Is it possible Compass could run out of money? Some experts say yes, find out why.

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Is it possible Compass could run out of money? Some experts say yes, find out why.

Compass, which has burned through nearly $800 million over the last 18 months, should have enough cash to last the brokerage at least another year, industry observers predict. But that runway could shrink even more if the residential market slump continues.

How does a company burn through a Billion dollars so quickly? Who was approving all the money they spent? Let’s look at the recent past.

After a dismal second quarter in which Compass lost $101 million and said it was slashing its revenue projections by more than $1.5 billion, investors reacted by pushing its stock to a record low of $3.17 (as of Aug. 25), which sent its market cap down to $1.4 billion. The most recent news coming from Compass may even push its stack down even more.

Compass lost 30% of its cash since the start of 2022

Compass ended last year with nearly $620 million in cash and cash equivalents. Its cash reserves fell by $187 million, or about 30 percent, since the start of the year. Its commissions payable were $95 million at the end of the second quarter, up slightly from $92 million in the second quarter of 2021.

Analysts have noted that Compass’ cash reserves fell by $45 million in the second quarter of 2022.

How bloody is it going to get?

Partly due to rapidly rising mortgage rates, U.S. home sales fell for the sixth consecutive month in July, the longest period of consecutive drops in eight years, according to the National Association of Realtors, which tracks sales recorded on the Multiple Listing Service.

Compass has adjusted its projected revenues for the rest of this year and next. Its rosiest projection for the year is that revenues could hit $6.5 billion, down from its earlier projected high of $8 billion.

“Cash burn was higher in Q1 than last year, and higher in Q2 than last year; in a rapidly cooling market, the pressure is on for the rest of the year,” Mike DelPrete, a residential industry analyst and an investor in the brokerage rival Side, wrote in an August blog post.

No more cash incentives for Boston condo agents

The company no longer offers equity or cash incentives to new agents.

Some good news for Compass

The brokerage, which also has about $318 million in untapped credit from Barclays, does have more cash than its competitors – Elliman ended the second quarter with about $202 million in cash, for example, while Anywhere Real Estate (formerly Realogy) had $251 million in cash. But no other firm has burned through this much money so fast.

What about Compass’s touted technology platform?

Compass has said that it has invested a total of $900 million in its technology platform, which it believes gives it a significant moat against its rivals and serves as a powerful recruiting tool. Its rivals have continually challenged both that number and that narrative.

How are they going to recruit Boston real estate agents without cash incentives?

The plan to cut costs while continuing to recruit in a down market will be challenging. On top of eliminating incentives, the brokerage will carry out a second round of layoffs, and will likely close offices. It also plans to scale back on its technology investment; last week, The Real Deal reported that it had let go of its CTO, Joseph Sirosh, and made a round of layoffs in his department.

Compass and the bottom line

It’s not easy what they’ve got to do. The key question becomes if you cut costs, eliminate agent incentives, how to do that in such a way that we don’t impact the relationships with your agents? That’s not easy.

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