Q4 2023 Douglas Elliman Inc Earnings Call

Participants

Howard Lorber; Chairman of the Board, President, & CEO; Douglas Elliman Inc

J. Bryant Kirkland; Chief Financial Officer, Senior Vice President, Treasurer; Douglas Elliman Inc

Soham Bhonsle; Analyst; BTIG LLC

Ahmed Mehri; Analyst; Jefferies LLC

Presentation

Operator

Welcome to Douglas Elliman's Fourth Quarter and Full Year 2023 earnings conference call. This call is being recorded and simultaneously webcast and archived version of the webcast will be available on the Investor Relations section of the Company's website located at investors dot illumina.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 the Safe Harbor statement. 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'd like to turn the call over to the Chairman, President and Chief Executive Officer of Douglas Elliman, Howard Lorber. Please go ahead.

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.
Before turning to financial results, we wanted to reference the ongoing system for NET and other resulting litigation in the residential real estate brokerage industry. Given this is active litigation, we are not going to comment or speak to potential outcomes. We also intend to decline to answer questions on these matters since diverse more than 20 cases have been filed.
Nationally of external settlement is currently aware of seven that involve us or one of its subsidiaries as a defendant plaintiffs in certain of those actions are seeking to centralize these lawsuits before the federal judge who presided over the Sensenbrenner trial in Missouri through Judicial Panel. We'll hear the matter on March 28th, 2024.
In addition, we understand that the Department of Justice is reviewing industry practices on certain buyers' broker commissions, including by weighing in on settlements reached by other companies. This element is currently defending the cases pending against it and has a number of pretrial motions that will or have been brought, we believe, the lawsuits, which are still in the very early stages and will likely take years to litigate lack merit. And we intend to challenge them.
As we begin to discuss our fourth quarter performance, we are enormously proud to share that David Zalman was recently named the most trusted real estate brokerage firm in the United States as part of the America's most trusted series by life story research. This tremendous accomplishment is a testament to the hard work of our world-class agents and their unwavering commitment to our clients across the markets we serve.
Now turning to Douglas Elliman's financial results for the three months ended December 31st, 2023. Please note that all numbers presented this morning will be as of December 31st, 2023, unless otherwise stated, we are pleased that Douglas Elliman continued to outperform many of its peers in the fourth quarter of 2023. Despite ongoing industry-wide headwinds that impact results, we attribute our solid performance to three factors stable pricing in our luxury markets where buyers are less sensitive to interest rate pressures, the competitive advantage provided by Douglas Elliman's, strong development marketing business and our world class agents.
For the fourth quarter of 2023, Douglas Elliman reported $214.1 million in revenues compared to $207.3 million in the fourth quarter of 2022. Net loss attributed to Douglas Elliman and for the fourth quarter was $14.8 million, or $0.18 per diluted share compared to $18.4 million or $0.23 per diluted share in the 2022 period. Adjusted EBITDA attributed to the settlement in the fourth quarter were a loss of $17.5 million compared to $17.1 million in the 2022 period.
For comparison purposes, our real estate brokerage segment reported an operating loss of $16.4 million this quarter compared to $15.6 million in the 2022 period. And adjusted EBITDA attributed to the segment grew approximately a loss of $12.5 million compared to $12.6 million in the 2022 period. Adjusted net loss attributed to Dover some in the fourth quarter was $14.5 million, or $0.18 per share compared to $18.4 million or $0.23 per share in the 2022 period.
Now turning to Douglas Elliman's results for the year ended December 31st, 2023, overselling reported $956 million in revenues for the year ended December 31st, 2023, compared to $1.15 billion in 2022. Net loss attributed to Douglas Elliman was $42.6 million or $0.52 per diluted share compared to $5.6 million or $0.08 per diluted share in 2022.
Adjusted EBITDA attributed to Douglas Elliman for the year is a loss of $40.7 million compared to income of $15 million in 2022. Our real estate brokerage segment reported an operating loss of $36.8 million for the year compared to operating income of $22 million in 2022. Adjusted EBITDA attributed to the real estate brokerage segment were a loss of $21.5 million compared to income of $34.5 million in 2022. Adjusted net loss attributed to Douglas Elliman $40.9 million or $0.5 per share for the year compared to $6.2 million or $0.08 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 residential real estate. We have previously discussed the cyclical nature of our industry generationally high mortgage rates have driven sustained listing inventory shortages across our luxury markets for almost two years. We saw projects that have resulted in significantly lower transactions during this time while we expect these industry-wide challenges will continue to impact our results in the first quarter of 2024.
We remain encouraged by improvements in the fourth quarter of 2023. Specifically, the fourth quarter saw our first increase in year-over-year quarterly revenues since the first quarter of 2022, which was driven by higher activity across the markets we serve particularly in Florida. Generally, the strongest markets tend to be the first markets to emerge from the downturn.
This trend has continued in 2024 as our commission receipts have improved on a year-over-year basis in January and February of 2024. We believe this signals that the market is beginning to adjust to higher interest rates. Nonetheless, buyers are feeling encouraged after the Federal Reserve signaled in January that it is nearing a long-awaited shift toward cutting interest rates. Importantly, total listing volume also improved in the fourth quarter of 2023 up 25% from the 2022 period, with gains in listings reported in Florida, California, New York and Colorado all increasing significantly compared to the fourth quarter of 2022 because we recognize revenues when the sale closes, we expect that we will begin to see the impact of increased listing volume in the second half of 2024 our gross transaction value increased to $7.9 billion in the fourth quarter of 2023 from $7.5 billion in the fourth quarter of 2022 and transaction volume increased by approximately 5.2% in the fourth quarter.
Consistent with the increase in transactions, our average sales price per transaction remained an industry-best $1.58 million in the fourth quarter. This was flat compared to the third quarter of 2023 and the fourth quarter of 2022. We believe the consistency in average price per transaction reflects the strength of the luxury markets we operated, as well as Douglas Elliman's reputation for offering the finest properties and client experience in real estate due to our solid financial position and cost reduction strategy. Douglas Elliman is well positioned to successfully navigate near-term industry challenges.
While this element strong balance sheet underscores our long history of profitability and managing various market conditions. We have maintained ample liquidity with cash and cash equivalents of approximately $120 million or $1.31 per common share and zero debt throughout the 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 cost reduction efforts have been judicious and the results of our strategy are beginning to flow to the bottom line. Our real estate brokerage segment reduced its operating expenses including commission expense, restructuring and other noncash expenses by $2.2 million in the fourth quarter of 2023, representing a decline of approximately 3.2% compared to the prior year period. We believe these efforts will continue to create a more nimble, diverse element without significantly impacting the agent experience. We are proud to share that our agent retention rate stands at 92%, 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 including our world-class network of agents and our development marketing business. We believe our development margin business is creating a foundation for long-term value of transactions close over the next several years. And provides a competitive advantage, particularly at premium residences and especially considering the limited inventory of existing home sales available.
As of December 31st, 2023, our development and marketing business had an active pipeline of signed and new projects at $21.6 billion gross transaction value, including $13.8 billion of gross transaction value in Florida alone, further $9.7 billion of additional transaction value from our development and marketing business 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 as they close in the coming years.
In summary, Dover suddenly continues to meet the current macroeconomic challenges, and we believe our differentiated platform and the underlying strength of our business position positions us for long-term growth and success. Our proven management team measure to assess successful history of navigating many economic cycles and a fine 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.

Question and Answer Session

Operator

(Operator Instructions) Soham Bhonsle, BTIG.

Soham Bhonsle

Can you hear me?

Operator

Mr. Bhonsle, your line is open. Please go ahead.

Soham Bhonsle

Can you all hear me?

Howard Lorber

Yes, we can hear you.

Soham Bhonsle

Hi, great. Good morning, everyone. Hope you're doing well on. So this looks like the second quarter in a row where you've taken some market share, at least compared to the national stats, which is great. But I know you're not in every market in the US today either. So I guess the question is, are you seeing market share take on a local level as well? Or should we sort of think about this more a function of your end markets just outperforming sort of the national markets here?

Howard Lorber

I would say that generally speaking, the high end markets do perform better. And that's why we've pretty much stuck to the high end markets. And our expansion is going to be going to be the same. We are not interested in going to every single market, just to say that we have no more markets more and more brokers, but they don't have anywhere near what we have an average price on sales. So we think that this is the right strategy for our company.

Soham Bhonsle

Got it. Okay. And it looks like your commission split was up another 200, 10 basis points this quarter. It was sort of in the same ballpark last quarter. So can you just maybe speak to the drivers of the increase there? And are you seeing more competition for agents today or is that just a function of mix on? And should we sort of expect this trend to continue?

Howard Lorber

Well, I think it's both those things you mentioned down surely there's been a lot of competition, companies are trading agents back and forth. And many times they're giving cash bonuses when they sign up, then higher splits. And this has been going on now for a number of years, probably for about six or seven years, and I think it's sort of slow down at this particular point. And my guess is that as the market improves and brokers are doing better and better that the that maybe will come down. That is not positive that I would say it will come down because it's hard to take something back that you've already given, but at least around New Age and so forth, will be at a lower level and that will help mediate these increases.

Soham Bhonsle

Okay. Understood. And then Bryant, on the operating expenses, it looks like the G&A line was a little higher quarter over quarter. Were there any one-time items to call out there? And then how should we think about sort of the quarterly run rate for just total OpEx ex commissions in 2024?

J. Bryant Kirkland

So good morning, first and all, you're correct. The G&A line was higher as some of that relates to the timing of expenses, particularly between the third quarter and fourth quarter related to Al events that we sponsor as well as our insurance. And obviously also there was an increase in professional fees during the quarter. Going forward, we would we would say we like where we are, but we are going to be making more meaningful cuts in 2024 in particular, we've discussed in our prior calls about a $4 million lease running off. And in addition to that, we are making meaningful cuts in our property management division, and I expect some of those cuts to go over to the other areas of the business.
Got it.

Soham Bhonsle

And then just lastly, I got on the call deals -- just one for Scott. I guess, Scott or Howard, I'm just wondering, you guys all speak to agents daily. Can you just maybe give us a feel for conversations with agents are going like today. You know, is there concern around sort of just uncertain environment today? Or do you feel like you feel good about adapting to whatever may come ahead.

Howard Lorber

Yes, I think that most of them are from adapting to what will ever come ahead of assume. As I said, we're not going to comment on the litigation but I feel that the work we have a great group of agents that are in that high end markets that do high very high end sales. And of course, we are happy to have markets that have lower end, but still high compared to the whole country like Long Island is Asia where the Company really started is a lower end market, but still that's a market probably that averages about 600,000, 600,000 in dollars per transaction. So it's not the extremely low market, but I think that the agents are are happy. Happy are anyway doing well. I guess there's been a little disappointment because I think most of us thought that we have a rate cut in the first quarter, which obviously is not going to happen now, but I think once that happens, which hopefully now will be the second quarter that I think that the it's going to be a great boon to the US for the industry.

Soham Bhonsle

Great. I appreciate all the votes.

Howard Lorber

Thank you, Soham.

Operator

Ahmed Mehri, Jefferies.

Ahmed Mehri

Good morning. This is Ahmed from Jefferies. I guess my first question is about the macro environment. I'm just hoping you could share some color on what you're seeing there and why comps it start to accelerate in terms of volume this year.

Howard Lorber

So you're talking about compared to our competitors now in terms of call that year over year?

Ahmed Mehri

Yes.

Howard Lorber

Again, year over year, obviously we have there's a lack of inventory in most in most markets, especially in San Marcus and the low tax states. So that that I believe once there is a rate cut that that will push a lot more into the market and we will be doing substantially more substantially more business as rates come down.
You know, our new development business as a key point of the Company is a key part of the settlement and we have a great, very strong, very strong business there. And that's generally speaking at the high end of the market. And we're still pretty new in markets like Texas, and there's a great upside to Texas. We now have we have three offices. We have Austin, Dallas and Houston. And there we're looking at maybe in other markets, so in Texas. So we think that's a great market to be. We're also looking at others and other markets, but we're looking pretty much at the low tax or no tax states to expand that and then on a macro basis.

Ahmed Mehri

Got it. That's great color on the markets. And actually, if you could maybe expand more on just what markets are seeing, you know, better and better demand or which markets maybe you're more concerned about?

Howard Lorber

Well, yes. I mean, there was I think the ones that were more concerned about are the ones that are attaching people added out of their states. We're in California, but California is very difficult.
Okay, very difficult because they keep adding taxes and you know, it's it's pretty it's pretty tough. And California was also a state that always had higher commission payouts to brokers than the East Coast. And so that's a tough one I think that's probably the toughest of the markets that we're in.
But I think that's the, Bryant, do you want to comment?

J. Bryant Kirkland

Yes, I'll be happy to, and good morning. I think one part about our story is as our luxury brand is permeating throughout the country as their shifts and the population, if you look at Florida, California and New Markets, they increase, but up from 41% of revenues in the fourth quarter last year to 46%.
This year, Florida alone went from 20.5% to 20% to 25% of the market to our total revenues. So that was a significant increase. And we are continuing to see a lot of strong demand in Florida. As Howard mentioned earlier, there's $13.8 billion and on inventory that we have that we're currently selling and development marketing and the backlog and in fact, on a backlog of others that will be coming onto the market. Yes, I had that number in Florida, I believe it's $5.8 million, 5.8 billion.

Ahmed Mehri

Yes. Got it. That's helpful. And then just one last one for me. Just really like I guess I couldn't find it. So apologies if I missed this on your filings but just trying to understand your development business, could you maybe explain again what's like the timing of them of, I guess it's recognition of cash and revenues on that because.

J. Bryant Kirkland

Yes, they are they have the effect that we saw generally when when when a deposit is received and development marketing, we record that as a liability or deferred revenue. And we recognize a the commission that we pay to our agent, as I call it, the deferred costs. So we do not recognize on profit on the new development until unit start to close because under the accounting rules, a sale occurs when Al, when all the items have been met to close that sale. So that's when revenue was recognized on. So there is a deferred liability on the books. I believe the number is about $63 million of the deferred costs related to commissions we paid on it is about $41 million. The difference of that $20 million will be recognized over time generally in the next four years.

Howard Lorber

And the other and other strategies. And this is going to have our margins commissions on new development and sales are less and regular resales.

Ahmed Mehri

Yes, got it. That's very helpful.

J. Bryant Kirkland

I gave a number earlier coming to market on new development this year. It's $9.7 billion in Florida up, that is $5.1 billion.

Ahmed Mehri

That's not including what's already on the market?

J. Bryant Kirkland

That's correct.

Ahmed Mehri

It hasn't closed yet?

J. Bryant Kirkland

Yes.

Ahmed Mehri

Perfect. Thank you.

Operator

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.