Cigarettes and luxury real estate are decidedly odd office mates. But together, they form the business backbone of a $2.64 billion publicly traded company that’s one of the largest Miami-based firms — even if few locals realize it’s here.
That company is Vector Group, a New York Stock Exchange-listed holding company that trades under the ticker symbol VGR.
The company isn’t even well known on Wall Street, perhaps because its diverse business portfolio makes the company hard to categorize and compare to other companies. Only two investment banks publish research on Vector.
What are widely familiar are some of its component businesses: Cigarette manufacturer Liggett, the nation’s fourth-largest, makes smokes under the brands Pyramid, Eve, Liggett Select, Grand Prix and Eagle 20’s. And Douglas Elliman residential real estate brokerage, said to be the nation’s fourth-largest residential real estate firm, boasts 5,000 luxury-focused agents nationwide.
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Vector also owns a sliver of Ladenburg Thalmann, a Miami-based investment banking firm that has expanded with a network of securities broker-dealers. Vector also has investments in spirits and hotels, including the trend-setting Morgans Hotel Group.
The company’s improbable mix of investments is testimony to its cash cow, the cigarette business. Ever since the company negotiated a crucial legal settlement of litigation over illnesses due to smoking in the late 1990s, Vector has been a small but durable player with a special cost advantage in the tobacco industry, and it has leveraged its success in tobacco to invest in other businesses, especially real estate, instead of pouring more money into the declining cigarette business.
Vector also returns a lot of cash to shareholders. The company has paid a quarterly cash dividend for 20 years in a row. Whether Vector keeps paying dividends for the next 20 years may hinge on the future course of its real estate operations and other non-cigarette businesses.
Vector is “kind of an anomaly in the tobacco space because it’s got a sizable portion of revenues coming from the real estate business,” said Nancy Meadows, an New York City-based analyst who follows Vector Group for Moody’s Investors Service. “They are super-small players in the tobacco space, and that has been a pretty steady business that has done well for them so far.”
But she also said cash flows in the real estate business are more variable than in the tobacco business, so it’s an analytical challenge “trying to project what the cash flows are going to look like with these lumpy moves in real estate.”
Vector’s dividend-paying stock has almost doubled in price from a five-year low of $13.41 in late 2012, and the stock has been durable despite recent market volatility. The stock market sell-off that started in early August took a limited toll on Vector’s stock price, which has dropped to the $22-$23 range from a 52-week peak of $25.71 on Aug. 5. VGR shares closed Friday at $23.
When the stock price declines, of course, the stock’s dividend yield increases. The yield, which is the annual cash dividend of $1.60 divided by the stock price, increased from 6.2 percent in early August to 6.7 percent in mid-September. On Sept. 29, Vector will pay shareholders a 40-cent quarterly cash dividend and an annual 5 percent stock dividend, or one share for every 20 held. Vector has paid a 5 percent stock dividend annually since 1999 and a quarterly cash dividend since 1995.
The company has been “reasonably well managed,” but “we view the financial policies as being skewed in favor of shareholders,” Meadows said. “It’s a pretty juicy dividend that they pay out. We’re always kind of sensitive to that because we want to see a balance between the interests of shareholders and debt holders.”
One prominent fan of Vector is Dr. Phillip Frost, the Miami billionaire, serial entrepreneur and philanthropist. (See box.) He appreciates top management’s maintenance of the cash return on Vector stock and the stock dividends. Frost is a major shareholder of Vector with about 15 percent of the company’s outstanding stock, some of it acquired outright, the rest through his investment in securities convertible to Vector shares.
“First of all, I like the management team led by [CEO] Howard Lorber,” Frost said in an Aug. 25 phone interview. Lorber, who has been the president and chief executive officer of Vector for almost 10 years, “is a very clever businessman and a good manager.”
“Secondly, I like the fact it is a company that thinks about the interests of the shareholders,” he said. “They are paying a high dividend ... The dividend has actually been increasing because they pay a 5 percent stock dividend in addition.”
Asked if he felt conflicted as a doctor holding a large investment in a cigarette company, Frost said, “Well, I look at it primarily in terms of their other interests, their real estate holdings and their other investments ... They make very timely investments of all sorts. I think the cigarette business is becoming less important to them as time goes on.”
Frost expects the real estate side of Vector Group to become increasingly important to the company’s overall performance
It certainly did last year: Real estate revenue exploded to $561 million from $65 million in 2013, and Vector’s total revenue grew by almost the same amount. Sources of real estate revenue include Douglas Elliman commissions, profits from sales of property holdings, and building-management fees.
Including about $1 billion annually from its tobacco business, Vector’s total revenue grew to $1.59 billion last year from $1.07 billion in 2014, a 48 percent surge. Net income rose to $49.2 million, up 26 percent from $38.9 million in 2013. Total cash dividends increased to $167 million last year from $144 million in 2013. (Frost’s share alone amounted to approximately $28 million last year.)
FOCUS ON TOBACCO
Tobacco’s share of Vector’s revenue is declining — down to 62 percent in the first six months of 2015, compared to 99 percent in 2000. Even so, the company’s cigarette business is still its primary one.
Vector’s tobacco business “could grow as it gradually increases pricing for its latest [cigarette] brand, Eagle 20’s, which has been gaining [market] share,” Oppenheimer & Company analysts Ian Zaffino and Richard Faulkner wrote in their July 29 report on Vector.
Vector’s roots in the industry can be traced to 1822, when the grandfather of John E. Liggett opened a snuff shop in Belleville, Illinois. Liggett went on to form a partnership with George S. Myers, and by the 1880s, the Liggett & Myers Tobacco Co. had entered the cigarette business, eventually introducing brands such as Chesterfield, Eve, L&M and Lark.
The company changed hands twice in the 1980s — first when it was acquired in 1980 by Grand Metropolitan PLC, and again in 1986 when private investor Bennett S. LeBow bought Liggett from Grand Metropolitan through Brook Group, a company he controlled, and took Brook public with a listing on the New York Stock Exchange. Under LeBow’s leadership, the company relocated its headquarters in 1993 to Miami from New York and renamed itself Vector Group in 2000.
Vector has had two CEOs in the past 25 years: LeBow, from June 1990 to December 2005, and Lorber, who succeeded him in January 2006. (Lorber declined to be interviewed for this article.)
It was LeBow — who remains the company’s chairman of the board — who led the company through the transformative period in the late 1990s, when Vector negotiated competitively favorable terms in a master settlement agreement to resolve widespread litigation over illnesses caused by smoking. Vector and three larger cigarette companies, Lorillard and industry leaders Philip Morris USA and R.J. Reynolds Tobacco, entered into the deal with 46 states and most U.S. territories.
The settlement gave Vector an enduring cost advantage in competition with the other three cigarette makers, each of them substantially larger than their Miami-based rival. Vector calculates that its cost advantage under the master settlement agreement amounts to $160 million a year, or 66 cents per pack of cigarettes.
Lorillard, Phillip Morris and R.J. Reynolds are required to make annual payments to the settlement fund totaling $9 billion, but Vector makes annual payments to the fund only to the extent that its share of the U.S. cigarette market exceeds 1.65 percent through its Liggett subsidiary or 0.28 percent through its Vector Tobacco subsidiary. If its subsidiaries’ market shares are lower than these thresholds, Vector makes no payments to the settlement fund. But regardless of their market shares, the Big 3 cigarette companies are required to make payments. .
And Vector tries to make the most of that cost advantage.
The company’s Liggett cigarette manufacturing facility in Mebane, North Carolina, is designed for short production runs, enabling Liggett to manufacture and market 117 different cigarette-brand styles. These include private-label cigarettes for other companies, mainly distributors who supply supermarkets and convenience stores.
The North Carolina plant made 8.9 billion cigarettes for domestic distribution last year and has the capacity to make as many as 17 billion a year. Its output equated to 3.4 percent of about 265 billion cigarettes shipped in the United States last year, compared to a 3.3 percent share of the domestic market in 2013 and 3.5 percent in 2012.
Despite a long-term decline in industry-wide cigarette shipments due to taxation, regulation, litigation and health concerns, Vector has succeeded in recent years in the discount segment of the market: Brands such as Eagle 20’s, Grand Prix, Liggett Select and Pyramid sell for significantly less than better-known brands do.
But competition in the tobacco industry is likely to get much tougher. In June, Reynolds American completed a $27.4 billion acquisition of Lorillard. Reynolds markets two of the nation’s biggest-selling cigarette brands, Camel and Pall Mall, along with Kool, Salem and Winston. Newport, the biggest-selling menthol cigarette, is the flagship brand of Lorillard. R.J. Reynolds and Lorillard agreed in May to divest part of their cigarette business to settle charges by the Federal Trade Commission that the merger of the two companies would probably be anti-competitive. The combined company and Altria would control almost 90 percent of the domestic cigarette market.
“The decision of the FTC’s commissioners not to challenge the transaction was ill-advised and will likely lead to an expansion of Reynolds’ so-called everyday low-priced program that we believe is anticompetitive,” Lorber said July 29 on the company’s quarterly conference call with stock analysts. “We will continue to closely monitor their activities and, as necessary, take appropriate steps to protect our business and ensure a fair playing field.”
REAL ESTATE ROLE
Meanwhile, Douglas Elliman is probably the most visible Vector brand in South Florida, which has about 750 agents and about 50 employees. If there are any concerns on the part of shareholders and analysts, it is about the cyclical nature of the real estate business and its profitability.
Douglas Elliman agents last year handled a total of $1.2 billion of real estate sales in approximately 1,100 transactions. It does business in markets in New York — where it has operated since it was founded in 1911 — and, increasingly, outside of it. In South Florida, the agency has nine offices across downtown Miami, Miami Beach, North Miami, Fort Lauderdale, Boca Raton and Palm Beach.
In the past two years, Douglas Elliman has been “capitalizing on the tremendous nexus between the New York market and the Florida market and expanding to Colorado, the Aspen market, and Southern California,” said Jay Phillip Parker, chief executive of Douglas Elliman’s Florida brokerage. In South Florida, “we feel that Douglas Elliman is well-positioned to gain market share as a luxury player.”
That sentiment is partly shared by Oppenheimer analysts Zaffino and Faulkner: “Douglas Elliman could benefit from a strong New York real estate market,” they noted in their July 29 report on Vector.
Vector indirectly owns about 70 percent of Douglas Elliman through a major subsidiary, the venerable New Valley Corp., which was founded in 1851. New Valley also has been Vector’s vehicle for a growing portfolio of real estate investments, many of them in the New York City area, some in South Florida and other places beyond the Big Apple.
For example, Vector owns a 15 percent interest in the Howard Johnson Plaza Dezerland Beach & Spa hotel in Miami Beach at 8701 Collins Ave., which will be redeveloped as a condominium building called Park 87; it’s expected to open in 2017. Vector also has invested in a luxury condominium project on Monad Terrace off Bay Road in South Beach with JDS Development Group and its founder, Michael Stern.
The company has been a seller, too, in South Florida’s bullish real estate market. Vector collected $14.4 million in May 2014 for selling 80 percent of a real estate development in the Indian Creek area of Miami Beach, according to the company’s annual Form 10-K filing this year with the Securities & Exchange Commission.
“We probably have about $40 million of future [real estate] projects. I guess some will always fall by the wayside, but as the market looks now, you know, I think most of them will get built and they’ll sell,” Lorber said on the July conference call.
“We are pleased with our recent performance and continue to believe that Vector Group is well-positioned,” Lorber said during the call. “We have strong cash reserves, have consistently grown our profit margins in recent years and will continue to benefit from our favorable terms under the MSA [master settlement agreement]. Additionally, we are proud of the company’s uninterrupted track record of paying a regular quarterly cash dividend since 1995 and an annual 5 percent stock dividend since 1999. The company once again reaffirms that our cash dividend policy remains the same.”
THE BOTTOM LINE
Lorber’s task, going forward, is to maintain dividends at the current levels.
Indeed, at least one investment bank says Vector’s current annual cash dividend of $1.60 per share is sustainable, even though Vector’s total dividend payout far exceeds its net income.
“Overall, both tobacco and real estate are performing well, and attractive real estate investments provide long-term upside. We believe the $1.60/share annual dividend is secure,” Zaffino and Faulkner wrote in their report on Vector. The company reported a “solid” second-quarter performance “on the back of strength in the traditional tobacco business.”
The Oppenheimer analysts lifted their price target for Vector from $25 to $27 and maintained their positive “outperform” rating on the company’s stock.
But although he has no shortage of experience in generating returns for Vector shareholders, Lorber may yet have to allay concerns both about volatility in the real estate markets and about his own pay and benefits.
Lorber was promoted from within. He already had been president and chief operating officer and a director from January 2001 to December 2005 when Vector elevated him from COO to CEO. He rose on the real estate side of the company. By the time he got his 2006 promotion to CEO, Lorber had been president and COO of Vector’s New Valley real estate subsidiary for 21 years.
Before he became president of New Valley in 1994, Lorber was chairman of the board of Hallman & Lorber Associates, a firm that provides consulting and actuarial services to pension and profit-sharing plans, for two decades. His ongoing boardroom commitments include serving as a trustee of Long Island University and as vice chairman of Vector subsidiary Ladenburg Thalmann Financial Services Inc., a New York Stock Exchange company listed under ticker symbol LTS.
All that experience doesn’t come cheap.
Lorber collected $29.6 million of total compensation in 2014, including stock awards worth about $20 million, making him the highest paid executive of a South Florida-based public company. His total compensation increased by 214 percent last year from the 2013 level.
In its latest proxy statement, Vector Group said it granted Lorber, now age 67, about a million shares of restricted stock in July 2014 “to recognize past and current performance and to serve as a ... meaningful incentive for Mr. Lorber to continue to serve as CEO during the next seven years, even though he is eligible to retire now.”
His lofty compensation may be a factor in sagging shareholder approval of Vector’s executive pay structure. Vector shareholders this year cast 57.2 percent of their advisory “say-on-pay” votes in favor of the compensation of Lorber and other executive officers, down from 61 percent in 2014 and 62 percent in 2013.
Nonbinding shareholder approval of executive pay may erode further if Vector’s increased reliance on the cyclical real estate business undermines efforts to maintain a steady dividend policy.
Vector subsidiaries own fractional interests in multiple real estate projects that produce irregular cash flow. For example, the company owns about 5 percent of a joint venture pursuing the conversion of a 260,000-square-foot office building into a luxury residential condominium, called 10 Madison Square West, in the Flatiron District / NoMad neighborhood of Manhattan.
Bernstein, president of Vector’s tobacco businesses, said on the July 29 conference call that payoffs from real estate projects like 10 Madison Square West come in unpredictable waves, not steady streams.
“These projects never close, and the revenues never come in, when you expect it. So one of the ones that we’re investing in, and we have a lot of commissions coming from, is 10 Madison Square West,” Lorber said on the call. “We thought closings would have started a few months ago and complete by the end of the year. Now they’re not starting until the end of the year and will complete in 2016.”
In a report on Vector she co-authored earlier this year, Meadows, the Moody’s analyst, said “majority ownership [of Douglas Elliman] adds cash flow but also adds volatility.” Nevertheless, Meadows and Moody’s analyst Peter H. Abdill issued a B2 corporate credit rating for Vector and reported a stable ratings outlook for the company. They credited the Liggett subsidiary’s ongoing cost advantage from the master settlement agreement, among other reasons.
“Liggett’s deep-discount core brands include Eagle 20’s, Pyramid, Liggett Select, Grand Prix and Eve, and are typically priced at least 10 to 35 percent below premium offerings from the largest three U.S. manufacturers,” the Moody’s analysts wrote.
For now, the analysts reported, Vector’s dividend appears secure because major shareholders are happy with it.
“We expect that Vector will continue to maintain stockholder-friendly financial policies because its ownership is highly concentrated,” Meadows and Abdill said in their March 26 report. “Three individuals (or entities controlled by these individuals) beneficially own 29 percent of Vector’s common stock” — a reference to Frost, who owns 15.3 percent of the company; LeBow, who owns 8.5 percent; and Lorber, who owns 5.1 percent.
But the Moody’s analysts also warned that the generous dividend policy could become burdensome: “We expect Vector’s free cash flow to remain negative due primarily to its high dividend payout,” and with a debt 4.8 times greater than its operating profit, “the company’s credit metrics leave it limited flexibility — especially if dividends remain a substantial use of cash.”
This article was updated with corrections on Sept. 21, 2015.
Vector at a glance
Company officers: Howard M. Lorber, president and chief executive officer (has been with the company 21 years); Richard J. Lampen, executive vice president (20 years); J. Bryant Kirkland III, vice president, chief financial officer and treasurer (23 years); Marc N. Bell, vice president, general counsel and corporate secretary (21 years); Ronald J. Bernstein, chief executive officer of Liggett Vector Brands and Liggett Group LLC (24 years)
Headquarters: 4400 Biscayne Blvd. in Miami
What it is: Vector Group Ltd. is a holding company incorporated in Delaware. Vector relies on upstream dividends from its subsidiaries for financial sustenance. Its subsidiaries Liggett Group LLC and Vector Tobacco Inc. manufacture and sell cigarettes in the United States. Vector also sells electronic cigarettes through its Zoom E-Cigs LLC subsidiary.
▪ Vector Tobacco has contracted with Liggett to produce most of its cigarettes at Liggett’s manufacturing facility in Mebane, North Carolina. Vector has about 1,100 employees, many of them hourly workers at Liggett’s North Carolina cigarette production facility.
▪ The real estate side of the business includes residential brokerage and property investment in New York, South Florida and other U.S. markets. Through its New Valley subsidiary, Vector owns about 70 percent of the New York-based Douglas Elliman realty firm and holds equity stakes in real estate properties and projects, many of them in the New York City market, and some in South Florida. One is the planned redevelopment of a Miami Beach hotel at 8701 Collins Ave. as a luxury condominium called Park 87.
▪ Publicly traded Vector (NYSE-VGR) also is a large owner of stock in other public companies, including New York-based liquor distributor Castle Brands Inc. (NYSE-ROX) and Miami-based securities brokerage Ladenburg Thalmann Financial Services. (NYSE-LTS).
Shareholder Phillip Frost
Phillip Frost, a major shareholder of Vector Group, is more than just another passive investor in the diversified public company.
The Miami billionaire and philanthropist also is a major shareholder of two other public companies that Vector partially owns: securities brokerage Ladenburg Thalmann Financial (NYSE-LTS) and liquor distributor Castle Brands Inc., which handles such brands as Gosling’s rum and Jefferson’s bourbon and rye whiskey.
Frost owns about 39 percent of New York-based Castle Brands and Vector about 11 percent.
He owns about 35 percent of Miami-based Ladenburg Thalmann and serves as chairman of the board, and Vector owns about 8 percent through its New Valley Corp. subsidiary.
Frost also shares a roof with Vector and Ladenburg.
A glass-clad office building at 4400 Biscayne Blvd. is the headquarters of Vector Group, which occupies the 10th floor, and the home office of Ladenburg Thalmann, which occupies the 12th floor. The 15th floor of the building is the headquarters of publicly held Opko Health Inc., headed by Frost, who owns 40 percent of Opko and serves as its chairman and CEO.
A glimpse of Vector
Annual revenue (in billions)
Annual cash dividend payout (in millions)
Annual cigarette production by Liggett subsidiary (in billions)
SOURCE: VECTOR FORM 10-K FILING WITH THE SECURITIES AND EXCHANGE COMMISSION
This shows a breakdown of Vector’s revenues for the past few years. (Dollars in thousands; years end Dec. 31)
Corporate and other
Operating income (loss):
Corporate and other
Total operating income
Source: Form 10-K filing this year with the Securities and Exchange Commission