Douglas Elliman Inc.: Form 10-Q for the period ended Sep 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 2023 Annual Report filed with the SEC, and our Condensed Consolidated Financial Statements and related Notes as of and for the quarterly period and nine months ended September 30, 2024. Any forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Any forward-looking statements are subject to several important factors, including those factors discussed under “Risk Factors” in our 2023 Annual Report and this Quarterly Report and “Special Note on Forward-Looking Statements,” that could cause our actual results to differ materially from those indicated in such forward-looking statements.

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 September 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. $4,795, $3,611, $3,355, and $4,539 are attributable to the Real estate brokerage segment for the last twelve months ended September 30, 2024, the nine months ended September 30, 2024, and 2023, and the year ended December 31, 2023, respectively. $9,331, $7,106, $6,311, and $8,536 are attributable to the Corporate and other segment for the last twelve months ended September 30, 2024, the nine months ended September 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

Management changes. On October 21, 2024, the Company’s Chairman of the Board of Directors, President and Chief Executive Officer, notified the Company’s Board of his resignation as Chairman of the Board, President and Chief Executive Officer, effective immediately. In connection with his cessation of employment with the Company, the Company cancelled 2,965,625 unvested shares of common stock subject to vesting pursuant to the Issuer’s 2021 Management Incentive Plan. On October 25, 2024, the President and Chief Executive Officer of the Company’s subsidiary, Douglas Elliman Realty LLC, was terminated effective immediately. On October 30, 2024, the Company and James D. Ballard, Senior Vice President - Enterprise Efficiency and Chief Technology Officer, mutually agreed to terminate Mr. Ballard’s employment, effective immediately. Mr. Ballard will be entitled to (i) receive cash payment in an amount equal to $835; (ii) acceleration of all unvested equity and option grants; and (iii) participation in a COBRA plan for 18 months.

Aircraft Leases. On October 17, 2024, the Company delivered notices of termination to terminate, effective as of November 16, 2024, the Aircraft Lease Agreements.

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 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 nine months ended September 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.

See Note 8 - “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 nine months ended September 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 $11,900 (5.9%) as compared to the corresponding period in 2023. These reductions during the nine months ended September 30, 2024 included approximately $11,900 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 September 30, 2024 Compared to the Three months ended September 30, 2023

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

(Dollars in thousands)

Revenues. Our revenues were $266,316 for the three months ended September 30, 2024 compared to $251,548 for the three months ended September 30, 2023. The $14,768 increase in revenues was primarily due to increases in commission and other brokerage revenues which primarily related to increases in commissions from existing home sales and development marketing.

Operating expenses. Our operating expenses were $273,747 for the three months ended September 30, 2024 compared to $260,369 for the three months ended September 30, 2023. The increase of $13,378 was due primarily to an increase in real estate agent commissions of $13,288 arising primarily from increases in commissions and other brokerage revenue partially offset by declines in general and administrative expenses.

Operating loss. Operating loss was $7,431 for the three months ended September 30, 2024 compared to $8,821 for the same period in 2023. The $1,390 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 (losses) income. Other losses was $20,018 for the three months ended September 30, 2024 compared to income of $1,822 for the three months ended September 30, 2023. For the three months ended September 30, 2024, other losses primarily consisted of the change in fair value of embedded derivative of $20,166, interest expense of $1,461, primarily associated with the debt issuance, and investment and other losses, primarily associated with our PropTech investments of $4. This was offset by interest income of $1,551 and equity in earnings from equity method investments of $62.

Loss before provision for income taxes. Loss before income taxes was $27,449 and $6,999 for the three months ended September 30, 2024 and 2023, respectively.

Income tax expense (benefit). Income tax expense was $0 compared to income tax benefit of $1,869 for the three months ended September 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 September 30, 2024 compared to the three months ended September 30, 2023:

(Dollars in thousands)

Revenues. Our revenues were $266,316 for the three months ended September 30, 2024 compared to $251,548 for the three months ended September 30, 2023. The increase of $14,768 was primarily related to an increase in our commission and other brokerage income, as a result of an increase in commissions from existing home sales and development marketing. The increase in revenues was driven by an increased average price per transaction of $1.61 million per homesale in three months ended September 30, 2024 compared to $1.57 million per homesale in the comparable 2023 period.

Our revenues from commission and other brokerage income were $254,074 for the three months ended September 30, 2024 compared to $239,255 for the three months ended September 30, 2023, an increase of $14,819. In the three months ended September 30, 2024, our commission and other brokerage income generated from the sales of existing homes increased by $6,939 in New York City, $1,143 in the Northeast region, which excludes New York City. This was partially offset by declines of $3,231 in the Florida market, and $740 in the West region. In addition, our revenues from Development Marketing increased by $10,708 in the 2024 period compared to the 2023 period and was primarily from an increase in closed sales in the Florida market.

Operating Expenses. Our operating expenses were $265,862 for the three months ended September 30, 2024 compared to $253,540 for the three months ended September 30, 2023, an increase of $12,322, 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 $199,133 for the three months ended September 30, 2024 compared to $185,845 for the three months ended September 30, 2023. Real estate agent commissions expense, as a percentage of revenues, increased to 74.8% for the three months ended September 30, 2024 compared to 73.9% for the three months ended September 30, 2023.

Sales and Marketing. Sales and marketing expenses were $19,240 for the three months ended September 30, 2024 compared to $20,770 for the three months ended September 30, 2023.

Operations and support. Operations and support expenses were $18,774 for the three months ended September 30, 2024 compared to $17,121 for the three months ended September 30, 2023. The increase is primarily related to higher professional fees in the 2024 period.

General and administrative. General and administrative expenses were $20,774 for the three months ended September 30, 2024 compared to $21,988 for the three months ended September 30, 2023. The decline is primarily related to reductions in personnel as well as lower incentive compensation expenses offset by higher professional fees.

Technology. Technology expenses were $6,025 for the three months ended September 30, 2024 compared to $5,602 for the three months ended September 30, 2023. The increase 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 $454 for the three months ended September 30, 2024 compared to operating loss of $1,992 for the three months ended September 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 $7,885 for the three months ended September 30, 2024 compared to $6,829 for the three months ended September 30, 2023. The increase was primarily attributable to increases in operating expenses.

Nine months ended September 30, 2024 Compared to Nine months ended September 30, 2023

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

(Dollars in thousands)

Revenues. Our revenues were $752,306 for the nine months ended September 30, 2024 compared to $741,442 for the nine months ended September 30, 2023. The $10,864 increase in revenues was primarily due to an increase in commissions and other brokerage income because of increased commissions from existing home sales.

Operating expenses. Our operating expenses were $804,874 for the nine months ended September 30, 2024 compared to $782,368 for the nine months ended September 30, 2023. The increase of $22,506 was due primarily to the litigation settlement of $17,750 and increases in real estate brokerage commissions of $17,857 partially offset by a decline in other operating expenses of $13,101.

Operating loss. Operating loss was $52,568 for the nine months ended September 30, 2024 compared to $40,926 for the nine months ended September 30, 2023. The $11,642 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 (loss) income. Other loss was $16,978 for the nine months ended September 30, 2024 compared to income of $4,226 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, other losses primarily consisted of the change in fair value of derivatives embedded within convertible debt of $20,166 associated with the issuance of the new financing debt, and interest expense of $1,475. This was partially offset by interest income of $3,989, $625 of investment and other income primarily associated with our PropTech investments, and equity earnings from equity method investments of $49.

Loss before provision for income taxes. Loss before income taxes was $69,546 for the nine months ended September 30, 2024 and $36,700 for the nine months ended September 30, 2023.

Income tax expense (benefit). Income tax expense was $1,368 for the nine months ended September 30, 2024 compared to income tax benefit of $8,552 for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2024 compared to the nine months ended September 30, 2023:

(Dollars in thousands)

Revenues. Our revenues were $752,306 for the nine months ended September 30, 2024 compared to $741,442 for the nine months ended September 30, 2023. The increase of $10,864 was primarily related to an increase in our commission and other brokerage income. The increase in revenues was driven by an increased average price per transaction of $1.68 million per homesale in the nine months ended September 30, 2024 compared to $1.60 million per homesale in the comparable 2023 period.

Our revenues from commission and other brokerage income were $714,652 for the nine months ended September 30, 2024 compared to $703,780 for the nine months ended September 30, 2023, an increase of $10,872. In 2024, our commission and other brokerage income generated from the sales of existing homes increased by $15,357 and this consisted of increases of $11,138 in our Florida market, $5,204 in the West region and $4,296 in the Northeast region, which excludes New York City; these increases were offset by declines of $5,281 in New York City. In addition, our revenues from Development Marketing declined by $4,485 in the 2024 period compared to the 2023 period.

Operating Expenses. Our operating expenses were $784,191 for the nine months ended September 30, 2024 compared to $761,791 for the nine months ended September 30, 2023, an increase of $22,400, 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 $564,606 for the nine months ended September 30, 2024 compared to $546,749 for the nine months ended September 30, 2023, an increase of $17,857. Real estate agent commissions expense, as a percentage of revenues, increased to 75.1% for the nine months ended September 30, 2024 compared to 73.7% for the nine months ended September 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 our revenues was generated from locations (primarily Florida, California, Texas, Colorado and Nevada) which generally pay higher commission rates and a lower percentage of commission revenues derived from Development Marketing, which generally pays lower commission rates, during nine months ended September 30, 2024 compared to the prior year period.

Sales and Marketing. Sales and marketing expenses were $62,691 for the nine months ended September 30, 2024 compared to $64,170 for the nine months ended September 30, 2023.

Operations and support. Operations and support expenses were $55,572 for the nine months ended September 30, 2024 compared to $53,338 for the nine months ended September 30, 2023.

General and administrative. General and administrative expenses were $59,847 for the nine months ended September 30, 2024 compared to $71,794 for the nine months ended September 30, 2023. The decline is primarily related to reductions in personnel as well as lower incentive compensation expenses.

Technology. Technology expenses were $17,301 for the nine months ended September 30, 2024 compared to $17,777 for the nine months ended September 30, 2023.

Operating loss. Operating loss was $31,885 for the nine months ended September 30, 2024 compared to $20,349 for the nine months ended September 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 $20,683 for the nine months ended September 30, 2024 compared to $20,577 for the nine months ended September 30, 2023.

Summary of PropTech Investments

As of September 30, 2024, New Valley Ventures had investments (at a carrying value) of approximately $13,037 in PropTech companies. This amounts to approximately 3% of the value of Douglas Elliman’s total assets, which totaled approximately $503 million, as of September 30, 2024.

Liquidity and Capital Resources

Cash, cash equivalents and restricted cash increased by $27,746 to $157,263, which included $5,847 of restricted cash, during the nine months ended September 30, 2024 and by $37,493, which included restricted cash of $7,549, during the nine months ended September 30, 2023.

Cash used in operations was $16,987 and $27,773 for the nine months ended September 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 nine months ended September 30, 2024.

Cash used in investing activities was $2,009 and $5,487 for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024, cash used in investing activities was comprised of capital expenditures of $4,273 and the purchase of investments of $259 in our PropTech business. This was offset by $2,523 of distributions from our investments in equity securities. For the nine months ended September 30, 2023, cash used in investing activities was comprised of capital expenditures of $5,380, and purchase of investments of $515 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 provided by financing activities was $46,742 for the nine months ended September 30, 2024 compared to cash used in financing activities of $4,233 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, cash provided by financing activities was comprised of proceeds from debt issuance of $48,750. This was offset by deferred financing charges of $1,997 and $11 for payroll tax liabilities associated with restricted stock withheld upon the vesting of restricted stock. For the nine months ended September 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.

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 nine months ended September 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.

See Note 8 Contingencies for a complete discussion of Real Estate Brokerage Litigation and related litigation.

Other litigation. Two real estate salespersons formerly associated with the Company as independent contractors, have, together or separately, been named as defendants in multiple complaints by women accusing them of sexual assault and related wrongdoing. While the Company is not named as a defendant in these lawsuits, the salespersons’ former association with the Company has been reported in various publications. The Company is aware of the potential for litigation against the Company and certain of its current and former executives based on such alleged sexual assault and related wrongdoing, including claims that the Company and those executives are liable or indirectly liable for such wrongdoing. The Company and its executives deny all liability.

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 $151,416 as of September 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 due 2029. 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 Note 7 Notes Payable 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 September 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 September 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 $36,061 and $41,338 as of September 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 2023 Annual Report.

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 extent 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 tax-free treatment of the Distribution,
• the failure of Vector Group to satisfy its respective obligations under the agreements entered into in connection with the Distribution, and
• the additional factors described under “Risk Factors” in our 2023 Annual Report filed with the SEC 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 2023 Annual Report filed with the SEC and our 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 of the 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 2023 Annual Report and Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024.