Rocket Companies, Inc. annual report, FY2021

Rocket Companies, Inc. — FY2021 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2021. This filing is an annual report; it does not provide a separate Q4 income statement or Q4 operating results. Rocket Companies is a technology-enabled mortgage, real estate and financial-services holding company, with Direct to Consumer and Partner Network reportable segments. Its consolidated results include substantial non-controlling interests held by RHI and Dan Gilbert.

Financial performance and key metrics

Metric	FY2021	FY2020	Change
Total revenue, net	$12.91 billion	$15.65 billion	Down 17.5%
Consolidated net income	$6.07 billion	$9.40 billion	Down 35.4%
Net income attributable to Rocket Companies	$308.2 million	$198.0 million	Up 55.7%
Adjusted EBITDA (non-GAAP)	$6.18 billion	$11.22 billion	Down 44.9%
Adjusted net income (non-GAAP)	$4.50 billion	$8.27 billion	Down 45.5%
Operating cash flow	$7.74 billion	$(1.68) billion	Improved

• Mortgage production: Originations were $351.2 billion, up 9.7% from $320.2 billion. Reported market share rose to 8.8% from 7.8%. Gain-on-sale margin fell to 3.13% from 4.46%, reflecting primary-secondary spread compression and a higher Partner Network mix.
• Revenue and earnings drivers: Gain on sale of loans, net decreased 30.5% to $10.47 billion. Servicing income, net, was $636.5 million versus a $1.31 billion loss in 2020, largely because MSR fair-value movements were less adverse. Other income declined 8.9% to $1.64 billion, primarily due to lower Rocket Loans revenue from pandemic-related SBA loan-processing activity.
• Margins: Adjusted EBITDA was about 47.9% of revenue, versus 71.7% in 2020. Consolidated net income was about 47.0% of revenue; this figure includes earnings attributable to non-controlling owners. Rocket Companies’ attributable net income was about 2.4% of revenue. These ratios are calculated from reported figures.
• Servicing: Year-end serviced and subserviced unpaid principal balance was $551.9 billion, with 2.57 million loans. MSR fair value was $5.39 billion, up from $2.86 billion. Delinquency of 60+ days was 1.60%, or 0.94% excluding forbearance loans; net client retention was 91%.
• Liquidity: Management reported $9.1 billion of total liquidity: $2.1 billion cash, $3.5 billion of discretionary self-funded loans, $3.1 billion of undrawn non-funding credit lines and $0.3 billion of undrawn MSR lines. Available cash was reported as $5.6 billion, including cash used to self-fund loans.
• Debt and balance sheet: Year-end funding facilities were $12.75 billion, senior notes net were $4.02 billion, early-buyout borrowings were $1.90 billion and lines of credit were $75 million. Total equity was $9.76 billion and total liabilities were $23.02 billion. The company reported compliance with its debt covenants.
• Capital returns and cash uses: FY2021 financing cash flow included $3.99 billion of distributions to unit holders and Class A shareholders and $231.6 million of share repurchases. A $1.11-per-share special dividend was paid in March 2021. In February 2022, the board declared a further $1.01-per-share special dividend.

Material changes versus FY2020

• Revenue, consolidated net income and Adjusted EBITDA declined despite higher mortgage originations, as gain-on-sale margins compressed from unusually strong 2020 levels.
• Direct to Consumer originations were $199.9 billion, approximately flat year over year; Partner Network originations increased to $151.3 billion from $119.7 billion. Partner Network gain-on-sale margin dropped to 1.20% from 2.19%.
• Marketing and advertising expense rose 31.5% to $1.25 billion; general and administrative expense rose 12.4% to $1.18 billion. Management cited greater marketing, technology and production-support costs.
• Servicing scale expanded: total serviced UPB increased to $551.9 billion from $409.6 billion. The reported MSR fair-value increase reflects valuation assumptions and portfolio changes, not solely cash earnings.
• The company acquired personal-finance app Truebill for approximately $1.2 billion in cash in December 2021. Preliminary purchase accounting recorded $1.13 billion of goodwill and $122.7 million of intangible assets; the allocation remained preliminary at filing.

Outlook, risks and unusual items

• The filing provides no numerical FY2022 revenue or earnings guidance. Management cautioned that mortgage results are sensitive to interest rates, refinancing demand, home sales, housing inventory, competition and secondary-market conditions. It said COVID-19 and related measures could continue to affect operations during 2022 or longer.
• Key liquidity risks include reliance on short-term mortgage funding and loan sales, margin calls, and the possibility that lenders terminate or do not renew uncommitted facilities. Approximately $19.6 billion of loan funding capacity was described as uncommitted; $4.7 billion of 364-day facilities was scheduled to mature at staggered dates during 2022.
• Servicing risks include required advances on delinquent or forborne loans, potential delays or inability to recover advances, and repurchase or indemnification claims. The year-end investor reserve for repurchase and indemnification obligations was $78.9 million; actual obligations could exceed the reserve.
• Interest-rate and MSR valuations are significant sources of earnings volatility. MSRs are Level 3 fair-value assets dependent on estimates such as prepayment speeds and discount rates. The auditor identified MSR valuation as a critical audit matter.
• Legal matters include HouseCanary litigation, putative securities class actions and related derivative suits, and a West Virginia class action remanded for further consideration. A $15.0 million reserve was recorded for potential damages in legal proceedings; the filing says losses could differ materially from estimates.
• Governance and capital-structure considerations include RHI’s control of approximately 79% of combined voting power, a dual-class share structure, related-party transactions and a Tax Receivable Agreement. The company estimated future TRA payments of approximately $685.7 million over 20 years under stated assumptions; acceleration provisions could affect liquidity in certain events.
• FY2021 included an $87.3 million loss on extinguishment of senior notes and a $15.0 million litigation accrual. In Q4, the company repurchased $948.0 million principal of its 2028 notes and removed substantially all restrictive covenants on the remaining notes.

Most important facts for investors to verify

• Whether mortgage volumes and gain-on-sale margins remain resilient as rates, refinancing activity and purchase-market conditions change.
• How much of reported liquidity is immediately available cash versus self-funded loans or undrawn facilities, and the renewal terms and covenant headroom of funding sources.
• The assumptions underlying the $5.39 billion MSR valuation, including prepayment speeds, discount rates and sensitivity to rate changes.
• Whether the Truebill acquisition delivers recurring revenue and expected synergies, and how final purchase accounting affects goodwill and impairment risk.
• Developments and potential financial exposure in HouseCanary, securities and other litigation, along with the adequacy of repurchase and indemnification reserves.
• The cash-flow impact of distributions, the special dividend, share repurchases and the Tax Receivable Agreement, including the interests of controlling shareholders.