Welcome to Douglas Elliman's Third 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 An archived version of the webcast will be available on the Investor Relations section of the company's website located at investors.elliman.com for one year.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 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 and Chief Executive Officer of Douglas Elliman, Michael S. Liebowitz.

Good morning, and thank you for joining us. First and foremost, I'm honored to have been named Chairman and CEO of Douglas Elliman and to lead this historic company through an exciting new chapter of transformation, growth and diversification. With me today on the call is Bryant Kirkland, our Chief Financial Officer. On today's call, we will discuss the current operating environment and Douglas Elliman's financial results for the three and nine months ended September 30, 2024. All numbers presented this morning will be as of September 30, 2024, unless otherwise stated. We will then provide closing comments and open the call for questions. Before we turn to our third quarter 2024 results, I'd like to start by reflecting on my first few weeks leading Douglas Elliman. I've met with and spoken to many of our agents and staff across the organization. We truly have an outstanding roster of agents and employees. They have all made me feel genuinely welcome. We have an incredible foundation to build on and enhance our culture and create an even stronger culture of collaboration, respect and integrity. Our brand, in my view, is the most recognizable brand in real estate. It's the reason I took this incredible opportunity. We must innovate and evolve to stay ahead and be the firm that provides expertise and added value with real estate services and in-depth analytics to differentiate Douglas Elliman from our competitors. We plan to grow and diversify the business to deliver value, and we have already created a strategic M&A unit to explore complementary acquisitions in ancillary businesses, like title, escrow, staging, insurance brokerage and property management that we are very excited about. We are already in discussions to expand our property management business into Florida where there's real opportunity as we expand our recurring revenue businesses. This approach will transform Douglas Elliman into a company with a diversified revenue stream and a sustainable growth engine. I look forward to sharing more of our plans in the weeks and months ahead. With that, I'll turn it over to Bryant, who will discuss our performance and the trends shaping the residential real estate industry.

Thank you, Michael, and the management team is enthusiastic about the vision for the new Douglas Elliman. With your leadership, our team at Douglas Elliman will be able to focus on increasing and diversifying revenues by logically investing in the business. We will capitalize on Douglas Elliman's competitive advantages in the ultra-luxury residential real estate brokerage segment as well as our expertise in the development marketing division. Before reviewing the financial performance, we will provide some updates on trends in home sale pricing, listings and development marketing as well as accolades earned in some of our key markets. First, pricing for home sales remained strong. In the third quarter, our industry-best average price per transaction rose to $1.6 million per home sale compared to $1.57 million per home sale in the comparable 2023 period. Year-to-date, through September 30, 2024, our average price per home sale transaction is $1.68 million compared to $1.6 million in the 2023 period. Second, we continue to build momentum from increased home sale listings. Our listing volume increased 6% in the third quarter of 2024 from the prior year period. Third, our development marketing division remains the preeminent industry player with a pipeline of actively marketed projects of approximately $26.8 billion of gross transaction value. Approximately $16.4 billion of this gross transaction value is in Florida alone. In addition to this active pipeline, I am pleased to report we have another $4.7 billion of gross transaction value that we expect will be coming to market through the end of 2025. We believe this foundation of business bodes well for the future as we will recognize commission income from these projects when they close, which is scheduled generally between the fourth quarter of 2024 and the year ended December 31, 2029. Fourth, many of our brokerages continue to outperform their peers. We were recently named the number 1 brokerage by sales volume on Long Island, the Hamptons, Westchester and the Hudson Valley and also eclipsed sales records in North Miami and the North Fork of Long Island. Now transitioning to updates on our expense structure. We continue to manage investments across our markets by focusing on return on investment. For the nine months ended September 30, 2024, our real estate brokerage segment reduced its operating expenses, excluding commissions, depreciation and amortization, litigation settlement, restructuring expenses and non-cash stock compensation expenses by approximately $11.9 million as compared to the corresponding period in 2023. Now we will turn to Douglas Elliman's financial results for the three months ended September 30, 2024. Douglas Elliman has maintained ample liquidity with cash and cash equivalents at September 30, 2024 of approximately $151.4 million. Douglas Elliman reported $266.3 million in revenues compared to $251.5 million in the 2023 third quarter. Net loss attributed to Douglas Elliman for the third quarter was $27.2 million or $0.33 per diluted share compared to $4.9 million or $0.06 per diluted common share in the 2023 period. Net loss attributed to Douglas Elliman in the 2024 period included a $20.2 million non-cash charge for a change in the fair value of derivative embedded within convertible debt. Adjusted EBITDA reported to Douglas Elliman in the third quarter was a loss of $1.4 million compared to a loss of $3 million in the 2023 period. For comparison purposes, our real estate brokerage segment reported operating income of $454,000 this quarter compared to an operating loss of $2 million in the 2023 period. Adjusted EBITDA attributed to this segment was income of $3.8 million compared to $1.5 million in the 2023 period. Adjusted net loss attributed to Douglas Elliman in the third quarter was $6.5 million or $0.08 per share compared to $4.7 million or $0.06 per share in the 2023 period. Now turning to Douglas Elliman's financial results for the nine months ended September 30, 2024. Douglas Elliman reported $752.3 million in revenues, an increase from $741.4 million in the 2023 period. Net loss attributed to Douglas Elliman was $70.3 million or $0.84 per diluted share compared to $27.7 million or $0.34 per diluted share in the 2023 period. Net loss attributed to Douglas Elliman in the 2024 period included a $20.2 million non-cash charge for the fair value of derivative embedded within convertible debt in the third quarter and a $17.75 million litigation settlement charge in the first quarter. Adjusted EBITDA attributed to Douglas Elliman in the nine months ended September 30, 2024 was a loss of $17.3 million compared to a loss of $23 million in the 2023 period. For comparison purposes, our real estate brokerage segment reported an operating loss of $31.9 million for the first nine months of 2024 compared to $20.3 million in the 2023 period. Operating loss in the 2024 period included a $17.75 million litigation settlement charge. Adjusted EBITDA attributed to the real estate brokerage segment was a loss of $3.8 million compared to a loss of $9 million in the 2023 period. Adjusted net loss attributed to Douglas Elliman in the nine months ended September 30, 2024 was $31.3 million or $0.38 per share compared to $26.4 million or $0.32 per share in the 2023 period. Now back to you, Michael.

Thanks, Bryant. I'd like to step away for a second from some of my prepared remarks so you can understand how we're looking at this business. ROI is going to be a major focus. We've moved all of our negotiations with agents on deals into this new M&A unit that we've created. We feel that focusing on ROI on each and every deal that we do is extremely important, and we are going to be laser-focused on that. In addition, I mentioned diversification. Diversifying this business model is one of our primary goals. As the business goes up and down, we all understand the real estate business has a lumpy nature to it, and diversifying the business and doing acquisitions, as well as organically starting and growing businesses that sit around the agent, will greatly enhance our agent base diversification and bring us into new markets. So we're very excited about that. The best days of Douglas Elliman are truly ahead of us. I took this role on because of the brand, the power of the brand, the ability to scale this brand, the ability to take this brand further than just domestically with all of the businesses that we can be in. I'm very excited about this opportunity. And with that, we'll be happy to answer any questions.

We'll go first to Peter Abramowitz with Jefferies. Please go ahead.

Yes. Thank you very much. Appreciate the time. Bryant, just wondering if you could dig in a little bit just on the accounting side to that charge from the embedded derivative change in the convertible debt. Just help us understand that a little bit more.

Thank you and good morning, Peter. Hope you are well? Thanks for the question. And obviously, we want to take the opportunity to explain the accounting for this embedded derivative. Before elaborating, it's important to note that the amount of the charge was primarily driven because the company's stock price increased by 71%. And again, I repeat that 71% between the time the debt was issued and the end of the quarter. So let's dive into the background. As you're aware, in July 2024, the company received a $50 million growth investment from the Kennedy Lewis Investment Management firm. We believe that this investment demonstrates the market's confidence in the strength of our business as well as the Douglas Elliman name Michael just mentioned. In connection with this, the accounting standards required the company to value the conversion feature of the debt separately from the debt. So this requirement occurs because of a provision in the convertible debt, which was mandated by stock exchange requirements, and that provision relates to stockholder approval of any modifications to the company's debt at an issue price below $1.23 per share. As we stated earlier, because the company's stock price increased by 71%, from $1.07 at the time of the debt issuance to $1.83 per share at the end of the quarter, the value of the convertible debt increased by $20.2 million, resulting in a non-cash charge to earnings. And again, it's important to emphasize this was a non-cash charge and should not be a cash-paid expense because the company's debt and embedded derivative were carried at $67.5 million at the end of the quarter or September 30 rather than the $50 million face value. To put it another way, when the debt is ‘in the money’, there are only two practical scenarios; either the holder would convert the debt for shares and then sell the shares, or the company would retire the debt at face value worth $50 million. So with that, do you have any other questions on it?

No. No, I think that's helpful. And then one on just the rate backdrop and kind of how you're thinking about the impact to your overall markets. Since the Fed has embarked on its easing cycle here, the long end of the curve has remained sort of stubbornly high. So just wondering if you can sort of help us think through how that might impact the sales market as we look ahead to '25.

BK, you want to address that for a second?

Yes. Thank you, Michael. Typically, when interest rates increase, we tend to perform better than our competitors because we are less affected by interest rates, thanks to a higher proportion of cash buyers. However, rising rates can lead to a mismatch between supply and demand and impact inventory, which we have experienced over the past 2.5 years. We believe we are in a stronger position than our competitors in this environment. Nevertheless, we are optimistic about potential rate cuts in the next year or two.

Yes. To add to that, we're very optimistic about the business. With the election now behind us, we anticipate a notable increase in activity. It's important to remember that now with Trump likely being the next President, he has previously questioned why the best credit isn't accessing the lowest rates. If you're a lender, ideally the best credit should get the lowest rates. It's probable that he will be vocal about this with the Fed. We still have to contend with inflation and uncertainties regarding the Fed's actions, but now there’s a President who clearly favors low interest rates. The Fed operates independently, and that should remain unchanged. Additionally, we have a real estate professional in the White House who may streamline regulations, making it easier to obtain building permits, which will encourage activity. As we saw in the markets yesterday, the next year is crucial for getting people into new homes and for home building. The country is undeniably lacking in new housing. We believe we are in a fantastic position to capitalize on these opportunities now that the election is over and the uncertainty has diminished. We are excited about our prospects moving forward.

Right. And the reason we're in that incredible position is because of the competitive advantage we have with the Douglas Elliman Development Marketing division.

Okay. That's helpful and very thorough. And just one more, if I could, for Michael. Good luck and good to meet you as you kind of embark on this journey here in a new position. But just curious, you mentioned talking about ROI targets on all your investments, whether new or existing across the company. Just wondering if you could help us think through quantifying how you're thinking about what the hurdles and return rates you're looking for to sort of create value here within the company?

Listen, I've been in this role for just a few weeks, and we are actively discussing the return on investment that we aim to achieve in each segment of our businesses. Along with our work with agents, we are involved in property management and some aspects of title insurance, and we plan to expand into more areas that will enhance ROI for our agents. We believe our agents are exceptional entrepreneurs and business builders, and we want to support them in growing their businesses. At this stage, we are not focused on being a recruiting machine; we already have outstanding agents and the potential to increase ROI for each one. We will approach new agent growth strategically and only pursue it when it clearly makes sense. We are not interested in simply boosting headcount. We see potential for significant profitability in this business moving forward, and we intend to proceed thoughtfully and judiciously. Our current agents are among the best in the field, so we will prioritize quality over quantity in terms of people, culture, and earnings. We plan to be very deliberate about our actions and strategies, and we are genuinely excited about the future.

All right. That’s all for me. Thank you.

Appreciated.

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, and this will conclude our call.