# Douglas Elliman Inc. (DOUG) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Douglas Elliman Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1878897/000187889723000005/doug-20221231.htm
Accession: 0001878897-23-000005
Filing date: 2023-03-16
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/DOUG/
All MD&A years: /company/DOUG/mda/
Previous year: /company/DOUG/mda/fy2021/ (FY 2021)
Next year: /company/DOUG/mda/fy2023/ (FY 2023)

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(All dollar amounts included herein are presented in thousands, except as otherwise noted)

The following discussion should be read in conjunction with the combined consolidated financial statements and corresponding notes, elsewhere in this Form 10-K. 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 a number of important factors, including those factors discussed under “Risk Factors” 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

Douglas Elliman Inc. is a holding company and is 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.

See Item 1. “Business” for detailed overview and description of our principal operations.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from our management’s perspective. Our MD&A is organized as follows:

Business Overview. This section provides a general description of our business, as well as other matters that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.

Critical Accounting Estimates. This section includes a discussion of accounting estimates considered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application. In addition, our significant accounting estimates, including our critical accounting estimates, are discussed in the notes to our audited combined consolidated annual financial statements included elsewhere in this Form 10-K.

Results of Operations. This section provides an analysis of our results of operations for the years ended December 31, 2022 and 2021. Certain discussions of the changes in our results of operations and liquidity and capital resources from the year ended December 31, 2021 as compared to the year ended December 31, 2020 have been omitted from this Form 10-K and may be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission on March 31, 2022.

Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, an analysis of our cash flows for the years ended December 31, 2022 and 2021, as well as certain contractual obligations and off-balance sheet arrangements that existed at December 31, 2022.

Business Overview

Since its inception in 1911, Douglas Elliman has challenged the status quo of the real estate industry. We were founded on Douglas L. Elliman’s vision that New Yorkers would shift their preference for traditional homes to favor luxury apartments that were both sold and managed by comprehensive real estate companies. More than a century later, the Douglas Elliman brand is still associated with service, luxury and forward thinking — our markets are primarily international finance and technology hubs that are densely populated and offer housing inventory at premium price points. The average transaction value of a home we sold in 2022 was approximately $1.62 million — significantly higher than our principal competitors.

30

Table of Contents

We are building on our record of innovation. Douglas Elliman is focused on digitizing, integrating and simplifying real estate activities for agents and elevating their clients’ experiences. We are bringing innovative, technology-driven PropTech solutions to Douglas Elliman by adopting new PropTech solutions for agents and their clients and also investing in select PropTech opportunities through our subsidiary, New Valley Ventures LLC. Our model is to source and use best-of-breed products and services that we believe will increase our efficiency. In addition to entering into business relationships with PropTech companies, as described further below, we are committed to creating over time a portfolio of PropTech companies that, through our business and investment relationship, have access to our agents and their clients, as well as our knowledge and experience, to grow their own businesses, while benefiting our operations. This keeps Douglas Elliman and our agents on the cutting edge of the industry with innovative solutions and services that can be integrated into our technology, while also remaining asset-light. Furthermore, we maintain upside potential in the success of our PropTech partners in which we invest through minority stakes in their capital structures.

Douglas Elliman is well positioned to capitalize on opportunities in the U.S. residential real estate market with a leading luxury brand and a comprehensive suite of technology-enabled real estate services and investments. Despite various “agentless” models such as “iBuying,” approximately 86% of buyers and sellers were assisted by a real estate agent or broker when purchasing or selling their home between July 2021 and June 2022, according to the National Association of Realtors (“NAR”), highlighting the central role agents continue to play in real estate transactions. Agents are able to generate significant repeat business from clients and referrals, with 63% of home sellers and 50% of home buyers between July 2021 and June 2022 choosing to work with an agent they had used in the past or through a referral, according to the NAR. Repeat business, as well the ability to provide ancillary services, allows agents to extend their client relationships and generate significant lifetime value.

Industry trends in 2022. After a strong 2021, when existing home sales reported by the NAR reached their highest level since 2006, the residential real estate brokerage industry encountered significant challenges in 2022. These challenges began during the second quarter of 2022 and included, among other things, a reduced inventory of homes available for sale as well as higher mortgage rates. According to the NAR, sales of existing homes declined by 34.0% in December 2022 from December 2021 and total homes sold in 2022 was the lowest since 2014. By comparison, our Gross Transaction Value declined by 16.2% in 2022 compared to 2021, from $51,200,000 in 2021 to $42,900,000 in 2022, reflecting the relative strength of the luxury markets in which we operate. In addition, our transactions of homes sold declined by 18% to 26,573 in 2022 from 32,400 in 2021. In the fourth quarter of 2022, our Gross Transaction Value and transactions of homes sold declined by approximately 40% and 43%, respectively, compared to the 2021 fourth quarter. We anticipate that the results for the first quarter of 2023 will reflect these same trends of significant year over year declines and the NAR and other real estate industry consortiums are forecasting continued challenges for the U.S. residential real estate market in 2023. We have maintained stable agent retention and our Principal Agents increased to 5,407 as of December 31, 2022 from 5,189 as of December 31, 2021. See Item 7, “Key Business Metrics and Non-GAAP Financial Measures.”

Despite these recent changes, we believe our competitive advantages in the luxury markets distinguish us from our competitors and our comprehensive suite of real estate solutions, our industry-leading brand name, and our talented team of employees and agents set us apart in the industry. As the real estate brokerage industry evolves and addresses challenges related to constrained inventory of homes as well as higher mortgage rates, we continue to pursue profitable growth opportunities through the expansion of our footprint, investments in cutting-edge PropTech companies through New Valley Ventures, continued recruitment of best-in-class talent, acquisitions (acqui-hires), and operational efficiencies. We will continue to employ a disciplined capital allocation strategy aimed at generating sustainable long-term value for our stockholders.

Distribution and Basis of Presentation

On December 29, 2021, Vector Group distributed all our common stock to its stockholders. Prior to the Distribution, we were a subsidiary of Vector Group and incurred indirect general and administrative costs allocated to us by Vector Group for certain functions and services including, but not limited to, executive office, finance and other administrative support. These expenses were allocated to us based on direct usage, when identifiable. After the Distribution, we are incurring expenses necessary to operate a standalone public company, including pursuant to a Transition Services Agreement entered into with Vector Group in connection with the Distribution.

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 and Adjusted EBITDA attributed to Douglas Elliman Margin and financial measures for the year ended December 31, 2022 (“Non-GAAP Financial Measures”), which are financial measures not prepared in accordance with GAAP.

31

Table of Contents

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021"],["Key Business Metrics"],["Total transactions (1)","26,573","","","32,400"],["Gross transaction value (in billions) (2)","$","42.9","","","$","51.2"],["Average transaction value per transaction (in thousands) (3)","$","1,616.3","","","$","1,580.0"],["Number of Principal Agents (4)","5,407","","","5,189"],["Annual Retention (5)","87","%","","94","%"],["Net (loss) income attributed to Douglas Elliman Inc.","$","(5,622)","","","$","98,838"],["Net (loss) income margin","(0.49)","%","","7.30","%"],["Non-GAAP Financial Measures"],["Adjusted EBITDA attributed to Douglas Elliman Inc.","$","14,951","","","$","110,699"],["Adjusted EBITDA margin attributed to Douglas Elliman Inc.","1.30","%","","8.18","%"]]
[[/GREPCENT_TABLE]]

_____________________________

(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. Total transactions by quarter for the year ended December 31, 2022 were 7,212 for the three months ended March 31, 2022, 7,789 for the three months ended June 30, 2022, 6,796 for the three months ended September 30, 2022 (previously reported 7,212) and 4,776 for the three months ended December 31, 2022.

(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. Gross transaction value by quarter for the year ended December 31, 2022 was $11.7 billion for the three months ended March 31, 2022, $13.6 billion for the three months ended June 30, 2022, $10.2 billion for the three months ended September 30, 2022 (previously reported $11.0 billion) and $7.5 billion for the three months ended December 31, 2022.

(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.

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 have been provided in the table below.

32

Table of Contents

Computation of Adjusted EBITDA attributed to Douglas Elliman

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021"],["Net (loss) income attributed to Douglas Elliman Inc.","$","(5,622)","","","$","98,838"],["Interest income, net","(1,779)","","","(83)"],["Income tax expense","6,503","","","2,133"],["Net loss attributed to non-controlling interest","(777)","","","(186)"],["Depreciation and amortization","8,012","","","8,561"],["Stock-based compensation (a)","11,138","","","\u2014"],["Equity in losses from equity method investments (b)","563","","","278"],["Change in fair value of contingent liability","\u2014","","","1,647"],["Other, net","(3,429)","","","(529)"],["Adjusted EBITDA","14,609","","","110,659"],["Adjusted EBITDA attributed to non-controlling interest","342","","","40"],["Adjusted EBITDA attributed to Douglas Elliman","$","14,951","","","$","110,699"],["Real estate brokerage segment"],["Operating income","$","21,993","","","$","102,098"],["Depreciation and amortization","8,012","","","8,561"],["Stock-based compensation","4,195","","","\u2014"],["Adjusted EBITDA","34,200","","","110,659"],["Adjusted EBITDA attributed to non-controlling interest","342","","","40"],["Adjusted EBITDA attributed to Douglas Elliman","$","34,542","","","$","110,699"],["Corporate and other segment"],["Operating loss","$","(26,534)","","","$","\u2014"],["Stock-based compensation","6,943","","","\u2014"],["Adjusted EBITDA attributed to Douglas Elliman","$","(19,591)","","","$","\u2014"],["Total adjusted EBITDA attributed to Douglas Elliman","$","14,951","","","$","110,699"]]
[[/GREPCENT_TABLE]]

_____________________________

(a)Represents amortization of stock-based compensation. $4,195 is attributable to the Real estate brokerage segment and $6,943 is attributable to the Corporate and other segment.

(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.

Critical Accounting Estimates

General. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Significant estimates subject to material changes in the near term include revenue recognition, impairment charges, valuation of intangible assets, deferred tax liabilities, and valuation of investments, including other-than-temporary impairments to such investments. Actual results could differ from those estimates.

Revenue Recognition. Revenue is measured based on a consideration specified in a contract with a customer and excludes any sales incentives. Revenue is recognized when (a) an enforceable contract with a customer exists, that has commercial substance, and collection of substantially all consideration for services is probable; and (b) the performance obligations to the customer are satisfied either over time or at a point in time.

Real estate commissions earned by our Real Estate brokerage businesses are recognized as revenue when the real estate sale is completed or lease agreement is executed, which is the point in time that the performance obligation is satisfied. Any commission and other payments received in advance are deferred until the satisfaction of the performance obligation.

33

Table of Contents

Corresponding agent commission expenses, including any advance commission or other direct expense payments, are deferred and recognized as cost of sales concurrently with related revenues.

Contracts in our development marketing business provide us with the exclusive right to sell units in a subject property for a commission fee per unit sold calculated as a percentage of the sales price of each unit. Accordingly, a performance obligation exists for each unit in the development marketing property under contract, and a portion of the total contract transaction price is allocated to and recognized at the time each unit is sold.

Under development marketing service arrangements, dedicated staff are required for a subject property and these costs are typically reimbursed from the customer through advance payments that are recoupable from future commission earnings. Advance payments received and associated direct costs paid are deferred, allocated to each unit in the subject property, and recognized at the time of the completed sale of each unit.

Development marketing service arrangements also include direct fulfillment costs incurred in advance of the satisfaction of the performance obligation. We capitalize costs incurred in fulfilling a contract with a customer if the fulfillment costs 1) relate directly to an existing contract or anticipated contract, 2) generate or enhance resources that will be used to satisfy performance obligations in the future, and 3) are expected to be recovered. These costs are amortized over the estimated customer relationship period which is the contract term. We use an amortization method that is consistent with the pattern of transfer of goods or services to its customers by allocating these costs to each unit in the subject property and expensing these costs as each unit sold is closed over the contract.

Commission revenue is recognized at the time the performance obligation is met for our Real Estate commercial leasing contracts, which is when the lease agreement is executed, as there are no further performance obligations, including any amounts of future payments under extended payment terms.

Our Real Estate property management revenue arrangements consist of providing operational and administrative services to manage a subject property. Fees for these services are typically billed and collected monthly. Property management service fees are recognized as revenue over time using the output method as the performance obligations under the customer arrangement are satisfied each month. Our Real Estate title insurance commission fee revenue is earned when the sale of the title insurance is completed, which corresponds to the point in time when the underlying real estate sale transaction closes and the payment is received.

Accounting for Leases. Under Accounting Standards Committee (“ASC”) 842, we determine if an arrangement is a lease at contract inception. At lease commencement, we record and recognize right-of-use (“ROU”) assets for the lease liability amount and initial direct costs incurred, offset by lease incentives received. We record lease liabilities for the net present value of future lease payments over the lease term. The discount rate we use is generally our estimated incremental borrowing rate unless the lessor’s implicit rate is readily determinable. We calculate discount rates periodically to estimate the rate we would pay to borrow the funds necessary to obtain an asset of similar value, over a similar term, with a similar security. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We recognize operating lease expense on a straight-line basis over the lease term. Operating leases are included in operating lease ROU assets and lease liabilities on the combined consolidated balance sheets.

Stock-Based Compensation. In connection with the Distribution, we granted stock-based compensation to employees and recognized expense on such grants. Our stock-based compensation uses a fair-value-based method to recognize non-cash compensation expense for share-based transactions. Under the fair value recognition provisions, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award.

Current Expected Credit Losses. We are exposed to credit losses for various amounts due from real estate agents, which are included in other current assets on the combined consolidated balance sheets, net of an allowance for credit losses. We historically estimated our allowance for credit losses on receivables from agents based on an evaluation of aging, agent sales in pipeline, any security, specific exposures, and historical experience of collections from the individual agents. Based on our historical credit losses on receivables from agents, current and expected future market trends, it was determined that the requirements of Accounting Standards Update (“ASU”) No. 2016-13 did not result in a material impact on our allowance for credit losses as of January 1, 2020 of $6,132, we estimated that the credit losses for these receivables were $10,916 and $8,607 at December 31, 2022 and 2021, respectively.

Goodwill and Indefinite Life Assets. Goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment on an annual basis, or whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. We follow ASC 350, Intangibles — Goodwill and Other, and subsequent updates including ASU 2011-08, Testing Goodwill for Impairment and ASU 2017-14, Simplifying the Test for Goodwill Impairment. The amendments permit entities to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that a reporting unit’s

34

Table of Contents

fair value is less than its carrying value or choose to bypass the optional qualitative assessment, we will then assess recoverability by comparing the fair value of the reporting unit to our carrying amount; otherwise, no further impairment test would be required. The fair value of the intangible asset associated with the Douglas Elliman trademark is determined using a “relief from royalty payments” method. This approach involves two steps: (i) estimating reasonable royalty rates for its trademark associated with the Douglas Elliman trademark and (ii) applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of the trademark. As discussed in Note 9 to our combined consolidated financial statements, during the first quarter of 2020, we performed quantitative assessments of our goodwill and our trademark intangible asset in conjunction with our quarterly review for indicators of impairment. The quantitative assessments resulted in impairment charges to goodwill of $46,252 and to the trademark intangible asset of $12,000. We performed a qualitative assessment for the year ended December 31, 2022, which did not result in additional impairment charges related to our goodwill or trademark.

Income Taxes. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. Therefore, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time and, as a result, changes in our subjective assumptions and judgments may materially affect amounts recognized in our combined consolidated financial statements.

Before the Distribution (and during the year ended December 31, 2021), we calculated our provision for income taxes by using a separate-return method and elected not to allocate tax expense to single-member limited liability companies or partnerships that did not incur income tax liability because they were not severally liable for the taxes of their owners. Before the Distribution, Douglas Elliman of California, Inc. and DER Holdings II LLC were the only two entities taxed as corporations for U.S. Income Tax purposes while the remaining entities were pass through entities for federal income tax purposes. Therefore, no income tax expense was allocated to entities other than DER Holdings II LLC, Douglas Elliman of California, Inc. and, for purposes of New York City Unincorporated Business Tax (“UBT”) only, Douglas Elliman Realty, LLC.

After the Distribution, we calculate our provision for income taxes based upon the taxable income attributable to our activity and the activity of our subsidiaries because after the Distribution, we are taxed as a corporation for purposes of U.S. and state and local income taxes. Therefore, after the Distribution, we have recorded an income tax provision at current income tax rates.

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 combined consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K.

The primary components of our operating expenses, the changes in which are described in the following discussion of our results of operations, are defined below:

•Sales and marketing. Sales and marketing expense consists primarily of marketing and advertising expenses, compensation and other personnel-related costs for employees supporting sales, marketing, expansion and related functions, occupancy-related costs and agent acquisition incentives.

•Operations and support. Operations and support expense consists primarily of compensation and other personnel-related costs for employees supporting agents, third-party consulting and professional services costs (not included in general and administrative or technology), fair value adjustments to contingent consideration for our acquisitions and other related expenses.

•General and administrative. General and administrative expense consists primarily of compensation, stock-based compensation expense and other personnel-related costs for executive management and administrative employees, including finance and accounting, legal, human resources and communications, the occupancy costs for our headquarters and other offices supporting our administrative functions and, after the Distribution (beginning in 2022), include transition services paid to our former parent, Vector Group, for the use of office space and employees, professional services fees for legal and finance, insurance expenses and talent acquisition expenses.

•Technology. Technology expense consists primarily of compensation and other personnel-related costs for employees in the product, engineering and technology functions, website hosting expenses, software licenses and equipment, third-party consulting costs, data licenses of PropTech and other related expenses associated with the implementation of our technology initiatives.

35

Table of Contents

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The following table sets forth our revenue and operating (loss) income by segment for the year ended December 31, 2022 compared to the year ended December 31, 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["","(Dollars in thousands)"],["Revenues by segment:"],["Real estate brokerage segment","$","1,153,177","","","$","1,353,138"],["Operating (loss) income by segment:"],["Real estate brokerage segment","$","21,993","","","$","102,098"],["Corporate and other segment","(26,534)","","","\u2014"],["Total operating (loss) income","$","(4,541)","","","$","102,098"],["Real estate brokerage segment"],["Operating income","$","21,993","","","$","102,098"],["Depreciation and amortization","8,012","","","8,561"],["Stock-based compensation","4,195","","","\u2014"],["Adjusted EBITDA","34,200","","","110,659"],["Adjusted EBITDA attributed to non-controlling interest","342","","","40"],["Adjusted EBITDA attributed to Douglas Elliman","$","34,542","","","$","110,699"],["Corporate and other segment"],["Operating loss","$","(26,534)","","","$","\u2014"],["Stock-based compensation","6,943","","","\u2014"],["Adjusted EBITDA attributed to Douglas Elliman","$","(19,591)","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

Year ended December 31, 2022 Compared to Year ended December 31, 2021

Revenues. Our revenues were $1,153,177 for the year ended December 31, 2022 compared to $1,353,138 for the year ended December 31, 2021. The $199,961 (14.8%) decline in revenues was primarily due to a $199,961 decline in the Real Estate Brokerage segment’s revenues because of lower 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. These factors were partially offset by increased revenues from the Texas market, which we began consolidating in August 2021.

Operating expenses. Our operating expenses were $1,157,718 for the year ended December 31, 2022 compared to $1,251,040 for the year ended December 31, 2021. The decline of $93,322 was due primarily to declines in real estate brokerage commissions of $148,720. This was offset by increases in expenses associated with Douglas Elliman operating as a standalone public company after the Distribution, which occurred on December 29, 2021, as well as increased expenses associated with our expansion into new markets and enhancements to our agent-facing technology platform.

Operating (loss) income. Operating loss was $4,541 for the year ended December 31, 2022 compared to operating income of $102,098 for the year ended December 31, 2021. The $106,639 decline in operating income was due to the net impact of declines in commission and other brokerage revenues, Douglas Elliman operating as a standalone public company after the Distribution, incremental expenses associated to support our business growth and agents as well as non-cash stock compensation expense.

Other income (expenses). Other income was $4,645 for the year ended December 31, 2022 compared to other expenses of $1,313 for the year ended December 31, 2021. For the year ended December 31, 2022, other income primarily consisted of investment and other income, primarily associated with our PropTech investments of $2,839, income from the indemnification by Vector Group under the Tax Disaffiliation Agreement of $589, and interest income, net of $1,779. This was offset by equity losses from equity method investments of $563.

36

Table of Contents

Income before provision for income taxes. Income before income taxes was $104 and $100,785 for the years ended December 31, 2022 and 2021, respectively.

Income tax expense. Income tax expense was $6,503 and $2,133 for the years ended December 31, 2022 and 2021, respectively. The difference is primarily related to income tax expense before and after the Distribution offset by lower income before provision for income taxes for the year ended December 31, 2022. Specifically, income tax expense calculated before the Distribution when we used a separate return method for the year ended December 31, 2021 resulted in a lower income tax rate in the 2021 period and is described below.

After the Distribution, we calculate our provision for income taxes based upon the taxable income attributable to our activity and the activity of our subsidiaries.

Before the Distribution during the year ended December 31, 2021, we calculated our provision for income taxes by using a separate-return method and elected not to allocate tax expense to single-member limited liability companies or partnerships that did not incur income tax liability because they were not severally liable for the taxes of their owners. Before the Distribution, Douglas Elliman of California, Inc. and DER Holdings II LLC were the only two entities taxed as corporations for U.S. Income Tax purposes while the remaining entities were pass through entities for federal income tax purposes. Therefore, no income tax expense was allocated to entities other than DER Holdings II LLC, Douglas Elliman of California, Inc. and, for purposes of New York City UBT only, Douglas Elliman Realty, LLC.

Real Estate Brokerage.

The following table sets forth our combined consolidated statements of operations data for the Real Estate Brokerage segment for the year ended December 31, 2022 compared to the year ended December 31, 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["","(Dollars in thousands)"],["Revenues:"],["Commissions and other brokerage income","$","1,099,885","","95.4%","","$","1,292,416","","95.5%"],["Property management","36,022","","3.1%","","37,345","","2.8%"],["Other ancillary services","17,270","","1.5%","","23,377","","1.7%"],["Total revenues","$","1,153,177","","100%","","$","1,353,138","","100%"],["Operating expenses:"],["Real estate agent commissions","$","836,803","","72.6%","","$","985,523","","72.8%"],["Sales and marketing","85,763","","7.4%","","77,174","","5.7%"],["Operations and support","72,946","","6.3%","","71,641","","5.3%"],["General and administrative","104,887","","9.1%","","92,798","","6.9%"],["Technology","22,773","","2.0%","","15,343","","1.1%"],["Depreciation and amortization","8,012","","0.7%","","8,561","","0.6%"],["Operating income","$","21,993","","1.9%","","$","102,098","","7.5%"]]
[[/GREPCENT_TABLE]]

Revenues. Our revenues were $1,153,177 for the year ended December 31, 2022 compared to $1,353,138 for the year ended December 31, 2021. The decline of $199,961 (14.8%) was primarily related to a decline of $192,531 in our commission and other brokerage income because of lower 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. These factors were partially offset by increased revenues from the Texas market, which we began consolidating in August 2021. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations Business - Overview - Industry Trends in 2022.”

Our revenues from commission and other brokerage income were $1,099,885 for the year ended December 31, 2022 compared to $1,292,416 for the year ended December 31, 2021, a decline of $192,531. In 2022, our commission and other brokerage income generated from the sales of existing homes declined by $91,738 in our Florida market, $41,263 in the Northeast region, which excludes New York City, $32,594 in New York City and $16,394 in the West region (which includes $29,499 related to our Texas market, which we began consolidating in August 2021), in each case compared to the 2021 period. In addition, our revenues from DEDM declined by $10,542 in 2022 compared to 2021.

Operating Expenses. Our operating expenses were $1,131,184 for the year ended December 31, 2022 compared to $1,251,040 for the year ended December 31, 2021, a decline of $119,856, due primarily to declines in real estate brokerage

37

Table of Contents

commissions. This was offset by increases in sales and marketing, general and administrative and technology expenses. The primary components of operating expenses are described below.

Real Estate Agent Commissions. As a result of declines in commissions and other brokerage income, our real estate agent commissions expense was $836,803 for the year ended December 31, 2022 compared to $985,523 for the year ended December 31, 2021, a decline of $148,720 (15.1%). Real estate agent commissions expense, as a percentage of revenues, decreased to 72.6% for the year ended December 31, 2022 compared to 72.8% for the year ended December 31, 2021.

Sales and Marketing. Sales and marketing expenses were $85,763 for the year ended December 31, 2022 compared to $77,174 for the year ended December 31, 2021. The increase was primarily due to additional promotional sponsorships and events in the 2022 period because of the reopening of the economy.

Operations and support. Operations and support expenses were $72,946 for the year ended December 31, 2022 compared to $71,641 for the year ended December 31, 2021. The increase related increased compensation expense associated with additional personnel required to support our business growth and agents as well as wage inflation and non-cash stock compensation partially offset by lower incentive compensation expense in the 2022 period.

General and administrative. General and administrative expenses were $104,887 for the year ended December 31, 2022 compared to $92,798 for the year ended December 31, 2021. The increase in expenses was primarily because of non-cash stock compensation, the expansion into the Texas region and incremental expenses to support business growth and wage inflation.

Technology. Technology expenses were $22,773 for the year ended December 31, 2022 compared to $15,343 for the year ended December 31, 2021. The increase in the 2022 period was related to technology enhancements, incremental refinements and additional functionality of our cloud-based “MyDouglas” agent portal that included social media grading widget via Real Grader, new enhanced video capabilities from Videobolt, and newly introduced Tongo and AdPro. Tongo enables our agents to obtain instant access to future income from pending deals. AdPro is an easy-to-navigate interface to promote properties on social media platforms. There was also increased utilization of our StudioPro Customer Relationship Management marketing application as well as transaction system and the integration of our newly announced Elliman Showroom, a complimentary personal assistant platform that will guide home purchasers through a high-touch and streamlined move-in process.

Operating income. Operating income was $21,993 for the year ended December 31, 2022 compared to $102,098 for the year ended December 31, 2021. The decline in operating income is primarily associated with the decline in revenues, expenses associated with non-cash stock compensation, business growth, agent support, expansion into new markets and technology.

Corporate and Other.

Corporate and Other loss. The operating loss at the Corporate and Other segment was $26,534 for the year ended December 31, 2022 due to expenses, including non-cash stock compensation, associated with Douglas Elliman operating as a standalone publicly traded company after the Distribution.

Summary of PropTech Investments

As of December 31, 2022, New Valley Ventures had investments (at a carrying value) of approximately $14.8 million in PropTech companies. This amounts to approximately 3% of the value of Douglas Elliman’s total assets, which totaled approximately $550 million, as of December 31, 2022. As of December 31, 2022 our PropTech investments include:

■Rechat: a lead-to-close fully-mobile technology dashboard for real estate agents including marketing, customer relationship management and transaction-management software. Douglas Elliman has a multi-year services agreement with Rechat for its agents, who are increasingly requesting and requiring superior access to technology and back-office support services. The Rechat technology is a key element of MyDouglas, Douglas Elliman’s primary agent portal designed to be our agents’ technology front door, and StudioPro, the cloud-based agent portal and marketing tool recently launched by Douglas Elliman that helps integrate all agent resources in one user-friendly suite.

■Purlin: an automated intelligence platform to aid in home buying, an agent “paid social media” integration in MyDouglas and Portfolio Escrow client and agent portals that also integrate with MyDouglas.

■Humming Homes: a tech-enabled home management service that is creating a new category of end-to-end home management. It has built a solution that provides single-family homeowners with a digital experience and offers a dedicated in-person home management team with a single point of contact and 24/7 support. The service employs data and insights to avoid reactive and expensive home maintenance issues. The investment will complement Douglas Elliman’s business in the Hamptons and align Humming Homes’ geographical growth with Douglas Elliman’s footprint in locations such as Aspen, Florida and Southern California.

38

Table of Contents

■MoveEasy: a client- and customer-facing digital concierge service designed to assist clients and customers moving into and “setting up” their new homes, while offering additional services to maintain their homes. In partnership with residential real estate brokerages, MoveEasy is delivered in a white-labeled format that features the name and contact information of the selling agent.

■Fyxify: a tech-enabled platform that utilizes direct scheduling and operating technology to avoid the inefficiencies of home repairs (for example: calling around, mystery repair costs and wasting time).

■EVPassport: an entity that offers complete electronic vehicle charging solutions including hardware and software.

■Bilt: a leading loyalty program and co-branded credit card for renters to earn points on their rent payments. Douglas Elliman has joined the Bilt Rewards Alliance, a network of more than 2 million rental units across the country where renters can enroll in the loyalty program to earn points on rent paid. This platform enhances Douglas Elliman’s suite of offerings for both the renters and landlords it represents.

■Persefoni AI: a software-as-a-service (“SaaS”) platform built to enable enterprises of all sizes to measure their carbon footprint accurately, dynamically, and regularly across all operations.

■Envoy: a shared mobility company that sets up fleets of electric vehicles that can be shared by residents of a condominium development, hotel, or shared space.

■Audience: a subscription-based platform built around proprietary robotic arms that generate hand-written notes on behalf of sales-oriented professionals.

■Tongo: a financial program that gives real estate agents instant access to future commissions up to 60 days before closing.

■Guest House: a tech-enabled company focused on the home staging market.

■Alpaca: investment in Getaway House, Inc., a start-up company that provides cabin rental services in rural areas throughout the United States.

■PropTech Venture Capital Funds: investments in the following venture capital funds providing New Valley Ventures exposure to opportunities in the emerging PropTech industry.

■Camber Creek Venture Capital Funds: two funds that invest in a diversified pipeline of new PropTech ventures. Camber Creek’s portfolio includes Notarize, a digitized notary service, and Curbio, a renovation firm designed to increase a property’s selling price.

■Sum Ventures: a fund that invests in growth companies in PropTech, FinTech, and CleanTech industries.

■MetaProp Venture Capital Fund: a fund advised or managed by a New York-based venture capital firm.

■The Lab PropTech Fund: a fund advised or managed by a Miami-based firm that aims to invest in emerging technologies with a focus on residential real estate and construction services.

Other than the five private funds listed above in which New Valley Ventures invests as a limited partner, all of these companies currently provide technology or services to Douglas Elliman. To date, we have not recognized revenue from these investments and do not anticipate recognizing revenue from these non-controlling PropTech investments. However, we target earning an attractive rate of return from the capital appreciation of our PropTech investments.

Liquidity and Capital Resources

Cash and cash equivalents declined by $57,484 and increased by $122,164 in 2022 and 2021, respectively. Restricted Cash, which is included in cash and cash equivalents, was $7,523 and $17,243 as of December 31, 2022 and 2021, respectively.

Cash used in operations was $14,744 in 2022 and cash provided from operations was $127,826 in 2021. The decline in the 2022 period was related to lower operating income as a result of the decline in revenues and inclusion of expenses associated with Douglas Elliman operating as a standalone public company and increased expenses in our brokerage segment. We also incurred increased income tax payments and increased discretionary compensation payments in 2022 compared to 2021. Our income tax payments increased in 2022 because we became a full taxpayer after the Distribution. Our discretionary

39

Table of Contents

compensation payments increased in the 2022 period because our compensation accruals at December 31, 2021 were more than our compensation accruals at December 31, 2020 as a result of improved operating income for the year ended December 31, 2021 when compared to the year ended December 31, 2020.

Cash used in investing activities was $12,737 and $8,858 in 2022 and 2021, respectively. In 2022, cash used in investing activities was comprised of capital expenditures of $8,537, purchase of investments of $3,875 in our PropTech business, and investments of $400 in equity-method investments. This was offset by $75 of distributions from equity-method investments. In 2021, cash used in investing activities was comprised of capital expenditures of $4,106, the purchase of investments of $4,340, and $500 in connection with the acquisition of the controlling interest in Douglas Elliman Texas. This was offset by $88 of distributions from equity-method investments.

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 used in financing activities was $30,003 in 2022 and cash provided by financing activities was $3,196 in 2021. In 2022, cash used in financing activities was comprised of dividends and distributions on common stock of $16,250, repayment of debt of $12,528, and earn-out payments, associated with acquisitions, of $1,600. These amounts were partially offset by contributions from a non-controlling interest associated with Douglas Elliman Texas of $375. In 2021, cash provided by financing activities was comprised of net contributions from Vector Group, our former parent, of $2,062 and contributions from non-controlling interest associated with Douglas Elliman Texas of $1,625. These amounts were offset by $361 for repayment of debt and earn-out payments, associated with acquisitions, of $130.

In March 2022, we began paying a quarterly cash dividend of $0.05 per share. We contemplate continuing to pay a quarterly cash dividend of $0.05 per share, subject to approval of our Board of Directors, which would result in annual dividends of approximately $16,900. We had cash and cash equivalents of approximately $163,859 as of December 31, 2022 and, in addition to 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 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.

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 amount 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 December 31, 2022, 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 December 31, 2022, we had outstanding approximately $3,107 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.

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.

40

Table of Contents

New Accounting Pronouncements

Refer to Note 1, Summary of Significant Accounting Policies, to our combined consolidated financial statements for further information on New Accounting Pronouncements.

Legislation, Regulation, Taxation and Litigation

See Item 1. “Business,” Item 1A. “Risk Factors,” Item 3. “Legal Proceedings” and Note 14 to our combined consolidated financial statements, which contain a description of litigation.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information included in this annual report on Form 10-K, 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,

•litigation risks,

•adverse changes in global, national, regional and local economic and market conditions, including those related to pandemics and health crises,

•our ability to effectively manage the impacts of any government-mandated or encouraged suspension of our business operations,

•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 level of our expenses, including our corporate expenses as a standalone public company,

•the tax-free treatment of the Distribution,

•our lack of operating history as a public company and costs associated with being a standalone public company,

•the failure of Vector Group to satisfy its respective obligations under the Transition Services Agreement or other agreements entered into in connection with the Distribution; and

•the additional factors described under “Risk Factors” in this report.

Further information on the risks and uncertainties to our business includes the risk factors discussed above under Item 1A. “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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.

41

Table of Contents