Compass Agents Could Get Lost

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Bears have long said that the technology-enabled real-estate brokerage, which has grown its agent network considerably over the past few years, lured top-performing agents with hefty commissions and equity ahead of its initial public offering earlier this year.

Compass maintains that its agent contracts are based on industry standards and that it hasn’t offered anything unusual. It also says that, while it offers its agents the ability to participate in an equity program, most of them don’t.

Something is working, though. In its IPO filing, Compass said its principal agent retention rate over the last three years was an industry leading 90%-plus. The company didn’t disclose a retention rate for the first quarter, but said it grew its count of principal agents—who are either leaders of agent teams or agents operating independently on its platform—by 20% year-over-year during the period.

Compass looks to be something of an outlier.

Redfin,

for example, said on its first-quarter conference call that it has had trouble retaining newly hired agents because the competitive housing market has made it difficult for them to win deals toward their first bonuses. Redfin said its annualized attrition rate in the first quarter was 53% among agents with less than 12 months of experience, noting retention issues for newly hired agents right now are “likely an industry-wide trend.”

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Perhaps the issue is circumstantial. Unlike some of its competitors, Redfin, whose agents are salaried, says it offers jobs, not contracts. At least some of Compass’s success retaining agents, then, could simply be because contracts for its newly hired agents have yet to expire.

Compass reportedly hasn’t been shy about offering enticing contracts or enforcing clawbacks—whereby financial incentives are recouped—when those contracts are breached. A Real Deal article from February detailed several instances when Compass’s clawbacks were especially severe. One agent estimated he would owe the company $400,000 if he left, according to the article.

Although Compass pitched itself as a technology company in its public offering, investors now seem soundly convinced otherwise. For agents, that is likely to make its equity less of an attraction. Compass’s stock has lost 34% of its market value from the opening price on its first day of trading on April 1. It now fetches an enterprise value to forward sales multiple of around 1.2 times, well below

Zillow’s

3.9 times, but still a premium to traditional brokerage platforms like

Realogy.

Of course, it is growing faster, too.

As of the end of the first quarter, Compass had a team of 850 people working as engineers and product specialists. With their help, its agents are ostensibly more productive. Compass agents sold homes in 21% fewer days on average last year relative to agents at firms with comparable average home sale values in the same cities, the company said. But it is still somewhat unclear whether that performance is the technology’s doing or the agents’.

Compass is known for recruiting especially high performing and seasoned talent and paying dearly to get it. Even though it grew revenue 56% to a whopping $3.7 billion last year, it still lost money. According to its IPO filing, the company paid more than 82% of its total revenue in commissions and other transaction-related expenses alone in 2020, growing those costs at a higher rate than its revenue.

Compass grew its principal agent base 28% on an annual basis last year, but nearly 152% in 2019. Given typical agent contracts last from one to three years, the risk of departing agents could become increasingly real over the next year now that the company has gone public.

With many expecting the scorching hot real-estate market to slow late this summer, investors can expect to get a better sense of what they have been valuing: talent or technology.

Write to Laura Forman at laura.forman@wsj.com

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