Vector Group Ltd (VGR) 2008 Q4 法說會逐字稿

Hello and welcome to Vector Group's fourth-quarter and full-year 2008 earnings conference call.

Before the call begins, I would like to read a Safe Harbor statement. The statements made during this conference call which are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. These risks are described in more detail in the Company's Securities and Exchange Commission filings.

I'd now like to turn the call over to the President and Chief Executive Officer of Vector Group, Howard Lorber. You may begin.

Thank you. Good morning and thank you for joining us on Vector Group's fourth-quarter and year-end 2008 earnings conference call.

With me today is Ron Bernstein, the President and CEO of Liggett Vector Brands and Liggett, and Bryant Kirkland, Vector's Chief Financial Officer. On today's call, I will provide an overview of our business and reviewed Vector Group's financials for the fourth quarter and full year ending December 31, 2008. Ron will then discuss the performance of Liggett Group and Vector Tobacco for the period and provide an update on recent industry developments and the competitive environment. After that, we will take your questions.

Let me begin by highlighting that our conventional tobacco business continued its positive trend of earnings growth in 2008 with operating income for the year increasing by $10.8 million or 6.8%. We are pleased with our performance in 2008 and remain confident about our prospects going forward. However, we also recognize that the $0.62 per pack federal excise tax increase that becomes effective April 1, 2009 will have an impact on the cigarette industry as a whole, as well as on our performance. Ron will cover this in more detail following my review of Vector Group's financial results.

Before discussing the financial results for the quarter and year, I would also like to note that our liquidity remains strong with cash and cash equivalents of approximately $211.1 million as of December 31, 2008. In addition, as of December 31, 2008, we held investment securities and partnership interest with a fair market value of approximately $83.5 million.

Now, let's turn to the key financials for the three months and full year ended December 31, 2008 for Vector Group. Our financial results for the fourth quarter of 2008 includes pretax impairment charges of $25.4 million on long-term investments, real estate and investment securities, and pretax gains of $16.5 million from changes in fair value of derivatives embedded within our convertible debt and a $583,000 pretax gain from our interest in the St. Regis Hotel in Washington, DC.

Our financial results for the fourth quarter ended December 31, 2007 included pretax charges of $1.9 million from changes in fair value of derivatives embedded within the convertible debt.

Our financial results for the year ended December 31, 2008 include $32.4 million of pretax impairment charges on long-term investments, real estate and investment securities, and pretax gains of approximately $24.3 million from changes in fair value of derivatives embedded within our convertible debt and approximately $12.6 million of pretax income from our interest in the St. Regis hotel in Washington, DC.

Our financial results for the year ended December 31, 2007 include income of $19.6 million from the March 2007 settlement between New Valley and the US government, an $8.1 million pretax gain from the exchange of notes receivable from Ladenburg Thalmann Financial Services for Ladenburg common stock and accrued interest, and pretax charges of $6.1 million from changes in fair value of derivatives embedded within convertible debt.

For the fourth quarter ended December 31, 2008, Vector Group revenues were $144.4 million compared to a $145.1 million in the 2007 fourth quarter. The Company recorded operating income of $35.4 million compared to operating income of $36.9 million in the 2007 fourth quarter.

Fourth-quarter 2008 net income was $12.2 million, or $0.09 per diluted share, compared to net income of $14.2 million or $0.21 per diluted share in the 2007 period. Excluding the impairment charges, gains on changes in the fair value of derivatives embedded within our convertible debt and income from the St. Regis, the Company's net income for the 2008 fourth quarter was $17.2 million or $0.25 per diluted share. Excluding the charge for changes in the fair value of derivatives embedded within our convertible debt, the Company's net income for the 2007 fourth quarter was $15.3 million or $0.22 per diluted share.

For the year ended December 31, 2008, Vector Group revenues were $565.2 million compared to $555.4 million in 2007. The Company recorded operating income of $135.3 million compared to $125.5 million for 2007. Net income was $60.5 million, or $0.80 per diluted common share, compared to net income of $73.8 million or $1.07 per share in 2007. Excluding the income from the St. Regis, the gains from the changes in the fair value of derivatives embedded within our convertible debt and the impairment charges in 2008, net income was $57.8 million for the year or $0.85 per diluted share. Excluding the Ladenburg note exchange, the gain from the US government lawsuit settlement and the charge from the changes in the fair value of derivatives embedded within our convertible debt, the company's net income for 2007 was $61 million or $0.89 per diluted share.

Now, I will turn the call over to Ron Bernstein for a review of the key financials for our Liggett and Vector Tobacco subsidiaries. Liggett's numbers reflect sales to both Liggett Group cigarettes and conventional cigarette products from Vector Tobacco. Ron?

Thanks, Howard. Good morning to everyone.

As Howard indicated, we are very pleased with our 2008 performance. Over the past several years, we've established and executed upon a strategy that strikes a balance between earnings and volume growth, and we believe that our continued strong performance validates that approach.

We are especially pleased that we've been able to sustain earnings growth over the past several years despite operating in increasingly challenging industry conditions and, more recently, in a decidedly more negative economic environment. As Howard mentioned, we are now facing a new challenge with the recently passed $0.62 per pack increase of the federal excise tax that is being used to pay for the State Children's Health Insurance Program, or SCHIP.

While the SCHIP program which helps provide insurance to uninsured children of families with modest incomes has merit, it has no connection to the tobacco industry. While it is our position that this tax is arbitrary, discriminatory and regressive, it is now law and we will deal with its consequences.

Economists and industry analysts who reviewed the potential impact of an FET increase of this magnitude, when first discussed in 2007, estimated that industry volume would decline by approximately 8% in a 12-month period following enactment of such legislation. Recently, other manufacturers have estimated a market decline of 6% to 8%.

There are many variables at play in determining the correct elasticity rate for cigarettes in the current economic environment, and we are not making any independent predictions. That said, we believe the estimated range of decline previously referenced is realistic, and we are implementing our plans accordingly.

It is also important to note that any industry volume decline greater than 3% will result in a decline in Liggett's and Vector Tobacco's MSA cap benefit. We estimate that the earnings impact to us will be approximately $1.8 million for each 1% of industry volume decline above 3%. I will discuss market developments and related issues further but first I will review the numbers.

For the three months and full year ended December 31, 2008, our conventional cigarettes generated revenues of $143.8 million and $562.7 million compared to $144.4 million and $551.7 million for the corresponding periods in '07. Operating income for the three months and full year ended December 31, 2008 was $43.2 million and $170.2 million, compared to $46 million and $159.3 million for the corresponding year-ago periods.

For the three months and full year ended December 31, 2008, Vector Tobacco's operating losses were one $1.6 million and $8.3 million compared to operating losses of $2.6 million and $9.9 million for the prior-year periods. As previously noted, Liggett's operating income increased by 6.8% for the year despite an approximate 6% decline in fourth-quarter operating income compared to the prior-year period. The fourth-quarter decline was primarily the result of litigation expense related to the judgment in the Davis product liability case and to a lesser extent a decline in Liggett Select volumes.

As I've discussed in previous calls, given the current economic environment, we focused our attention in 2008 on maximizing volume of Grand Prix while pursuing margin opportunities on other brands in our portfolio, including Liggett Select. As a result, fourth-quarter Grand Prix wholesale shipments increased by 4% compared to the prior-year period and increased by 2.8% for the year.

Overall, LVB wholesale shipments declined by 6.4% for the quarter and 4.5% for the year. The wholesale decline was as expected and is consistent with our strategy of striking a balance between earnings and volume growth.

Industry-wide, wholesale shipments declined 3.3% for both the quarter and the year. Liggett Select declined 19% for the quarter and 12.5% for the year, which was consistent with expectations, while EVE shipments increased by 4.5% for the quarter and 1.6% for the year.

As previously mentioned, the SCHIP legislation, which includes a $6.17 per carton federal excise tax increase, was signed into law by the President in February of 2009, and the excise tax increase will become effective on April 1. This is by far the largest federal excise tax increase in history and is also greater than the initial increase associated with the Master settlement agreement in 1998.

In addition, state excise taxes have grown over the past decade by approximately $8 per carton. Given the budget deficits most states are facing, it is likely that we will continue to see increases in these taxes.

The combination of these extraordinary tax increases and the current economic environment will certainly have an impact on the cigarette industry and marketplace going forward. At this time, we have no specific information as to what actions others in the industry may take, but we believe Philip Morris and other large manufacturers will raise prices by at least the full amount of the excise tax increase. It is impossible to predict the actions of the smaller companies in the industry, but it seems likely that they will also take the full increase.

For Liggett, there is certainly some risk related to this tax increase. As noted, we expect to see an earnings decrease related to the impact on our MSA cap benefit. Additionally, despite operating in the discount segment, we are not immune from an overall industry volume decline. Thus, we expect to see some short-term earnings pressure related to volume declines and also anticipate a shift to lower-margin brands. However, market circumstances such as these also create opportunities, and we believe that Liggett is well positioned to make the most of those that arise.

Since this increase was first discussed almost two years ago, we've had time to consider scenarios that could be beneficial to Liggett's long-term earnings potential. We are currently finalizing plans consistent with our long-term strategy, which we believe will best position Liggett in this changing marketplace. We will elaborate on these strategic plans during our next conference call.

What we can say now is that the SCHIP legislation has one positive aspect in that Congress took action to equalize the excise tax rates on little cigars and roll-your-own cigarettes to that of manufactured cigarettes. As I've previously reported, those two categories have grown by over 8 billion cigarette unit equivalents, over 90%, during the past five years while manufactured cigarettes have been declining in the general range of 2.5% to 3% per year during the same period.

The sole reason for the growth of little cigars and RYO cigarettes has been the extraordinary -- and we believe unfair -- tax advantages they've both enjoyed on the federal and state level. They've been paying approximately 10% of the FET rate and 33% of the state excise tax rates paid by cigarette manufacturers.

Had the FET rate not been equalized, the companies selling such products would have enjoyed an approximate $9 per carton advantage on the federal tax rate alone. While most states have not yet been equalized, there is proposed legislation pending in several states, and we believe that revenue-starved states will quickly follow the federal government's lead.

Another area that we believe is being looked at by the federal and state governments is smokeless tobacco products such as snuff, chewing tobacco, and snus. These products enjoy the same sort of tax advantages that little cigars and RYO formally did, and it seems clear that PM's acquisition of UST and Reynolds' acquisition of Conwood, at least in part, relates to profit and growth opportunities created by the lower, more favorable tax rates enjoyed by those products. We intend to watch these developments carefully and to take actions as necessary to ensure the fairest possible marketplace for all of our products.

As previously reported, we selectively introduced our own snus product, Grand Prix Snus, into a number of test markets during the second quarter of 2008 and have been gradually expanding those markets since then. Grand Prix snus is a pouch tobacco product designed for adult smokers who are interested in smokeless tobacco alternatives to cigarettes, as well as for existing adult users of other smokeless products. Grand Prix snus is a premium quality snus product offered to adult snus consumers at an affordable value price point. The product is currently manufactured in Sweden and is available in three flavor varieties -- original, spearmint and wintergreen.

In the second quarter of '08, we also began shipments of Tourney Snus to our long-term partner, Speedway SuperAmerica. Speedway launched TOURNEY snus into each of their 1588 stores and is making a major commitment to the brand. As noted in our third-quarter call, the initial performance of Tourney and Grand Prix snus has been consistent with those of our competitors with strength in some markets and softness in others.

In 2008, Reynolds announced their intention to expand Camel snus from their test markets to a national launch in early '09. While we see that as a promising sign, we do note that Reynolds is heavily discounting the price of Camel snus, including giving away significant quantities of product. It remains unclear how the smokeless market may continue to develop, and we believe excise tax increases, education about snus and the passing of time are the key factors for evaluating the potential of this product.

From the start, we viewed this as a long-term proposition and have planned accordingly. As a result, we have a go-to-market approach which limits expenditures while allowing us to evaluate the longer-term snus opportunity. We will continue to provide updates as the market for snus products further develops.

Additionally, on the legislation front, there continues to be discussion in Congress regarding legislation that would grant the FDA authority to regulate tobacco products. Recent media reports have indicated that an FTA bill could be brought forward in the House as early as this week. We are currently unaware of any reports regarding the Senate's potential timeframe but note that their calendar is quite full busy.

In conclusion, while the large federal excise tax increase passed by Congress and continued state excise tax increases will certainly bring additional challenges to an already difficult marketplace, we believe it will also create new opportunities for us. We are very pleased with our results for 2008. While we will likely experience some short-term earnings setbacks related to the excise tax increase, we also believe that we are positioned to recover quickly, maximize our performance, and resume the earnings growth track that we've been on in recent years.

Thanks for your attention, and back to Howard.

Thank you, Ron. Before I finish the prepared remarks, the COMPANY once again reaffirms that our cash dividend policy remains the same.

Now, operator, would you please open the call for questions?

Thank you. Ladies and gentlemen, at this time, we would now like to open the floor for questions. (Operator Instructions). Joel Luton, APS Financial.

Good morning, guys. With your cash position and the stock where it is right now, have you all considered maybe buying back some of your shares?

You know, we think the best for the shareholders is continuing to pay dividends, as we said at the end of the call, that we believe that the best use of the money is to pay dividends.

It is a little crazy when you look at the dividend yield now because, as you know, we are paying $1.60 and we have also paid a 5% stock dividend now I think for eight years. So it is a very hefty dividend, but we still believe that that's the best thing to be doing.

Okay, thanks.

(Operator Instructions). [Mitch Pindas], Royal Bank of Canada.

Realizing it's a challenging environment right now, my question goes to, for one thing, the acquisitions you're looking at. You've got a lot of cash sitting on the books; asset values are way down; real estate is way down, which I know is one of your loves. Are you looking at right now, and when do you see yourself pulling the trigger?

Well, Mitch, you know, the real estate business, much like the stock market over the last at least say ten months, has been no matter what you did ten months ago, you were sorry you did it a few months later. While I agree that you can never catch the bottom, I think we are just, we are trying to maximize or optimize the values in the real estate things that we've done so far. So I don't think there's anything else of any major acquisition that's on the horizon.

We continue to look every day. We continue to look at different properties. We continue to look at different opportunities, but nothing that would make us spend a lot of money right now.

Well, I guess my question goes to the $211 million in cash that you are sitting on right now. A lot of that has been raised through the issuance of the bonds. We are paying a very high rate on those bonds and getting a very low return. Treasuries right now are under 1%. So it would seem like that's a pressing need, to get that money to work for you. That's my first question I suppose.

My other question is since you are sitting on all of this cash, where do you -- I see that there's the option by some of the holders to call that debt back in. What triggers that? What would you do to prevent that from happening? Cash is king these days.

Okay, so you are sort of saying two things sort of opposite of each other, which is the same problem that we look at every day.

Yes, there's lots of things that look cheap to buy but on the other hand, if you use your cash, there's no cash that you can go out and raise today. Okay?

So the answer to your question directly is yes, those bonds can be put to us near the end of the year, I think in November, in which case I guess the good news would be that we would retire some high-interest debt, convertible debt. I guess the bad news would be when can we sell other debt again?

I mean, look. We tried to manage the process. We want to have money to pay dividends; we want to keep our dividends where they are as long as we can. With the capital markets, which are basically closed right now, it's sort of more a sit-and-wait position.

All right, so no pressing acquisitions up front?

No.

-- at this point?

No, not unless I thought there was money that could be raised, additional money. Again, we have this debt that could be put to us. We want to have the money for that. We have other obligations. You know we want to maintain our dividend. We look at that as being very important.

As you know, in even the years we struggled, we did everything we could years back to maintain it. That's how we believe the Company should be run, which is best for the shareholders.

All right. Then if you could talk a little bit about some of the acquisitions you did make, the non-real estate acquisitions over the last year, like Castle Brands, [Opco]. What attracted you to those and where do you see them going?

Dick, do you want to talk about those? Are you on?

Sure. I think, in both cases, I mean they are just seen as -- they are not strategic acquisitions as much as they were investment opportunities.

I think we have talked in prior calls about Opco and our belief in the track record of Doctor Phillip Frost in his prior endeavors in that space, as well as belief in what he is creating there. Again, Castle was seen as really an investment opportunity together with a group of successful investors. That is a situation where there is an opportunity for real growth for a public distribution company in the Spirit space. So again, these were isolated one-off investments as opposed to being strategic acquisitions.

Okay. I guess my last question goes toward Douglas Elliman. Can you talk a little bit about the notes, what's left on it, and what the paydown has been?

BK, we just got some more paid down today, I think, so BK, do you want to (multiple speakers)?

As of December 31, there was around $13.5 million left on the subordinated notes. Obviously, Vector owns half of those. The face value of those notes was $14.2 million. There was $2.4 million paid down yesterday.

What about the seniors, are they gone?

Gone.

(inaudible) (technical difficulty) gone.

That's nice. What is that was that business looking like right now?

You know, tough right now. Transactions are down a lot; prices are down. The city has not seen it as bad as -- well, the two other markets we are in, as you know being Long Island and the Hamptons, those markets are quieter right now than the city.

You know, we had a decent year; we made money last year. Although I will say, in looking at it, if you want to analyze it, the bulk of that came in the earlier part of the year and then things sort of just stopped.

I mean, I saw a chart yesterday on CNBC on consumer spending; it was like an unbelievable chart. The line went down a little bit and then all of a sudden there was a cliff, you know?

Of course, having said that, I think the good part was the savings rate was 5%, which I think was the highest in January, the highest it's ever been since the '60s. So people are definitely not spending, but ultimately, when it comes to housing, I think, as the economy starts to improve a little bit, I think that's back to where people are going to spend money and things are going to look good because prices are down, they are more affordable, and I think that business is going to pick up again.

So we are very happy with our Douglas Elliman investment. We think that being that we are strong and we really don't have any debt other than to ourselves, unlike our competitors which were very leveraged, we think come out of this in very strong shape, hopefully with bigger market share.

All right. Well, I am sorry to revisit this but going back to the bonds, what can trigger that put by the bondholders?

They have the absolute right to do it. The bonds have been trading very high, so you wouldn't think they would put them at par, but if the price of the stock comes down, they can. Then you know, we could deal with it in a number of different ways.

What about if that money has been spent for acquisitions?

Well, it's not going to be spent until we know that they are dealt with obviously.

Fred Burrows, Merrill Lynch.

Two questions -- one, when do you have the tail end obligation on the Phillip Morris transaction? Is that in '09 or 2010?

Well, they exercised their option. We received, I think, $5 million, which means we're going to have tax payments; we are going to be paying taxes I guess at the end of '09. DK, is that right?

right, yes.

How much is due on those taxes?

It's around $75 million.

Okay, so that's going to be -- you've earmarked that out of your cash on hand for that payment at the end of 2009?

Unless there's any other tax planning or anything else that's around to reduce our overall tax payments.

Okay. Then also on your private partnerships, a couple of your hedge fund investments -- you took some write-downs that you encapsulated in that one number. I'm wondering. Can you comment a little on how the Icon partnership is doing, and then your other -- I believe it's Jefferies private equity partnership?

Well, Icon -- Icon was down 30%, about 37% for '08. They were up in January I think about 3.5%, and I haven't seen the February numbers yet.

Did they come out with any estimate yet, BK?

I have not seen any.

Do you want to comment -- Jefferies do you want to comment on?

Jefferies, we liquidated that in the second quarter of 2008. I believe we ended up taking about $0.5 million loss on it. We have received most of the payments on that. There's been a small holdback of around $100,000.

Ken Bann, Jefferies & Co.

Thanks. Most of my questions have been answered, but could you just comment on what you saw and are continuing to see in terms of like Native American Brands? And are they continuing to be like more competitive than they have been in the last few years?

The answer is that the segment in the industry that has grown most substantially and really the only significant growth during '08 was the deep discount segment. Almost all of that growth was concentrated in the Native American Brands. That is probably -- that has replaced many of the renegade companies that we had dealt with over the last seven or eight years as the biggest competitive issue in terms of the deep discount end of the market.

However, we are seeing some states take actions. In general, people are aware of what New York has been doing, but also in Oklahoma which is a major center for those brands. They have been negotiating new compacts with the various tribes that will I think bring a better competitive balance to the situation. I think that, around the country, that this is something that is likely to continue, particularly with higher excise taxes that are coming into play. So I think that, while there has been substantial growth, I am anticipating that growth is going to slow and likely turn to a decline at some point before too long.

You expect that will benefit you, that --?

Yes.

Okay, so people will switch to your brands from their brand. Okay, thank you very much.

[Louis Geiser], Dreyfus.

Yes, good morning. I had two questions, one of which was answered. I did have a question with respect to some of your I guess it is on-balance sheet real estate, whether it's at Vector or New Valley through Douglas Elliman. I don't know but there are a number of Manhattan properties that you've acquired that I guess are held for sale. Could you discuss those to the extent you can?

Basically, one of the investments was a loan on a project that was sold, about 80% sold and the developer needed some additional money to complete the project because of some cost overruns. That project is proceeding towards completion and I think we expect closings to start before the end of the year. That one is I think 111 is the address.

We still have this Hawaii hotel, the Sheraton, which BK, I think that has been written down, hasn't it?

It has been written off. Yes.

Written off, you know. We are now looking at possibly -- looking at the bank loans, seeing if we could buy it and create some value back in that situation.

We have these investments that we made in this company that had these townhomes which were financed by Wachovia. Basically the loan is due now, and we are seeing what we can do there. As of the latest, we took a write-down on it of a few million dollars, but I think, as of the latest appraisal, I think our money is okay for the time being, but depending on the market keeps going down or not.

Is there anything else I missed, BK?

Oh, yes. Our big loan that we bought for about $21 million or $22 million and a big project in Palm Springs. We are proceeding towards a judicial foreclosure which would give us ownership and a settlement with Lennar, who was the original borrower. I think we are hoping that will come to a conclusion sometime in April.

Is there anything else, BK?

That's it.

[Dennis Smith], GP Capital.

I wanted to ask, with regards to the excise taxes, the bulk of it would be borne by the -- is most of it going to be passed through, and how that will affect your margins?

Well, our anticipation is that the entire excise tax increase will be passed on, as I indicated during my comments. Our expectation, while we don't know specifically, our expectation is that Philip Morris and the other large companies will certainly take the full excise tax increase. We think it's likely that all of the small companies will because they don't really have the ability to dig in and not take it.

As far as our margins are concerned, I think that there is not as much of an issue relative to margins as there are relative to volume and what is anticipated to be somewhere between a 6% and 8% decline in the overall industry.

We expect that there will be some shifting from higher-margin brands, even within our own portfolio, to lower-margin brands. This is going to be a major event in terms of pricing in the marketplace, so you're going to see consumers taking a range of different actions to try to deal with it. Some of that will involve trading down that we believe we will benefit from.

Of course, some trading down made occur from our higher-margin brands to our lower-margin brands. So we anticipate that, at least in the short term, that margins will contract a bit. We expect that volumes will go down a bit, but we think it's within a manageable range from our perspective.

Just one other point there. You know, when the MSA was passed with the big increase and there was volume declines, the companies actually -- and Ron, correct me if I'm wrong -- but my recollection is that during that period of time, the companies actually raised prices more than they needed to to pay the MSA payment so they would get additional margin to offset volume declines. So I guess, in the best-case scenario, that could possibly happen. Is that correct?

That is correct. I think there's two issues. One is that Philip Morris and virtually everybody else in the industry raised prices by approximately $0.90 per carton about a month ago. There's many in the industry who believe that is something that will be in addition to the full excise tax increase that's likely to occur sometime in the next three weeks or so.

Lastly, my last question is do you have a sense for what the -- you know, obviously, you have a cost advantage with regard to paying less in taxes and all that. Have you quantified what that is per pack, roughly, in terms of your competitive advantage, sort of relative to your peers?

Well, it varies. I mean, it's an issue. We have an exclusion of the first -- our market-share exclusion is 1.92% of the market, so until we get to that level, we don't pay anything. Once you get above that, we pay full-boat MSA. So, it varies based upon the amount of cigarettes we sell, but also what our own competitive activities are in the marketplace.

But do you have just a rough guesstimate, sort of, say, in a market that you would consider typical, say for the United States, that is $.50 per pack (multiple speakers)?

Again, when you talk about advantage, it's advantage relative to what the price of other cigarettes are. So you could equate an advantage over Philip Morris as being somewhere in the range of $1.80 per pack.

Ron, maybe it would be easier to understand if you just talk about what does the MSA exemption mean to us on a per-pack basis today -- on the 1.9% of the market.

Right. It's approximately $0.54 per pack.

Right.

Perfect, thank you very much. Sorry, then my last question was you know obviously with equity risk premium and credit risk premium being higher than typical, you must have a pretty high hurdle rate in terms of investing cash. I'm just curious how you think about that in terms of sort of returns that you would like to achieve either in absolute or relative terms.

Ron?

I'm sorry. Could you repeat the question?

I am just wondering. With the market where it is, obviously someone had mentioned different things you could do with your capital, like retire debt, for instance. Obviously you are not doing that because you feel that there is potentially better opportunities out there. I'm just curious how you think about your hurdle rates in terms of deploying capital in this market.

Well, as I said before, one of the issues with deploying capital, in some form or another, is where do you ever get the capital (technical difficulty) if you want it or if you need it for something? You know, when the capital markets were open, you didn't analyze it that way. So now we're looking at it and we are saying to ourselves okay, we know what our potential cash needs are, we know we want to continue the dividend, and these are the primary objectives. So therefore, we are not going to go out and spend a lot of money or spend any serious money on an acquisition without having it financed in some way where we don't use up a big part of our capital because, again, in one situation, if this one series of bonds is put to us at the end of the year, I mean I guess the good news is we will be saving a lot of interest. I guess the bad news is obviously we will have less liquidity for a little while until we could go out and raise money again to look for acquisitions.

[Todd Thacker], Private Investor.

I just had a quick question. You answered most of the stuff about the real estate investment, but I was wondering. Was there another real estate investment in Islamorada, Florida and can you comment on that?

We've written that off a long time ago, and basically the deed is gone on that, and it was a bad investment. It was a speculation into a condo project in the Keys just as the market down there pretty much disappeared and crashed, and we are out of it.

It's been written off; I think it was written off a while ago.

Yes, two or three years ago.

[AJ Guido], GoldenTree.

Just a question on your distributions -- you have, in your operating cash flows, you get about $8.5 million from your real estate businesses, and then, in the investing cash flows, you have about $19 million. It seems like the $8 million is pretty stable. I mean, what can we expect for -- from the $19 million number I guess this year?

BK?

Okay, what are you referring to again?

Just to distributions from the nonconsolidated real estate business?

Sure, just a minute. Last year, Elliman sent us $10.5 million. This year, we know -- they have scheduled debt payments of $4.7 million. There will be tax-sharing payments also. Then of course there will be some small cash distributions.

In 2007, Elliman sent us $8.9 million, as you said. That has been fairly consistent.

The part that is obviously guaranteed from Elliman is the $4.8 million of debt repayments, and then any tax-sharing payments and any cash distributions.

Just looking at -- you have $211 million in cash and then the $83 million of investments, which is broken down like $25 million-$55 million-ish in your 10-K, I believe, so your potential payments then could be the $112 million of bonds plus $75 million of this tax payment. Then there's also a payment of $20 million to your former Executive Chairman. Can you provide some color on that?

That was a deferred compensation plan in which he is entitled to his money.

Okay. Like in '09, do you have payments that could be $8 million or $9 million I believe? Is that a guaranteed payment? I'm sorry, in 2010? Is that just guaranteed, or is that just a possibility that those payments go out?

(inaudible) in all likelihood will be deferred. There's only $1.5 million that will occur.

Okay, so I mean potentially in a worst-case scenario, you could be looking at $270 million of your cash just going out the door for all of those one-time payments in '09? Is that correct?

BK, I think so, right?

Yes, that's right.

Okay. So I guess how tight would you let liquidity get this year, given that you may face some pressure in the tobacco business? I guess what happens if you have more of a downturn in that business? How would you guys manage that?

Well, I think, again, as we get towards the end of the year with the bonds, there are things we can do to extend the bonds. We could do an exchange (inaudible) the bonds, we could change terms. There are alternatives, so we are not looking at it that -- and the bonds haven't traded lately I don't think but a couple weeks ago, the last trade I think was 112, 115. So with a couple years left on the bonds and the conversion features and everything, I'm not so sure what happens with those bonds, but I think we focus on that as a variable, meaning if they do all (inaudible), then we determine what we're going to do for that not to happen, or at least for not all of them to come out, whether it's like I said, a possible perpetual exchange offer or whatever.

My understanding is that it is pretty concentrated; it's held pretty tightly.

Yes. Well, I think that's good, I think from that perspective, in making a deal.

Right. It's basically about a 15% coupon if you include the dividends at this point, is that (multiple speakers)?

It's exactly 15%.

(Operator Instructions). Dan Goldberg, RBC.

Talk about the dividend. Is there, at this point in time, is there anything that would cause you to reduce that dividend? Obviously, 15% is quite a high rate looking across all the equity markets these days.

Well, we are not considering it now, no.

Would you consider it in the future, if things got tight?

Well, obviously, when things get tight, you have a miscellaneous group of actions that you could take, and then you decide which is the best for the shareholders. So, I can't tell you. You know, anything is -- look, if everything goes to 0, then obviously you have to cut your dividend, right? That's the way the world is going and everything is 0, then I guess there's not much for any of us to worry about if everything goes to 0.

Sure. Given current estimates, if all things stayed the same as they are now, you are not earning your dividend so to speak, correct?

That's correct.

Okay. At the same time, your converts, which are the 3-7/8 of 2026, they are quoted around the 102-104 level, last I saw. The last trade might have been 112, but they are much lower than that.

Right.

That's FYI. So you said you would entertain perhaps some sort of exchange offer or sweetener, perhaps, if the time came and if you didn't feel like parting with all of that cash.

Or, look, again, there is a whole list of things that we would entertain. You know, one of them is what you just said, obviously, is always on the table. One of them is going to someone else who may want to own the bonds, maybe one of our large investors. So I think there's lots of different options.

I mean, clearly, at this point in time, they are a very cheap source of financing for you, given that you are paying 15% on your stock.

Well, they are not that cheap because they get the advantage of the dividend. What are they actually paying?

The 3-7/8 pay 12.5%.

The 3-7/8, right.

That's right.

The 5s pay 15%.

Right, right, correct. That's correct.

I got it, okay. As you said, not really looking on the acquisition front, just trying to manage businesses as they are right now, as they are on your plate. So --

I just would not put us in a position for an acquisition where we had to use a substantial amount of our cash and then risk having a problem with our dividend, or having a liquidity problem. I just don't think it makes any sense unless things change. When things change, then obviously we'll look at it. Again, with the capital markets closed, I just wouldn't want the Company to be in that position.

Right. Understood and appreciated, thank you very much for your answers.

Thank you. At this time, we have no further questions. I would like to turn the conference back over to Mr. Lorber.

Okay. Well, thank you everyone. I thought the questions were pretty much the same questions I would be asking in this environment and this market, but we thank you for being on the cal. Those of you that are shareholders, we, as I said, we'll continue to manage the Company the best we can to provide the returns for the shareholders. We are always around if anyone has any further questions. They can always reach me, or if they can reach our Chief Financial officer, BK, or Ron Bernstein at Liggett. Thank you very much.

Thank you. Ladies and gentlemen, this conference call has now ended. You may disconnect at this time. Have a great rest of the week.