Rocket Companies, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Comparisons are with the three months ended March 31, 2021, unless stated otherwise. Rocket is a technology-enabled mortgage, real estate and financial-services company, with Direct to Consumer and Partner Network reportable segments. Holdings is consolidated, and most earnings are attributable to non-controlling owners.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue, net | $2.671 billion | $4.539 billion |
| Income before taxes | $1.062 billion | $2.843 billion |
| Consolidated net income | $1.037 billion | $2.777 billion |
| Net income attributable to Rocket Companies | $53.7 million | $123.7 million |
| Adjusted EBITDA (non-GAAP) | $450.1 million | $2.452 billion |
| Adjusted revenue (non-GAAP) | $1.931 billion | $4.040 billion |
| Adjusted net income (non-GAAP) | $293.4 million | $1.805 billion |
| Class A EPS | $0.44 basic; $0.40 diluted | $1.07 basic and diluted |
- Closed mortgage originations were $54.0 billion, down 47.9%; gain-on-sale margin declined to 3.01% from 3.74%.
- Gain on sale of loans, net fell 58.2% to $1.484 billion. Loan servicing income rose 66.5% to $820.6 million, including a $454.4 million increase in MSR fair value. Other income fell 31.9% to $317.4 million, principally reflecting lower title-related revenue.
- Total expenses declined 5.2% to $1.608 billion. The filing attributes the reduction chiefly to lower title-related and payoff-interest expenses.
- Operating cash flow was $8.772 billion, compared with $6.274 billion. Cash flow reflects large loan-originations and loan-sale movements and should not be read as recurring free cash flow. Investing cash flow was positive $218.7 million; financing cash outflow was $8.816 billion, including debt repayments and distributions.
- At March 31, cash and cash equivalents were $2.311 billion and restricted cash was $77.0 million. The company reported $8.701 billion of equity and $16.547 billion of liabilities.
- Funding facilities totaled $6.470 billion outstanding; senior notes, net, were $4.024 billion; and the early-buyout facility was $1.698 billion. The company reported $22.2 billion of unused capacity across its facilities. It also described $2.1 billion of discretionary self-funded loans and $4.4 billion of available cash, including those self-funded amounts.
- The company paid a $1.01-per-share special dividend in March. It repurchased 8.0 million Class A shares for $100.2 million during the quarter.
Changes versus the prior-year quarter
- Revenue decreased 41.2%, and consolidated net income declined 62.7%. Management linked weaker results primarily to lower origination volume and margin compression as the primary-secondary mortgage-rate spread tightened.
- Direct to Consumer contribution margin decreased to $626.5 million from $2.205 billion; Partner Network contribution margin decreased to $171.7 million from $542.7 million.
- The servicing portfolio grew: total serviced unpaid principal balance, including subserviced loans, was $545.8 billion versus $467.0 billion. MSR fair value rose to $6.410 billion from $4.305 billion, supported in part by lower prepayment assumptions amid rising mortgage rates.
- Servicing delinquency rates were 1.31% for loans 60-plus days past due, or 0.84% excluding COVID-19 forbearance loans. The comparable reported rates were 3.21% and 0.72%, respectively; the filing’s presented measures distinguish the total rate from the rate excluding forbearance.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or origination guidance. Management describes a rapidly changing mortgage market; results remain sensitive to mortgage rates, loan volume, gain-on-sale margins, prepayment behavior and MSR valuations.
- After quarter-end, Rocket began voluntary transition programs for eligible employees. It expects approximately $50–$60 million of non-recurring charges and cash payments, predominantly recognized in Q2 2022.
- MSRs are Level 3 fair-value assets based on assumptions including prepayment speeds and discount rates. The filing estimates that an adverse 100-basis-point discount-rate change would reduce MSR value by $281.5 million; a 10% adverse prepayment-speed change would reduce it by $218.4 million. These are sensitivities, not forecasts.
- The company reported compliance with borrowing covenants and applicable minimum net-worth requirements at March 31. It cautions that margin calls, delays or failures in selling loans, covenant breaches, or cross-default provisions could adversely affect liquidity. Several funding-facility terms were amended after quarter-end.
- Legal and administrative proceedings are routine in the company’s regulated businesses. Management does not expect current matters to have a material adverse effect, but outcomes are uncertain; the company reported $15 million in reserves for potential legal damages.
- The $1.01 special dividend’s final tax characterization may differ from expectations. The company also has a Tax Receivable Agreement requiring generally 90% of applicable realized or deemed tax savings to be paid to LLC members.
Investor verification priorities
- Reconcile GAAP results with non-GAAP measures, including the company’s revised Adjusted EBITDA and Adjusted Net Income definitions and their exclusions.
- Assess whether loan-volume and margin declines persist, and how much reported earnings depend on non-cash MSR fair-value changes and hedge performance.
- Review liquidity available after self-funding, facility amendments, margin-call exposure, and the timing of loan sales and repayments.
- Track the servicing portfolio’s delinquency and prepayment assumptions, and the sensitivity of MSR valuations to rate changes.
- Verify the timing and actual cost of the voluntary transition programs, legal contingencies, dividend tax treatment, and ongoing share repurchases.