Douglas Elliman is treading in troubled waters. But you wouldn’t know it from listening to Chairman Howard Lorber.
Residential brokerages have spent the last year holding on to their bottom lines while the industry is in a state of flux: home sales are constrained by high mortgage rates, brokerages agreed to massive settlements in an onslaught of antitrust litigation and impending regulatory changes are threatening how agents earn commissions.
But among publicly-traded firms, Elliman appears especially vulnerable, with mounting losses and a sharp valuation drop after its spin-off from parent company Vector Group in 2021.
Elliman executives have yet to chart a clear path back to the black or address how the firm plans to boost its stock price, which at around $1.11 a share is hovering dangerously close to delisting. Its market capitalization is now teetering around $100 million — far from more than $900 million during its solo public debut.
“My big thing with [Elliman] is that you have to show some sort of path toward break-even profitability,” said BTIG analyst Soham Bhonsle, who also covers Compass and Anywhere Real Estate.
Though Bhonsle pushed executives to outline their plan on the company’s latest earnings call, he was met with the same refrain the firm has repeated for the last year: cost cuts, cost cuts and more cost cuts.
“We’re not going to sit here and just keep it the way it is now and hope that the market changes,” Lorber assured him.
Between April and December 2023, the firm reduced operating expenses by more than $13 million. But even with the cuts, the brokerage is still losing money each quarter, and executives are tight-lipped about plans for the coming year.
“Absent a marked improvement in the overall market or clear steps to reach profitability, it may be difficult for the stock to work from here, in our view,” Bhonsle wrote in a report after the call.
Spin-off
Elliman was riding high when it debuted on the New York Stock Exchange in December 2021. (It wasn’t alone — more than 1,000 companies went public that year and in late 2020 as capital costs hit historically low levels.)
Low mortgage rates and skyrocketing demand boosted the firm’s coffers, with third-quarter revenues up 70 percent year-over-year to more than $350 million, and a net income of $25 million. The company had no debt, $200 million cash and a valuation consultant Steve Murray estimated to be around $850 million.
Elliman’s executives cast its break with Vector Group and its ties to cigarette manufacturing as a bet to free the brokerage up for a more profitable future.
“Tobacco has good, consistent cash flow, but there are still certain funds and institutions that won’t invest in it,” Lorber, then the CEO of Vector Group and Elliman chairman, said at the time.
But the parent company wasn’t Elliman’s only obstacle. The company only just turned a profit in 2018 and 2019, and like other brokerages, its net income plummeted in 2020 after the pandemic froze sales in the first half of the year.
Then, just three months after Elliman’s public play, the Federal Reserve started hiking interest rates, chilling the housing boom. Transactions stalled, listings froze and brokerages started losing money again.
By the third quarter of 2022, Elliman had reported its first net loss since going public. The firm’s stock price dropped to $3.83, then an all-time low, and Lorber bought 100,000 of its shares, in a move some characterized as a morale-boosting tactic after the firm lost top agents Tal and Oren Alexander and two executives to a rival brokerage in New York City.
Seven quarters later, the company still hasn’t turned a profit. It started narrowing its losses in 2023, bolstered by the Fed’s pledge to lower interest rates.
But the improvement was short-lived. The Fed stalled on its promise, and the market lost the momentum it had gained when rate cuts appeared on the horizon. Elliman started the year with a $42 million loss, compounded by its $17.75 million agreement to settle antitrust lawsuits over broker commissions.
But even without the settlement charge factored in, the company lost a considerable sum. It reported adjusted EBITDA — earnings before interest, taxes, depreciation and amortization — of negative $18.2 million, more than the $17.6 million loss it reported a year ago.
Top-heavy expenses
Elliman doubled down on its cost-cutting campaign last year after making sizable reductions in 2020. (It wasn’t alone: After a nine-figure loss in the fourth quarter of 2022, Anywhere last February vowed to reduce its expenses by another $200 million in 2023.)
So far, Elliman’s reductions have targeted corporate sponsorships, office space and staff, with the firm laying off 100 employees last year. The reductions included $7.4 million in general and administrative expenses, $2.1 million in sales and marketing expenses and $1.3 million in operations and support expenses.
In early 2023, Lorber also indicated the firm planned not to renew a “very expensive” lease for its property management division at 675 Third Avenue.
“We just have to focus on getting the business to make money for the shareholders and not wait and worry about where the volume is at any particular point,” Lorber said during Elliman’s first-quarter earnings call in May. “We want to keep trimming down the business until we really can’t anymore.”
But the campaign to reduce expenses didn’t cut raises and bonuses for executives at the top of the firm, according to the company’s amended annual report. Excluding stock awards, Lorber earned more than $4.7 million last year, up by more than $600,000 from 2022.
His compensation boost was due in part to a 10 percent raise in his base salary, included in his contract. Other executives, including chief financial officer Richard Lampen and chief technology officer David Ballard, received 5 percent raises.
President and CEO of the brokerage Scott Durkin’s salary remained unchanged from 2022. Durkin received a $250,000 bonus — less than half of his bonus the previous year. Ballard’s bonus was the same as in 2022.
While the firm slashed Durkin’s bonus, both Lorber and Lampen were awarded more than the previous year under the company’s non-equity incentive plan, which takes into account performance metrics like adjusted EBITDA and transaction volume.
The firm’s adjusted EBITDA calculation to determine 50 percent of Lorber and Lampen’s bonuses differs from the one it uses on its earnings report. The company excluded some corporate-level expenses and losses tied to expansion into new markets, allowing executives to meet the minimum threshold of negative $20 million to receive this portion of their bonus. Without the subtracted metrics, the adjusted EBITDA would have been outside of the minimum threshold.
A spokesperson for Elliman declined to comment on executive compensation.
Waiting for the upswing
A meaningful uptick in home sales remains uncertain, with interest rate cuts likely delayed until the end of this year or early 2025 and an approaching presidential election expected to temporarily restrain home sales.
One of Elliman’s challenges are the regions where the firm operates. The company bet big on its business in Florida and Texas, heralded as lands of opportunity with luxury markets and prices boosted by the pandemic-era housing boom.
“The future is here,” one of Elliman’s top brokers, Fredrik Eklund, said last year at The Real Deal’s Showcase + Forum in South Florida. Eklund, who leads the top-producing Eklund-Gomes Team with John Gomes, moved from Los Angeles to Miami last year to support his business “expanding quickly” in the city.
These states aren’t immune to the macroeconomic headwinds, but are yielding more returns than the company’s other core markets like New York City. Revenue last quarter declined across the Big Apple but expanded in Florida and the West, which includes markets in California and Las Vegas.
“We want to keep trimming down the business until we really can’t anymore”
But operating in these markets comes at a cost. Commission splits are significantly higher in Florida, California and Texas. The company’s real estate commission expense accounted for more than 74 percent of revenue in the first quarter, up from 73 percent in the same period last year.
Reducing commission costs is a tall order. Competition for top agents — and their high-net-worth clients — is fierce, and brokerages that want to retain those agents have to pay up.
The company also touts its development marketing business, with a pipeline of projects totaling $25 billion in gross transaction value. There is $15 billion in Florida alone, where Elliman heads sales at more than 20 new developments.
Some of its banner projects include Related Group, Two Roads Development and Rockpoint’s Rivage, a 61-unit tower in Bal Harbour with prices ranging from $8 million to a $65 million penthouse. The Eklund-Gomes team is leading sales at Witkoff and Monroe Capital’s Shore Club and the Ritz-Carlton Residences South Beach.
But new developments take years to yield revenue, and the income generated in a given year likely won’t be enough to move the needle. Agents also earn a smaller percentage of commission on new-development sales than on resales, limiting the revenue the firm will glean from the projects.
“That’s just kind of pie in the sky,” McKenna said of the potential for new-development marketing to meaningfully help Elliman’s bottom line in the short term. “Look at how much they’ve lost.”
The company does have options to right the ship. To boost its share price, Matt Franz, founder of investment advisor Eagle Point Capital, pointed to a reverse stock split, which would consolidate shares and alleviate the threat of delisting.
After the spinoff announcement, some questioned whether the move was a play to attract a buyer for Elliman, though a source at the firm denied those plans at the time.
BTIG analyst Bhonsle said he couldn’t speculate on whether Elliman’s current financial position rendered the company ripe for acquisition, but the decision comes down to Lorber.
“To have a takeover, you need a willing seller,” Bhonsle said. “How willing is Howard to sell?”