Douglas Elliman (DOUG) - 2022 Q1 - Quarterly Report

Filing Information This section details the document type, filing entity, filer classification, and outstanding common stock shares - The document is a Quarterly Report (Form 10-Q) for the period ended March 31, 2022, filed by DOUGLAS ELLIMAN INC[2] - The registrant is classified as a Non-accelerated filer[4] - As of May 6, 2022, Douglas Elliman Inc. had 81,235,626 shares of common stock outstanding[4] PART I. FINANCIAL INFORMATION Item 1. Douglas Elliman Inc. Condensed Combined Consolidated Financial Statements (Unaudited) This section provides the unaudited condensed combined consolidated financial statements, including the balance sheets, statements of operations, statements of stockholders' equity, statements of cash flows, and accompanying notes, for Douglas Elliman Inc. for the periods presented Condensed Combined Consolidated Balance Sheets This section presents the company's financial position at specific dates, detailing assets, liabilities, and stockholders' equity | Metric | March 31, 2022 ($ Thousands) | December 31, 2021 ($ Thousands) | | :---------------------- | :--------------------------- | :------------------------------ | | Total Assets | 588,227 | 595,169 | | Total Liabilities | 301,104 | 313,296 | | Total Stockholders' Equity | 287,123 | 281,873 | Condensed Combined Consolidated Statements of Operations This section outlines the company's financial performance over specific periods, including revenues, operating income, and net income | Metric | Three Months Ended March 31, 2022 ($ Thousands) | Three Months Ended March 31, 2021 ($ Thousands) | | :---------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Total Revenues | 308,900 | 272,776 | | Operating Income | 7,879 | 14,228 | | Net Income Attributed to Douglas Elliman Inc. | 6,510 | 13,965 | | Per Basic Common Share | 0.08 | 0.18 | | Per Diluted Common Share | 0.08 | 0.18 | Condensed Combined Consolidated Statements of Stockholders' Equity This section details changes in the company's equity accounts over time, reflecting transactions with owners and comprehensive income | Metric | January 1, 2022 ($ Thousands) | March 31, 2022 ($ Thousands) | | :-------------------------------------- | :---------------------------- | :--------------------------- | | Total Douglas Elliman Inc. Stockholders' Equity | 279,934 | 285,034 | | Non-controlling Interest | 1,939 | 2,089 | | Total Stockholders' Equity | 281,873 | 287,123 | - During the three months ended March 31, 2022, the company paid dividends on common stock of $4,062 thousand and recognized stock-based compensation of $2,652 thousand[14] Condensed Combined Consolidated Statements of Cash Flows This section reports the cash generated and used by the company across operating, investing, and financing activities | Cash Flow Activity | Three Months Ended March 31, 2022 ($ Thousands) | Three Months Ended March 31, 2021 ($ Thousands) | | :---------------------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Net cash (used in) provided by operating activities | (6,780) | 13,993 | | Net cash used in investing activities | (1,815) | (597) | | Net cash used in financing activities | (6,834) | (21) | | Net (decrease) increase in cash, cash equivalents and restricted cash | (15,429) | 13,375 | Notes to Condensed Combined Consolidated Financial Statements These notes provide detailed information on the company's significant accounting policies, revenue recognition, credit losses, leases, long-term investments, equity method investments, notes payable, contingencies, income taxes, fair value measurements, and segment information, offering context to the financial statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the fundamental accounting principles and methods used in preparing the financial statements - Douglas Elliman Inc. is engaged in real estate services and property technology (PropTech) investment business[18] - The company became a standalone entity after its distribution from Vector Group Ltd. in December 2021, impacting the comparability of financial results with prior periods due to changes in operations and capitalization[18] | Related Party Transactions (Q1) | 2022 ($ Thousands) | 2021 ($ Thousands) | | :------------------------------ | :----------------- | :----------------- | | Transition Services Agreement | 1,050 | N/A | | Aircraft Lease Agreement | 491 | N/A | | Real Estate Commissions | 900 | 2,357 | - The company is evaluating ASU 2021-08, 'Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,' effective for fiscal years beginning after December 15, 2022[31] 2. REVENUE RECOGNITION This section details the company's policies and methods for recognizing revenue from various sources and regions | Revenue Source & Region (Q1) | 2022 ($ Thousands) | 2021 ($ Thousands) | | :----------------------------- | :----------------- | :----------------- | | Total Revenue: | 308,900 | 272,776 | | New York City | 113,515 | 88,140 | | Northeast | 50,508 | 56,840 | | Southeast | 89,040 | 82,860 | | West | 55,837 | 44,936 | | Commission & Other Brokerage Income - Existing Home Sales: | | | | New York City | 92,388 | 70,135 | | Northeast | 50,079 | 56,250 | | Southeast | 80,824 | 75,553 | | West | 51,884 | 41,078 | - The company recognized $8,069 thousand in revenue for the three months ended March 31, 2022, that was included in contract liabilities balances at December 31, 2021[35] 3. CURRENT EXPECTED CREDIT LOSSES This section describes the company's methodology and provisions for estimating and accounting for credit losses on financial assets | Metric | March 31, 2022 ($ Thousands) | December 31, 2021 ($ Thousands) | | :-------------------------------------- | :--------------------------- | :------------------------------ | | Allowance for credit losses (agent receivables) | 8,833 | 8,607 | | Allowance for Credit Losses Rollforward (Q1 2022) | January 1, 2022 ($ Thousands) | Current Period Provision ($ Thousands) | Write-offs ($ Thousands) | March 31, 2022 ($ Thousands) | | :------------------------------------------------ | :---------------------------- | :------------------------------------- | :----------------------- | :--------------------------- | | Real estate broker agent receivables | 8,607 | 558 | 332 | 8,833 | 4. LEASES This section provides information on the company's lease arrangements, including lease costs, terms, and payment obligations | Lease Cost (Q1) | 2022 ($ Thousands) | 2021 ($ Thousands) | | :---------------- | :----------------- | :----------------- | | Operating lease cost | 8,169 | 8,135 | | Short-term lease cost | 257 | 200 | | Variable lease cost | 985 | 956 | | Less: Sublease income | (121) | (88) | | Total lease cost | 9,290 | 9,203 | - The weighted average remaining lease term for operating leases was 7.42 years as of March 31, 2022[43] - Total undiscounted lease payments for operating leases as of March 31, 2022, were $213,571 thousand[43] 5. LONG-TERM INVESTMENTS This section details the company's long-term investment portfolio, including PropTech securities and other fair value investments | Investment Type | March 31, 2022 ($ Thousands) | December 31, 2021 ($ Thousands) | | :------------------------------------ | :--------------------------- | :------------------------------ | | PropTech convertible trading debt securities | 3,077 | 2,222 | | Long-term investment securities at fair value | 2,332 | 1,534 | | PropTech investments at cost | 4,363 | 4,338 | | Total investments | 9,772 | 8,094 | | Less PropTech current convertible trading debt securities | 2,376 | — | | Total long-term investments | 7,396 | 8,094 | | Net Gains Recognized on Long-Term Investment Securities (Q1) | 2022 ($ Thousands) | 2021 ($ Thousands) | | :----------------------------------------------------------- | :----------------- | :----------------- | | PropTech convertible trading debt securities | 154 | — | | Long-term investments at fair value | 598 | 34 | | Total net gains | 752 | 34 | - During Q1 2022, New Valley Ventures invested $701 thousand into convertible notes of two additional PropTech ventures[46] - The company had unfunded commitments of $1,460 thousand related to long-term investment securities at fair value as of March 31, 2022[47] 6. EQUITY METHOD INVESTMENTS This section describes the company's investments accounted for using the equity method, including ownership percentages and exposure to loss | Investment Type | March 31, 2022 ($ Thousands) | December 31, 2021 ($ Thousands) | | :---------------------- | :--------------------------- | :------------------------------ | | Ancillary services ventures | 2,508 | 2,521 | - The company's ownership percentages in equity-method investments ranged from 17% to 50% as of March 31, 2022[50] - The maximum exposure to loss from equity method investments was $2,508 thousand as of March 31, 2022[52] 7. NOTES PAYABLE AND OTHER OBLIGATIONS This section outlines the company's outstanding debt instruments and other financial obligations, including their maturities | Obligation Type | March 31, 2022 ($ Thousands) | December 31, 2021 ($ Thousands) | | :------------------------------ | :--------------------------- | :------------------------------ | | Notes payable | 9,375 | 12,500 | | Other | 199 | 203 | | Total notes payable and other obligations | 9,574 | 12,703 | | Less: Current maturities | (9,405) | (12,527) | | Amount due after one year | 169 | 176 | - The remaining principal of $9,375 thousand for notes payable is due in 2022[54] 8. CONTINGENCIES This section addresses potential future liabilities arising from legal proceedings and other uncertain events - The company is involved in litigation through the normal course of business[57] - Management believes the resolution of these matters will not have a material adverse effect on the financial position, results of operations, or cash flows[57] 9. INCOME TAXES This section details the company's income tax provision, including the impact of its standalone public company status | Income Tax Metric (Q1) | 2022 ($ Thousands) | 2021 ($ Thousands) | | :--------------------- | :----------------- | :----------------- | | Income before provision for income taxes | 9,202 | 14,246 | | Income tax expense | 2,917 | 281 | - After the Distribution, Douglas Elliman Inc. and its subsidiaries became a separate taxable entity for federal and state income tax purposes, leading to a change in the calculation of income tax provision[59] 10. INVESTMENTS AND FAIR VALUE MEASUREMENTS This section provides information on the valuation methodologies and fair value hierarchy for the company's investments | Asset Type (Fair Value) | March 31, 2022 ($ Thousands) | December 31, 2021 ($ Thousands) | | :---------------------- | :--------------------------- | :------------------------------ | | Total Assets | 50,953 | 55,817 | | Level 1 (Money market funds) | 44,975 | 51,492 | | Level 2 (Certificates of deposit) | 569 | 569 | | Level 3 (PropTech convertible trading debt securities) | 3,077 | 2,222 | - Fair values of Level 3 PropTech convertible trading debt securities are derived using a discounted cash flow model with a probability-weighted expected return method[64] - Unobservable inputs for Level 3 valuations at March 31, 2022, include interest rates (4%-8%), maturity (Feb 2023 - Dec 2023), volatility (40.7%-73.6%), and discount rates (28.22%-46.66%)[64] 11. SEGMENT INFORMATION This section presents financial data broken down by the company's operating segments, including revenues and operating income | Segment Performance (Q1) | Real Estate Brokerage 2022 ($ Thousands) | Corporate and Other 2022 ($ Thousands) | Total 2022 ($ Thousands) | | :----------------------- | :--------------------------------------- | :------------------------------------- | :----------------------- | | Revenues | 308,900 | — | 308,900 | | Operating income (loss) | 14,541 | (6,662) | 7,879 | | Adjusted EBITDA attributed to Douglas Elliman | 17,662 | (4,935) | 12,727 | | Segment Performance (Q1) | Real Estate Brokerage 2021 ($ Thousands) | Corporate and Other 2021 ($ Thousands) | Total 2021 ($ Thousands) | | :----------------------- | :--------------------------------------- | :------------------------------------- | :----------------------- | | Revenues | 272,776 | — | 272,776 | | Operating income (loss) | 14,228 | — | 14,228 | | Adjusted EBITDA attributed to Douglas Elliman | 16,351 | — | 16,351 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, liquidity, and capital resources for the three months ended March 31, 2022, compared to the prior year. It details revenue and expense drivers, segment performance, and key business metrics, highlighting the impact of operating as a standalone public company Overview This section introduces the company's business segments and the impact of its recent transition to a standalone public entity - Douglas Elliman Inc. operates in two business segments: Real Estate Brokerage and Corporate and Other[71][72] - The Real Estate Brokerage segment operates the largest residential brokerage company in the New York metropolitan area and in other key regions[71] - The company became a standalone public company on December 29, 2021, after its distribution from Vector Group, which impacts the comparability of financial results with prior periods[73] Key Business Metrics and Non-GAAP Financial Measures This section presents crucial operational and financial performance indicators, including non-GAAP adjustments, for evaluating the company's business | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Total Transactions | 7,212 | 7,094 | | Gross Transaction Value (in billions) | $11.7 | $10.1 | | Average Transaction Value per Transaction (in thousands) | $1,620.4 | $1,427.8 | | Number of Principal Agents | 5,174 | 4,954 | | Net Income Attributed to Douglas Elliman Inc. ($ Thousands) | 6,510 | 13,965 | | Net Income Margin | 2.11% | 5.12% | | Adjusted EBITDA Attributed to Douglas Elliman ($ Thousands) | 12,727 | 16,351 | | Adjusted EBITDA Attributed to Douglas Elliman Margin | 4.12% | 5.99% | - Adjusted EBITDA attributed to Douglas Elliman is a non-GAAP financial measure that adjusts net income for depreciation and amortization, investment income, stock-based compensation, income taxes, and other items[79] Results of Operations This section analyzes the company's financial outcomes, detailing revenue, expenses, and profitability trends Three months ended March 31, 2022 Compared to Three months ended March 31, 2021 This section compares the company's financial performance for the first quarter of 2022 against the same period in 2021, highlighting key changes in revenues, expenses, and income | Metric (Q1) | 2022 ($ Thousands) | 2021 ($ Thousands) | Change ($ Thousands) | Change (%) | | :-------------------- | :----------------- | :----------------- | :------------------- | :--------- | | Revenues | 308,900 | 272,776 | 36,124 | 13.2% | | Operating Expenses | 301,021 | 258,548 | 42,473 | 16.4% | | Operating Income | 7,879 | 14,228 | (6,349) | (44.6%) | | Other Income | 1,323 | 18 | 1,305 | 7250% | | Income Before Provision for Income Taxes | 9,202 | 14,246 | (5,044) | (35.4%) | | Income Tax Expense | 2,917 | 281 | 2,636 | 938.1% | - The increase in revenues was primarily due to increased revenues from existing home sales in the Real Estate Brokerage segment, driven by home-buying trends post-COVID-19 lockdowns[87] - The decline in operating income was due to expenses associated with operating as a standalone public company and non-cash stock compensation expense[87] Real Estate Brokerage This section focuses on the financial performance of the company's primary real estate brokerage segment, including revenue and expense drivers | Real Estate Brokerage Segment (Q1) | 2022 ($ Thousands) | % of Revenues 2022 | 2021 ($ Thousands) | % of Revenues 2021 | | :--------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Revenues | 308,900 | 100% | 272,776 | 100% | | Commissions and other brokerage income | 295,109 | 95.5% | 259,100 | 95.0% | | Real estate agent commissions | 223,422 | 72.3% | 197,017 | 72.2% | | General and administrative | 26,168 | 8.5% | 19,307 | 7.1% | | Technology | 5,293 | 1.7% | 3,497 | 1.3% | | Operating income | 14,541 | 4.7% | 14,228 | 5.2% | - Commission and other brokerage income increased by $36,009 thousand, driven by existing home sales in New York City, West, and Southeast regions, and expansion into the Texas region[90] - Technology expenses increased due to refinements of the cloud-based 'MyDouglas' agent portal, StudioPro agent concierge service, and the introduction of new applications for payment processing and streamlined escrow services[92] Corporate and Other This section details the financial results of the corporate and other segment, primarily reflecting overhead and investment activities - The Corporate and Other segment reported an operating loss of $6,662 thousand for Q1 2022[94] - The loss was primarily due to expenses, including non-cash stock compensation, associated with operating as a standalone publicly traded company after the Distribution[94] Summary of PropTech Investments This section provides an overview of the company's investments in property technology ventures and their financial impact - As of March 31, 2022, New Valley Ventures held approximately $7,396 thousand in PropTech investments, representing about 1% of Douglas Elliman's total assets[95] - New PropTech investments during Q1 2022 included Envoy (shared mobility company) and Audience (subscription-based platform for hand-written notes)[95][96] Liquidity and Capital Resources This section discusses the company's ability to generate and manage cash, its financial flexibility, and capital allocation strategies | Cash, Cash Equivalents and Restricted Cash (Q1) | 2022 ($ Thousands) | 2021 ($ Thousands) | | :---------------------------------------------- | :----------------- | :----------------- | | Net (decrease) increase | (15,429) | 13,375 | - Cash used in operations was $6,780 thousand in Q1 2022, a decline from $13,993 thousand provided in Q1 2021, due to lower operating income and higher discretionary compensation payments[97] - Cash used in investing activities was $1,815 thousand in Q1 2022, including $926 thousand for PropTech investments and $849 thousand for capital expenditures[97] - Cash used in financing activities was $6,834 thousand in Q1 2022, primarily due to $4,062 thousand in dividends and $3,129 thousand in debt repayment[98] - The company contemplates continuing to pay a quarterly cash dividend of $0.05 per share, which would result in annual dividends of approximately $16,200 thousand[99] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from fluctuations in interest rates and may face risks from foreign currency exchange rates and equity prices in the future. These risks are managed through regular operating and financing activities and long-term investment strategy - The company is exposed to market risks principally from fluctuations in interest rates[100] - Future market risks could include foreign currency exchange rates and equity prices[100] - These risks are minimized through regular operating and financing activities and the company's long-term investment strategy[100] Item 4. Controls and Procedures Management, including the principal executive and financial officers, concluded that the company's disclosure controls and procedures were effective as of March 31, 2022. There were no material changes in internal control over financial reporting during the first quarter of 2022 - The company's disclosure controls and procedures were evaluated and concluded to be effective as of March 31, 2022[111] - There were no material changes in internal control over financial reporting during the first quarter of 2022[112] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings in the normal course of business, as described in Note 8 to the financial statements - The company is involved in litigation through the normal course of business[115] - Further details on legal proceedings are provided in Note 8 of the condensed combined consolidated financial statements[115] Item 1A. Risk Factors There are no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - There are no material changes from the risk factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2021[116] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity securities were issued or sold by the company during the three months ended March 31, 2022 - No equity securities not registered under the Securities Act were issued or sold by the company during the three months ended March 31, 2022[117] Item 6. Exhibits This section lists all documents filed as exhibits to the report, including agreements and certifications - The exhibits include an Amendment to Employment Agreement (10.1), Certifications of Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32.1), and various Inline XBRL Taxonomy Extension documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[119] SIGNATURE This section formally attests to the accuracy and completeness of the report, signed by an authorized officer - The report was signed on behalf of Douglas Elliman Inc. by J. Bryant Kirkland III, Senior Vice President, Treasurer and Chief Financial Officer, on May 11, 2022[122]