Rocket Companies, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results; financial amounts below are U.S. dollars. Rocket is a fintech holding company with mortgage, real estate, personal finance and lending businesses, reported in Direct to Consumer and Partner Network segments.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue, net | $1.203bn | $1.295bn | $3.105bn | $5.358bn |
| Net income (loss) | $114.9m | $96.2m | $(157.4)m | $1.193bn |
| Net income (loss) attributable to Rocket | $6.2m | $6.9m | $(4.9)m | $64.0m |
| Adjusted EBITDA (non-GAAP) | $73.2m | $(159.7)m | $12.5m | $262.9m |
Q3 revenue declined about 7%; consolidated net income increased 19%. The nine-month loss reflects a steep decline in mortgage-related revenue and MSR valuation contribution. Nearly all consolidated earnings are allocated to non-controlling interests: Rocket reported 6.63% ownership of Holdings at quarter-end.
Revenue drivers and margins: Q3 gain on sale of loans was $572.1m, up 1%; servicing income was $356.8m, down 31%; net interest income was $37.9m, down 23%; and other income was $236.3m, up 44%, largely from higher deposit interest income. Nine-month gain on sale was $1.636bn, down 43%, and net servicing income was $710.9m, down 58%. Gain-on-sale margin was 2.76% in Q3 versus 2.69%; nine-month margin was 2.61% versus 2.91%.
Volumes and costs: Q3 closed residential mortgage originations were $22.2bn, down 13% year over year; nine-month originations were $61.5bn, down 46%. Q3 expenses fell 9% to $1.086bn and nine-month expenses fell 21% to $3.265bn, reflecting lower staffing-related compensation, marketing and other costs.
Cash flow and liquidity: Nine-month operating cash flow was $(1.284)bn, versus $9.605bn provided in 2022; investing cash flow was $738.961m provided and financing cash flow was $747.409m provided. Cash and restricted cash totaled $991.9m at September 30, 2023. Management reported total liquidity of $8.7bn, including cash, cash available to self-fund originations and undrawn credit and MSR lines.
Balance sheet and debt: Total assets were $20.649bn, liabilities $12.142bn and equity $8.506bn. Funding facilities totaled $4.670bn outstanding; senior notes were $4.032bn net carrying value ($4.062bn principal); and the early buyout facility was $256.7m. The company said it complied with debt covenants and applicable seller/servicer financial requirements at quarter-end.
Material changes, outlook and risks
- Management attributed weaker mortgage activity to higher interest rates and economic uncertainty, which reduced origination demand, particularly refinancing. No specific earnings or origination guidance is provided in the filing.
- MSR fair value was $6.678bn at quarter-end, down from $6.947bn at year-end 2022. The nine-month change in MSR fair value recognized in servicing income was a $343.1m loss, compared with a $592.2m gain in the prior-year period. MSR valuations depend on assumptions including prepayment speeds and discount rates.
- A career transition program generated a $51.5m Q3 charge. Q3 Adjusted EBITDA excludes this charge and other items; the company cautions that non-GAAP measures are not substitutes for GAAP results or cash available to meet obligations.
- Liquidity risks include delays in loan sales, collateral valuation changes and potential margin calls. Funding facilities have covenants and cross-default provisions. Mortgage rates and changes in servicing assumptions can materially affect results.
- The company disclosed ordinary-course legal and regulatory proceedings, with $15m reserved for potential legal damages; management did not expect current matters to have a material adverse effect, while noting outcomes are uncertain. Escrow deposits administered for clients are not company assets, but the company remains contingently responsible for their disposition.
- After quarter-end, certain financing facility maturities were extended or amended, including Citi mortgage repurchase and MSR arrangements. The filing reports no dividend declared in the first nine months of 2023. About $590.7m remained under the share repurchase authorization at September 30.
Investor facts to verify
- Reconcile consolidated net income with the much smaller amount attributable to Rocket shareholders and assess the effects of Holdings’ non-controlling ownership.
- Review operating cash flow, the composition and availability of management’s $8.7bn liquidity measure, and debt maturities, facility terms and post-quarter amendments.
- Test sensitivity of MSR fair value and earnings to prepayment speeds, discount rates and mortgage-rate movements.
- Assess whether mortgage origination volumes, gain-on-sale margins and cost reductions can support sustained profitability if market conditions remain weak.
- Review legal contingencies, representation-and-warranty exposure, and the conditions attached to the remaining share repurchase authorization.