Rocket Companies, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial statements are unaudited combined results of businesses historically operated within Rock Holdings, Inc. (RHI), not historical results of a standalone public company. Rocket completed its IPO in August 2020; the public company acquired only a minority economic interest in Holdings, with RHI retaining control.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue, net | $5.04 billion | $937.5 million | $6.40 billion | $1.57 billion |
| Net income (loss) | $3.46 billion | $(54.0) million | $3.56 billion | $(353.3) million |
| Adjusted Revenue (non-GAAP) | $5.31 billion | $1.33 billion | $7.42 billion | $2.28 billion |
| Adjusted EBITDA (non-GAAP) | $3.84 billion | $396.3 million | $4.76 billion | $476.6 million |
| Operating cash flow | Not presented quarterly | $(1.92) billion | $(2.86) billion |
Q2 net margin was approximately 68.7% of revenue, versus a loss in the prior-year quarter. The unusually high earnings reflected mortgage production gains and fair-value effects; it should not be read as a recurring margin level. Adjusted measures exclude changes in MSR fair value due to valuation assumptions and have limitations as substitutes for GAAP results or cash flow.
Balance sheet and liquidity at June 30, 2020
- Cash and cash equivalents were $1.72 billion; restricted cash was $78.4 million.
- Total assets were $28.86 billion and total equity was $5.54 billion.
- Mortgage loans held for sale were $17.63 billion; interest-rate lock commitments (IRLCs) at fair value were $2.39 billion.
- Funding facilities totaled $15.69 billion outstanding. Senior Notes had $2.26 billion principal outstanding ($2.24 billion carrying value); other material borrowings included $160 million of lines of credit and $242 million under the early-buyout facility.
- Management reported $22.3 billion of aggregate facility availability, $16.1 billion outstanding and $6.2 billion unused capacity. The company was in compliance with debt covenants and applicable minimum net-worth requirements.
Operating cash flow was negative despite substantial reported earnings, reflecting the working-capital demands of originating and selling large volumes of mortgage loans. Cash and restricted cash together increased to $1.80 billion from $660.5 million a year earlier. The company reported $1.59 billion of net transfers to RHI during the first half.
Material changes versus prior periods
- Residential mortgage originations rose 126.3% to $72.3 billion in Q2 and 128.5% to $124.0 billion for the first half. Total market share increased to 7.79% in Q2 from 6.05% a year earlier.
- Gain-on-sale margin increased to 5.19% in Q2 from 3.23%; first-half margin was 4.45% versus 2.97%. Management attributed stronger margins to demand and industry capacity constraints.
- Expenses also increased with production: Q2 salaries, commissions and benefits rose 75.4%, and general and administrative costs rose 74.5% year over year.
- MSR fair value fell to $2.29 billion from $2.87 billion at year-end 2019. First-half servicing loss was $1.04 billion, principally reflecting higher prepayment assumptions and realization of cash flows.
- At June 30, 98,000 serviced clients, or 5.1% of the portfolio, were in COVID-related forbearance; by August 31 the figure was 96,000, or 4.7%. Delinquencies of 60 days or more were 3.71% including forbearance loans and 0.65% excluding them.
Outlook, unusual items and risks
- The filing provides no numerical forward guidance. Management said the pandemic’s effects on results, liquidity and financial position could not be reasonably estimated; it also reported no known adverse material event requiring recognition at the time of filing.
- Rocket Loans recorded substantial revenue from processing 7.4 million unique recommendations under the Small Business Administration’s Economic Injury Disaster Loan program. Management said this revenue was not expected to continue in future quarters.
- In August, the company completed an IPO of 100 million Class A shares at $18 per share. Net proceeds of approximately $1.76 billion were used to purchase Holdings units and Class D shares from RHI, rather than retained as operating proceeds by the issuer.
- Subsequent to quarter-end, the company made $2.26 billion of distributions to RHI. The filing’s pro forma June 30 balance sheet shows cash of approximately $974 million after the distribution adjustments, alongside a $1.51 billion non-interest-bearing payable related to the distribution.
- Interest-rate changes affect mortgage production, hedging results and MSR valuations; MSR estimates rely on sensitive assumptions about prepayments and discount rates. Warehouse funding also exposes the company to margin calls, collateral requirements, facility renewal and cross-default risks.
- Legal matters include a West Virginia class-action appeal with a disclosed possible loss range of zero to $15 million, and HouseCanary litigation involving a prior jury award that was partly reversed and remanded for a new trial. The company recorded no reserves for these matters, stating losses were not probable and reasonably estimable.
- The tax receivable agreement generally requires payment to RHI and Dan Gilbert of 90% of certain realized tax savings. Post-IPO ownership and tax structure also mean most consolidated earnings and net assets are attributable to non-controlling interests.
Most important facts for investors to verify
- How much of the record earnings and gain-on-sale margins depended on unusually strong refinance demand, favorable market conditions and fair-value gains, and whether those conditions persisted.
- The cash conversion of earnings, funding-facility capacity and terms, and liquidity after the $2.26 billion distribution and post-quarter financing changes.
- Forbearance trends, subsequent delinquencies and the sensitivity of MSR valuations to prepayments and interest rates.
- The durability of Rocket Loans’ SBA-program revenue and the contribution from related businesses to consolidated results.
- The effects of the IPO, RHI’s continuing control, non-controlling interests and the 90% tax receivable agreement on public shareholders’ economic interest.
- Developments in material litigation, repurchase and indemnification exposures, and any resulting effects on liquidity or funding agreements.