Rocket Companies, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results compare with the corresponding 2019 periods. The company completed its IPO in August 2020; pre-IPO results reflect the combined predecessor businesses, including the retrospective combination of ATI.
Business context and performance
Rocket is a technology-driven mortgage, real estate and financial services company. Its principal business, Rocket Mortgage, originates and sells primarily GSE-conforming and government-insured loans. The company reports Direct to Consumer and Partner Network segments.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Mortgage originations | $89.0 billion | $40.1 billion | $213.0 billion | $94.3 billion |
| Total revenue, net | $4.634 billion | $1.620 billion | $11.036 billion | $3.189 billion |
| Consolidated net income | $2.995 billion | $494.6 million | $6.559 billion | $143.0 million |
| Net income attributable to Rocket Companies | $57.9 million | — | $57.9 million | — |
| Adjusted EBITDA (non-GAAP) | $3.253 billion | $743.1 million | $8.015 billion | $1.222 billion |
| Gain-on-sale margin | 4.52% | 3.29% | 4.48% | 3.11% |
Q3 2020 diluted EPS was $0.54. The substantial difference between consolidated net income and income attributable to Rocket Companies reflects the non-controlling interests in Holdings; Rocket Companies owned 5.81% of Holdings Units at quarter-end. 2019 EPS was not presented.
Financial position, cash flow and liquidity
- Cash and cash equivalents: $3.485 billion at September 30, 2020, versus $1.395 billion at December 31, 2019. Cash plus restricted cash was $3.570 billion.
- Cash flow, nine months: $3.662 billion used in operating activities, $311.1 million provided by investing activities, and $5.466 billion provided by financing activities. Operating cash use reflects the scale and timing of mortgage originations and loan sales.
- Debt and funding: Balance-sheet funding facilities were $19.089 billion; senior notes, net, were $4.217 billion; lines of credit were $375.0 million; and the early buyout facility was $213.3 million. Total liabilities were $31.392 billion. Loans subject to Ginnie Mae repurchase rights had matching $5.554 billion asset and liability balances.
- Funding capacity: Management reported $27.7 billion of aggregate available facility capacity, $19.7 billion outstanding and $8.5 billion of unused capacity. The filing notes these figures do not reconcile arithmetically because one facility temporarily exceeded its stated line amount with lender approval.
- Equity: Total equity was $6.361 billion at September 30, 2020, including $6.030 billion of non-controlling interest.
Material changes and management commentary
- Originations more than doubled year over year in both the quarter and nine-month period. Management attributed the sharp revenue and earnings growth principally to higher volume, stronger mortgage demand and wider gain-on-sale margins.
- Q3 loan servicing loss was $102.6 million, compared with $154.4 million a year earlier. For the nine months, the servicing loss widened to $1.140 billion from $763.5 million, primarily reflecting lower MSR fair values amid faster prepayments and realized servicing cash flows.
- Operating costs rose with production: salaries and benefits, general and administrative costs, and other expenses increased. Marketing expense was comparatively stable in Q3 and lower for the nine-month period.
- Other income benefited from higher Amrock title, valuation and settlement activity and Rocket Loans’ work processing Small Business Administration Economic Injury Disaster Loan recommendations. Management said the SBA-related revenue was not expected to continue beyond 2020.
- Adjusted measures exclude specified MSR valuation changes and other items. Management cautions that non-GAAP measures are not substitutes for GAAP results and may not be comparable with other companies’ measures.
Outlook, risks and unusual items
- The filing provides no specific forward revenue, earnings or origination guidance. Management said the financial impact of COVID-19 and market volatility remained uncertain and could not be reasonably estimated.
- At September 30, approximately 92,000 clients, or 4.6% of the serviced portfolio, were in COVID-related forbearance; by October 31 this had declined to approximately 84,000, or 4.1%. Serviced-loan delinquencies of 60 or more days were 4.01%, but 0.71% excluding forbearance plans.
- Interest-rate movements can affect origination volume, loan pipeline values and MSR valuations. MSRs are Level 3 fair-value estimates sensitive to prepayment speeds and discount rates. The company uses economic hedges, which may not fully offset valuation changes.
- Liquidity depends on selling originated loans and maintaining warehouse and other funding facilities. Lenders may require additional collateral or repayment following margin calls; a large unanticipated call or disruption in secondary-market loan sales could materially affect liquidity. The company reported compliance with debt covenants at quarter-end.
- After quarter-end, Rocket redeemed the $1.25 billion 5.75% senior notes due 2025 at 102.875% of principal plus accrued interest. It also sold MSRs on loans with approximately $20 billion of UPB, about 5% of the servicing portfolio.
- The IPO and reorganization established a holding-company structure with a large non-controlling ownership interest. A tax receivable agreement obligates the company generally to pay RHI and the chairman 90% of specified realized tax savings; the recorded liability was $558.1 million.
- Legal matters include a West Virginia class action with a stated possible loss range of zero to $15 million, TCPA class actions for which a loss range could not be estimated, and the ongoing HouseCanary litigation following reversal and remand of certain claims. No reserves were recorded for these matters because losses were not considered both probable and reasonably estimable. The filing says an unfavorable outcome could materially affect results or liquidity.
- The board authorized a share repurchase program of up to $1 billion on November 10, 2020, for a two-year period; repurchases are discretionary.
Key facts for investors to verify
- How much of the exceptional 2020 origination volume and gain-on-sale margin is sustainable as interest rates, capacity and market demand change.
- The effect of faster prepayments, MSR fair-value assumptions, servicing portfolio performance and forbearance trends on future earnings and liquidity.
- Actual available borrowing capacity, facility renewal terms, margin-call exposure and the effect of the post-quarter senior-note redemption.
- The timing and amount of payments under the tax receivable agreement, and the impact of future exchanges of Holdings Units on public shareholders’ economic interest.
- Developments in the identified litigation and any resulting claims, judgments or costs.
- Whether SBA-related Rocket Loans revenue and other unusual or non-recurring income sources decline as management anticipated.