Nation's largest brokerage braced for more trouble after 14% revenue decline
In reporting his company’s third quarter earnings this week, Compass Inc. CEO Robert Reffkin didn’t sugarcoat the state of the real estate industry, calling it “generationally bad” as he reported a 14% loss in revenue from last year.
“This has been a generationally bad year in residential real estate,” Reffkin said during an earnings call scheduled at the end of the day on Thursday. “One of the worst years over the past several decades. The incredible speed of the decline has been historic. Transactions have fallen significantly as soaring mortgage rates, high home prices, lack of inventory, stock market declines and high levels of uncertainty are keeping many buyers on the sidelines.”
The largest residential real estate brokerage in the US, Compass reported total revenues of $1.49 billion for the third quarter – a 14% drop from the comparable period last year – driven principally by lower market volumes.
Moreover, the company incurred $29 million in restructuring charges, of which $25 million was for severance pay originating from past layoffs. The firm posted a net loss of $154 million compared to a net loss of $100 million in the third quarter of 2021 as lower revenues and restructuring costs more than offset reduction in commission and operating expenses.
The company is braced for further bad times ahead, Reffkin said: “The past 12 months have been tough and the next 18 months fear that they can be tougher,” he told investors and financial journalists.
“Compass will be diligent and persistent. We’re focused on getting to the other side. Since the second quarter of this year, we have been aggressively meeting down our expenses to adapt to this rapidly deteriorating market and already achieve significant cost reductions in our technology, engineering and other operating expenses through a variety of measures, including reductions in force.”
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Nevertheless, the CEO pointed to improved efficiencies moving forward that will aid the firm in navigating choppy waters: “With our heavy investment period behind us, we are operating the business more efficiently,” he said. “We have achieved significant market share gains among weakening competitors. We have built an incredibly strong agent network, a highly regarded brand in the most advanced technology platform that helps us recruit agents and make them more productive. We believe that the actions we have taken to date and cost reduction initiatives currently in place put us on pace to deliver our targeted non-GAAP operating expense run rate of between $1.05 billion and $1.15 billion exiting 2022.”
He hinted at further steps toward bolstering financial performance: “We are managing the business to reduce the cost base with a very specific goal to become free cash flow positive for 2023, starting with being free cash flow positive in the second quarter of 2023,” he said.
“Market conditions are continuing to deteriorate and as a result we’ll be implementing additional cost reduction initiatives to get ahead of any future market declines. We are seeing industry forecasts of plus 1% to negative 23% for the full year 2023.”
For now, the company is preparing for further market downturn, he added: “We have been planning for a significant double-digit decline,” the CEO said. “While we do not believe the market will go down 25% next year we are not waiting and have already begun to build a plan to account for a decline of this magnitude, and we expect this plan to be implemented in the next three months.”
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By sheer coincidence, the tough times in the market have emerged as the company marks a key milestone. “We just reached our 10-year anniversary as a company,” Reffkin noted. “And I spent most of the past two months meeting with and talking to our agents all over the United States. A couple weeks ago, we had 2,500 of our agents at our annual agent retreat in Atlanta. I am convinced that we have the best agents in the industry and that they believe in Compass as much as I do.”
He added: “While we believe the housing market will remain challenged during 2023, we continue to build a solid foundation so that we can fully capitalize when stability and growth return in the future. The Compass team remains dedicated to providing our agents with the best technology, workflow tools in marketing supports to be successful in the market over the medium and long term.”
For now, the focus is not trimming the fat: “In the meantime, we continue to be later focused on reducing costs, so we can reach our goal to become free cash flow positive for 2023, starting with being free cash flow positive in the second quarter of 2023.”
