Business Breakdowns
· Geoff Collette
[00:00:00] S1: Yes, absolutely. So I think that the housing market downturn that began in the early to middle part of 2022 was the true test for the company and its approach. Just for context, mortgage rates quickly spiked from under 3% to over 7%, and home sales precipitously dropped from about 6 million to around 4 million. A level that it's been at for a few years and really the lowest level in 30 years. And so Compass needed to react quickly, and it did. By the middle of 2022, it had paused market expansion, it stopped M&A. It had to execute three rounds of layoffs within a year. It eliminated all agent incentives and as part of this, brought on a CFO, Kalani Realuytz, who played an instrumental role in decreasing the level of OPEX that the company had from a level of $1.5 billion run rate to around $850 million. So nearly cut in half. But the company actually didn't have to stop investing in its platform around the same time. Actually, the full capabilities for an agent to be able to do their entire workflow on the platform actually coincided with this timeframe. By late 2022 that had been rolled out. Both the company and the market could see the validity of the model and perhaps surprising to some, without those incentives. And not just incentives to have agents join, but they were having these multi-year incentives roll off and they were able to maintain organic agent growth and very high levels of retention, around 90% for principal agents. And really the technology-oriented value prop was able to kind of stand on its own. By early 2023, the company had sort of been proving out this new ability and had started to get to a point where it was operating around free cash flow, break even and was really positioning itself to go back on the offense after being really focused on the cost cutting and stabilizing the business in this new environment.
· Matt Reustle
[00:00:00] S0: Yeah, it's a really interesting time period. I think we're going to look back on 22 and 23 and reflect on companies that swallowed the pill, got operating hygiene and kind of reoriented themselves to an environment that wasn't just pure capital influx and spend on whatever you want to spend. And even though we've seen some of that come back, it's just very interesting to see who's emerged with some more operating efficiency. If you were to just take a snapshot of Compass today, I think of them as certainly a very successful platform just in terms of the properties they get. And this is in very particular regions specific to me. But do you have any headline numbers just around their market share or anything else that could give a sense of the size and scale today in the market?
· Geoff Collette, Matt Reustle
[00:00:00] S1: Compass operates the largest real estate brokerage in the U.S. by sales volume, it has about 6% market share. On a gross transaction volume basis, it has around 21,000 principal agents and nearly 40,000 total agents across about 38 states. In 2025, it's expected to generate close to $7 billion in revenue and around $200 million in free cash flow. Beyond its core owned brokerage, it recently expanded its capabilities by acquiring Christie's International Real Estate in January of this year. That's a high-margin global franchise business that gives independent brokerages a way to join Compass without selling outright to them. It's also built title and escrow operations in a majority of its markets. And it has a mortgage joint venture that's still very early stages and not financially meaningful, but over time it could be very impactful to the financial profile of the business. [00:00:00] S0: It certainly confirms what I thought. Just in terms of market share, they're the largest. That speaks for itself. And then just some numbers, because I know it is important. We'll get into more detail. The targets that they have seem pretty grand and ambitious. Can you lay those out? And we'll talk more about them as we go on. Just to set the ground.
· Matt Reustle, Geoff Collette
[00:00:00] S0: It certainly confirms what I thought. Just in terms of market share, they're the largest. That speaks for itself. And then just some numbers, because I know it is important. We'll get into more detail. The targets that they have seem pretty grand and ambitious. Can you lay those out? And we'll talk more about them as we go on. Just to set the ground. [00:00:00] S1: I think one of the unique characteristics that I didn't highlight was really that it's a national brokerage that actually has a high level of concentration within major markets. So it's not everywhere, but it has a very strong presence in almost all the major cities within the United States. So in the middle of 2024, the company set a strategy, 30 for 30, whereby they wanted to grow its average market share in its top 30 markets to 30% on average by the end of 2026. At the time that they made that announcement, they were probably about halfway there with the growth and the M&A that they've done since then. They're just over 20%, I believe. And so I think that real estate is a local business and for them, on this basis, the average number two competitor tends to be in the single-digit range. And so with the capabilities that they've been building and the local market scale, plus its national presence, there likely become certain elements of tipping points where it becomes more easy to attract more productive agents on a local market basis as they become a bigger and bigger market share presence within those markets.
· Geoff Collette, Matt Reustle
[00:00:00] S1: I think one of the unique characteristics that I didn't highlight was really that it's a national brokerage that actually has a high level of concentration within major markets. So it's not everywhere, but it has a very strong presence in almost all the major cities within the United States. So in the middle of 2024, the company set a strategy, 30 for 30, whereby they wanted to grow its average market share in its top 30 markets to 30% on average by the end of 2026. At the time that they made that announcement, they were probably about halfway there with the growth and the M&A that they've done since then. They're just over 20%, I believe. And so I think that real estate is a local business and for them, on this basis, the average number two competitor tends to be in the single-digit range. And so with the capabilities that they've been building and the local market scale, plus its national presence, there likely become certain elements of tipping points where it becomes more easy to attract more productive agents on a local market basis as they become a bigger and bigger market share presence within those markets. [00:00:00] S0: It's interesting, especially on a relative basis, to a number two or number three to see what they're doing. I have this association with Compass for luxury listings, or at least expensive listings. It might be related to just the markets that they operate in. But do you think that's a fair categorization of Compass or am I oversimplifying? Based on the markets that they're operating in?
· Matt Reustle, Geoff Collette
[00:00:00] S0: It's interesting, especially on a relative basis, to a number two or number three to see what they're doing. I have this association with Compass for luxury listings, or at least expensive listings. It might be related to just the markets that they operate in. But do you think that's a fair categorization of Compass or am I oversimplifying? Based on the markets that they're operating in? [00:00:00] S1: I think that that's generally fair. I would sort of categorize it more as premium. I think the average price for a transaction for them is around a million dollars. And over time, their strategy, as we kind of hit on briefly earlier, had been to launch in markets, attract the highest producing agents that were most influential to enable the company to attract agents at lower levels of productivity that have better commission split dynamics and that can kind of cascade as the business and its presence grows. And so I think that in certain markets it has a higher-end positioning, but over time it's become more premium, if that makes sense.