Unpaid commissions key ingredient in Compass’ cash-flow positivity

Compass reached its much-publicized goal of being cash flow positive by the end of the second quarter. But an analysis of its numbers shows that the brokerage’s path  to reach that milestone was not a straightforward one.

The company last week reported that it brought in $51 million more than it spent in the second quarter, which executives hailed as an important marker of its long term viability. 

“We said we would be free cash-flow positive in Q2,” said CEO Robert Reffkin during the earnings call. “We did it. We are very strong, and we are still investing in growth and the platform.”

While it’s true that Compass was cash-flow positive, the company’s liabilities for commissions payables jumped by $40 million last quarter, which it booked as positive cash flow on its statement. That’s allowed because it represents cash the company has on hand should it need it — but it’s money the company ultimately owes to its agents. 

The leap in unpaid commissions comes despite falling revenues, which in general would reduce associated liabilities. But at the end of the second quarter, Compass owed its agents $97 million, roughly $1 million more than the same time last year, even though revenues fell by 26 percent over that period. 

“The amount they’re sitting on in payables is too high considering the level of activity,” said Francine McKenna, a former lecturer of accounting at Wharton. “I look at that and say this is a cash conservation strategy.”

By comparison, Anywhere Real Estate, the parent company of Sotheby’s International Realty and Corcoran, owed its agents $47 million at the end of the quarter, up by $11 million from the previous quarter and an increase of just $3 million over its year-end figures, because it lowered its commission liabilities in the first quarter.

If you removed the commissions payable number from the equation, Compass would be $11 million in the black last quarter. Other contributing factors were a $9 million reduction in its lease expenditures, $1.4 million from its accounts payable and $2.7 million in cash from its non-current assets, a category which a Compass executive was unable to define. (Compass declined an on-the-record comment for this story.) 

The $97 million Compass owes to agents is due to deals closed at the very end of quarter the company couldn’t pay out, the executive claimed, either because it hadn’t yet received the money for the sale, or because there wasn’t enough time to process the commissions before the quarter’s end.

The executive said the company does not delay payments to agents. “We don’t do that, nor would we ever do that,” they said. “It would create massive risk and issues for our agents to do something like that. But also, it’s not something we need to do.”

The executive cited agent recruitment and the Fourth of July holiday as contributing factors to the jump in liabilities last quarter. They said that clawbacks and disputes over payments to former agents do not contribute to the liabilities.

“It’s just the random luck of the draw what the balance will be at any given point in time,” they said. “If you recall the balance today, it’s going to be different.”

Compass last year stopped giving new agents cash bonuses, but the firm still covers the difference in lost commissions from an agent’s previous brokerage in onboarding, the executive said. The brokerage last quarter had a net increase of 118 agents, down from 1,238 in the same period last year.

“Even though revenue’s coming down, we’re bringing on agents,” the executive said. “As we bring on more agents, you’re still getting commission payouts to them.”

More deals than normal closed in the last week of June — the final week of the second quarter — because agents and clients scrambled to close before the holiday, according to the executive, thereby increasing the amount of outstanding commissions at the end of the quarter.

The brokerage in January put its headquarters up for sublease,, driving the $9 million decrease in lease obligations reported in earnings. Filings show Compass incurred nearly $16 million in costs associated with its overall office restructuring last quarter. 

The executive said there would be no new closures.

“We’re not doing anything different there than what we’ve indicated already,” they said. “We have no plans to reduce additional agent offices, if we haven’t already indicated in a market that we will.”

Clarification: This article was updated to reflect that McKenna is a former lecturer at Wharton.

Read more

National

Resi brokerages claw their way out of slow market

National

Two years into going public, Compass still has issues with its books

National

Compass' new CFO on the path ahead