Douglas Elliman Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Douglas Elliman operates a residential real estate brokerage business and a corporate and other segment that includes its holding-company costs and PropTech investments. The company became an independent public company in December 2021; 2021 comparisons reflect pre-separation results and may not be fully comparable.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $272.6 million | $354.2 million | $945.8 million | $1,018.9 million |
| Operating income (loss) | $(5.2) million | $25.5 million | $17.3 million | $82.9 million |
| Net income (loss) attributable to Douglas Elliman | $(4.0) million | $25.2 million | $12.8 million | $78.7 million |
| Diluted earnings (loss) per share | $(0.05) | $0.32 | $0.16 | $1.01 |
| Adjusted EBITDA attributable to Douglas Elliman | $0.1 million | $27.8 million | $32.1 million | $89.4 million |
Q3 operating margin was approximately -1.9%, compared with 7.2% a year earlier; nine-month operating margin was approximately 1.8%, compared with 8.1%. The filing reports a nine-month net income margin of 1.35%, versus 7.72% in 2021. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
- Cash and liquidity: Cash and cash equivalents were $192.7 million at September 30, 2022; cash, cash equivalents and restricted cash totaled $201.7 million. Cash from operating activities was $5.2 million for the nine months, versus $93.4 million a year earlier. Investing activities used $9.7 million and financing activities used $22.7 million; cash including restricted cash declined $27.2 million.
- Debt: Notes payable and other obligations totaled $3.3 million, of which $3.1 million was current. The remaining $3.125 million note principal was repaid in October 2022. Operating lease liabilities totaled approximately $146.2 million.
- Dividends: The company paid $12.1 million in dividends during the nine months and began quarterly dividends of $0.05 per share in March 2022.
- Other items: General and administrative expense increased to $33.5 million in Q3 from $22.3 million, including higher standalone-company, expansion and stock-compensation costs. The nine-month income tax expense rose to $8.2 million from $1.7 million, in part because the company became a full taxpayer after the separation. Q3 included a $0.3 million income tax benefit.
Material changes and management commentary
Q3 revenue fell 23.0% year over year; nine-month revenue declined 7.2%. Management attributed the declines primarily to lower existing-home sales revenue, citing lower listing inventory, financial-market volatility and higher mortgage rates. Q3 declines in existing-home brokerage revenue affected Florida, New York City, the Northeast and the West. For the nine-month period, declines in Florida and the Northeast were partly offset by growth in New York City, Texas and California.
Brokerage operating income fell to $1.5 million in Q3 from $25.5 million and to $37.6 million for the nine months from $82.9 million. Higher standalone public-company costs, market expansion, agent support, technology investment and non-cash stock compensation weighed on profitability. Corporate and Other recorded operating losses of $6.7 million in Q3 and $20.3 million for the nine months.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided. Management said cash, expected operating cash flows and financing proceeds, if available, should be sufficient for liquidity needs over the next 12 months. It expects to continue quarterly dividends of $0.05 per share, subject to board approval, implying approximately $16.2 million of annual dividends. Acquisitions or additional investments could reduce liquidity otherwise available.
Key risks include further mortgage-rate increases or reduced access to homebuyer financing, which could pressure home sales, transaction volume and potentially home prices; general economic and market conditions; competition; and regulatory or litigation changes involving MLS and National Association of Realtors practices and commission arrangements. The company is involved in ordinary-course litigation, mostly covered by insurance, and believes its resolution will not materially adversely affect its financial position, results or cash flows. PropTech investments had a carrying value of $13.8 million, with $1.2 million of unfunded commitments.
Important facts for investors to verify
- Whether transaction volumes, listing inventory and brokerage revenues continue to weaken as mortgage rates and market conditions change.
- Whether operating costs, including standalone-company expenses, agent support and technology spending, can be managed against lower revenue.
- Whether operating cash generation recovers from the sharp year-over-year decline and remains adequate for dividends and investment plans.
- The valuation and performance of PropTech investments, including Level 3 convertible securities valued using significant unobservable assumptions.
- The effects of post-separation tax treatment and the comparability of 2021 results, which reflect pre-separation arrangements and allocated costs.