A business's first year after an IPO can often be choppy. But for real estate newcomer Compass, its second quarter as a public company was full of good news. The company reported record revenue of $1.95 billion, driven by its impressive growth in the luxury real estate market in and around major cities and vacation destinations.
Like other real estate brokerages, Compass's income is powered by agent commissions. The company boosted its agent count to 10,629, and those agents brought in a whopping $77 billion in transaction value.
The Compass strategy centers on building a technology platform and support services around what it calls its “principal” agents. These agents closed an average of 6.2 deals a quarter. Gross transaction value per quarter per agent was $7.2 million, up 130% year over year. Now in 62 markets, Compass agents make up just 1.5% of all agents in the United States, yet they represent 6.2% in total market share.
More engineers, more sales?
On the earnings call, CEO Robert Reffkin noted that, with more than 1,000 members, Compass’s product and engineering team represents an investment in technology that far exceeds that of other brokerages. However, this commitment to building a technology platform has also delayed the company’s profitability. While it reduced its losses in Q2, it still ran a $7 million net loss.
Like many other real estate brokerages, Compass is focused on extracting maximum value from each transaction by developing ancillary services, such as mortgage, title, and escrow. These are currently a small portion of Compass's business and not available in all the markets where it operates.
Compass also rolled out a mortgage joint venture with Guaranteed Rate that it expects to be profitable by fiscal year 2022. This was launched a year ahead of schedule, partly because of the opportunity that this hot real estate market presents.
Where Compass's strategy differentiates itself a bit is that the company also sees a potential profit stream from its agents. As Reffkin described it on the earnings call, Compass can enter not just into markets such as home insurance and home warranties, but also into areas such as listing, photography, sign production, client gifting programs, and other businesses that are not traditionally bundled into a real estate brokerage.
The path to profitability
Compass expects to be profitable on an adjusted EBITDA basis for full year 2022. The brokerage has upped its full-year revenue guidance for 2021 from $6.15 billion to $6.35 billion. Part of this will come from the continued growth of ancillary services.
Another contributing factor is that many of the markets Compass recently entered aren't fully matured. Compass estimates that it takes new markets three years to scale. Kristen Ankerbrandt, chief financial officer, noted the company has gotten better at getting to profitability in each market more quickly.
What happens if or when the market shifts? Reffkin is prepared. "We have a very large buffer of growth on top of the market because our transactions have consistently outgrown and outperformed the market, with our transaction growth this past quarter at 140% versus the industry at 32%,” he said on the earnings call. "So even if there is flat or decline in the market, we will still have a significant buffer to allow us to grow aggressively."
Time to invest?
In its pre-public days, much of the company's growth was fueled by the acquisition of large luxury brokerages. Since its IPO, Compass share prices have fallen. While its strong Q2 results caused the share price to bounce up, the market still isn't seeing a true disruptor in Compass. If it does deliver on some of the ancillary services for agents, that could increase the value of each transaction. But at its core, Compass is still dependent on rising home prices and home sales for its future success.