Is Compass the next WeWork?

inonada

Well-known member
Indeed, David.

I like the combination of cluelessness and disloyalty presented by the following quote:
“You know who cares about that? Staff,” said Lee Mintz, a Los Angeles-based Compass broker, in a phone interview. “They’re paid employees, they’re the ones that are going to get affected by anything. [For] agents, the only things that are going to get affected are our stocks, and all my stocks are down.”
At the burn rate of the last 2 quarters, they’ll be out of cash in 3 quarters. For every $100 in revenue, they spent around $110. About $82 went to broker commissions, $23 went to running the ship, and $5 went to misc, etc. So in order to come up with $10 to stem the bleeding, they’re gonna cut about half the ship’s crew from $23 to $13? To say nothing about the notion that a corporation might eventually look for profit?

I’m just a casual observer looking at a 10-Q based on a rando post I read. I wonder if this broker is even aware.
 

David Goldsmith

All Powerful Moderator
Staff member
Another take on drain circling.
Compass Prepares for 25% Downturn in Housing Market, Plans Serious Cost Cutting, Pukes All Over the Place

Because suddenly the SoftBank-backed company, which blew $1.73 billion since 2017, is running out of runway.

Compass, which calls itself the “#1 Brokerage in the US” and has for years hyped its technology, and has billed itself more as a tech company than a real estate broker, whacked folks over the head multiple times this evening:
  • With another huge loss, $101 million this time, bringing the total losses since 2017 to $1.73 billion – a real estate brokerage, for crying out loud!
  • With Q2 revenues that barely grew and missed guidance.
  • With shocking cuts in its Q3 revenue guidance, forecasting a 25% plunge in revenues, when analysts had expected revenue growth!
  • With a morsel from CEO Robert Reffkin during the earnings call: “The Fed took repeated actions, which have had the direct effect of driving down our revenue.”
  • With another morsel from Reffkin: “We’re preparing for the real estate market this year to be nearly 25% below where industry experts believe it would be just six months ago.”
  • And with a plan to cut costs, and by a lot – a company whose business model had been “growth at all costs.”
CEO Reffkin explained during the earnings call (transcript via Seeking Alpha): “There’s still buyer demand, and still prices are flat in good markets; they’re down to modestly down into the more challenged markets. But there’s no longer multi offers everywhere like we have before. Days on market are definitely increasing. And so overall, we’re still negative on outlook.”
KATHOOMPH made the shares in afterhours trading today, plunging between 12% and 20% to just over $4, having collapsed by 82% from the first trading day after the IPO in April, 2021. The shares have plunged so much that today’s afterhours debacle is barely visible (data via YCharts):
US-stocks-2022-08-15-compass.png


The cost-cutting thingy is funny because Compass was never designed to make a profit in the first place. It was designed to rake in cash from investors by promising them forever-growth and then blowing this cash to achieve this growth.
In its startup phase, it raised $1.5 billion, including from the geniuses over at SoftBank, and then it raised $450 million during its IPO in April 2021. Compass spent the past years going around the US blowing this money by overpaying for real estate brokerages and poaching brokers from other brokerages, promising them oodles of money and stock-based compensation to the moon, and by plowing large amounts of cash into developing its much hyped software platform, all based on the promise of forever growth – and forget profits.
But now this scenario has gotten shookalacked by the downturn in the housing market and the projected plunge in revenues.
In its prior earnings call on May 12, Compass already announced that it stopped all expansion into new markets and buying other brokerages. In early July, Compass announced it would lay off 10% of its workforce, about 450 employees.
So in today’s earnings release, it said that market conditions were “extremely challenging” in Q2. And it announced a “new cost reduction program” that would cut about $320 million in operating expenses over the 12-month period compared to the 12-month period through June. And this cost-cutting would allow them to “generate positive free cash flow in 2023” in this environment of sharply dropping revenues, yeah, they’re going to be cash-flow positive during the 25% downturn after having burned huge piles of cash during the hottest real estate market ever, yup, I got it.
“Specifically, we plan to reduce our two biggest areas of expense: technology and incentives to acquire agents,” they said during the conference call.
“If the market gets worse, we will pursue the necessary steps to achieve that goal” – being free cash flow positive in 2023 – Chief Operating Officer Greg Hart said during the conference call.
Cutting costs when your business model is “growth at all costs” is always a peculiar thing. But now as the housing market has turned down and home sales have dropped, and it’s much harder to make a sale and get the commissions, cost cutting is doubly peculiar for a “growth at all costs” company. It is in essence admitting defeat of the business model that it had hyped to investors all along.
And that’s a desperate move because investors will be fleeing, making it that much harder to raise new money to burn.
Compass has a reason to make this desperate move. It may be running out of runway. It reported net cash used in operating activities of $120 million in the first half of 2022. It ended the quarter with $430 million in cash, down from $618 million six months ago. So at this rate of cash-burn, you can count on the fingers of your hands how many quarters the company has left before the cash will be all burned.
 

David Goldsmith

All Powerful Moderator
Staff member

A pitch to buy Compass stock goes horribly wrong​

As brokerage’s shares plummeted, one cheerleader kept pumping it​

If you find yourself in a hole, stop digging.
It’s an adage that Compass cheerleaders would do well to keep in mind. One in particular.

No, not Compass CEO and co-founder Robert Reffkin. He seems to be coming around to the reality that the brokerage needs to stop hemorrhaging cash, especially with home sales in a rut.
Rather, it is a stock-picker named Gary Alexander. He’s not the most important market prognosticator, but he has 24,000 followers on Seeking Alpha, a popular website in the investment community, and experience covering technology companies on Wall Street, working in Silicon Valley, and advising seed-round startups, according to his profile. His articles are syndicated in popular trading apps.

Alexander epitomizes the rah-rah optimism that has cost loyal Compass shareholders (himself included) money these past 17 months.
On Aug. 17, two days after the firm’s brutal second-quarter earnings call, Alexander published a piece headlined, “Compass: Buy While the Market is Looking the Other Way.”
It turns out that the market was not looking the other way. Goldman Sachs downgraded the brokerage’s stock that same day. Investors reacted by dumping Compass shares, as they had done earlier in the week when Compass announced another big quarterly loss and lowered its revenue expectations.

The selling drove Compass’ share price down 11 percent on Aug. 17 and 10.8 percent on Aug. 19. It fell another 7.7 percent Monday morning and on Tuesday reached an all-time low of $3.21. This was a $20 stock on its April Fool’s Day debut last year.
“Compass requires a bit of bravery, but I am enthusiastic about buying one of the country’s largest and fastest-growing real estate brokerages at pennies on the dollar,” Alexander wrote on Aug. 17. “Use this dip as a buying opportunity.”

Alexander might be right that with Compass stock on the discount rack, this is a good time to buy. His argument would be more compelling, though, if he had not been making it for the past 14 months, during which its plunge has continued virtually unabated. (Compass shares are down about 66 percent this year; by comparison, Redfin is down 76 percent, Douglas Elliman 49 percent and Anywhere Real Estate 35 percent.)

His first piece ran June 22, 2021, when Compass was in its third month as a publicly traded company and its stock was trading at about $14, or 22 percent below its IPO price. The headline was “Compass: Tremendous Performance Overlooked by the Market.”
On Feb. 17, 2022, he doubled down with “Compass: Very Obvious Buying Opportunity.” The stock had lost more than half of its value and could be had for about $9 a share. In retrospect, he should have written: “Compass: Very Obvious Shorting Opportunity.”

Not even a month later, on May 15, he tripled down with “Compass: This Real Estate Titan Is Too Good of a Steal to Pass On.”
At some point, one might think the stock picker would have moved on from Compass stock. Instead, he drew attention to his embarrassing history of endorsing it.
Readers were not very forgiving.
“Gary gets the pumper of the year award,” wrote one, Mr. HL. “Compass has never had an ability to make money. It’s a company that has zero capacity to stop the hemorrhaging.”

Reffkin, of course, begs to differ. He promised his staff last week that Compass would reduce expenses and “not run out of cash.” The CEO has a variety of ways to cut expenses, including layoffs, which he announced in June and again last week. He also argues that Compass can add agents simultaneously — the company said last week that the number of “principal agents,” defined as team leaders or individual agents operating independently on the Compass platform, was up 22 percent since last year. Compass declined to comment for this story.

Keep in mind, readers can say anything they want on the internet and hide behind the cloak of anonymity. But their analysis nonetheless raises questions that investors should consider before swallowing Alexander’s.

“Mr. HL” opined that to grow, Compass paid “ridiculous money-losing splits and incentives to attract and retain agents,” and that Reffkin now says the company will stop doing that.

“His new invention, ‘benchmark splits,’ is in reality just bringing splits more in line with traditional companies that — unlike Compass — don’t lose money on most transactions!” Mr. HL wrote. “Good luck growing without giving away ‘free’ money to cranky agents chasing the next shiny object!!”

Compass’ competitors have been making that complaint for years as the firm recruited their talent. But until Compass makes a profit — it lost nearly $500 million last year despite the hottest residential market since the bubble — it’s hard to say they are wrong.

Another reader, serenochris, linked to a video by The Real Deal titled “Resi Giant Compass Faces Financial Reckoning.”
The commenter then chided Alexander, noting, “You have called Compass a buy all the way down.”
“Let’s say [Compass] can pull off making these cuts,” serenochris postulated. “What’s left? A traditional bricks-and-mortar real estate company that lives or dies off whatever its share is of agent-driven commissions, less expenses.”

Actually, that might not be so bad: Traditional brokerages do tend to turn a profit. It’s reasonable to think that Compass could eventually make money using the old-fashioned commission model after spending lots of its early investors’ funding to carve out market share.
But if achieving profitability requires it to become a traditional brokerage, that means its stock would trade at a multiple similar to that of other brokerages — not at the high multiples that growth companies enjoy.

Elliman’s price/equity ratio is 7, for example. Anywhere (formerly Realogy) has a PE ratio of 5. Compass has no earnings, but if it did make money the way its rivals do, its stock would figure to trade at a similar multiple. So even if the downside of buying Compass stock is limited, its upside also figures to be.
The investment community has let other companies — most famously Amazon — spend years sacrificing profit for growth, confident that they could go into the black whenever they wanted by slowing their expansion. But investors did not extend Compass that courtesy, and now Reffkin must shift faster toward profitability than his doubters think is possible.

As another reader, marketman007, put it, “Compass cannot outrun math.”
Picking individual stocks is notoriously difficult. Countless studies have shown that virtually no one can do it well consistently, meaning that whoever does so for a short period of time is more likely lucky than good.
The best advice for young investors is to buy low-fee stock index funds and hold them for decades. The market’s gains have been largely driven by the immense success of a handful of companies (think Apple, Facebook, Microsoft and Google), but there is no way to know what the next big winners will be. Hence the strategy of buying the whole market.

But if you’re going to try to pick winners and sell people on a brokerage that has lost truckloads of money while telling the world it has built a better mousetrap, some caution is in order. A lot, actually.
 

David Goldsmith

All Powerful Moderator
Staff member
I believe Compass is (or at least was at IPO) over 80%. I think Realogy and Elliman average about 10% lower? But those are more average than median so I'm not sure "typical."
 

inonada

Well-known member
That’s certainly what it looks like from their public filings.

How much of that 70% or 80% goes to a broker’s costs? E.g., marketing expenses and whatnot that do not flow into income. I’m trying to understand how big the Compass “value proposition” was on an agent’s after-expense income. I’m sure the full answer has a wide range and lots of nuances, but I’m just curious about the ballpark.
 

David Goldsmith

All Powerful Moderator
Staff member
I'm very unconfident about this answer but AFAIK none of that was the agent's ad budget, etc it was all actual compensation to agents.
 

David Goldsmith

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All Real Estate brokerages profit from the "float" - funds they receive from commissions collected but the haven't paid agents their splits yet. Bellmarc and Sopher were notorious for being slow payers so they could extend their float. They say their cash position is $431 million, but just 2 weeks of float on $6.4 billion revenue is about $250 million.

Understanding Compass’ cash position​

The firm has $431 million in the kitty. Will that be enough to brave the down market?​

Compass, which has burned through nearly $800 million over the last 18 months, should have enough cash to last the brokerage at least another year, industry observers predict. But that runway could shrink if the residential market slump continues.
After a dismal second quarter in which Compass lost $101 million and said it was slashing its revenue projections by more than $1.5 billion, investors reacted by pushing its stock to a record low of $3.17 (as of Aug. 25), which sent its market cap down to $1.4 billion.

“Here’s the problem. The market has slowed significantly,” said Steve Murray, co-founder of Real Trends and a residential brokerage analyst. “We’re looking at a market that across the board is down between 6 to 8 percent in volume, down 15 percent in unit sales. Price appreciation is slowing down.”

Compass ended last year with nearly $620 million in cash and cash equivalents. Its cash reserves fell by $187 million, or about 30 percent, since the start of the year. Its commissions payable was $95 million at the end of the second quarter, up slightly from $92 million in the second quarter of 2021.

To understand how much time Compass’ cash buys it, you might try dividing the brokerage’s losses by its cash on hand. But that wouldn’t account for the fact that over half of its losses stem from stock awards. At the end of the second quarter, Compass reported a $101 million loss, and $59 million (or about 60 percent) of that was stock-based compensation.
Analysts have noted that Compass’ cash reserves fell by $45 million in the second quarter, which is typically the most profitable quarter for brokerages. And in 2021, a record-breaking year for residential real estate,Compass only reported a profit in the second quarter.
Partly due to rapidly rising mortgage rates, U.S. home sales fell for the sixth consecutive month in July, the longest period of consecutive drops in eight years, according to the National Association of Realtors, which tracks sales recorded on the Multiple Listing Service.

“Compass was created in an ascending market,” a rival brokerage owner said. “How bloody is it going to get?”
Compass has adjusted its projected revenues for the rest of this year and next. Its rosiest projection for the year is that revenues could hit $6.5 billion, down from its earlier projected high of $8 billion.
“Cash burn was higher in Q1 than last year, and higher in Q2 than last year; in a rapidly cooling market, the pressure is on for the rest of the year,” Mike DelPrete, a residential industry analyst and an investor in the brokerage rival Side, wrote in an August blog post.
But Compass is stressing that it’s taking the necessary steps to survive the market slump and get a grip on losses.

The company no longer offers equity or cash incentives to new agents. And Reffkin emphasized in a company-wide email that the firm is and will continue to be in a “strong financial position… even if the market continues to show slower unit sales. Anyone suggesting the contrary is wrong.”
The brokerage, which also has about $318 million in untapped credit from Barclays, does have more cash (totaling $430.5 million at the end of the second quarter) than its competitors – Elliman ended the second quarter with about $202 million in cash, for example, while Anywhere Real Estate (formerly Realogy) had $251 million in cash. But no other firm has burned through this much money so fast.
Compass has said that it has invested a total of $900 million in its technology platform, which it believes gives it a significant moat against its rivals and serves as a powerful recruiting tool. Its rivals have continually challenged both that number and that narrative.

The plan to cut costs while continuing to recruit in a down market will be challenging. On top of eliminating incentives, the brokerage will carry out a second round of layoffs, and will likely close offices. It also plans to scale back on its technology investment; last week, The Real Deal reported that it had let go of its CTO, Joseph Sirosh, and made a round of layoffs in his department.
Jason Helfstein, an analyst at Oppenheimer & Co. who covers Compass, estimates that with the firm’s $320 million cost reduction program, it could end the year with about $300 million in the bank. By next year, Compass could generate about $15 million in free cash flow, if the market “rebounds,” Helfstein said.

Still, “we have their revenue down 3 percent next year to be conservative,” Helfstein said. “With no revenue growth and the cost reduction plan, they can break even and be slightly cash [positive]. They need to show they can generate cash flow.”
Murray, of Real Trends, said that even though the company is “in a tough spot, there is a way out for them.”
“It’s not easy what they’ve got to do,” Murray said. “The key question becomes if we [cut costs], how do we do that in such a way that we don’t impact the relationships with our agents? That’s not easy.”
 

David Goldsmith

All Powerful Moderator
Staff member

SoftBank’s losses on Compass were $540M as of August. The brokerage’s stock is down by a third​

Japanese investor disclosed $1.08B investment was worth $543M on Aug. 5​

Masa Son’s SoftBank made what it hoped would be a transformative bet on residential brokerage through its investment in Compass. It’s a bet that has proven extraordinarily costly.
The Japanese investment giant’s Vision Fund disclosed on Aug. 5 that its stake in Compass, for which it pumped in $1.08 billion over three funding rounds, was worth just $543 million as of Aug. 5., wiping out about half its investment. And the current value is likely much lower: Compass shares have fallen 33 percent since then, hitting $2.82 as of market close Thursday, compared to $4.10 as of Aug. 5.

SoftBank co-led Compass’ $550 million Series E round in December 2017, which valued the brokerage at $2.2 billion, according to PitchBook. It also co-led Compass’ $400 million Series F round in December 2018 (at a $4.4 billion valuation) and its $500 million Series G round in November 2019 (at a $6.4 billion valuation).
“With disruptive technology and unique data advantages, Compass is well-positioned for future growth in a sector that represents trillions in transaction volume,” Justin Wilson, then a partner at the Vision Fund, said at the time of its first investment in Compass.

Compass went public on April Fool’s Day in 2021, selling 25 million shares at a price of $18 per share for a total raise of $450 million. After the IPO, the company was valued at just shy of $7 billion. Its opening day price was $20 a share, but it was all downhill from there – the company’s stock has dropped 86 percent since, and its current market cap is $1.21 billion.

The company disclosed losses of $289 million in the first six months of the year, and said it is looking to slash its costs by $320 million in a bid to become profitable. It has been conducting layoffs, including that of its chief technology officer, and put an end to its equity grant program for new agents.
The $100 billion Vision Fund, led by Rajeev Misra, lost a record $21.6 billion in the second quarter. Its other big missteps include WeWork, with the fund saying that a $3.5 billion investment in the co-working firm was worth just $458 million as of Aug. 5 (SoftBank’s overall investment in WeWork is far larger.)
 

Upstairs Realty

Well-known member
Late to this discussion but I was not offered 70%-80% when Compass tried to recruit me! I WAS offered tech tools, two of which would replicate things I already do but would have saved me considerable amounts of time, access to design/marketing support (I believe with a budget to use them), the camaraderie of an office with lots of yogurt pretzels (this was pre-Pandemic), and a split where I was like, "why would I fold my business for that?"

Their answer was "because you'll grow your business so much when you're at Compass, you'll make more money."

I didn't bite.
 

David Goldsmith

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Staff member

Founding agent of Compass’ Houston office jumps ship​

Bryan Beene’s could trigger run for the lifeboats among fellow brokers​

A founding agent of Compass’ Houston office is headed to Martha Turner Sotheby’s.
Bryan Beene’s departure from Compass comes at a critical juncture in the former start-up’s short history as the now-public company’s stock tanks, and top executives sell-off shares.

Before joining Compass when its Houston office opened in 2018, Beene was a top broker at longtime luxury realtor John Daugherty, which is now Douglas Elliman’s Houston outpost.

Beene, who represented buyers and sellers in transactions totaling over $32 million in 2021, follows two former Compass agents who left for Houston’s Nan and Co. Properties in mid-August.
His move could trigger even more departures from Compass’ Houston office. The Real Deal has learned that at least three current Compass agents are looking to depart from its Houston office.

“This is big, when these OGs leave, others tend to follow,” a source familiar with Compass’ Houston office told TRD.
Beene, who has been a real estate agent for the past decade, has closed over $215 million in sales volume in Greater Houston, according to a Martha Turner Sotheby’s press release.
“Brian’s departure was in the best interest of both parties,” said Seita Jongebloed, managing director for Compass Greater Houston, in a statement to TRD. “We wish him the best in his future endeavors and look forward to continuing to work with him through our Compass agents across Greater Houston.”

Beene did not return TRD’s call for comment.
 

inonada

Well-known member
Ali, what is the cost of “folding your business” as a broker and changing shops?

I got curious as I was thinking about what happens if / when brokers start jumping ship from Compass and a death spiral ensues. Is it better to jump early (to secure a better hand elsewhere) or late (milk it as long as you can)? Are you more inclined to jump ship if you’re a big broker syndicate vs. a small individual broker?
 

David Goldsmith

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If you notice Compass isn't the only one whose shares are tanking - they're just tanking the hardest. The recently spun off Douglas Elliman is down 60% since December IPO. Anywhere (Realogy; parent of Corcoran, Sotheby's, etc) is down over 50% from about the same time. IF transaction volumes continue to tank nationwide not only will these numbers get worse but there's a very good chance you will see large numbers of agents leave the business. The good news for these large companies is that if they somehow all decided to cut commission splits at the same time and also agree to some form of agreement to stop poaching each other's talent they could probably get away with commission split cuts because for agents who have gotten used to working for large firms the incentives to jump (in a bad market nonetheless) would be limited. Some would go independent or to smaller shops but many aren't prepared to do that.

Also if you look at this thread you'll see (as I think I correctly predicted) we have already seen a lot of the top producing talent bouncing as market turmoil has increased since the start of the pandemic.
 

David Goldsmith

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Compass Bay Area founding agent joins Christie’s​

Phil Chen, who generates $250M in annual sales, and his team of nine switch brokerages​

Phil Chen, the agent who launched Compass’ operations in the Bay Area’s Mid-Peninsula four and a half years ago, has switched to Christie’s International Real Estate’s Northern California affiliate, taking $250 million in annual sales volume and a team of nine people with him.
Chen and his team, Sybarite Luxury Realty, joined Christie’s Burlingame office, increasing its active agent headcount to 16 from 10, according to the brokerage’s vice president of operations, Shawna Borg. Chen started his real estate career in 2006 and has since generated more than $1.1 billion in sales volume, according to Christie’s news release disclosing the move.

Sybarite consists of seven agents, including Chen, and a support staff of three. It specializes in buying and selling homes in the Mid-Peninsula, generally defined as Redwood City, San Carlos, Belmont, Foster City, San Mateo, Burlingame, Hillsborough, Millbrae, and San Bruno. Many of its sold listings are in Hillsborough, an affluent suburb where the median home sales price was $7.9 million from May through July, according to U.S. Census and Compass data.

The exit fits into a series of negative developments at Compass, based in New York. The brokerage lost $289 million in the first half of the year, according to a quarterly report released last month. CFO Kristen Ankerbrandt departed earlier this year as the company, which has billed itself as using technology to improve the home-selling process, cuts its tech budget. And several agents have recently defected to competitors; in the local market, Jeff Barnett left Compass to take the helm at The Agency’s Los Gatos office.
For Chen, the move will give him and his team access to a luxury brokerage network with affiliates worldwide and Christie’s name recognition to complement Sereno, he said in a statement. Sereno, a Northern California residential brokerage, partnered with Christie’s owner @properties earlier this year to bring the brand to the Bay Area. The deal created Christie’s International Real Estate Sereno, which has more than 600 agents in the Bay Area and amassed nearly $6.6 billion in sales volume last year, Borg wrote in an email.

Compass declined to comment. Despite Chen and his team’s departure, it remains the Bay Area’s largest residential brokerage by gross sales volume and number of agents, the latest San Francisco Business Times data show.
 

David Goldsmith

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Staff member
"Now, it looks more like the WeWork of residential real estate."
Real Estate Giant Compass Is Facing an ‘Existential’ Cash Burn Problem

The real estate company once seemed poised to revolutionize the industry. Now, it looks more like the WeWork of residential real estate.

Not too long ago, the real estate company Compass looked poised to dominate the industry for years to come. With a promise to combine the best of the technology and real estate sectors, it had raised an eye-popping $1.5 billion in funding from investors that included SoftBank, poached or acquired many of the top agents in the business, developed a deep bench of engineers, and made its logo an almost omnipresent feature of high-end neighborhoods.

By CEO Robert Reffkin’s own admission, earning a profit was not top of mind. “Short-term profitability is something that many of the more modern companies are not as focused on,” he told the Wall Street Journal in 2019. Instead, Compass kept aggressively spending to grow. By last year, Compass, which focuses on selling luxury homes in high-end markets with the help of a sleek app, was working with thousands of agents and selling more residential real estate by sales volume than any other brokerage.

Now, Compass looks like something more akin to the WeWork of the residential real estate market—a company that raised and spent money like a tech firm but made money like a brokerage. “What they’re doing, it doesn’t make sense,” one rival CEO recently told Bloomberg. Like a lot of high-growth tech darlings, Compass has still never made an annual profit, but when the housing market started to cool down and the tech industry came back to earth this year, the lack of even a clear path toward profitability was laid bare.

Have you worked at Compass? We want to speak to you. From a non-work device, contact our reporter at maxwell.strachan@vice.com or via Signal at 310-614-3752 for extra security.

In mid-May, one analyst, Mike DelPrete, published a short analysis of the company to his website saying Compass had a severe “cash burn problem” and was at a “a critical juncture” where it would need to raise money or cut costs after years of operating “more unprofitably than any of its publicly-listed peers.” One month later, the company announced it was laying off 10 percent of its workforce. Then, in August, Compass announced an additional $320 million “cost-reduction program.” Soon after, DelPrete wrote that the move made sense, considering the company needed to “significantly reduce expenses to remain solvent.”

DelPrete, a scholar-in-residence at the University of Colorado Boulder—and an investor in real estate companies, including Compass competitor Side—has become one of the most closely-watched thinkers in the online real estate space, thanks to his evidence-based and often prescient analysis of companies like Compass and Zillow.

He spoke to Motherboard on the phone last week about the rise of Compass, where it went wrong, and where they could go from here. We lightly edited the interview for clarity.

Motherboard: Let's just start here: When Compass announced these job cuts and this cost-cutting strategy, were you surprised?
Mike DelPrete: No, not at all.

And why was that?
Because they have a cash burn problem. Fundamentally, Compass is a business that spends more money than it makes. And it's been spending more money than it makes for years now, since inception, so perhaps a decade, and it's doing it at a scale unprecedented in the real estate space. Compass is the world's most unprofitable brokerage ever.

What are they spending their money on that other companies aren’t?
They're spending their money to aggressively grow. So over time, that's been recruiting. They're acquiring brokerages. They're acquiring agents. So aggressive, aggressive recruiting tactics. Also, technology. They say they've spent $900 million—just say it again, $900 million—building their technology platform.

And what does their technology platform do?
The technology platform is like a back office or an operating system for a real estate agent. So it's designed to help an agent do everything they need to do in business: handling and managing leads, sending out mailers, prospecting for new customers—anything that an agent needs to do to run their business.

You've compared the company's strategy to the New York Yankees’ strategy. Can you elaborate on that?
There's a couple famous sports teams, the New York Yankees and Real Madrid in Spanish soccer, that have tons of money and they go out and they buy the superstars. And that's their competitive advantage. They have so much money, they can go out and buy the best players and try to build the all-star team. Compass had a similar approach. They had so much money, they would go out and target the most productive agents. If you get a list in terms of how many houses agents sell in a given area, they would just start at the top and go through the list and call those agents and they wouldn't hang up until they've thrown enough money or incentives at those agents to convince them to come on Compass. So their strategy was to effectively try to build an all-star team. And when it got too cumbersome to pick up the phone and call them one at a time, they would go out and just acquire the brokerages.

The entire brokerage?
Yeah, just acquire the brokerage. They were paying top, top dollar. They didn't care. They just wanted to acquire market share to get as many top-producing agents as they possibly could.

(“We are working to be the best place in the industry for agents to come and be successful and grow their businesses,” Compass spokesperson Joshua Friedlander said in response to a Motherboard request for comment. “The size of the residential real estate opportunity is massive, and there is lots of upside for the company that becomes truly excellent at empowering agents to succeed.”)

So is it fair to say compensation was high there compared to competitors consequently?
Yeah, and agents don't get a salary. An agent gets compensated based on a commission split, where when they sell a home, they get to keep a percentage of the commission they earn and they pay a percentage of the commission to the brokerage they work for. So Compass’ share of that commission was very, very, very low, meaning the agent got to keep most of that money. Compass would also incentivize agents with sign-on bonuses and stock options. So those kinds of all added up to make it financially a really lucrative proposition for an agent.

Just to back up, how was Compass able to raise all this money? They raised over $1 billion, including from SoftBank. What made them the company that could raise so much compared to their competitors?
I don't know. How does anybody raise money? It's a great compelling narrative, coupled with a charismatic founding team. They told a great story of a huge industry—real estate—that kind of operates the same way it always has, coupled with technology. Real estate and technology, put them together, and we're gonna make a lot of money.

The CEO said a couple years back that short-term profitability is something that many of the more modern companies are not as focused on, is it safe to say profit was not a point of emphasis early on?
It was definitely not an emphasis, nor shouldn't have been. If you have a billion dollars in the bank, the worst thing you can do is let it sit in the bank. You need to spend it to grow. That's what these high-growth companies are supposed to do. They're supposed to spend money in an unprofitable manner to reach escape velocity, to get really, really big. So they were going according to plan.

But I think the idea of having a viable path to profitability was always uncertain. There was no clear path to profitability. Everybody knew this couldn't last forever. And there were vague notions of what would need to happen to reach profitability—either it would have to get to enormous scale in the U.S. or they would have to deliver on the promise of technology reducing costs and making people more efficient. Or, We're gonna get into mortgage and title insurance and we'll make money there. But that's where things got really hazy. It's like a magician waving their hands and the misdirection [that comes with that]. There was no real set in stone path of: This is how we're going to be profitable one day.

(“This is not really true. Of course we had plans to build a profitable business,” Friedlander said. The company had planned to “profitability naturally” by scaling to such a level that revenues overtook costs, Friedlander added, but recent “market dynamics have necessitated a different approach to the same outcome where we will make cuts more quickly.”)

So maybe a year ago before the housing downturn, before people were talking about inflation very much, where would you say Compass was then? Had the cash-burn issue not become apparent yet because funding was still so plentiful?
A year ago, nobody was paying attention, myself included. They had a lot of money in the bank. They were spending a lot, but that's what they've been doing for years. So there was nothing new. There was nothing different. What really happened is that in 2022—I don't know what happened; I don't know what meeting I missed or what memo I didn't get—but suddenly the investment community decided: Actually, profitability is really important. We need and want all companies to be profitable or have a path to profitability.

So the stock market got hammered. Suddenly, Compass’ ability to replenish its coffers, to raise more money was gone or severely handicapped. And that's when the pressure is on, right? It's like if you're driving your car across the country, everything's fine until you run out of gas. But when your next gas station is in 350 miles, you have an Oh shit moment. Like, Oh my God, can I make it?

And that's when they started layoffs and other cost cutting. Can you give me a sense of what costs they're reducing? And where do you expect them to cut costs moving forward?
Earlier this year, they cut 10 percent of the workforce—450 employees. And now they just announced a much larger $320 million cost reduction program. And they alluded to two areas.

The most important area is tech. They're basically saying, Hey, our tech platform is almost done. And we're gonna be able to reduce our expenses there. It's a little weird, because a tech platform’s never done. It’s like saying, We’re finished, we're done. All of the technology has been built, we're gonna fire 80 percent of our engineering team. Or Google being like, We're done. We finished the search engine. We are totally set. That's not how tech works. But I think that's code that they'll be cutting their tech team in a pretty aggressive way. Their software development team has 1,000 people, which is mind-boggling for a real estate brokerage. I think they're on track to spend around $360 million on tech this year. So there's a huge cost there.

(“Mike is right, but it is true that building an end-to-end platform takes a big investment to ‘build from scratch’ and it's completely possible to maintain and deliver further new innovations and features with a smaller team than what it took to start from scratch,” Friedlander said in response. “We will still have a tech team to run the platform and continue to add new capabilities based on what agents and the employees who serve them need, but we can do that with a smaller team than we have had to date.”)

The CEO of a rival brokerage told Bloomberg recently that Compass is not a technology company. They're a real estate brokerage company. That's been a constant question: How much are they really a tech company? Do you feel like all of this is an admission: Maybe we really are just a very snazzy real estate brokerage at the end of the day?
We could have a philosophical argument about that for hours. I don't know. I don't know if they're a brokerage or a tech company, and I would assert that it doesn't really matter. They make money as a real estate brokerage. They have 1,000 software engineers. They pitch themselves as a technology company. I mean, they’re both. They've clearly been valued as a technology company in the past. And today, and always, they make money as a real estate brokerage. The interesting irony here is they could be profitable tomorrow if they fired all of their tech people. So it's a Catch-22.

It does sort of remind me of WeWork. There were lots of co-working space companies, but WeWork was the company that raised a lot of money because they were the ones that said, We're not just a co-working space company. We have a technology element as well. Do you think that's possibly part of it?
Yeah, it's impossible not to draw parallels between those businesses. But just because there's similarities doesn't mean they're the same.

(“While we are similar in that both are founder-driven companies, we'd look at each founder individually – that’s where you’ll see the difference (diligence vs excess),” Friedlander said.)

Where do you see this problem heading over the next six months or so?
Compass is not going to run out of money. But Compass does have a cash-burn problem. They're spending a lot of money, and they have a rapidly diminishing bank account. So they need to make really significant cuts. And the question is, can they do that while still retaining their agents? How does a company cut $320 million of expenses and still offer the same level of service to its customers?

It's one thing to say, Oh, we're gonna cut some enormous chunk of the company and then the balance sheet will look a bit better. It's a bit different so come out the other side with a sustainable operation and not one that’s really injured.
The other interesting angle here is looking at the competitive set. So you've got Compass who's cash flow negative and needs to cut $320 million. Who are its peers? Who is it competing against? eXp. Anywhere Real Estate, which is Coldwell Banker and Sotheby's. Douglas Elliman. These are companies that are cash-flow positive. They're making money. They're not laying off people. They're not having to cut hundreds of millions of dollars of expense. It's important to think about it from a competitive standpoint.

You have a company like Compass that needs to shed hundreds of millions of dollars of costs. And they’ve said we're stopping growing, we're not going into new markets, we’re not going to offer new incentives to new agents to join us. Many of these other companies that are actually cash flow positive, they're making money. They can afford to invest. They can afford to grow.

So I think that's an existential risk here for Compass. They're taking a much-needed pause. But what's the long-term implication of that going to be relative to who they're competing with in the market?
 

David Goldsmith

All Powerful Moderator
Staff member

Institutional investors take dueling approaches to Compass stock​

BlackRock, Vanguard go on shopping spree; Citrone, Wellington cut losses​

Compass’ steady stock slide since the residential brokerage went public 17 months ago has put a familiar question to big-name investors: is it time to buy or sell?
Wall Street’s so-called smart money has chosen to do both.

Institutional investors, who own two-thirds of Compass stock and range from conservative 401k managers to opportunistic hedge funds, have taken contrasting approaches: Some look to have cut bait by selling off the bulk of their holdings. Others have opted to buy the dip.
BlackRock, for one, has gone on a shopping spree.
The world’s largest money manager has amassed more than 3 percent of Compass stock, mostly over the last six months, according to data provided to The Real Deal by investment analytics platforms Simply Wall St and FactSet. That stake is now valued at about $44 million, compared to Compass’ current market cap of $1.43 billion.
Vanguard, which manages over $7 trillion in money, offers ownership of Compass in a variety of exchange-traded funds. Like BlackRock, it accumulated nearly all of its holdings in the brokerage, currently valued at about $106 million, in the last six months.
But there are two sides to every transaction, and the three largest trading days in Compass stock by volume have all come since the company’s share price hit $4.05 in May.

Robert Citrone’s Discovery Capital Management is a notable seller, both given the volume of stock it has offloaded and its evangelism of Compass prior to its IPO.
The hedge fund, an early Compass investor which owned nearly 10 percent of Compass stock pre-IPO, bought some for as much $118 per share, according to prior TRD reporting and data from PitchBook. Discovery executed a selling spree over the last six months. Its current holdings are valued at $19 million, down from approximately $240 million, according to PitchBook.

While Discovery sold 77 percent of its Compass stock in that time, the value of its investment declined by a disproportionate 93 percent, as Compass’ share price fell.
Since the start of this year, Wishbone Management and Wellington Management have sold 32 and 40 percent of their holdings respectively. Wellington led Compass’ $75 million Series D round in 2016, which valued the firm at $1 billion at a price per share of $42.6, according to PitchBook.
Compass’ largest shareholder continues to be SoftBank, the Japanese investment giant that co-led the firm’s Series F and G rounds. SoftBank recently disclosed that as of Aug. 5, its stake in Compass was down $540 million, and its losses have widened since then as the stock has fallen further.
Institutional investors now own over 75 percent of outstanding shares in U.S. markets, up from below 40 percent in 1980, according to research from the Darden School of Business at the University of Virginia.

Compass declined to comment for this story. The firm’s stock, at $3.32 as of Monday afternoon, is down 65 percent this year, as it grapples with a slowing housing market that has also rocked many of its rivals – Anywhere Real Estate is down 40 percent and Douglas Elliman is down 55 percent. But some believe Compass’ share price declines are also a reflection of investors’ changing perceptions about the company.
“Valued as a tech company especially prior to its IPO, Compass has over time become valued more as a brokerage,” said Mike DelPrete, a residential real estate analyst at the University of Colorado and an investor in Compass rival Side.
But DelPrete said that the semantics didn’t really matter given the scale of Compass’ losses – more than $800 million between January 2021 and June 2022.
“Asking whether Compass is a technology company or a brokerage,” DelPrete said, “is like arguing what color a house is while it’s on fire.”
 

David Goldsmith

All Powerful Moderator
Staff member

Why Compass isn’t closing offices​

Less than 1% of brokerage's’ $320M cost-cutting will come from shuttering locations​

When Compass announced an aggressive cost-cutting strategy, one of the places expected to get a hard look was its office footprint.
After all, closing an office doesn’t require many layoffs, and in some regions, the firm has several prime locations within minutes of each other. Some of those leases were signed when rents were at a premium.

But sources said the company isn’t reducing its physical footprint, despite looking to cut roughly $320 million from its budget after a quarter in which it announced losses of $101 million.
“One, we don’t need to because we have other levers we’re focused on, and two, it’s not what agents want,” said a company executive. “We’ve worked backwards and said to agents, ‘What’s ideal for you?’ Most of them have said, ‘We want to be in the office.’”

According to Compass, closing offices doesn’t necessarily save money up front, as there are termination fees for long-term leases.
“We have other cost centers that yield a lot more savings and don’t materially affect the experience of our agents,” said the executive.

Up until this year, Compass had been aggressively expanding, a strategy that entailed opening up its SoftBank-funded checkbook to poach top brokers and acquire smaller competitors. At the end of 2019, it had 15,500 brokers nationally across 325 offices.

The number of offices has since grown to 427 staffed full-time, according to Compass’ website, and another 85 satellite offices staffed part-time that aren’t listed on the site, according to data provided by a company representative. The company now has nearly 13,000 “principal agents,” defined by the company as team leaders or individual agents operating independently on the Compass platform, up 22 percent year-over-year. Overall, the company has about 28,000 agents.
As the number of spaces has grown, so has the cost to keep them open. According to Compass’ 2021 annual filing, it spent $135 million on office leases last year, up from $122 million in 2020. Its future lease liabilities at the end of last year totaled more than $564 million.

Those numbers could increase if Compass continues to open offices across the country. It recently opened a second location in St. Louis, where it plans to recruit another 200 agents, according to Inman.
And it doesn’t plan on closing many offices. Compass said it closed a net of eight offices this year, and that plans for those closures date back to last year, before the market shifted and cost-cutting was announced.
“In some cases maybe we closed two locations but opened a larger location,” said a company spokesperson.
The brokerage’s office footprint is heavily concentrated in three states: California (140), Florida (62) and New York (57). In California, its offices are mostly in and around San Francisco and Los Angeles, both cities with rents far exceeding the national average. Its New York offices are clustered in and around New York City, with a strong presence out to the Hamptons on Long Island. It also has a sizable foothold in secondary markets like Rhode Island, where it has 12 offices, and Cape Cod, Massachusetts, where it has more than 20.

Many of those locations came by way of acquisitions. Between 2018 and 2021, Compass spent $300 million acquiring at least 14 brokerages, leaving it with a cluster of locations in some markets.
For example, the office it inherited when it acquired Stribling & Associates gave it three locations within six blocks on New York’s Upper East Side. In San Francisco, it has three offices on 24th Street and all of its offices are within a 10-minute drive of another office, according to Mapbox, a location data provider. Similar situations have played out on Cape Cod and Rhode Island.
An executive said the company did away with its redundant locations and those that remain are profitable.

“Take Rhode Island and Cape Cod, where we acquired multiple companies,” the executive said. “They’re smaller towns and they’re more confined to the geography of that actual town. So you end up having a lot of offices, but they’re smaller.”
“That business model worked really well for those acquired companies,” the executive added. “They were strong businesses, they were profitable. That’s why we don’t have plans to change that.”
 

David Goldsmith

All Powerful Moderator
Staff member

Compass does another big round of layoffs​

Brokerage notes $23M-$26M in severance costs, says "significant portion" of cuts hit product, engineering team​

Compass announced Tuesday that it has conducted another round of layoffs, billing the step as a “significant action” en route to its goal of becoming profitable.
“The Company believes it is in a position to reduce its go forward investment in technology given the maturity of the Company’s technology platform,” it said in an SEC filing Tuesday. “As a result, a significant portion of the Workforce Reduction involves reductions in headcount on the Company’s product and engineering team.”

Compass has stated that it has invested $900 million in its tech platform, but the breakdown of those expenditures is unclear, and industry rivals have long questioned the return on that investment.

“As entrepreneurs, you are no strangers to making hard decisions for the long-term success of your businesses,” Compass CEO Robert Reffkin said in an email Tuesday to the firm’s agents, which was viewed by The Real Deal. “I am more excited than ever about what we are building together.”
Compass did not provide specifics on the number of layoffs, but they are likely to be substantial given that they necessitated an SEC filing and that the filing noted costs of between $23 million and $26 million for severance and termination benefits. When the company laid off 450 employees in June, it incurred severance and termination-related costs of between $15 million and $16 million. Given that, it’s likely the layoffs this time around were larger, though the company declined to comment beyond the filing.

The company plans to cut its expenses by $320 million this year.
Reffkin continues to employ a “nothing to see here” approach. He said in the agent email that he and president Neda Navab would host a “fireside chat” Wednesday to “talk about why we are so confident in the company we are building, how we are navigating through this moment in the market while maintaining a strong financial position, and how we are going on the offense to dispel the narratives that have been circulating about Compass.”

Compass’ losses in 2021 and the first half of this year totaled nearly $800 million, according to its financial statements. Its stock price hit an all-time low of $2.50 shortly after the opening bell Tuesday and was trading down about 4.7 percent as of late morning.
 

David Goldsmith

All Powerful Moderator
Staff member

Compass’ Houston ‘Impact Day’ bucks up the troops​

President of national brokerage operations Neda Navab flew in from NYC for selfies and upbeat talk with rank-and-file​

If you were a real estate outsider attending Compass’ “Impact Day” at the company’s swanky Houston office in River Oaks — arguably the Bayou City’s poshest neighborhood — you wouldn’t think this is a real estate brokerage facing a struggle.
Despite the firm’s financial woes and news of agents heading for the exits on almost a weekly basis, the Houston edition of Compass’ Impact Day — an event the company holds at all its offices around the country where top executives fly in to inspire the rank-and-file agents — was bustling and decidedly upbeat.

The theme of the Houston event was to finish 2022 strong.
Agents from all five of Compass’ Houston offices, some of whom in company t-shirts, mingled with each other over a Tex-Mex lunch on Sept. 14 at 4200 Westheimer Road, which is also home to commercial real estate giant JLL’s Houston headquarters.
The company’s Houston mothership exudes the vibe of a well-funded tech start-up rather than a traditional real estate brokerage office. Think coworking desks, common areas, privacy booths for calls, offices for top producers with glass doors and great city views, well-appointed conference rooms with huge flat-screen televisions, fixtures and desks all in a sleek matte black — modern office minimalism with all the amenities.

Compass’ president of national brokerage operations, Neda Navab, flew in from New York and posed for pictures with agents and chatted with them one-on-one. Compass’ remaining founding Houston agents were engaging with newer brokers in the atmosphere of a cocktail party.
After all the networking and noshing was done, a panel made up four of Compass Houston’s top producing agents — Caroline Bean, Mike Mahlstedt, Courtney Robertson and Caroline Schlemmer — gave essentially a pep talk to the company’s agents heading into the fourth quarter.
Compass’ Houston all-stars emphasized that the post-pandemic real estate market was going to be different and that agents would have to negotiate more with sellers than buyers in the coming months — and when it came to closing deals, there was lots of talk about not burning bridges with agents from other brokerages on the other side of listings.

The consensus about the Houston market was that agents should prepare for a descent from the stratospheric heights, but needn’t brace for a crash. The subtext of all the upbeat talk was that Compass was “adjusting” to a “shifting market” and saw a path to finish 2022 strong.
 
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