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Real Estate

Compass losing money, gaining market share

We break down the brokerage's gains, losses, opportunities and potential red flags from the company's S-1

The numbers are in: Compass lost $270 million in 2020, and the residential real estate brokerage generated $3.7 billion in revenue.

Those figures are from a statement Compass filed with the Securities and Exchange Commission on Monday afternoon, in which the brokerage proposed offering $500 million in class “A” common stock.

For residential real estate professionals, Compass’s “S-1” – the financial disclosure statement a U.S. company must provide before trading on a Wall Street exchange – has been hotly anticipated.

The hulking document released Monday does not disappoint, with everything from prices on specific Compass acquisitions to a long, philosophical letter from CEO Robert Reffkin.

Compass, for example, racked up $151.7 billion in sales volume in 2020, a leap from $97.5 billion in 2019.

The firm’s revenue has gone up by leaps and bounds each year amid a flurry of brokerage acquisitions, such as the purchase of Pacific Union in San Francisco and Stribling in New York. Compass recorded $884 million in 2018 revenue, and $2.4 billion in 2019.

However, Compass has also lost money each of the past three years, including a $388 million net loss in 2019. In all, it’s lost $1.1 billion as of Dec. 31, 2020.

Recent acquisitions include the firm’s buy of Bold New York for $2 million upfront with “up to an additional $2 million in cash upon meeting certain requirements.”

Also, last month: the brokerage purchased KVS Title Inc., a title and escrow company for $52 million. It is the second such purchase of a title and escrow outfit in the past six months: Compass purchased Modus in October.

The filing also indicates that Goldman Sachs – Reffkin’s former employer – is the lead underwriter of Compass being listed on a public exchange. Morgan Stanley and Barclay’s are also advising the brokerage.

Reffkin co-founded Compass with Ori Allon, who is evidently no longer with the company. The S-1 reads that Allon stepped down from the Board of Directors last month, though he does have a 5.2 percent share of all common stock.

Reffkin, meanwhile, would appear more important than ever.

“Our success depends upon the continued service of our senior management team, including, in particular, Robert Reffkin, our founder, Chairman and Chief Executive Officer,” the S-1 reads.

At another point, the document reads, “The multi-class structure of our common stock will have the effect of concentrating voting power with Robert Reffkin, our founder, Chairman and Chief Executive Officer.”

Compass does not provide an estimate for what price its stock might trade at.

Also, the public filing acknowledges that all the financial disclosures may not be totally accurate.

“We have identified material weaknesses in our internal controls over financial reporting,” reads a bolded sentence in the filing.

Another significant risk for Compass’s business may lie in 3rd party tech providers not honoring obligations. The warning is arguably at odds with Compass’s pitch that the brokerage has a competitive advantage due to the in-house technology it provides real estate agents.

Founded in 2012 in New York, Compass boasts 19,000 agents and has raised roughly $1.5 billion from investors, including Masa Son’s SoftBank Group. SoftBank’s Vision Fund holds nearly 35% of Class A shares, the S-1 filing revealed.

Though it’s climbed the ranks of brokerages over the years, Compass trailed Realogy and Berkshire Hathaway Homeservices by sales volume in 2020. At least in terms of revenue, Realogy, posted $6.7 billion in 2020, well above Compass’ $3.7 billion.

Check out coverage from our sister site, FinLedger, here.

Check back for updates on this breaking news story.

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