Compass loses $101M; will no longer offer equity to new agents

Compass suffered losses of $101.1 million in the second quarter, the residential brokerage said Monday, noting that it would look to slash costs as the industry grapples with a slower housing market.

The brokerage reported losses of $289 million for the first half of the year, according to an earnings release Monday. It projected full-year revenues for 2022 at between $6.15 billion and $6.45 billion, well below earlier guidance of between $7.6 billion and $8 billion.

In the second quarter of 2021, with the residential market hitting record highs, Compass lost $7 million, even as revenue tripled. Now, however, the outlook is a lot less rosy, and Compass said it would act accordingly.

“Given the challenges the real estate market has faced so far this year and the likelihood that this difficult environment will continue for the foreseeable future, we are announcing a significant cost reduction program,” Compass CEO and co-founder Robert Reffkin said in the release. In a subsequent earnings call, Reffkin said that “never in my time at Compass have we seen such a big downturn in such a short period of time.”

And he dropped a bombshell about one of Compass’ most effective recruitment tools: The company no longer offers equity or cash incentives to new agents.

“I am focusing the efforts around the following three objectives,” Reffkin said. “One, generating free cash flow. Two, profitably gaining market share; and three, retaining our agents.”

He noted that Compass continues to retain over 90 percent of its agents, and said retention figures had improved quarter-over-quarter. When asked about how ending the equity program would impact recruitment, Reffkin said that the firm had ended the equity incentive program two months ago, with “no impact on our ability to bring on agents.”

The company now has nearly 13,000 “principal agents,” defined by the company as team leaders or individual agents operating independently on the Compass platform, up 22 percent year-over-year. Overall, the company has about 28,000 agents.

“Our ability to do this reflects the value our platform provides,” Reffkin said of the agent growth. The firm is now targeting more mid-tier agents across its markets, he added.

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He said that incoming agents on higher commission splits than Compass’ benchmark in a given market could keep their current splits for a year, after which they would need to accept the company’s benchmark split.

Second-quarter revenues were $2 billion, up 4 percent from last year, and closed transactions were up 2 percent from last year to just under 67,000. A Compass spokesperson noted to The Real Deal that industry-wide, overall transactions were down 10 percent year-over-year.

Compass had $430.5 million in cash and cash equivalents at the end of the quarter, down from $618.3 million at the end of last year. Reffkin said that the firm would focus on reducing technology and incentive-related expenses, “while not reducing agent service levels to ensure our existing revenue base is not impacted.”

Compass COO Greg Hart, who came on board in 2020 to oversee product, said that the firm plans to roll out new features in September that would give agents the ability to run the transaction “from first contact to close” without having to rely on third-party software. He alluded to upcoming new revenue streams but did not provide more information.

Going forward, Hart stressed, profitability would be the firm’s mantra.

“If the market gets worse, we will pursue the necessary steps to achieve that goal,” he said. Compass shares dropped in after-hours trading after the earnings and outlook were published.

After the earnings call, Reffkin wrote to Compass agents, reiterating that the firm was committed to agent development and saying speculation from critics and competitors was “not new, not true, and not credible.”

“Let me be very clear,” Reffkin wrote in the email, which was shared with TRD. “Compass will not run out of cash.”