Wait, is Compass on the right track?
The New York City-headquartered residential brokerage lost money again in the second quarter. But its net loss of $7.1 million more than favorably compared to not just a deficit of $84.2 million in the second quarter of 2020 – when the real estate market faced its pandemic low point – but $212 million of negative income in this year’s first quarter.
Meanwhile, the eight-year-old brokerage’s gross revenue soared to $2.0 billion. Granted, 81% of that revenue goes back to Compass agents, mostly as their cut of sales commissions. But the $361 million in revenue – after the deduction of commissions and other related expenses – compares to $151 million revenue for the first quarter.
“We are in the strongest position we have ever been as a company,” declared Compass CEO Robert Reffkin during an earnings call Monday.
Reffkin is no stranger to effusive pronouncements. Buoyed by $1.6 billion in venture capital money, the former Goldman Sachs and George W. Bush administration employee grew Compass into wealthy urban enclaves across the country in part by offering agents high-commission splits and juicy incentives. Compass also acquired a roster of other firms.
But when Compass filed to become a publicly traded company in March, it confirmed critics’ suspicions that the brokerage is burning money. Compass lost $270 million last year with most of its revenue going straight back to the agents it recruited.
The company, which hoped to trade at $23-$26 a share on the New York Stock Exchange, was trading at $12.75 a share last week.
But the latest quarterly numbers may back up some of Reffkin’s rhetoric. Compass’s share of the residential real estate market grew to 6.2% after June of this year compared to 3.3% the year prior, according to the company’s quarterly report.
(Compass’s share price has since bumped up to $15.28 as of close of business Monday, with a $6.0 billion market capitalization.)
And the brokerage’s transaction volume soared 140% year-over-year, which – as Reffkin and Chief Financial Officer Kristen Ankerbrandt repeatedly mentioned during the call – favorably compares to the overall U.S. real estate market climbing 32% over that time.
One insight gleaned on Monday’s call was the success of recent expansion efforts. “We’ve gotten better at launching these markets over time,” Ankerbrandt said.
The company expanded in the past quarter to Indianapolis, Charlotte, and Minneapolis among other mid-sized cites. Perhaps agents are getting a little less than the moon in these locales as Compass’s agent commission split is dipping down toward 80%.
Still, Compass is losing money amid a historically great real estate market. Neither Reffkin nor Ankerbandt nor Wall Street analysts on the call acknowledged this fact, instead pointing out Compass made a profit before taxes, depreciation, and amortization.
Reffkin did repeatedly discuss technology including a goal for Compass to create an “end-to-end platform” for its agents by “next summer.”
“I know some you just see Compass as a brokerage,” Reffkin said, but “no brokerage firms are making necessary the technology investments” of Compass.
With everything “centralized on one platform,” the CEO added, the brokerage will enjoy revenues “multiples above the industry average per transaction.”
Pressed on details about what components of this end-to-end platform need another year to complete, Reffkin mentioned improved transaction management.
One part of an end-to-end platform is Compass joining the field of brokerages with a title division and mortgage joint venture. The brokerage announced a deal last month with mortgage lender Guaranteed Rate to start a joint venture, OriginPoint.
The collaboration between Guaranteed Rate and Compass expects to originate its first mortgage by the end of 2021, Ankerbrandt said on the call.
