Rocket Companies, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Rocket is a technology-driven mortgage, real estate and financial-services company. Results are unaudited and consolidated results include substantial non-controlling interests held by RHI and the company’s chairman.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue, net | $1.392bn | $2.668bn | $4.063bn | $7.207bn |
| Income before taxes | $78.5m | $1.061bn | $1.141bn | $3.904bn |
| Net income (consolidated) | $59.8m | $1.037bn | $1.096bn | $3.814bn |
| Net income attributable to Rocket | $3.4m | $61.1m | $57.1m | $184.8m |
| Adjusted EBITDA (non-GAAP) | $(27.5)m | $1.279bn | $422.6m | $3.731bn |
| Operating cash flow | Not provided for the quarter | $6.585bn | $2.558bn |
Q2 revenue fell 47.8% year over year; consolidated net income fell 94.2%. The company reported a Q2 adjusted net loss of $66.9m and adjusted diluted loss per share of $0.03. These are non-GAAP measures; the company cautions they are not substitutes for GAAP results or measures of discretionary cash.
- Mortgage production: Q2 closed originations were $34.5bn, down 58.8%; first-half originations were $88.5bn, down 52.7%. Overall gain-on-sale margin was 2.92% in Q2 versus 2.78% a year earlier, and 2.98% for the first half versus 3.29%.
- Servicing and fair value: Q2 servicing income was $345.1m, compared with a $72.0m loss in Q2 2021. First-half servicing income was $1.166bn. MSRs were valued at $6.658bn at quarter-end, up from $5.386bn at year-end 2021; the reported value is sensitive to prepayment and discount-rate assumptions.
- Expenses and margins: Q2 expenses declined 18.3% to $1.314bn, but revenue contracted faster. Q2 net income was about 4.3% of revenue, versus 38.9% a year earlier. Cost reductions included lower production staffing, variable compensation and marketing.
- Cash and liquidity: Cash and restricted cash totaled $984m at June 30, down from $2.212bn at year-end. Management reported $7.3bn of total liquidity, including $4.0bn of cash and self-funded loan originations; it cited $8.3bn pro forma including a subsequently added $1bn MSR facility. Operating cash flow was positive, while financing activities used $8.221bn, including debt repayments and distributions.
- Debt and balance sheet: At June 30, funding facilities were $7.647bn, senior notes net were $4.025bn, and the early buyout facility was $1.154bn. Total assets were $25.077bn and total liabilities $16.305bn. Funding facilities declined from $12.752bn at year-end 2021. The company reported compliance with debt covenants.
Material changes and management outlook
- Management attributed lower revenue and earnings mainly to mortgage volume contraction as interest rates rose, alongside lower title-related revenue and lower MSR originations. Lower prepayment assumptions associated with higher rates supported MSR valuations and servicing results.
- Direct-to-Consumer and Partner Network contribution margins fell to $229.5m and $81.5m, respectively, in Q2, from $1.436bn and $143.1m a year earlier. Direct-to-Consumer sold-loan volume and margin declined; Partner Network volume also fell sharply.
- The Federal Reserve’s rate increases and expected further increases were anticipated to reduce the 2022 mortgage origination market and Rocket’s origination volume. The filing provides no specific full-year financial guidance.
- A Q2 career transition program generated $61.0m of charges, including compensation, benefits, transition services and accelerated equity vesting. Management reported a $15m reserve for potential legal damages; outcomes remain uncertain, though it did not expect pending matters to have a material adverse effect.
- The company paid a $1.01-per-share special dividend in March 2022. It repurchased $45.3m of shares in Q2; approximately $623m remained under the $1bn authorization at June 30. Subsequent to quarter-end, a new $1bn MSR facility was added.
Important facts for investors to verify
- How mortgage volume, pricing competition and interest-rate movements affect future originations, gain-on-sale margins and profitability.
- The assumptions behind MSR fair value, including prepayment speeds and discount rates, and the sensitivity of reported earnings to those assumptions.
- Liquidity definitions and availability, especially the treatment and transferability of self-funded loans, undrawn facilities, and the subsequent MSR facility.
- The sustainability of positive operating cash flow given mortgage-loan sale and funding cycles, distributions, debt repayments and share repurchases.
- Legal contingencies, covenant requirements, and the allocation of earnings to non-controlling interests; Rocket-attributable income differs materially from consolidated net income.