Rocket Companies, Inc. quarterly report, Q3 FY2021

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Rocket Companies, Inc. — Q3 2021 Form 10-Q

Reporting period: Quarter ended September 30, 2021; comparisons are with the corresponding 2020 periods unless noted. Amounts are U.S. dollars. Financial statements are unaudited.

Business context

Rocket is a technology-enabled mortgage, real estate and related-services company. Its reportable segments are Direct to Consumer and Partner Network. Rocket Companies consolidates Holdings, while RHI and the company’s chairman held approximately 93.1% of Holdings units at quarter-end; therefore, most consolidated earnings are attributed to non-controlling interests. Quicken Loans, LLC changed its name to Rocket Mortgage, LLC effective July 31, 2021.

Financial performance and key metrics

  • Q3 revenue: $3.115 billion, down 32.5% from $4.616 billion. Nine-month revenue: $10.322 billion, down 5.9% from $10.970 billion.
  • Q3 net income: $1.393 billion, versus $2.995 billion. Nine-month net income: $5.207 billion, versus $6.559 billion. Net income attributable to Rocket Companies was $75.3 million for Q3 and $260.2 million for nine months; substantial amounts were attributable to non-controlling interests.
  • Adjusted EBITDA (non-GAAP): $1.568 billion for Q3, down 52.1%; $5.299 billion for nine months, down 34.4%. Adjusted diluted EPS was $0.57 for Q3 and $1.94 for nine months; these measures assume conversion of non-controlling interests and are not directly comparable to GAAP EPS.
  • Mortgage production and margin: Originations were $88.0 billion in Q3, down 1.1%, and $275.3 billion for nine months, up 29.3%. Overall gain-on-sale margin fell to 3.05% from 4.52% in Q3 and to 3.21% from 4.48% for nine months.
  • Segment detail: Partner Network sold-loan gain-on-sale margin declined to 0.78% from 2.70% in Q3 and to 1.32% from 1.98% for nine months. Direct to Consumer margins were 4.47% versus 5.78% in Q3 and 4.88% versus 5.36% for nine months.
  • Cash flow: Nine-month operating cash flow was $3.337 billion, compared with cash use of $3.662 billion in 2020. Investing activities provided $507 million; financing activities used $3.519 billion, including $4.0 billion of distributions to shareholders and Holdings unit holders.
  • Liquidity and balance sheet: At September 30, cash and cash equivalents were $2.234 billion and restricted cash was $146 million. Management reported $5.1 billion of available cash including cash used for discretionary self-funding. Total assets were $35.809 billion, total liabilities $26.623 billion, and equity $9.186 billion.
  • Debt and facilities: Balance-sheet amounts included $16.623 billion of funding facilities, $2.219 billion of early-buyout financing, $2.976 billion of senior notes (net), and $75 million of lines of credit. The company reported $31.0 billion of aggregate facility capacity, $18.9 billion outstanding and $12.1 billion unused; it was in compliance with debt covenants at quarter-end.
  • Servicing and MSRs: Serviced unpaid principal balance, including subserviced loans, was $521.3 billion. MSRs were valued at $4.701 billion. Delinquency of 60+ days was 2.15%, or 0.83% excluding clients in COVID-related forbearance.

Material changes versus the prior comparable periods

  • Lower mortgage gain-on-sale revenue was the main driver of weaker earnings, reflecting tighter primary-to-secondary mortgage spreads and lower margins. Q3 originations were slightly lower, while nine-month originations grew materially.
  • Servicing results improved year over year: Q3 servicing loss narrowed to $7 million from $121 million; nine-month servicing income was $414 million versus a $1.206 billion loss. MSR valuation changes remain significant and market-sensitive.
  • Expenses rose 8.3% in Q3 and 15.4% for nine months. Higher staffing, technology spending and marketing contributed; nine-month marketing expense rose 40.7%.
  • Partner Network volume grew, but lower margins drove a substantial decline in its contribution margin. Direct to Consumer contribution margin also declined.
  • The nine-month cash-flow comparison improved, while financing cash use included substantial distributions. The company paid a $1.11-per-Class-A-share special dividend in March 2021.

Outlook, risks and unusual items

  • The filing provides no specific numerical guidance for future revenue, earnings or originations. Management describes its statements about future results as forward-looking and subject to risks.
  • Management cites mortgage-rate movements, primary-secondary spread compression, origination volumes and MSR prepayment assumptions as important drivers. A 100-basis-point adverse discount-rate change was estimated to reduce MSR fair value by $202 million; a 10% adverse prepayment-speed change by $188 million.
  • Liquidity depends on continuing loan sales and access to warehouse and other funding facilities. Margin calls, collateral-value changes, delayed loan sales, covenant breaches or cross-default provisions could materially affect liquidity.
  • COVID-related forbearance covered 1.5% of the serviced portfolio at quarter-end, falling to 1.1% as of October 31, 2021, according to the company.
  • The company recorded a $15 million legal reserve for potential damages. Management did not expect pending matters to have a material adverse effect, but noted that outcomes are uncertain and could be material.
  • After quarter-end, Rocket Mortgage issued $1.15 billion of 2.875% notes due 2026 and $850 million of 4.000% notes due 2033; it used part of the proceeds to redeem $948 million principal amount of 5.250% notes due 2028. The filing also reports a November purchase of MSRs on loans with approximately $9.0 billion UPB for about $82.1 million.
  • Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether mortgage origination margins and Partner Network profitability stabilize as mortgage-market spreads and volumes change.
  • How MSR fair values, hedge results and prepayment assumptions affect reported earnings and cash realization.
  • Available liquidity after self-funding, debt refinancing and distributions, and the company’s sensitivity to margin calls or reduced facility access.
  • The effect of non-controlling interests, potential unit exchanges and the tax receivable agreement on earnings attributable to public shareholders and future cash obligations.
  • Developments in legal proceedings and the adequacy of the $15 million reserve.