Rocket Companies, Inc. (RKT) Earnings Call Transcript & Summary

All right. So we'll kick it off. Very pleased to have Rocket here today. And joining me on stage is Brian Brown, President and Chief Financial Officer. So welcome, Brian.

Thanks, Terry. Thanks for having me.

Yes. Very happy to have you. So maybe we just set the table with some market questions. 2026 origination volumes have come in below expectations relative to the start of the year. What needs [indiscernible] for the housing market to become healthier and for the mortgage market to expand? And how are you thinking about the mortgage market size over the next several quarters?

Sure. Yes, happy to take that. Good to see some familiar faces. Thanks for the support. Yes. I think, Terry, you've done a nice job timing this conference around some market news today. So it's probably an appropriate question to start with as we see the 10-year starting to touch a 5 handle. So yes, look, there's a couple of different things. I'll start with the things that I think are obvious, and we know our challenges. But there's no question that there's a lot of inflation based in the system, and that's with energy or without energy. That's putting pressure on mortgage rates. I do think there's some room and spreads still to compress. But all in all, the increasing 10-year treasury is putting pressure on mortgage rates, we know that. Interestingly enough, I think just this morning, Fannie came out with a new mortgage forecast for the year, assumingly incorporating a lot of this data that we're all reading and digesting today. And the interesting piece is they took their purchase -- assumptions of the purchase market down a bit, but it's still very close to 2025 levels in terms of the total expected amount of purchase volume to be done in the market. And that feels just about right to us. So while there is a lot of pressure, and I'll be the first to say, I would like it if rates cooperate a little bit more and inflation slowed down, I think there's still a lot to be excited about and a lot of opportunity ahead of us. That purchase volume that I mentioned, if that stays reasonably close to '25 levels, again, maybe not as high as we'd like, but provides a ton of opportunity in the market. And then the other thing I don't think folks are talking about quite as much, but we have to remember that we are experiencing equity -- record equity levels in homes today. That presents a huge opportunity for Rocket. Most of you probably know this, but we are the #1 home equity lender. And that's even -- we only do second liens. We only do second mortgages, but we're #1, even when you include the home equity lending side, the revolving line. So having a product to allow consumers to tap into their most valuable asset, being the home that they own and the equity that they build up still presents a great opportunity even in this market. And then, of course, depending on the loan size or the amount of cash that you need to get out of your home, a cash out refinance can still make a lot of sense to you. So overall, we'd like it to -- we like rates to cooperate, but we also know that there is still opportunities ahead of us. Maybe just 1 more thing to double-click on the home buying side. I think sometimes we can look at national statistics and those can be misleading because we do know that inventory is starting to pick up in certain areas, but that's offset by some really competitive markets where if you're listing your home, you're probably still getting 10 offers or 13 offers. But there is some -- if you really break it down, there is some interesting geographies that are starting to show some green shoots. Nashville comes to mind, San Jose comes to mind, Seattle comes to mind. We're seeing inventory unlocks in these areas. So it just goes to show you that having a 50 stay national platform being scalable. You know that we have several -- our business is very diversified now. So we have brokers that sit out in market in all of these markets. We have local loan officers that are feet on the street. We have a centralized loan officer base. And when you add that up, we're in all 50 states, all 3,000 counties. And so we get a really nice read on what's going on across the market nationally, but it also presents a bunch of opportunities because while some markets are still hot and it's really tough on buyers, other markets actually have plenty of inventory, and it's turning into an actual buyers market. So for all those reasons, despite rates maybe not being where we'd want them to be. I'm still really excited for the year ahead and into next year because I just think it's still a big market. It's still fragmented. And even though we're the biggest player, we still have single-digit share and purchase. So there's still a lot of room to run.

Got it. That's super helpful color. So what type of market environment would you say is best for Rocket? Do you prefer a more challenging market like the 1 we're in, where execution and scale matter more or just a more favorable market where a rising tide with all boats.

Yes, I love this question. It's a good question. And I don't want to give you a flipping answer, but we really try to build this business, particularly through the more recent acquisitions and some of the investments we made is a have your cake and eat it to business. And what I mean by that is it would be very obvious for me to be up here in front of you and say, well, a lower rate market is clearly the best market because we'd love to help consumers lower their monthly payments or rate and term refinances, which isn't too much of now. But I actually think that our house view for many years has been that rates would stay higher for longer. In fact, I was just talking to someone in the back there, and they said something about buying Mr. Cooper and accessing that, which I'm sure we'll talk about. And they were like, I assume you were buying Mr. Cooper because you expected rates to go down and you wanted to take advantage of all the rate and term refinance. And of course, that is part of the thesis that's very important, but it wasn't actually why we bought Mr. Cooper, we bought Mr. Cooper because the house view is that rates would hire for longer. And that diversification, bringing that servicing income into the mix. Now 70% of our income -- or excuse me, 70% of our revenue being from less rate-sensitive products, which I couldn't have told you if I was sitting up here 5 years ago or 3 years ago as a big change in our business model. So I -- going back to our comments on the market, I actually think that this market presents enough opportunity for us to continue to grow the top line and the bottom line, which we've done very successfully over the past couple of quarters, taking share and growing EBITDA margins. But the other thing, Terry, that does get me a bit excited about this market is I think it's tougher out there for everyone else. I really do. Most of you probably follow this to some extent, but we are the only mortgage company that has less than 1x leverage. We're the only mortgage company that has investment-grade rating from Fitch. We have an investment-grade company rating from Moody's. They look a little bit more down in the industry. So we're working on that. We're the only mortgage company with $3 billion of cash on our balance sheet, $11 billion of liquidity that we have access to. So if there's someone that is in a position to benefit from a higher rate environment, it's definitely Rocket. We've seen industry consolidation pick up at quite a rate over the past, I'll call it, maybe 8 months. I expect some of that to continue. I expect some of the best players like Rocket to continue to grow and take share, while many other companies in this space are struggling with free cash flow. They're struggling on their unit economic side, and they're saying all the right things in terms of how they want to bring costs out of the system. But I don't necessarily think that they have the strength in the balance sheet that Rocket does to continue to invest in the cycle. So to answer your question, I, of course, would like rates to cooperate a little bit more. But we didn't build this business for a low rate environment. We built it for a high rate environment without giving up the ability to capture the upside when rates move. It wasn't that long ago that we were sitting in the first quarter, and rates did cooperate for a very short period of time. And that's one of the orders that I'm most proud of because you've been able to see Rocket capitalize pick up share, take that extra capacity without adding any fixed cost. When rates cooperated, we sit here in the third quarter, they're not cooperating, and we're still growing EBITDA margins and taking share.

Got it. I wanted to touch on affordability briefly that remains 1 of the biggest challenges for homebuyers. Maybe just talk about what Rocket's doing to help address the affordability issues for clients?

Yes. This is a top priority for us. And you've heard us talk about it quite a bit. It's so important because going back to what we were just talking about, it's very market dependent, whether it's the buyer's market today or a seller's market today. But regardless if it's a buyer's market or a seller's market, consumers feel pressure. There's no question. When you look at the percentage of people's total income or even disposable income that goes towards their mortgage payment now compared to what that was 5 years ago, it's a much bigger percentage. So consumers are very focused on it. And I think that's the beauty of Rocket. We are in it with the consumers, and we have assets that other companies don't have. We have a search portal. We have our own brokerage plus a partnership with Compass and access to hundreds of thousands of brokers. We are the biggest lender and financer, but we also have our own title and closing company. And then, of course, after all that said and done, we retain the servicing on the back end. We have the lowest cost of service, thanks to Mr. Cooper and the capabilities that we have there. So if you were in our shoes and you had all those assets and capabilities, you would believe like we do that we are ripe for helping consumers fix this affordability problem. We can't change interest rates, Terry, I haven't figured out how to do that yet, maybe you know. But what I can do is I can collect revenues and cash flows off of multiple assets in the transaction, and I can share some of that back with the consumer because I'm capturing more revenue across the different assets than anyone else. And you see us in market doing that right now. We have special pricing if you use Rocket Mortgage and you use Redfin and a Redfin agent, we can give you up to $6,000, maybe $10,000. If you're a service client that can be up to a client in our ecosystem already and you're returning customer. Remember, those come with very little cost of acquisition because they're already in our ecosystem. They get up to $20,000. Those are market winning deals in a great way to show we are in it with the consumer and they can get something here that they can't get anywhere else. Now the beauty of it, these are obviously, smart financial people here. And the question we get is, well, isn't that going to impact your profitability margins. And the answer is because we're collecting revenue over those asset classes and because we are very efficient, and we're continuing to take cost out of the system through integration and synergies and even beyond, which we talked about in our last earnings call, our EBITDA margins continue to increase despite offering pricing incentives that others in the business couldn't offer.

Got it. So you've talked about having a more balanced business model in recent public calls. What exactly do you mean by that? And how has Rocket's business model evolved following Redfin and the Mr. Cooper acquisition?

It's a couple of things. One is the revenue diversification. There's a slide we put out in our investor deck recently, and it shows what I was speaking to before, that 70% of our revenue now comes from less rate-sensitive products. For those of you that have been following Rocket for a long time, even 5 or 3 years ago, that was completely inverted. I would have had to sit up here and tell you 70% of our revenue came from refinances. And of course, it's not always fair to look at it on a percentage basis because the important part is you maintain those recurring sources and capture the upside. But as we sit here today, 70% comes from purchase transactions. It comes from Rocket money, it comes from servicing comes from market loan, and it comes from some of those tapping into your home equity products that I mentioned, which are much less rate sensitive. We know that because we're doing a bunch of them today, even when rates are higher. And only the remaining 30% was really rate and term refinance or some of the more interest-sensitive things that are attached to servicing like escrow. So that's 1 way I describe the balanced business model. It's such a significant change for Rocket to have these recurring cash flows dropping to the bottom line in a rate environment like this. But I think the other important aspect of having a balanced business model is the cost of the house because I get asked a lot, how are we going to continue to increase EBITDA margins in a challenged environment. And a lot of that has to come from the middle of the P&L, too. We will continue to grow top line, and we will continue to drive revenue even in this market, but we have to be disciplined while we do it. And we talked a lot about the synergy math and achieving that early, but that was really a combination, a business combination, and you'd expect to achieve synergies that way. I still look at a bunch of opportunity going forward on the cost side of the house. Our -- when I look at the velocity of which innovation is pacing in this organization, I have never seen anything like it. We are shipping more code per engineer record levels. And by the way, it's not just engineers, shipping code anymore. Product managers or shipping code. Designers are shipping code. Even better than that, business people are shipping code. These AI tools have made it so that you don't have to be a technical engineer anymore to make configuration changes to your system. So think about things like when there's product changes from the GSEs or things are changing your business. Traditionally, that was an engineer, it was probably a product person who had to write a story and an engineer to pick it up and code it and then business would come in and test it. Today, you can skip all that. The business can make it still got to do the testing and make sure it works effectively, but you can almost skip 2 or 3 steps in the process. So the reason I bring that up in this question is because I think continuing to focus on an efficient business model back when rates were low and COVID, we IPO-ed, and we're all happy that big margins were dropping to the bottom line. But if we're being honest, the way we captured a lot of that upside capacity was through human capital. We hired. And we were like really good at it. We were some of the best recruiting. We like basically a loan officer recruiting firm, underwriter recruiting firm or a loan officer licensing firm. And while that all still matters to some extent, being able to do $300 billion and growing of capacity through the system with a much lower apples-to-apples head count numbers than we did during COVID is a much more balanced business model. Our goal on the cost side is grow our capacity at the same or less fixed cost. It no longer rely on human capital. I know, Terry, you're probably doing a bunch of these today, and I don't know what others will say up here, but I do know even today, you're hearing people still talking about needing to meaningfully grow their loan officer count and out there hiring. And we're always hiring the best loan officers of course, as you'd expect us to do and rebalancing the portfolio through attrition and gaining. But we are laser-focused on growing the capacity while not growing the human cap -- not going human capital and headcount.

Got it. Rocket doesn't sound like a traditional mortgage company when you use terms like ecosystem platform and distribution, what do you really mean by -- what do those mean to Rocket?

Yes. Let me start with platform. I think it's an important question. So to me, the platform is the foundation. If you think about a home -- it doesn't matter what you build on top of it if the foundation isn't solid. And I think this is, frankly speaking, where a lot of companies, at least in our space go wrong, I think about the foundation being the infrastructure, the technology layer, but maybe more importantly, the data layer, that is 1 of the most valuable assets that we own is the amount of client data that have. But that's only the half of it being able to access that client data, being able to build propensity models on top of it is really a secret sauce. Everyone today has access to the same LLM, the same frontier models for the most part. You can have some anything you thought was an exclusive partnership or something that you were doing with an LLM is going to be short-lived. It just is. So the value that we have that others don't have really comes through the amount of data that a and being able to train these models on top of the richest data from a 40-year mortgage company a our biggest service, 50 million people coming to Redfin every single month and searching for homes 5 million-plus people going to Rocket Money and having a premium subscription, hundreds of thousands of clients getting personal loans with us and being able to combine that data and those attributes being able to mine that, get and personalize our messaging and our marketing for our clients is something that's hard to replicate. So I think of that as the foundation, the platform. The ecosystem, to me, are really the assets that you put around it, going back to some of our previous talking points. That's being able to say we have this really strong foundation. Now we need to put the assets and capabilities around it. So that's things like the search portal, the brokerage, the loan officers, the underwriters, the servicers and the closers and the title people and the processors, all doing a job on top of this foundation, on top of that platform. And to your last point around distribution, I think this is something that gets overlooked in our space. If we were at a different conference -- technology conference or we were meeting with other firms. They would talk a lot about their access to distribution. You don't really hear mortgage companies talk about distribution, but I'd argue it might be the most important thing. How many contacts do you have? What's the network effect of those. That's why having all these brokers out on the field, all these service clients, all of the 50 million Redfin clients out there, that's why the Compass partnership was so important because having these contact points with realtors bringing new clients at a low cost of acquisitions and going through your purchase process with them, all of that matters. At the end of the day, we all have a client base, and we all want to market to that client base and make sure they choose us first for their financial products, particularly in this case, their mortgage. And no 1 has a bigger client base than us, and no 1 has more different levers and channels to pull on. I just don't hear most people think about it like this. I think some people on the servicing side are just beginning to think about servicing as a distribution channel or a very important client base they can mine. And do their next loan. That was how we built servicing. But I do think there's even fewer companies thinking about the number of clients that they get to have a search interaction with or the number of clients using Rocket Money is another major advantage to us. So we really think about the platform and the ecosystem and distribution is sort of words to describe how we think about the business and how we think about tackling share gains and accessing clients in a way that's less traditional in this space. Just real quick, Terry to wrap up this when I've got the space, I'm always surprised how mortgage companies in [indiscernible] will just keep rebuying the same bias. They will do the loan 1 time and then the next time they'll buy the same client again because there's the infrequency of mortgage just makes it for hard to maintain a relationship over time. It's kind of obvious when I say it. However, I think a lot of people [ saw in track ] code, they're still repurchasing or rebuying that client or the -- we know they're losing that client on their next transaction because the industry numbers tell us that 70% of the time, the client is going to choose a different lender on their second mortgage from their first lender, of course, at Rocket, that's inverted. And the majority of the time, they're going to come back to rock. That's not the case for the industry.