How long can this last?
Compass lost $494 million in 2021, a historically robust year for U.S. real estate, as the New York City brokerage continues to burn through money amid its rapid expansion.
The net income loss is 83% greater than Compass’s $270 million loss in 2020, eight-year-old Compass’s final year as a private company.
Compass did report on an earnings call Wednesday another mammoth revenue gain, rocketing to $6.4 billion in yearly revenue from $3.7 billion, a 73% leap.
However, 83% of that is instantly lost to “commissions and other related expenses.” Compass has earned a reputation for paying higher commission splits than other full service real estate brokerages like the conglomerate Realogy or HomeServices of America. After commissions and other expenses, Compass posted $1.1 billion in yearly revenue.
The net income loss was not discussed by CEO and company co-founder Robert Reffkin.
“I am happy to announce that our strategy of achieving strong revenue growth while improving profitability and investing in our business is working exceptionally well,” Reffkin said on the earnings call.
Improved profitability? Reffkin would appear to measure profitability not by net income, but adjusted EBITDA, a measurement that he and Chief Financial Officer Kristen Ankerbrandt referenced frequently on the call.
EBITDA is earnings before interest, taxes, deductions, and amortization. Compass’s adjusted EBITDA, meanwhile, effectively wipes off the books the company’s $386 million stock-based compensation to agents and employees. It also wipes off $24 million in expenses from acquisitions. By treating stock-based compensation and acquisition expenses as non-operating expenses, Compass can claim to have an adjusted EBITDA of positive $2 million for 2021.
While acquisition expenses may be a one-time cost, the vast majority of stock-based compensation is not. Just $149 million – or 38% — of the compensation is a one-time cost from Compass’s initial public offering. Compass began selling shares on the New York Stock Exchange in April, generating $440 million in one-time proceeds from issuing common stock.
Compass’s market capitalization has sank 240% since that debut and is now at $3.4 billion, which is still higher than competitor Realogy.
Not known is how long Compass can continue to hemorrhage money, though the company reports having $618 million cash on hand.
The desultory bottom line stands in sharp contrast to the brokerage’s glittering sales growth.
Compass’s agent count has shot up to 26,000 agents, who produced $254 billion in sales transaction volume in 2021 – a 68% leap from 2020. Compass also reported that its share of the U.S. real estate market grew to 5.6% from 4.0% in 2020, suggesting that the brokerage may overtake Realogy as enjoying the largest share of an exceedingly fragmented landscape.
Also, if Compass’s independent contractor agents are concerned about the company’s financials, they are not showing it with their feet. The company reported an over 90% agent retention, a rebuke to anecdotal tales of agents and agent teams souring on the brokerage.
Reffkin suggested that Compass is not giving agents the compensation packages it has in the past, stating 62% of agents who recently came to Compass are receiving a less favorable split compared to their brokerage. Also, “Less agents are getting equity,” Reffkin said.
Besides lower agent compensation, one potential avenue to profitability is offering title, escrow, and mortgage. Analysts on the call returned time and again to these subjects, which may play a larger role in Compass’s 2022 financials. The company has started a mortgage joint venture with Guaranteed Rate, which has JVs with Realogy and @properties. Compass may explore additional JVs and related partnerships, Reffkin said.