Rocket Companies, Inc. annual report, FY2022

Rocket Companies, Inc. — FY2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; the provided filing text does not provide a clear set of standalone Q4 results. Rocket is a technology-led mortgage, real estate and financial-services company, with mortgage origination and servicing as its core businesses.

Financial performance

Metric	FY2022	FY2021	Change
Total revenue, net	$5.84 billion	$12.91 billion	Down 54.8%
Net income, consolidated	$699.9 million	$6.07 billion	Down 88.5%
Net income attributable to Rocket Companies	$46.4 million	$308.2 million	Down 84.9%
Adjusted revenue (non-GAAP)	$4.63 billion	$12.43 billion	Down 62.8%
Adjusted EBITDA (non-GAAP)	$59.3 million	$6.20 billion	Down 99.0%
Mortgage originations	$133.1 billion	$351.2 billion	Down 62.1%
Gain-on-sale margin	2.82%	3.13%	Down 31 basis points
Operating cash flow	$10.82 billion	$7.74 billion	Increased

Consolidated net income includes earnings allocated to non-controlling interests: $653.5 million in 2022. The much lower income attributable to Rocket Companies reflects its ownership share of Holdings. Adjusted revenue and Adjusted EBITDA are non-GAAP measures; the company cautions they are not substitutes for GAAP results or measures of discretionary cash.

Revenue, margins and operating trends

Gain on sale of loans fell 70.0% to $3.14 billion, reflecting sharply lower volume and weaker margins amid rising rates and intense price competition.
Direct-to-Consumer sold-loan volume declined 60.7% to $84.1 billion; its sold-loan gain-on-sale margin fell to 4.14% from 4.75%. Partner Network volume declined 56.4% to $60.5 billion, and its margin decreased to 1.05% from 1.20%.
Servicing fee income rose to $1.46 billion from $1.33 billion. Net servicing income was $1.64 billion, versus $636.5 million, supported by higher servicing revenue and favorable MSR valuation changes as rates rose and expected prepayments slowed.
Other income decreased 46.8% to $873.2 million, mainly because lower mortgage production reduced Amrock title, closing and settlement revenue. Rocket Money, acquired in December 2021, contributed $141.6 million in revenue in 2022.
Total expenses declined 24.3% to $5.10 billion as the company reduced staffing, variable compensation, marketing and other costs. The reductions did not offset the revenue contraction.

Cash, liquidity and debt

Cash and cash equivalents were $722.3 million at year-end; restricted cash was $66.8 million. Cash and restricted cash totaled $789.1 million, down from $2.21 billion a year earlier.
Management reported total liquidity of $8.1 billion: $0.7 billion cash on hand, $2.6 billion of corporate cash used to self-fund originations, $3.1 billion of undrawn non-funding credit lines and $1.7 billion of undrawn MSR lines. These categories and definitions should be reviewed against the filing.
Funding facilities had $3.55 billion outstanding; the company reported $22.3 billion of total facility availability and $18.1 billion of unused capacity. It also had $672.9 million outstanding under an early-buyout facility.
Senior Notes had a net carrying value of $4.03 billion, with stated coupons from 2.875% to 5.25% and maturities from 2026 to 2033. Funding facilities are generally short-term, secured by mortgage assets, and some are uncommitted or subject to renewal and margin calls.
Operating cash flow was $10.82 billion, but reflects large mortgage-loan disbursements and sale proceeds and should not be read as recurring earnings-based cash generation. Financing cash outflow was $12.82 billion, including distributions and net repayments of funding facilities.
Equity was $8.48 billion, down 13.2%. The company reported compliance with its debt covenants at December 31, 2022.

Material changes and notable items

Management attributed the mortgage-market contraction to multiple Federal Reserve rate increases, higher mortgage rates and economic uncertainty; refinancing demand was particularly affected. Originations fell 62.1% year over year.
MSR fair value increased to $6.95 billion from $5.39 billion. Changes in MSR assumptions, chiefly lower expected prepayment speeds, contributed materially to reported results. MSRs are Level 3 fair-value assets based on significant unobservable assumptions.
The company incurred $81.1 million in 2022 charges for a career transition program offered to eligible team members.
Cash and cash equivalents and restricted cash declined by $1.42 billion, primarily due to distributions and other financing activity. The company paid approximately $2.0 billion for its 2022 special dividend and $166.2 million in tax distributions to other Holdings unit holders.
The company repurchased 17.7 million Class A shares during 2022 for $177.7 million. Approximately $590.7 million remained under its renewed $1 billion authorization at year-end.

Outlook, risks and contingencies

Outlook: The filing provides no quantified revenue, earnings or origination guidance. Management describes a difficult, rate-sensitive mortgage environment and emphasizes cost adjustments and its broader Rocket platform; actual performance remains dependent on market conditions.
Market and funding risk: Higher rates can depress originations and pressure margins, while changing rates affect MSR valuations. Loan sales depend heavily on the secondary market and GSEs. Funding access may be affected by facility renewals, uncommitted lines, covenants, collateral values and margin calls.
Servicing and credit exposures: Servicing advances may be delayed or unrecoverable; Ginnie Mae delinquent-loan repurchases and loan-sale representations and warranties can require cash. Investor reserves for repurchase and indemnification obligations were $110.1 million, up from $78.9 million.
Legal matters: The filing discusses ongoing litigation, including the HouseCanary dispute and securities and derivative actions. The company states it does not believe the matters are expected to have a material adverse effect based on its current assessment, but outcomes are uncertain. It had a $15 million reserve related to specified legal proceedings at year-end.
Other risks: Extensive and changing consumer-finance regulation, cybersecurity and privacy incidents, vendor dependence, competition, and execution risks in newer businesses could adversely affect results.
Leadership: The company announced that CEO Jay Farner would retire effective June 1, 2023, with Bill Emerson appointed interim CEO. It also disclosed the CFO’s transition to a strategic advisory role and the General Counsel’s planned retirement.
Governance and related-party structure: RHI, controlled by founder and Chairman Dan Gilbert, held 80.7% of combined voting power. The company is controlled, has a dual-class structure and is party to a Tax Receivable Agreement; the year-end liability was $613.7 million.

Most important facts for investors to verify

How mortgage volumes, gain-on-sale margins and expense reductions are progressing after the steep FY2022 downturn.
The assumptions underlying the $6.95 billion MSR valuation, including prepayment speeds and discount rates, and the sensitivity of earnings and equity to changes in those assumptions.
The composition and availability of the reported $8.1 billion of liquidity, including restrictions, facility commitments, maturities, covenants and margin-call exposure.
The adequacy of the $110.1 million repurchase and indemnification reserve and the status and potential financial impact of material litigation.
The durability of servicing income and client retention, including the 95% reported net client retention rate and the servicing portfolio’s performance.
The effect of the Tax Receivable Agreement, distributions, share repurchases and the controlling shareholder structure on cash available to public shareholders.

Audit: Ernst & Young issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2022. MSR valuation was identified as a critical audit matter.