Douglas Elliman Q2 2023 Earnings Call Transcript

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August 8, 2023

There are 4 speakers on the call.

Operator

Welcome to Douglas Elliman's Second 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 An archived version of the webcast will be available on the Investor Relations section of the company's website located at investors. Aliment.com for 1 year. During this call, the terms adjusted EBITDA and adjusted net income will be used.

Operator

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 income are contained in company's earnings release, which has been posted to the Investor Relations sections of the company's website. Before the call begins, I would like to read a Safe Harbor statement. The statement 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. Those set forth in or implied by forward looking statements.

Operator

These risks are described in more details 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.

Speaker 1

Good morning, and thank you for joining us. With me today are Richard Lampen, our Chief Operating Officer Ryan 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 Douglas Elliman's financial results for the Q2 and 1st 6 months of 2023, as well as our thoughts on the current operating environment and trends in residential real estate. All numbers presented this morning will be as of June 30, 2023, unless otherwise stated. We will then provide closing comments and open the call for questions.

Speaker 1

Starting first with Douglas Elliman's financial results for the 3 months ended June 30, 2023. We are pleased that Douglas Elliman continued to outperform many of its competitors in the Q2 of 2023 even during the challenging backdrop of the current U. S. Residential real estate market. We attribute this to 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 the unwavering dedication of our world class agents.

Speaker 1

Still, our results over the past 12 months reflect these industry wide headwinds, which I will discuss in further detail shortly. In the Q2 of 2023, Douglas Elliman reported $275,900,000 in revenues compared to $364,400,000 in the 2022 period. Net loss attributed to Douglas Elliman for the Q2 was $5,200,000 or $0.06 per diluted share compared to net income of $10,200,000 or $0.12 per diluted share in the 2022 period. Adjusted EBITDA attributed to Douglas Elliman was a loss of $2,600,000 in the Q2 of 2023 compared to income of $19,200,000 in the 2022 period. For comparison purposes, our Real Estate Brokerage segment reported an operating loss of $1,000,000 in the Q2 of 2023 compared to operating income of $21,600,000 in the Q2 of 2022.

Speaker 1

Adjusted EBITDA attributed to Douglas Elliman's Real Estate Brokerage segment was $2,500,000 in the Q2 of 2023 compared to $24,400,000 in the Q2 of 2022. Adjusted net loss attributed to Douglas Elliman was 4,900,000 dollars per share in the Q2 compared to adjusted net income of $9,700,000 or $0.11 per share in the 2022 period. Now turning to Douglas Elliman's results for the 6 months ended June 30, 2023. Douglas Elliman reported $489,900,000 in revenues for the 6 months ended June 30, 2023, compared to $673,300,000 in the 2022 period. Net loss attributed to Douglas Elliman for the 6 month period was $22,800,000 or $0.28 per diluted share compared to net income of $16,800,000 or $0.20 per diluted share in the 2022 period.

Speaker 1

Adjusted EBITDA attributed to Douglas Elliman for the 6 month period was a loss of $20,200,000 compared to income of $31,900,000 in the for the Q2 period. For comparison purposes, our Real Estate Brokerage segment reported an operating loss of $18,400,000 for the in the 6 month period of 2023 compared to operating income of $36,100,000 in the 2022 period. Adjusted EBITDA attributed to Douglas Elliman's Real Estate Brokerage segment was a loss of $10,500,000 in the 2023 6 month period compared to income of $42,100,000 in the 2022 period. Adjusted net loss attributed to Douglas Elliman was $21,600,000 or $0.27 per share in a 6 months period compared to adjusted net income of 16,200,000 or $0.19 per share in the 2022 period. Now we will discuss our outlook on the current operating environment for Douglas Simon as well as trends we are seeing in residential real estate.

Speaker 1

As we have mentioned on previous calls, our industry is cyclical and the last year has been a difficult part of the cycle due to sharp increases in mortgage rates, which have created sustained listing inventory shortages in the luxury markets we serve. We're expecting these industry wide challenges to continue and to impact our results in the second half of twenty twenty three. However, as we touched on last quarter, we are encouraged by some improvements in trends we are seeing. Specifically, First, our average sales price per transaction remains strong at $1,640,000 for the Q2 and was the highest quarterly average since the Q2 of 2022. We believe this improvement validates both the expertise of our agents in the luxury markets we serve as well as the stability of the luxury markets more broadly.

Speaker 1

As we have stated before, the luxury markets in which Douglas Settlement operates are usually the 1st markets to emerge from a down cycle as buyers are less mortgage reliant. We also expect listings to increase and the tight supply of inventory to gradually ease as consumers adjust to higher interest rates, sellers adjust price expectations and traditional life milestones require buyers and sellers to transact. 2nd, we continue to see sequential improvement in our financial and operating results. Our Q2 2023 results show improvement from the previous three quarters in terms of revenue and average selling price per home. And our Q2 2023 results improved from the previous two quarters in terms of operating income, adjusted EBITDA, number of transactions and gross transaction value.

Speaker 1

We have also seen sequential improvements in total listings for the 1st and second quarters of 2023, with 1st quarter listings up 40% compared to the Q4 of 2022 and 2nd quarter listings up 12% compared to the Q1 of 2023. Given the conversion of listings to revenues usually takes 3 to 9 months. This is an encouraging sign for the Q4 of 2023. Importantly, Due to our strong financial position and cost reduction strategy, Douglas Elliman is well positioned to successfully navigate near term industry challenges. Logos Element's strong balance sheet underscores our long history of profitability and managing various market conditions.

Speaker 1

We maintain ample liquidity with cash and cash equivalents of approximately $130,000,000 or $1.47 per common share and no debt, which we believe provides us flexibility to adjust to various market conditions. This liquidity also continues provide us with a competitive advantage in expanding our core brokerage business as well as scaling our overhead expenses when entering new markets. In the Q2 of 2023, our Board made a decision to suspend our quarterly cash dividend of $0.05 per share and declare an annual stock dividend on our common stock of 5%, which was paid on June 30, 2023. We believe the updated dividend policy will strengthen our balance sheet and position us to deliver long term stockholder returns. Related to our cost reduction strategy, in the first half of twenty twenty three, we continue to make thoughtful efforts to adjust our cost structure to fit our business, including reducing headcount more approximately by 45 positions, cutting costly sponsorships, streamlining advertising and commencing a program to begin consolidating office space.

Speaker 1

As a result of these efforts, when comparing the Q2 of 20 23 through the Q2 of 2022, our Real Estate Brokerage segment reduced its general and administrative expenses by $2,000,000 and its operations and support expenses by $2,200,000 9.2 percent of the 2 categories. On a sequential basis, from the Q1 of 2023, our Real Estate Brokerage segment reduced its general and administrative expenses by 1,900,000 and its operations and support expenses by $1,600,000 or 7.7 percent of the 2 categories. We expect the impact of our cost reduction efforts to continue and firmly believe these actions will create a more nimble Douglas Summit without significantly impacting the agent experience. These encouraging trends and our solid financial profile make us optimistic about Douglas Elliman and the significant growth opportunities we see in our luxury markets. We remain focused on continuing to capture market share by leveraging our key strengths, which include, 1st and most importantly, our global network and our strong relationships with our 6,900 outstanding agents who include some of the industry's most celebrated teams and individuals.

Speaker 1

We remain very proud of our 87% agent retention rate. Our preeminent Douglas Elliman Development Marketing business also provides a competitive advantage, especially considering the limited inventory of existing homes available for resale. For the 12 months ended June 30, 2023, our The development marketing business signed and brought to market $4,700,000,000 of gross transaction value, including $4,200,000,000 of gross transaction value added in the 12 months ended June 30, 2023 in Florida alone. This will provide a foundation and create a long term value as these transactions close over the next several years. In summary, Douglas Elliman continues to weather the current macroeconomic challenges and we believe our differentiated platform and the underlying strength of our business makes us well positioned for long term growth and success.

Speaker 1

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. Operator? Operator, please open for questions.

Speaker 1

Operator, do you have any questions from the audience?

Speaker 2

Howard, there appear to be technical difficulties. We're trying to reach Edmund, Okay.

Speaker 1

We'll wait. We'll give it a minute or a couple of minutes.

Operator

Dan Fenton from Jefferies. Please ask your question. Your line is open.

Speaker 3

Thanks. Good morning. Can you hear me?

Operator

Yes.

Speaker 3

Great. So I was just hoping to get a little bit more color on some of the current environment, maybe by region. You talked about The number of new listings still being low, but starting to pick up. Obviously, average sales price is also holding in there. So maybe if you could talk a bit about Your strengths within obviously the Northeast as well as Florida, if there's just any differences as you think about the pockets where you have presence today in terms of some of the activity.

Speaker 1

Well, over the last couple of years, For sure that our 2 biggest markets are New York and Florida. And Florida has sort of can close of overtaking New York, but not quite yet. What we see in the or I see in the New York market, I speak to brokers every day, The lower end is still doing well. The higher end is doing well in certain Parts of New York, predominantly downtown. The weaker markets are the Upper East Side right now, which Traditionally, we're the better markets.

Speaker 1

So that has changed. In Florida, South Florida, Pretty much the story is that there is business. We go week by week and we see like Last week, for instance, was very strong, weak in business. My new development is doing very well. Just to give you some numbers on one particular project in Miami Beach, We started sales about 7 months ago.

Speaker 1

It's on around 21st Street in the Ocean at Collins Avenue. And we sold as of just recently over $600,000,000 at an average price of the high 4s, which is very strong for Florida. Most of our Florida new developments are selling well, maybe not as quick as the one I'm talking about, but they're selling well. Our business in Texas, we've opened now, we're now in Austin, Houston and Dallas is Starting to move forward. We're still pretty new there, but we're starting to pick up a couple of new developments also there.

Speaker 1

California is slow right now. It's been a tough market, I'd say, for a while. Other than the 1 year that we all love, this probably will never happen again, it's 2021 and they picked up then. But we've done other things now, other businesses. We have an escrow company there and so forth.

Speaker 1

And so we're trying to Some of the ancillary things that we need to pick up revenue. Las Vegas is new for us. Nevada, it's in new office in Summerlin. We're close to signing up a new pretty big new development there. We have one, this will be the second one.

Speaker 1

Some of the other markets are new and small Nantucket. You don't really know much until the end of the season. That's a low cost market for us the way we entered. Our Boston business has been increasing and We are considering a couple of other markets. One is that we've looked at This is Nashville.

Speaker 1

We're trying to stay with the low tax or no tax states. And we think that's the best place to be at all times, but especially during these times.

Speaker 3

Great. That's helpful. And then just on seasonality in terms of activity and where we sit here At this point in the year, is there typically given new listings are starting to get better as you look at the back half of the year versus The first half, do you think that I know you aren't expecting any material recovery here in the short term and But as you think about kind of the second half and then into 2024, do you think you've seen the bottom and the lows in terms of that activity level?

Speaker 1

I would hope so. I'll put it that way. We're very hopeful that we're going to have a better second half of Traditionally, B. K, what is the best quarter has been?

Speaker 2

Traditionally, the best quarters are the 2nd and third quarter, and then the goes to the 4th quarter and then the 1st quarter is generally the weakest.

Speaker 1

Yes. So, and that's because the holiday times and so forth and people traveling. So, We're hoping. We're hoping. We're very hopeful for a good closing to the year.

Speaker 3

Okay. And then just on the cost, appreciate the numbers that have been taken out, some of the expense items. So as we think about the exit 2Q run rate, Is the majority of what you had planned out of the expense base or as we think about And also just the timing of that in 2Q, just meaning that there's still from an exit level, there might be some flow through into 3Q. So just trying to get a good starting point of what the kind of fixed cost base

Speaker 1

looks like. I'll let BK tell you the numbers where we are in that, but I will say this, we are constantly looking at cost cutting. But we obviously have to be careful that we don't cut things that Would be detrimental to the agents. B. K, do you want to

Speaker 2

Yes. And Both Dan and Howard, you said it correctly. We are entering into cost cutting phase. I would expect that we have now hit A run rate which will continue to be lower and as Howard mentioned during the call, looking at year over year, we were down about $4,200,000 on our 2 key expenses at the brokerage segment, which are general administrative and operations and support. We would think that's going to continue for the rest of the year.

Speaker 2

Think there will be as we enter 2024 and we have leases expiring, we will see more cost reductions going forward.

Speaker 1

Yes, we have yes. And one of those leases is in our management company. That was a big lease and that's going to be a substantial Change, as we've already located, smaller, less expensive space, And we're working on getting that done. I believe our lease is over the Q1 or the Q2 of next year. And Howard, it's a very expensive lease, very expensive lease.

Speaker 2

Yes. And Howard, I think it's important to note that we've had a luxury that Many of our competitors have not because we have had such a strong balance sheet and we have been very deliberate in this cost cutting not to impact the agent experience.

Operator

Ladies and gentlemen, those are all the questions that we have for today. Thank you for joining us on Douglas Elliman's Q2 2023 earnings conference call. We hope you have a good day and this will conclude our call.

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Douglas Elliman Q2 2023
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