Profitability Within Reach for Compass, But Challenges Remain

A photo illustration of Compass' Robert Reffkin (Getty, Compass)

A photo illustration of Compass’ Robert Reffkin (Getty, Compass)

Compass is facing a pivotal six-month stretch.

As it aims for profitability, with an interim goal of being cash flow–positive by the end of June, the brokerage must thread a needle by cutting costs without losing agents and revenue.

It has taken a hatchet to its product and engineering team, which along with other cuts will save the company $320 million this quarter, Compass estimates.

That size of that number, equal to a 20 percent reduction in operating expenses, is a reminder of how the company has burned cash with abandon. It also points to the degree of belt-tightening required to reach profitability amid the biggest housing market slowdown in company history.

And yet, profitability may not be as distant as it seems: Were Compass to reach its fourth-quarter revenue projection of $1.3 billion and achieve the savings it advertised to investors, it would be within reach of breaking even.

Whether it can do that is far from certain. So too is how the housing market will fare in an era of higher mortgage rates.

Steve Murray, co-founder of Real Trends and a residential brokerage analyst, said one of his biggest clients said it was “pulling out our 2008 playbook” to survive the sharp decline in sales.

“This is going to take some tough decisions,” Murray said.

Real estate technology analyst Mike DelPrete, who invests in the brokerage Side, calculates that for Compass to break even next year, its revenue can’t fall below $5.3 billion, meaning no more than 14 percent.

The headwinds are strong, however. The number of US homes sold fell 28 percent in October year-over-year, continuing a trend that has presented a major revenue challenge for brokerages.

“Never in my time at Compass have we seen such a big downturn in such a short period of time,” said CEO Robert Reffkin last summer. October marked the ninth straight month of falling home sales — the longest slide on record.

Despite that, the brokerage is on track for a banner year revenue-wise, as it added agents and gained market share. But it might not be able to bring in another $6 billion in 2023. Rising mortgage rates are scaring off buyers and discouraging listings by owners who don’t want to give up their low-interest mortgages.

Compass needs $1.32 billion in revenue per quarter to become profitable by the end of next year, according to DelPrete’s math. Winter is typically the slowest season for home sales, and if mortgage rates rise another 1.5 percentage points, as some predict, it could take the wind out of the spring and summer selling seasons.

The good news for Compass is that its agent count and market share have continued to grow even as the firm stopped using cash and equity to recruit. It needs to continue grabbing a bigger slice of what is now a smaller pie. A recent dip in mortgage rates and uptick in listings are also positive signs.

Compass’ dwindling cash position makes any decline in revenue more challenging still. That cash position, however, is not as strong as it may seem.

Its cash on hand has fallen by more than 40 percent this year, to $355 million from $618 million. But Compass has to keep $150 million of that in the bank to satisfy the terms of its $300 million revolver loan. So although Compass has said it has access to over $600 million in cash, the true figure is closer to $500 million.

That’s still substantial, but Compass burned through $120 million in the past two quarters. Should revenue fall below $3.8 billion, an unlikely scenario, it could lose access to its revolver.

“We don’t ever see a scenario where that comes into play,” said a Compass executive. “[The revolver] is really there for a rainy day. If we get to next year and revenue is significantly down because the market is significantly down, it’s there.”

Compass’ fortunes could hinge on its ability to attach services to the sales it brokers. The company is integrating title, mortgage and escrow services into its end-to-end tech platform. Executives say that could double the revenue of each transaction and dramatically increase the margin retained by the company.

“The impact of these tools is starting to be felt,” Rory Golod, a top executive at the brokerage, previously told The Real Deal. “That will eventually manifest itself in financial outcomes.”

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