While reading the latest "Washingtonian," it is hard not to notice the significant number of high-performing sales agents from Compass Inc. (COMP, Financial). The company primarily focuses on residential properties, specializing in high-margin, luxury homes in upscale markets. Compass is a relatively new real estate brokerage that leverages the internet and real estate technology as its main marketing medium.
Founded in 2012 by Ori Allon, Robert Reffkin and Avi Dorfman, Compass is headquartered in New York City and serves buyers and sellers across the United States. It employs more than 25,000 agents who earn a percentage of the selling price and give a percentage of each commission to Compass, consistent with the traditional real estate brokerage business model.
The Compass advantage
Compass provides software to real estate agents and was the first to have built a proprietary mobile app for its real estate agents. The company has received several recognitions, including a Webby Award for Best Real Estate Website, and was named to Fast Company's Best Workplaces for Innovators in 2019.
There are not many publicly traded real estate brokerage companies, especially ones that focus solely on high-end residential markets. Outside of the excellent technological approach to real estate, Compass has two services that significantly differentiate the business from competitors: Concierge and Private Exclusive.
The Compass Concierge is a service that fronts the cost of home improvement services with no interest and is vertically integrated with the company’s real estate brokerage service. This is designed to help sell a home faster and for a higher price as more buyers want move-in ready conditions.
A Compass agent determines which services can deliver the greatest return on your investment. The services covered by Compass Concierge include floor repair, carpet cleaning and replacement, staging, deep-cleaning, decluttering, cosmetic renovations, landscaping, interior and exterior painting, HVAC, roofing repair, moving & storage, pest control, custom closet work, fencing, electrical work, seller-side inspections and evaluations, kitchen improvements, bathroom improvements, pool and tennis court services, water heating and plumbing repair, sewer lateral inspections and remediation and more than 100 other home improvement services.
The process works right along with the seller agent's normal course of business. Once the transformation is complete, the seller’s home is placed on the market and they only pay for the services when the home sells, the seller terminates the listing agreement with Compass or a full year passes from the start date. For most homeowners, renovations are a huge point in valuation. The concierge service alleviates that pressure in signing with an agent.
The Private Exclusive service allows consumers to sell their homes while maintaining privacy. The home is listed as a private exclusive, which means it is an off-market home that can be shared by a Compass agent directly with their colleagues and their buyers. Property details are not disseminated widely and will not appear on public home search websites. With so many “Coming Soon” listings now available, this is a huge deal for buyers trying to find good homes without creating bidding wars.
The program offers discretion, flexibility, quality and value, allowing the seller to decide when to share details about a home; and it only benefits Compass buyers, which could mean higher total commissions on a transaction. It also helps get buyers the best offer by testing the market privately to gather key insights without a listing getting stale.
Compass' market value
The company went public on April 1, 2021, trading at $8.22 billion. Today, that value has declined to around $1.5 billion, in line with another real estate technology company- Redfin Corp. (RDFN, Financial).
Compass, however, generates nearly 3 times more in top-line revenue. In fact, from 2018 through the last 12 months, the company has gone from $885 million in revenue to more than $5.5 billion.
Recently, that top-line growth has not been profitable. However, a few adjustments on the income statement and growth turns into profit. To generate the kind of attention that takes a company from unknown to market leader within a decade takes capital.
Currently, selling, general and administrative expenses eat up all of the company's gross profits. Compass also spends a lot on research and development, something a real estate company does not usually worry about. As for the cost of revenue numbers, that is a product of getting top producers. Gross margins may not improve for some time, especially if the company retains its talent base. In the beginning, it had to strike payout deals to entice producing realtors to join. It is an old trick and it works, but that is why gross margins are pretty low.
Future growth and profitability
Compass trades at just 27% of its annual sales and is likely to continue its high growth for the next decade. In fact, GuruFocus data show analysts expect double-digit growth annually for at least the next three to five years, with Compass turning a net profit at the tail end of that period.
More importantly, management has made expense control a top priority. CEO Robert Reffkin noted on the May 9 first-quarter earnings call that this is permanent structural change with an operating expenses target range between $850 million to $950 million by the end of 2023 and stay within this range over the next two to three years. If that happens and the company hits growth numbers of $6 to $7 billion in sales, then Compass will turn a profit. At that point, the market could already have placed a much higher value in anticipation.
