Douglas Elliman: Opportunity to be bullish on housing with 3.9% dividend yield (NYSE: DOUG)

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Douglas Elliman Inc (NYSE: DOUG) is one of the largest residential real estate agencies in the United States, specializing in luxury properties. The company became publicly listed following the completion of a spin-off from its former parent company, Vector Group (VGR) in the fourth quarter of last year. After the pandemic-fueled housing boom between 2020 and 2021, the story is now about the changing macro environment defined by record inflation and soaring interest rates. Indeed, DOUG shares are down nearly 50% from their IPO price on fears of slowing growth and lower earnings.

Still, we think the stock looks interesting with the feeling that the selloff has gone too far due to unwarranted extreme pessimism. Although there are signs that housing has cooled with falling property prices, Douglas Elliman remains supported by broadly strong fundamentals and recurring profitability. The possibility of economic conditions improving in the future may trigger a rally in the stock. We also like DOUG’s 3.9% dividend yield, which highlights attractive value at the current level.

DOUG Key Metrics

The company last released its first-quarter results in early May, the first full quarter as an independent company. EPS of $0.08 was $0.01 below consensus, while revenue of $308.9 million, up 13% year-over-year, was slightly above estimates.

The business model here is simple, on each real estate transaction, Douglas Elliman receives a commission, typically around 3% of the value of the property. This segment accounts for more than 95% of total revenue, while the company also offers property management and other related services. On the brokerage commission pool, the underlying agents receive a reduction of approximately 75% of the total fees which, in the income statement, represent the bulk of the operating expenses.

This quarter, growth in total revenue was driven by real estate brokerage which reached a record gross transaction value of approximately $11.7 billion, up from $10.1 billion in the quarter. last year. This trend reflects the dynamism of the housing market over the past year as well as the increase in average prices.

On the cost side, additional expenses related in part to the IPO resulted in a 70% increase in general and administrative costs for the company. The result is that operating profit of $7.9 million was down 45% from the year-ago period. The company also notes that its first-quarter adjusted EBITDA of $12.7 million was down from $16.4 million in the year-ago period.

DOUG Metrics

source: IR company

Management focused on its overall positive operating momentum. Douglas Elliman took part in key markets during the last years. In New York, brokerage accounted for 21% of all deals in the last twelve months, up from 19% in 2017. The company nearly doubled its presence in Florida, which has been a real estate hotspot since 2020. forecasts earnings, the takeaway is that conditions were strong in the first quarter, with some strength continuing into the second quarter.

Finally, we note that Douglas Elliman ended the quarter with a balance sheet cash position of $204 million versus effectively zero long-term financial debt beyond lease obligations. DOUG pays a quarterly dividend of $0.05 per share, representing an annualized distribution of approximately $16.3 million that we believe is well supported by underlying cash flow and recurring profitability.

DOUG Metrics

source: IR company

Housing Market Outlook

Economic conditions have deteriorated more recently in the second quarter, which explains much of the volatility in the broader market and also in DOUG stocks. We mentioned higher than expected inflation and rising interest rates with all indications pointing to an unusually strong slowdown from 2021. % compared to less than 3% last year.

Trends are evident in existing home sales data for May National Association of Realtors showing a seasonally adjusted annual rate of 5.4 million home sales, down 8.6% year-over-year and well above the 6.5 million level of as recently as ‘in January. At the same time, the report notes that even in hindsight, the rate of existing home sales simply returned to levels in 2018 that can be considered normal.

DOUG Metrics

source: National Association of Estate Agents

On the other hand, the median price of existing homes at $407,000 is up 14.6% year over year. The combination of record prices with higher interest rates is limiting affordability, suggesting further declines in home sales and prices as the market cools.

DOUG Metrics

source: RAN

We mentioned the company’s specialization in the luxury side of the market. This is important when considering how conditions have changed this year. An average sale price for homes by Douglas Elliman approaching $1.6 million in 2021 is nearly 4 times the median national average for existing homes closer to $400,000.

Data through May shows the high end of the market outperformed in terms of price increases, up 22.1% year-on-year from declines in the average single-family home. The reading here is that even though market conditions are tougher, the data suggests that DOUG is still benefiting from persistent tailwinds. This means that even if total home sales slow down, Douglas Elliman’s results should be a bit stronger based on transaction values.

The other dynamic is that for luxury properties the share of cash transactions is often higher than what can be considered starter homes, implying that the business has less exposure to mass market brokers compared . This topic was discussed during the earnings conference call:

Well, it varies from market to market, but the fact is that in high-end transactions there is less talk of a mortgage. And that doesn’t mean they don’t end up getting financing after buying it… But we don’t really see interest rates having affected too much yet. And actually, what I’ve seen in the past over the years is that when rates start to go up, it gets people into the market faster because they don’t want to be pushed out of the market.

DOUG Metrics

source: National Association of Estate Agents

DOUG Stock Price Forecast

Overall, there are good and bad signals about the direction the housing market is heading and the impact on DOUG. Consensus estimates call for 2022 revenue of $1.4 billion, about 1% higher than last year. The market expects EPS of $0.59, 54% lower than the prior year period, based on higher spending which also includes an advertising push. For 2023, it is estimated that revenue can climb 6% and earnings accelerate towards $0.69 per share. Again, all of this will depend on how economic and housing market conditions evolve.

DOUG Metrics

Looking for Alpha

We take a generally more optimistic view. The bullish case for DOUG is that economic conditions remain resilient, avoiding scenarios of a deep recession that would result in a “collapse” in the housing market. From a general perspective, signs of slowing inflation as interest rates stabilize may provide a boost to consumer confidence to keep real estate indicators strong. The latest June payrolls report showed that the US economy added more than 372,000 jobs stronger than expected in June, which is encouraging for the economic backdrop.

The way we see things playing out is that better-than-expected data going forward will help improve market sentiment, which puts DOUG in a good position to revalue its pricing as a category leader. Based on the stock price chart below, the cycle low at $4.57 is a critical level of support for the stock to hold in the near term. On the upside, a break above $6.00 per share can add further bullish momentum.

Table DOUG

Looking for Alpha

Final Thoughts

The takeaway here is that despite the tougher environment, DOUG remains profitable with a positive long-term outlook as it grows and consolidates market share. The dividend yield approaching 4% highlights the underlying value of the stock. The main risk to consider would be the adverse scenario where economic conditions deteriorate further. Macro indicators regarding inflation, interest rates and housing figures are key watch points.

We are bullish and rate DOUG as a buy with a price target for the year ahead at $7.50, representing an 11x multiple on the current 2023 EPS consensus. , expected in August, could be a catalyst for stocks to rebound higher if it confirms that financial conditions remain positive.

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