Q3 2024 Compass Inc Earnings Call
[inaudible]
Thank you for standing by and at this time I would like to welcome everyone, two today's campus incorporated Q3 2020 for a financial results call.
All lines have been placed on YouTube event in any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Once again, star one. And if you'd like to withdraw your question, simply press star one again.
and thank you.
Speaker Change: So without further ado, I would like to turn the call over to CFO, Kalani Reelitz. Kalani, please go ahead.
Kalani Reelitz: Good afternoon and thank you for joining the Compass Third Quarter earnings call. A head of our prepare remarks I want to welcome our new head of investor relations, so homophosely, so hom comes to us from the cell side with a decade of experience, covering the entire life cycle of a real estate transaction.
He began his career covering the home builders and mortgage insurance companies, but over time, expanded his expertise into title insurance, mortgage origination, prop tech, home improvement, home furnishings, and of course the residential brokerage industry. Welcome so-how and we are excited to have you here at Compass.
Thank you for the introduction, Kalani. I'm thrilled to be here and look forward to working with all their shareholders and covering analysts going forward. In addition to Kalani, joining us today will be Robert Reffkin, our founder and CEO.
Speaker Change: In discussing our company's performance, we will refer to some non-gap measures. You can find the reconciliation of these non-gap measures to the most directly comparable gap measures in our third quarter, 2024, earnings release, posted on our investor relations website.
We will be making forward-looking statements that are based on our current expectations, forecasts, and assumptions, and involve risks and uncertainties.
Kalani Reelitz: These statements include our guidance for the fourth quarter of 2024 and full year 2024, including comments related to our expected financial results, operating expenses, and free cash flow, as well as our expectations for operational achievements.
Our actual results may differ materially from these statements.
You can find more information about risks, uncertainties, and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the FCC and available on our Investor Relations website.
You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, October 30th. We expressly disclaim any obligation to update this information. I will now turn the call over to Robert Reffkin. Robert?
Robert Reffkin: Thank you for joining us today for our third quarter conference call.
I'm pleased to share that in the third quarter, we again grew market share, grew agent counts, grew a tax or title in escrow, realized industry-leading agent retention, and generated another quarter of positive free cash flow.
Robert Reffkin: Before we dive into the results, I want to take a moment to express my sincere gratitude for the hard work of the entire Cumbus team over the past two years.
Their efforts have driven the positive results we're seeing today and have me more convinced than ever that cost discipline will be a cornerstone of our ongoing success going forward.
As the market makes its way back to mid-cycle transaction levels of 5.4 to 5.6 million existing home sales, I'm excited to showcase the true earnings potential of our platform while continuing to provide unparalleled support to our agents.
Thanks to our team's incredible work, we are now able to guide to adjusted EBITDA in excess of $100 million for 2024 and reaffirm our positive free cash flow guidance for the full year.
Robert Reffkin: This is a remarkable achievement, especially given the challenging market backdrop with existing home sales at three-decade lows.
and many more. Thank you. Thank you. Thank you. Thank you.
I'm pleased to say that we delivered another quarter of strong growth in our performance relative to the market through our continued focus on delivering value to our agents and the clients they represent alongside a disciplined approach in managing operating expenses.
In Q3 2024, we generated adjusted EBITDA of $52 million, up 139% compared to $21.8 million in Q3 2023, and above the high end of our guidance range.
Robert Reffkin: and many others. Thank you. Thank you.
Revenue in the third quarter increased by 11.7% year over year.
Transactions increased by 16.1% from a year ago compared to the overall market where transactions declined by 1.9% during the same period. So this means Compass outpaced the market by 18%.
Robert Reffkin: and many more. Thank you. Thank you.
Quarterly market share was 4.8%, an increase of 49 base points compared to Q3 2023.
We recruited over 750 principal agents organically in the quarter, marking our highest quarter of organic agent count growth since 2021.
Year over year, we have now grown our principal agent count by 2,927, or 20%, in what has been a very volatile four quarters for the industry.
Robert Reffkin: I'm also proud to report that Q3 was our strongest quarter in the last four quarters for quarterly agent retention at 97.8 percent.
Our title and escrow business continues to gain momentum. We finished Q3 with another record quarter of T&E attached.
Over the past three quarters, we've improved our catch rate by 700 base points.
reflecting both our new and existing markets.
Robert Reffkin: I'm also excited to report that we now have all seven wholly-owned T&E operations integrated into our Cumbus platform, which further increases our ability to improve attach rates.
And as we stated on our last call, over the next 18 months, we are executing against our plans to launch title operations across all of our most mature transaction-rich markets, including the San Francisco Bay Area, New York City, and the United States.
Revenue, less commissions, and other related expenses as a percentage of revenue in the third quarter increased to 17.83%.
Robert Reffkin: up 47 basis points from the second quarter. When excluding recent acquisitions, the same metric was up 62 basis points from the second quarter. These improvements compare favorably to 2023 when the same metric dropped three basis points between the second quarter and the third quarter.
Over the long term, we believe we can expand our margins for a few reasons.
First, we believe we will continue to get credit from our agents on the increasing value we provide to them and their clients through the Compass platform. Second, we continue to increase margins from our ongoing expansion of integrated service offerings across our markets, as well as increased attach of those offerings.
And lastly, we believe we can continue to increase margin as incentives roll off from existing agents as we hire new agents at Better Economics.
Kalani will discuss our progress on agent economics in more detail, but I am excited to share that in Q3, we improved overall agent economics by 54 base points on a year-over-year basis.
Robert Reffkin: As a reminder, when we say agent economics, this reflects Compass's margin after accounting for both commission expense and other expenses, such as agent marketing expense.
In the third quarter, our total non-GAAP operating expenses, excluding commissions and other related expenses, improved both on a year-over-year and a sequential basis.
I am particularly pleased that this improvement in OVX
was achieved in a period where we grew transactions 16.1% year-over-year, principal agent count 20% year-over-year, total agent count by nearly 4,000 agents year-over-year, and after accounting for four acquisitions.
And consistent with what we said last quarter, we are reiterating our expectation that stock comps will be under $130 million for the full year.
Finally, because of our cost discipline, which is again permanent, not temporary, we delivered our third quarter in a row a positive free cash flow.
and have now been free cash flow positive for five of the last six quarters during a period of time that reflects a trough-level transaction environment of approximately four million annual existing home sales.
We generated $32.8 million in free cash flow in the quarter.
And importantly, we are reiterating our full year positive free cash flow guide.
Now, zooming out and thinking about the long term.
Robert Reffkin: Whether you have a bearish or bullish view on the housing market, we believe we are building a company that succeeds in any scenario.
Robert Reffkin: If we're faced with a housing recovery that is slower than expected, we believe our object optimization and region share gains will offset any impact from near-term interest rate volatility.
Robert Reffkin: This in itself should drive long-term enterprise value creation through earnings outperformance.
Any move higher in rates will likely hurt our competitors more than accomplish.
as they don't have the capital, technology, and operational resources to scale in markets like the one we are in today, which will allow us to continue to gain share and increase our pipeline of M&A opportunities at favorable economics.
This is evident by our performance in each of the past five quarters, where we have increased our quarterly market share on a year-over-year basis in the toughest housing market the industry has faced in multiple decades.
and many more. Thank you. Thank you.
Robert Reffkin: In a scenario where existing home sales simply recover from roughly 4 million to 5.5 million mid-cycle levels,
We plan on delivering hundreds and hundreds of millions of dollars of free cash flow in Adjusted EBITDA by running our current playbook of retaining agents at high levels, gaining share, increasing attach of integrated services, and maintaining operating expense growth at 3 to 4% annually.
Robert Reffkin: Beyond just a market-driven increase in earnings, we have also proven that we can outperform the industry by leveraging our structural advantages and intend to continue doing so going forward. Let me now touch on each of our four structural advantages briefly.
Robert Reffkin: Our first structural advantage is our end-to-end platform. While other brokerages have been scaling back support and technology offerings to their agents, our OPEX discipline and operating efficiencies have allowed us to continue to invest in our end-to-end platform during the down cycle, building new products and adding features that help agents run and grow their business.
In 2024, we will have invested another $100 million in the technology platform, reflecting a life-to-date investment of $1.7 billion.
I am proud of the team for being able to advance the tech stack in a real estate recession when competition has been forced to stop investing.
Robert Reffkin: and many more. Thank you. Thank you.
In Q3, we launched the Compass Reverse Processing Tool to all of our agents, and the beta version of our Client Dashboard to several hundred Compass agents.
The Compass Reverse Prospecting Tool is a powerful new tool that enables agents and their homeowners to identify which of the 33,000 Compass agents, and their millions of buyers, have viewed,
Robert Reffkin: shared, favorited, or commented on their listing. With these insights, the listing agent can develop an informed outreach strategy to bring interested buyers to the transaction.
And agents can leverage this information to secure stronger offers, accelerate negotiations, and move efficiently to a successful closing. We expect this tool to help Cumbas agents win more listings, as sellers will want their agents to have this functionality to best serve their needs.
Robert Reffkin: As for the Client Dashboard, the full release to the entire Compass agent community.
and their millions of clients.
will be in early Q1 of 2025 and will put all of the key agent-client interactions in one place for buyers, sellers, and owners of multiple homes. It will be a one-stop shop for the agent-client journey, not just through the life of a transaction, but through the ongoing journey of home ownership.
Over time, we will also integrate our current high margin service offerings, like title and escrow and mortgage, as well as future high margin offerings, like home insurance, through the client dashboard, which will allow us to continue to build upon our record attach rates.
and many more. Thank you. Thank you.
Our second structural advantage is our national scale.
At the end of the quarter, we had over 33,000 agents across the country.
Not only does our skill allow us to amplify the network effects of our platform as we roll out tools and programs like reverse prospecting and make me sell.
but it also makes us less susceptible to regional market fluctuations as we continue to expand and Reduces our cost to serve per agent by spreading the cost of our platform investment over a larger agent base
Robert Reffkin: and many more. Thank you. Thank you.
Our third structural advantage is our network of top agents. Per Realtrends, Compass has nearly double the amount of top agents at the next largest brokerage firm when measured by sales volume. Our network of top agents provides three distinct advantages that can't easily be replicated by other brokerages.
1. Our national referral network provides our agents with high-intent leads that would be hard to come by at other brokerages.
Two, it helps with agent recruiting.
because other high-performing agents want to be a part of our network, which in turn helps elevate our brand in each of our markets even further.
In Q3, about two-thirds of the agents we recruited were introduced by an existing Compass agent. Not only does this ensure we're hiring agents other agents want to work with, but it is also our most efficient recruiting channel.
Lastly, culture. High-performing agents want to work with other top agents, and this helps with culture. Better culture leads to less attrition and results in a higher propensity to engage in Congress's integrated services like title and escrow and mortgage.
Our fourth and final structural advantage is our depth of inventory in local markets.
Listing inventory remains the lifeblood of the residential real estate marketplace. At Compass, we already have a depth of listings in many of our local markets that is unmatched.
Our 30-30 vision of realizing, on average, 30% market share in our top 30 cities will strengthen this advantage by growing listings in more markets where we have the largest presence, as well as enabling double-digit growth in our gross transaction volume.
Achieving our 30-30 vision will be a function of continued organic agent growth, accretive M&A, and market share gains by existing agents as they win more listings from leveraging our platform.
and many more. Thank you for watching. I hope you enjoyed the video. If you did, please click the like button and subscribe to my channel. I'll see you in the next video.
By growing our listing inventory, we believe more and more buyers will search Cumbas.com and use Cumbas Agents as it will be known that Cumbas has more inventory than any other website or brokerage.
This inventory advantage includes not only our active inventory, but also potential inventory from our Make-Me-Sell program, which allows clients of Compass Agents to provide an aspirational sales price for their home in our CRM.
Since we launched Make Me Sell this quarter, we now have approximately 5,000 Make Me Sell entries that all have the potential to create incremental inventory and transactions that would otherwise not have been possible. We have even seen transactions happen from Make Me Sell to date.
In an inventory constrained environment, we see buyers want to expand their search to unique inventory generated by Compass, whether it's the potential inventory of the Make-Me-Sell program or the exclusive inventory of Compass Private Exclusives and Compass Cuminstance.
and many more. Thank you. Thank you.
Private exclusive listings are not allowed to be publicly marketed and are only available to Convus agents and their clients, while Convus Coming Soons are listings that are only searchable on Convus.com and not on third-party sites. Coming Soons reflects that it's going to be coming soon to all the different portals and third-party sites.
Ultimately, our North Star is to use our depth of inventory to create better outcomes for sellers, buyers, and our agents, which as a function should translate to better outcomes for Compass and our shareholders.
and many more. Thank you. Thank you.
Now, before I close, I would like to take a moment to discuss the ongoing debate in the industry regarding a seller's right to choose how to market their home. It is our view that this right is currently being infringed upon by the National Association of Realtors' Clear Cooperation Policy, which says that if you want to publicly market your home and use a Realtor, it is mandatory.
that you submit your listing into the MLS within one day. And if a realtor markets publicly for more than one day without putting the listing in the MLS, they can get fined up to $5,000.
We don't think this is right. Homeowners should not be forced to do anything they don't want to do.
Robert Reffkin: Cleric operation is like Google saying if you advertise anywhere you must also advertise on Google and if I see you advertise anywhere else
Robert Reffkin: even a social post, newsletter, or postcard for more than one day, and you haven't advertised on Google, then I'm going to fine you up to $5,000.
We believe that homeowners are getting the short end of the stick.
One homeowner wants days on market on their listing.
So why is it there? What homeowner wants priced-off history on a listing? So why is it there?
It's there because the most powerful websites in real estate.
have made their business model one of selling buyer leads.
Robert Reffkin: In the same way tabloids use negative headlines to attract readers, real estate websites use negative insights to attract buyers. Negative insights such as days on market, price drop history, crime, weather, value estimates.
No homeowner wants these negative insights on their listing.
But again, the powerful real estate websites use these insights to empower their model of selling buyer leads to third-party agents. While they sell leads, at Compass, we sell homes.
Speaker Change: It is important to appreciate that in our efforts to remove queer cooperation,
There is nothing we are advocating for on behalf of an individual homeowner that professional home builders and real estate developers don't do every single day to maximize the value of their homes.
Professional homebuilders and real estate developers are excluded from being forced to comply with the marketing restrictions Clear Cooperation places on individual homeowners in the resale market, which puts individual homeowners at a disadvantage.
Robert Reffkin: At Compass, we are committed to leveling the playing field for individual homeowners by giving them the same marketing strategies that create value for their homes used by the professional homebuilders and real estate developers.
The listing agent's name being taken off of the listing, diverting buyer inquiries away from the listing agent who knows the most about the home and therefore can serve the seller better.
Last year, professional homebuilders sold hundreds of thousands of homes off the MLS and avoided these risks. Remember, professional homebuilders and real estate developers are not subject to the same market restrictions through clear cooperation. They have a carve-out.
Individual home sellers should not be put at a disadvantage to professional homebuilders and real estate developers.
Moreover, pre-marketing and multi-phase marketing strategies are used by the most valuable companies in the world.
Weather the most valuable companies that sell homes.
such as D.R. Horton, Lennar, and Pulte, or the most valuable companies that sell their own products like Apple, Tesla, and LVMH. They all use pre-marketing and multi-phase marketing strategies to ensure their product launch is as successful as possible.
Over time, Compass will become synonymous with homeowner value, because our agents will be known for offering homeowners the same advantages as these other companies.
The future we are creating is one where buyers will know to search compass.com as we become known as the place homeowners list their homes early using compass private exclusives and compass coming soon which protect them from the risk of MLS exposure.
Risk, such as days on market, price drop history, ensuring their listing agent's contact information is the only information on their listing.
ensuring that all the buyer inquiries go to the agent that they hired, their listing agent.
For most homeowners, their home is their most valuable financial asset. It deserves the most valuable marketing. It deserves to be protected from the risks of mass exposure.
Speaker Change: regardless of NARA's decision to amend or repeal the Clear Cooperation Policy.
Speaker Change: We believe the public marketing restrictions imposed by clear cooperation will eventually go away for two reasons. First, MLSs that represent about one-third of our markets have eliminated or no longer enforce off-MLS public marketing restrictions imposed by clear cooperation.
Robert Reffkin: We expect this trend to continue as more and more MLSs respond to continued pressure to remove or amend the rule.
Second, if not removed by NARM, we believe clear cooperation will be removed through the courts. Legal pressure continues to mount on private party litigation. Ultimately, I believe the industry will reach a common-sense approach where sellers have a choice of where, when, and how to advertise their home for sale.
Robert Reffkin: As I close, I want to restate for the avoidance of doubt that we remain acutely focused on building the best brokerage in the industry and positioning ourselves to capture the upside as the market normalizes.
This means maintaining our core brokerage objects at three to four percent growth, recruiting high-performing agents, enhancing margin by adding integrated services to the platform, and pursuing accretive M&A.
Robert Reffkin: We believe this formula alone positions us to deliver hundreds and hundreds of millions in free cash flow per year by the time we reach mid-cycle. I will now turn it over to Kalani.
Thank you, Robert. Following on some of Robert's comments, I'm very pleased with our operating and financial results.
In the third quarter, we process 55,872 transactions, an increase of 16.1% from a year ago, or an increase of 4.4% when excluding the impact of M&A.
Each of which compare very favorably to the 1.9% decline in transactions for the entire residential real estate market in the second quarter as reported by the National Association of Realtors.
Our market share for Q3 2024 was 4.8%, up 49 basis points year-over-year.
As of September 30, 2024, we had 17,542 principal agents compared to 14,615 as of September 30, 2023, an increase of 2,927 year-over-year, or 20%.
This increase was driven in part by the 2,375 principal agents that we acquired through the acquisition of Ladder & Bloom and Park Real Estate, which closed in the June 2024 quarter.
But, we also had a very strong organic recruiting quarter in which our team recruited 785 principal agents in the third quarter, the highest level in almost three years. Our quarterly retention rate in the third quarter was 97.8%.
For our integrated services, Q3 was another strong quarter. As Robert mentioned, we continue to see record levels of attach to our title and escrow businesses.
And for OriginPoint, our joint venture mortgage affiliate, Q3 was their best quarter of the year, driven by a nearly 90% increase in refi volume year-over-year.
Year-over-year lock and funded volume were both up approximately 50% for Q3, owing to recruiting success and attached increases.
While these integrated services are a small portion of our overall results, we're excited for the growth opportunities.
Robert Reffkin: Turning to our financial results for the quarter, our third quarter revenue was $1.5 billion, an increase of 11.7% from the year-ago period, which was towards the high end of our guidance range of $1.425 billion to $1.525 billion.
Robert Reffkin: 5.3% of this revenue growth is attributed to organic growth, while 6.4% came from M&A.
Gross transaction value was $57.7 billion in the third quarter, an increase of 13.4% from a year ago, reflecting the 16.1% increase in total transactions, partially offset by a decrease in average selling price.
Our commission expense as a percent of revenue was 82.2 percent, a slight increase of 21 basis points compared to Q3 of last year at 82 percent.
Robert Reffkin: M&A completed in the past year drove about 28 basis points of the increase in commission expense as the acquisitions were completed in markets with higher average rates compared to our core brokerage.
So, when you exclude the impact of M&A, our commission rate improves slightly.
On a sequential quarter basis, our commission expense as a percent of revenue declined by 47 basis points when comparing the second quarter of this year to the third quarter.
Now, let me move into some thoughts on the topic of Op-Ex.
First, our total non-GAAP operating expenses were $250 million in Q3.
We expected a slight step up in OPEX from the trailing second quarter due to the full quarter inclusion of the OPEX assumed from our mid-Q2 acquisition.
However, the $215 million was slightly better than the Q2 period, primarily driven by some favorability in the marketing expenses incurred by our agents in the quarter.
As you've heard me say previously, the commission expense lines included in our P&L only reflect a portion of the economics we share with our agents.
In addition, while it varies by market, we also incur certain cash expenses on behalf of our agents, primarily marketing expenses, which are classified within OPEX in our P&L.
When combining the commissions and the additional costs included in OPEX, the total economics of our agent base improved by 54 basis points in Q3 of 2024 compared to Q3 a year ago.
This improvement was due to, among other things, favorability in agent expenses predominantly driven by efficiencies gained in agent marketing.
Robert Reffkin: and many more. Thank you. Thank you. Thank you. Thank you.
Second, when comparing our Q3 OPEX to Q3 from a year ago, you need to consider that the year-ago period included a one-time credit of $7.2 million for a tax refund.
So adjusting for that credit, OPEX for the year-ago quarter would have been $226 million compared to $250 million in the third quarter of 2024, reflecting a reduction in OPEX of $11 million, or 5% year-over-year.
Finally, it is important to note that this year-over-year improvement in OPEX is after considering the added expenses we assumed for the M&A completed since the year-ago period.
Robert Reffkin: And as a reminder, when forecasting our 2025 OPEX, you'll need to consider an increase for the wraparound effect of the OPEX assumed from the ladder and bloom and parks acquisition for the period from January 1st of this year through the respective acquisition dates in Q2 of 2024, which would be roughly $10 million in aggregate.
To wrap up my comments on operating expenses, it's worth noting that we've used some of the room created from our over-performance on OPEX reductions.
to add some additional investments in our title and escrow entities.
Robert Reffkin: These investments include the hiring of additional title and escrow officers and related personnel which drive incremental revenue and healthy incremental adjusted EBITDA to these businesses.
Our adjusted EBITDA for the third quarter was $52 million, which was slightly better than the high end of our guidance range of $30 million to $50 million and an improvement of 139% over the year ago results.
Gap net loss was $1.7 million, which reflects very favorably to the gap net loss of $39 million a year ago, driven by the increase in adjusted EBITDA, but also lower stock-based compensation expense.
which was 32 million in the quarter compared to 38 million in Q3 of last year.
Consistent with what we said in the last quarter, we are reiterating our expectation that stock comp will be under $130 million for the full year.
and many more.
As a reminder, the non-GAAP operating expenses we refer to omit certain expenses that we exclude from the calculation of adjusted EBITDA, including stock-based compensation and depreciation and amortization. And as always, we've included tables,
on page 12 and 13 in our Q3 Investor Deck that reconcile these amounts to our GAAP operating expenses.
Free cash flow during the third quarter was positive 32.8 million, an improvement of 169% over the free cash flow of 12.2 million in Q3 of last year.
On a year-to-day basis through September 2024, our free cash flow was $79 million, compared to $4 million in 2023.
This reflects an increase of $75 million year-over-year, which would have been even higher if excluding the $29 million paid in Q2 for the first 50% of our legal settlement. The second 50% of this legal settlement will be paid in Q2 of 2025.
Robert Reffkin: and many more. Thank you. Thank you.
As an additional reminder and consistent with my comments from prior quarters, it's important to note that our quarterly cash flow is impacted by the seasonality of our business cycle along with a handful of timing items that tend to be neutral for the full year but can create choppiness for individual quarters within the year.
Specifically, while we continue to expect free cash flow to be positive for the full year, we expect to see negative free cash flow in Q4.
We ended the third quarter with $211 million of cash and cash equivalents on our balance sheet, and we have no outstanding draws on a revolving line of credit.
Robert Reffkin: Turning now to financial guidance.
For Q4 of 2024, we expect revenue in the range of $1.225 billion to $1.325 billion, and we expect adjusted EBITDA to be in the range of $0 to positive $10 million.
When combined with the actual results for the first three quarters of the year, this implies a full-year revenue range of $5.47 billion to $5.57 billion, and a full-year adjusted EBITDA range of $109 million to $119 million.
The midpoints of the full-year revenue and adjusted EBITDA ranges reflect an increase in revenue of 13% and an increase in adjusted EBITDA of $153 million, compared to the full year of 2023.
Robert Reffkin: and many more. Thank you. Thank you.
Robert Reffkin: As it relates to OPEX, we are reiterating our OPEX range for the year 2024 of $876 million to $896 million. As we laid out last quarter, this range starts with our core company OPEX of $850 million and adds in $15 million for 2023 M&A OPEX.
$12 million of OPEX for the Lateran Bloom acquisition that closed in April and an additional $9 million for the balance of 2024 from the park entities that we acquired in May.
Given some of the favorability we saw in OPEX for Q3, we now believe OPEX will trend towards the lower end of that range for the full year.
Finally, as I stated earlier, we are reiterating our expectations to be free cashflow positive for the full year of 2024.
However, we expect free cash flow to be negative in Q4 given the seasonality of our business.
As a last point of guidance, we expect our weighted average share count for the fourth quarter to be between 510 million to 513 million shares.
As I wrap up my prepared remarks, I'd like to once again extend a sincere thank you to our agents and employees for their hard work and dedication.
that resulted in another great quarter of results where year over year, we meaningfully grew market share.
Aging Count, Attach, and Cash Flow.
At Compass, we have built the leading platform in residential real estate, and we are executing against a strategy that positions us for success in any market scenario.
Robert Reffkin: And quarter after quarter, I only gain more conviction that we have the winning formula.
Thank you so much. And at this time, I would like to remind everyone in order to ask a question, press star than the number one on your telephone keypad. Once again, star one. And we'll pause just a moment to compile the Q&A roster.
And it looks like our first question today comes from the line of Matthew Booley with Barclays. Matthew, please go ahead.
Speaker Change: Thank you. Thank you.
Good afternoon, everyone. Thanks for taking the questions and for all the helpful color at the top. I wanted to ask on that commission rate topic. I think I heard you say, and correct me if I'm wrong, that excluding M&A, your commission rate was actually, I think it was improved year over year. And again, correct me if I'm wrong.
Yeah, just obviously given the change in the industry in August, I'm curious if you are starting to see any transactions occurring at lower commission rates than otherwise may have, or just kind of how that's trending since then. Thank you.
Speaker Change: Hey Matthew, thanks for the question. Look let me first start by saying thank you to all the people that did such a great job training our agents on the biorepistation agreements. We had over 90% of our agents trained over the previous month before August 17th.
including 66 national training sessions and hundreds of local training sessions.
I can tell you, you know, we are not seeing any meaningful change to our business since the announcements in our settlement are post-August 17th.
related to the commission rates, and they're still in line with the historical internal averages.
Anecdotally, you know, we are hearing things at both ends of the spectrum, but...
Speaker Change: We're hearing a number of top agents, for example, saying that they're now
Speaker Change: They're charging...
a more, a stronger commission rate, more in their favor since they are now able to negotiate for themselves. Again, remember, as a reminder, every buyer agent or most buyer agents were just accepting the commission that was negotiated by the LISN agent.
Speaker Change: I'd say one other thing that has changed is I think this is driving some of the worst agents and part-time agents out of the business. The way I would describe it and what I hear from the market is
Before August 17th, you could be a buyer agent and do one transaction every two years.
Speaker Change: And if someone comes to you about buying a home, you say, hey, don't.
You know, you don't have to pay me, you'll come out of the listing agent.
And the seller will pay for it, and you don't need to sign anything.
Speaker Change: It was not something that required commitment from the buyer in any meaningful way, and as a result, it allows someone who, again, does one transaction for two years to be able to compete and get paid based off of what the list needs to negotiate on their behalf.
Speaker Change: Now, post-August 17th, you do one transaction every two years, and a buyer comes to you, and you try to – you have to convince them to want to work with you, and you have to convince them to sign something before showing property. And you have outlining compensation, and so it's much harder for –
for agents without a lot of experience to compete. There's a reason why agents that were newer in the business tended to work with buyers more than sellers, because you didn't need a strong commitment. You need a strong tracker, because again, they didn't have to sign anything like the
Speaker Change: like sellers did with a listing agreement. So I think those trends tend to go to our favor as a company because we are a company that focuses on agents with experience, that are full-time, highly professional. And I think on balance, again, that will do us.
We will perform better because of this.
Got it. Okay. Thank you for that, Robert. Very, very helpful.
Speaker Change: Secondly, I just wanted to touch on the overall housing market trends. You know, it seems like every time we have interest rates starting to go in the right direction, then, you know, that kind of reverses course. So I'm just curious, maybe into October, if you can even quantify it a little bit. What are you seeing around inventory and transactions? Are your agents saying anything around election uncertainty playing into the market at all? Yep, just any kind of near-term market call there would be helpful. Thank you.
Yes, so look, let me start by saying in the year following 10 of the last 11 presidential elections, transaction volume went up.
In the year following 10 of the last 11 presidential elections, also prices of homes went up.
Speaker Change: The
Yes, single-family or existing home sales in September is down three and a half percent year-over-year and of course it every every month Last quarter was below four million Seasonally adjusted annual rate of home sales for existing home sales. So it's a really really low level of transactions
Speaker Change: However,
Let's look at purchased mortgage applications and let's look at pendings. Purchased mortgage applications in July were in the, down in the kind of low to mid teens. In August and September they were down single digits.
and so even with mortgage rates going to 6.9%
Speaker Change: last week, you had
Speaker Change: mortgage applications actually increase.
I think that shows a level of resilience that people aren't really talking about as much in the market. In terms of pendings, the last two weeks of pendings in contract listings that are in contract to be sold,
it was up 10% two weeks ago, and a week ago up 9%, which is consistent with the purchase mortgage applications. And so, again, just in the rising rate environment that we've seen over the last couple weeks to see the pendings and purchase mortgage applications,
go in the favor of transactions I think is a healthy sign.
Speaker Change: Of course, we aren't overly optimistic, but it does look like the worst is behind us. And, you know, also at Compass, like we mentioned and alluded to on the call, I think there's a real case where
Compass will do better over the medium-term if the market stays where it is. And so we're here to perform and execute regardless of the environment.
Well, thank you, Robert. Good luck, guys.
Thank you.
Thank you, Matthew.
Thank you for watching. Bye.
And Matthew, make sure you're not muted.
Speaker Change: and many others. Thank you. Thank you.
Hey, can you hear me? Yeah, we can hear you now. Go ahead. Sorry about that. So I wanted to follow up on the point about clear cooperation. Robert, I think you made a very compelling case for some of the drawbacks that it causes and why it might be going away. I guess in an environment where that policy does go away,
You know, what fills the void or what does the environment look like ultimately when there's no longer that requirement? Because obviously being forced to place a listing on the MLSF provides some value certainly to potential home buyers in terms of information being available in the market. So what changes, you know, what fills that void and what does it mean for Compass? Thank you.
Speaker Change: and many more. Thank you. Thank you.
Look, I think what it means for COMBIS are...
Speaker Change: Compass.
Speaker Change: If agents and homeowners wanted to be forced to put their listings on MLS in one day, I wouldn't be against clear cooperation. Agents are my clients. I work for them, not the other way around. And they are infuriated across the country for being fined up to $5,000 for...
for doing what their clients say, to keep a listing off MLS for more than one day.
and still at Public Marketing.
And so...
I share that because
Speaker Change: I think in a world where career collaboration goes away, more great listing agents and their homeowners will want to come to Compass, List with Compass, because we have built and are continuing to build a platform that protects them from the risks of mass exposure and syndication to all these third-party websites. We talked about it, days on market, price drop history, all those different things. I mean, it is almost laughable, the amount of IP that has been stripped away from agents over the years.
No agent can even put a watermark on their listing.
on their photo. But then when it goes to MLS, the MLS puts a watermark on it, so that they can sell the data. Imagine going to a big developer and saying, you can't put a watermark on your photo, or the listing agent.
Speaker Change: your sales agent in your in in in the in the building in 400 units in the building that they're
Contact information is going to be taken off their listing on thousands of sites And you can't you can do nothing to control that of course you can't bully people like that I mean we have a billionaire client who
who won off-market listing to Optimalist Marketing.
And then his agent got the fine in the email, $5,000. And the agent said, I have to put it on the MLS, or I'm going to pay this fine.
You know what that homeowner did?
He hired some lawyers, and he sued the board of MLS. And you know what the board of MLS did? They said, hey, you know, do whatever you want. You can mark it. We're not going to make, we're not going to enforce this.
Speaker Change: But the question is...
Speaker Change: Should you have to be a billionaire to be able to afford lawyers to be able to market your home how you want in this country?
Speaker Change: And so again, a long way to say that I think we will be known as the, Compass will be known as the defenders of homeowner value, the defenders of homeowner choice, your home, your choice. And we have built a product.
that can protect them from the risk of exposure. We are working with our agents and their clients to create a company that better serves homeowners.
We're protecting and maximizing the value of their homes.
and Compass. All we're doing is, again, there's nothing that we're asking for for an individual homeowner in marketing that the carve-out for career cooperation for homebuilders and real estate developers lets them do every single day. Compass, what we are what we are going to launch in the weeks ahead,
Speaker Change: is a program where Compass gives individual homeowners the same advantages as real estate developers and professional home builders. And we're gonna frame it as such. And so we will level the playing field between those two parties.
Speaker Change: In terms of searching, look, there are so many arguments on the other side, but one of them is...
Speaker Change: It was so hard to find the inventory everywhere, and they like to point to other countries. By the way, in a lot of these other countries, it's not as hard as it used to be 10 years ago and 15 years ago.
Speaker Change: It's really gravitational in one or two places.
And so it's a little, you know, it's a past recollection. But look, I'd love to be able to search everything.
I'd love to be able to only go on Netflix and be able to see any TV show I want.
Speaker Change: But that's not the world. In a free and fair world, there's something called competition.
Speaker Change: and different companies come in and create different...
different offerings. And so I got to go to Netflix for one place, Disney Plus for another. By the way, Disney Plus controls their own content.
Speaker Change: and didn't let all the disruptors take advantage of them like some of the other companies.
Speaker Change: had done. And I go to Apple Plus for something else. I think in the future of real estate, at some point in this country...
People will come to Compass to find listings. They'll go to the MLS to find listings. They'll go to one or two aggregators to find listings But it's not going to be it's not going to be unlike
Speaker Change: almost any other product that you want to buy.
Okay, thank you for the question, Matthew.
And our next question comes from the line of Ryan McEvaney with Zellman & Associates. Ryan, please go ahead.
Hey, thank you guys. Congrats on the results. Kalani wanted to dig in a little on the OPEX commentary. So
Really nice outperformance this quarter, but maintaining that full year target. I think it implies, you know, something like a 20 to 40 million step up in costs and and I heard you call out the.
Additional T&E investments, you know, is that the entirety of things? Was there anything timing related where, you know, 3Q may be benefited, but some expenses flow into 4Q? I'm just trying to understand that trajectory to expect for the fourth quarter. Thank you.
Speaker Change: Yeah
Hey, Ryan. Thanks for the question. Overall, again, I'd start by saying we are pleased and I thank all of our teams who support our agents.
really driving down efficiencies we really built.
muscle and discipline and kind of in our DNA operating efficiencies. You're seeing that come through. I think, you know, we have not moved our overall operating guide. I do believe that we'll be on the low end of that overall. And so nothing really new. There's a little bit of seasonality, but mostly it's going to be driven by the M&A and the annualization of M&A from a year-over-year perspective. And then we are making some really smart
and Timely Investments in our T&E businesses to really drive growth.
Just a reminder that comes with really healthy economics and so we've taken a chance, but you know, I think to to get to the To be at the low end of the range. We'll continue to look and feel the same way We have an operating expense and we'll quite frankly continue to drive drive our actions in a discipline
Got it. That's helpful. And then one, you called out origin point a little bit in the prepared remarks, you know, it looks like.
In addition to the growth you called out, it looks like that actually flipped, the JV flipped from kind of modest losses to a modest gain this quarter. So maybe Robert, maybe Kalani, but just taking a step back, maybe you can give us a bit of a.
Speaker Change: status update, you know, where things stand in terms of just, you know, adding loan officers, expanding markets. Maybe it's too soon to really talk to attach rates, but, you know, maybe just generally how you're thinking the path of origin point expands in the coming years. Thank you.
Speaker Change: Thank you.
Speaker Change: Yeah, yeah, no, it's it's really been a great story. We've we've seen I mean, we've seen the whole market in that mortgage kind of hit.
Bottoms over the last two years and the team has really
first of all, controlled cost and made some real timely investments as well as cost savings. Q3 was our strongest quarter. We did kind of turn a corner there, as you mentioned. We continue to look for the loan officers and originators who are really, quite frankly, the teams that our agents want, right? And so Robert says it often, we don't do anything that our agents don't.
Speaker Change: don't ask for and we work for them. And so I think what the team has really done is been able to focus in our markets that we're in. At this point, we're not expanding as much as we're driving down deeper attached in the markets we're in. And really, quite frankly, working with the agents that we have, our best agents to determine who they support and work to grow originators and loan officers there. So I'm pleased with the results. We'll continue to grow and continue to make prudent investments with the right thing. But I think that the connection between our teams and at origin point and our agents and driving that partnership is going to continue to be a key shift for our success.
Speaker Change: That's very helpful. Thanks a lot.
and many more. Thank you. Thank you. Thank you. Thank you.
Ryan: Thank you, Ryan.
Speaker Change: And our next question comes from the line of Jason Helpstein with Oppenheimer. Jason, please go ahead.
Jason Helpstein: Hey, how is it going? So, I apologize if this was already answered.
Is there a second question? How should we think about your ability to continue doing tuck-in acquisitions, let's say, you know, into 25? Kind of what's the likelihood that we continue to see acquisitions? Thank you.
and many more. Thank you. Thank you.
Let me start with the latter. I think you'll continue to see us exude acquisitions. There's a strong pipeline of
great companies with great leaders and great agents that were
Jason Helpstein: that we continue to speak with, and that's all moving well. In terms of technology, let me start with reverse prospecting.
Jason Helpstein: They're
is no other company that has 33,000 agents in almost every major market in the country that can go to the homeowners in their markets and say, I can let you know any time, any
of our 30,000 agents nationally and the millions of clients they serve.
Jason Helpstein: have shared, viewed,
Jason Helpstein: commented, favorited your listing, when they last viewed it, how many times they viewed it, how many comments there were.
so I can say, hey, you know, Sharon.
Agent Sharon in our market. You have 18 comments with your client on a listing. Come bring...
Bring them by. Let's make a transaction. I've already... We launched it yesterday. And...
We've already, I've already had emails from agents saying that.
buyers came to the transaction.
and were sourced.
and I've heard the word game-changer more times than I could count. You can look at some of the social posts that agents have sent about it. But we are unique in that we built our own platform. It's not a third-party platform, it's our own. So you can constantly make more and more investments in it to display more things. In terms of make me sell,
You remember this was the number one rated idea of any of agents in the history of Columbus and what it was specifically is we have a hundred million addresses in our CRM. It's our CRM, it's not a third-party CRM. And our platform is the same platform where agents can search.
for listings. And so the idea is when I search for listings, let's call it Soho penthouses.
Jason Helpstein: It can tell me of the...
300-odd SOHO penthouses. How many are in my theorem and how many are in other Compass's agent theorem?
And so you can say, well, 80% of the Soho penthouses
Jason Helpstein: We are in our serum. We as Compass, we know them. And so then I can go to Byron and say, I can give you access and help try to create listings that may not be available.
And then we have already given our agents the ability to put on all of their CRM contacts an aspirational make-me-sell price. Most people, of course, don't want to sell, but if you ask them what is the price that you would sell, most people will have a number.
Jason Helpstein: technology CEOs in the country, if not the world, want to buy a specific house and that house was not available because it wasn't available and so the agent went to that house, knocked on the door
and then put in a letter and then that letter in the letter said I have a buyer who's willing to pay
It was probably one of the stronger organic net a quarters that we've seen in some time.
Speaker Change: And if you could also discuss your outlook for net adds.
Speaker Change: Foreseeable future. Thank you.
And so I think compass.
Speaker Change: On our relative position has become.
Stronger and better.
We worked really really hard to re builds our culture.
We brought employees back full time into the office to support our agents well before most brokerage.
You can still earn back in office.
<unk> agents.
Speaker Change: Hmm.
Of what agents value they value.
People and they value and culture and so it's hard to create a great culture virtually and so that there is nothing that I could ask whom they didn't help us more than every one of our broker brokerage competitors decided to be completely virtual.
Speaker Change: Yeah.
And we just have a very different philosophy.
Speaker Change: We and so I think that has been one thing has really helped.
To we what was surprising is this August 17th Strange change a lot.
Speaker Change: Lot of smaller brokerages their agents said they had zero training zero preparation they felt scared.
And Underprepared and like I mentioned earlier, we had 66 national and training sessions hundreds of local ones, we have and we have incredible compliance broker records and we just did a lot there and so I think that was almost like a marketing opportunity come to countries, where you can get great training and great coaching support.
Then the technology has really become.
Speaker Change: An advantage I call every principal agent it comes to kind of ask them why they come its well over 95% of time, they say, it's rare that they they don't say technology as a reason.
And so look you just call any agents that come to campus in the last year and say why why do you come.
Speaker Change: You'll hear about technology.
And then lastly, I think.
The brand of Compass two years ago was.
Speaker Change: With hurt.
Speaker Change: Bye.
We were hurt for reasons that some ferrous and nonferrous one.
One that may not be fair is like from an investor perspective, we were the fastest to do risks. We did three risks within effectively seven months, we didn't and now people are still doing risk because they were they didn't do them back then so from your perspective to say hey that was a great job, but when youre. The first to do risk three reps in the seven months in an industry that's covered by <unk>.
Every single day, where they're saying Oh comes going out of business. All of these risks like that was it.
Speaker Change: A problem.
And when the stock price movement from where it was to where it went down as the problem, but now others are doing risks and we look stable for you know for quite some time now.
Speaker Change: Now.
It's it's much more rare to see a negative article about compass.
So I think we look like a leader we look stable.
And we look like they are a good culture and yeah, Yeah, I I personally travel.
On average three days, a week to visit agents and employees across the country.
I visited open houses basically every weekend on Sunday during my personal time during my entire family to support agents at open House.
Speaker Change: And I put it on social media to create a signal to the to the agents and employees that we care. We are all in we care about agents and this.
Literally this morning was talking to one of the.
Speaker Change: Great leaders in our space.
Speaker Change: And are on track to fall of.
Speaker Change: Every brokerage firm.
Back to them not to mention the names of them back to the seventies, but these are all like the great names that arent that kind of moved down and I said why was there a theme and what he said this morning. He said it all came to when they when they lost their culture, where the where the management team.
Stopped showing that they care more about the agent than anyone else and this is not going to happen here at compass.
In order to be successful at Columbus, as an employee you need a lot of agents there are clients when they succeed we succeed that's the foundation of our business well when I when I mean agents and interesting people say Hey, this is what was the only top clients.
And so that's I think that that culture with the other things we mentioned that's really helped us.
Speaker Change: Perform in this period of time, but I'll pass it onto the money.
Speaker Change: Yes, yes, no I think I think we're definitely feeling Michael the momentum that Robert is mentioning I would just say to answer the second part of your question.
We've recalibrated in extremely.
Proud of our recruiting team our strategic growth team, we should expect to your question about 700, plus principal agent added organically every quarter.
We're seeing the momentum books or we have.
Speaker Change: Incentive plans and all of the right.
Conversations locally to really win so we should expect the 700 as a reminder, our 30 for 30 strategy is built on an organic agent growth. So that 700 principal agents. Some tuck in M&A is as Jason asked and then and then productivity from the platform that we've continued to enhance and so all of those things.
Speaker Change: Should continue as Youre seeing this quarter.
Excellent. Thank you for all that color Robert and thank you Connie I appreciate it.
Speaker Change: Great. Thanks, Michael.
Speaker Change: And our final question today comes from the line of Chris <unk> with UBS, Chris. Please go ahead.
Alright, Thanks for taking my question here.
Maybe two if I can first one for Robert.
Just curious how youre thinking about the strategic road map and the implications for clearer cooperation policy. This is maybe another way how much of your call. It 18 to 24 months strategic roadmap hinges on changes around clear cooperation policy and maybe how could we see that potentially change if they are not.
Speaker Change: Okay.
Yeah look I want to reiterate the core of our business.
Is allowing the market to recover and keeping our opex growth at 3% to 4% our organic opex growth of 3% to 4% is that that's the core business that.
Speaker Change: Is the core of our strategy and then just being best in the world and making agents better.
Speaker Change: And that's kind of what we have been and will continue to be.
Speaker Change: Clear preparation.
Clear cooperation is I would just call it.
European investors I think is would be an upside case very likely upside case [laughter] and.
And this is only interested I know of where people's asset their hard work.
The agent gets them lifting they build a relationship they get the lithium they take the photos they pay for photos and they're forced to put their entire listing and their photos into an MLS they cannot water market and the Emirates watermarks. They can get any economics, where their listing but then the MLS again sell the listings.
Speaker Change: Countless third parties.
Speaker Change: And so I think this is this.
This is at the end and I think the only reasons lasted as long as it has is because people didn't fully understand what was happening.
Speaker Change: But yeah, it's not it's not core I think what is core to the strategy is inventory.
Congress will continue to help homeowners.
Speaker Change: Listed properties in ways that help homeowners more not.
Posted a current environment, where we are.
The industry is being forced to.
Speaker Change: Two.
Speaker Change: With properties in ways that help third party lead diver.
Speaker Change: Diversion companies sell leads the best of Mls's sell client data the best World MLS is so charge eight induce the best because they are not 100 and market share in an order to your jamba. The agent you have to have access to them a lot and there is no competition lifting systems right and so but again the thing will it will and it will become but I do believe in a strong unless all of that.
It is I don't believe you should be able to force every home in the country do something they don't want to do.
And and and so we will we will get better and better at helping homeowners and that will help us get more lithium don't help listing agents get more lifting they'll make listen I just want to stay here.
I think listen I, just want to come here.
Speaker Change: And we will lead the journey with other brokerages by the way.
Having inventory be an asset not just an.
Speaker Change: And input.
Got it very helpful and declining maybe just one quick follow up on 30% to 30 program.
I think last call. You said you guys are a little more than halfway there can you just talk about kind of a range of market shares within that group of 30 markets and then just should we be thinking about that 30% market share target.
Speaker Change: <unk> achieved.
Speaker Change: In 2006, but I just wanted to clarify if that's the average of 26 or exiting 'twenty six thanks.
Speaker Change: Yes, Thanks, Chris.
Speaker Change: Work backwards.
We believe it will work to get faster, but we believe that that rate is kind of exiting 'twenty.
Speaker Change: <unk> 2006, I think.
We are excited by the opportunity.
And I think when you look at it we're looking for an average across so as we sit here today, we're probably halfway to it we have a few markets that are at or over we have a lot of markets kind of in that.
High teens area and some markets that we just started going into as we went into a market downturn and so.
Speaker Change: We do believe.
Speaker Change: We kind of run the full gamut and our top 30 markets, but we can see the markets. We can see the the Tam and we are we are operationally aligning all of our prioritization in the recruiting team M&A.
Speaker Change: To make sure we achieve it so I do think we will get there exiting 'twenty six though to answer your question directly.
Got it very helpful. Thank you.
Speaker Change: Okay. Thank you Chris.
Speaker Change: And with that I will now turn the call back over to founder and CEO, Robert rocket to close us out Robert.
Robert Reffkin: Well. Thank you for joining the call today I just want to express my gratitude to all of our agents to all of our employees as well as all the shareholders. Your commitment to Congress has driven our success and outperformance in a difficult market and we've selectively put the company in a position to thrive as the market conditions improve.
With that thank you have a great rest of your day.
Thank you Robert and ladies and gentlemen that concludes today's call again. Thank you for joining and you may disconnect.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: [noise].