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Whales buy the dip in Compass
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There will be blood: Inside Compass’ wartime playbook
Brokerage in cost-cutting mode as it grapples with a slow market and plummeting stock
When Compass was raising record-shattering sums of venture capital, rattling the residential industry in the process, a rival brokerage leader described it as the “greatest fundraising machine in the history of America.”
Unfortunately for the company, it has since earned another, more dubious distinction: becoming the most unprofitable publicly traded residential brokerage of its era.
Its losses between January 2021 and June 2022 totaled nearly $800 million, filings show — including almost $500 million last year during a bonanza for the residential market — and the macro environment in which it’s operating is taking a turn for the worse.
Mortgage rates have hit 2007 highs (6.7 percent as this story went to press), and the luxury market across the country is basically on ice. Compass’ stock price has plummeted more than 75 percent so far this year, to below $2.50 from an opening-day price of $20 in April 2021. (By way of comparison, Redfin is down 85 percent, eXp is down 66 percent, Douglas Elliman 63 percent and Anywhere Real Estate 51 percent.)
Compass’ market capitalization upon going public was nearly $7 billion; today, it hovers around $1 billion — $500 million less than it raised from venture capitalists during its heady growth days. SoftBank, its largest investor, disclosed in August that its losses from its bet on Compass exceeded $500 million.
Compass and its CEO, Robert Reffkin, are now in wartime mode. Reffkin insists that the company is on firm financial footing: “Let me be very clear,” he told agents in August, “Compass will not run out of cash,” later saying that “our critics will continue to try and create confusion.”
He and other Compass leaders have pointed to the firm’s cash reserves of more than $400 million, its low debt levels relative to competitors and its technology investments as a long-term competitive advantage.
Inside Compass' wartime playbook, from TRD's October issue:
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Understanding Compass' cash position
In September, Reffkin embarked on a roadshow across the brokerage’s markets, meeting with agents to shed light on its strategy to weather the storm.
A core part of that strategy will be to cut costs — rapidly and across the board. Compass hopes to reduce its expenses by more than $300 million by the end of this year and has already conducted rounds of layoffs, scaled back its popular Compass Concierge program, announced the end of equity grants for new agents and said it will tighten up commission splits.
Meanwhile, the brokerage adjusted its outlook for 2022. Its rosiest projection is that revenues could hit $6.5 billion, down from an earlier estimated high of $8 billion. And, in what sources said is a highly unusual situation for a public company, it remains without a chief financial officer — Reffkin is serving as interim CFO.
“I am focusing the efforts around the following three objectives,” Reffkin said during the company’s second-quarter earnings call. “One, generating free cash flow. Two, profitably gaining market share; and three, retaining our agents.”
The company’s COO, Greg Hart, reiterated the firm’s new emphasis on profitability, hinting at tough decisions to come.
“If the market gets worse,” he said, “we will pursue the necessary steps to achieve that goal.”
All of this leads to a lot of questions about how Compass’ moves are affecting its agents, acquired firms, staffers, investors, rivals and the industry at large. The Real Deal broke down the current state of play and analyzed how it would affect each group of stakeholders.