Rocket Companies posts $3.5B profit in first earnings report since IPO

Rocket Companies posts $3.5B profit in first earnings report since IPO

The U.S. home sales boom, fueled by low interest rates, is proving to be good business for Rocket Companies Inc.

For the first time as a public company, the Detroit-based mortgage lending giant on Wednesday reported its second-quarter financial results — less than a month after the company raised $1.8 billion in an initial public offering.

Rocket Companies’ Dan Gilbert and Jay Farner rang the opening bell Aug. 6 on the New York Stock Exchange in celebration of its IPO. (Photo: NYSE)

In the quarter that ended June 30, Rocket posted a nearly $3.5 billion profit on revenue of more than $5 billion. In the second quarter of 2019, by contrast, the company lost $54 million. And, in a record for the 35-year-old company founded by billionaire businessman Dan Gilbert, Rocket reported a closed loan origination volume $72.3 billion, up 126% year-over-year.

“Record low interest rates are driving demand for home loans, and the power of our platform is proving a key differentiator for Rocket Mortgage,” CEO Jay Farner said Wednesday. He noted the company’s margins jumped nearly two percentage points, to 5.19%, in the second quarter: “This is exactly the kind of market environment we built our platform to perform in.”

Even as the novel coronavirus pandemic has battered the economy, pent-up demand among homebuyers and historically-low interest rates have fueled home sales and refinance activity. The average mortgage interest rate for a 30-year fixed home loan was 3.07% this week, according to Bankrate. 

Looking ahead to the second half of the year, Rocket executives are forecasting an even stronger third quarter for the company — buoyed by interest rates that are expected to remain low — followed by a fourth quarter that adheres to typical seasonal downturns in home sales.

In the longer term, they expect the market to return to normal, but in the meantime are looking to capitalize on an industry that is so hot, some economists predict mortgage lending will top $3 trillion this year. Rocket executives on Wednesday attributed the company’s success in the second quarter in part to their platform’s ability to quickly scale up and meet demand; by the end of this year, Rocket has said it aims to be able to process $40 billion in loans per month.

The company forecasts it will close loan volume of between $82 billion and $85 billion in the third quarter.

“We continue to see strength and durability in consumer sentiment, record low interest rates, and an improving real-estate market continue to drive demand for home loans,” Farner said. “The purchase market in particular continues to recover following COVID-related disruption in the second quarter. In fact, we expect the third quarter to be one of our best for purchase-origination volume ever at Rocket Mortgage.”

The company’s strong second-quarter results were due in part to an uptick in Rocket’s mortgage servicing business, with mortgage servicing making up 46% of total loan volume, chief financial officer Julie Booth said: “These repeat transactions with existing clients come with little-to-no client acquisition costs, leading to substantial incremental profitability.”

About 4.7% of Rocket’s mortgage servicing portfolio was on a COVID-19-related forbearance plan at the end of August, down from 5.1% at the end of the second quarter, and a number that Booth said she expects to trend downward in the third quarter.

Outside of Rocket Mortgage, Rocket Companies’ digital mortgage application tool, title company Amrock contributed to the company’s revenue growth: “The business was able to scale up and meet the increased demand for mortgages and the related title insurance and settlement services,” Booth said.

Rocket — which employs some 20,000 people, the majority based in downtown Detroit — reported a 24% cost increase compared to the first quarter, which it attributed to higher variable compensation due to increased loan volume.

The company reported it has about $3.7 billion of liquidity, including $1 billion in cash, post-IPO.

Analysts questioned executives about how they plan to achieve their stated long-term goal of capturing 25% market share in the next decade. 

“We obviously don’t control interest rates,” said Farner. “So it’s critical that we think about long-term growth over an extended period of time, and then make all the right moves to make sure we’re growing and gaining market share.”

Twitter: @JGrzelewski

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