The Real Deal New York

If Dottie Herman cashed out for $40M, what is Elliman worth?

“As a buyer, you always want an aggressive price. She didn't have to sell.”
By E.B. Solomont and Hiten Samtani | January 03, 2019 10:00AM

(GIF by Kerry Barger for The Real Deal)

Dottie Herman will pocket $40 million by selling her stake in Douglas Elliman. Depending on who you ask, she either made out like a bandit or sold for a song.

Either way, the deal for Herman’s 29 percent stake pulls back the curtain on how much Elliman is worth. And the numbers don’t bode too well for the residential-brokerage business.

If Herman sold her stake at a fair price to her business partner Howard Lorber, back-of-the-napkin math shows that Elliman is valued at $136 million. That’s at a time when the firm has a significant nationwide presence, with over 7,000 agents and north of $27 billion in deal volume in 2018. Compare that to Compass, a venture-backed firm with a similar number of agents that claimed to have a deal volume of $35 billion in 2018. Compass, after its Series F fundraising round in September, was valued at $4.4 billion. Assuming its valuation hasn’t changed since, Compass is over 30 times more valuable than Elliman.

“Look, I think it’s great for them that they’re getting that valuation,” Lorber said of Compass in an interview Wednesday. “I’m not really sure what it means.”

Lorber declined to comment on Elliman’s current valuation, but disputed the $136 million figure. He suggested that the company’s market share – particularly on the heels of an expansion to Los Angeles – justifies a higher valuation.

“There’s a premium for that market share,” he said. He also noted that as Elliman’s majority shareholder, Vector Group – the public company of which Lorber is CEO – held most of the cards when negotiating with Herman.

“I’m not going to get into formulas,” he said. “But she was the seller, I was the buyer. As a buyer, you always want an aggressive price. She didn’t have to sell.”

In an interview Monday, Herman, who will remain CEO for now, said it “was just time” to get her money out.

“Now I can just have a little more security,” she said. (It’s worth remembering that Forbes had assessed her net worth at $260 million in 2016.)

Dottie Herman and Howard Lorber

The 65-year-old Herman has been CEO ever since she and Lorber bought the firm in 2003, but over the last couple years had been rumored to be on her way out. Insiders at the firm had recently described her role as more akin to a “brand ambassador” and “national spokesperson” – not responsibilities one typically associates with a company’s top person. In December 2017, the company had elevated Scott Durkin, a Corcoran Group veteran who was leading Elliman’s national expansion, to the position of president, and Durkin assumed day-to-day responsibilities of running the firm.

So the news of Herman selling wasn’t much of a surprise. The number is another matter.

When Herman and Lorber bought Elliman from Insignia Financial Group in 2003 for $72 million, Elliman had just 250 agents, 13 offices and was a pure-play New York shop with about $4 billion in annual sales volume, according to Newsday. So, 15 years, thousands of agents and a nearly sevenfold increase in sales volume later, Elliman’s value is less than twice what it was when Lorber and Herman bought it.

And in 2013, Vector bought out Prudential’s 20.59-percent stake for $60 million, a deal that in theory valued Elliman at $291.4 million. Which means that if Herman sold her stake at a fair price, Elliman has lost more than half its value over the past five years, a period marked by existential challenges for the brokerage industry and one which has seen former big players such as Town Residential and Eastern Consolidated bow out of the game.

But not everyone thinks Herman’s stake-sale accurately reflects Elliman’s value today.

“I think $40 million is a very discounted number, frankly,” said one analyst who suggested Elliman could be worth $650 million — a number based on the brokerage’s annual revenue of $722 million in 2017. “If you’re a dominant player, as Douglas Elliman is, you should command a premium.”

Steve Murray, president and owner of Real Trends, a consulting firm that advised Herman on the buyout over the last 18 months, speculated that Elliman is probably worth at least $250 million to $300 million. Both sides walked away with a good deal, he said, given Lorber’s negotiating advantage over Herman.

“She wanted to sell, but he was under absolutely no compunction to have to buy,” Murray said. “The leverage was always with Howard because he’s the majority owner.”

Though Herman claimed Elliman is well-positioned for growth, sources said she had also grown weary of the uphill battle traditional firms face competing with well-funded rivals like Compass.

Lorber didn’t deny Elliman is worth less than it was a few years ago based on lower earnings. In 2014, Vector reported $42.4 million in profits related to its real estate business. That number dropped to $21.4 million in 2017, according to the company’s most recent annual report.

Overall, Vector’s stock price is down 55 percent since January 2018 — a decline Lorber attributed to a rocky year for both its real estate and tobacco holdings. “You have two industries, both of which had not-great years,” he said.

And Vector is one among many real estate stocks that are hurting.

In October, StreetEasy parent Zillow Group’s stock price dropped over 20 percent overnight after an earnings call in which the company acknowledged that revenue from Premier Agent, its main cash cow, fell below expectations. Within 24 hours, the company’s market cap dropped to $6.3 billion, down from $8.2 billion. And shares of Realogy — parent company of Corcoran, Sotheby’s International Realty and others — are down 42 percent year-over-year. The company’s market cap now stands at $1.8 billion — a fraction of the $7.5 billion it was in mid-2013.

According to Murray, brokerage firm valuations are down by 5 percent to 20 percent over the past few years. Compound that with a lackluster luxury market since 2016 and an expectation that sales will remain sluggish for the next year, and there’s reason for concern.

But he said firms like Elliman — and a handful of other independent, national players — have retained value partly because of their presence in major metropolitan centers. That makes them attractive to acquisition-hungry behemoths like Berkshire Hathaway’s HomeServices of America and to private equity investors looking to get into the business.

“Those big guys wouldn’t sell at today’s prices,” Murray said. But New York City is one of four or five key markets they all want to be in. “Imagine if Compass was able to buy Elliman? They’d own the place.”