(Dollars in Thousands, Except Per Share Amounts)
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader ofVector Group Ltd.'s financial statements with a narrative from our management's perspective. Our MD&A is divided into the following sections: •Overview •Recent Developments •Results of Operations •Summary of Real Estate Investments •Liquidity and Capital Resources Please read this discussion along with our MD&A and audited financial statements as of and for the year endedDecember 31, 2019 and Notes thereto, included in our 2019 Annual Report on Form 10-K, and our Condensed Consolidated Financial Statements and related Notes as of and for the quarterly period and six months endedJune 30, 2020 and 2019.
Overview
We are a holding company and are engaged principally in two business segments:
• Tobacco: the manufacture and sale of cigarettes in
through our
Tobacco") subsidiaries, and
• Real Estate: the real estate business through our subsidiary
LLC ("
Elliman"), (ii) has interests in numerous real estate projects across the
estate properties or projects. Douglas Elliman operates the largest residential brokerage company in theNew York metropolitan area and also conducts residential real estate brokerage operations inFlorida ,
Recent Developments COVID-19 Pandemic. The recent outbreak of the novel coronavirus, COVID-19, which was declared a pandemic by theWorld Health Organization onMarch 11, 2020 , has led to adverse impacts on theU.S. and global economies and created economic uncertainty. Although much uncertainty still surrounds the pandemic, including its duration and ultimate overall impact on our operations and real estate ventures, we are carefully evaluating potential outcomes and working to mitigate risks. As with many other companies, our operations have been affected by COVID-19. We have implemented remote working for many employees and adopted the social distancing protocols recommended by public health authorities. The following provides a summary of our actions in our two segments - Tobacco and Real Estate - since COVID-19 was declared a pandemic. Impact of COVID-19 on Tobacco Segment. To date, we have not experienced any material disruptions to our supply or distribution chains, and have not experienced any material adverse effects associated with governmental actions to restrict consumer movement or business operations. However, our suppliers and members of our distribution chain may be subject to government action requiring facility closures and remote working protocols. The majority of retail stores in which our tobacco products are sold, including convenience stores, have been deemed to be essential businesses by authorities and have remained open. We continue to monitor the risk that a supplier, a distributor or any other entity within our supply and distribution chain closes temporarily or permanently. Although our tobacco segment has not been negatively impacted to date by COVID-19, there remains uncertainty as to how the pandemic may ultimately impact the market. We continue to monitor the macro-economic risks of COVID-19 and the effect on tobacco consumers, including purchasing behavior changes and changes in sales volumes and mix within the discount category. Our EAGLE 20's brand is priced in the deep discount category and our other brands are primarily priced in the traditional discount category. 56 -------------------------------------------------------------------------------- Impact of COVID-19 on Real Estate Segment. Douglas Elliman is the largest residential real estate broker in theNew York metropolitan area and approximately 70% of its revenues were derived from this region in 2018 and 2019. In addition,New Valley has investments in multiple real estate ventures and properties in theNew York metropolitan area, which had a carrying value of$67,058 atJune 30, 2020 . Published reports and data indicate that theNew York metropolitan area was initially impacted more than any other area inthe United States . Consequently, various governmental agencies in theNew York metropolitan area and in other markets where Douglas Elliman operates, instituted quarantines, "pause" orders, "shelter-in-place" rules, restrictions on travel and restrictions on the types of businesses that could operate. These restrictions adversely impacted Douglas Elliman's ability to conduct business during the three months endedJune 30, 2020 . For example, Douglas Elliman's agents were restricted from performing in-person showings of properties or conducting open houses in most of Douglas Elliman's markets fromMarch 2020 toJune 2020 . Douglas Elliman experienced a severe decline in closed sales volume inNew York City beginning inMarch 2020 which has continued. We anticipate that sales volume inNew York City may continue to be slow through the fall of 2020, and possibly longer. Beginning inApril 2020 , we made significant operating adjustments at Douglas Elliman, including a reduction of personnel expense of approximately 25% and reductions of other administrative expenses, as well as a reduction, deferral or elimination of certain office lease expenses. While we continue to evaluate other expense reduction measures, to the extent Douglas Elliman's business improves in the third quarter, we will begin to relinquish, as appropriate, some of the second quarter expense reductions, including advertising and personnel expenses. The COVID-19 pandemic could continue to have a material impact on our Real Estate segment; the likelihood and magnitude of a material impact increases with the amount of time the virus affects activity levels in locations in which Douglas Elliman operates. Therefore, we are unable to predict the ultimate impact of the COVID-19 pandemic on the future financial condition, results of operations and cash flows from our Real Estate segment. Ladenburg Thalmann Financial Services Inc. ("LTS"). OnNovember 11, 2019 , LTS entered into an Agreement and Plan of Merger withAdvisor Group . OnFebruary 14, 2020 , the merger was completed, and each share of LTS common stock was converted into a cash payment of$3.50 per share. We received proceeds of$53,169 from our 15,191,205 common shares of LTS, and we recorded a pre-tax gain of$53,052 from the transaction in the first quarter of 2020. We also tendered 240,000 shares of LTS's 8% Series A Cumulative Redeemable Preferred Stock for redemption and received an additional$6,009 inMarch 2020 . At the closing of the transaction, our Executive Vice President resigned as Chairman, President and Chief Executive Officer of LTS, and our management agreement with LTS was terminated. Maturity of 5.5% Variable Interest Senior Convertible Debentures due 2020. InApril 2020 , our 5.5% Variable Interest Senior Convertible Debentures due 2020 matured and we retired them with a cash payment for the principal balance of$169,610 .
Issuance of Common Stock. On
Recent Developments in Litigation The cigarette industry continues to be challenged on numerous fronts. New cases continue to be commenced against Liggett and other cigarette manufacturers. Liggett could be subjected to substantial liabilities and bonding requirements from litigation relating to cigarette products. Adverse litigation outcomes could have a negative impact on our ability to operate due to their impact on cash flows. It is possible that there could be adverse developments in pending cases including the certification of additional class actions. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. In addition, an unfavorable outcome in any tobacco-related litigation could have a material adverse effect on our consolidated financial position, results of operations or cash flows. Liggett could face difficulties in obtaining a bond to stay execution of a judgment pending appeal.
Critical Accounting Policies
There are no material changes except for the items listed below from the critical accounting policies set forth in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K, for the year endedDecember 31, 2019 . Please refer to that section and the information below for disclosures regarding the critical accounting policies related to our business. 57 -------------------------------------------------------------------------------- Current Expected Credit Losses. OnJanuary 1, 2020 , we adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, therefore, our measurement of credit losses for most financial assets and certain other instruments has been modified as discussed in Note 3 to our condensed consolidated financial statements.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. During the first quarter of 2020, we performed quantitative assessments of the goodwill associated with the Douglas Elliman reporting unit and its trademark intangible asset in conjunction with our quarterly review for indicators of impairment. Based on the results of these assessments, we determined that the estimated fair value of the Douglas Elliman reporting unit in our Real Estate segment, for which the related goodwill had a carrying value of$78,008 , exceeded the fair value, resulting in a non-cash goodwill impairment charge of$46,252 . In addition, we recognized a non-cash impairment charge of$12,000 for intangible assets related to the Douglas Elliman trademark. These non-cash impairment charges are the result of consideration of potential impacts of COVID-19, including the possibility of an economic recession, on Douglas Elliman's business. If we fail to meet the financial projections used in the quantitative assessments of goodwill and trademark intangible asset in future periods or the impacts of COVID-19 are more severe than expected, this would result in additional impairment charges related to the Company's goodwill and trademark intangible asset. Results of Operations The following discussion provides an assessment of our results of operations, capital resources and liquidity and should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report. The condensed consolidated financial statements include the accounts of Liggett, Vector Tobacco,Liggett Vector Brands ,New Valley and other less significant subsidiaries. For purposes of this discussion and other consolidated financial reporting, our business segments for the three and six months endedJune 30, 2020 and 2019 were Tobacco and Real Estate. The Tobacco segment consisted of the manufacture and sale of cigarettes.The Real Estate segment included our investment inNew Valley , which includes ownership of Douglas Elliman, investments in real estate and investments in real estate ventures. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenues: Tobacco$ 312,510 $ 294,501 $ 599,579 $ 551,257 Real estate 133,250 243,931 300,669 408,099 Total revenues$ 445,760 $ 538,432 $ 900,248 $ 959,356 Operating income (loss): Tobacco$ 79,309 (1)$ 68,651 (3)$ 148,495 (4)$ 128,795 (6) Real estate (6,875 ) (2) 14,453 (74,350 ) (5) 4,044 Corporate and Other (5,637 ) (6,860 ) (12,252 ) (14,005 ) Total operating income$ 66,797 $ 76,244 $ 61,893 $ 118,834 (1) Operating income includes$53 of litigation settlement and judgment expense. (2) Operating loss includes$2,961 of restructuring charges. (3) Operating income includes$655 of litigation settlement and judgment expense. (4) Operating income includes$53 of litigation settlement and judgment expense. (5) Operating loss includes$58,252 of impairment charges related to the impairments of goodwill and intangible assets and$2,961 of restructuring charges. (6) Operating income includes$655 of litigation settlement and judgment expense. 58 -------------------------------------------------------------------------------- Three Months EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 Revenues. Total revenues were$445,760 for the three months endedJune 30, 2020 compared to$538,432 for the three months endedJune 30, 2019 . The$92,672 (17.2%) decline in revenues was primarily due to a$110,681 decline in Real Estate revenues, which was primarily related to a decline in Douglas Elliman's brokerage revenues, offset by a$18,009 increase in Tobacco revenues. Cost of sales. Total cost of sales was$304,885 for the three months endedJune 30, 2020 compared to$368,174 for the three months endedJune 30, 2019 . The$63,289 (17.2%) decline in cost of sales was primarily due to a$72,895 decline in Real Estate cost of sales, which was primarily related to a decline in Douglas Elliman's commissions. This was offset by a$9,606 increase in Tobacco cost of sales. Expenses. Operating expenses were$74,078 for the three months endedJune 30, 2020 compared to$94,014 for the same period last year. The$19,936 (21.2%) decline in operating expenses was due to a$16,458 decline in Real Estate expenses, primarily at Douglas Elliman, including restructuring charges of$2,961 for the three months endedJune 30, 2020 , a$2,255 decline in Tobacco expenses, including a decline in litigation settlement and judgment expense of$602 , and a$1,223 decline in Corporate and Other expenses. Operating income. Operating income was$66,797 for the three months endedJune 30, 2020 compared to$76,244 for the same period last year. The$9,447 (12.4%) decline in operating income was due to a$21,328 decline in Real Estate operating income, primarily related to Douglas Elliman. This was offset by a$10,658 increase in Tobacco operating income and a decline of$1,223 in Corporate and Other operating loss. Other expenses. Other expenses were$30,107 and$19,478 for the three months endedJune 30, 2020 and 2019, respectively. For the three months endedJune 30, 2020 , other expenses primarily consisted of interest expense of$29,358 and equity in losses from real estate ventures of$12,260 . This was offset by income of$1,669 from changes in fair value of derivatives embedded within convertible debt, other income of$7,635 and equity in earnings from investments of$2,207 . For the three months endedJune 30, 2019 , other expenses primarily consisted of interest expense of$32,753 and equity in losses from investments of$1,685 . This was offset by income of$3,788 from changes in fair value of derivatives embedded within convertible debt, other income of$4,781 , and equity in earnings from real estate ventures of$6,391 . Income before provision for income taxes. Income before income taxes was$36,690 and$56,766 for the three months endedJune 30, 2020 and 2019, respectively. Income tax expense. Income tax expense was$10,916 and$17,459 for the three months endedJune 30, 2020 and 2019, respectively. Our provision for income taxes in interim periods is based on expected income, statutory rates, permanent differences, valuation allowances against deferred tax assets, and any tax planning opportunities available to us. For interim financial reporting, we estimate the annual effective income tax rate based on full year projections and apply the annual effective income tax rate against year-to-date pretax income to record income tax expense, adjusted for discrete items, if any. We refine annual estimates as new information becomes available. For the three months endedJune 30, 2020 , the annual effective tax rate applied to year-to-date income resulted in tax expense which was reduced by discrete items. The discrete items of$32 primarily relates to changes in value of certain contingent consideration and stock-based compensation. Tobacco. Tobacco revenues. Liggett increased the list price of EAGLE 20's by$0.11 per pack onJune 22, 2020 ,$0.08 per pack inFebruary 2020 , and$0.08 per pack inOctober 2019 . Liggett also increased the list price of PYRAMID, LIGGETT SELECT, EVE andGRAND PRIX by$0.11 per pack onJune 22, 2020 ,$0.08 per pack inFebruary 2020 ,$0.08 per pack inOctober 2019 , and$0.06 per pack inJune 2019 . All of our Tobacco sales were in the discount category in 2020 and 2019. For the three months endedJune 30, 2020 , Tobacco revenues were$312,510 compared to$294,501 for the three months endedJune 30, 2019 . Revenues increased by$18,009 (6.1%) due primarily to an increase in the average selling price of our brands for the three months endedJune 30, 2020 along with a 1.0% (24.5 million units) increase in sales volume. 59 -------------------------------------------------------------------------------- Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows: Three Months Ended June 30, 2020 2019 Manufacturing overhead, raw materials and labor$ 32,669 $ 33,197 Customer shipping and handling 1,361 1,503 Federal Excise Taxes, net 121,170 119,943 FDA expense 6,116 6,048 MSA expense, net of market share exemption 52,751 43,770 Total cost of sales$ 214,067 $ 204,461 The Tobacco segment's MSA expense is included in cost of sales. Under the terms of the MSA, we have no payment obligations except to the extent that our tobacco subsidiaries' market share of theU.S. Cigarette market exceeds 1.92%. The calculation of our benefit from the MSA is an estimate based onU.S. domestic taxable cigarette shipments. As ofJune 30, 2020 , we estimate taxable shipments in theU.S. will decline by 4.5% in 2020. Our annual MSA liability changes by approximately$1,700 for each percentage change in the estimated shipment volumes in the U.S. market. For the three months endedJune 30, 2020 , the estimated decline in taxable shipments in excess of the annual MSA inflation adjustment resulted in an increase in cost of sales of approximately$470 because the value of Liggett's market share exemption declined compared to the three months endedJune 30, 2019 . Tobacco gross profit was$98,443 for the three months endedJune 30, 2020 compared to$90,040 for the three months endedJune 30, 2019 . The increase in gross profit for the three months endedJune 30, 2020 is primarily attributable to increased pricing associated with the EAGLE 20's and Pyramid brands. For the three months endedJune 30, 2020 , EAGLE 20's remains Liggett's primary low-cost cigarette brand and its percentage of Liggett's total unit volume sales has increased from 61% in the three months endedJune 30, 2019 to 63% for the three months endedJune 30, 2020 . Pyramid, Liggett's second-largest brand, declined from 26% of total unit volume sales in the three months endedJune 30, 2019 to 24% for the three months endedJune 30, 2020 . As a percentage of revenue (excluding Federal Excise Taxes), Tobacco gross profit declined from 51.6% in the 2019 period to 51.4% in the 2020 period primarily as a result of the continued growth of the lower-priced EAGLE 20's brand as well as a higher MSA expense associated with the increases in unit volume above the market share exemption. This was offset by price increases. Tobacco expenses. Tobacco operating, selling, general and administrative expenses, excluding settlements and judgments, were$19,081 and$20,734 for the three months endedJune 30, 2020 and 2019, respectively. The decline of$1,653 is primarily due to decreased travel expenses incurred during the COVID-19 pandemic and the timing of compensation expenses. Total tobacco product liability legal expenses, including settlements and judgments, were$1,641 and$2,274 for the three months endedJune 30, 2020 and 2019, respectively. Tobacco operating income. Tobacco operating income was$79,309 for the three months endedJune 30, 2020 compared to$68,651 for the same period last year. The increase in operating income for the three months endedJune 30, 2020 of$10,658 is primarily attributable to higher gross profit, as discussed above, and lower operating, selling, general and administrative expenses. Real Estate. Real Estate revenues. Real Estate revenues were$133,250 and$243,931 for the three months endedJune 30, 2020 and 2019, respectively. Real Estate revenues declined by$110,681 (45.4%), primarily related to a decline of$107,080 in Douglas Elliman's commission income. We believe the decline was attributable to two events: (i) the impact of the COVID-19 pandemic and (ii) the acceleration of real estate closings in theNew York City market during the three months endedJune 30, 2019 as a result of the increased transfer and "mansion" tax associated with resales of homes of more than$1,000 , effectiveJuly 1, 2019 . 60 -------------------------------------------------------------------------------- Real Estate revenues and cost of sales for the three months endedJune 30, 2020 and 2019 were as follows: Three Months Ended June 30, 2020 2019 Real Estate Revenues: Commission and other brokerage income$ 123,254 $ 230,334 Property management revenue 8,832 10,218 Title fees 843 2,400 Sales on facilities primarily from Escena 321 979 Total real estate revenues$ 133,250 $ 243,931 Real Estate Cost of Sales: Real estate commissions$ 90,116 $ 162,192
Cost of sales on facilities primarily from Escena 563 871 Title fees
139 650 Total real estate cost of sales$ 90,818 $ 163,713
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Brokerage cost of sales. Douglas Elliman real estate commissions decreased by$72,076 for the three months endedJune 30, 2020 as a result of a decline in sales volume. Douglas Elliman's gross margin on real estate brokerage income declined from 29.6% for the three months endedJune 30, 2019 to 26.9% for the three months endedJune 30, 2020 primarily as a result of declines in revenues in its development marketing division and existing-home sales in theNew York City and Northeast regions, which traditionally earn higher gross margin percentages than the Southeast (Florida ) and Western (primarilyCalifornia ) regions. The COVID-19 pandemic has had a profound effect on the economy and, especially, in theNew York metropolitan area, where approximately 70% of Douglas Elliman's commissions and other brokerage revenues were derived in 2018 and 2019. In response to the pandemic, various governmental agencies in theNew York metropolitan area and in other markets where Douglas Elliman operates instituted restrictions on individuals and on the types of businesses that are permitted to operate fromMarch 2020 toJune 2020 , which adversely impacted Douglas Elliman's business. We anticipate that sales volume may continue to be slow through the fall of 2020, and possibly longer. Real Estate expenses. Real Estate expenses, which are primarily expenses at Douglas Elliman, were$49,307 and$65,765 for the three months endedJune 30, 2020 and 2019, respectively. For the three months endedJune 30, 2020 , Real Estate expenses included restructuring charges of$2,961 . The restructuring charges were the result of Douglas Elliman realigning its administrative support functions, and office locations as well as adjusting its business model to more efficiently serve its clients. In response to the COVID-19 pandemic, we have implemented significant expense reductions at Douglas Elliman, including a reduction of personnel by approximately 25% as well as reduction, deferral or elimination of leases across the country. As a result of the expense reductions, in additional to personnel expenses, Douglas Elliman's professional services, advertising, travel and other occupancy expenses were reduced during the three months endedJune 30, 2020 . While we continue to evaluate other expense reduction measures, to the extent Douglas Elliman's business improves in the third quarter, we will begin to relinquish, as appropriate, some of the second quarter expense reductions, including advertising and personnel expenses. Real Estate operating (loss) income.The Real Estate segment had operating loss of$6,875 for the three months endedJune 30, 2020 and operating income of$14,453 for the three months endedJune 30, 2019 . The decline in operating income of$21,328 was primarily related to reduced operating income at Douglas Elliman. Corporate and Other. Corporate and Other operating loss. The operating loss at the Corporate and Other segment was$5,637 for the three months endedJune 30, 2020 compared to$6,860 for the same period in 2019 and the difference was due primarily to decreased administrative costs related to professional fees and travel expenses. 61 -------------------------------------------------------------------------------- Six Months EndedJune 30, 2020 Compared to Six Months EndedJune 30, 2019 Revenues. Total revenues were$900,248 for the six months endedJune 30, 2020 compared to$959,356 for the six months endedJune 30, 2019 . The$59,108 (6.2%) decline in revenues was primarily due to a$107,430 decline in Real Estate revenues, which was primarily related to a decrease in Douglas Elliman's brokerage revenues. This was offset by a$48,322 increase in Tobacco revenues related to an increase in both unit volume and net pricing. Cost of sales. Total cost of sales was$615,508 for the six months endedJune 30, 2020 compared to$654,194 for the six months endedJune 30, 2019 . The$38,686 (5.9%) decline in cost of sales was primarily due to a$68,279 decline in Real Estate cost of sales, which was primarily related to increases Douglas Elliman's commissions. This was offset by a$29,593 increase in Tobacco cost of sales primarily related to increased sales volume and higher MSA expense. Expenses. Operating expenses were$222,847 for the six months endedJune 30, 2020 compared to$186,328 for the same period last year. The$36,519 (19.6%) increase was due to a$39,243 increase in Real Estate expenses, including impairment of goodwill and intangible asset charge at Douglas Elliman of$58,252 and restructuring charges of$2,961 for the six months endedJune 30, 2020 . This was offset by a$971 decline in Tobacco expenses, including a decline in litigation settlement and judgment expense of$602 , and a$1,753 decline in Corporate and Other expense. See Critical Accounting Policies -Goodwill and Indefinite Life Assets for detail of the Douglas Elliman impairment charge. Operating income. Operating income was$61,893 for the six months endedJune 30, 2020 compared to$118,834 for the same period last year, a decline of$56,941 (47.9%). Real Estate operating income declined$78,394 primarily related to the impairments of goodwill and intangible assets of$58,252 at Douglas Elliman and restructuring charges of$2,961 . This was offset by an increase in Tobacco operating income of$19,700 and the Corporate and Other operating loss declined$1,753 . Other expenses. Other expenses were$29,412 for the six months endedJune 30, 2020 compared to$40,286 for the six months endedJune 30, 2019 . For the six months endedJune 30, 2020 , other expenses primarily consisted of interest expense of$64,985 , equity in losses from real estate ventures of$18,765 and other expenses of$3,020 . This was offset by equity in earnings of investments of$52,359 and income of$4,999 from changes in fair value of derivatives embedded within convertible debt. For the six months endedJune 30, 2019 , other expenses primarily consisted of interest expense of$70,273 and equity in losses from investments of$323 . This was offset by income of$14,137 from changes in fair value of derivatives embedded within convertible debt, other income of$12,221 , and equity in earnings from real estate ventures of$3,952 . Income before provision for income taxes. Income before income taxes was$32,481 for the six months endedJune 30, 2020 compared to$78,548 for the six months endedJune 30, 2019 . Income tax expense. Income tax expense was$9,938 for the six months endedJune 30, 2020 compared to$24,208 for the six months endedJune 30, 2019 . Our provision for income taxes in interim periods is based on expected income, statutory rates, permanent differences, valuation allowances against deferred tax assets, and any tax planning opportunities available to us. For interim financial reporting, we estimate the annual effective income tax rate based on full year projections and apply the annual effective income tax rate against year-to-date pretax income to record income tax expense, adjusted for discrete items, if any. We refine annual estimates as new information becomes available. Our income tax expense for the six months endedJune 30, 2020 was increased by discrete items related to income tax benefits on the goodwill and trademark impairment charges, changes in value of certain contingent consideration and stock-based compensation partially offset by the income tax expense related to the equity in earnings from investments associated with the one-time gain on sale of LTS. Our income tax expense for the six months endedJune 30, 2019 was decreased by discrete items related to an income tax benefit for stock-based compensation. Tobacco. Tobacco revenues. Liggett increased the list price of EAGLE 20's by$0.11 per pack onJune 22, 2020 ,$0.08 per pack inFebruary 2020 ,$0.08 per pack inOctober 2019 , and$0.11 per pack inFebruary 2019 . Liggett also increased the list price of PYRAMID, LIGGETT SELECT, EVE andGRAND PRIX by$0.11 per pack onJune 22, 2020 ,$0.08 per pack inFebruary 2020 ,$0.08 per pack inOctober 2019 ,$0.06 per pack inJune 2019 , and$0.11 per pack inFebruary 2019 . All of our Tobacco sales were in the discount category in 2020 and 2019. For the six months endedJune 30, 2020 , Tobacco revenues were$599,579 compared to$551,257 for the six months endedJune 30, 2019 . Revenues increased by$48,322 (8.8%) due primarily to an increase in the average selling price of our brands for the six months endedJune 30, 2020 along with a 4.4% (196 million units) increase in unit sales volume. 62 -------------------------------------------------------------------------------- Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows: Six Months EndedJune 30, 2020 2019
Manufacturing overhead, raw materials and labor
2,833 2,995 Federal Excise Taxes, net 234,309 224,576 FDA expense 12,466 12,393 MSA expense, net of market share exemption 96,215 80,128 Total cost of sales$ 411,357 $ 381,764 The Tobacco segment's MSA expense is included in cost of sales. Under the terms of the MSA, we have no payment obligations except to the extent that our tobacco subsidiaries' market share of theU.S. Cigarette market exceeds 1.92%. The calculation of our benefit from the MSA is an estimate based onU.S. domestic taxable cigarette shipments. As ofJune 30, 2020 , we estimate taxable shipments in theU.S. will decline by 4.5% in 2020. Our annual MSA liability changes by approximately$1,700 for each percentage change in estimated shipment volumes in the U.S. market. For the six months endedJune 30, 2020 , the estimated decline in taxable shipments in excess of the annual MSA inflation adjustment resulted in an increase in cost of sales of approximately$900 because the value of Liggett's market share exemption declined compared to the six months endedJune 30, 2019 . Tobacco gross profit was$188,222 for the six months endedJune 30, 2020 compared to$169,493 for the six months endedJune 30, 2019 , an increase of$18,729 . The increase in gross profit for the six months endedJune 30, 2020 was primarily attributable to increased pricing on the EAGLE 20's and Pyramid brands and increased EAGLE 20's volume. For the six months endedJune 30, 2020 , EAGLE 20's remains Liggett's primary low-cost cigarette brand and its percentage of Liggett's total unit volume sales has increased from approximately 59% in the six months endedJune 30, 2019 to approximately 63% for the six months endedJune 30, 2020 . Pyramid, Liggett's second largest brand, declined from approximately 28% of total unit volume sales in the six months endedJune 30, 2019 to 24% for the six months endedJune 30, 2020 . As a percentage of revenue (excluding Federal Excise Taxes), Tobacco gross profit decreased from 51.9% in the 2019 period to 51.5% in the 2020 period primarily as a result of the continued growth of the lower-priced EAGLE 20's brand as well as a higher MSA expense associated with the increases in unit volume above the market share exemption. This was offset by price increases. Tobacco expenses. Tobacco operating, selling, general and administrative expenses, excluding settlements and judgments, were$39,674 for the six months endedJune 30, 2020 compared to$40,043 for the six months endedJune 30, 2019 . The decline of$369 was mainly due to lower travel related expenses partially offset by higher professional fees. Tobacco product liability legal expenses, including settlements and judgments, were$3,191 and$3,737 for the six months endedJune 30, 2020 and 2019, respectively. Tobacco operating income. Tobacco operating income was$148,495 for the six months endedJune 30, 2020 compared to$128,795 for the same period last year, an increase of$19,700 . The increase in operating income was primarily attributable to higher gross profit, as discussed above. Real Estate. Real Estate revenues. Real Estate revenues were$300,669 and$408,099 for the six months endedJune 30, 2020 and 2019, respectively. Real Estate revenues declined by$107,430 (26.3%), which was primarily related to a decline of$103,427 in Douglas Elliman's Commission and other brokerage income, which we believe was because of the impact of the COVID-19 pandemic as well as the impact of the increased "mansion" tax inNew York City for the six months endedJune 30, 2019 , which is discussed in Results of Operations - Three Months endedJune 30, 2020 compared to Three Months endedJune 30, 2019 . . 63 --------------------------------------------------------------------------------
Real Estate revenues and cost of sales for the six months ended
Six Months Ended June 30, 2020 2019 Real Estate Revenues: Commission and other brokerage income$ 279,220 $ 382,647 Property management revenue 17,611 18,569 Title fees 1,699 3,633 Sales on facilities primarily from Escena 2,139 3,250 Total real estate revenues$ 300,669 $ 408,099 Real Estate Cost of Sales: Real estate commissions$ 202,315 $ 269,542
Cost of sales on facilities primarily from Escena 1,559 1,958 Title fees
277 930 Total real estate cost of sales$ 204,151 $ 272,430 Brokerage cost of sales. Douglas Elliman real estate commissions declined by$67,227 as a result of lower commission and other brokerage income. Douglas Elliman's gross margin on real estate brokerage income declined from 29.6% for the six months endedJune 30, 2019 to 27.5% for the six months endedJune 30, 2020 , primarily as a result of declines in revenues in its development marketing division and existing-home sales in theNew York City and Northeast regions, which traditionally earn higher gross margin percentages than the Southeast (Florida ) and West (primarilyCalifornia ) regions. See Results of Operations - Three Months endedJune 30, 2020 compared to Three Months endedJune 30, 2019 for a discussion of the impact of the COVID-19 pandemic on the Real Estate segment. Real Estate expenses. Real Estate expenses were$170,868 and$131,625 for the six months endedJune 30, 2020 and 2019. These expenses included the non-cash impairment of goodwill and intangible assets of$58,252 and restructuring charges of$2,961 at Douglas Elliman for the six months endedJune 30, 2020 . The non-cash impairment related to the evaluation of potential impacts of the COVID-19 pandemic, including the possibility of an economic recession, on Douglas Elliman's business. The restructuring charges were the result of Douglas Elliman realigning its administrative support functions, and office locations as well as adjusting its business model to more efficiently serve its clients. In response to the current COVID-19 pandemic, we have implemented significant expense reductions at Douglas Elliman, including a reduction of personnel by approximately 25%, as well as reduction, deferral or elimination of leases across the country. As a result of the expense reductions, in additional to personnel expenses, Douglas Elliman's professional services, advertising, travel and other occupancy expenses were reduced during the six months endedJune 30, 2020 . While we continue to evaluate other expense reduction measures, to the extent Douglas Elliman's business improves in the third quarter, we will begin to relinquish, as appropriate, some of the second quarter expense reductions, including advertising and personnel expenses. Real Estate operating (loss) income.The Real Estate segment had operating loss of$74,350 and operating income of$4,044 for the six months endedJune 30, 2020 and 2019, respectively. The increase in the Real Estate segment's operating loss was caused by the decreased gross margin discussed above, the impairment of goodwill and intangible assets of$58,252 at Douglas Elliman and restructuring charges of$2,961 at Douglas Elliman offset by the impact of expense-reduction initiatives at Douglas Elliman in 2020. Corporate and Other. Corporate and Other loss. The operating loss at the Corporate and Other segment was$12,252 for the six months endedJune 30, 2020 compared to$14,005 for the same period in 2019 and the difference was due primarily to decreased administrative costs related to professional fees and travel expenses. 64 -------------------------------------------------------------------------------- Summary of Real Estate Investments We own and seek to acquire investment interests in various domestic and international real estate projects through debt and equity investments. Our real estate investments primarily include the following projects as ofJune 30, 2020 : (Dollars in Thousands. Area and Unit Information in Ones) Future Capital Projected Number Commit- of Residential Date of ments from Projected Projected Lots, Units Actual/Projected Projected Initial Percentage Net Cash Invested Cumulative Carrying Value asNew Valley Residential Commercial and/or Hotel Construction Construction Location Investment Owned (1) (Returned) Earnings (Losses) ofJune 30, 2020 (2) and/orHotel Area Space Rooms Start Date End DateSagaponack Sagaponack, NY April 2015 100 %$ 19,024 $ -$ 19,024 $ - TBD N/A 1 R N/A N/A Master planned community, golf course, and club house in Palm 667 R Lots Escena, net Springs, CAMarch 2008 100 % 2,243 7,609 9,852 - 450 Acres - 450 H N/AN/A Investments in real estate, net$ 21,267 $ 7,609 $ 28,876 $ - Investments in real estate ventures: Flatiron District/NoMad 10 Madison Square West neighborhood, October (1107 Broadway )Manhattan, NY 2011 5.0 %$ (43,671 ) $ 43,671 $ - $ - 260,000 SF 20,000 SF 124 RAugust 2012 Completed11 Beach Street TriBeCa,Manhattan, NY June 2012 49.5 % 4,090 5,600 9,690 - 97,000 SF - 27 RMay 2014 Completed 20 Times Square (701 Times Square, August Seventh Avenue) Manhattan, NY 2012 7.9 % (7,827 ) 7,827 - -
252,000 SF 80,000 SF 452 H
6,393 (4,413 ) 1,980 -
330,000 SF 1,700 SF 157 R
West Greenwich Village,160 Leroy Street Manhattan, NY March 2013 3.1 % (1,075 ) 1,075 - - 130,000 SF - 57 R Fall 2015 Completed The Dutch (25-19 43rd Avenue)Long Island City, NY May 2014 9.9 % (1,247 ) 1,385 138 65,000 SF - 86 RSeptember 2014 Completed 87 Park (8701 Collins December Avenue)Miami Beach, FL 2013 15.0 % 13,138 3,317 16,455 - 160,000 SF TBD 70 ROctober 2015 Completed Financial District, August125 Greenwich Street Manhattan, NY 2014 13.4 % 7,992 (7,992 ) - - 306,000 SF 16,000 SF 273 RMarch 2015 TBD West Hollywood Edition (9040 Sunset Boulevard) October 20 R (4)West Hollywood, CA 2014 48.5 % 3,949 (6,153 ) (2,204 ) - 210,000 SF - 190 HMay 2015 Completed The XI (76 Eleventh West Chelsea, 236 R Avenue)Manhattan, NY May 2015 5.1 % 17,000 (17,000 ) - - 630,000 SF 85,000 SF 137 HSeptember 2016 March 2021 SeptemberMonad Terrace Miami Beach, FL May 2015 19.6 % 7,635 (4,831 ) 2,804 - 160,000 SF - 59 RMay 2016 2020 Takanasee (805 Ocean December Ave)Long Branch, NJ 2015 22.8 % 6,144 (2,306 ) 3,838 - 63,000 SF - 13 RJune 2017 TBD Brookland (15 East 19th St)Brooklyn, NY April 2017 9.8 % 402 45 447 - 24,000 SF - 33 RAugust 2017 Completed November September Dime (209 Havemeyer St )Brooklyn, NY 2017 16.5 % 9,145 2,331 11,476 - 100,000 SF 150,000 SF 177 RMay 2017 2020 February December352 6th Avenue Brooklyn, NY 2019 37.0 % 500 61 561 - 5,200 SF - 4 RSeptember 2019 2020 Meatpacking District,Meatpacking Plaza NYApril 2019 16.9 % 10,692 (1,515 ) 9,177 - TBD - TBD - TBD - TBD TBD September The Park on FifthMiami Beach, FL 2019 38.9 % 14,132 723 14,855 - 434,000 SF 15,000 SF 302 RApril 2020 August 2023 9 DeKalbBrooklyn, NY April 2019 4.2 % 5,000 544 5,544 - 450,000 SF 120,000 SF 540 RMarch 2019 June 2022 December FebruaryWest Hialeah Miami, FL 2019 77.8 % 12,522 536 13,058 - 1,400,000 SF - 1,369 RDecember 2019 2024 Condominium and Mixed Use Development$ 64,914 $ 22,905 $ 87,819 $ - Primarily Baltimore Maryland Portfolio County, MDJuly 2012 7.6 % 774 (774 ) - - N/A N/A 5,517 R N/A N/A Apartment Buildings$ 774 $ (774 ) $ - $ - Park Lane Hotel (36 Central Park South, NovemberCentral Park South )Manhattan, NY 2013 1.0 %$ 8,682 $ (6,519 ) $ 2,163 $ - 446,000 SF - 628 H N/A N/A Lower East Side, December215 Chrystie Street (4)Manhattan, NY 2012 18.4 % (4,551 ) 4,257 (294 ) - 246,000 SF - 367 HJune 2014 Completed Coral Beach and Tennis December ClubCoral Beach ,Bermuda 2013 49.0 % 6,048 (4,438 ) 1,610 - 52 Acres - 101 H N/A N/ACentral Park South , 589 H February ParkerNew York Manhattan, NY July 2019 1.0 % 1,000 (56 ) 944 - TBD - 99 RMay 2020 2022 Hotels$ 11,179 $ (6,756 ) $ 4,423 $ - The Plaza at Harmon Meadow Secaucus, NJ March 2015 49.0 % $
4,797
N /A December Wynn Las Vegas RetailLas Vegas, NV 2016 1.6 % 4,798 2,769 7,567 - - - 160,000 SF - - N/A N/A Commercial $
9,595 $ 48
Witkoff GP Partners (3) MultipleMarch 2017 15.0 %$ 11,082 $ (1,038 ) $ 10,044 $ 4,911 N/A N/A N/A N/A N/A 1 QPS Tower (23-10 DecemberQueens Plaza South )Long Island City, NY 2012 45.4 % (14,406 ) 14,406 - - N/A N/A N/AMarch 2014 Completed Witkoff EB-5 Capital September Partners Multiple 2018 49.0 % 516 434 950 8,735 N/A N/A N/A N/A N/ADiverse Real Estate Portfolio$ (2,808 ) $ 13,802 $ 10,994 $ 13,646 Investments in real estate ventures$ 83,654 $ 29,225 $ 112,879 $ 13,646 Total Carrying Value$ 104,921 $ 36,834 $ 141,755 (1) The Percentage Owned reflects our estimated current ownership percentage. Our actual ownership percentage as well as the percentage of earnings and cash distributions may ultimately differ as a result of a number of factors including potential dilution, financing or admission of additional partners. (2) This column only represents capital commitments required under the various joint venture agreements. However, many of the operating agreements provide for the operating partner to call capital. If a joint venture partner, such asNew Valley , declines to fund the capital call, then the partner's ownership percentage could either be diluted or, in some situations, the character of a funding member's contribution would be converted from a capital contribution to a member loan. (3)The Witkoff GP Partners venture includes a$2,471 investment in500 Broadway and a$7,573 investment in Fontainebleau Las Vegas. (4) Equity in losses in excess of the joint ventures' carrying value were$2,498 as ofJune 30, 2020 , and are classified in Other current liabilities. 65
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N/A - Not applicable SF - Square feet H - Hotel rooms TBD -To be determined R - Residential Units R Lots - Residential lotsNew Valley capitalizes net interest expense into the carrying value of its ventures whose projects were under development. Net capitalized interest costs included in Carrying Value as ofJune 30, 2020 were$7,547 . This amount is included in the "Cumulative Earnings (Losses)" column in the table above. During the six months endedJune 30, 2020 ,New Valley capitalized$2,257 of interest costs and utilized (reversed)$5,307 of previously capitalized interest in connection with the recognition of equity in (losses) earnings, gains and liquidations from various ventures. 66 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash, cash equivalents and restricted cash increased by$169,658 for the six months endedJune 30, 2020 and decreased by$258,325 for the six months endedJune 30, 2019 . Cash provided from operations was$341,329 and$98,102 for the six months endedJune 30, 2020 and 2019, respectively. The increase primarily related to increases in working capital, particularly in increased excise tax payables, income tax payables and promotional accruals in the tobacco segment, atJune 30, 2020 as well as the proceeds received from the sale of LTS in the 2020 period offset by lower operating income in 2020. The increases in excise tax payables related to the 90-day postponement of the payment due dates ofU.S. excise taxes fromMarch 1, 2020 toJuly 1, 2020 . We expect this postponement resulted in an increase to the liquidity of our tobacco segment in the second quarter of 2020 of approximately$131,700 and will result in a corresponding decline in the third quarter of 2020. Cash provided by investing activities was$46,575 for the six months endedJune 30, 2020 and cash used in investing activities was$9,087 for the six months endedJune 30, 2019 . In the first six months of 2020, cash provided by investing activities was from the sale of investment securities of$19,555 , pay downs of investment securities of$415 , maturities of investment securities of$31,574 , distributions from investments in real estate ventures of$5,172 , a decrease in restricted assets of$87 , and proceeds from the sale or liquidation of long-term investments of$23,407 . This was offset by the purchase of investment securities of$16,867 , investments in real estate ventures of$3,858 , capital expenditures of$6,242 , investments in real estate, net of$679 , an increase in cash surrender value of life insurance policies of$751 , and purchase of long-term investments of$5,238 . In the first six months of 2019, cash used in investing activities was for the purchase of investment securities of$44,222 , investments in real estate ventures of$21,908 , capital expenditures of$6,320 , investments in real estate, net of$1,153 , an increase in cash surrender value of life insurance policies of$789 , and purchase of subsidiaries of$668 . This was offset by the sale of investment securities of$12,942 , pay downs of investment securities of$545 , maturities of investment securities of$28,610 , and distributions from investments in real estate ventures of$23,200 , a decrease in restricted assets of$668 , and proceeds from the sale of fixed assets of$8 . Cash used in financing activities was$218,246 and$347,340 for the six months endedJune 30, 2020 and 2019, respectively. In the first six months of 2020, cash was used for the dividends and distributions on common stock of$63,478 , repayments of debt of$172,467 , distributions to non-controlling interest of$448 , and net repayments of debt under the revolver of$34,952 . This was offset by proceeds from issuance of common stock of$52,563 , proceeds from debt issuance of$531 and other of$5 . In the first six months of 2019, cash was used for the dividends and distributions on common stock of$118,748 , repayments of debt of$230,771 , distributions to non-controlling interest of$285 , deferred financing costs of$33 , offset by net borrowings of debt under the revolver of$2,497 . The terms of our 10.5% Senior Notes due 2026 contain covenants that place significant limitations on our ability to pay dividends and distributions in the future. See "10.5% Senior Notes due 2026" below. For the next twelve months beginningJune 30, 2020 , we have significant liquidity commitments at the corporate level (not including our tobacco and real estate operations) that require the use of existing cash resources. These include cash interest expense of approximately$110,300 on our other debt and other corporate expenses and taxes. In addition, the board continues to evaluate our dividend policy on a quarterly basis. Based on the$0.20 per share quarterly dividend rate in 2020, payment of our quarterly dividend would require cash payments of approximately$128,900 over the next twelve months. In order to meet these liquidity requirements as well as other liquidity needs in the normal course of business, we have in the past used cash flows from operations as well as existing cash and cash equivalents, which have, in the past, been generated from operations, monetization of investments and proceeds from debt issuances. Should these resources be insufficient to meet upcoming liquidity needs, we may also liquidate investment securities and other long-term investments, or, if available, draw on Liggett's credit facility. While there are actions we can take to reduce our liquidity needs, there can be no assurance that such measures will be successful. As ofJune 30, 2020 , we had cash and cash equivalents of$540,363 (including$60,921 of cash at Douglas Elliman and$217,590 of cash at Liggett), investment securities, which were carried at$88,643 (see Note 6 to condensed consolidated financial statements), and long-term investments, which were carried at$33,232 (and, including in-transit redemptions atJune 30, 2020 , with a fair value of$35,380 ). As discussed elsewhere, we used$169,610 of cash to retire the convertible notes due inApril 2020 . As ofJune 30, 2020 , our investments in real estate ventures were carried at$115,377 and our investments in real estate, net of accumulated depreciation, were carried at$28,876 . Limitation of interest expense deductible for income taxes. Since 2018, our interest expense that is deductible in the computation of our income tax liability has been limited to a percentage of adjusted taxable income, as defined, with certain exceptions. In 2019 and 2020, the amount is limited to 50% of taxable income before interest, depreciation and amortization and, in 2021, the amount is limited to 30% of taxable income before interest, depreciation and amortization. Beginning in 2022, the amount is limited to 30% of taxable income before interest thereafter for non-excepted trade or businesses. One such excepted trade or 67 -------------------------------------------------------------------------------- business is any electing real property trade or business, which portions of our real estate business may qualify. Interest expense allocable to an excepted trade or business is not subject to limitation. If any interest expense is disallowed, we are permitted to carry forward the disallowed interest expense indefinitely. Nonetheless, due to our high degree of leverage, a portion of our interest expense in future years may not be deductible, which could increase the after-tax cost of any new debt financings as well as the refinancing of our existing debt. Tobacco Litigation. Adverse verdicts have been entered in 16 Engle progeny cases against Liggett. Liggett has paid$39,773 , including interest and attorney's fees, to satisfy the final judgments entered against it. It is possible that additional cases could be decided unfavorably. Notwithstanding the comprehensive nature of the Engle progeny settlements, 42 Engle progeny cases remain pending. In addition, 54 individual actions are pending. Therefore, we and Liggett may still be subject to periodic adverse judgments which could have a material adverse effect on our consolidated financial position, results of operations and cash flows. Management cannot predict the cash requirements related to any future settlements or judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met. Management is unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases. It is possible that our consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any such tobacco-related litigation. Vector. 6.125% Senior Secured Notes due 2025. InJanuary 2017 , we issued$850,000 of our 6.125% Senior Secured Notes due 2025 ("6.125% Senior Secured Notes"). The indenture governing our 6.125% Senior Secured Notes (the "2025 Indenture") contains covenants that restrict the payment of dividends if our consolidated earnings before interest, taxes, depreciation and amortization ("Consolidated EBITDA"), as defined in the 2025 Indenture, for the most recently ended four full quarters is less than$75,000 . The 2025 Indenture also restricts the incurrence of debt if our Leverage Ratio and our Secured Leverage Ratio, as defined in the 2025 Indenture, exceed 3.0 and 1.5, respectively. Our Leverage Ratio is defined in the 2025 Indenture as the ratio of our guaranteeing subsidiaries' total debt less the fair market value of our cash, investment securities and long-term investments to Consolidated EBITDA, as defined in the 2025 Indenture. Our Secured Leverage Ratio is defined in the 2025 Indenture in the same manner as the Leverage Ratio, except that secured indebtedness is substituted for indebtedness. The following table summarizes the requirements of these financial covenants and the results of the calculation, as defined in the 2025 Indenture. Indenture June 30, Covenant Requirement 2020
Consolidated EBITDA, as defined
<3.0 to 1 2.08 to 1
Secured leverage ratio, as defined <1.5 to 1 0.61 to 1
As ofJune 30, 2020 andDecember 31, 2019 , we were in compliance with all debt covenants related to the 2025 Indenture. 10.5% Senior Notes due 2026. OnNovember 2, 2018 andNovember 18, 2019 , respectively, we sold$325,000 and$230,000 of our 10.5% Senior Notes due 2026 in private offerings exempt from the registration requirements of the Securities Act to qualified institutional buyers in accordance with Rule 144A of the Securities Act. The indenture governing our 10.5% Senior Notes due 2026 (the "2026 Indenture") restricts our ability to pay dividends and make certain other distributions subject to certain exceptions, including exceptions for (1) dividends and other distributions in an amount up to 50% of our consolidated net income, plus certain specified proceeds received us, if no event of default has occurred, and we are in compliance with a Fixed Charge Coverage Ratio (as defined in the 2026 Indenture) of at least 2.0x, and (2) dividends and other distributions in an unlimited amount, if no event of default has occurred and we are in compliance with a Net Leverage Ratio (as defined in the 2026 Indenture) no greater than 4.0x. As a result, absent an event of default, we can pay dividends if the Net Leverage ratio is below 4.0x, regardless of the value of the Fixed Charge Coverage Ratio at the time. The 2026 Indenture also restricts our ability to incur debt if our Fixed Charge Coverage Ratio is less than 2.0x, and restricts our ability to secure debt other than secured debt incurred pursuant to a Secured Leverage Ratio no greater than 3.75x, unless the 10.5% Senior Notes are secured on an equal and ratable basis. In addition, the 2026 Indenture restricts our ability to spin-off or transferNew Valley and its subsidiaries as a whole, orDER Holdings LLC and its subsidiaries (including Douglas Elliman) as a whole, unless (1) such spin-off or transfer complies with the covenants restricting mergers and asset sales, or (2) our Net Leverage Ratio is no greater than 4.0x. Our Fixed Charge Coverage Ratio is defined in the 2026 Indenture as the ratio of our Consolidated EBITDA to our Fixed Charges (each as defined in the 2026 Indenture). Our Net Leverage Ratio is defined in the 2026 Indenture as the ratio of our and our guaranteeing subsidiaries' total debt less our cash, cash equivalents, and the fair market value of our investment securities, long-term investments, investments in real estate, net, and investments in real estate ventures, to Consolidated EBITDA, as defined 68 --------------------------------------------------------------------------------
in the 2026 Indenture. Our Secured Leverage Ratio is defined in the 2026 Indenture as the ratio of our and our guaranteeing subsidiaries' total secured debt, to Consolidated EBITDA, as defined in the 2026 Indenture.
June 30, Covenant Indenture Requirement 2020 Consolidated EBITDA, as defined N/A$270,637
Fixed charge coverage ratio, as defined >2.0 to 1 2.68 to 1 Net leverage ratio, as defined
<4.0 to 1 2.16 to 1 Secured leverage ratio, as defined <3.75 to 1 3.21 to 1 As ofJune 30, 2020 andDecember 31, 2019 , we were in compliance with all of the debt covenants related to the 2026 Indenture. Liggett Credit Facility and Liggett Term Loan Under Credit Facility. As ofJune 30, 2020 , there was no outstanding balance under the Credit Agreement, which was primarily the result of the 90-day postponement ofU.S. excise taxes due betweenMarch 1, 2020 andJune 30, 2020 . Availability as determined under the Credit Agreement was$60,000 based on eligible collateral atJune 30, 2020 . AtJune 30, 2020 , Liggett was in compliance with all covenants under the Credit Agreement; Liggett's EBITDA, as defined, were$243,545 for the last twelve months endedJune 30, 2020 . Anticipated Liquidity Obligations. We and our subsidiaries have significant indebtedness and debt service obligations. As ofJune 30, 2020 , we and our subsidiaries had total outstanding indebtedness of approximately$1,433,200 . Of this amount,$850,000 comprised of the outstanding amount under our 6.125% Senior Secured Notes due 2025, and$555,000 comprised of the outstanding amount under our 10.5% Senior Notes due 2026. There is a risk that we will not be able to generate sufficient funds to repay our debt. If we cannot service our fixed charges, it would have a material adverse effect on our business and results of operations. We currently believe that our tobacco segment will be a positive cash-flow-generating unit and will continue to be able to sustain its operations in 2020 without any significant liquidity concerns. Our real estate segment has historically been a positive cash-flow generating segment, but we do not currently expect our real estate operations to generate positive cash-flow in 2020, primarily due to the COVID-19 pandemic and related economic disruption. In order to meet the above liquidity requirements as well as other anticipated liquidity needs in the normal course of business, we had cash and cash equivalents of approximately$540,400 , investment securities at fair value of approximately$88,600 , long-term investments with an estimated value of approximately$35,400 , and availability under Liggett's credit facility of approximately$60,000 atJune 30, 2020 . Management currently anticipates that these amounts, as well as expected cash flows from our operations, proceeds from public and/or private debt and equity financing to the extent available, management fees and other payments from subsidiaries should be sufficient to meet our liquidity needs over the next 12 months. Depending on market conditions, we may utilize our cash, investment securities and long-term investments to repurchase our 6.125% Senior Secured Notes due 2025 and 10.5% Senior Notes due 2026 in open-market purchases or privately negotiated transactions. We may acquire or seek to acquire additional operating businesses through merger, purchase of assets, stock acquisition or other means, or to make other investments, which may limit our liquidity otherwise available. Market Risk We are exposed to market risks principally from fluctuations in interest rates, foreign currency exchange rates and equity prices. 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 all market risk sensitive financial instruments. As ofJune 30, 2020 , approximately$27,500 of our outstanding debt at face value had variable interest rates determined by various interest rate indices, which increases the risk of fluctuating interest rates. Our exposure to market risk includes interest rate fluctuations in connection with our variable rate borrowings, which could adversely affect our cash flows. As ofJune 30, 2020 , there was no outstanding balance on the Liggett Credit Facility which also has variable interest rates. As ofJune 30, 2020 , we had no interest rate caps or swaps. Based on a hypothetical 100 basis point increase or decrease in interest rates (1%), our annual interest expense could increase or decrease by approximately$300 . We held debt securities available for sale totaling$54,885 as ofJune 30, 2020 . See Note 6 to our condensed consolidated financial statements. Adverse market conditions could have a significant effect on the value of these investments. On a quarterly basis, we evaluate our debt securities available for sale and equity securities without readily determinable fair values that do not qualify for the NAV practical expedient to determine whether an impairment has occurred. If so, we also make a determination if such impairment is considered temporary or other-than-temporary. We believe that the assessment of temporary or other-than-temporary impairment is facts-and-circumstances driven. The impairment indicators that are taken into consideration 69 -------------------------------------------------------------------------------- as part of our analysis include (a) a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, (b) a significant adverse change in the regulatory, economic, or technological environment of the investee, (c) a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates, and (d) factors that raise significant concerns about the investee's ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants.
Equity Security Price Risk
As ofJune 30, 2020 , we held various investments in equity securities with a total fair value of$66,990 , of which$33,758 represents equity securities at fair value and$33,232 represents long-term investment securities at fair value. The latter securities represent long-term investments in various investment partnerships. These investments are illiquid and their ultimate realization is subject to the performance of the underlying entities. See Note 6 to our condensed consolidated financial statements, respectively, for more details on equity securities at fair value and long-term investment securities at fair value. The impact to our condensed consolidated statement of operations related to equity securities fluctuates based on changes in their fair value. We record changes in the fair value of equity securities in net income. To the extent that we continue to hold equity securities, our operating results may fluctuate significantly. Based on our equity securities held as ofJune 30, 2020 , a hypothetical decrease of 10% in the price of these equity securities would reduce the fair value of the investments and, accordingly, our net income by approximately$6,699 .
New Accounting Pronouncements
Refer to Note 1, Summary of Significant Accounting Policies, to our financial statements for further information on New Accounting Pronouncements.
Legislation and Regulation There are no material changes from the Legislation and Regulation section set forth in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , except as follows. The following paragraph of "Item. 1. Business--Legislation and Regulation-Advertising and Warnings on Packaging" from our Annual Report on Form 10-K, which is referenced therein, is amended and restated in its entirety: OnMarch 18, 2020 , FDA issued a final rule to require new health warnings on cigarette packages and in cigarette advertisements. This rule requires each cigarette package and advertisement to bear one of eleven textual warning statements accompanied by a corresponding graphic image covering 50% of the area of the front and rear panels of cigarette packages and at least 20% of the area at the top of cigarette advertisements. The rule establishes marketing requirements that include the random and equal display and distribution of the required warnings for cigarette packages and quarterly rotation of the required warnings for cigarette advertisements. The final rule provided for an effective date ofJune 18, 2021 , 15 months after issuance of the final rule. The inclusion of new warnings and rotation requirements pursuant to the final rule would likely increase Liggett's production costs. OnApril 3, 2020 , Liggett, along with other tobacco companies, commenced an action against the FDA in theUnited States District Court , District ofTexas (Tyler Division) challenging the legality of the graphic warning final rule. OnMay 8, 2020 , the court issued an updated scheduling order and granted a joint motion to postpone the effective date of the final rule by 120 days toOctober 16, 2021 . We cannot predict whether the court will delay the effective date and/or determine that some or all of the proposed textual and/or graphic warnings, or proposed prominence of the warnings, violate the First Amendment, Administrative Procedure Act, or other legal requirements, or what the impact of such a court ruling would have on the compliance timeline or requirements imposed on industry. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS In addition to historical information, 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, 70
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• legislation and regulations,
• cash flows, • operating performance, • 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," "estimate," "expect," "intend," "may be," "objective," "plan," "seek," "predict," "project" and "will be" and similar words or phrases or their negatives. The forward-looking information involves 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, due to
acts of war and terrorism or otherwise,
• governmental regulations and policies,
• adverse changes in global, national, regional and local economic and
market conditions, including those related to pandemics and health crises,
such as the recent outbreak of COVID-19,
• significant changes in the price, availability or quality of tobacco,
other raw materials or component parts, including as a result of the COVID-19 pandemic, • potential dilution to our holders of or common stock as a result of issuances of additional shares of common stock to fund our financial obligations and other financing activities, • the impacts of the Tax Cuts and Jobs Act of 2017, including the deductibility of interest expense and the impact of the markets on our Real Estate segment,
• effects of industry competition,
• impact of business combinations, including acquisitions and divestitures,
both internally for us and externally in the tobacco industry,
• impact of legislation on our results of operations and product costs, i.e.
the impact of federal legislation providing for regulation of tobacco
products by FDA,
• impact of substantial increases in federal, state and local excise taxes,
• uncertainty related to product liability and other tobacco-related
litigations including the Engle progeny cases pending in
individual and class action cases where certain plaintiffs have alleged
compensatory and punitive damage amounts ranging into the hundreds of million and even billions of dollars; and, • potential additional payment obligations for us under the MSA and other settlement agreements with the states. Further information on the risks and uncertainties to our business include the risk factors discussed above in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and under Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSecurities and Exchange Commission . 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.
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