In residential real estate, Compass (NYSE: COMP) has been one of the most buzzed-about upstarts to the traditional brokerage world. Originally backed by Softbank, Compass raised over $1.5 billion before going public. Now, its first earnings statement gives us a chance to look at how the company is making the most of this hot real estate market.
Compass is around eight years old and has had a strategy of focusing on the upper end of the real estate market in metropolitan areas where prices are above the national median price. It currently has a 5.2% market share in all of the markets it operates in, with a 26% share in its top three markets. This is a bit short of the plan that CEO Robert Reffkin announced in 2017 to have 20% market share in 20 cities by 2020. Compass is currently active in 47 markets.
In the first quarter, Compass reported that revenues were up 80% to $1.1 billion, beating analyst expectations. This quarter's net loss of $212 million included a charge of $149 million for stock-based compensation in connection with the company’s IPO. So excluding this charge, the net loss was $64 million, which represents an improvement of $69 million year over year.
A loss isn't great news, especially in this robust market, but Compass has acted more like a technology company in which losses are the price you pay for future strong growth. In fact, Compass has 850 engineers around the world. As Reffkin put it in the shareholders' letter, Compass plans to "further spin the flywheel and provide our agents and Compass with the tools for future success."
For real estate brokerages, tech-fueled or not, success, especially in this booming real estate market, comes down to two things: an increase in agents and growth in transaction sides. Compass is a relatively small fry compared to RE/MAX (NYSE: RMAX), eXp World Holdings (NASDAQ: EXPI), and other large brokerage firms. The average number of principal agents was up to 9,812, an increase of 20% compared to the prior-year period. What's more impressive is that transactions were up 67% to 40,268.
Growth by acquisition
Compass can attribute its rapid growth to acquisition, and that trend has continued after its IPO. It bought Glide, a transaction management platform, shortly before its earnings call. Like Zillow (NASDAQ: Z) (NASDAQ: ZG), Redfin (NASDAQ: RDFN), and Realogy (NYSE: RLGY), Compass is working on creating a complete transaction system. It bought KVS Title and now offers closing services in California, Florida, Washington state, Maryland, Virginia, and Washington, D.C. For many brokerages, the ability to grow and monetize adjacent services may be an important revenue driver even as the market shifts. The next step for Compass is to expand into mortgage services.
Part of the work Compass engineers are doing is around building more tools for agents. It has an algorithm called Likely to Sell that forecasts which homes are likely to sell within the next 12 months. These selected targets result in a 61% higher win rate for Compass agents compared to other properties. Another tool is Business Tracker, an all-in-one transaction and lead manager for agents.
Building a strong future
Compass currently has two credit facilities: $75 million to be used for its concierge program and a $350 million revolving credit facility. The Concierge Program gives homeowners capital to fix their homes, with the expectation that the repairs will result in a faster transaction for more money.
The firm expects the robust real estate market to roll on into the second quarter of 2021 and is forecasting revenue of $1.5 billion to $1.6 billion. For Compass, the challenge is to fuel continued expansion while trimming costs in order to help push the company toward profitability.
So far, the stock market hasn't embraced Compass. It started off at $20.15 per share and was at $14.15 as of May 14th. However, one quarter doesn't tell the story of any company, Compass now has the challenge of stitching together all of its technology while also giving agents everything they need to make the most of the opportunities in the market.