Rocket Companies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited, with comparison to Q1 2020. Amounts are U.S. dollars. Rocket is a Detroit-based holding company with Direct to Consumer and Partner Network mortgage segments, alongside real estate, title, personal lending, auto and other businesses.
Financial and operating results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue, net | $4.584 billion | $1.366 billion |
| Net income, consolidated | $2.777 billion | $99.0 million |
| Net income attributable to Rocket Companies | $123.7 million | $0 reported |
| Adjusted EBITDA (non-GAAP) | $2.407 billion | $921.9 million |
| Operating cash flow | $6.274 billion | $381.6 million |
| Cash and cash equivalents, March 31 | $2.865 billion | — |
- Residential mortgage originations were $103.5 billion, up 100.2% year over year. Gain-on-sale margin increased to 3.74% from 3.25%.
- Gain on sale of loans, net was $3.552 billion, versus $1.822 billion. Net servicing income was $538.3 million, compared with a $734.2 million loss, reflecting a $245.9 million MSR fair-value gain versus a $991.3 million loss in Q1 2020.
- Expenses in the condensed income statement totaled $1.741 billion, up from $1.266 billion. Income tax expense was $65.8 million. Class A basic and diluted EPS were each $1.07; the filing does not present comparable Q1 2020 EPS because the IPO reorganization had not occurred.
- Adjusted net income was $1.771 billion and adjusted diluted EPS was $0.89, non-GAAP measures that assume pro forma conversion of non-controlling interests. These are not directly comparable with reported Class A EPS.
- Operating cash flow should be read in light of the mortgage business’s large loan-originations and loan-sale cash flows. Cash and restricted cash together were $2.941 billion at quarter-end.
- At March 31, total assets were $34.732 billion, total liabilities $26.426 billion and equity $8.306 billion. Funding-facility borrowings were $14.453 billion; senior notes, net, were $2.974 billion; lines of credit were $375 million; and the early-buyout facility was $636 million.
Material changes and management commentary
- Revenue rose substantially, mainly on higher mortgage volume, improved gain-on-sale margins and stronger MSR valuation. Management reported Adjusted EBITDA growth of 161.1% year over year.
- The servicing portfolio, including subserviced loans, reached $467.0 billion UPB and 2.3 million loans. Serviced 60-plus-day delinquency was 3.21%; excluding borrowers in forbearance, it was 0.72%. COVID-related forbearance affected 3.0% of clients at March 31, improving to 2.8% by April 30.
- MSR fair value increased to $4.305 billion from $2.863 billion at year-end. The valuation is sensitive to assumptions including prepayment speeds and discount rates; the reported quarterly gain included a $544.5 million favorable change in valuation assumptions, net of hedges.
- The company declared and paid a $1.11-per-share special dividend to Class A holders. Holdings also distributed approximately $2.2 billion to its members; Rocket reported $2.4 billion in total distributions during the quarter, including tax distributions.
- Rocket reported $31.5 billion of aggregate facility capacity, $15.5 billion outstanding and $16.0 billion unused at March 31. Approximately $3.1 billion of cash was used to buy down facilities or self-fund originations. Management warned that delayed loan sales or large margin calls could adversely affect liquidity. All debt covenants were reported in compliance.
Outlook, risks and unusual items
- The filing provides no specific quantitative revenue, earnings or origination guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Results are exposed to mortgage-market conditions, interest-rate movements, prepayment behavior, MSR valuation assumptions, hedging and loan-sale execution. Funding facilities may require additional collateral or repayment following margin calls.
- The company recorded a $15 million reserve for potential legal damages. Management said pending or threatened matters were not expected to have a material adverse effect, but noted that unfavorable outcomes could affect liquidity and results.
- The Tax Receivable Agreement generally requires payment to RHI and the company’s chairman of 90% of qualifying realized or deemed tax benefits. The reported liability was $669.7 million at March 31.
- The company said risk factors were not significantly changed from its 2020 Form 10-K. It reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and cash generation is recurring versus driven by loan-volume conditions, hedging and non-cash MSR fair-value movements?
- How do MSR valuation assumptions, borrower prepayments and forbearance trends affect servicing asset values and future results?
- What liquidity remains available after self-funding originations, and how sensitive is it to margin calls, loan-sale delays and facility renewals?
- How should investors assess Rocket’s $123.7 million attributable income and $1.07 Class A EPS alongside consolidated net income and non-GAAP results, given the substantial non-controlling interest?
- What are the potential financial outcomes of the legal matters and the future cash obligations under the Tax Receivable Agreement?