Rocket Companies, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparisons are with the three months ended March 31, 2022 unless noted. Rocket is a fintech holding company whose businesses include mortgage, real estate and financial services. Its reportable segments are Direct to Consumer and Partner Network.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue, net | $666.1 million | $2.671 billion |
| Net income (loss), consolidated | $(411.5) million | $1.037 billion |
| Net income (loss) attributable to Rocket Companies | $(18.5) million | $53.7 million |
| Adjusted Revenue (non-GAAP) | $882.1 million | $1.931 billion |
| Adjusted EBITDA (non-GAAP) | $(79.0) million | $450.1 million |
| Adjusted Net Income (Loss) (non-GAAP) | $(110.6) million | $293.4 million |
| GAAP diluted EPS | $(0.16) | $0.40 |
| Adjusted diluted EPS (non-GAAP) | $(0.06) | $0.15 |
- Mortgage production: Originations were $16.9 billion, down 69% from $54.0 billion. Gain-on-sale margin was 2.39%, versus 3.01%; net rate-lock volume declined 61%.
- Revenue drivers: Gain on sale of loans fell 68% to $469.6 million. Servicing fee income was essentially flat at $366.4 million, but the change in fair value of MSRs was a $398.3 million loss, versus $454.4 million of income a year earlier. Interest income, net declined 23% to $37.7 million.
- Expenses and margins: Total expenses declined 33% to $1.082 billion, reflecting cost reductions, lower production-related compensation and processing costs, and reduced marketing. The consolidated pretax loss was $416.0 million, equivalent to a pretax margin of approximately negative 62% of reported revenue.
- Cash flow: Operating cash flow was $(1.326) billion, compared with $8.772 billion provided in Q1 2022. Investing activities provided $58.6 million and financing activities provided $1.436 billion. Cash, cash equivalents and restricted cash ended at $957.7 million, up $168.6 million during the quarter. Operating cash flow is affected by mortgage origination and sale timing.
Financial position, debt and liquidity
- At March 31, 2023, total assets were $21.202 billion, total liabilities $13.093 billion and total equity $8.109 billion.
- Cash and cash equivalents were $893.4 million; restricted cash was $64.3 million. Mortgage loans held for sale were $8.439 billion and MSRs were $6.670 billion.
- Funding facilities totaled $5.236 billion outstanding, up from $3.549 billion at year-end 2022. Senior Notes, net, were $4.029 billion; the early buyout facility was $423.8 million. The Senior Notes’ stated weighted-average interest rate was 3.59%.
- Management reported $8.1 billion of total liquidity, comprising $0.9 billion of cash, $2.4 billion of corporate cash used to self-fund originations, $3.1 billion of undrawn lines of credit and $1.7 billion of undrawn MSR lines. These figures are management’s liquidity measure, not simply balance-sheet cash. The filing also reports $21.1 billion of aggregate facility capacity, $5.7 billion outstanding and $15.5 billion of unused capacity.
- The company reported compliance with debt covenants and the applicable $1.5 billion minimum adjusted net worth requirement at quarter-end.
Material changes and management commentary
- Management attributed the sharp production and revenue decline to higher mortgage rates, reduced refinance demand and a smaller mortgage origination market. Originations fell 69%, while total revenue fell 75% year over year.
- MSR fair value decreased to $6.670 billion from $6.947 billion at December 31, 2022. Management cited valuation changes, including market-driven assumptions, and cash-flow realization. MSR values are sensitive to prepayment speeds and discount rates.
- Direct to Consumer contribution margin was $205.6 million, down 67%; Partner Network contribution margin was $25.7 million, down 85%. These are segment measures, not GAAP net income.
- Other Rocket businesses produced mixed results: Rocket Money subscription revenue increased, while Amrock revenue and Rocket Homes activity declined. The filing’s MD&A description of the direction of the change in “Other income” conflicts with its financial tables; the tables report $190.7 million in Q1 2023 versus $317.4 million in Q1 2022.
- No specific forward-quarter financial guidance is provided in the supplied filing text. Management noted that interest-rate and economic conditions could continue to affect mortgage demand; forward-looking statements are not guarantees of results.
Risks, contingencies and unusual items
- Mortgage lending depends on loan sales and funding facilities. Delays in secondary-market sales, collateral value declines, margin calls, covenant breaches or facility termination could adversely affect liquidity. The company uses interest-rate derivatives as economic hedges; Q1 net hedging losses were $79.1 million.
- MSRs and other fair-value items rely in part on models and assumptions. The filing’s MSR sensitivity analysis estimates that an adverse 100-basis-point discount-rate change would reduce MSR value by $282.6 million; an adverse 10% change in prepayment speeds would reduce it by $171.4 million.
- The company reported a $15 million reserve for potential legal damages. Management did not expect pending matters to have a material adverse effect, but stated that unfavorable outcomes could materially affect results, liquidity or cash flows. The company also operates in heavily regulated industries.
- The Tax Receivable Agreement liability was $578.0 million at quarter-end; $35.7 million was paid to LLC members during the quarter. The agreement generally entitles them to 90% of specified realized or deemed tax savings.
- After quarter-end, a $25 million bond previously included in restricted cash was released. The filing also reports a post-quarter extension of one mortgage funding facility to April 26, 2024.
Key facts for investors to verify
- Whether mortgage origination volumes, gain-on-sale margins and cost reductions are sufficient to improve operating performance if rates remain elevated.
- The effects of MSR valuation assumptions and hedging on reported revenue, earnings and equity; compare GAAP results with the company’s non-GAAP measures.
- The composition and availability of management’s $8.1 billion liquidity measure, including cash deployed to self-fund originations and undrawn facilities.
- Funding-facility renewal, covenant and collateral requirements, and potential exposure to margin calls or changes in loan-sale timing.
- The $15 million legal reserve, potential outcomes of proceedings, and future Tax Receivable Agreement obligations.
- The ownership structure: Rocket Companies owned 6.37% of Holdings at quarter-end, with the remaining economic interest largely held by RHI; consolidated results therefore include a substantial non-controlling interest.