Business Breakdowns
· Matt Reustle, Geoff Collette
[00:00:00] S0: Yeah. It feels a premium experience, without a doubt. And I certainly see it out there in the market. I found myself in some of these distribution lists and it's noteworthy to see how different it looks. I want to transition a bit just into the model itself. I think it's fairly straightforward. They generate fees based on commissions. I would imagine that's going to be tied to the housing market. Just thinking about revenue and sales and putting aside the market share changes, is that the right way to think about a real estate brokerage business is correlation to the housing market? [00:00:00] S1: Yeah. Compass's core business is an owned brokerage versus a franchise model, which they now do have through Christie's. But the owned brokerage is really the following: drivers, agents times their productivity equals the number of transactions that they're doing. Compass has actually taken organic market share in all 17 quarters it's been a public company. M&A is an additional lever for them. And then those transactions times the average home transaction price, times the agent commission rate and then the commission split between the agent and the brokerage is really the gross profit stream that is so critically important to understanding Compass's business model.
· Geoff Collette, Matt Reustle
[00:00:00] S1: Yeah. Compass's core business is an owned brokerage versus a franchise model, which they now do have through Christie's. But the owned brokerage is really the following: drivers, agents times their productivity equals the number of transactions that they're doing. Compass has actually taken organic market share in all 17 quarters it's been a public company. M&A is an additional lever for them. And then those transactions times the average home transaction price, times the agent commission rate and then the commission split between the agent and the brokerage is really the gross profit stream that is so critically important to understanding Compass's business model. [00:00:00] S0: On the commission rate, the brokerage split, is there just a right way to frame what that looks in the industry, how Compass may differ? I know it's going to be nuanced based on agent and all of that, but just some ballpark in terms of the gross profit percentage that Compass would take home, not net of those commissions.
· Geoff Collette
[00:00:00] S1: Yeah. So on average for Compass it's roughly 82% going to the agent, 18% going to Compass. To your point though, there's a range around that on an agent-by-agent basis. I believe there's around a 9 percentage point difference in splits for certain production levels. It's important to understand the mix dynamics here in terms of as Compass's agent grows, it's likely mix-shifting away from the top 10% of agents towards the top 50%, improving overall margins without actually changing commission splits between the constituents. Industry-wide agent splits had been trending in the favor of the agent for quite some time, but they've actually reached a level of stability I believe for a few years now since really the housing downturn pulled out some of the dynamics around the ability to do that, particularly in the area of the market where Compass plays. And I would also just say that there's other business model types in the space that offer even more generous splits and or caps. Those often come with less support, more out-of-pocket costs for tools, marketing, training. Those models will likely appeal to a certain segment of agents, but clearly not all of them. And what Compass is really aiming to do is transcend the value proposition away from just that economic split to be around capabilities that drive performance for the agent to grow more profitably. And so that would sum that up.
· Matt Reustle, Geoff Collette
[00:00:00] S0: I think it sells the point on the marketing plan and everything that goes into that as well. If you can say if you're a Compass agent, everything's going to feel premium for your customers, it does change the dynamics and doesn't make each brokerage house feel a commodity. On the 82%, do you have any context for what the earliest agents were looking at in terms of commissions? Just to get a sense of how much maybe that's come down over time. [00:00:00] S1: I would probably just frame it as it could be extremely lucrative for founding agents in a market. And there were often multi-year financial incentives that were part of the conversation in the early days of Compass being a public company that needed to expire effectively. And that was the concerns around what that would mean to the model were very front and center from an investor's perspective in 2021-22 for Compass, because no one knew what the level of retention and really what the stable level of commissions that would enable the company to continue to attract agents would be. And so I think that resolved in that downturn environment that we spoke of earlier and has remained in kind of a healthy place. Just to reiterate something, I think ultimately, what they can do is go to market with competitive splits against traditional brokerages that offer support but provide extra value that others have difficulty replicating.
· Geoff Collette, Matt Reustle
[00:00:00] S1: I would probably just frame it as it could be extremely lucrative for founding agents in a market. And there were often multi-year financial incentives that were part of the conversation in the early days of Compass being a public company that needed to expire effectively. And that was the concerns around what that would mean to the model were very front and center from an investor's perspective in 2021-22 for Compass, because no one knew what the level of retention and really what the stable level of commissions that would enable the company to continue to attract agents would be. And so I think that resolved in that downturn environment that we spoke of earlier and has remained in kind of a healthy place. Just to reiterate something, I think ultimately, what they can do is go to market with competitive splits against traditional brokerages that offer support but provide extra value that others have difficulty replicating. [00:00:00] S0: Rather than just compete on price in theory, for your talent, it makes a lot of sense. On the mechanics of commissions, I know it differs from one brokerage to the next, but are there tiers like your first 1 million in commissions are at this rate, above that they're at this rate? Is there any change just in terms of how the commission structure works in one direction or the other?
· Matt Reustle, Geoff Collette
[00:00:00] S0: Rather than just compete on price in theory, for your talent, it makes a lot of sense. On the mechanics of commissions, I know it differs from one brokerage to the next, but are there tiers like your first 1 million in commissions are at this rate, above that they're at this rate? Is there any change just in terms of how the commission structure works in one direction or the other? [00:00:00] S1: There certainly are tiers at certain players in the industry. I think it can actually be pretty bespoke by agent and by the level of volume that they do. The frame of reference for Compass is just, I think they publicly stated there's a 9 percentage point differential between certain bands. That is really the way to think about the mix shift over time. [00:00:00] S0: Makes sense. You mentioned before free cash flow generation in recent quarters or years. What does the operating leverage look like for this business? Because I think it had the connotation of taking in a lot of capital, spending that capital and then some. Seems like there's been some inflection. But is there inherent operating leverage in the business? How do you frame that or think about that as an investor? And if you want to put some numbers to help explain or contextualize, that's helpful.