Residential brokerages staggered to the halfway point of 2024, battered and bruised by costly settlements for antitrust litigation and a thawing activity freeze.
Douglas Elliman and Anywhere Real Estate, the parent company of Corcoran, Coldwell Banker, Century 21 and Sotheby’s International Realty, saw their stock prices crater since the start of the year. Both were down about 36% year-to-date at press time.
During that same time, Compass’ stock price soared over 75 percent. The company recorded back-to-back quarters of positive cash flow in 2024 and posted a net gain of nearly $21 million in the second quarter — its first-ever positive net income.
“We believe our structural advantages result in clear financial advantages,” CEO Robert Reffkin said on the company’s most recent earnings call.
The $21 million profit is a drop in the bucket of cash and equity the company has burned through since going public in 2021.
But it’s also the type of milestone that gives investors renewed confidence in an era of high interest rates and shareholder pressure on residential players to chart a clear course forward.
In his most recent buy recommendation, BTIG analyst Soham Bhonsle said that more important than Compass’ growing market share is the fact that “the company has shifted its thinking on how to grow going forward, with an acute focus on profitable growth vs. growth at all costs.”
While a Compass executive would not commit to a timeline for full-year profitability, the company’s stated goal is ending the year cashflow positive (the same goal it had last year).
There are still questions about how good the going is. Compass has twice in a row shone brightest from April to June — a seasonal pattern more pronounced than its peers’ — and its growing market share has come with increases in commission expenses and some unorthodox accounting.
And while Compass continues to bring in more dollars than it spends, its cash position remains perilously close to a liquidity threshold established by its creditors.
By the most rigid of accounting metrics, the second quarter was something of a proof of concept for Compass about how to make money. But as the company turns away from survival and looks toward growth, can it keep the wins coming?
Real profit
Compass hitting profitability this past quarter was like the dog catching the mailman — if the dog went through a methodical, yearslong process with cost cuts and intricate accounting.
Since going public in 2021, the brokerage notorious for burning cash in pursuit of market share has mostly flirted with breaking even. In its second quarter as a public company, it posted a loss of just $7 million. At the same time, revenue jumped 186 percent to over $1.9 billion, fueled by a historically strong housing market.
That quarter was a high-water mark for an industry subsequently pummeled by high interest rates, which cratered demand and supply, and Wall Street pullbacks as investors questioned brokerages’ path to sustainable profitability.
“Things are improving, and it might take a little bit longer to see if this lumpiness is an anomaly, is something to be concerned about, or if it even works itself out as the financial situation improves.”
Compass reported a loss of $158 million to close out 2022, and by 2023 several analysts publicly doubted the firm’s ability to break even by 2025. Meanwhile, the stock price had fallen nearly 90 percent since the high at its initial public offering. Compass, along with many of its peers, made public commitments to cut costs.
By the following quarter, Compass had posted its first cash-positive results since going public; it brought in $51 million more than it spent. Compared to the same period in 2022, Compass had slashed fixed costs — excluding commissions expense — by over $150 million, rolling back its agent stock incentives and reducing headcount across its operating teams.
“We said we would be free cash flow positive in Q2. We did it. We are very strong, and we are still investing in growth and the platform,” CEO Robert Reffkin said in earnings calls.
And while Compass still lagged its competitors on a net income basis, posting a loss of $48 million on the quarter compared to Elliman’s $5.2 million loss and Anywhere’s $19 million profit, it was the only brokerage to improve on a year-over-year basis
In the most recent quarter, Compass continued touting a cost-cutting campaign, picked its revenue growth back up and found itself in the black for the first time in the company’s history.
“At the trough of the market, which it’s been sitting here for 18 months, they’ve managed to balance their costs against their expected revenue so they can produce a positive outcome,” said advisor and Real Trends co-founder Steve Murray.
Commissions coming due
Showing profitability this past quarter may have been a result of necessity, not a luxury for Compass.
Brokerage companies typically make their hay in the second and third quarters, and revenue tends to peak then. Compass has had an even more extreme split than other players, partly due to its regular spike in commissions payable. For a short period, the money had poured in and not yet flowed out.
As a result, at the end of Q2, the brokerage had over $106 million in unpaid commissions still on its books, up roughly $32 million from the prior quarter. That increase is down from the prior year, when Compass saw its commissions liability spike over $40 million despite lower revenue growth.
This year, that contradiction seems to have dissipated as revenue increased over 61 percent from the prior quarter, and commissions payable increased just 44 percent.
“Things are improving, and it might take a little bit longer to see if this lumpiness is an anomaly, is something to be concerned about, or if it even works itself out as the financial situation improves,” said Francine McKenna, a former lecturer of accounting at Wharton.
Still, Compass carries by far the highest commissions payable balance of any of its competitors. Elliman and Anywhere had $23 and $65 million in unpaid commissions on their books in the second quarter of this year, respectively.
“At the trough of the market, which it’s been sitting here for 18 months, they’ve managed to balance their costs against their expected revenue so they can produce a positive outcome.”
“Obviously the gross dollars for [commissions payable] is bigger because we do a lot more deals,” the Compass executive said, pointing to the fact that last quarter Elliman had a higher commissions payable as a percent of revenue than Compass.
For Compass, its heightened short-term liabilities can mean higher highs in the middle quarters, but lows that much lower, as it pays out that $106 million over the course of the subsequent quarter.
If Compass falls short of its projected $1.4 to $1.5 billion of revenue for the third quarter, those delayed expenses will still eat into the company’s bottom line and free cash flow.
Already hurting its bottom line are increasing commission expenses.
This past quarter saw commissions as a percent of revenue hit 82.6 percent, up 70 basis points from last year. On its earnings call, CFO Kalani Reelitz attributed two-thirds of the increase to changes in geographic mix, partly driven by its acquisition of firms in Louisiana and Tennessee.
A shrinking wallet
Compass has also touted its cash position, which grew $20 million to nearly $186 million in the second quarter, in addition to what Reffkin said was “ample liquidity” thanks to its $350 million credit revolver.
But the company’s cash on hand has dwindled in the past several years. At the end of last September, it counted $220 million in its coffers, a drop from $300 million that held steady through 2022.
While Compass has its credit revolver to draw down in case it needs it, that also requires a minimum liquidity of $150 million at the end of each quarter, a figure it has hovered near throughout the past three quarters.
The revolver itself is also not entirely unburdened, as Compass is currently using $55 million of its allowable $125 million letter of credit sublimit as collateral for leased properties, up nearly $10 million since the start of the year.
Compass says it’s also eyeing more acquisition opportunities. Acquisitions made up the bulk of its agent growth this quarter but will also require more cash.
“Now that our expense base is at such a reasonable level, people aren’t concerned about the amount of cash on the balance sheet,” the Compass executive said, adding that the company has “the balance sheet to be able to continue” pursuing inorganic growth.
But by entering the back half of 2024 with a profitable quarter in its rearview mirror, Compass may have to overcome its largest obstacle by staying strong long enough to see the market begin to turn.
In addition to paying out higher commissions, Compass, like the rest of the industry, faces the fallout of the NAR settlement, which required the removal of buyers’ commissions offers from MLSes and that members implement their own buyer agreements.
Reffkin sought to assuage concerns about the commission compression on the earnings calls, claiming that “the fears many had about commissions going down or buyer compensation disappearing has simply not materialized.”
But as Bhonsle pointed out in his analyst report, “it’s too early to tell how the consumer is going to react when a buyer agent agreement is put in front of them,” and he expects to see moderate rate pressure over time.
The company still has to thread a needle of keeping costs down while adding agents and growing its business, but with an increasingly hot housing market it may have found its footing — and its cash — at the right time.
“If they stay focused on acquisitions and organic growth, and … really keep a lid on what they’re spending, they can make some real money in the next year or two,” Murray said.