Compass Readies For First Earnings Report After A Turbulent Month
Since its inception in 2013, Compass has ruffled feathers within the real estate industry. First for its impressive seed funding round lineup that included investing giants, such as Goldman Sachs, as key backers, and then from there, CEO Robert Reffkin shook things up once again with rapid-fire market expansions, a slew of multi-million dollar funding rounds, strategic acquisitions and bold (sometimes controversial) recruiting tactics to bring the industry’s best to Compass.
All of those moves stoked rumors about an eventual initial public offering (IPO) that finally came to fruition on April 1. However, the company cut its offering a day before going live on Nasdaq — a decision that some analysts and industry members took as a sign that the proof may indeed not be in the pudding.
Although Forbes contributor and investing expert David Trainer told Inman it would take up to three years to have a full understanding of Compass’ future on Wall Street, the brokerage’s first-ever earnings call on May 12 will be the first, true sneak peek of how they’ve weathered a tumultuous market and what path lies ahead.
Here’s a review of Compass’ first month as a publicly traded company:
April 1: Compass goes live on the Nasdaq
After slashing its initial public offering from a maximum of $936 million at $26 per share to $450 million at $18 per share, Compass (NYSE: COMP) started its first day on the Nasdaq with an opening price per share of $21.25. The opening share price gave Compass a fully diluted valuation, including restricted stock units and options, of $10.3 billion.
After ringing the bell, Reffkin explained his bullish stance, despite a diminished offering. “The goal was never a valuation [and] the goal was never a price,” he told Bloomberg. “The goal was a capital raise, and we met that goal and succeeded in that goal.”
“With this IPO, we have hundreds of millions of dollars infused into the company to help us accelerate our investment into our tech platform in creating a one-stop-shop solution and a modern platform for real estate agents that meets all their needs so they can better serve their clients and grow their business,” he added.
After experiencing a brief, first-day pop of 11.9 percent to $22.11 per share, Compass closed the day at $20.15 per share. The performance put the company on par with the market caps of tech-enabled brokerages like Redfin ($6.83 billion) and eXp ($6.27 billion) as of market close on April 1.
“Investors are not valuing Compass as richly as high-multiple tech-centric peers like $RDFN, $Z, $EXPI, and $OPEN. As a result, Compass is landing somewhere in between ‘real estate tech’ and traditional brokerage ($RLGY, $RMAX) in terms of multiple/valuation,” venture capitalist Paul Levine said of Compass’ debut.
April 9: Compass announces its first new market after IPO
In 2019, Compass turned its attention from market expansions to bolstering its proprietary marketing, customer relations, and transaction management platform. In the fourth quarter of 2020, Compass broke its two-year hiatus to open a new office in Hawaii, only to pause its expansion plans once again leading up to the IPO.
Compass chose Wilmington, Delaware, as its first post-IPO addition, with three of the area’s top brokers taking their talents — and 60 agents — to the brokerage.
“Compass is proud to call Delaware our newest home, and we’re humbled to welcome some of the most experienced and well-respected professionals from across the state,” Compass Pennsylvania, Delaware, and Southern and Central New Jersey Regional President Jeff Bedard said. “In such a strong real estate market, we look forward to bringing our tech-forward support to agents throughout the State of Delaware.”
Shortly thereafter, Compass also launched operations in Tampa Bay, Florida; Raleigh-Durham, North Carolina; and Jacksonville, Florida. In one month, Compass added 144 new agents to its ranks, who represented more than $1.9 billion in 2020 sales volume.
The brokerage’s revved-up expansion pace was due to the IPO, where Reffkin said a portion of the $450 million raised would be used to spark the brokerage’s market reach.
April 13: The lawsuits keep trickling in with Howard Hanna
Since the beginning of its headline-making legal battle with Realogy in 2019, multiple competitors have stepped into the ring with the same claims of price-fixing, theft of trade secrets and illegal business practices.
On March 23, Pennsylvania-based brokerage Howard Hanna accused Compass of stealing trade secrets through the recruitment of three Howard Hanna agents: Michael Hornung, Jennifer Crouse and Leah George. In court documents, Howard Hanna claimed Compass “aided and abetted” the agents’ breach of non-compete, non-solicitation and confidentiality provisions in their contracts.
“This case involves a real estate company on the brink of going public and its no-holds-barred approach to soliciting new agents in order to justify its narrative as a technology firm poised to upend the real estate industry,” the complaint read according to a previous Inman article.
Compass and Howard Hanna are the fourth and fifth largest brokerages nationwide by transaction sides, respectively, according to Real Trends.
A Compass spokesperson dismissed the allegations, telling Inman, “While we’re disappointed by Howard Hanna’s recently amended complaint we remain unshaken in our belief that real estate agents should have the right to choose their brokerage affiliation.”
The defendants filed counterclaims on April 12 and April 19 denying any breach of contract and asking Howard Hanna pay Crouse $28,892.50 in withheld commissions. “[T]he Compass Defendants explicitly require new employees not to disclose trade secrets and/or confidential information of prior employers to the Compass Defendants,” attorneys for the defendants wrote.
The case is ongoing.
April 16: The Agency files suit against Compass
Three days after news broke of Howard Hanna’s theft of trade secrets suit against Compass, Los Angeles-based luxury brokerage The Agency made its own claims in federal court.
In court documents, the brokerage said Compass illegally prohibited The Agency President Rainy Hake Austin from recruiting Compass agents. Prior to The Agency, Hake Austin had an almost two-year stint at Compass, where she served as the company’s head of operations for the West.
Compass confronted Hake Austin twice about her recruitment of Compass agents in March, saying it’s a breach of contract. However, The Agency maintained Hake Austin’s innocence as California doesn’t recognize post-employment employee non-solicitation agreements.
Since Hake Austin is a resident of California and worked for Compass’ California brokerage operations, her attorneys argued the non-solicitation provision doesn’t apply.
“Compass is threatening to violate Rainy’s rights by enforcing an illegal non-solicitation provision in her employment agreement,” the statement added. “This lawsuit is Rainy’s attempt to vindicate her rights as a California employee, and The Agency fully supports her efforts in doing so.”
The case is ongoing, with The Agency filing a proof of service on May 7 for the summons and complaint against Compass.
April 26: Compass acquires Glide
In late April Compass announced transaction management platform Glide as its first post-IPO acquisition. Founded in 2018, California-based Glide enables agents and brokers to complete offer, disclosure and closing documents online. The company offers a free plan for members of 60 California-based Realtor and MLS associations.
Compass Chief Product Officer Greg Hart said they’ll work on expanding Glide’s footprint past California and explained Glide will continue serving agents and brokers at other brokerages.
“The Glide team has built a seamless software solution that has attracted tens of thousands of real estate agents in California, including many Compass agents who love the service,” Compass Chief Technology Officer Joseph Sirosh said in a press release. “Their products have an excellent track record of saving time, reducing risk, and simplifying every step of the offer process — and of course, making complex tasks seem effortless for agents and their clients.”
Compass didn’t disclose financial details, but it’s not hard to imagine they paid a pretty penny for a platform that’s become a crowd-favorite amongst California agents. From 2018 to 2021, Compass has spent at least $308 million on acquisitions, according to deals where they disclosed the purchase price.
May 4: Compass is hit with two more lawsuits
Compass started May with two more lawsuits in California and Pennsylvania state courts.
In California, former Compass team leaders Lisa Sheppard and Todd Sheppard filed a class-action suit on April 29 seeking redress for California employment and labor law violations. The duo said Compass lied about commission splits, deductions for marketing and other expenses, and its agent-equity plans.
The Sheppards said Compass wasn’t upfront about the deduction of marketing and other expenses from their 90 percent commission split, and another deduction when agents on their team made a commission of less than 5 percent. Furthermore, the duo said they were led to believe they’d have access to common stock through Compass’ agent-equity program.
Former agent Greg Maffei filed a similar class-action suit in January with the same allegations. “This class action challenges Compass’ unfair, unlawful and fraudulent business practices that were designed to gain market share by luring top real estate agents with promises of high commissions and compensation packages that include bonuses, covered business expenses and stock options to hire them from Compass’ competitors,” Maffei’s complaint read.
The same day, Pennsylvania-based Better Homes and Gardens Real Estate affiliate Valley Partners Real Estate (VPRE) filed a theft of trade secrets suit against Compass, saying the company “actively assisted” two agents in breaking non-disclosure, non-competition, and non-solicitation covenants.
Compass declined to comment about VPRE’s allegations, but offered this statement about the Sheppard’s suit: “Compass intends to vigorously defend itself against these claims, which are completely without merit.”
May 10: D-Day is approaching
Compass is less than 48 hours away from its first earnings call, where lingering questions about commission splits and the path to profitability could, at least, start to be answered.
Since reaching a $22.11 price per stock high on April 1, Compass has yet to match or surpass their first-day pop. The company has stayed within the $16 to $17 range, with a 52-week low of $16.20. Compass closed the day trading at $16.34 — a 3.19 percent decline from May 9.
Nine Wall Street analysts released their ratings for Compass, according to investing site MarketBeat. Three analysts provided a ‘hold’ rating and six analysts provided a ‘buy’ rating with a twelve-month consensus price target of $23.00 and a possible upside of 40.50 percent.