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

Hi. I'm Arren Cyganovich. I'm the consumer finance analyst at Citi, and I'm with Pete Christiansen. He's the analyst under our Citi fintech team. And together, we co-cover Rocket Companies. We're really excited to have Rocket Companies CEO, Jay Farner, with us today, and he's going to share with us the Rocket story and how it differentiates itself in mortgage lending and its other Rocket businesses that are also growing quickly.

So first, I'll just kick it off. Maybe we could just talk a little bit about the housing ecosystem that you've built. And it's beyond just mortgage originations. You've been acquiring other businesses that help fit within the industry and the housing industry. And maybe you could just talk a little bit about your efforts there and how that has helped to expand your mortgage business.

Yes. Absolutely. Well, thanks for having me, Arren, and good afternoon, everyone. Right. So we've talked a lot about as the largest lender here in the country, I'm incredibly proud of the volume growth that we've seen in particular this year, more than double -- doubling in size. But to your question, really, we think about this fintech platform that we're building as changing the entire consumer experience. And so that's got to be more than mortgage. It's got to be the front end with Rocket Homes and engaging the client with MLS listings, realtors that can help them throughout the entire process; our Amrock Title business that allows us to have a streamlined experience and gain efficiencies ordering appraisal and title work; Nexsys, which is a tech company that allows us to have access to e-closing technology as well as our HOI system, Clear HOI, so we can pull data in from homeowners' insurance companies across the country. And then there's the ancillary businesses, of course, as well that are growing rapidly and create a better experience for our client base, our Rocket Auto business to help people purchase a new car and our personal loans business as well, which has been growing rapidly here this year, especially with COVID and supporting some of the lending that needs to be done there. And then probably -- I won't say most important, but something that really helps us with the lifetime value of our client is our servicing business. And so not only are we the largest loan originator here in the country, but one of the largest mortgage servicers in the country. And our retention rate, north of 90%, our recapture rate, 4.5x that of the industry, really allows us to think about the clients that we're helping through this ecosystem on a lifetime -- from a lifetime perspective, not just a transaction perspective. So that's -- and then we've got our businesses in Canada. As we think about the market there, $700 billion and growing, how can we play an important role in Canada? So we're doing a lot of things when it comes to real estate and housing and just complicated or important transactions for our clients.

And then maybe we could just talk a little bit about market share. You've been increasing your market share in mortgage originations. Obviously, the low rate environment has helped in a lot of capacity constraints from the industry's perspective that you were able to take advantage of. Maybe you could just talk a little bit about why you're able to more efficiently gain that market share. And then also what your expectation is to -- will you be able to hold that market share into 2021?

Yes. So we've had great growth this year, but we've had great growth over 35 years. And I think it really comes down to our culture. The company was founded in 1985. Our founder is Dan Gilbert. And so the mission has been, since the very beginning, differentiate the experience with marketing and technology. And that's been our investment. We were on the web, so to speak, in the late '90s. And so each and every day, everyone here wakes up thinking to themselves, how do I innovate? How do I create a better experience? How do we drive efficiency into our tech platform? And so market share, when there's opportunities like this year, where we see north of a $3 trillion mortgage market, that's at scale. Can you go from $14 billion or $15 billion closed in January to north of $35 billion closed in October? How do you achieve that? Do you have a platform that allows you to scale at those levels? And we've demonstrated we can do that. But there's another important component, the marketing and the efficiency. And so in a more challenging interest rate market, the question is, can you process, underwrite and close mortgages at an efficient level so you can lean in and grow market share. What we typically see in a more challenging interest rate market is people pull back. They shrink the size of their business, and that gives us the opportunity to go and grab market share. We demonstrated that in 2018. And as we get into a more challenging rate environment, whenever it comes, we'll do that again. Again, leveraging the tech in our platform, leveraging those efficiencies, now leveraging the machine learning and the ethical artificial intelligence that we're building, our data group is generating leads for us here that don't take marketing dollars. So all of those things position us to be able to grow in a rising rate market because we have an advantage, which is profitability.

And you've put out a very sizable long-term goal of getting to about 1/4 of the origination market over time. Do you worry at all about setting a goal like that, if that's going to make your team make decisions that may not be for the best interest of Rocket just to achieve a market share goal?

Yes, great question. We have 20 ISMs that Dan Gilbert founded -- we just had our 20th year this year, but started many, many years ago, about 20 years ago. And they are kind of our cultural DNA. And they're simple things like do the right thing, every client, every time, no exceptions, no excuses. We'll figure it out. But this is what we spend our time talking to our leadership about, our team members about. Every Monday, we have a call with our top 250, 300 leaders, and we discuss culture. We discuss our ISMs. We talk about the importance of the client. That's rooted in who we are. That's how we've built this business at this point in time. So we're aspirational. We'll set a target like 25%. We think about the normalized mortgage market, somewhere around $2 trillion. And so driving towards building all the important components to get to $0.5 trillion closed a year, north of $40 billion a month was important to us. We've achieved that now. As we think about our Rocket Pro TPO, our partner network, the Rocket Mortgage network, all the marketing that we're able to do, the financing that we've put in place to able to warehouse and close these mortgages, the tech platform that we put in place, that goal allowed each group to say, okay, what do I need to do? What are the strategic objectives that we need to set to be able to achieve that? But that's really all it is, the North Star to make sure we're prioritizing our strategies properly, that culture underneath, ensuring that we're making the right decisions. That's what drives those decisions each and every day. And that's what allows our team members to say we're going to get there the right way with the highest-quality loans. Look at our servicing book and the performance there. Really proud of the forbearance work that we've done this year and how low our forbearances are. It all speaks to that culture that's driving great decisions.

Very interesting, Jay. You touched upon Rocket's tech platform a number of times in those comments. And I think back a number of years ago, it seems that Rocket overhauled its tech platform entirely, almost starting from scratch, I would think. Can you walk us through what -- back then, what led you to take this tech-enabled approach? What was the thesis back then? And obviously, you've got a great mobile-first kind of agile development core that's been improving engagement for users. You've talked about AI and ML, those components. But can you break them down for investors so we can kind of understand how that supports the business from a support point of view, from operations, from go to market? If you could just walk us through that journey, that would be really helpful.

Well, we built our first website in the late '90s, rocketloans.com. And at that moment in time, Dan made a point of kind of teaching us all. Look, we happen to be in the mortgage business. But what we're really in is the marketing and tech business. And so whatever we do, our brands got to stand above everyone else's. We've got to drive consumers to wherever that best destination is. And then we've got to be better at the building process, the creating process. From Detroit, Michigan, out back here, you can see the cranes. We've got a building coming up right here. And this is where the Model T in the first kind of automated assembly line was created. And so that mindset for us exists today, innovation, how do we lean into innovation and how do we perform that activity, whatever it is, in a more efficient manner, in a better manner. And so we went from building that first website and driving people with our brand to recognizing that the traditional way of processing, underwriting and closing mortgages wasn't going to work. And so we developed a team called the Mousetrap Team. And we started mousetrapping the entire process and changing it from an individual-driven loan officer or processor-driven model to a data model. That looks and scans at every loan in the system and says, okay, what's the next best loan to work on and what work does that loan need? And early on, we were still leveraging humans to do a lot of that work. But over time, we then go in and say, okay, what's the next best loan to work on based on all the data that we have, the loan that's most likely to close, but also how do we replace that human work with just leveraging data, AI, those sorts of things? So humans can focus on the critical components that they need to focus on. Meanwhile, the machine can do all the other work, delivering the highest-quality loan in the shortest period of time. And so we went and built all of that kind of underpinnings. And then you kind of referenced the rebuild or the brand-new build of Rocket Mortgage. And so as we got into 2013, 2014, really studying the marketplace and trying to determine what was holding back the first-time homebuyer from making that purchase. And the feedback we received is because they shouldn't have to go anywhere. They should be able to get on their mobile device and figure out what they're approved for and buy a house. And they were wondering why all these other industries had advanced, but mortgage and real estate hadn't. And so we leaned into building a new platform called Rocket Mortgage. Again, taking that -- underpinning that methodology we'd already built but now leveraging all the available data that was out there and putting that power into the consumer's hands. And that was the launch of Rocket Mortgage, '15, '16 to '17. And then what you saw in '17 and '18 is we took that same idea, and we said, let's build out Rocket Pro. Let's give that same transparency and visibility and empower a real estate agent or an insurance agent or a mortgage broker to have access to the same platform. And we launched Rocket Pro. We've seen great growth there in '19 and in '20. And so it's just always innovating on the next idea. Most recently, we just launched Rocket Pro Insight, giving our real estate agents the visibility into the loan so they can be confident and know exactly what's happening with the loan. They can interact. They can understand conditions that need to be cleared. They can refer clients into the process. And so that's what we will continue to do. And you're going to see that same innovation, the same knowledge that we learned through mortgage. You'll see that embedded in Rocket Auto. You'll see that come through in Rocket Homes. You'll see that in our Amrock Title platform. So that's really the key to what we do here, market and innovate with technology.

That's interesting. So you really have built -- first of all, you're capturing all the stakeholders in the value chain. And you built decision data or tools to help all those constituents form an action point there. Now obviously, you've leapfrog a lot of players in this industry. How do you envision staying ahead of that curve? And do you think that some of these tech innovations that you've made will help you accelerate in some of these newer categories that you're looking to build out?

Yes. We get that question a lot about what are the new categories, and one of the key components is that the learnings from mortgage have to apply. And so I'll use auto again. The understanding of a lead or a client that's interested in the purchase, leveraging the data and AI to score that lead, to work the lead properly, building components like chatbots in there to properly bring that lead into the funnel, all those things we've done in mortgage we can apply in our business like auto. And so that's an important thing. It's got to be able to have a competitive advantage, right, to whatever we're going to lean into. And the other thing that I'll talk about is data. So people ask, well, how do you recapture loans that are paying off in your servicing book at 4.5 or 4.6x the industry average? Well, through this -- the engagement that our clients have with our marketing, with our servicing site, with our origination site, now with our personal loan, our Rocket Homes listings, we learn about our clients. And we learn when they're thinking about making a move, doing something different. And so that data becomes richer each and every day. And so you talk about leveraging the tech that we've built. But we're leveraging the culture. We're leveraging the learnings. We're leveraging the tech. And we're leveraging the data to accelerate the growth in these other businesses.

My last question before I pass it back to Arren. You brought up culture a number of times. And I would think you have this assembly line kind of approach, which helps to maintain this certain level of capacity. And there's a lot of efficiencies there. But there's a cultural aspect that certainly needs to be embraced across that way. And how do you see -- like how are you reinforcing this culture, tech enablement, customer first, all the ISMs that you've talked about? How does that -- is it more challenging because of the structure, the operating structure of the company? Or do you think it's an enabler that actually helps promote this culture?

Yes. So I was unsure, if you would have asked me this question 6 or 7 months ago, where I'd be right now. But the way that everyone has leaned in and got excited about this, I would say our culture is stronger than it's ever been. And we're empowering our team members. Actually, COVID is a very interesting experience not only from how homeownership is becoming a more important, and our team members feel that they're playing an important role in our economy, but what we're doing right here, the ability to communicate and break down barriers. Certainly, we have a large campus in the city of Detroit, and people are able to move from building to building. And as soon as we get people back here because it really helps innovation, we're going to do that. But this connectivity through all this technology, we are seeing team members share with each other, bring -- surface opportunities like never before. And it's all around this mission now that's been crystallized more with us going public. They get to listen to these conferences. They get to listen to the calls. They get to understand more about our business and recognize how their work matters. We just had our 35th anniversary last -- well, it happened in June, but we waited until last month to do it. And so we invited all 22,000 team members virtually. We sent everybody a large box with all kinds of goodies in there, including our brand-new ISMs book. We rolled out our 20th ISM. These are -- this is our cultural DNA. Dan joined us on stage, and we talked about the ISMs and why they're so important. We recognize people constantly. Actually, we're having our -- what we call our Rockies here this fall, where we recognize our team members, team by team, for achieving. And this is very -- it's very cool this year. Usually, we go into the Fox Theatre. And we bring in teams of folks and it's on stage. And we recognize team members and they get a trophy and all those things. But this year, because of COVID, we're doing it virtually. And the neat part about that is their families are able to join them. So now we've got people receiving awards and their wife and their children and their husband are there with them, celebrating their success. And they're talking and taking pictures. They're talking about the culture. And so you're faced with challenges like COVID, and I'm really proud of our team. Everyone leaned in and we're stronger than we were before. And it's -- again, it's that underpinning of our culture and our ISMs. And everyone's just -- they're running with it, and I couldn't be prouder.

That's great. Arren?

You just mentioned how the pandemic is impacting your company. First-time homebuyers seems to be an important part of the mortgage story and the housing market over the next several years. The pandemic, if you had asked me initially, I thought it was actually going to slow down first-time home buying just because everybody had a fear of going into homes. And it's actually been the opposite because folks are moving from urban centers into the suburbs. So maybe you can just talk a little bit about how you're marketing to this segment? And one of the areas that stands out for me is that you'd be up against a little bit more pressure against those that have more of a local presence versus your kind of more direct to market. How do you combat that dynamic in that segment as well?

Well, there's so many important things to unpack there. We've seen the opposite when it comes to the local presence component. Although with our Rocket Pro partners, we have local presence in all the states across the country, but people's desire to complete the transaction online digitally -- I was talking to a fellow CEO of a company we're very close with, part of our FOC called StockX. And the expectation that everything can be done digitally and the acceleration -- do we just accelerate 3 years or 5 years or maybe 10 years? Everyone's got their different opinion. But we certainly accelerated a significant chunk of years. And if it can be done in real estate, that's what we're seeing, virtual tours, people making most of their decisions online as they look at homes. Yes, maybe making the final visit to the property. But then getting that full approval, doing everything online via chat and text. I mean that acceleration has been unbelievable, and we benefited from that. And we look at all of our businesses, the digital piece grew faster than any other component. And I think there's 2 other really important things you just brought up, Arren. So we're getting good news now about a vaccine, and that's great news for all of us. And hopefully, whether it's 6 months or 9 months, that we'll put an end to this thing. What won't change is everything that we've learned along the way. The way that we work. I mean, clearly, we've talked about some of the efficiencies that we've gained, leveraging technology, but the way that people are now expecting to be able to interact with the family. As we talk to our team members and I talk to other CEOs and I've seen recent surveys, people are recognizing that they can spend more time at home, achieve their mission at work, maybe even at a higher level and spend more time with their family. And I don't think that changes with the elimination, hopefully, of COVID. And so that drive to have that home office, to have -- at home where they're spending more time with their family, that's going to carry us for years to come. And so for us, being the leader in mortgage and in particular the leader for millennials, first-time homebuyers, we're just going to continue to reach out to millennials, to advertise. You'll see it digital. You'll see it traditional. And now we're talking about -- we've changed our marketing to Rocket Can because it allows us to expand that message not only to mortgage but to homes and to auto. But that's why we've got NFL players like Larry Fitzgerald. That's why we've launched our Latinx brand-new advertising campaign. We know there's a huge group of first-time homebuyers out there that we can reach that can go online, day or night, get their approval on Rocket Mortgage and become confident when it comes to purchasing a home. And that's exactly what they want to do. So as you can probably tell, I'm very excited about home purchase in particular in 2021. I think it's going to be a big year here for our country.

Great. Maybe you can just talk a little bit about the competitive environment. Gain on sale margins, obviously, are very important for the business in mortgage. And they've been elevated throughout the year and surprisingly sticky. I think most folks expected there to be an increase of capacity that would help drive down that advantage. What are you seeing there into the fourth quarter? And what's your expectation on how that will play out through the next year?

Well, you're right. We saw margins -- our margins tend to be very healthy. We focus on the client experience. We focus on the technology. Our capital markets group does an incredible job. And so we tend to have some very strong margins. That said, what we experienced here in Q2 and Q3 of this year across the industry -- and those were, I would use the word, unexpected up until the pandemic. We were fortunate because of the tech platform that we built, we were able to, as a matter of about 3 days, move everybody to work from home. And so as others, I think, maybe figured out how to accomplish that, we were able to lean in and really accelerate our growth in March, in April and May. I saw some Black Knight data. I think they're saying 70% or so of the mortgage market still would save $100 or more from refinancing. In last month, we issued the most verified approvals for our new home purchase that we've ever issued in a quarter in our company's history. So purchase demand and refinance activity remains incredibly strong. And that's why when we gave our guidance for Q4, looking at the net rate locks, the closings, we're expecting to have a very strong Q4. We think that this demand -- we just talk about the purchase carries into 2021. And certainly, margins may normalize a bit from those record highs. But we're still feeling very good about the demand, and that should lead to continued strong margins, which is what we've been able to accomplish for years now.

And before I hand it back to Pete, how do you achieve the higher gain on sale margins in your business? Maybe you could just talk a little bit about how -- why it is that your gain on sale tends to be higher than that of some of your competitors?

Well, so in a competitive market like mortgage, there are many components, right, that allow you to excel. And we talked a lot about the data. So understanding where we're marketing, understanding someone's propensity to purchase, understanding the follow-up that needs to occur, how quickly you need to reach out to that person, all of those things start increasing our conversion rate. And if you're driving up your conversion rate, then the sensitivity to margin is reduced. And so that constant focus on excelling in all these other areas takes pressure off of us to have to lean in from a margin perspective to win business. I also touched on the fact that our capital markets group performs -- we're the leader in this space. And so our ability to execute trades, to find niche opportunities to do maybe private mortgage insurance different than others, there are wins that we achieve there underneath the hood, so to speak, that allow our margins to be very, very strong. And then the last is culture. I mean what you focus on, you find. And if you focus on winning your 11th J.D. Power award and delivering an incredible client experience and building the best technology, then the conversation with the client tends to not be about the [ eighth ] in interest rate. And that's how we work with our banker force, too. We've got 4,000-plus great trade professionals, and they're there to take care of our clients and help them arrive at the best decision. And when you focus at that level and the servicing that's going to be provided in the years to come, we've, I think, now 7 times in a row won the J.D. Power award for the best in client experience for servicing in the country. Then you spend less time talking about interest rate. And so of course, we'll always have to be competitive, but we find that $8, $9, $10 a month in payment after tax usually isn't the deciding factor. It's all these other things I just talked about. And so that culture of understanding that drives our decisions around marketing, drives our decision around brand to ensure that people know our brand and trust our brand, drives our decision around technology to ensure that they have a great experience. We win those awards. And that's -- we think that's a better place to invest your dollar, then cutting a little bit of revenue off the top.