SoftBank-backed Compass rose in its Wall Street debut, shaking off earlier signs of investor caution about the brokerage’s ambitions to disrupt real estate sales after raising less than expected from its initial public offering.
Shares for the New York-based company closed their first trading day at $20.15 on Thursday, up 12 per cent from the $18 mark at which the brokerage priced shares the previous evening. Compass raised $450m in its IPO, only about half of what it had anticipated.
On Wednesday, the company had reduced the number of shares it planned to sell by almost a third and slashed the top of its price range by more than a quarter.
The shares’ closing price on their first trading day gave Compass a market capitalisation of $7.8bn, an increase from its last private valuation of $6.5bn two years ago.
“I feel great about the outcome,” said Robert Reffkin, chief executive of Compass. “The goal was not to have a certain price or a certain valuation, it was to have a capital raise that would bring dollars into the company.”
Compass tries to differentiate itself from other real estate brokers through a digital marketing and analytics platform for its agents, which has helped catapult the company’s valuation into a range typically reserved for large tech start-ups. The company had more than 19,000 agents on its platform at the end of last year and claims 4 per cent of the US homebuying market.
Unlike other real estate tech companies, such as Opendoor, which charges a service fee for buying and flipping homes, Compass has a more traditional business model, taking a cut of the commission when an agent sells a house.
Compass’s revenues increased 56 per cent to $3.7bn last year, while its net losses narrowed to $270m, from $388m in 2019.
The company’s public debut comes amid a boom in the US housing market as Americans trade in city apartments for suburban homes as a result of the pandemic. Average home prices rose at their fastest rate since 2006 in January, according to S&P Corelogic Case-Shiller indices, a measure of US home prices.
Flush with $1.5bn in venture capital funds raised before its IPO, Compass has been able to build out its agent base rapidly, in part by acquiring several independent brokerages.
Other brokers have accused the company of using its cash to poach agents with extravagant compensation packages. Some who joined Compass later complained that these early compensation packages created a misleading appearance about what they would earn.
Compass said in a prospectus that its retention rate among “principal agents” — team leaders or independent agents who together made up about half of its total contractor base — exceeded 90 per cent in the past three years. But analysts have warned that competitors with better deals could lure them away.
“Real estate agents, they’re independent contractors, they’re entrepreneurs,” said Mike DelPrete, an independent real estate tech adviser. “The moment Compass becomes less lucrative to agents, there’s a big retention problem.”
Reffkin will retain almost half of the company’s voting power after the offering through his ownership of class C shares, which carry 20 votes each. As Reffkin’s compensation package vests over time, he is set to gain majority control of the company.
SoftBank’s Vision Fund owned 36.7 per cent of the company’s class A shares, giving it a $2.3bn stake at the offering price.
Goldman Sachs, Morgan Stanley and Barclays led the Compass public offering.