Release Date: November 12, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Rocket Companies Inc (RKT, Financial) reported a 32% increase in adjusted revenue year-over-year, surpassing the high end of their guidance.
- Net rate lock volume surged 43% year-over-year, driven by significant refinance activity and growth in purchase volume.
- The company achieved an adjusted EBITDA margin of 22%, three times higher than Q3 of 2023.
- Rocket Companies Inc (RKT) expanded both purchase and refinance market share year-over-year in the third quarter.
- The company has a strategic sub-servicing partnership with Annaly, allowing for expansion of their servicing portfolio in a capital-efficient manner.
Negative Points
- Despite the Fed cutting rates, mortgage rates did not follow suit, with both the 10-year treasury yield and the 30-year fixed mortgage rate increasing.
- The housing market remains challenging with affordability and inventory still being significant issues.
- Rocket Companies Inc (RKT) anticipates a typical seasonal decline in the mortgage market for the fourth quarter.
- The company faces pricing pressure from competitors, particularly around the holiday season.
- Interest rates have been volatile, impacting mortgage applications and creating uncertainty in the market.
Q & A Highlights
Q: Can you explain the drivers behind the revenue outlook for the fourth quarter, which suggests a 10% to 20% decline sequentially?
A: Varun Krishna, CEO, explained that the fourth quarter is typically smaller than the third due to seasonal factors like home buying slowing post-Labor Day and the holiday season. Additionally, recent interest rate increases have impacted mortgage applications. Despite these factors, Rocket Companies is focused on growing market share with strong execution, and the guidance reflects a 27% year-over-year increase, indicating resilience and market share gains. Brian Brown, CFO, added that they expect a slight expansion in gain on sale margin in Q4 compared to Q3, with some conservatism due to potential pricing plays by competitors around the holidays.
Q: How do you view the mortgage market and your market share goals for 2025, given industry forecasts of a 20% to 30% increase in originations?
A: Varun Krishna expressed optimism for 2025, citing factors like a potentially improving rate environment, rejuvenation in the housing market, and a forecasted market size increase to over $2 trillion. Rocket Companies is confident in its ability to execute and capture market share, leveraging its Superstack technology. Brian Brown highlighted that the company has achieved double-digit EBITDA margins in 2024, and with a healthier market in 2025, they expect to increase operating leverage and continue gaining market share.
Q: Can you provide more details on the Annaly partnership and how the recapture economics will work?
A: Brian Brown explained that while specific economics are not disclosed, the partnership with Annaly focuses on sub-servicing and leveraging Rocket's high recapture rates to protect against prepayments. This creates a win-win situation, with Rocket efficiently managing servicing and Annaly benefiting from reduced prepayment risk. The partnership aligns with Rocket's strategy to grow its servicing portfolio in a capital-efficient manner.
Q: How did rate locks and gain-on-sale margins perform during the period when mortgage rates were down close to 6%?
A: Brian Brown noted that during a two-week window in September when rates were in the low 6s, there was significant consumer demand, particularly for rate and term refinances. Rocket Companies was able to scale quickly to capture this demand, demonstrating the effectiveness of their strategy and technology. The ability to handle increased volume without compromising service quality or efficiency was a key differentiator.
Q: Is there an opportunity to reduce fixed costs given the capacity for $150 billion in origination volume, even if it means reducing capacity?
A: Brian Brown emphasized that Rocket Companies' focus is on capturing market share and growing into a larger market, with a relatively flat fixed cost base. The company aims to avoid the traditional mortgage market's hiring and layoff cycles by leveraging technology to increase operating leverage. Varun Krishna added that the current capacity is well-suited to their growth ambitions, supported by technology investments that enhance team member efficiency.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
