Andrew Bary
Real-estate broker Douglas Elliman's stock amounts to a cheap fixer-upper that looks like a good deal for investors.
Douglas Elliman is a leading luxury residential real estate broker with 7,000 agents and top positions in expensive markets such as Miami Beach, the Hamptons, Aspen, and Palm Beach, home to President elect Donald Trump.
The company's stature hasn't helped its shares, which are down 80% to around $1.90 since a spinoff from cigarette maker Vector Group at the end of 2021.
The stock looks inexpensive and could see a revival after naming a new CEO and putting cost-cutting initiatives in place. Greater activity in the high-end real estate market, which is possible in the year ahead, would help as well.
Despite its outsize position in key markets and its standing as the fifth-largest real estate broker nationwide, Douglas Elliman is a microcap stock with virtually no Wall Street coverage and a market capitalization of under $200 million, compared with $3.6 billion for industry leader Compass.
The company has staying power. It has a solid balance sheet with total cash and equivalents of $151 million on Sept. 30 and net cash -- cash less debt -- of around $100 million, or more than $1 share.
Douglas Elliman operates in six main markets, New York City, New York state (including Long Island and the Hudson Valley), Colorado, Texas, and Florida. The average selling price on homes it brokered was $1.6 million this year, tops among its peers.
The stock is depressed because Douglas Elliman has operated in the red for the past two years and has burned through more than $100 million in cash since the Vector spinoff. But losses have moderated more recently and totaled $7 million before taxes in the third quarter.
Douglas Elliman lost $43 million after taxes in 2023 and $6 million in 2022 but can be profitable. It had net income of $99 million in 2021, when real estate volumes were strong, which was why the stock made its debut near $10 a share in early 2022. Through the first nine months of 2024, it lost about $35 million from operations before taxes and a one-time litigation charge.
"I see two large tailwinds for Douglas Elliman, namely cost controls and the cycle. And I see a compelling valuation in absolute and relative terms," says Bradley Tirpak, a Douglas Elliman shareholder and small-cap company activist who wrote a public letter in July criticizing the company's executive pay plan.
Douglas Elliman has generated unfavorable publicity about its work culture, including allegations of sexual assault against two former brokers that were described in a recent article in The Wall Street Journal.
Against that backdrop, the company in October named a new CEO, board member Michael Liebowitz, 55, who replaced Howard Lorber, 76, who retired after running the company since the spinoff. Lorber remains CEO of Vector Group.
On the company's third-quarter conference call in early November, Liebowitz vowed to "create a stronger culture of collaboration, respect and integrity."
The company, which is more than a century old, is cutting expenses, which were down $12 million in the first nine months of 2024 relative to the same period a year earlier. It also aims to boost revenue by expanding its property management business and potentially entering related businesses, like staging and insurance brokerage.
"This approach will transform Douglas Elliman into a company with a diversified revenue stream and a sustainable growth engine," Liebowitz said on the recent call.
Lorber's retirement will save the company money because Liebowitz is expected to earn appreciably less than Lorber, who received over $8 million in total compensation last year. The company will save another $2 million a year by ending a private-jet agreement with Vector.
The company's annualized revenue is running at about $1 billion based on results through the third quarter and it pays about 80% of that to its agents in commissions.
Tirpak says there is room to cut costs with operating expenses as a percentage of revenue much higher than at Compass.
"The valuation of DOUG is also very compelling," Tirpak tells Barron's in an email. He compares it to rivals like Compass, Re Max Holdings, and Anywhere Real Estate, which owns Corcoran Group, a competitor of Douglas Elliman in some of its high-end markets.
Compass, for example, has about $6 billion of annual sales and a market value of more than $3.5 billion, giving it price/sales ratio of about 0.6. Douglas Elliman has a price/sales ratio of just 0.1 based on its enterprise value (market value less net cash).
Existing home sales are running at a rate of about four million units annually and are probably closer to the bottom of the cycle than the top. Douglas Elliman has said a lack of inventory has depressed sales in some key markets.
Douglas Elliman could offer investors several ways to win: successful cost cutting to restore profitability, a more active residential real estate market, and a potential takeover.
One possible buyer is Berkshire Hathaway, which operates Home Services of America, one of the largest residential real estate brokerage firms in the country.
Write to Andrew Bary at andrew.bary@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 18, 2024 02:30 ET (07:30 GMT)
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