Compass turns to cost cutting as its tackles a ‘generationally bad year’

The brokerage lost $154 million during the third quarter of 2022

As Compass attempts to continue navigating what CEO Robert Reffkin called a “generationally bad year in residential real estate,” cost cutting measures remain the name of the game for the brokerage.

“The past 12 months have been tough and the next 18 month appear that they can be tougher,” Reffkin told inventors and analysts on the brokerage’s third-quarter 2022 earnings call Thursday evening. “Since the second quarter this year, we have been aggressively melting down our expenses to adapt to this rapidly deteriorating market and already have achieved significant cost reductions in our technology, engineering and other operating expenses through a variety of measures, including force reductions.”

Reffkin said that the firm will be implementing further cost cutting measures in the next three months, as Compass prepares for what some are predicting to be a significant double-digit decline in transactions in 2023. In addition, executives said the brokerage plans to be free cash flow positive in the second quarter of 2023.

While Compass did not perform as well as executives had hoped, thanks to rising mortgage rates triggering a housing market slowdown, executives were still pleased with the firm’s performance. This was most notably due to just a 12% yearly reduction in closed transactions sides to 54,606 for the quarter, compared to an industry average of 21%, according to the National Association of Realtors.

During the third quarter of 2022, Compass generated a total revenue of $1.49 billion, down 14% year over year, which the firm said was driven by lower market volumes. In addition, the brokerage failed again at turning a profit, reporting a GAAP net loss of $154 million compared to a net loss of $100 million one year ago.

According to Compass, this net loss included non-cash stock-based compensation expenses of $50 million, depreciation and amortization of $21 million, restructuring charges due to the cost saving actions of $29 million, $25 million of which was for severance, and litigation charges of $11 million.

In August, Compass announced the end of its agent recruitment incentives program as one of its cost cutting measures.

“The benefit of this step meant that we moved to a much better economic approach to recruiting agents, as we no longer use equity or cash incentives to attract agents to Compass,” Greg Hart, the firm’s COO, said.

In the third quarter, Compass gained 335 principal agents, resulting in an average principal agent count of 13,314 — up 15% year over year.

“In October, the first month of recruiting with zero incentives after our September force reduction, our growth team reported more expected profit per recruited principal agent than we ever had,” Hart said. “We believe agents are making the decision to join because of our platform, our strong brand and the support we offer as the deciding factors, as opposed to financial incentives.”

Looking ahead, executives are continuing to bank on the brokerage’s agent platform and are looking for ways to better improve the real estate agent experience. The most recent change being piloted on the platform is the integration of title and escrow into the platform in Southern California.

“By integrating title and escrow directly into the technology platform, we are creating a low friction way for our agents to offer title and escrow services to an existing brokerage transaction, increasing the attach rate of adjacent services,” Hart said.

With Compass pausing any further merger and acquisition activity, the brokerage’s main goal for adjacent services moving forward is to improve the adoption of and attach rates for Compass core services.