Compass CEO Robert Reffkin is predicting a big year for his brokerage, despite the fact that it posted another loss last quarter and had negative cash flows for the first time in six months.
His optimism is rooted in the fact that Compass cut roughly $500 million in cash and non-cash expenses last year, while its total operating expenses fell by nearly $1.5 billion, a figure that includes commission payments, which rise and fall with revenue.
The brokerage notched two consecutive cash flow positive quarters after that and aims to have positive cash flow this coming year.
Reffkin says the company is positioned to succeed when the market picks up, though he stopped short of predicting profitability.
“We believe that Compass will generate hundreds and hundreds of millions of dollars in EBITDA and free cash flow as the market recovers to a more normalized midcycle home sales level of 5.3 to 5.5 million annual home sales,” said Reffkin during the most recent earnings call.
Investors seem to share some of Reffkin’s optimism: Compass stock has been up roughly 16 percent since the earnings call.
But the margin for error is thin.
Compass’s cash continues to dwindle, meaning lower-than-expected revenue could prove problematic. That could occur due to market forces outside the company’s control — sales sometimes suffer during an election year, for example — or if Compass doesn’t maintain its agent count.
Signs point to potential problems on that front. After years of rapid agent growth, fueled in part by lavish sign-on bonuses, headcount growth has flattened. Compass grew its average total agent count by just 1 percent last year, down from 22 percent the year before. That includes the addition of more than 1,000 agents by way of acquisition.
It’s unclear whether the slowing rate is due to fewer agents joining Compass, or if more agents are leaving. Compass says it recruited 1,000 agents last year and let go of 400 underperforming agents last quarter, but headcount growth started slowing long before.
At the same time, Compass has fewer back-end employees to support those agents. A final round of layoffs in January 2023 helped bring its employee count to 2,500, down from 3,200 at the end of 2022, a year in which it laid off 1,600 people. The brokerage also started offshoring jobs last year, so its U.S. workforce is lower than the reported figure. Compass declined to say how many people it employs domestically, but a representative said it doesn’t plan on having more layoffs.
It also has substantially less cash than it did a year ago. Compass finished the year with $167 million in cash, down from $362 million at the end of 2022, though the latter figure includes a $150 million draw against its revolver loan, which it has since paid back.
Compass needs to maintain a minimum balance of $150 million at the end of each quarter to keep that loan, valued at $300 million. That means it has a little over $300 million in cash, including the loan.
Though Compass has drastically reduced its expenses, it’s also facing 10 antitrust lawsuits filed in the wake of the landmark Sitzer/Burnett verdict, which found NAR and several brokerages liable for price fixing over the coupling of agent commissions. Anywhere and Re/Max, two of the defendants in the suit, decided to settle, for $83 million and $55 million, respectively.
A similar settlement for Compass would eat up a significant amount of its cash reserves. The other option is to litigate, an expensive option that can lead to massive payouts in damages: NAR and other non-settling defendants in the Sitzer case may have to pay $5 billion.
In its annual report, Compass said it “plans to vigorously defend itself against all claims.”
A representative declined to confirm whether the company plans to litigate.
This article has been updated with additional details on Compass’ total operating expenses.