Rocket Companies, Inc. ($RKT)

I'm Rick Shane with JPMorgan. Please join me in welcoming Varun Krishna, CEO of Rocket. Varun joined in 2023 and in that time, has really embarked on a journey taking rocket from what I think we all saw as a mortgage company to what I think is fairly described as a homeownership platform, along the way, acquired Redfin, acquired Mr. Cooper and most recently announced a new partnership with Compass. Interestingly enough, Varun really does come to this from a technology background, having been a tech executive throughout his career. I think personally, we are on the cusp of transformation in one of the most important sectors and one of the most important industries within financial services. So delighted to have her on join us today. Thank you for being here.

Of course, my pleasure. Good to be here, Rick.

Look, 3 years ago, you joined. A lot has changed not only in the industry but at Rocket. -- walk us through the changes that you've implemented and where you see this is going?

Yes. I mean, I'll start by saying that Rocket is a very, very special company. I don't think that I've been at a lot of companies through my career, tech, consumer, Fintech, enterprise, B2B, and it's a very special place. And when I came to Rocket, there were a couple of just key observations for me, having me entered a little bit around fintech through most of my career, I kind of saw that home ownership in some ways, is like the last frontier of fintech. It's why you have a savings account. It's why you make payments. It's why you try to build your credit. At some point, homeownership is kind of the ultimate purpose. It's not a coincidence that it's the bedrock of the American Dream. And Rocket is one of the few companies that has the scale and kind of the power to make a real difference. And so that's what attracted me to Rocket. At the same time, when we think about the concept of TAM, total addressable market, housing itself is the largest TAM that there is. It's 20% of the GDP whether the mortgage market is up or down in any given year, it's still $1 trillion TAM. No player has more than low single-digit percentage market share. It's antiquated and it's kind of ripe for technological transformation. And so those were kind of the big reasons that I came to Rocket and I've been having a blast since -- and a big part of our strategy is to connect the pieces and to bet big on technology. When you think about the different parts of homeownership, there's the front end of the funnel where consumers are searching for home, working with a realtor, mortgage broker, there's the middle part of the funnel where consumers go through the financing aspect. That's where most of the margin and profitability comes from. And then there's the bottom part of the funnel, which is the servicing experience where you have lifetime value. And in most typical consumer products, concepts like LTV to CAC ratios are very standard. But in housing, these things have not been recognized, understood or implemented. And so, that's been our strategy is over the past 2, 2.5 years. We experimented with the top of the funnel with Rocket Homes. We experimented with our servicing book with a concept called recapture where if we do a good job with servicing, we earn the right to generate repeat business. And so, this thesis was very sound for us and it allowed us to make a pretty big bet on 2 big acquisitions. We did them very quickly, both public company deals, both back-to-back and both done with all stock, which gives you a sense of just the commitment that both companies have to the shared future that we're building together now that they're a part of Rocket. And the vision is simple. We want to connect these parts and build a super funnel. We want to turn Rocket into a platform and an ecosystem. We can acquire clients from Redfin that are searching for homes. Redfin has 50 million consumers at the top of the funnel. We can provide financing in an integrated experience through the Rocket Mortgage flagship experience. And then we can serve those clients for life in our servicing book and earn the right to generate new business for them, whether it's new cash out refinance, rate and term refinance, home equity loan or a new purchase. So the vision is to create a self-sustaining ecosystem around housing, something that has never been done before. And then the foundation of that is obviously technology. I mean we've been a technology company for 40 years. We were the first to bring mortgages to the Internet. We were the first to put them on a mobile phone. And we are now the first to bring them into the realm of artificial intelligence. So a lot has changed, but it's all in service to the client. It's all about building an experience that's better and faster with lower rates and lower fees. And we're just executing.

You clearly are. And it really is interesting. So I followed the mortgage industry for close to 25 years. I remember when Dan moved everybody to Detroit and how transformational that was for the industry. It's a fascinating business because to your point, the TAM is enormous. It's about roughly $2 trillion a year. it is very profitable. It is also incredibly fragmented, and it is incredibly fragmented for 2 reasons. And I'd love to explore those 2 reasons and how you're addressing them. One is historically, the business has scaled poorly. The second is that the business is incredibly cyclical. And I'll share something with investors in the room. In a 2-year window, cyclical compression of TAM, the market shrank by 60%. Find me anywhere, an industry that saw a 60% compression of TAM simply due to cyclicality, fine. We see that all the time from secular decline, but find me a real industry where you see 60% decline. So what I'd love to talk about is how you're changing both the scalability of the industry and ultimately, how you address the cyclicality. And I'll throw out one buzz phrase for you to start the scalability conversation. Back in December, you said something on your earnings call that made everybody on my team, our heads jumped up. And you know what it was. You talked about infinite capacity. Talk about how you guys are approaching the scalability issue of mortgage and what this means long term?

Yes, great question. So let's start with scalability. And I think there are a couple of different components to what is, I would say, very unique about Rocket. I think the first thing is you have to remember that this company didn't come out of nowhere. It's been around for a long time. So a part of the scalability is just the investment in foundational infrastructure over many, many, many years. Being able to do compliance and licensing in 50 states and 3,000 counties and parishes that takes a long time. being able to have the capital markets infrastructure to be able to hedge and price every single day and update pricing and rate sheets relative to margin that's taken decades to build. And so a lot of this predates me, but there is a foundational component of scalability that really is just a moat to not overuse that word because I know it's a bit of a cliche, but these are things that are going to be very difficult for an AI platform to disrupt just because a capital markets infrastructure, a hedging relationship, the relationship with the government-sponsored exchanges Fannie, Freddie, Ginnie. the compliance infrastructure, the money movement infrastructure, there's no substitute for experience, right? And that's one. The second thing, I think, that's really important is we've got really, really big on technology, and I'm sure we can talk about AI, but we -- I suspect we will. But we had a goal to hit $300 billion of capacity by the end of '27, and we are there now almost a full 2 years early. And a big part of that is just how we've implemented technology. We have dramatically increased that fixed capacity $200 billion, $300 billion, and we've had a reduction in our fixed costs, including headcount. So we have created sort of an order of magnitude shift in capacity, and we've reduced headcount. And the simple reason for that is we're betting on technology. And I can give you a couple of examples. Lead prospecting is one such example where one of the reasons mortgage is hard is because there's a very complex sales motion around how you process leads, how you communicate with clients, how you process documents. especially in purchase where the sales motion can take place over many weeks or many months. AI does that for us now. And this is where the scale matters. I mean many companies will talk about AI, but these are real numbers that I'm sharing with you. we prospect via AI 32,000 leads a day. pulling credit, maybe another example. That used to be a manual process that required a person, sometimes multiple people, we pull credit 5,000 times a day automatically. When we look at closed loans per team member that works in production. That's another example of a really key metric that we track, that's up 74%. So we're closing 74% more closed loans per team member. So -- these are some examples of how we address the scalability challenge, but we do it very purely and very simply with technology. And to your second question, and I think that was around the cyclicality.

We'll get there. We'll circle back on cyclically. I want to talk about that more. I want to explore the theme of scalability first. And again, look, I got my first mortgage in 2000, and the process was we took our tax returns, drove Kinko's, photocopied our tax returns, FedEx them and send them to our mortgage lender. And the big innovation back then was optical character recognition that they didn't have to hand code 100% of our tax returns. They could code 50 -- or they could hand in put 50%, but they could scan 50% I'd love to talk about scalability from 2 perspectives here. One is from the user perspective and also again, how you guys are using AI tools, how your developers are using AI tools to do the equivalent of not hand input photocopied tax returns.

Yes. I mean the biggest one is, I would say, just investments in computer vision. And what used to be OCR, optical character recognition is now advanced to what's more generally known as computer vision. And the beautiful thing about computer vision is that unstructured data and structured data can be semantically analyzed, characterized, classified, extracted and applied. And so we can read through a machine, that same package of documents. We can extract meaning from those documents, and we can apply them very simply to a loan or to an application. And so that's like one like very important investment. And we believe that computer vision technology over the coming 2 to 3 years is going to be nearly perfect. And it used to be that when you do these OCR things, and I did this a little bit in the tax world, that there's always kind of some margin of error. And what's interesting now is just the technology is so good because it uses look-a-like modeling, comparative modeling that it is able to process structured and unstructured data very, very easily. And so that takes a lot of the guesswork out of the process for both the client as well as the loan officer or the processor, the underwriter because you now move from just like having the scan documents or photocopy or find documents, it's actually sourcing them from digital places, for example, with Rocket Money or with Rocket Loans or any of the other Rocket products you have a financial identity. -- you wire up your accounts. So you don't really even have to do anything with your documents because they're automatically transferred via an application programming interface or an API. So that part of it is really simple. But on the other side, we invest a lot in our document processing technology as well. So the loan officer or the underwriter spends very little time deduping, picking out information, applying it to a loan, which are manual expensive, time-consuming and error prone. So this is just now the new way of working. And so what instead happens is the human-to-human connection becomes more important, and the drudgery of just shifting bits and bites and atoms from point A to point B has sort of become automatic. And so this is a brave new world. The world of paper -- and by the way, this extends all the way into the rest of the experience as well. You can sign and notarize documents digitally. You can schedule closings remotely. You can tour homes virtually, right? And so -- the -- essentially, what we're seeing is a total digitization of every single aspect of the experience. And it happens what happened on a computer, now happens on a mobile phone, what happened on a mobile phone is now happening more implicitly with AI. So it's pretty exciting.

So -- and this may -- I didn't take me for this question. So if you don't have a good answer, fair enough. But if we think about the time line -- the application time line 20 years ago, 5 years ago, today, how much has the consumer experience improved in terms of how much more quickly do those happen?

I think it's improved by 95-plus per ton. And to give you an example, you can do a fully digital refinance application on Rocket, soup to nuts as a client without talking to a person in less than 30 minutes, that's a brave new world. And the best part of it is it's not just that you can do it from start to finish in 30 minutes. It's that there's no breaks. What normally happens is -- and you know this, is there's a workflow. You do something information is transferred, you're waiting and wondering. Someone else has to do something. It comes back to you, then you take the next step. And so what was a more asynchronous back and forth process that -- and by the way, it's not just that it's 30 minutes, it's 30 minutes in 1 sitting versus a couple of hours that are spread out over multiple days where there's notifications waiting in 1 rig and one person is waiting for another person. And the best part of this is you can now do this 24/7 because with an experience like chat, which consumers, by the way, prefer 3:1, you can do it at 3:00 in the morning. You can do it in Saturday morning in your pajamas, right? And so -- the beautiful thing about this technology is it's not just efficiency for efficiency's sake. It's also just more delightful, it's more convenient, it's more simplified. And that's why more -- and it's what more clients are preferring.

Got it. Well, and just a little context, in May of 2020, we moved and we called the bank that we had worked with for 2 decades and said, "Hey, we're interested in getting a mortgage and we're looking at the closing documents and we're trying to -- you said 30 minutes. This was a high-touch, high-service banking relationship with that goes dated to 20 years, 2 decades, they asked us to aim for a 30-day close. So it is -- so that 95% reduction actually is within 2% of my own personal experience. So, yes. Okay. So let's talk a little bit about the other part of the equation, which is, okay, we've talked about how you bring efficiency. How do you -- again, 2021 mortgage market was $4.6 trillion, $4.7 trillion and they're worth 3.5 or 4 points of origination fees associated with that. 2024, it was 1.6, and there were maybe 2, 2.5 points of origination. Again, we're talking a swing of between $100 billion revenue opportunity or more and a $30 billion. You saw $70 billion that you were competing with 1,000 other companies go away in 2 years, temporarily, but went away for 2 years. That's a tough way to run a public company. How do you approach that?

Yes. I mean I think this maybe goes a little bit back to your concept of cyclicality. And I'd say there's 2 things. I think the first thing is there's a saying that I love, which is when the going gets tough, the tough get going. And the nice thing about the mortgage market is that it's equally competitive for everyone. And for smaller players or weaker players what we think of as in general, we just outcompete. And when we see a tough market or when we see a growing market, we look at it as an opportunity to capitalize and to take share. And there's a couple of things that we've done really that our acquisitions are focused around because we can talk about technology all day, but we've obviously made a huge, huge investment in technology, $500 million over the past 5 years. to build some of these infrastructure pieces so that we can capitalize on AI. But the other thing that I think is important is, one, 70% of Rocket's revenue is now what we call less rate sensitive. It used to be a very different picture when Rocket primarily really focused on refi. But today, we are the largest servicer. We have a big purchase business. We have a big business with Redfin. And all of these represent revenue sources that don't depend as much on the rate environment. So that's like one. The second thing that I would highlight is that we have a natural hedge inside of the company with origination and servicing, working together. And servicing is a beautiful business because it gives you a pipeline of clients that you can refinance if and when rates move, but it also creates an annuity that continues to fuel your business in a higher rate environment. But the other thing that Redfin and Mr. Cooper do for Rocket is that they provide us with a pipeline of clients. The other dynamic that is sort of inherent in the housing and mortgage space is that the acquisition cost to acquire a client for mortgage is extremely expensive. It's thousands and thousands of dollars. But if you have 50 million clients that use Redfin, every single data search for a home, high-quality clients, high intend clients, you have a self-sustaining lead pipeline. If you have a servicing book with 10 million clients that we serve, that's 1 in 6 mortgages that you see every single month, paying their property taxes, paying their mortgage, making their mortgage payments, paying for their expos. You have a self-sustaining ecosystem. And so this is how we deal with cyclicality is because we have a natural hedge now within the company by having both the origination business and the servicing business that act as a self-reinforcing mechanism. The servicing business actually feeds the origination business through recapture, but it also sustains itself during high-rate environments as well. And so the way we think about this is we are not waiting for rates to recover or not recover, we know that it applies significant pressure on our competitors, but we have created a very, very unique business model with a combination of Redfin and Mr. Cooper and Rocket working together, where we have a self-created lead flow. We have a self-created servicing book that we can recapture and then we have the mortgage origination engine that sort of sits in between it. And so -- these are -- think of it as like just pieces and parts of an engine that we have assembled with a great degree of intentionality by just studying the patterns of what work with other consumer platforms, platforms that have created things like network effects, platforms that leverage concepts like distribution, and we're simply taking those patterns and applying them to the housing industry. We also, in some ways, and I am biased here, but we were very specific in which companies we wanted to buy. We didn't just want to buy a home search portal. We wanted the best home search portal, and that's why we bought Redfin. We didn't just want to buy a servicer. We wanted the biggest, best and highest quality servicer. That's why we bought Mr. Cooper. And we wanted to do that because, one, the cultures of the different companies would integrate well. And then two, it just would allow our ecosystem to be very unique and in some ways, create a competitive advantage that would be impossible to replicate.

The intentionality comment really resonates with me. And one thing I didn't mention, but you've mentioned a couple of times is Rocket Money. And again, I think I see how that fits in the Mosaic. worth mentioning my daughter is a Rocket Money customer I discovered when I was at your Investor Day a couple of years ago, and she asked me to get a picture with the founder, which was super fun. I also really recognize, and we've been very clear and print of the strategic value of Mr. Cooper and the lead gen that, that brings. I think you said in the most recent quarter, 50% of your refi activity was generated through existing leads or existing servicing book, which predominantly is Mr. Cooper. Can you talk a little bit about how that integration is going?

Yes. I have been incredibly impressed by just how well it's going. And I think part of it is, I have to give a lot of credit to our team because the thing about Rocket's culture that is unique is just there's a level of tenacity that when we set our direction, we just get after it, and we get after it tirelessly. This is a very complex integration. You're talking about the largest servicing migration in the known history of the universe, right? Millions and millions of clients, trillions of dollars of servicing and it's not been without its complexities. I mean just everything from the client experience to the technology behind moving the loans to making sure that there's a good onboarding experience for clients as they move from one back into another front end from a front end to a new back end. But we have completed like the biggest parts of the migration. And the other thing I think that we shared on our earnings call is we're on track to recognize the synergies from the Mr. Cooper acquisition a full year ahead of schedule. And so those are 2 data points. But the biggest data point that I would share, it's not where we are or where we have been, it's where we're going. And where we're going is really a function of one thing. It's our organization and its culture. And if your culture isn't there and the team isn't with you, it doesn't matter. I've learned this after years of leadership. It doesn't matter how intellectually correct you are. It doesn't matter whether you have the right strategy. What really matters is that you have a team behind you that believes in where you're going, that believes in the company and is committed to its future. And the reason I bring this up is because that is something that I do not take for granted, but I think that it is very much eroding into big tech companies right now is more of a fear-based culture, more of a worry about job longevity and things like that. It is a very, very real thing. We just did our -- what we call our outlet, which is our annual quarterly basically a pulse survey where we gauge the engagement of the entire organization. And this outlet was particularly important for us is because we were creating a new baseline with Redfin, with Mr. Cooper. And so think about an organization that's grown by 60%, 60% new team members. There's about 10,000 people that are now part of Rocket. And I was prepared for anything because you can imagine going through an integration as a public -- 2 public companies coming together, and our engagement was 82%, which is up 2 points. So it actually went up as a result of the integration. And that gives me a lot of confidence. So it's not just that the integration is going well. It's that the organization believes in the future direction of the company. and they sit in solidarity with leadership. And that gives me a lot of confidence that it's not just that we have the right strategy, but we have the right team. And when you put those 2 things together, I think that's where Rocket has separated itself and will continue to separate itself.

Got it. Good. Look, one of the dynamic tensions here is that we get 35 minutes in, I would sit here and ask you questions about mortgage until tomorrow happily. But we have an audience as well, and I should not be selfish. So -- right away, I got a couple of questions. Those 2, please.

Everyone, good to see you. So the implementation of all this technology is definitely transforming the industry, and I don't know exactly which comes first to ticket. But of course, you vertically integrate with the servicing. It's changed the business a lot. And I'm curious like how we should really be thinking about the KPIs for the business because I'm not sure that just getting on sale is a good indicator. -- you have to do a lot more in the correspondent space and that kind of skews the numbers. So just tell me what do you think that the industrial structure looks like a couple of years? And how should we think about approaching Rocket. It seems to me, maybe we should just look at on some kind of return on invested capital and that should be growing over time or growing through the cycle.

Yes, great question. I would say First off, like I do think you're right that the typical margin profile approach of looking at a mortgage company is Rocket is starting to look less and less like that. And what I can share with you, candidly is that here's how we look at internally, how we've decided to organize the entire company. We've decided to organize it around really 4 core KPI frameworks. The first one is what we call grow and grow is really simple. It's just are we growing the top of the funnel, which means are we introducing more client relationships to the Rocket Mortgage experience. And growth comes from Redfin. It comes from Mr. Cooper but it's a self-sustaining growth pillar. So that's one -- and you can imagine some of the sub KPIs around things like traffic generation, et cetera. unique inventory would be another good one given our compass partnership, which, of course, we can talk about. The second one is very simply conversion. And conversion is a simple matter of when taking a prospect and turning it into a closed loan. And that is one of the more complex metrics. But essentially, what that means is everything from getting through the sales motion successfully to getting high-intent leads through the pipeline to basically being able to close on time. So the entirety of the conversion funnel and obviously that going up into the right. The third one is rent efficiency. And that's basically focused on what we think of as reducing the cost to originate a loan because if we become more efficient, and this is through the use of technology, it's by removing some of the fixed costs, it's by increasing turn times, reducing the cost to originate a loan obviously drives more efficiency in the business. But the most important thing it does, looking at the client is it allows us to deliver a lower cost experience in the form of lower rates and lower fees. A good example of that today is -- and this is the power of the Rocket ecosystem at work now. is we just announced a brand-new offering for Rocket ecosystem clients. So -- and it goes up progressively. If you are a client that uses Redfin to buy analyst at home, you save a certain amount of money. If you are a client that use Redfin and Rocket Mortgage, you save more money. If you're a client from our servicing book who uses Redfin and Rocket, you save even more money up to $20,000. So -- these are examples of where our efficiency and the cost to originate a loan and that low CAC that I'm talking about with our lead flow all are working together. And you can expect us to create more offerings like that. And then the last -- so grow, convert, reduce. And then the last KPI that I would highlight is a recapture. And recapture is simply our ability to harvest our servicing book to generate a lifetime value for our clients. And so think of it as very simply our ability to target that massive servicing book, deliver automatic refinance experience, deliver new purchase experience, even things like personal loans, home equity loans, cash out refinance. -- and how do we continue to drive that recapture rate higher. So those are kind of the 4 top level KPIs that we use to run the company. And I thought it would be helpful just to share that with you.

[indiscernible] return less capital or era. What would that mean for the return on investment capital, I mean if we're now looking at just gain on sale, and we certainly don't want to just look at earnings because you can buy that.

Yes. I mean I think it would just come down to EBITDA growth and margin expansion.

What about capital intensity?

Well, I mean, it depends on what you're like -- our capital allocation principles are pretty simple. I mean, we -- our first goal is to invest in the business. Our second is to pursue organic or inorganic. And the third is to return capital to our shareholders. So we follow those principles.

Two quick ones. Could you touch on the Compass relationship and kind of what your expectations are there strategic rationale? And then where does any blockchain technology fit on the road map?

Good questions. I'll start with Compass. And part of it, this relationship, which is very exciting is there's a lot of change happening in the industry right now. I'm sure those of you that are following this part of the funnel, every day, there's a new cycle that's breaking news. But fundamentally, this is all about tackling affordability. And 1 of the ways that we believe you tackle affordability is to create more inventory. So the Compass relationship has 3 components to it. The first one is private exclusive and coming soon inventory. And Compass has a vast repository of unique listings that are not available anywhere else. And it's bringing those listings to the market on Redfin as the exclusive home search portal. So that's part one. Quick data point on that is we have about 10,000 listings now with the partnership with Compass that are unique to Redfin that are only available on Redfin. And we expect that number to go up significantly as Compass obviously continues to integrate with the Anywhere platform, which is what they've acquired. The second one is a lead flow relationship to really shift the economics of Redfin and Rocket to make them more profitable and more successful. So today, Rocket, Redfin and Mr. Cooper are a lead generation pipeline. Today, we happen to consume most of those leads ourselves but we're not in really the real estate business, right? And so with Compass, there's a virtuous cycle where we have a lead flow relationship with them. And those are leads that come from Redfin, Rocket Mortgage and Mr. Cooper Think of it as someone that has sort of the financing or the home search figured out, but they don't have an agent, which is a very common use case. A quick data point on that. We've delivered about 30,000 leads to Compass successfully to date, and we expect that to go up as well. And then the third one, which I'm particularly excited about is a mortgage partnership with Compass as well. And what's unique about Compass is they have a vast distribution network of about 0.25 million agents in the U.S. So it's 250,000 agents. And these are high-producing agents, high-quality agents, and they all use a proprietary technology platform that Compass has built. And we are taking the Rocket Mortgage platform, and we are going to be plugging that into the Compass experience. So very similar to what we do with Redfin we will have exclusive products. We will have exclusive bundles, exclusive pricing. We will have dedicated turn times. We'll have a better workflow, and we will allow the Rocket Mortgage platform to sort of breathe inside of the Compass platform. and to be kind of a premier offering for the Compass agent network. So there's 3 different points of distribution. And really, what it's focused on is just how we can create better offering for clients, lower rates, lower freeze, less friction and Compass is the best in the business when it comes to real estate, and this is just how we're going after that. In terms of blockchain, I would say, first off, like we do implement blockchain in a few different parts of our organization. Our account process would be 1, I would say the money movement processes would be another. But it's still kind of early. So I wouldn't say that we have like broad scale implementation in many, many different places. but it is an area that we're continuing to experiment. Those are 2 places that I know we have implementations.

When you stuck the landing, you got 3 seconds left. We'll count it down together. We're out of time. Varun, thank you very much. Thank you all for joining us. I know we had one other question from the room. Hopefully, you guys [indiscernible].

Thank you.