Five Takeaways From Compass’ Q2 Earnings

Compass reported some key turning points in the second quarter.

The residential brokerage hit a self-imposed milestone in the second quarter when it reported it was cash-flow positive, one year after announcing the goal. While the picture may not be as rosy as it may seem, it marks a first for the company since going public in 2021.

And though the company is still losing money — it posted a net loss of $48 million last quarter — it’s doing so at a far slower clip than it had been. The second quarter’s adjusted EBITDA — earnings before interest, taxes, depreciation and amortization — was $30 million, up significantly from last year’s second quarter figure of $4 million.

But it’s unclear what the market has in store for Compass and other residential players as mortgage rates hover near 8 percent and some have floated concerns the year could end with a recession.

With that in mind, here are five takeaways from the brokerage giant’s earnings:

Cash Position

Compass ended the quarter with $335 million in cash on hand, but that may be lower now. The company said it in July repaid a $150 million draw on its revolving line of credit, a decision it says points to its confidence it can remain cash-flow positive. A revolving loan is a loan that can be borrowed against and paid back as needed.

That means the company’s cash position could be substantially lower than it was at the end of the quarter, at which point it also owed its agents $97 million in unpaid commissions. The brokerage must maintain a minimum balance of $150 million to maintain the line of credit.

Compass executives appeared positive cash won’t be an issue, with CEO Robert Reffkin citing “our ability to generate strong free cash flow, ongoing improvement in operating expenses and positive free cash flow outlook” for the repayment.

Cost reductions

Compass has made significant progress in cutting costs. It’s done so via three rounds of layoffs that reduced its headcount by more than 1,600, according to a comparison of its two annual reports. That figure doesn’t include the most recent round of layoffs because they occurred in January. It’s offshored other jobs to further lower its expenses.

The company’s operating expenses have been lowered to an $953 million annualized basis, a figure which Compass says it can lower to $900 million by the end of the year. That puts the expenses in line with where analyst Mike DelPrete last year said they would have to be for the company to break even.

Commissions

Commission splits are trending in Compass’ favor, a trend CFO Kalani Reelitz said during the earnings call he expects to continue through the end of the year. Commission splits improved by 35 basis points year-over-year, up from a 27 year-over-year basis point improvement in the first quarter. Compass has previously said it’s recruiting more mid-level agents, who get less favorable splits.

The brokerage was in good company with residential conglomerate Anywhere, which reported its commissions continued to rise last quarter, up 32 basis points annually. Along with exceeding expectations for the quarter, the company said it expects them to increase about 50 to 75 basis points by the end of the year above 2022.

Acquisitions

Compass in the first quarter expanded to Arizona by buying a 300-agent brokerage in an all-equity deal. The estimated value of that deal was $8.8 million, according to filings, although the value could fluctuate depending on the brokerage’s performance in the coming years, according to a company executive.

The brokerage last week bought Properly, a Canadian proptech company, for $32 million in equity, according to a public filing. The purchase transacted on the same day as the company’s earnings call.

“[The purchase] includes their intellectual property surrounding real estate solutions such as buy-before-you-sell and mortgage tools,” said Compass in a statement. “Additionally, their co-founders will work as consultants with Compass as we research and learn more about these potential solutions and how our agents can benefit from them.”

Material Weaknesses

Executives previously downplayed the significance of material weaknesses in their financial reporting, but independent experts said the problems are pervasive and wide-ranging. Material weaknesses are systemic issues within the company that threaten the accuracy of its financial reporting.

“There’s significant risk of material misstatement or fraud,” Francine McKenna, a former lecturer of accounting at Wharton, previously told The Real Deal. “They have a hole that somebody can drive a truck through either via a big mistake or fraud.”

Compass took steps last quarter towards addressing the material weaknesses in their earnings statements, including adding an internal controls testing team that reports to the vice president of internal audit.