Breaking Down Compass’ Industry-shaking Deal For @properties

Compass sent shockwaves across the industry when it announced its massive acquisition deal for @properties and Christie’s International Real Estate.

The deal is less the cherry on top of this year, and more another heaping spoonful of ice cream for Compass, which hit a number of financial and strategic milestones in 2024.

Compass has been cash-flow positive in all three quarters this year, watching its coffers grow from $167 million to $211 million. It also had its first profitable quarter, bringing in nearly $21 million in the second quarter of this year.

Now, the company is putting its dollars to use, shelling out roughly $150 million in cash and $294 million in stock for @properties, Christie’s International Realty and its affiliated firms. The deal gives Compass its first-ever access to international markets and affiliate programs, and secures it a now-dominant position in markets like Chicago and Atlanta.

“It was a brilliant move,” Finley Hair, national director of M&A Advisory at WAV Group. “It is probably going to go down as the deal of the decade for real estate.”

Breaking down the “deal of the decade”

In addition to the cash from the deal, the @properties ownership team will get 44 million shares in Compass, making the group the fourth-largest shareholder in the company, according to Simply Wall Street.

The stock in the deal won’t all accrue to @properties founders Thad Wong and Mike Golden. In 2018, the pair took an investment from private equity firm Quad-C Partners, which likely will not be a long-term shareholder in the publicly traded company.

The brokerage has been subject to a shift in ownership in the last year. CEO Robert Reffkin has been steadily decreasing his company holdings; he’s now sold roughly 6.7 million shares — or roughly $39 million — this year, either personally or through affiliated trusts. The company’s largest shareholder, Softbank, sold 7.5 million shares in September, likely as part of its goal to get below 10 percent ownership in its public investments.

To fund the cash portion of the deal, Compass will be drawing on its cash balance and its $350 million revolver while maintaining a cash position above whatever it draws on its revolver, CFO Kalani Reelitz said on an investor call.

The deal is expected to close in early 2025, typically a lower cash-generating period for the company (in the first quarter of 2024, Compass produced $8.6 million in free cash flow).

Reelitz said paying down the revolver will be a top priority, but it remains to be seen when that will happen. Compass expects to pay another roughly $29 million in antitrust settlement payments in the second quarter, when the company usually produces its most cash.

Brighter times ahead

It will also be a wait-and-see approach for understanding if Compass can hit its post-synergy transaction multiple — a measure of a company’s value divided by its earnings — of five to six times adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization.

The lower the multiple, the better the deal — why pay nearly half a billion for $50 million of earnings when you can spend it to earn $80 million.

Compass is currently projecting $500 million in added revenue in the first year after the deal is approved, with an adjusted EBITDA of $49 million, which works out to a multiple of nine. But the company expects $30 million in cost savings from the merger, which should boost earnings to nearly $80 million and its target multiple.

Francine McKenna, a former lecturer of accounting at Wharton, cautioned the forecast, saying “nobody ever gets what they think they’re going to get in terms of cost-savings from mergers.”

But Bernie McTernan, an analyst covering Compass, says that even if they fall short, the deal will fall in line for those of other brokerages and will still be accretive compared to Compass’ relatively lofty valuation, which is closer to 30 times its earnings.

The additional $500 million in revenue — some of which may not be booked in Compass’ next fiscal year — will also give the national brokerage a head start on hitting its growth targets for next year. McTernan, for example, had the company pegged for $485 million in revenue growth next year in his reports issued before the deal.

“With their recruiting and retention, tech and all the stuff they have, (Compass) can probably grow organically two to three percent a year without much trouble,” Steve Murray, founder of RealTrends said. “But Reffkin understands he can’t do that if he wants to have a vibrant company which is growing and satisfies the investing communities. So, he has to add acquisitions.”

Compass closed two deals this year, for Tennessee-based Parks Real Estate and Louisiana-based Latter & Blum, which have contributed an outsize amount to the company’s strong transaction growth in another difficult housing market.

“Wall Street is bearish on companies that aren’t showing above-market growth,” said Murray, who is regarded as an expert on residential real estate trends. “If you can’t show a picture of growth now and in the future, they’re going to hammer you.”

Publicly traded competitor Anywhere Real Estate has fallen from an all-time high of $51.21 in May 2013 to an average price of $5.26 over the last year, and eXp Realty has been on a downward trend since 2021 amid lower growth numbers.

So far, the market hasn’t rewarded Compass for its move — the stock closed the week nearly even with Monday’s opening price of $7.07.

On top of the immediate revenue bump, the deal also opens new growth strategies through Christie’s high-margin affiliation model and the new firms’ title and mortgage business.

“It gives Compass an additional means by which they’re going to boost their revenues next year and cash flow, and it gives them a new way to grow through the Christie’s franchise,” Murray said. “I wish I’d thought of it.”

Kelli Duncan contributed reporting.