA and adjusted net loss 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 adjusted EBITDA and adjusted net loss were 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 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 and 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.

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 and 6 months ended June 30, 2024. All numbers presented this morning will be as of June 30, 2024, unless otherwise stated. We will then provide closing comments and open the call for questions. Before I turn to our results, I want to begin with an update on certain matters. First, in July 2024, we were pleased to have received a $50 million growth investment from Kennedy Lewis, a leading credit-focused alternative asset management firm. We believe this positions us for strategic growth and expansion and we look forward to tapping into the network and knowledge base of Kennedy Lewis as we collaborate to drive long-term stockholder value. Second, in June 2024, we were pleased to receive preliminary court approval of our settlement of the pending seller class action litigation relating to real estate brokerage fees which will also result in other similar pending litigation. Now we will discuss our outlook on our current operating environment as well as trends we are seeing in residential real estate. As discussed in previous quarters, generationally high interest rates have driven sustained listing inventory shortages across our luxury markets for more than 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 results, we remain encouraged by recent improvements. First, our second quarter revenues and gross transaction values increased from the prior year period by approximately 4% and 7%, respectively. Further, average daily cash receipts from existing home sales in July increased by approximately 12% compared to July 2023. This continues a trend that began in October 2023. We believe this is evidence of the market's gradual adjustment to higher interest rates. Second, we continue to see momentum in our development marketing business, a platform that differentiates Douglas Elliman from our competitors. 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 as they are often hired to resell or rent those very same units. Consequently, Douglas Elliman development marketing continues to be sought after by well-known real estate developers. This division has an active pipeline of signed and new projects of approximately $26.5 billion gross transaction value, including approximately $16 billion gross transaction value in Florida alone. We believe this bodes well for the future as we will recognize commission income from these projects when they close. Third, listing volume increased 23% in the second quarter of 2024 from the prior year period as Douglas Elliman continues to be the leader in the luxury markets it serves. The advent of the $100 million listing is upon us and we are well positioned to market and sell these prestigious homes. For example, during the quarter, we won significant nine-figure exclusives in Orange County, California, Snowmass, Colorado, and Coral Gables, Florida. The increases in total listing volume follow a 6.7% increase in the first quarter compared to the first quarter of 2023 and a 25% increase in the fourth quarter of 2023 compared to the fourth quarter of 2022. We believe we are already seeing the impact of increased listing volume and this trend will continue in the remainder of 2024 and into the first quarter of 2025. Consistent with the increase in listing volume, our average sales price per transaction remained an industry best $1.81 million in the second quarter and was $1.64 million for the past four quarters. We believe the consistency in our average sales price per transaction reflects the strength of our luxury markets 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 better fit 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, excluding commission expenses, litigation settlement expenses, restructuring and other non-cash expenses by $11.3 million in the first half of 2024, representing a decline of approximately 7.9% compared to the prior year period. Over the last 12 months ended June 30, 2024, our real estate brokerage segment has reduced its operating expenses, excluding commission expenses, litigation settlement expenses, restructuring and other non-cash expenses by $21 million or approximately 7.3% compared to the 12 months ended June 30, 2023. We believe these efforts are enabling 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 88% and we continue to attract the industry's best talent. Now turning to Douglas Elliman's financial results for the 3 months ended June 30, 2024. Douglas Elliman reported $285.8 million in revenues compared to $275.9 million in the 2023 period. Net loss attributed to Douglas Elliman for the second quarter was $1.7 million or $0.02 per diluted share compared to $5.2 million or $0.06 per diluted share in the 2023 period. Adjusted EBITDA attributed to Douglas Elliman in the second quarter was income of $2.4 million compared to a loss of $2.6 million in the 2023 period. For comparison purposes, our Real Estate Brokerage segment reported operating income of $2.9 million this quarter compared to an operating loss of $1 million in the 2023 period. Adjusted EBITDA attributed to the segment was income of $6.6 million compared to $2.5 million in the 2023 period. Adjusted net loss attributed to Douglas Elliman in the second quarter was $1.1 million or $0.01 per share compared to $4.9 million or $0.06 per share in the 2023 period. Douglas Elliman has maintained ample liquidity with cash and cash equivalents at June 30, 2024, of approximately $92.9 million. Now turning to Douglas Elliman's financial results for the 6 months ended June 30, 2024. Douglas Elliman reported $486 million in revenues compared to $489.9 million in the prior year period. Net loss attributable to Douglas Elliman for the second quarter was $43.1 million or $0.52 per diluted share compared to $22.8 million or $0.28 per diluted share in the 2023 period. Net loss attributed to Douglas Elliman in the 2024 period included a $17.75 million litigation settlement charge, of which we have paid $7.75 million in June 2024. Adjusted EBITDA attributed to Douglas Elliman in the 6 months ended June 30, 2024 was a loss of $15.9 million compared to $20.2 million in the 2023 period. For comparison purposes, our real estate brokerage segment reported an operating loss of $32.3 million for the first 6 months of 2024 compared to $18.4 million in the 2023 period. Operating loss in the 2024 period includes the $17.75 million litigation settlement charge. Adjusted EBITDA attributed to the segment was a loss of $7.6 million compared to $10.5 million in the 2023 period. Adjusted net loss attributed to Douglas Elliman in the 6 months ended June 30, 2024, was $24.8 million or $0.30 per share compared to $21.6 million or $0.27 per share in the 2023 period. In summary, 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 agents. With that, we will be happy to answer questions.

We'll take our first question from Soham Bhonsle with BTIG.

So first one, I guess, Howard, more recently, we've seen an increase in inventory in some of your core markets like Florida and Texas and I think you sort of noted that in your comments as well. So I guess, wondering what you're hearing from agents as to why that's maybe not translated into more transaction unit growth this quarter. Because when I sort of break down your GTV performance into units in price, it looks like units were still down 3%. So any thoughts there would be helpful.

Yes. I mean, look, I think people are still waiting for the inventory building a little bit because they're still waiting for rate cuts. So you have inventory build and then there's really less buyers at most levels, especially at the lower end levels in the market because of rates. So hoping that we will have some rate cuts before the end of the year. Who knows? I mean we’d be really happy with two quarter-point cuts but there's also been talk of a half-point cut and then 0.25-point before year-end. And we're sure we'll see the inventory really going down as people decide to make new purchases from the current inventory.

Okay. And then Bryant, I guess you did in the prepared comments, say, I think up 12% on cash receipts. Can you just remind us how that actually translates into revenue going forward?

Certainly. We have experienced strong performance in 2024, with a 12% increase compared to 2023. Our margins are fluctuating between 20% and 25%, depending on the regions. The market is very strong, and in response to the earlier question, we are starting to notice the effects of our listing, particularly with a strong July. We recognize revenue only once the earnings process is complete, which occurs at the point of sale. Therefore, we are optimistic about the outlook moving forward.

Okay, great. And then I guess on the capital raise, it sounds like you're looking to deploy that for growth. So can you maybe just talk about whether you envision that spend going towards tuck-in acquisitions? Or is it building out teams more organically? And then maybe just a market that you'd be looking to target.

Our expansion is mainly focused on states with no income tax, as those are the areas seeing an influx of people. There are several markets we haven't entered yet but could. We've been cautious, although we now have a good presence in most of the no tax states. We're performing well in Texas and are also established in Florida, which continues to see significant growth, surprisingly so as people are relocating there in large numbers. While many believe most newcomers are from New York, we've also noticed people from California moving to Florida. This challenges the previous assumption that Californians would primarily move to Texas to escape high taxes. We've actually encountered neighbors from California on both sides of us here in Florida. We're pleased with these developments and will keep managing our funding carefully. We're also planning to collaborate with Kennedy Lewis, a major lender to single-family home developers, and hope to secure some of that business if we can.

Okay. And then, Bryant on expenses. So it looks like you've been able to bring down the G&A line nicely. But my question is more around the go-forward. So if volumes were to begin to inflect next year or in the back half of the year, how are you sort of thinking about managing that line or just your fixed expenses in general, right? Should we expect that to continue to trend down as some of your prior actions sort of flow through? Or do you expect to add more folks to support the growth as you go forward?

You're asking about scaling expenses, and we believe we can manage them effectively as revenues come back, which will positively impact the business. Let's look at our progress. The profit contributions from reduced expenses reflect our efforts over the past two years, showing a gradual improvement as management has carefully implemented these cuts while remaining attentive to ongoing expenses. We aim to enhance the agent experience, which is key to long-term shareholder value. Initially, expense reductions came from decreasing advertising, which is somewhat related to revenues and personnel costs. Now, we are also experiencing the benefits of cutting leases and long-term sponsorships. We'll continue to make thoughtful decisions; if there's a need to increase spending, such as on advertising, we will, but we will strive to maximize scaling our expenses.

And let me add something to what I was talking about before on expansion. Our way of expansion now is not to go buy a company or not to start from scratch but what we do is we go into markets and most of these developers do business in multiple states. So like, for instance, we have projects in Tennessee coming up. We don't have an office in Tennessee. We have a broker. And so that may be just for a while just doing new development projects which is a great part of our business. And that's pretty much how we save money in opening other markets.

Okay, understood. And just last one. On split, Bryant, it was up 150 basis points. And look, we've seen pressure across the industry. Can you just maybe talk about some of the dynamics that play there.

Yes, certainly. This is similar to what we saw in the first quarter, but let me explain the details. There have been no changes in the commissions paid to agents in recent years. When we analyze the conditions by region, they remain consistent. However, our margin analysis is very sensitive to market mix, especially in states like Florida, which is known for higher commissions. In the second quarter of 2023, Florida constituted 27% of our existing home sales, and this increased to 30% in the second quarter of 2024. This shift accounted for about half of the 1.5% change in our margin compared to New York City. The rest of the change was influenced by our Douglas Elliman development marketing business, which is sensitive to revenue recognition since we only recognize revenue and related profit when a sale closes. As mentioned by Howard, we have a strong pipeline in this area, which bodes well for our future profits. Additionally, higher commission payouts on a percentage basis stem from our focus as an ultra-luxury realtor. We recorded some significant nine-figure transactions during the quarter, which will lower margins but also increase our overall gross profit.

Our next question comes from Peter Abramowitz with Jefferies.

Yes. So if we just look at overall transaction value in your business versus the overall market, it would seem that you gained market share this quarter. So just wondering if you could provide any context or comments around that. Maybe what drove that and if you think that's something that's sustainable going forward?

Obviously, record-breaking sales drove. We have the best agents. We're ultra-luxury residential real estate broker.

Just to add, we have, I think, in the whole industry, in the whole country, we have the highest level of sales. Our average sale this year was $1.8 million, I think, right? The rest of the companies, even companies, no matter what size they are, I don't think there's anyone that's even close to that. I think they're all $1 million or less.

I believe you're correct, Howard. We are in markets that not only have record-breaking sales and are classified as ultra-luxury real estate, but also in areas that are less affected by mortgage rates. Given that mortgage rates were very high in the second quarter, we expect to outperform in such conditions from an interest rate perspective.

Okay, that's helpful. And then a question just overall on the macro backdrop, obviously, some volatile and wild moves in the market. And there seems to be maybe a little bit more concern around a recession today than there was a couple of weeks ago. Just if you could help us think through the impact on your business. I know that your core buyer is maybe less impacted by the macro backdrop and not as sensitive. But have you had conversations internally about how that affects the business? And could you help us think through, if we do go into a recession, how we should think about sort of the go-forward sort of medium term?

Yes. That's a tough question because we don't know how the recession would be if there even is one. We keep hearing how many times that we've heard about it, oh, recession is coming, recession is coming. I don't think there's going to be any serious recession; there may be others that the opposite. But I still say that we are in the best position in the industry to weather a recession. And that's what's important because when you come out of that recession, if there is one, we'll be the number one; we'll continue to be the number one broker in the country.

Got it. And then one more, if I could. I think, Howard, you mentioned in your comments toward the end there, just on strategic market expansion. Could you touch on maybe some of the markets where you're thinking that may be a possibility, whether it's acquiring new teams or potentially just kind of beefing up for recovery, just markets overall, where you think the business could be expanding over the next year or two?

Yes. One of the ways we're achieving this without significant expenditure is through new development. In several markets, there aren't many players involved in new development sales. This approach is evident in Tennessee, and it applies to nearly all our markets, including Texas and Las Vegas. We have some excellent projects underway, and it doesn't require substantial investment since our back office operations in New York and Florida can support the entire country. We're not setting up large, lavish offices right away; instead, we aim to secure business first before opening an office. This strategy has been successful for us because we're well-recognized in the new development sector. We have a significant market share in Florida, even though we haven't been active there for long.

11 years.

10, I was going to say 10 years, 10, 11 years. And we built up where we're the number one broker in Miami Beach, we're the number one bulk broker in Palm Beach County. And we're all the way up pretty much, we go halfway up on the east side and we're now on the West Coast of Florida. And they really don't have anyone that really knows the new development business like we do. And that's really been a huge help. And so we're going to be going to places where there's business. It doesn't matter really where they are. If we can do it and do it economically and make money, we're doing it.

All right, that’s all for me. Thanks for the time.

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