Rocket Companies, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Rocket is a technology-enabled mortgage, real estate and consumer-finance company; it completed its IPO in August 2020. Unless stated otherwise, figures are consolidated and in U.S. dollars.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue, net | $15.74 billion | $5.12 billion |
| Net income | $9.40 billion | $897 million |
| Net income attributable to Rocket Companies | $198 million | None reported; company was not yet public |
| Adjusted EBITDA (non-GAAP) | $11.13 billion | $1.95 billion |
| Mortgage originations | $320.2 billion | $145.2 billion |
| Gain-on-sale margin | 4.46% | 3.19% |
| Cash and cash equivalents | $1.97 billion | $1.39 billion |
| Total assets | $37.53 billion | $20.12 billion |
| Total liabilities | $29.65 billion | $16.61 billion |
- Fourth quarter: Revenue was $4.70 billion, net income was $2.84 billion, and net income attributable to Rocket Companies was $140 million. Class A diluted EPS was $1.09. The filing reports no comparable 2019 Class A EPS.
- Cash flow: Operating activities used $1.68 billion in 2020, compared with $6.98 billion used in 2019. Investing activities provided $517 million and financing activities provided $1.76 billion. The large mortgage-loan funding and sale flows affect operating cash flow; earnings should not be read as equivalent to cash generation.
- Debt and funding: Funding-facility borrowings were $17.74 billion at year-end. Senior Notes had $3.01 billion principal outstanding, across 2028, 2029 and 2031 maturities; the 2025 notes were redeemed during 2020. Total reported liabilities also include other financing and operating liabilities. The company reported $29.4 billion of aggregate facility availability, $18.4 billion outstanding and $11.0 billion unused capacity; facilities are subject to covenants and some are uncommitted.
- Servicing: Serviced unpaid principal balance, including subserviced loans, was $409.6 billion across about 2.06 million loans. MSRs were valued at $2.86 billion. The MSR fair-value change was a $2.29 billion loss, including a $1.20 billion loss from valuation assumptions, largely reflecting faster expected prepayments.
- Non-GAAP caveat: Adjusted EBITDA and adjusted net income exclude or adjust specified items and are not substitutes for GAAP results or cash flow. Adjusted net income and EPS use a pro forma conversion of non-controlling interests; reported GAAP net income attributable to Rocket was only $198 million because most Holdings interests remained with RHI and Dan Gilbert.
Material changes versus the prior year
- Originations rose 120.6%, and reported mortgage market share increased to 8.4% from 6.4%. Higher volume and a wider gain-on-sale margin drove most of the sharp increase in revenue and earnings.
- Direct-to-Consumer and Partner Network funded volumes both grew substantially. Partner Network funded volume increased to $106.5 billion from $46.7 billion; its funded gain-on-sale margin rose to 2.19% from 0.77%.
- Expenses rose 50.1% to $6.34 billion, reflecting higher production compensation, loan-processing and title/settlement costs, and other volume-related expenses.
- Servicing fee income increased to $1.07 billion, but the MSR fair-value loss deepened. Total serviced delinquency was 3.91%, including borrowers in forbearance; excluding forbearance, it was 0.84%.
- Other income grew to $1.80 billion, supported by Amrock activity and Rocket Loans revenue that included processing 19.9 million unique recommendations through the SBA economic injury disaster loan program. Management said this program-related revenue was not expected to continue beyond 2020.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified forward guidance. Management noted that the SBA program-related revenue was not expected to recur and that future effects of COVID-19 and market volatility could not be reliably estimated.
- COVID-19 and liquidity: About 80,000 serviced borrowers, or 3.9% of the portfolio, were in forbearance at year-end; the count fell to about 74,000, or 3.4%, by February 28, 2021. Servicer advances, possible delinquencies, loan-funding access and secondary-market demand remain risks. More than 98% of team members had worked remotely since March 2020.
- Interest-rate and market exposure: Rates affect refinancing demand, origination margins, MSR valuations and variable-rate funding costs. The company relies on GSEs and government programs and on secondary-market sales; disruption, policy changes or reduced investor demand could pressure liquidity and results.
- Fair-value sensitivity: MSRs are Level 3 assets valued using assumptions including prepayment speeds and discount rates. The auditor identified MSR valuation as a critical audit matter; a 20% adverse change in prepayment speeds would reduce estimated MSR fair value by about $280 million, based on the filing’s sensitivity analysis.
- Legal and regulatory matters: Rocket Homes received a CFPB civil investigative demand concerning possible RESPA issues and said it was cooperating. Amrock’s HouseCanary litigation remained unresolved; prior trial damages were reversed in part and claims remanded, with further proceedings possible. The company reported no reserves for damages in the described proceedings and said outcomes could differ from expectations.
- Other notable items: A $550 million Tax Receivable Agreement liability was recorded; the agreement generally requires payments to RHI and Dan Gilbert equal to 90% of certain realized tax savings. The filing estimated about $549 million of future payments over 20 years from IPO-related tax-basis increases, subject to assumptions. A $1 billion repurchase authorization was approved, with no shares repurchased by year-end. A $1.11-per-share special dividend was declared in February 2021 and paid in March 2021.
- Governance: RHI controlled about 79% of combined voting power at year-end through the dual-class structure. Rocket qualifies as a controlled company and relies on related governance exemptions.
Important facts for investors to verify
- Separate consolidated net income from the much smaller amount attributable to Rocket Companies, and understand the effect of non-controlling interests and pro forma non-GAAP measures.
- Assess how much of 2020’s exceptional origination volume and margins can persist as rates, refinancing demand, capacity and competition change.
- Review operating cash flow, warehouse-facility availability and maturity/renewal terms, covenant headroom, margin-call exposure and the extent of uncommitted funding.
- Track MSR valuation assumptions and sensitivity, forbearance and delinquency trends, servicing advances, and any changes in secondary-market or GSE requirements.
- Monitor resolution of the CFPB inquiry and material litigation, as well as Tax Receivable Agreement payments and other related-party arrangements.
- Note that the financial statements received an unqualified audit opinion, but the auditor did not express an opinion on internal control over financial reporting; the company cited the newly public-company transition period.