Rocket Companies, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; unaudited. Dollar amounts are U.S. dollars. Rocket is a technology-enabled mortgage, real estate, and financial-services company, with Direct to Consumer and Partner Network reporting segments.
Financial performance and position
| Metric | Q3 2022 | Prior-year comparison |
|---|---|---|
| Mortgage originations | $25.6 billion | Down 71% from $88.0 billion |
| Revenue, net | $1.295 billion | Down 58% from $3.115 billion |
| Income before taxes | $106.4 million | Compared with $1.426 billion |
| Net income, consolidated | $96.2 million | Compared with $1.393 billion |
| Net income attributable to Rocket Companies | $6.9 million; diluted EPS $0.04 | $75.3 million; diluted EPS $0.54 |
| Adjusted EBITDA (non-GAAP) | Loss of $159.7 million | $1.568 billion profit |
| Adjusted net income (loss) (non-GAAP) | Loss of $166.4 million | $1.139 billion profit |
For the nine months ended September 30, revenue was $5.358 billion versus $10.322 billion; consolidated net income was $1.193 billion versus $5.207 billion; and Adjusted EBITDA was $262.9 million versus $5.299 billion. These non-GAAP measures are company-defined and should be considered alongside GAAP results.
- Revenue and operating trends: Q3 gain on sale of loans was $566.0 million, down 79%. Loan servicing income was $514.5 million, compared with a $7.0 million loss a year earlier; the change reflected MSR valuation movements and higher servicing fees. Other income fell 60% to $164.6 million, largely due to lower Amrock activity. Q3 gain-on-sale margin was 2.69%, versus 3.05%.
- Costs: Q3 expenses totaled $1.188 billion, down 30%, reflecting lower production-related compensation, processing costs, marketing, and other costs. The company recorded $20.1 million of career-transition program charges in Q3 and $81.1 million year to date.
- Cash flow: For the first nine months, operating cash flow was $9.605 billion, investing cash flow was $382.2 million, and financing cash flow was negative $11.306 billion. Cash and restricted cash declined by $1.320 billion to $891.6 million. Operating cash flow includes large mortgage-loan originations and sale proceeds and should not be read as recurring free cash flow.
- Liquidity: Management reported $8.8 billion of total liquidity at September 30, including $825.9 million cash on hand, $3.2 billion used to self-fund originations, $3.1 billion of undrawn non-funding credit lines, and $1.7 billion of undrawn MSR lines. Available cash, including self-funded loans, was $4.0 billion. These amounts depend on facility availability, collateral values, and continued covenant compliance.
- Debt and balance sheet: Total assets were $22.601 billion and total liabilities $13.689 billion. Senior notes had a net carrying value of $4.027 billion (principal $4.062 billion); funding facilities were $4.909 billion and the early-buyout facility was $814.5 million. Funding facilities are primarily secured by mortgage loans. The company reported covenant compliance. Cash and cash equivalents were $825.9 million; MSRs were valued at $7.260 billion.
Material changes and management commentary
- Management attributed the sharp production and revenue contraction to higher mortgage rates following Federal Reserve rate increases, economic uncertainty, and a smaller mortgage origination market. Q3 originations fell 71% year over year; nine-month originations fell 59%.
- Management said reduced staffing in production roles and lower variable compensation and processing costs helped lower expenses. Direct to Consumer and Partner Network contribution margins fell 91% and 96%, respectively, in Q3 year over year, primarily reflecting lower sold-loan volumes.
- The servicing portfolio supported results: serviced unpaid principal balance, including subserviced loans, was $531.0 billion, up from $521.3 billion a year earlier. The MSR asset’s fair value rose from $4.701 billion to $7.260 billion; its valuation is sensitive to prepayment and discount-rate assumptions.
- The company paid a $1.01-per-share special dividend in March 2022. On November 1, 2022, the board approved a new share repurchase authorization of up to $1 billion, effective November 11, 2022, for two years. These were post-quarter developments. The filing reported $602.4 million remaining under the prior program at September 30.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific numeric earnings or production guidance. Management described a pressured mortgage market and noted that interest-rate increases were expected to continue at the time of the report.
- MSR fair values are Level 3 estimates based on assumptions including prepayment speeds and discount rates. Management’s sensitivity analysis showed that adverse assumption changes could materially reduce MSR value; market-rate movements also affect loan and hedge valuations.
- Liquidity risks include delays or failures in selling loans, collateral-value declines that trigger margin calls, and facility termination or cross-default provisions. Funding lines and other borrowings carry financial covenants; the company reported compliance at quarter end.
- The company operates in highly regulated businesses and faces routine legal and administrative proceedings. It held $15 million of reserves for potential legal damages; management did not expect pending matters to have a material adverse effect, while acknowledging that an unfavorable outcome could materially affect results or liquidity.
- The Tax Receivable Agreement liability was $623.5 million at quarter end; payments to LLC members under the agreement were $40.7 million in the first nine months. The Inflation Reduction Act’s corporate alternative minimum tax was not expected to have a material effect on the quarter; the filing also identifies tax-law changes and interpretation as risks.
Important facts for investors to verify
- Whether mortgage originations, gain-on-sale margins, and contribution margins stabilize as rates and industry capacity change.
- How much reported earnings depends on MSR valuation assumptions, hedges, and other fair-value movements, and how sensitive the MSR asset is to changing assumptions.
- Liquidity available after accounting for self-funded originations, collateral requirements, margin calls, and facility terms and covenants.
- The basis and comparability of Adjusted EBITDA and Adjusted Net Income, including exclusions for MSR valuation changes, share-based compensation, and career-transition costs.
- Future legal, tax, and Tax Receivable Agreement cash requirements, and the pace and price of any share repurchases under the renewed authorization.