VECTOR GROUP LTD. (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 of Vector 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 ended December 31, 2020 and Notes thereto, included in
our 2020 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
ended June 30, 2021 and 2020.
Overview
We are a holding company and are engaged principally in two business segments: •Tobacco: the manufacture and sale of cigarettes inthe United States through ourLiggett Group LLC ("Liggett") andVector Tobacco Inc. ("Vector Tobacco") subsidiaries, and •Real Estate: the real estate services, technology and investment business through our subsidiaryNew Valley , which (i) ownsDouglas Elliman Realty LLC ("Douglas Elliman"), (ii) has interests in numerous real estate projects acrossthe United States and (iii) is seeking to acquire or invest in additional real estate services, technologies, 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 ,California ,Connecticut ,Massachusetts ,Colorado ,New Jersey andTexas . Our tobacco subsidiaries' cigarettes are produced in 100 combinations of length, style and packaging. Liggett's current brand portfolio includes: •Eagle 20's •Pyramid •Montego •Grand Prix •Liggett Select •Eve •USA and various Partner Brands and private label brands. The discount segment is a challenging marketplace, with consumers having less brand loyalty and placing greater emphasis on price. Liggett's competition is divided into two segments. The first segment consists of the three largest manufacturers of cigarettes inthe United States :Philip Morris USA Inc. , which is owned by Altria Group, Inc.,RJ Reynolds Tobacco Company , which is owned by British American Tobacco Plc, andITG Brands LLC , which is owned by Imperial Brands Plc. These three manufacturers, while primarily premium cigarette-based companies, also produce and sell discount cigarettes. The second segment of competition is comprised of a group of smaller manufacturers and importers, most of which sell deep discount cigarettes. 45 --------------------------------------------------------------------------------
COVID-19 Pandemic
The COVID-19 pandemic continues to evolve and disrupt normal activities in many segments of theU.S. economy even as COVID-19 vaccines have been and continue to be administered in 2021. Many uncertainties continue to surround the pandemic, including risks associated with the timing and extent of vaccine administration and the impact of COVID-19 variants, the duration of the pandemic and the length of immunity. Thus, the ultimate overall impact on our operations and real estate ventures is uncertain and we are continuing to carefully evaluate potential outcomes and working to mitigate risks.
The following provides a summary of our actions in our two segments - Tobacco
and Real Estate - since COVID-19 was declared a pandemic in
Impact of COVID-19 on Tobacco Segment. We believe many adult tobacco consumers have had incremental discretionary spending availability during the COVID-19 pandemic as a result of a variety of factors, including federal government stimulus payments and enhanced unemployment benefit payments enacted in response to the COVID-19 pandemic, and lower non-tobacco discretionary spending due to their stay-at-home practices. Although our Tobacco segment has not experienced a material adverse impact to date by the COVID-19 pandemic, there is continued uncertainty as to how the COVID-19 pandemic (including vaccine administration and the impact of variants as well as changes in COVID-19-related restrictions and guidelines) may impact adult tobacco consumers in the future. 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. Our management also continues to monitor the macroeconomic risks of the COVID-19 pandemic and its effect on adult tobacco consumers purchasing behaviors, including mix between premium and discount brand purchases. Our Eagle 20's and Montego brands are priced in the deep discount category and our other brands are primarily priced in the traditional discount category. 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. 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. Impact of COVID-19 on Real Estate Segment. The three and six months endedJune 30, 2021 demonstrated continued strength in the residential real estate market, which has improved markedly from a sharp decline in transactions, primarily in the second quarter of 2020, due to factors related to the COVID-19 pandemic. As Douglas Elliman's markets began reopening and vaccines for COVID-19 have become available, and consistent with home buying trends in theU.S. , Douglas Elliman's business improved significantly in markets complementary toNew York City , includingSouth Florida (Miami andPalm Beach ), theNew York City suburbs (Long Island ,Westchester County andConnecticut ), the Hamptons,Los Angeles , andAspen and, in 2021, inNew York City . In 2020, and, in particular, the second quarter of 2020, Douglas Elliman experienced a severe decline in closed sales volume inNew York City . Therefore, as a result of the impact of COVID-19 pandemic on theNew York City market, and combined with the increased demand for existing-homes in other areas of theU.S. , the percentage of Douglas Elliman's brokerage revenues from theNew York City market declined from approximately 46% in 2019 to approximately 29% for the twelve months endedJune 30, 2021 . In addition,New Valley has investments in multiple real estate ventures and properties in theNew York metropolitan area, which had a carrying value of$27,347 atJune 30, 2021 . Beginning inApril 2020 , as a response to the impact of the COVID-19 pandemic, we made significant operating adjustments at Douglas Elliman, including a reduction of brokerage personnel of approximately 25% and reductions of other administrative expenses, as well as a reduction, deferral or elimination of certain office lease expenses. As markets have reopened and Douglas Elliman's revenues have significantly increased, Douglas Elliman's expenses have increased from the comparable 2020 periods. These increases were primarily the result of increased personnel expenses (associated with both discretionary compensation as well as the reinstatement of salary levels) and advertising expenses (associated with increased listings in 2021). Despite increases in expenses, which began during the fourth quarter of 2020, Douglas Elliman operated at a lower cost basis during the three and six months endedJune 30, 2021 when compared to the 2019 comparable periods. The circumstances around the potential impact of COVID-19 pandemic on our Real Estate segment remain fluid and we continue to actively monitor the impact of the pandemic, including risks associated with the timing and extent of vaccine administration and the impact of COVID-19 variants, the duration of the pandemic and how long immunity lasts. Therefore, we are unable to predict the ultimate impact of the COVID-19 pandemic and related macroeconomic trends (including, in particular, the virtual work trend arising as a result of the COVID-19 pandemic and the availability of vaccines), or other factors resulting therefrom on the future financial condition, results of operations and cash flows from our Real Estate segment. 46 -------------------------------------------------------------------------------- Recent Developments Issuance of Senior Secured Notes due 2029. InJanuary 2021 , we issued$875,000 in aggregate principal of our 5.75% Senior Secured Notes due 2029 ("5.75% Senior Secured Notes") in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to persons outsidethe United States in compliance with Regulation S under the Securities Act. The 5.75% Senior Secured Notes pay interest on a semi-annual basis at a rate of 5.75% per year and mature onFebruary 1, 2029 . Prior toFebruary 1, 2024 , we may redeem some or all of the 5.75% Senior Secured Notes at any time at a make-whole redemption price and, thereafter, we may redeem some or all of the 5.75% Senior Secured Notes at a premium that will decrease over time, plus accrued and unpaid interest, if any, to the redemption date. The aggregate net proceeds from the issuance of the 5.75% Senior Secured Notes were approximately$855,500 after deducting offering expenses. We used the net proceeds of the issuance, together with cash on hand, to redeem all of our outstanding 6.125% Senior Secured Notes due 2025, including accrued interest and any premium thereon, and to pay fees and expenses in connection with the offering of the 5.75% Senior Secured Notes. Liggett Credit Facility. OnMarch 22, 2021 , Liggett, 100Maple LLC ("Maple") and Vector Tobacco entered into Amendment No. 4 and Joinder to Third Amended and Restated Credit Agreement (the "Credit Agreement") withWells Fargo Bank, National Association , as agent and lender. The existing credit agreement was amended to, among other things, (i) add Vector Tobacco as a borrower under the Restated Credit Agreement, (ii) extend the maturity of the Credit Agreement toMarch 22, 2026 , and (iii) increase the amount of the maximum credit line thereunder from$60,000 to$90,000 . As ofJune 30, 2021 , approximately$84,600 was available for borrowing with no outstanding balance under the Restated Credit Agreement. Montego. SinceAugust 2020 , Liggett has expanded the distribution of its Montego deep discount brand by 17 states, primarily located in the southeast and midwest. Montego was Liggett's third-largest brand for the three months endedJune 30, 2021 . Prior toAugust 2020 , Montego was sold in select targeted markets in four states. Montego's volume represented approximately 12% for the three months endedJune 30, 2021 compared to approximately 5% of total unit volume sales for the three months endedJune 30, 2020 and approximately 12% of Liggett's unit volume for the six months endedJune 30, 2021 compared to approximately 5% for the six months endedJune 30, 2020 . Property Technology ("PropTech") Investments.New Valley Ventures' made the following investments (all of which are currently$1,000 or less) during the six months endedJune 30, 2021 . •Rechat - an investment inFebruary 2021 in a mobile-centric real estate agent marketing, customer relationship management and transaction-management software. This investment aligns strategically with Douglas Elliman's multi-year services agreement with Rechat for its agents. •Purlin - an investment inMarch 2021 in an automated intelligence platform to aid in home buying. •EVPassport - an investment inMarch 2021 in an electronic vehicle charging platform. •Humming Homes - an investment inMarch 2021 in a tech-enabled home management service. •MoveEasy - an investment inJune 2021 in a client-facing digital concierge service designed to assist clients move into and "set up" their new homes, while offering additional services to maintain their homes. MoveEasy is delivered in a white-labeled format in partnership with residential real estate brokerages in a package that features the name and contact information of the selling agent. •The Lab PropTech Fund - an investment inJune 2021 into aMiami -based fund that will invest in emerging technology companies serving emerging real estate and construction industries. 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. 47 -------------------------------------------------------------------------------- Mississippi Dispute. InJanuary 2016 , the Attorney General forMississippi filed a motion inChancery Court inJackson County, Mississippi to enforce theMarch 1996 settlement agreement (the "1996 Agreement") alleging that Liggett owesMississippi at least$27,000 in compensatory damages and interest. InApril 2017 , theChancery Court ruled, over Liggett's objections, that the 1996 Agreement should be enforced and referred the matter first to arbitration and then to a Special Master for further proceedings to determine the amount of damages, if any, to be awarded. InApril 2021 , following confirmation of the final arbitration award, the parties stipulated that the unpaid principal (exclusive of interest) purportedly due from Liggett toMississippi pursuant to the 1996 Agreement (from inception through 2020 - the final contract year) is approximately$16,700 , subject to Liggett's right to litigate and/or appeal the enforceability of the 1996 Agreement (and all issues other than the calculation of such principal amount). InSeptember 2019 , the Special Master held a hearing regardingMississippi's claim for pre and post-judgment interest. InJune 2021 , the Special Master issued a draft report with proposed findings that pre-judgment interest in the amount of approximately$18,600 , is due from Liggett fromApril 2005 -July 9, 2021 . At the request of the Special Master, the parties provided comments to the draft report and the matter is sub judice. The Special Master's report, once finalized, is subject to objections by the parties and further review and hearing by the trial court before a final judgment may be entered. Once final judgment is entered, additional interest amounts will accrue if the judgment is not overturned on appeal. Liggett continues to believe that theApril 2017 Chancery Court order is in error because the most favored nations provision in the 1996 Agreement eliminated all of Liggett's payment obligations toMississippi , and it reserved all rights to appeal this and other issues at the conclusion of the case. In the event Liggett appeals an adverse judgment, the posting of a bond may be required. Liggett may be required to make additional payments toMississippi andTexas which could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. See "Legislation and Regulation" in Item 2 of the MD&A for further information on litigation.
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, 2020 . Please refer to that section and the information below for disclosures regarding the critical accounting policies related to our business.
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, 2021 and 2020 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, 2021 2020 2021 2020 Revenues: Tobacco$ 329,496 $ 312,510 $ 597,959 $ 599,579 Real estate 400,033 133,250 675,334 300,669 Total revenues$ 729,529 $ 445,760 $ 1,273,293 $ 900,248 Operating income (loss): Tobacco$ 103,179 $ 79,309 (1) $
184,778 (3)
Real estate 42,362 (6,875) (2) 57,622 (74,350) (5)
Corporate and Other (8,465) (5,637) (15,121) (12,252)
Total operating income $ 137,076 $ 66,797 $ 227,279 $ 61,893 (1) Operating income included
48
--------------------------------------------------------------------------------
(3) Operating income included $2,722 received from a litigation settlement
associated with the MSA (which reduced cost of sales) and $5 of litigation
settlement and judgment expense.
(4) Operating income included $53 of litigation settlement and judgement
expense.
(5) Operating loss included $58,252 of impairment charges related to the
impairments of goodwill and other intangible assets and $2,961 of restructuring
charges.
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Revenues. Total revenues were $729,529 for the three months ended June 30, 2021
compared to $445,760 for the three months ended June 30, 2020 . The $283,769
(63.7%) increase in revenues was primarily due to a $266,783 increase in Real
Estate revenues, which was primarily related to Douglas Elliman and a $16,986
increase in Tobacco revenues.
Cost of sales. Total cost of sales was $500,410 for the three months ended
June 30, 2021 compared to $304,885 for the three months ended June 30, 2020 . The
$195,525 (64.1%) increase in cost of sales was primarily due to a $203,447
increase in Real Estate cost of sales, which was primarily related to Douglas
Elliman. This was offset by a $7,922 decline in Tobacco cost of sales.
Expenses. Operating expenses were $92,043 for the three months ended June 30,
2021 compared to $74,078 for the same period last year. The $17,965 (24.3%)
increase in operating expenses was due to a $14,099 increase in Real Estate
expenses, which included $2,961 of restructuring expenses, a $1,038 increase in
Tobacco expenses, and a $2,828 increase in Corporate and Other expenses.
Operating income. Operating income was $137,076 for the three months ended
June 30, 2021 compared to $66,797 for the same period last year. The $70,279
(105.2%) increase in operating income was due to a $49,237 increase in Real
Estate operating income, primarily related to Douglas Elliman, and a $23,870
increase in Tobacco operating income. This was offset by an increase of $2,828
in Corporate and Other operating loss.
Other expenses. Other expenses were $4,911 and $30,107 for the three months
ended June 30, 2021 and 2020, respectively. For the three months ended June 30,
2021 , other expenses primarily consisted of interest expense of $28,115 . This
was offset by equity in earnings from real estate ventures of $16,685 , other
income of $5,578 and equity in earnings from investments of $941 . For the three
months ended June 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 .
Income before provision for income taxes. Income before income taxes was
$132,165 and $36,690 for the three months ended June 30, 2021 and 2020,
respectively.
Income tax expense. Income tax expense was $38,860 and $10,916 for the three
months ended June 30, 2021 and 2020, 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 ended
June 30, 2020 , 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, Pyramid,
Liggett Select and Grand Prix by $0.14 per pack on June 28, 2021 , $0.14 per pack
in January 2021 , by $0.13 per pack in November 2020 , $0.11 per pack in June
2020 , and $0.08 per pack in February 2020 .
All of our Tobacco sales were in the discount category in 2021 and 2020. For the
three months ended June 30, 2021 , Tobacco revenues were $329,496 compared to
$312,510 for the three months ended June 30, 2020 . Revenues increased by $16,986
(5.4%) due primarily to an increase in the average selling price of our brands
for the three months ended June 30, 2021 partially offset by a 1.9% (46 million
units) decline in sales volume.
49
--------------------------------------------------------------------------------
Despite recent pricing increases, Eagle 20's remains Liggett's primary low-cost
cigarette brand and its percentage of Liggett's total unit volume sales has
declined slightly from 63% in the three months ended June 30, 2020 to 60% for
the three months ended June 30, 2021 . Pyramid, Liggett's second-largest brand,
declined from 24% of total unit volume sales in the three months ended June 30,
2020 to 21% for the three months ended June 30, 2021 . Montego is Liggett's third
largest brand and increased from approximately 5% of total unit volume sales in
the three months ended June 30, 2020 to approximately 12% for the three months
ended June 30, 2021 .
Tobacco cost of sales. The major components of our Tobacco cost of sales were as
follows:
Three Months Ended
June 30,
2021 2020
Manufacturing overhead, raw materials and labor $
33,277
Customer shipping and handling 1,885 1,361
Federal Excise Taxes, net 118,735 121,170
FDA expense 5,622 6,116
MSA expense, net of market share exemption 46,626 52,751
Total cost of sales $ 206,145 $ 214,067
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 the U.S. Cigarette market exceeds 1.92%. The
calculation of our benefit from the MSA is an estimate based on U.S. domestic
taxable cigarette shipments. As of June 30, 2021 , we estimate taxable shipments
in the U.S. will decline by 6.0% in 2021. As of June 30, 2020 , we estimated
taxable shipments in the U.S. would decline by 4.5% in 2020 and, the actual
change in 2020 taxable shipments was an increase of 2.0%. Our annual MSA expense
changes by approximately $1,650 for each percentage change in estimated shipment
volumes in the U.S. market.
Inflationary pressures impact Liggett's cost of sales through increases in MSA
expense as well as manufacturing costs. Liggett's MSA expense is subject to an
annual inflation adjustment, which is the greater of the U.S. CPI rate or 3% and
inflationary pressures in the U.S. economy could also increase Liggett's cost of
sales. For the three months ended June 30, 2021 , Liggett's management assumed an
inflation adjustment to MSA expense of 3.4% for the six months ended June 30,
2021 and assumed 3% for the three months ended June 30, 2020 . The actual
inflation adjustment to the MSA in 2020 was 3%. In addition, the largest
component of Liggett's manufacturing costs is leaf tobacco and other raw
materials. Our annual MSA expense increases by approximately $1,800 for each 1%
percentage increase of inflation in excess of 3%. In addition, the largest
component of Liggett's manufacturing costs is leaf tobacco and other raw
materials. In recent years, due to declining prices of leaf tobacco as well as
efficiencies gained from technological innovation in Liggett's factory,
Liggett's raw material costs have been flat and, therefore, has not been
impacted by inflation. However, during 2021, Liggett experienced a 2.1%
inflation increase for the three months ended June 30, 2021 and management
anticipates the inflationary trends could continue.
Tobacco gross profit was $123,351 for the three months ended June 30, 2021
compared to $98,443 for the three months ended June 30, 2020 , an increase of
$24,908 (25.3%). The increase in gross profit for the three months ended
June 30, 2021 was primarily attributable to increased pricing associated with
the Eagle 20's and Pyramid brands more than offsetting the impact of a 1.9%
decline in unit sales. As a percentage of revenue (excluding Federal Excise
Taxes), Tobacco gross profit increased from 51.4% in the 2020 period to 58.5% in
the 2021 period. The increase in gross profit was primarily the result of
increased net pricing as well as lower per unit MSA expense.
Tobacco expenses. Tobacco operating, selling, general and administrative
expenses, excluding settlements and judgments, were $20,172 and $19,081 for the
three months ended June 30, 2021 and 2020, respectively. The increase of $1,091
was mainly due to increased travel and marketing expenses related to the lifting
of COVID-19 pandemic related restrictions, and higher compensation accruals,
partially offset by a decrease in professional fees and expenses associated with
Colorado's minimum price legislation. Total tobacco product liability legal
expenses, including settlements and judgments, were $1,542 and $1,641 for the
three months ended June 30, 2021 and 2020, respectively.
Tobacco operating income. Tobacco operating income was $103,179 for the three
months ended June 30, 2021 compared to $79,309 for the same period last year.
The increase of $23,870 (30.1%) was primarily attributable to higher gross
profit, as discussed above, partially offset by increased operating, selling,
general and administrative expenses.
50
--------------------------------------------------------------------------------
Real Estate.
Real Estate revenues. Real Estate revenues were $400,033 and $133,250 for the
three months ended June 30, 2021 and 2020, respectively. Real Estate revenues
increased by $266,783 , which was primarily related to an increase of $252,779 in
Douglas Elliman's commission and other brokerage income, reflecting increased
revenues from existing home sales due to home-buying trends in Douglas Elliman's
markets.
In 2020, and, in particular, the second quarter of 2020, Douglas Elliman
experienced a severe decline in closed sales volume in New York City . Therefore,
as a result of the impact of COVID-19 pandemic on the New York City market, and
combined with the increased demand for existing-homes in other areas of the
U.S. , the percentage of Douglas Elliman's brokerage revenues from the New York
City market declined from approximately 46% in 2019 to approximately 29% for the
twelve months ended June 30, 2021 .
The three months ended June 30, 2021 demonstrated continued strength in the
residential real estate market, which has improved markedly from a sharp decline
in transactions, primarily in the second quarter of 2020, due to factors related
to the COVID-19 pandemic. As Douglas Elliman's markets began reopening and
vaccines for COVID-19 have become available, and consistent with home buying
trends in the U.S. , Douglas Elliman's business improved significantly in markets
complementary to New York City , including South Florida (Miami and Palm Beach ),
the New York City suburbs (Long Island , Westchester County and Connecticut ), the
Hamptons, Los Angeles , and Aspen and, in 2021, in New York City . Douglas
Elliman's commission and other brokerage income generated from the sales of
existing homes increased by $98,734 in the Southeast region, $69,991 in New York
City , $31,494 in the West (California and Colorado ) region, and $30,788 in the
Northeast region, which excludes New York City . In addition, Douglas Elliman's
revenues from Development Marketing increased by $21,772 for the three months
ended June 30, 2021 .
Real Estate revenues and cost of sales for the three months ended June 30, 2021
and 2020, respectively, were as follows:
Three Months Ended
June 30,
2021 2020
Real Estate Revenues:
Commission and other brokerage income $ 376,033 $ 123,254
Property management revenue 9,901
8,832
Escrow and title fees 6,041
843
Revenues from investments in real estate 6,750 - Sales on facilities primarily from Escena 1,308 321 Total real estate revenues$ 400,033 $ 133,250 Real Estate Cost of Sales: Real estate commissions$ 283,652 $ 90,116 Cost of sales from investments in real estate 6,744 - Escrow and title fees 2,867
139
Cost of sales on facilities primarily from Escena 1,002
563
Total real estate cost of sales$ 294,265 $
90,818
___________________________________
Real Estate cost of sales. Real Estate cost of sales were$294,265 and$90,818 for the three months endedJune 30, 2021 and 2020, respectively. Real Estate cost of sales increased by$203,447 , primarily related to a$193,536 increase in Douglas Elliman's real estate agent commissions, which resulted from an increase in sales volume. Real estate brokerage commissions increased from 73.1% for the three months endedJune 30, 2020 to 75.4% for the three months endedJune 30, 2021 . This was primarily due to the increase in the percentage of revenues from the Southeast (Florida ) and Western (primarilyCalifornia ) regions which traditionally pay higher commission percentages than theNew York City region. Real Estate segment gross profit increased from$42,432 for the three months endedJune 30, 2020 to$105,768 for the three months endedJune 30, 2021 , an increase of$63,336 , which was primarily related to increases in Douglas Elliman's commission and other brokerage income. Real Estate expenses. Real Estate expenses, which are primarily comprised of expenses of Douglas Elliman, were$63,406 and$49,307 for the three months endedJune 30, 2021 and 2020, respectively. For the three months endedJune 30, 2020 , Real Estate expenses included restructuring charges, which were the result of expense-reduction initiatives, of$2,961 at Douglas 51 -------------------------------------------------------------------------------- Elliman. 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. Beginning inApril 2020 , as a response to the impact of the COVID-19 pandemic, we made significant operating adjustments at Douglas Elliman, including reductions in brokerage personnel of approximately 25%, certain salaries and other administrative expenses, as well as a reduction, deferral or elimination of certain office lease expenses. As markets have reopened and Douglas Elliman's revenues have significantly increased, Douglas Elliman's expenses have increased from the comparable 2020 periods. Real estate expenses, excluding restructuring charges, increased by$17,060 for the three months endedJune 30, 2021 compared to the comparable period in 2020, primarily as a result of increased personnel expense (associated with both discretionary compensation as well as the reinstatement of salary levels) and advertising expenses associated with Douglas Elliman's increased listings in 2021. Real Estate operating income (loss).The Real Estate segment reported operating income of$42,362 for the three months endedJune 30, 2021 compared to operating loss of$6,875 for the three months endedJune 30, 2020 . The increase in Real Estate segment's operating income of$49,237 was primarily the result of the increase in gross profit discussed above along with the impact of expense-reduction initiatives that began at Douglas Elliman in the second quarter of 2020. Corporate and Other. Corporate and Other operating loss. The operating loss at the Corporate and Other segment was$8,465 for the three months endedJune 30, 2021 compared to$5,637 for the same period in 2020 and the difference was due primarily to increased administrative costs related to professional fees and travel expenses related to the lifting of COVID-19 restrictions. Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 Revenues. Total revenues were$1,273,293 for the six months endedJune 30, 2021 compared to$900,248 for the six months endedJune 30, 2020 . The$373,045 (41.4%) increase in revenues was primarily due to a$374,665 increase in Real Estate revenues, which was primarily related to an increase in Douglas Elliman's brokerage revenues related to the strength of theU.S. existing home market during the 2021 period. This was offset by a$1,620 decline in Tobacco revenues related to lower unit volume partially offset by increases in net pricing resulting primarily from increases in 2020 and 2021. Cost of sales. Total cost of sales was$863,952 for the six months endedJune 30, 2021 compared to$615,508 for the six months endedJune 30, 2020 . The$248,444 (40.4%) increase in cost of sales was primarily due to a$289,625 increase in Real Estate cost of sales, which was primarily related to increased Douglas Elliman's commissions. This was offset by a$41,181 decline in Tobacco cost of sales primarily related to decreased sales volume. Expenses. Operating expenses were$182,062 for the six months endedJune 30, 2021 compared to$222,847 for the same period last year. The$40,785 (18.3%) decline was due to a$46,932 decline in Real Estate expenses, primarily related to the absence of the impairment of goodwill and other intangible asset charge and restructuring charges at Douglas Elliman of$58,252 and$2,961 , respectively, recorded in the 2020 period. This was offset by a$3,278 increase in Tobacco expenses and a$2,869 increase in Corporate and Other expense for the six months endedJune 30, 2021 . Operating income. Operating income was$227,279 for the six months endedJune 30, 2021 compared to an operating income of$61,893 for the same period last year. Operating income for the six months endedJune 30, 2020 included an impairment expense associated with goodwill and other intangible assets and restructuring charges in our Real Estate segment. Real Estate operating income increased$131,972 primarily related to increased revenues at Douglas Elliman in 2021 associated with the strength of existing-home sales, which was propelled by home-buying trends associated with increased demand in Douglas Elliman's markets, and the absence of the impairment and restructuring expenses in the 2021 period. Tobacco operating income increased by$36,283 due primarily to increases in net pricing and lower per unit MSA expense. This was offset by the increased Corporate and Other operating loss of$2,869 . Other expenses. Other expenses were$50,104 for the six months endedJune 30, 2021 compared to other expenses of$29,412 for the six months endedJune 30, 2020 . For the six months endedJune 30, 2021 , other expenses primarily consisted of interest expense of$56,866 , and loss on the extinguishment of debt of$21,362 . This was offset by equity in earnings from real estate ventures of$18,274 , equity in earnings from investments of$1,518 and other income of$8,332 . For the six months endedJune 30, 2020 , other expenses primarily consisted of interest expense of$64,985 , equity in losses from real estate ventures$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. Income (loss) before provision for income taxes. Income before income taxes was$177,175 for the six months endedJune 30, 2021 compared to loss before income taxes of$32,481 for the six months endedJune 30, 2020 . 52 -------------------------------------------------------------------------------- Income tax expense (benefit). Income tax expense was$51,913 for the six months endedJune 30, 2021 compared to income tax expense of$9,938 for the six months endedJune 30, 2020 . 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 six months endedJune 30, 2020 , the annual effective tax rate applied to year-to-date income resulted in tax expense which was increased by discrete items related to income tax benefits on 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 equity in earnings from investments associated with the one-time gain on sale of LTS. Tobacco. Tobacco revenues. Liggett increased the list price of Eagle 20's, Pyramid, Liggett Select, Eve andGrand Prix by$0.14 per pack onJune 28, 2021 ,$0.14 per pack inJanuary 2021 , by$0.13 per pack inNovember 2020 ,$0.11 per pack inJune 2020 , and$0.08 per pack inFebruary 2020 . All of our Tobacco sales were in the discount category in 2021 and 2020. For the six months endedJune 30, 2021 , Tobacco revenues were$597,959 compared to$599,579 for the six months endedJune 30, 2020 . Revenues declined by$1,620 (0.3%) due primarily to a 7.7% (357 million units) decline in unit sales volume partially offset by an increase in the average selling price of our brands for the six months endedJune 30, 2021 . Despite recent pricing increases, Eagle 20's remains Liggett's primary low-cost cigarette brand and its percentage of Liggett's total unit volume sales declined from approximately 63% in the six months endedJune 30, 2020 to approximately 60% for the six months endedJune 30, 2021 . Pyramid, Liggett's second largest brand, declined from approximately 24% of total unit volume sales in the six months endedJune 30, 2020 to approximately 21% for the six months endedJune 30, 2021 . Montego is Liggett's third largest brand and increased from approximately 5% of total unit volume sales in the six months endedJune 30, 2020 to approximately 12% for the six months endedJune 30, 2021 . Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows: Six Months EndedJune 30, 2021 2020
Manufacturing overhead, raw materials and labor
3,301 2,833
Federal Excise Taxes, net 216,449 234,309
FDA expense 11,694 12,466
MSA expense, net of market share exemption 78,194 (1) 96,215
Total cost of sales $ 370,176 $ 411,357
(1) Includes $2,722 received from a litigation settlement associated with the
MSA expense.
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 the U.S. cigarette market exceeds 1.92%. The
calculation of our benefit from the MSA is an estimate based on U.S. domestic
taxable cigarette shipments. As of June 30, 2021 , we estimate taxable shipments
in the U.S. will decline by 6.0% in 2021. As of June 30, 2020 , we estimated
taxable shipments in the U.S. would decline by 4.5% in 2020 and, the actual
change in 2020 taxable shipments was an increase of 2.0%. Our annual MSA expense
changes by approximately $1,650 for each percentage change in estimated shipment
volumes in the U.S. market.
53
--------------------------------------------------------------------------------
Inflationary pressures impact Liggett's cost of sales through increases in MSA
expense as well as manufacturing costs. Liggett's MSA expense is subject to an
annual inflation adjustment, which is the greater of the U.S. CPI rate or 3% and
inflationary pressures in the U.S. economy could also increase Liggett's cost of
sales. For the six months ended June 30, 2021 , Liggett's management assumed an
inflation adjustment to MSA expense of 3.4% for the six months ended June 30,
2021 and assumed 3% for the six months ended June 30, 2020 . The actual inflation
adjustment to the MSA in 2020 was 3%. In addition, the largest component of
Liggett's manufacturing costs is leaf tobacco and other raw materials. In recent
years, due to declining prices of leaf tobacco as well as efficiencies gained
from technological innovation in Liggett's factory, Liggett's raw material costs
have been flat and, therefore, has not been impacted by inflation. However,
during 2021, Liggett experienced a 1.2% inflation increase for the six months
ended June 30, 2021 and management anticipates the inflationary trends could
continue.
Tobacco gross profit was $227,783 for the six months ended June 30, 2021
compared to $188,222 for the six months ended June 30, 2020 , an increase of
$39,561 (21.0%). For the six months ended June 30, 2021 , gross profit included
$2,722 received from an MSA settlement, which reduced cost of sales. Excluding
this settlement, gross profit for the six months ended June 30, 2021 was
$225,061 , an increase of $36,839 (19.6%). This increase in gross profit for the
six months ended June 30, 2021 was primarily attributable to increased net
pricing across Liggett's brand portfolio more than offsetting the impact of a
7.7% decline in unit sales. As a percentage of revenue (excluding Federal Excise
Taxes), Tobacco gross profit increased from 51.5% in the 2020 period to 59.7% in
the 2021 period. The increase in gross profit was primarily the result of
increased pricing and lower per unit MSA expenses.
Tobacco expenses. Tobacco operating, selling, general and administrative
expenses, excluding settlements and judgments, were $43,000 for the six months
ended June 30, 2021 compared to $39,674 for the six months ended June 30, 2020 .
The increase of $3,326 was mainly due to increased professional fees and
expenses associated with Colorado's minimum price legislation, increased travel
and marketing expenses related to the lifting of COVID-19 restrictions and
higher compensation accruals. Tobacco product liability legal expenses,
including settlements and judgments, were $3,067 and $3,191 for the six months
ended June 30, 2021 and 2020, respectively.
Tobacco operating income. Tobacco operating income was $184,778 for the six
months ended June 30, 2021 compared to $148,495 for the six months ended
June 30, 2020 . The increase of $36,283 (24.4%) was primarily attributable to
higher gross profit margins, as discussed above, partially offset by increased
operating, selling, general and administrative expenses.
Real Estate.
Real Estate revenues. Real Estate revenues were $675,334 and $300,669 for the
six months ended June 30, 2021 and 2020, respectively. Real Estate revenues
increased by $374,665 , which was primarily related to an increase of $355,913 in
Douglas Elliman's commission and other brokerage income, reflecting increased
revenues from existing home sales due to home-buying trends in Douglas Elliman's
markets.
In 2020, and, in particular, the second quarter of 2020, Douglas Elliman
experienced a severe decline in closed sales volume in New York City . Therefore,
as a result of the impact of COVID-19 pandemic on the New York City market, and
combined with the increased demand for existing-homes in other areas of the
U.S. , the percentage of Douglas Elliman's brokerage revenues from the New York
City market declined from approximately 46% in 2019 to approximately 29% for the
twelve months ended June 30, 2021 .
The six months ended June 30, 2021 demonstrated continued strength in the
residential real estate market, which has improved markedly from a sharp decline
in transactions, primarily in the second quarter of 2020, due to factors related
to the COVID-19 pandemic. As Douglas Elliman's markets began reopening and
vaccines for COVID-19 have become available, and consistent with home buying
trends in the U.S. , Douglas Elliman's business improved significantly in markets
complementary to New York City , including South Florida (Miami and Palm Beach ),
the New York City suburbs (Long Island , Westchester County and Connecticut ), the
Hamptons, Los Angeles , and Aspen and, in 2021, in New York City . Douglas
Elliman's commission and other brokerage income generated from the sales of
existing homes increased by $144,109 in the Southeast region, $90,017 in New
York City , $52,314 in the Northeast region, which excludes New York City , and
$46,872 in the West region. In addition, Douglas Elliman's revenues from
Development Marketing increased by $22,601 for the six months ended June 30,
2021 .
54--------------------------------------------------------------------------------
Real Estate revenues and cost of sales for the six months ended
Six Months Ended
June 30,
2021 2020
Real Estate Revenues:
Commission and other brokerage income $ 635,133 $ 279,220
Property management revenue 19,169
17,611
Escrow and title fees 10,449
1,699
Revenues from investments in real estate 7,650 - Sales on facilities primarily from Escena 2,933 2,139 Total real estate revenues$ 675,334 $ 300,669 Real Estate Cost of Sales: Real estate agent commissions$ 480,669 $
202,315
Cost of sales from investments in real estate 6,744 - Escrow and title fees 4,485
277
Cost of sales on facilities primarily from Escena 1,878 1,559
Total real estate cost of sales$ 493,776 $
204,151
Real Estate cost of sales. Real Estate cost of sales were$493,776 and$204,151 for the six months endedJune 30, 2021 and 2020, respectively. Real Estate cost of sales increased by$289,625 , primarily related to$278,354 increase in Douglas Elliman's real estate agent commissions, which resulted from an increase in sales volume. Real estate brokerage commissions increased from 72.5% to for the six months endedJune 30, 2020 to 75.7% for the six months endedJune 30, 2021 . This was primarily due to the increase in the percentage of revenues from the Southeast (Florida ) and Western (primarilyCalifornia ) regions which traditionally pay higher commission percentages than theNew York City region. Real Estate segment gross profit increased from$96,518 for the six months endedJune 30, 2020 to$181,558 for the six months endedJune 30, 2021 , an increase of$85,040 , which was primarily related to increases in Douglas Elliman's commission and other brokerage income. Real Estate expenses. Real Estate expenses, which are primarily comprised of expenses of Douglas Elliman, were$123,936 and$170,868 for the six months endedJune 30, 2021 and 2020. The expenses for the six months endedJune 30, 2020 included the non-cash impairment of goodwill and other intangible assets of$58,252 and restructuring charges, which were the result of expense-reduction initiatives, of$2,961 at Douglas Elliman. 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. Beginning inApril 2020 , as a response to the impact of the COVID-19 pandemic, we made significant operating adjustments at Douglas Elliman, including reductions in brokerage personnel of approximately 25%, certain salaries and other administrative expenses, as well as a reduction, deferral or elimination of certain office lease expenses. As markets have reopened and Douglas Elliman's revenues have significantly increased, Douglas Elliman's expenses have increased from the comparable 2020 periods. Real estate expenses, excluding the restructuring charges and non-cash impairment, increased by$14,281 for the six months endedJune 30, 2021 compared to the comparable period in 2020, primarily as a result of increased personnel expense (associated with both discretionary compensation as well as the reinstatement of salary levels) and advertising expenses associated with Douglas Elliman's increased listings in 2021. These amounts were offset by lower general and administrative, occupancy and travel expenses. Real Estate operating income (loss).The Real Estate segment reported operating income of$57,622 and operating loss of$74,350 for the six months endedJune 30, 2021 and 2020, respectively. The increase in the Real Estate segment's operating income, after excluding the non-cash impairment charge in the 2020 period, was primarily the result of the increase in gross profit discussed above along with the impact of expense-reduction initiatives that began at Douglas Elliman in the second quarter of 2020. Corporate and Other. Corporate and Other loss. The operating loss at the Corporate and Other segment was$15,121 for the six months endedJune 30, 2021 compared to$12,252 for the same period in 2020. 55 -------------------------------------------------------------------------------- Summary of Real Estate Investments We own and seek to acquire investment interests in various domestic and international real estate projects through debt and equity investments. Our real estate investments primarily include the following projects as ofJune 30, 2021 : (Dollars in Thousands. Area and Unit Information in Ones) Future Capital Commit- Projected Number ofNet Cash Cumulative Carrying Value ments from Residential Lots, Actual/Projected Percentage Owned Invested Earnings as ofJune 30 , New Valley Units and/or Hotel Construction Start Projected Location Date ofInitial Investment (1) (Returned) (Losses) 2021 (2) Projected Residential and/orHotel Area Projected Commercial Space Rooms Date Construction End Date Master planned community, golf course, and club house in Palm 667 R Lots Escena, net Springs, CAMarch 2008 100 %$ 2,951 $ 6,657 $ 9,608 $ - 450 Acres 450 H N/A N/A Townhome A (11 Beach Street )TriBeCa ,Manhattan, NY November 2020 100 % (6) 6 - - 6,169 SF 1 R N/A Completed Investments in real estate, net$ 2,945 $ 6,663
Investments in real estate ventures:
111 Murray Street TriBeCa ,Manhattan, NY May 2013 9.5 %$ 6,819 $ (4,414) $ 2,405 $ - 330,000 SF 1,700 SF 157 RSeptember 2014 Completed 87 Park (8701 Collins Avenue )Miami Beach, FL December 2013 23.1 % (6,485) 6,485 - - 160,000 SF TBD 70 ROctober 2015 Completed Financial District, Manhattan,125 Greenwich Street NYAugust 2014 13.4 % 7,992 (7,992) - - 306,000 SF 16,000 SF 273 RMarch 2015 TBD West Hollywood Edition (9040 Sunset 20 R Boulevard)West Hollywood, CA October 2014 48.5 % 11,513 (11,513) - - 210,000 SF - 190 HMay 2015 Completed 236 R The XI (76 Eleventh Avenue )West Chelsea ,Manhattan, NY May 2015 5.1 % 17,000 (17,000) - - 630,000 SF 85,000 SF 137 HSeptember 2016 TBDMonad Terrace (1300 West Ave )Miami Beach, FL May 2015 19.6 % 7,635 (7,635) - - 160,000 SF - 59 RMay 2016 Completed Takanasee (805 Ocean Ave )Long Branch, NJ December 2015 22.8 % 6,144 (6,144) - - 63,000 SF - 13 RJune 2017 TBD Brookland (15 East 19th St )Brooklyn, NY April 2017 9.8 % 402 1 403 - 24,000 SF - 33 RAugust 2017 Completed Dime (209 Havemeyer St )Brooklyn, NY November 2017 16.5 % 9,145 (1,356) 7,789 - 100,000 SF 150,000 SF 177 RMay 2017 Completed352 6th Avenue Brooklyn, NY February 2019 37.0 % 685 111 796 - 5,200 SF - 4 RSeptember 2019 Completed Meatpacking District,Meatpacking Plaza (44 Ninth Ave )Manhattan, NY April 2019 16.9 % 10,692 (2,746) 7,946 - 8,741 SF 76,919 SF 15 RJuly 2021 May 2023 Five Park (500 Alton Road )Miami Beach, FL September 2019 38.9 % 18,098 1,461 19,559 - 482,000 SF 15,000 SF 291 RApril 2020 August 2023 9 DeKalb Avenue Brooklyn, NY April 2019 4.2 % 5,000 894 5,894 - 450,000 SF 120,000 SF 540 RMarch 2019 February 2023 Natura Miami, FL December 2019 77.8 % 7,354 5,263 12,617 - 460,000 SF - 460 RDecember 2019 November 2022 Townhome B (11 Beach Street )TriBeCa ,Manhattan, NY November 2020 46.7 % (594) 594 - - 4,752 SF - 1 R N/A CompletedRitz-Carlton Villas (4701 Meridian Avenue)Miami Beach, FL December 2020 50.0 % 4,109 (32) 4,077 - 55,000 SF - 15 ROctober 2020 August 2022 Condominium and Mixed Use Development$ 105,509 $ (44,023) $ 61,486 $ - Maryland Portfolio PrimarilyBaltimore County, MD July 2012 7.6 %$ (16,585) $ 16,585 $ - - N/A N/A 245 R N/A N/A Apartment Buildings$ (16,585) $ 16,585 $ - $ - Park Lane Hotel (36 Central Park Central Park South, Manhattan, South) NYNovember 2013 1.0 %$ 8,682 $ (7,229) $ 1,453 $ - 446,000 SF - 628 H N/A N/A215 Chrystie Street (4)Lower East Side ,Manhattan, NY December 2012 17.8 % (2,136) 1,803 (333) - 246,000 SF - 367 HJune 2014 CompletedCoral Beach and Tennis Club Coral Beach,Bermuda December 2013 49.0 % 6,048 (4,724) 1,324 - 52 Acres - 101 H N/A N/A 587 H ParkerNew York (119 W 56th St ) Midtown,Manhattan, NY July 2019 0.4 % 1,000 (339) 661 - 470,000 SF - 99 RMay 2020 December 2022 Hotels$ 13,594 $ (10,489) $ 3,105 $ -The Plaza at Harmon Meadow Secaucus, NJ March 2015 49.0 %$ 4,200 $ (4,200) $ - $ - - - 219,000 SF - - N/A N /A Wynn Las Vegas RetailLas Vegas, NV December 2016 1.6 % 4,519 2,620 7,139 - - - 160,000 SF - - N/A N/A Commercial$ 8,719 $ (1,580) $ 7,139 $ -Witkoff GP Partners (3) MultipleMarch 2017 15.0 %$ 11,154 $ (9,620) $ 1,534 $ - N/A N/A N/A N/A N/A1 QPS Tower (23-10 Queens Plaza South )Long Island City, NY December 2012 45.4 % (14,406) 14,406 - - N/A N/A N/AMarch 2014 CompletedWitkoff EB-5 Capital Partners MultipleSeptember 2018 49.0 % 516 479 995 - N/A N/A N/A N/A N/A Biscayne Mortgage MultipleApril 2021 50.0 % 1,500 - 1,500 - N/A N/A N/A N/A N/A Partners Land Services MultipleJune 2021 50.0 % 100 - 100 - N/A N/A N/A N/A N/A Diverse Real Estate Portfolio$ (1,136) $ 5,265 $ 4,129 $ - Investments in real estate ventures$ 110,101 $ (34,242) $ 75,859 $ - Total Carrying Value$ 113,046 $ (27,579) $ 85,467 $ - 56
-------------------------------------------------------------------------------- (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 as New 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$1,534 investment in500 Broadway , a Condominium andMixed Use Development inSanta Monica, CA. (4) Equity in losses in excess of the joint ventures' carrying value were$333 as ofJune 30, 2021 , and are classified in Other current liabilities. TBD -To be R - Residential N/A - Not applicable SF - Square feet H - Hotel rooms determined Units R Lots - Residential lots New 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, 2021 were$8,347 . This amount is included in the "Cumulative Earnings (Losses)" column in the table above. During the six months endedJune 30, 2021 , New Valley capitalized$1,022 of interest costs and utilized (reversed)$153 of previously capitalized interest in connection with the recognition of equity in (losses) earnings, gains and liquidations from various ventures. 57 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash, cash equivalents and restricted cash increased by$139,420 and$169,658 for the six months endedJune 30, 2021 and 2020, respectively. Cash provided from operations was$221,300 and$341,329 for the six months endedJune 30, 2021 and 2020, respectively. The decline in cash provided from operations related primarily to higher federal excise tax payments by the tobacco segment in 2021, (ii) the absence of proceeds in 2021 associated with the sale of LTS, which occurred in 2020, and (iii) cash expenditures inFebruary 2021 associated with the premium for the retirement of our 6.125% Senior Secured Notes due 2025. These amounts were offset by increased operating income during the six months endedJune 30, 2021 . The lower excise tax payments in 2020 related to the 90-day postponement of the payment due dates ofU.S. excise taxes fromMarch 1, 2020 toJuly 1, 2020 . This postponement resulted in an increase to the liquidity of our tobacco segment in the second quarter of 2020 of approximately$131,700 and the payments were made in the third quarter of 2020. Cash used in investing activities was$16,666 for the six months endedJune 30, 2021 and cash provided by investing activities was$46,575 for the six months endedJune 30, 2020 . In the first six months of 2021, cash used in investing activities was for the purchase of investment securities of$74,805 , investments in real estate ventures of$9,902 , capital expenditures of$3,055 , an increase in cash surrender value of life insurance policies of$1,348 , purchase of long-term investments of$6,963 , and an increase in restricted assets of$5 . This was offset by the sale of investment securities of$23,477 , paydowns of investment securities of$302 , maturities of investment securities of$36,461 , distributions from investments in real estate ventures of$11,163 , and proceeds from the sale or liquidation of long-term investments of$8,009 . In the first six months of 2020, cash provided by investing activities was from the sale of investment securities of$19,555 , paydowns 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 . Cash used in financing activities was$65,214 and$218,246 for the six months endedJune 30, 2021 and 2020, respectively. In the first six months of 2021, cash was used for the dividends on common stock of$63,738 , repayments of debt of$856,316 , deferred financing costs of$20,109 , and other of$51 . This was offset by proceeds from debt issuance of$875,000 . In the first six months of 2020, cash was used for 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 . We use dividends from our tobacco and real estate subsidiaries, as well as cash and cash equivalents maintained at the corporate level, to fund our significant liquidity commitments at the corporate level (not including our tobacco and real estate operations). These liquidity commitments include cash interest expense of approximately$108,900 , dividends on our outstanding common shares of approximately$128,900 , which is based on an assumed quarterly cash dividend of$0.20 per share, and other corporate expenses and income taxes. As ofJune 30, 2021 , we had cash and cash equivalents of$490,390 (including$155,224 of cash at Douglas Elliman and$108,191 of cash at Liggett), investment securities and long-term investments, which were carried at$212,363 (see Note 6 to condensed consolidated financial statements). As ofJune 30, 2021 , our investments in real estate ventures were carried at$76,192 and our investment in real estate, net of accumulated depreciation, was carried at$9,608 . Limitation of interest expense deductible for income taxes. Since 2018, the amount of interest expense that is deductible in the computation of income tax liability has been limited to a percentage of adjusted taxable income, as defined by applicable law. In 2019 and 2020, the amount of deductible interest expense was limited to 50% of taxable income before interest, depreciation and amortization and, in 2021, the amount will be limited to 30% of taxable income before interest, depreciation and amortization. Beginning in 2022, the amount will be limited to 30% of taxable income before interest. However, interest expense allocable to a designated excepted trade or business is not subject to limitation. One such excepted trade or business is any electing real property trade or business, for which portions of our real estate businesses may qualify. If any interest expense is disallowed, we are permitted to carry forward the disallowed interest expense indefinitely. As a result of interest expense that is allocated to our real estate businesses (from the holding company) not being subject to the limitation, all of our interest expense to date has been tax deductible; however, due to our high degree of leverage and the large amount of our interest expense that is currently allocated to our real estate businesses (from the holding company) for income tax purposes, 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. 58 -------------------------------------------------------------------------------- Tobacco Litigation. As ofJune 30, 2021 , 16 verdicts were entered in Engle progeny cases against Liggett. Several of these verdicts have been affirmed on appeal and have been satisfied by Liggett. Liggett has paid$40,111 , 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 of more than 5,200 cases, approximately 38 plaintiffs' claims remain outstanding. Therefore, we and Liggett may still be subject to periodic adverse judgments that could have a material adverse effect on our consolidated financial position, results of operations and cash flows. In addition, Liggett may be required to make additional payments toMississippi which could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. See Recent Developments in Litigation. 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. OnFebruary 1, 2021 , the 6.125% Senior Secured Notes due 2025 were redeemed in full and we recorded a loss on the extinguishment of debt of$21,362 for the six months endedJune 30, 2021 , including$13,014 of premium and$8,348 of other costs and non-cash interest expense related to the recognition of previously unamortized deferred finance costs. 5.75% Senior Secured Notes due 2029. OnJanuary 28, 2021 , we completed the sale of$875,000 in aggregate principal amount of our 5.75% Senior Secured Notes due 2029 ("5.75% Senior Secured Notes") to qualified institutional buyers and non-U.S. persons in a private offering pursuant to the exemptions from the registration requirements of the Securities Act contained in Rule 144A and Regulation S thereunder. The aggregate net cash proceeds from the sale of the 5.75% Senior Secured Notes were approximately$855,500 after deducting the initial purchaser's discount and estimated expenses and fees in connection with the offering. We used the net cash proceeds from the 5.75% Senior Secured Notes offering, together with cash on hand, to redeem all of our outstanding 6.125% Senior Secured Notes due 2025, including accrued interest and premium thereon, onJanuary 28, 2021 . The 5.75% Senior Secured Notes pay interest on a semi-annual basis at a rate of 5.75% per year and mature on the earlier ofFebruary 1, 2029 and the date that is 91 days before the final stated maturity date of our 10.5% Senior Notes due 2026 ("10.5% Senior Notes") if such 10.5% Senior Notes have not been repurchased and cancelled or refinanced by such date. Prior toFebruary 1, 2024 , we may redeem some or all of the 5.75% Senior Secured Notes at any time at a make-whole redemption price. On or afterFebruary 1, 2024 , we may redeem some or all of the 5.75% Senior Secured Notes at a premium that will decrease over time, plus accrued and unpaid interest, if any, to the redemption date. In addition, any time prior toFebruary 1, 2024 , we may redeem up to 40% of the aggregate outstanding amount of the 5.75% Senior Secured Notes with the net proceeds of certain equity offerings at 105.75% of the aggregate principal amount of the 5.75% Senior Secured Notes, plus accrued and unpaid interest, if any, to the redemption date, if at least 60% of the aggregate principal amount of the 5.75% Senior Secured Notes originally issued remains outstanding after such redemption, and the redemption occurs within 90 days of the closing of such equity offering. In the event of a change of control, as defined in the indenture governing the 5.75% Senior Secured Notes (the "2029 Indenture"), each holder of the 5.75% Senior Secured Notes may require the Company to repurchase some or all of its 5.75% Senior Secured Notes at a repurchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest, if any, to the date of purchase. If the Company sells certain assets and does not apply the proceeds as required pursuant to the 2029 Indenture, it must offer to repurchase the 5.75% Senior Secured Notes at the prices listed in the 2029 Indenture. The 5.75% Senior Secured Notes are fully and unconditionally guaranteed, subject to certain customary automatic release provisions, on a joint and several basis by all of our wholly-owned domestic subsidiaries that are engaged in the conduct of our cigarette businesses, which subsidiaries, as of the issuance date of the 5.75% Senior Secured Notes, were also guarantors under our outstanding 10.5% Senior Notes. The 5.75% Senior Secured Notes are not guaranteed byNew Valley LLC , or any of our subsidiaries engaged in our real estate business conducted through our subsidiary,New Valley LLC . The guarantees provided by certain of the guarantors are secured by first priority or second priority security interests in certain collateral of such guarantors pursuant to security and pledge agreements, subject to certain permitted liens and exceptions as further described in the 2029 Indenture and the security documents relating thereto.Vector Group Ltd does not provide any security for the 5.75% Senior Secured Notes. 59 -------------------------------------------------------------------------------- The 2029 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 2029 Indenture, for the most recently ended four full quarters is less than$75,000 . The 2029 Indenture also restricts the incurrence of debt if our Leverage Ratio and our Secured Leverage Ratio, each as defined in the 2029 Indenture, exceed 3.0 to 1.0 and 1.5 to 1.0, respectively. Our Leverage Ratio is defined in the 2029 Indenture as the ratio of our and 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 2029 Indenture. Our Secured Leverage Ratio is defined in the 2029 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 test and the extent to which we would have satisfied these requirements had the 2029 Indenture been in effect as ofJune 30, 2021 . Indenture June 30, Covenant Requirement 2021 Consolidated EBITDA, as defined$75,000 $411,838 Leverage ratio, as defined <3.0 to 1 2.10 to 1
Secured leverage ratio, as defined <1.5 to 1 0.79 to 1
As ofJune 30, 2021 , we were in compliance with all debt covenants related to the 2029 Indenture. 10.5% Senior Notes due 2026. OnNovember 2, 2018 andNovember 18, 2019 , respectively, we sold$325,000 and$230,000 , respectively, in aggregate principal amount of our 10.5% Senior Notes to qualified institutional buyers and non-U.S. persons pursuant to the exemptions from the registration requirements of the Securities Act contained in Rule 144A and Regulation S thereunder. The 10.5% Senior Secured Notes due 2026 are guaranteed by all of our wholly owned domestic subsidiaries that are engaged in the conduct of our cigarette business andDER Holdings LLC . The indenture governing our 10.5% Senior Notes due 2026 (the "2026 Indenture") contains covenants that restrict the payment of dividends and 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 by the Company, 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 2.0 to 1.0, 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 4.0 to 1.0. As a result, absent an event of default, we can pay dividends if the Net Leverage ratio is below 4.0 to 1.0, 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 2.0 to 1.0, and restricts our ability to secure debt to the extent doing so would cause our Secured Leverage Ratio (as defined in the 2026 Indenture) to exceed 3.75 to 1.0, 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 transfer New 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 4.0 to 1.0. 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 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. The following table summarizes the requirements of these financial test and the extent to which we satisfied these requirements as ofJune 30, 2021 . June 30, Covenant Indenture Requirement 2021 Consolidated EBITDA, as defined N/A
Fixed charge coverage ratio, as defined >2.0 to 1 4.01 to 1 Net leverage ratio, as defined <4.0 to 1 1.46 to 1 Secured leverage ratio, as defined <3.75 to 1
1.99 to 1
As ofJune 30, 2021 andDecember 31, 2020 , we were in compliance with all of the debt covenants related to the 2026 Indenture. Guarantor Summarized Financial Information.Vector Group Ltd. (the "Issuer") and its wholly-owned domestic subsidiaries that are engaged in the conduct of its cigarette business (the "Subsidiary Guarantors") have filed a shelf registration 60 -------------------------------------------------------------------------------- statement for the offering of debt and equity securities on a delayed or continuous basis and we are including this condensed consolidating financial information in connection therewith. Any such debt securities may be issued by us and guaranteed by our Subsidiary Guarantors. New Valley and any of its subsidiaries, other thanDER Holdings LLC (the "Nonguarantor Subsidiaries") will not guarantee any such debt securities. Both the Subsidiary Guarantors and the Nonguarantor Subsidiaries are wholly-owned by the Issuer. The Condensed Consolidating Balance Sheets as ofJune 30, 2021 and the related Condensed Consolidating Statements of Operations for the six months endedJune 30, 2021 of the Issuer, Subsidiary Guarantors and Nonguarantor Subsidiaries are set forth in Exhibit 99.2. Presented herein are the Summarized Combined Balance Sheets as ofJune 30, 2021 andDecember 31, 2020 and the related Summarized Combined Statements of Operations for the six months endedJune 30, 2021 for the Issuer and the Subsidiary Guarantors (collectively, the "Obligor Group "). The summarized combined financial information is presented after the elimination of: (i) intercompany transactions and balances among theObligor Group , and (ii) equity in earnings from and investments in the Nonguarantor Subsidiaries.
Summarized Combined Balance Sheets:
June 30, December 31,
2021 2020
Assets:
Current assets $ 605,478 $ 515,082
Noncurrent assets 262,690 264,041
Intercompany receivables from Nonguarantor
Subsidiaries 1,835 2,040
Liabilities:
Current liabilities 256,488 193,125
Noncurrent liabilities 1,529,714 1,521,293© Edgar Online, source
