Douglas Elliman Inc.: Form 10-Q for the period ended Jun 30, 2024

The following discussion should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Audited Consolidated Financial Statements as of and for the year ended December 31, 2023 and Notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”), and our Condensed Consolidated Financial Statements and related Notes as of and for the quarterly period and six months ended June 30, 2024.

Overview

We are a holding company and engaged principally in two business segments:

Real Estate Brokerage: the residential real estate brokerage services through our subsidiary Douglas Elliman Realty, which operates the largest residential brokerage company in the New York metropolitan area and also conducts residential real estate brokerage operations in Florida, California, Texas, Colorado, Nevada, Massachusetts, Connecticut, Maryland, Virginia and Washington, D.C.

Corporate and other: the operations of our holding company as well as our investment business that invests in select PropTech opportunities through our New Valley Ventures subsidiary.

Key Business Metrics and Non-GAAP Financial Measures

In addition to our financial results, we use the following business metrics to evaluate our business and identify trends affecting our business. To evaluate our operating performance, we also use Adjusted EBITDA attributed to Douglas Elliman, Adjusted EBITDA attributed to Douglas Elliman Margin and financial measures for the last twelve months ended June 30, 2024 (“Non-GAAP Financial Measures”), which are financial measures not prepared in accordance with GAAP.

Key Business Metrics

(1) We calculate total transactions by taking the sum of all transactions closed in which our agent represented the buyer or seller in the purchase or sale of a home (excluding rental transactions). We include a single transaction twice when one or more of our agents represent both the buyer and seller in any given transaction.

(2) Gross transaction value is the sum of all closing sale prices for homes transacted by our agents (excluding rental transactions). We include the value of a single transaction twice when our agents serve both the home buyer and home seller in the transaction.

(3) Average transaction value per transaction is the quotient of (x) gross transaction value divided by (y) total transactions.

(4) The number of Principal Agents is determined as of the last day of the specified period. We use the number of Principal Agents, in combination with our other key business metrics such as total transactions and gross transaction value, as a measure of agent productivity.

(5) Annual Retention is the quotient of (x) the prior year revenue generated by agents retained divided by (y) the prior year revenue generated by all agents. We use Annual Retention as a measure of agent stability.

Non-GAAP Financial Measures

Adjusted EBITDA attributed to Douglas Elliman is a non-GAAP financial measure that represents our net income adjusted for depreciation and amortization, investment and other income, stock-based compensation expense, benefit from income taxes, and other items. Adjusted EBITDA attributed to Douglas Elliman Margin is the quotient of (x) Adjusted EBITDA attributed to Douglas Elliman divided by (y) revenue. Last twelve months (“LTM”) financial measures are non-GAAP financial measures that are calculated by reference to the trailing four-quarter performance for the relevant metric.

We believe that Non-GAAP Financial Measures are important measures that supplement analysis of our results of operations and enhance an understanding of our operating performance. We believe Non-GAAP Financial Measures provide a useful measure of operating results unaffected by non-recurring items, differences in capital structures and ages of related assets among otherwise comparable companies. Management uses Non-GAAP Financial Measures as measures to review and assess operating performance of our business, and management and investors should review both the overall performance (GAAP net income) and the operating performance (Non-GAAP Financial Measures) of our business. While management considers Non-GAAP Financial Measures to be important, they should be considered in addition to, but not as substitutes for or superior to, other measures of financial performance prepared in accordance with GAAP, such as operating income, and net income. In addition, Non-GAAP Financial Measures are susceptible to varying calculations and our measurement of Non-GAAP Financial Measures may not be comparable to those of other companies.

Reconciliations of these non-GAAP measures are provided in the table below.

Computation of Adjusted EBITDA attributed to Douglas Elliman

(a) Represents amortization of stock-based compensation. $4,712, $2,353, $2,180, and $4,539 are attributable to the Real estate brokerage segment for the last twelve months ended June 30, 2024, the six months ended June 30, 2024, and 2023, and the year ended December 31, 2023, respectively. $8,969, $4,477, $4,044, and $8,536 are attributable to the Corporate and other segment for the last twelve months ended June 30, 2024, the six months ended June 30, 2024, and 2023, and the year ended December 31, 2023, respectively.

(b) Represents equity in losses recognized from the Company’s investment in an equity method investment that is accounted for under the equity method and is not consolidated in the Company’s financial results.

(c) Represents the settlement of litigation related to the resolution on a nationwide basis of pending class action litigations against NAR and the Company.

Recent Developments

Convertible Debt. On July 2, 2024, we issued $50,000 in aggregate principal amount of senior secured convertible notes due on July 2, 2029 (the “Convertible Notes”) to funds advised by KLIM. The Convertibles Notes bear interest at a rate of 7.0% per annum payable in cash, or, at the our election, 8.0% per annum paid in kind, due semi-annually. The convertible notes are convertible into common stock at an initial conversion rate equal to $1.50 per share, subject to certain customary anti-dilution adjustments. We intend to use the net proceeds from the sale of the Convertible Notes for general corporate purposes.

Litigation Settlement. On April 26, 2024, we entered into a settlement agreement (the “Settlement Agreement”) to resolve, on a nationwide basis, the Gibson and Umpa cases (the “Lawsuits”). The settlement resolves all claims, on a nationwide basis, by the plaintiffs and proposed settlement class members in the Lawsuits, which includes, but is not limited to, all claims concerning brokerage commissions by the proposed settlement class members that were asserted in other lawsuits against us and our subsidiaries (collectively, the “Claims”), and releases us, our subsidiaries, and affiliated agents from all Claims. The settlement is not an admission of liability, nor do we concede or validate any of the claims asserted against us.

Under the Settlement Agreement, we paid $7,750, into an escrow fund, on June 12, 2024 and agreed to pay two $5,000 contingent payments subject to certain financial contingencies on or before December 31, 2027 (collectively, the “Settlement Amount”). The contingent payments may be accelerated under certain circumstances. We recognized an expense of $17,750 in the six months ended June 30, 2024.

In addition, we agreed to make certain changes to our business practices and emphasize certain practices that have been a part of Douglas Elliman’s longstanding policies and practices, including: reminding our brokerages and agents that we have no rule requiring agents to make or accept offers of compensation; requiring our brokerages and agents to clearly disclose to clients that commissions are not set by law and are fully negotiable; prohibiting our brokerages and buyer agents from claiming buyer agent services are free; requiring our brokerages and agents to disclose to the buyer the listing broker’s offer of compensation for prospective buyers’ agents as soon as possible; prohibiting our brokerages and agents from using any technology (or manual methods) to sort listings by offers of compensation, unless requested by the client; reminding our brokerages and agents of their obligation to show properties regardless of compensation for buyers’ agents for properties that meet the buyer’s priorities; and developing training materials for our brokerages and agents that support all the practice changes outlined in the injunctive relief.

The Settlement Agreement remains subject to final court approval and will, if approved, become effective at that time. See Note 7 - “Contingencies” to our condensed consolidated financial statements.

Update on Expense Reduction. Since June 2022, our operating results have been negatively impacted by a reduction of revenues from existing home sales caused, in part, by lower listing inventory and the volatility in the financial markets as well as increases in mortgage rates. As a result, during 2023 and 2024, we have endeavored to adjust our cost structure to better fit our business, including through, among other things, reductions in personnel and incentive compensation expense, eliminating certain corporate sponsorship events, streamlining advertising expenditures and beginning a process of consolidating offices as leases expire. These efforts have been undertaken to increase the efficiency of our operations without significantly impacting the agent experience.

During the six months ended June 30, 2024, our real estate brokerage segment reduced its operating expenses, excluding commissions, litigation settlement, restructuring expenses and non-cash stock compensation expenses by approximately $11,300 (7.9%) as compared to the corresponding period in 2023. These reductions during the six months ended June 30, 2024 included approximately $10,700 of general and administrative expenses.

In 2023, we actively executed expense reduction programs that reduced expenses in our business, including our headcount by approximately 100 employees in 2023. These programs are continuing in 2024. In addition, in the second quarter of 2024, a lease on property used by one of our subsidiaries expired and it has moved its operations to a new location resulting in an approximate $4,000 reduction in annual occupancy costs on an ongoing basis.

Results of Operations

The following discussion provides an assessment of our results of operations, capital resources and liquidity and should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report.

Three months ended June 30, 2024 Compared to the Three months ended June 30, 2023

The following table sets forth our revenue and operating (loss) income by segment for the three months ended June 30, 2024 compared to the three months ended June 30, 2023:

(Dollars in thousands)

Revenues. Our revenues were $285,751 for the three months ended June 30, 2024 compared to $275,912 for the three months ended June 30, 2023. The $9,839 increase in revenues was primarily due to increases in commission and other brokerage revenues which primarily related to increases in revenues from existing home sales.

Operating expenses. Our operating expenses were $289,424 for the three months ended June 30, 2024 compared to $284,209 for the three months ended June 30, 2023. The increase of $5,215 was due primarily to an increase in real estate agent commissions of $11,655 arising primarily from increases in commissions and other brokerage revenue partially offset by declines in general and administrative expenses.

Operating loss. Operating loss was $3,673 for the three months ended June 30, 2024 compared to $8,297 for the same period in 2023. The $4,624 decline in operating loss was due to the net impact of increases in commission and other brokerage revenues partially offset by the increases in operating expenses.

Other income. Other income was $2,066 for the three months ended June 30, 2024 compared to $1,826 for the three months ended June 30, 2023. For the three months ended June 30, 2024, other income primarily consisted of interest income, net of $1,048, investment and other income, primarily associated with our PropTech investments of $1,020. This was partially offset by equity in losses from equity method investments of $2.

Loss before provision for income taxes. Loss before income taxes was $1,607 and $6,471 for the three months ended June 30, 2024 and 2023, respectively.

Income tax expense (benefit). Income tax expense was $173 compared to income tax benefit of $1,293 for the three months ended June 30, 2024 and 2023, respectively.

We calculate our provision for income taxes based upon our estimate of the annual effective income tax rate based on full year projections and apply the annual effective income tax rate against year-to-date pretax income to record income tax expense, adjusted for discrete items, if any. We refine annual estimates as current information becomes available.

Real Estate Brokerage.

The following table sets forth our condensed consolidated statements of operations data for the Real Estate Brokerage segment for the three months ended June 30, 2024 compared to the three months ended June 30, 2023:

(Dollars in thousands)

Revenues. Our revenues were $285,751 for the three months ended June 30, 2024 compared to $275,912 for the three months ended June 30, 2023. The increase of $9,839 was primarily related to an increase in our commission and other brokerage income, as a result of an increase in revenues from existing home sales.

Our revenues from commission and other brokerage income were $272,313 for the three months ended June 30, 2024 compared to $262,489 for the three months ended June 30, 2023, an increase of $9,824. In the three months ended June 30, 2024, our commission and other brokerage income generated from the sales of existing homes increased by $11,193 in the Florida market, $3,590 in the West region, and $1,672 in the Northeast region, which excludes New York City. This was partially offset by declines of $3,662 in New York City. In addition, our revenues from Development Marketing declined by $2,969 in the 2024 period compared to the 2023 period.

Operating Expenses. Our operating expenses were $282,804 for the three months ended June 30, 2024 compared to $276,926 for the three months ended June 30, 2023, an increase of $5,878, due primarily to increases in real estate brokerage commissions, partially offset by reductions in general and administrative and technology expenses. The primary components of operating expenses are described below.

Real Estate Agent Commissions. As a result of increases in our commissions and other brokerage income, our real estate agent commissions expense was $216,457 for the three months ended June 30, 2024 compared to $204,802 for the three months ended June 30, 2023. Real estate agent commissions expense, as a percentage of revenues, increased to 75.8% for the three months ended June 30, 2024 compared to 74.2% for the three months ended June 30, 2023. The increase in real estate agent commissions expense as a percentage of revenue in the 2024 period was primarily driven by a higher percentage of revenues being generated in the Southeast (Florida), which traditionally pay higher commission rates than other regions, as well as a lower percentage of commission revenues derived from Development Marketing, which generally pays lower commission rates.

Sales and Marketing. Sales and marketing expenses were $22,153 for the three months ended June 30, 2024 compared to $22,161 for the three months ended June 30, 2023.

Operations and support. Operations and support expenses were $17,999 for the three months ended June 30, 2024 compared to $17,324 for the three months ended June 30, 2023. The increase is primarily related to an increase in legal expense in the 2024 period.

General and administrative. General and administrative expenses were $18,235 for the three months ended June 30, 2024 compared to $23,976 for the three months ended June 30, 2023. The decline is primarily related to reductions in personnel as well as lower incentive compensation expense in the 2024 period.

Technology. Technology expenses were $5,433 for the three months ended June 30, 2024 compared to $6,163 for the three months ended June 30, 2023. The decline resulted from continued expense reduction efforts in 2024, which included the negotiation of existing licensing agreements in an effort to improve our technology efficiency

Operating income (loss). Operating income was $2,947 for the three months ended June 30, 2024 compared to operating loss of $1,014 for the three months ended June 30, 2023. The increase in operating income is primarily associated with the net impact of increased commission and other brokerage revenues and partially offset by increases in operating expenses.

Corporate and Other.

Corporate and Other loss. The operating loss at the Corporate and Other segment was $6,620 for the three months ended June 30, 2024 compared to $7,283 for the three months ended June 30, 2023. The decline was primarily attributable to a decline in operating expenses.

Six months ended June 30, 2024 Compared to Six months ended June 30, 2023

The following table sets forth our revenue and operating loss by segment for the six months ended June 30, 2024 compared to the six months ended June 30, 2023:

(Dollars in thousands)

Revenues. Our revenues were $485,990 for the six months ended June 30, 2024 compared to $489,894 for the six months ended June 30, 2023. The $3,904 decline in revenues was primarily due to a decline in commissions and other brokerage income because of lower revenues from existing home sales caused, in part, by lower listing inventory associated with continued high mortgage rates.

Operating expenses. Our operating expenses were $531,127 for the six months ended June 30, 2024 compared to $521,999 for the six months ended June 30, 2023. The increase of $9,128 was due primarily to the litigation settlement of $17,750 and increases in real estate brokerage commissions of $4,569 partially offset by a decline in other operating expenses of $13,191.

Operating loss. Operating loss was $45,137 for the six months ended June 30, 2024 compared to $32,105 for the six months ended June 30, 2023. The $13,032 increase in operating loss was primarily due to the litigation settlement and the net impact of declines in commissions and other brokerage revenues partially offset by a decline in operating expenses.

Other income. Other income was $3,040 for the six months ended June 30, 2024 compared to $2,404 for the six months ended June 30, 2023. For the six months ended June 30, 2024, other income primarily consisted of interest income, net of $2,424 and $629 of investment and other losses primarily associated with our PropTech investments. This was partially offset by equity losses from equity method investments of $13.

Loss before provision for income taxes. Loss before income taxes was $42,097 for the six months ended June 30, 2024 and $29,701 for the six months ended June 30, 2023.

Income tax expense (benefit). Income tax expense was $1,368 for the six months ended June 30, 2024 compared to income tax benefit of $6,683 for the six months ended June 30, 2023.

We calculate our provision for income taxes based upon our estimate of the annual effective income tax rate based on full year projections and apply the annual effective income tax rate against year-to-date pretax income to record income tax expense, adjusted for discrete items, if any. During the six months ended June 30, 2024, we analyzed the likelihood of utilizing our deferred tax assets and determined it will be more likely than not that the benefits of these deductible differences will not be realized, and as a result we established a valuation allowance for the full amount of the deferred tax assets. We refine annual estimates as current information becomes available.

Real Estate Brokerage.

The following table sets forth our condensed consolidated statements of operations data for the Real Estate Brokerage segment for the six months ended June 30, 2024 compared to the six months ended June 30, 2023:

(Dollars in thousands)

Revenues. Our revenues were $485,990 for the six months ended June 30, 2024 compared to $489,894 for the six months ended June 30, 2023. The decline of $3,904 was primarily related to a decline in our commission and other brokerage income because of lower revenues from development marketing sales.

Our revenues from commission and other brokerage income were $460,578 for the six months ended June 30, 2024 compared to $464,525 for the six months ended June 30, 2023, a decline of $3,947. In 2024, our commission and other brokerage income generated from the sales of existing homes declined by $12,220 in New York City. This was partially offset by increases of $14,369 in our Florida market, $5,944 in the West region and $3,153 in the Northeast region, which excludes New York City. In addition, our revenues from Development Marketing declined by $15,193 in the 2024 period compared to the 2023 period.

Operating Expenses. Our operating expenses were $518,329 for the six months ended June 30, 2024 compared to $508,251 for the six months ended June 30, 2023, an increase of $10,078, due primarily to the litigation settlement partially offset by declines in other operating expenses.

Real Estate Agent Commissions. Our real estate agent commissions expense was $365,473 for the six months ended June 30, 2024 compared to $360,904 for the six months ended June 30, 2023, an increase of $4,569. Real estate agent commissions expense, as a percentage of revenues, increased to 75.2% for the six months ended June 30, 2024 compared to 73.7% for the six months ended June 30, 2023. The increase in real estate agent commissions expense as a percentage of revenue in the 2024 period was primarily driven by a lower percentage of commission revenues derived from Development Marketing, which generally pays lower commission rates, during six months ended June 30, 2024 compared to the prior year period. In addition, during the six months ended June 30, 2024, a higher percentage of our revenues was generated from locations (primarily Florida, California, Texas, Colorado and Nevada) which generally pay higher commission rates.

Sales and Marketing. Sales and marketing expenses were $43,451 for the six months ended June 30, 2024 compared to $43,400 for the six months ended June 30, 2023.

Operations and support. Operations and support expenses were $36,798 for the six months ended June 30, 2024 compared to $36,217 for the six months ended June 30, 2023.

General and administrative. General and administrative expenses were $39,073 for the six months ended June 30, 2024 compared to $49,806 for the six months ended June 30, 2023.The decline is primarily related to reductions in personnel as well as lower incentive compensation expenses.

Technology. Technology expenses were $11,276 for the six months ended June 30, 2024 compared to $12,175 for the six months ended June 30, 2023.

Operating loss. Operating loss was $32,339 for the six months ended June 30, 2024 compared to $18,357 for the six months ended June 30, 2023. The increase in operating loss is primarily associated with the litigation settlement of $17,750 and decline in revenues partially offset by a decline in operating expenses.

Corporate and Other.

Corporate and Other loss. The operating loss at the Corporate and Other segment was $12,798 for the six months ended June 30, 2024 compared to $13,748 for the six months ended June 30, 2023.

Summary of PropTech Investments

As of June 30, 2024, New Valley Ventures had investments (at a carrying value) of approximately $12,919 in PropTech companies. This amounts to approximately 3% of the value of Douglas Elliman’s total assets, which totaled approximately $464 million, as of June 30, 2024.

Liquidity and Capital Resources

Cash, cash equivalents and restricted cash declined by $26,613 to $102,904, which included $10,040 of restricted cash, during the six months ended June 30, 2024 and by $32,084, which included restricted cash of $8,880, during the six months ended June 30, 2023.

Cash used in operations was $25,973 and $23,140 for the six months ended June 30, 2024 and 2023, respectively. The decline in the cash used in the 2024 period was related to the receipt of income tax refunds and lower uses of working capital. This was partially offset by lower operating income in the six months ended June 30, 2024.

Cash used in investing activities was $629 and $4,711 for the six months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024, cash used in investing activities was comprised of capital expenditures of $2,967 and the purchase of investments of $185 in our PropTech business. This was offset by $2,523 of distributions from our investments in equity securities. For the six months ended June 30, 2023, cash used in investing activities was comprised of capital expenditures of $4,614, and purchase of investments of $505 in our PropTech business. This was offset by $408 of distributions from our investments in equity securities.

Our investment philosophy is to maximize return on investments using a reasonable expectation for return when investing in equity-method investments and PropTech investments as well as making capital expenditures.

Cash used in financing activities was $11 and $4,233 for the six months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024, cash used in financing activities was comprised of tax benefit of options exercised of $11. For the six months ended June 30, 2023, cash used in financing activities was comprised of dividends and distributions on common stock of $4,222 and $11 for payroll tax liabilities associated with restricted stock withheld upon the vesting of restricted stock.

We paid a quarterly cash dividend of $0.05 per share from March 2022 to March 2023. On June 12, 2023, we announced that our Board had suspended the quarterly cash dividend, effective immediately. On June 12, 2023, our Board also declared a stock dividend on our common stock of 5%, which was paid on June 30, 2023 to stockholders of record as of the close of business on June 22, 2023. As part of the evaluation of our dividend policy, our Board determined that making a stock dividend and suspending the quarterly cash dividend was in the best interest of us and our stockholders. The amount and payment of any stock or cash dividend is subject to the Board’s regular evaluation of our dividend policy and capital allocation strategy.

Real Estate Brokerage Litigation. On April 26, 2024, we entered into a settlement agreement to resolve all claims on a nationwide basis in the pending class action litigations, Gibson v. NAR, No. 4:23-cv-00788-SRB (W.D. Mo.) and Umpa v. NAR, 4:23-cv-00945-SRB (W.D. Mo.) alleging claims on behalf of sellers against Douglas Elliman Inc. and our subsidiaries. Under the settlement agreement,the Company paid $7,750 into an escrow fund on June 12, 2024, and agreed to pay two $5,000 contingent payments subject to certain financial contingencies on or before December 31, 2027 (collectively, the “Settlement Amount”). The contingent payments may be accelerated under certain circumstances. The Company recognized an expense of $17,750 for the six months ended June 30, 2024. Litigation is subject to uncertainty and it is possible that there could be adverse developments in other pending cases or that more cases, including antitrust lawsuits, could be concerned.

Management cannot predict the cash requirements related to any future settlements or judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met. Management is unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome of the cases pending against the real estate brokerage segment or the costs of defending such cases. It is possible that our consolidated financial position, results of operations or cash flows in any future period could be materially adversely affected by an unfavorable outcome in any such brokerage-related litigation.

We had cash and cash equivalents of approximately $92,864 as of June 30, 2024 and, in addition to any cash provided from operations, such cash is available to be used to fund such liquidity requirements as well as other anticipated liquidity needs in the normal course of business. Management currently anticipates that these amounts, as well as expected cash flows from our operations and proceeds from any financings to the extent available, should be sufficient to meet our liquidity needs over the next twelve months. We may acquire or seek to acquire additional operating businesses through a merger, purchase of assets, stock acquisition or other means, or to make or seek to make other investments, which may limit our liquidity otherwise available.

On July 2, 2024, we issued $50,000 in aggregate principal amount of Convertible Notes. The Convertible Notes bear interest at a rate of 7.0% per annum, payable in cash, or, at our election, 8.0% per annum paid in kind, due semi-annually. See “-- Recent Developments” and “Item 1A. Risk Factors -- Our debt obligations under our Convertible Notes could impair our financial condition, limit our operational flexibility and result in significant dilution” for more information concerning our Convertible Notes.

Off-Balance Sheet Arrangements

We have various agreements in which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which we customarily agree to hold the other party harmless against losses arising from a breach of representations related to such matters as title to assets sold and licensed or certain intellectual property rights. Payment by us under such indemnification clauses is generally conditioned on the other party making a claim that is subject to challenge by us and dispute resolution procedures specified in the particular contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential number of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, payments made by us under these agreements have not been material. As of June 30, 2024, we were not aware of any indemnification agreements that would or are reasonably expected to have a current or future material adverse impact on our financial position, results of operations or cash flows.

As of June 30, 2024, we had outstanding approximately $3,000 of letters of credit, collateralized by certificates of deposit. The letters of credit have been issued as security deposits for leases of office space, to secure the performance of our subsidiaries under various insurance programs and to provide collateral for various subsidiary borrowing and capital lease arrangements.

As a service to its customers, Portfolio Escrow Inc., a subsidiary of the Company, administers escrow and trust deposits which represent undisbursed amounts received for the settlement of real estate transactions. Deposits at FDIC-insured institutions are insured up to $250. The escrow funds on deposit at the subsidiary were $34,314 and $41,338 as of June 30, 2024 and December 31, 2023, respectively, and corresponding escrow funds in holding of the same amount. While these deposits are not assets of the Company (and, therefore, are excluded from the accompanying condensed consolidated balance sheets), the subsidiary of the Company remains contingently liable for the disposition of these deposits.

Market Risk

We are exposed to market risks principally from fluctuations in interest rates and could be exposed to market risks from foreign currency exchange rates and equity prices in the future. We seek to minimize these risks through our regular operating and financing activities and our long-term investment strategy. Our market risk management procedures cover material market risks for our market risk sensitive financial instruments.

New Accounting Pronouncements

Refer to Note 1, Summary of Significant Accounting Policies, to our financial statements for further information on New Accounting Pronouncements.

Legislation and Regulation

There are no material changes from the Legislation and Regulation section set forth in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2023.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this report contains “forward-looking statements” within the meaning of the federal securities law. Forward-looking statements include information relating to our intent, belief or current expectations, primarily with respect to, but not limited to, economic outlook, capital expenditures, cost reduction, cash flows, operating performance, growth expectations, competition, legislation and regulations, litigation, and related industry developments (including trends affecting our business, financial condition and results of operations).

We identify forward-looking statements in this report by using words or phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may be,” “objective,” “opportunistically,” “plan,” “potential,” “predict,” “project,” “prospects,” “seek,” and “will be” and similar words or phrases or their negatives.

Forward-looking statements involve important risks and uncertainties that could cause our actual results, performance or achievements to differ materially from our anticipated results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, without limitation, the following:

• general economic and market conditions and any changes therein, including due to macroeconomic conditions, interest rate fluctuations, inflation, acts of war and terrorism or otherwise,
• governmental regulations and policies, including with respect to regulation of the real estate market or monetary and fiscal policy and its effect on overall economic activity, in particular, mortgage interest rates,
• the impacts of banks not honoring the escrow and trust deposits held by our subsidiaries,
• litigation risks, the costs associated with, and the outcome of, litigation and other proceedings to the exten uninsured, including litigation or other claims against companies we invest in or acquire,
• adverse changes in global, national, regional and local economic and market conditions, including those related to pandemics and health crises (and responses to them),
• the impacts of the Inflation Reduction Act of 2022 and the Tax Cuts and Jobs Act of 2017, including the continued impact on the markets of our business,
• effects of industry competition,
• severe weather events or natural or man-made disasters, including the increasing severity or frequency of such events due to climate change or otherwise, or other catastrophic events that may disrupt our business and have an unfavorable impact on home sale activity,
• the level of our expenses, including our corporate expenses as a standalone public company,
• the tax-free treatment of the Distribution,
• our lack of operating history as a public company and costs associated with being a standalone public company,
• the failure of Vector Group to satisfy its respective obligations under the Transition Services Agreement or other agreements entered into in connection with the Distribution, and
• the additional factors described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission as updated in this report.

Further information on the risks and uncertainties to our business includes the risk factors discussed above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC and in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024.

Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, there is a risk that these expectations will not be attained and that any deviations will be material. The forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any of these statements to reflect events or circumstances occurring after the date of this report. New factors may emerge, and it is not possible to predict all factors that may affect our business and operations.

The information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Risk” is incorporated herein by reference.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting that occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

There are no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2023, except as set forth below:

Industry structure changes that disrupt the functioning of the residential real estate market could materially adversely affect our operations and financial results.

Through our brokerages, we participate in MLS and are a member of the NAR and state real estate associations and, accordingly, are subject to each group’s rules, policies, data licenses, and terms of service. The rules of each MLS and real estate association to which we belong can vary widely and are complex.

From time to time, certain industry practices, including NAR and MLS rules, have come under regulatory scrutiny. There can be no assurances as to whether the Department of Justice (the “DOJ”) or Federal Trade Commission (the “FTC”), their state counterparts, or other governmental body will determine that any industry practices or developments have an anti-competitive effect on the industry. Any such determination could result in industry investigations, legislative or regulatory action, private litigation or other actions, any of which could have the potential to disrupt our business.

On July 1, 2021, the DOJ announced its withdrawal from a settlement agreement reached during the prior administration with the NAR in relation to claims of anticompetitive behavior with respect to commissions received by buyers’ agents from sellers’ agents. The settlement previously required the NAR to adopt certain rule changes, such as increased disclosure of commission offers from sellers’ agents to buyers’ agents. In January 2023, a federal district court ruled that the DOJ must uphold the settlement agreement. The DOJ appealed the district court’s January 2023 ruling, which has been fully briefed and is scheduled for oral argument on December 1, 2023. The withdrawal of the DOJ from this settlement and the executive order signed by President Biden on July 9, 2021, which, among other things, directs the FTC to consider additional rule making pertaining to the real estate industry, indicates increased regulatory scrutiny of the real estate industry.

In addition, private litigants have filed several antitrust suits against the NAR and certain real estate brokerage firms, some of which the DOJ has intervened in, that allege certain NAR and MLS rules are anti-competitive under federal and state antitrust laws and result in increased costs to consumers. Certain of these antitrust suits have resulted in settlement agreements, pursuant to which the settling real estate brokerage companies have agreed to injunctive relief that requires those companies to implement practice changes in their brokerage operations. On October 31, 2023, a federal jury in the Western District of Missouri found in favor of a class of plaintiffs of home sellers from April 2015 to June 2022 in three states, and awarded damages of approximately $1.78 billion (which is subject to statutory treble damages) for anticompetitive behavior in violation of federal antitrust laws arising from the NAR’s requirement that sellers’ agents for MLS-listed properties offer to pay a portion of commissions received on the sale of such properties to buyers’ agents (the Sitzer/Burnett case). NAR and certain brokerage defendants have settled the Sitzer/Burnett case. These settlements, which remain subject to final court approval, include both monetary and non-monetary settlement terms, which may impact business practices within the industry. Douglas Elliman is not a defendant in the Sitzer/Burnett case.

Following the federal jury decision in the Sitzer/Burnett case on October 31, 2023, several additional putative class action lawsuits were filed against the NAR and additional real estate brokerage firms, including Douglas Elliman, alleging anticompetitive conduct similar to that in the Sitzer/Burnett case in violation of federal and state antitrust laws, consumer protection claims and allegations of unjust enrichment. Douglas Elliman is presently aware that it is a named defendant in eight such matters in Missouri, Illinois and New York. Douglas Elliman may become involved in additional legal proceedings concerning the same or similar claims. On April 26, 2024, we entered into a settlement agreement (the “Settlement Agreement”) to resolve, on a nationwide basis, the Gibson and Umpa cases (the “Lawsuits”). The settlement resolves all claims on a nationwide basis by the plaintiffs and proposed settlement class members in the Lawsuits, which includes, but is not limited to, all claims concerning brokerage commissions by the proposed settlement class members that were asserted in other lawsuits against us and our subsidiaries (collectively, the “Claims”), and releases us, our subsidiaries, and affiliated agents from all Claims. Under the Settlement Agreement, the Company paid $7,750 into an escrow fund on June 12, 2024, and agreed to pay two $5,000 contingent payments subject to certain financial contingencies on or before December 31, 2027 (collectively, the “Settlement Amount”). We are unable to reasonably estimate the financial impact of any remaining matters.

Any of the foregoing litigation (including any related settlement agreement) or subsequent regulatory action, if successful, could result in significant changes or disruptions to industry practices of the residential real estate market, including changes or disruptions to buyers’ agent’s commissions, and could negatively affect our financial condition and results of operations. Such consequences may reduce our revenues, require additional expenditure, or distract our management’s attention from pursuing our growth strategy.

We could experience meaningful changes in industry operations or structure, as a result of governmental pressures, the result of litigation, changes to NAR or MLS rules, the actions of certain competitors or the introduction or growth of certain competitive models.

Contractual obligations related to confidentiality and noncompetition may be ineffective or unenforceable against departing employees.

Our operations are dependent on the efforts, abilities and experience of our employees, and we compete for their services. We have contracts with certain employees that include provisions preventing them from competing with us both during and after the term of our employment contracts with them. Enforceability of the non-compete agreements that we have in place is not guaranteed, and contractual restrictions could be breached without discovery or adequate remedies. On July 9, 2021, President Biden signed an executive order encouraging the Federal Trade Commission (“FTC”) to curtail unfair use of non-compete agreements and other agreements that may unfairly limit worker mobility. While we cannot predict how the initiatives set forth in the executive order will be implemented or, as a result, the impact that the executive order will have on our operations, there is now increased uncertainty regarding the long-term enforceability of our non-compete agreements. In April 2024, the FTC issued a final rule that prohibits employers from entering into non-compete agreements with workers and requires employers to rescind existing non-compete agreements (other than with respect to senior executives). If the final rule becomes effective, our business may be negatively affected. In addition, the New York state legislature passed legislation in 2023 that would have prohibited most non-compete agreements between employers and workers in New York State, although it was not ultimately enacted. It is possible that additional similar legislation may be introduced in the future. We are monitoring developments related to these proposed laws for any potential impact on the arrangements we enter into with third parties, including our real estate agents.

Our debt obligations under our Convertible Notes could impair our financial condition, limit our operational flexibility and result in significant dilution.

On July 2, 2024, we issued Senior Secured Convertible Promissory Notes due July 2, 2029 (the “Convertible Notes”), pursuant to a Securities Purchase Agreement, dated as of July 2, 2024 (the “Purchase Agreement”), by and among the Company, Alter Domus (US) LLC, as collateral agent for the purchasers, and the purchasers named therein (such purchasers being funds affiliated with or managed by Kennedy Lewis Investment Management LLC (“KLIM”), in an aggregate principal amount of $50.0 million. The Convertible Notes mature on the fifth anniversary of the issuance date and are convertible into shares of the Company’s common stock, par value $0.01 (the “Common Stock”). The Convertible Notes were issued in a private placement pursuant to an exemption for transactions by an issuer not involving a public offering under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

In connection with the Purchase Agreement and the Convertible Notes, certain of the Company’s subsidiaries (each a “Guarantor” and, collectively, the “Guarantors”) entered into a Security Agreement, dated as of July 2, 2024 (the “Security Agreement”), whereby the Guarantors agreed to guarantee the obligations and liabilities of the Company under the Convertible Notes. As a result, our obligations under the Convertible Notes are secured by a perfected security interest in substantially all of our tangible and intangible assets (including our intellectual property assets).

Our indebtedness under the Convertible Notes could:

• impair our ability to obtain financing or additional debt in the future for working capital, capital expenditures, acquisitions or general corporate purposes;
• impair our ability to access capital and credit markets on terms that are favorable to us or at all;
• require us to dedicate a substantial portion of our cash flow for interest payments on our indebtedness and other financial obligations, thereby reducing the availability of our cash flow to fund working capital and general corporate purposes; and
• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

The Purchase Agreement contains certain affirmative and negative covenants (including restrictions on the Company’s ability to incur indebtedness, create liens, pay dividends or distributions, make investments and enter into certain affiliate transactions). In addition, pursuant to the Purchase Agreement, if the Company has negative Consolidated Adjusted EBITDA (as defined in the Purchase Agreement) for any two consecutive fiscal quarters from and after the fiscal quarter commencing July 1, 2024, then the Company will be required to maintain Liquidity (as defined in the Purchase Agreement) of at least $20.0 million as of the end of each calendar month until the Company has positive Consolidated Adjusted EBITDA at the end of any subsequent fiscal quarter. There is no guarantee that we will be able to pay the principal and interest under the Convertible Notes or that future working capital, borrowings or equity financing will be available to repay or refinance any amounts outstanding under the Convertible Notes.

The Convertible Notes are convertible at any time at the option of KLIM, at an initial conversion price of $1.50 per share of Common Stock, provided that KLIM is prohibited from converting the Convertible Notes into shares of Common Stock if, upon such conversion, so long as the aggregate number of shares of Common Stock beneficially owned by KLIM would not exceed 4.99% (the “Beneficial Ownership Limitation”) of the number of shares of Common Stock outstanding immediately after giving effect to the conversion, as such percentage ownership is determined in accordance with the terms of the Note, and which may be increased up to 24.99% at the election of KLIM. Assuming the Convertible Notes are converted in full (without issuance of any make-whole shares), and without giving effect to the Beneficial Ownership Limitation, the Convertible Notes would convert into 33,333,334 shares of Common Stock, or 40,854,085 shares of Common Stock upon issuance of all make-whole shares, which would result in significant dilution to our stockholders.

We may not have the ability to raise the funds necessary to settle conversions of our Convertible Notes in cash or to repurchase the Convertible Notes in connection with a Major Transaction, and any other indebtedness we may incur in the future may contain limitations on our ability to pay cash upon conversion or repurchase of the Convertible Notes.

In the event of certain Major Transactions (as defined in the Purchase Agreement), the Company will be required to repay the Convertible Notes on the date on which such transaction occurs at a price equal to the greater of (i) the outstanding principal and capitalized interest on the Convertible Note plus a make-whole premium and (ii) the sum of (a) the fair market value of the as-converted amount of the Convertible Note for Common Stock plus (b) the fair market value of additional make-whole shares calculated pursuant to a customary make-whole table. The noteholders may elect to convert the Convertible Notes prior to such repayment, receive shares of Common Stock in respect of such repayment amount in certain circumstances or require such payment in cash. Our ability to repurchase the notes or to pay cash upon conversion of the Convertible Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase notes at a time when the repurchase is required by the Convertible Notes or to pay any cash payable on future conversions of the Convertible Notes may constitute an Event of Default under the Purchase Agreement. An Event of Default under the Purchase Agreement or the occurrence of the Major Transaction itself could also lead to a default under any agreements governing other future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and to repay or repurchase our Convertible Notes.