Compass, Inc. (COMP) Q4 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Compass Inc. Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It's now my pleasure to turn today's call over to Mr. Richard Simonelli, Vice President of Investor Relations. Sir, please go ahead.

Thank you, operator. We appreciate it. Good afternoon, and thank you for joining the Compass fourth quarter and full year 2022 earnings call. Joining us today will be Robert Reffkin, our Founder and Chief Executive Officer; and Greg Hart, our Chief Operating Officer; and Kalani Reelitz, our Chief Financial Officer. In discussing our company's performance, we will refer to some non-GAAP measures, and you can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our fourth quarter and full year 2022 earnings release. A case of free cash flow in the presentation each posted on our Investor Relations website. We will make forward-looking statements that are based on our current expectations, forecasts and assumptions that involve risks and uncertainties. These statements include our guidance for the first quarter 2023 and comments related to our operating expenses. 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 on our most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC and available also on our Investor Relations website. You should not place any undue reliance on any forward-looking statements. All information in this presentation is as of today's date, February 28, 2023, and we expressly disclaim any obligations to update this information. I'll now turn the call over to Robert Reffkin. Robert?

Thank you for joining us today for our fourth quarter and full year results conference call. I want to start by thanking the entire Compass team of employees and agents. Their incredible dedication in these difficult times allows us to go into 2023 and beyond with the confidence that we have a strong foundation for future success. 2022 was a very difficult year in residential real estate, with the industry seeing one of the sharpest declines in transaction volume in decades. I am pleased to report that Compass revenue for 2022 was just over $6 billion, down 6% compared to 2021, which was our best revenue year ever and the best year in the industry on a volume basis. This is a major accomplishment when you consider transactions declined industry-wide 18% year-over-year. The 2022 industry decline in units was as bad as the Great Financial Crisis when the number of units fell by 18% year-over-year from 2007 to 2008. While 2022 was a tough year for the housing market, particularly in the fourth quarter, we responded to the challenging market conditions by taking the initiative to reset our cost base. We took decisive steps throughout 2022 to reduce expenses and drive operating efficiencies in the business with a very specific goal to become free cash flow positive for 2023, starting with being free cash flow positive in the second quarter of 2023. As the market deteriorate fast, we moved quickly to respond and initiated cost-cutting actions that reduced our non-GAAP operating expenses by $338 million, which is 23% less on an annualized basis from the second quarter of 2022 to the fourth quarter of 2022. We shared on our third quarter call that we intend to develop and implement a plan to further reduce our non-GAAP operating expenses to a range of $850 million to $950 million. As we reported in early January, we believe our actions make it possible to achieve below the middle of the $850 million to $950 million range of annualized operating expenses by the fourth quarter of 2023. As a result of investments in prior years, even at this reduced level of operating expenses, we continue to invest in growth and technology to further strengthen the company during this downturn in the market. We are seeing industry forecasts for negative volume of 22.6% from Fannie Mae, negative 18.6% from MBA and negative 12.6% from NAR. We expect to achieve our goal of being free cash flow positive in 2023 at each of these levels. We are confident that this is the right level of non-GAAP operating expenses. However, as we have demonstrated throughout 2022 and into 2023, we are prepared to move swiftly to implement additional cost cuts if the markets turn out to be worse than expected. Our employees have worked incredibly hard to reset our cost base over the last 12 months. We believe it's the right cost base, and we are committed to maintain our OpEx levels even if and when the market goes up. We continue to differentiate ourselves through our technology platform. It is an asset for Compass because it helps us attract and retain agents and helps make them more productive. It also gives us the ability to attach other services, which will further monetize the platform. Greg will share with you later that we are doing – what we are doing with title and escrow platform integration in Southern California. In 2022, our agents continue to demonstrate they are the best in the industry and are using the technology platform more and more over time. The value of the technology platform is the most common reason they tell us they come to Compass and the most common reason they tell us they stay at Compass. We are clearly not out of the woods as in the industry. 2023 is still filled with a lot of uncertainty and choppiness resulting from an unpredictable macroeconomic environment. While we have seen some positive signings with more foot traffic at open houses and return on multiple offers, inventory remains low and mortgage rates have continued to rise over the last few weeks. With so much uncertainty, no one can accurately predict what will happen with revenue this year. As a result, today, we are only providing non-GAAP operating expense guidance for the full year 2023. We are going to continue to be laser-focused on what we can control and remain diligent in our desire to achieve positive free cash flow in 2023. I remain incredibly excited about the future of Compass for our agents, for our employees and for shareholders. I'll now turn it over to Greg.

Thank you, Robert. The challenging economic headwinds facing the residential real estate industry grew stronger in the fourth quarter of 2022. But as Compass has done throughout our history, our core business has continued to outperform the industry based on our ability to continue to add agents, improve our technology advantage and maintain our industry-leading principal agent retention of over 90%. The good news is that with our expense reductions taking hold, we are operating the business more efficiently today, and we'll continue to drive further efficiencies as part of our everyday go-forward strategy. We believe we can accomplish this while still maintaining our highly capable technology and agent recruiting teams to further grow our business and build upon our technology advantage versus the competition. After a great 2021, unfortunately and unexpectedly, 2022 turned out to be the worst year for residential brokerages in decades as aggressive Fed actions drove mortgage rates from an all-time low of about 3% to a 20-year high in excess of 7% in a matter of months, bringing transaction activity down sharply. As a result, we had to bring our cost structure in line with reduced top line revenue, making 2022 a challenging year from a personnel standpoint. When the revenue growth that we and the rest of the industry expected for 2022 did not materialize, we had to make the difficult decision to reduce headcount, taking actions in June, September and at the beginning of January of this year. Kalani will talk about the impact of these reductions on our operating expenses a bit later. Turning to our agent growth strategy. Before 2022, we grew our agent base rapidly through acquisitions, and by hiring the top agents in new markets with cash and stock sign-on bonuses. This strategy was successful as Compass built the number one independent brokerage and sales volume in less than 10 years. We created a strong network and excellent brand and now have an agent roster that features 18% of the top 1,000 agents in the industry. Over the years, our use of incentives as an agent recruiting tool has decreased. And now that we achieved scale in the business, our agent acquisition strategy has evolved further. When we became apparent early in 2022 that revenue growth could be challenged, we paused our expansion into new markets and also halted all M&A activity. As the year progressed, we eliminated cash and stock agent sign-on bonuses of any kind, driving a more profitable approach to growth. We always intended to move deeper into our existing markets by attracting the agents in the top 50% in those markets. This would allow us to evolve the mix of agents over time to improve our gross margins. The market conditions of 2022 accelerated that move. Since August, we have been successful in attracting more than 1,000 agents who have come to Compass without cash or stock sign-on bonuses. To put this in perspective, the number of agents in the industry is now contracting according to NAR, and some of our competitors are reporting that they're leaving agents. Competition for agents is fierce with some of our competitors still willing to pay large incentives to attract agents. Yet we also see that in the midst of these difficult economic times, maybe agents are delaying these to new agencies. In Q4 of 2022 in the midst of a very difficult quarter for the industry, our average number of principal agents increased by 112 principal agents. Our average number of principal agents increased to 13,426, representing a 10% growth year-over-year in the fourth quarter. For the full year, we grew our average number of principal agents by 18% compared to 2021. Our technology platform is a differentiator in our agents' ability to run their business and in our ability to attract agents. We continue to invest in our platform and believe this strategy will continue to deliver competitive advantage for Compass. Our priorities for 2023 include improved team functionality, the integration of title and escrow into the platform, which has been launched in beta in Southern California. We also plan to continue to improve popular features like agent search and Compass collections. And last, but not least, our client dashboard, which will give consumers an excellent platform for them to interact with their Compass agents. Our technology continues to make our agents more productive. We know that the agents who use the platform the most have greater success. The top quartile of teams by title one platform now account for 63% of our transactions, and these teams have an annualized retention rate of 99%. Keep in mind that retention rate accounts for every principal agent, including those that retire or leave the industry altogether. In spite of lower transaction volume for the industry in 2022, on a full year basis, we processed more than 211,000 transactions, which represents a decline of 6% year-over-year. However, this was 3x better than the industry, which saw transactions down nearly 18% for the full year as reported by NAR. On a per agent basis, for the full year, Compass agents had an average of 16.2 transactions per principal agent versus 6.4 per agent for the industry. In the fourth quarter, we processed more than 42,000 transactions, a decline of 25% from a year ago, which compares favorably to the 34% decline in transactions for the entire residential real estate market in the fourth quarter as reported by NAR. In the fourth quarter of 2022, Compass agents averaged 3.2 transactions per principal agent, which outdistanced the industry average of 1.3. While the entire industry saw a decline in transactions and value in 2022, we maintained our market share. Our market share for the full year remained steady at 4.6% on a trailing 12-month basis as it has for all of 2022. We grew the average number of principal agents 18% year-over-year in 2022, and our principal agent retention for Q4 2022 was 98%, which is consistent with both Q3 2022 and Q4 2021. Recently, we rolled out the integration of title and escrow into our technology platform for a beta group of agents in Southern California. We are creating a low friction way for our agents to offer these services to an existing brokerage transaction, increasing the attach rate of adjacent services. Anecdotally, agents are positively commenting on how easy it is to use this feature. We will be sharing more on this as we get more data. As part of our ongoing focus on reducing our operating expenses, we're going to continue to harness low-cost labor as well as technology. We are working with Genpact, a leading business process outsourcing provider to help us tap into a global pool of lower-cost talent. We believe there is potential for lowering our operating expenses even more using offshore talent. I'm proud of the team and excited for our future. We have taken major strides in the transformation of Compass while operating in an unprecedented market environment. I will now turn it over to our CFO, Kalani Reelitz.

Thanks, Greg. And hello, to everyone joining us on the call. I'm going to review our fourth quarter financial results in more detail, and then I'll provide an update on our guidance expectations for the first quarter. Before getting into the numbers, I want to quickly say that it passed the three-month market Compass, and I could not be more excited about the future of Compass. What I have seen early on is that we have a truly differentiated technology offering that enables our world-class agents to be the very best they can be. In the midst of this historical low housing market, we are controlling what we can control, namely our cost base and our ability to attract and retain our best agents. We have already implemented an action on plans that we expect by the end of 2023 will have reduced our run rate expenses by as much as $550 million from the second quarter of 2022. We believe we have put Compass in a position that in a normalized revenue setting can deliver profitability and free cash flow when the market returns. In other words, the math works. Turning to our financial results, fourth quarter revenue was $1.11 billion, coming in below our revenue guidance range of $1.15 billion to $1.13 billion. As a result of lower transactions seen industry-wide, this compares to $1.61 billion of revenue in the prior year period, representing a 31% reduction year-over-year. Gross transaction value was $42.5 billion in the fourth quarter, a decline of 34% from a year ago, reflecting a 25% reduction in total transactions as well as a decrease in average selling price of about 12%. Our non-GAAP commission expense as a percent of revenue increased by approximately 20 basis points from Q4 of last year to 80.9%. Consistent with what we discussed in our past few analyst calls, the year-over-year increase was driven primarily by the reduced participation in the 2022 agent equity program relative to 2021. Excluding the impact of reduced program participation, we saw a 56 basis point improvement year-over-year in the core business. Page 19 of the Q4 investor deck includes additional details on the agent equity programs impact on the commission line. As a reminder, 2022 was the last year we offered the agent equity program. Our adjusted EBITDA for the fourth quarter was a loss of $75.3 million, which was within our $50 million to $80 million guidance range we provided in November. We were able to reduce expenses more quickly than originally planned, which partially offset the shortfall in revenue and allowed us to stay within our guidance range for adjusted EBITDA. Our total non-GAAP operating expenses, excluding commissions, were $282 million for the fourth quarter. As we talked about previously, many of our noncommission-based operating expenses are somewhat fixed in nature and have historically increased sequentially from quarter-to-quarter as opposed to varying in line with revenue. However, due to our cost reduction initiatives implemented since Q2, the $282 million of OpEx for the fourth quarter reflects an $85 million reduction from the second quarter of this year. We continue to implement our expense reduction actions. And last month, we announced an additional reduction in force as part of these continuing cost efforts. We expect to achieve a range of non-GAAP operating expense of $850 million to $950 million in 2023. At the midpoint, the range reflects an annualized reduction of $565 million from the expenses we incurred in Q2 of 2022, which reflects a percentage decrease approaching 40%. As a reference point, the non-GAAP operating expenses, we refer to include the expense categories of sales and marketing, operations and support, research and development, and G&A and excludes stock-based compensation expense and other expenses that are excluded from adjusted EBITDA. We've included tables on Page 16 and 17 in our Q4 investor deck that reconcile these amounts. Our GAAP net loss for the quarter was $158 million compared to a loss of $175 million in the same period a year ago. Included in the GAAP net loss for the quarter are noncash charges, which includes $61 million of non-cash, stock-based compensation expense and $21 million of depreciation and amortization expense. Consistent with prior quarters, included in the press release issued today is a schedule that reconciles GAAP net loss to adjusted EBITDA. Free cash flow during the fourth quarter was negative $131 million, which was higher than prior year due to the higher adjusted EBITDA loss as well as approximately $18 million of severance payments related to our reduction in force and $10.5 million from litigation settlements announced last quarter. We had $362 million of cash and cash equivalents on our balance sheet at the end of December. During the fourth quarter, we drew down $150 million from our revolving credit facility. We did this out of an abundance of caution given the unprecedented market conditions we saw in the second half of 2022 and the continued unknowns ahead of the industry. We have not utilized the revolver to fund our operations, and under current market assumptions, we do not expect to use revolver to fund our operations. Importantly, we've invested the proceeds into a treasury bill to minimize the interest cost which is less than 2% on a net basis and therefore, an inexpensive form of capital. We expect to return these funds once we have generated sufficient free cash flow. Now turning to our financial guidance, we continue to see mixed signals in the market. And while some trends have improved, we've also seen additional pressure in key metrics over the last few weeks that we are monitoring. For Q1 of 2023, we expect revenue in the range of $850 million to $950 million, and adjusted EBITDA of negative $90 million to negative $70 million. We expect transaction volumes to be down at least 30% in Q1. We do expect the revenue lift from the impact of net new agent additions over the last year. However, we anticipate this will be offset by mix drag, particularly from California, which is our largest market and experienced record sales in Q1 of last year. As Robert stated earlier, given the uncertain market conditions, we are not providing full year guidance or full year adjusted EBITDA guidance for 2023. However, we are reaffirming our expectations for our full year non-GAAP operating expenses to be in the range of $850 million to $950 million. We expect to be at the high end of this range on an annualized basis by the second quarter and at the midpoint of this range by year-end. Through our continued focus on expense reduction initiatives, we expect to be free cash flow positive for the full year 2023, starting with being free cash flow positive in the second quarter of 2023. The entire management team remains committed to managing the operating expense of this business through the current challenging macroeconomic environment and beyond. For the past three quarters, we've demonstrated that commitment through actions taken and results achieved. I would now like to turn the call back over to the operator to begin our Q&A.

[Operator Instructions] Your first question comes from the line of Jason Holstein with Oppenheimer. Your line is open.

Thanks for taking the questions. So first, do you think there is an impact on margins related to agent productivity? Obviously, we're going through a period of time where agent productivity is kind of well below obviously, record levels but probably even below normal periods. And just how do you think about agent productivity on margins given that obviously the bulk of their compensation is variable? And then second, just can you give us an update on the percent of transactions that are using online closing? And as it becomes more widely used, how you think it transforms the business? Thank you.

Yes, I'll start with the first question, and I'll let Kalani answer the second, again, historically, as agent productivity declines, margins actually increase because the way the agents are compensated or the way that the split is determined between company and agent is based off of their prior year income, their gross commission income. And last year was a more normalized year relative to 2021. And so the economic relation between brokerage firms and agents in 2022 was based off of a record year of agent performance in 2021, which led to for the industry record splits in the favor of the agent. All that normalizes as productivity normalizes. But Kalani, how about you take the second part of the question.

Yes. I would just reiterate, Robert, what you said. What impacts our margin is really the mix of agents. And as we saw this year, 2022 was impacted by record years 2021. We expect that to reset a bit in 2023 as we look at 2022 volumes.

I guess I was asking more on the product side. So the online closing is a relatively new feature that you rolled out for the software platform. I'm just curious kind of how widely it's being used by agents and just how you think that – the impact of the business that, that can have as it becomes worldwide used? Thanks.

Yes, sure. This is Greg. Thanks for the question, Jason. That feature rolled out over the course of last year, culminating in the rollout in California. In Q3 of last year, it's used by the vast majority of our agents. It is also unique in the industry. That set of functionality enables an agent to literally go from first contact to close all within the platform, and we believe that's a massive differentiator for us, and we've heard very positive feedback from our agents on it. And we will look to continue to improve while facing feedback as well.

Thank you.

Your next question is from the line of Bernie McTernan with Needham & Company. Your line is open.

Great, thank you for taking the questions. To start, I would love just to get a sense in terms of how you guys are thinking about agent additions in 2023. We saw the average agent count for principal agents was up about 100,000 from 3Q to 4Q. Is that the right way to think about quarterly ads in 2023?

Yes, Bernie, thank you for the question. We haven't historically given forward-looking forecasts for principal agents, and we don't intend to start doing that, particularly given the market conditions we mentioned on the scripted portion of the call that nor has seen the total number of agents in the industry decline from 1.6 million to 1.5 million, I believe. And so in light of that, I don't think that would be the appropriate time to start giving out forward-looking forecasts for principal agents.

Understood. Maybe to ask a question in a different way. Just in terms of the – even if there's a seasonality or cyclicality for agents, how you would expect agent count in the industry or your own on the gross add side maybe ramp up with industry growth? I'm just trying to get a sense in terms of what's the leading indicator that we should be looking at for? Is it industry growth or is it agent growth?

I think regardless of the industry, we intend to be a net grower of agent count quarter-over-quarter. But beyond that – that's the guidance we would share.

Yes. No, that's fair. And then just lastly, you guys are highlighting free cash flow positive. Does that mean EBITDA positive to for this year? And what are the moving pieces that we should be thinking about between those two line items?

Yes, thanks, Bernie. It's Kalani. Look, I think, our main focus, obviously is free cash flow positive, EBITDA will track in line with that for the most part. So there are some other cash items that we fall outside of the EBITDA. But I would say, in general, we'll track EBITDA and free cash flow. So those are expected to be in line for the most part historically.

Understood, thank you.

Your next question is from the line of Ryan McKeveny with Zelman & Associates. Your line is open.

Hey, thank you very much. One on the expense side of things, so obviously, you have confidence in the targets that you've put out there. As we think about movement over time potentially from kind of the high-end of that OpEx range towards the lower-end of that range; can you talk to us about like what expense categories those could be? Has the – effectively the heavy lifting already been implemented, but once that's the case, like what becomes the incremental driver? Is it related to the office footprint itself? Is it anything related to like technology? Or is it more support operations? Just trying to qualitatively think through if we wanted to think about the progress over time toward the lower end of that range, which categories we should be thinking about? Thank you.

Yes. Thanks for the question, Ryan. As we mentioned, the heavy lifting is behind us. But we have ongoing vendor management opportunities. Like you mentioned, there's some occupancy opportunities. There are some opportunities in low-cost labor, but the heavy lifting is definitely behind us.

Okay. Perfect. And I think the idea of franchising has been floated a bit in the past as maybe a longer-term opportunity. Anything you can share in terms of how you're thinking about geographic expansion going forward, obviously with the context of it being paused today in the macro being what it is. But do you think over the longer term, incremental expansion from here could be through a different form than what it's been in the past, maybe through franchising or licensing in some way, again as we think about maybe the longer-term opportunity for geographic expansion?

Yes. At a high level, we're focused on profitable growth and profitable growth means still expanding in our current markets, but it's – given the infrastructure is already set up, it's profitable particularly as we are now hiring agents without the financial incentives that we used in the past. But when it comes to new markets, instead of having to hire a bunch of people and build out an office space in advance of having the revenue to cover it. Like you mentioned franchising is definitely a more profitable way to grow. So that is something that we are exploring and as a lot of the OpEx work is now getting to a point where the heavy lifting is behind us, we will be putting more focus on franchising. But it's important to keep in mind that we would not do that in a way where we impair the experience for our existing agents in any way. And so as an example of something that we would not do is we would not franchise within the same geographies of our owned operations.

Got it. That's very helpful. Thank you, Robert.

Your next question is from the line of Lloyd Walmsley with UBS. Your line is open.

Thanks. Two questions, if I can. Just first kind of looking, trying to do some math on the back end of period end principal agents from the disclosure, which is based on average. It looks like you might not add many from period end 3Q to period end 4Q. Is that right? And I guess just more broadly in recognizing that you're not providing formal guidance on the principal agent growth. Can you just talk about how conversations are going with prospects about joining? Do you feel like you're getting a good reception even ex kind of the special incentives you've provided in the past? And then the second one, maybe for Kalani, you've now been in the business for a few months. You've had a lot of historical experience focusing on efficiencies. Are there any kind of new areas where you see potential to further reduce that kind of non-commission OpEx base or just generally improve efficiency in the business? Thanks.

So on the first question, I'll just start and then I’ll pass on to Greg. Look, I think in the conversations we've had in the past, I think there was a question of agents come to Compass for the platform and its ability to help them grow their business, and reduce their time and expenses on third-party software, third-party people. I think now that we've hired 1,000 agents without – signing bonuses without equity, I think it's a clear statement to the market why else would they come, right? They're coming because they believe when they meet with a strategic growth manager and agent recruiter. They believe him that hour – two-hour conversation that Compass the platform will help them grow their business. Otherwise, they would just stay where they are. So we're really happy to see that as a proof point for the market and to kind of eliminate the question of would people come otherwise. But with that, I'll pass on to Greg for the first question. Greg. I'm not sure if we hear you.

Apologies for that, Robert. Just building on what Robert was saying with, we've always believed and continue to believe in the value of the platform for our agents. However in a booming market it's easy for any agent to sell a house quickly without the benefit of the platform. In a down market, it's much harder. Agents need every advantage they can possibly get and the platform provides that for agents. It helps them save time. It helps them save money. It helps them reduce their costs on other things they might spend whether that's third-party technology or assistance, et cetera. And so we actually think the platform provides even more benefit to our agents in the current market conditions. In terms of the specifics of your question, we don't break out beginning and data, but we did grow our agents from Q3 to Q4 sequentially. And I'll pass it to Kalani, I think for the same part of your question.

Sure. Yes. Thanks for the question. I guess I'd start actually by just acknowledging that we've done and our teams have done a ton of work to the last nine months to really drive up to $550 million of really hard status quo cost. I think as we look at what's next, I think we move to opportunities to continue to drive operating leverage. I think we've talked about some of those. I think we look at the low-cost labor and that operating model there to continue to drive leverage. I think we'll continue to look at our footprint and make sure we understand exactly how we can make that footprint as productive as possible. And then I do think we still have continued leverage with our vendor spend, looking at what's needed, learning from what's really the value of vendors. And then the last thing I'd say, and it kind of goes to the last question with Robert is, I think we need to continue to look at leveraging our platform. So we've done an incredible job building out our platform, both our technology and also in markets. And it's also we're going to get operating leverage by driving really high-margin growth. We talked about potentially looking at the franchise or licensing. We also – I would be remiss if I didn't push kind of our attach with T&A [ph] mortgage. There's tons of opportunity to really drive high-margin business, and I think that's the third maybe part of our operating leverage opportunity.

Okay. Thank you.

[Operator Instructions] Your next question is from Matthew Bouley with Barclays. Your line is open.

Hey. Good evening everyone. Thanks for taking the question. Maybe just one on kind of the overall market; I know you mentioned seeing some trends improved begin this year. I think we've seen some of that in the overall housing data. Just curious if you can kind of elaborate a little, what are you seeing in your markets? Obviously, you mentioned rates have moved up the past couple of weeks. I don't know how much detail you want to get on a week-by-week basis, but kind of anything you can kind of give us around how this market is evolving year-to-date would be helpful? Thank you.

Yes. Yes. And so look at a market, there – it's still challenging. There are good signs and there are bad signs. I would say, relative to the last nine months, the ratio of good signs to a bad science is better than it has ever been. We have an early spring market, multiple offers, more foot traffic at open houses. On balance, it's clear that across the vast majority of our markets, there are more buyers than sellers. On the buy side, mortgage rates have increased from six; it went from 6.4 down to 6 which was great. They have now moved up almost 100 basis points since as you mentioned in the last couple of weeks. But it's clear that buyers are accepting these rates as a new normal. And the current almost 7% merge rate has not slowed down the in-contract volume, so the real market, and so we feel good about that. In terms of the sell side, there are 85% of homeowners have mortgage rates below 5%. And in many cases, they're considering their mortgage rate as a financial asset. And so yes, that is definitely contributing to a holdback of inventory. And I think if there's an issue this year, it's not going to be about as long as mortgage rates are below 7%, we grew about 8%, even I don't think buyers are going to be holding back the industry. It's going to be more of the sellers. And that said, we still – people have to move. Owners of homes have to sell them. You can only hold back life events for so long. People get married, they have a kid, they, God – you never wishes on anyone, but people pass away and they get divorced, and so they have to move. And so inventory is still coming through even in this environment. And on the price side, I think last quarter a lot of people were estimating that prices were going to go down dramatically. The market has not seen that because there's such a lot of inventory. And as an example, in December, which was to date at least it was the bottom of the in-contract listing market, and so contracts went down 40% year-over-year. Even in that environment, prices were up 6% versus the prior year. And I think that's also contributing to buyers realizing there's more risk that prices could go up than go down. And that's bringing more buyers back into this market because they don't want to miss prices where they are.

Got it. Super helpful there, Robert, that's a great overview of what's happening today. Second one, just another one on the commission expense. We saw your competitor the other day speak to some mix pressure towards the sort of higher split, higher productive agents ahead. Are you guys expecting something similar? Do you kind of not have that because maybe you don't have the lower split agents to begin with, kind of given where you are in the life cycle? How are you thinking about that this year?

Yes. I think you highlight part of the story. I think some of our competitors only have tailwinds or headwinds from that perspective while we have combinations and tailwinds and headwinds on more tailwinds. On the tailwind side, people that came in with splits that were part of the incentive, those normalize to policy. And then secondly, as you mentioned we're now hiring not just top 5% agents, the top 50% agents. We're not hiring unproductive, I'd say, bottom 50% agents. But the top 50%, if you do the full category, there's – the weighted average split, there's much more benefit to the company amount.

Got it. Alright. Thank you, Robert. Good luck everyone.

Thank you.

There are no further questions at this time. I will now turn the call back to the CEO, Mr. Robert Reffkin.

So I just want to say again, thank you, everyone for joining today's call. But I also want to give a specific thank you to all of the Compass employees and agents that worked so hard in 2022 to help navigate this company through a truly historic time, and your hard work does not go unnoticed. We appreciate everything that you have done and continue to do. Thank you.

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.