Rocket Companies, Inc. quarterly report, Q2 FY2021

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Rocket Companies, Inc. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. Unaudited results are consolidated and include Holdings, of which Rocket Companies owned 6.85% at quarter-end; most income was attributed to non-controlling interests held by RHI and the Chairman. Unless otherwise noted, amounts are in U.S. dollars.

Business context and financial results

Rocket is a technology-enabled mortgage, real estate, personal lending and auto business, with Direct to Consumer and Partner Network reportable segments. Mortgage originations grew, but mortgage gain-on-sale margins compressed sharply year over year in Q2.

  • Q2 revenue, net: $2.669 billion, down 47.0% from $5.036 billion. Six-month revenue: $7.253 billion, up 13.3% from $6.402 billion.
  • Q2 net income: $1.037 billion versus $3.464 billion. Net income attributable to Rocket Companies was $61.1 million; basic and diluted Class A EPS were $0.45 and $0.40. For the six months, net income was $3.814 billion and attributable income was $184.8 million, or $1.47 basic and $1.46 diluted EPS. 2020 EPS is not presented because the IPO reorganization had not occurred.
  • Non-GAAP measures: Q2 Adjusted EBITDA was $1.279 billion versus $3.841 billion; six-month Adjusted EBITDA was $3.685 billion versus $4.762 billion. Adjusted net income was $920.4 million for Q2 and $2.691 billion for six months. These measures exclude specified items and are not substitutes for GAAP results.
  • Mortgage production and margin: Q2 originations were $83.8 billion, up 15.8%; six-month originations were $187.3 billion, up 51.0%. Overall gain-on-sale margin fell to 2.78% from 5.19% in Q2 and to 3.29% from 4.45% for six months. Management cited narrower primary-to-secondary spreads and a higher Partner Network mix.
  • Cash flow: Six-month operating cash flow was positive $2.558 billion versus negative $1.911 billion in 2020. Investing cash flow was negative $5.0 million and financing cash flow negative $2.555 billion. Cash and restricted cash ended June at $2.052 billion, compared with $2.054 billion at December 31, 2020.
  • Margins and expenses: Total expenses rose 3.8% to $1.632 billion in Q2 and 21.1% to $3.439 billion for six months. Six-month increases included marketing and advertising (+49.3%), salaries and benefits (+9.4%), and other expenses (+52.0%), reflecting higher production, marketing, title and settlement activity, and payoff interest expense.

Financial position, debt and liquidity

  • At June 30, total assets were $35.619 billion, total liabilities $27.434 billion and equity $8.186 billion. Cash and cash equivalents were $1.975 billion; mortgage loans held for sale were $23.195 billion; MSRs were $4.644 billion.
  • Borrowings included $17.221 billion on funding facilities, $2.975 billion of senior notes net of issuance costs, $2.149 billion on the early buyout facility and $75 million on lines of credit. Senior notes had $3.010 billion principal outstanding, with a 4.27% weighted-average interest rate.
  • Management reported $31.4 billion of aggregate facility availability, $19.4 billion outstanding and $12.0 billion of unused capacity. It also cited $4.4 billion of available cash, including approximately $2.4 billion used for discretionary self-funding of loans. A large margin call or disruption in loan sales could materially affect liquidity.
  • The company was in compliance with debt covenants and applicable minimum net-worth requirements at quarter-end. It reported a $2.040 billion minimum adjusted-net-worth requirement.

Material changes and management commentary

  • Q2 gain on sale of loans, net fell 50.7% to $2.341 billion, despite higher originations. For six months it declined 10.4% to $5.894 billion. Higher origination volume and greater MSR production partly offset weaker margins.
  • Q2 servicing loss narrowed to $71.4 million from $303.0 million, while six-month servicing income was $466.9 million versus a $1.037 billion loss in 2020. The comparison largely reflects changes in MSR fair-value movements. MSR fair value ended at $4.644 billion, up from $2.863 billion at year-end.
  • The servicing portfolio, including subserviced loans, was $507.2 billion UPB and 2.4 million loans. Delinquency of 60+ days was 2.60%, or 0.71% excluding COVID-related forbearance. At June 30, 54,364 clients, or 2.3% of the serviced portfolio, were in COVID-related forbearance; by July 31 the figure was 49,859, or 2.1%.
  • The company paid a $1.11-per-share special dividend in March 2021. Six-month distributions included approximately $2.2 billion to Holdings members and $1.4 billion of tax distributions. It repurchased 496,829 Class A shares for $8.3 million in Q2; approximately $991.7 million remained under its $1.0 billion authorization.

Outlook, risks and unusual items

  • The filing provides no quantified forward guidance. Management’s commentary emphasizes production growth and platform expansion, while results remain exposed to mortgage volume, gain-on-sale margins, interest rates and prepayment behavior.
  • MSRs are Level 3 fair-value assets sensitive to unobservable assumptions, particularly prepayment speeds and discount rates. The filing’s sensitivity analysis estimates that an adverse 100-basis-point discount-rate change would reduce MSR value by $193.4 million; an adverse 200-basis-point change would reduce it by $361.6 million.
  • Mortgage funding depends on short-term facilities and timely secondary-market loan sales. Collateral revaluations can trigger margin calls; covenant breaches may permit lenders to terminate facilities or accelerate repayment. The company reported compliance at quarter-end.
  • Rocket operates in regulated businesses and faces legal and administrative proceedings. Management did not expect pending matters to have a material adverse effect, but outcomes remain uncertain. A $15 million reserve for potential legal damages was recorded at June 30; an adverse resolution could affect liquidity and results.
  • After quarter-end, the company sold MSRs on loans with approximately $35.3 billion UPB and $373 million fair value, about 7.6% of its single-family servicing portfolio; it also purchased MSRs on approximately $3.6 billion UPB. On August 10, Rocket Mortgage replaced its revolving credit agreement with a $1.0 billion unsecured facility maturing in August 2024.
  • The Tax Receivable Agreement generally requires payment to RHI and the Chairman of 90% of qualifying realized or deemed tax benefits. The recorded liability was $669.7 million at quarter-end.

Important facts for investors to verify

  • Whether mortgage gain-on-sale margins stabilize or continue to compress as production and channel mix change.
  • How MSR fair value, servicing economics and prepayment assumptions respond to interest-rate movements.
  • Actual liquidity available after accounting for self-funded loans, facility terms, margin-call exposure and debt maturities.
  • The effect of distributions, non-controlling ownership and future Holdings Unit exchanges on cash available to Rocket Companies shareholders and per-share results.
  • Developments in legal proceedings, COVID-related forbearance and other servicing delinquencies, and any related reserve changes.
  • Execution and utilization of the post-quarter $1.0 billion revolving credit facility and the reported post-quarter MSR sales.