Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rocket Companies, Inc. Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise After the speakers’ remarks, there’ll be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Sharon Ng, Head of Investor Relations. Sharon, please go ahead.

Good afternoon, everyone, and thank you for joining us for Rocket Companies earnings call covering the third quarter of 2023. With us this afternoon are Rocket Companies CEO, Varun Krishna; our President and COO, Bill Emerson; and our Chief Financial Officer, Brian Brown. Earlier today, we issued our third quarter earnings release which is available on our website at rocketcompanies.com under Investor Info. Also available on our website is an investor presentation. Before I turn things over to Varun, let me quickly go over our disclaimers. On today's call, we provide you with information regarding our third quarter 2023 performance as well as our financial outlook. This conference call includes forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and the assumptions we mentioned today. We encourage you to consider the risk factors contained in our SEC filings for a detailed discussion of these risks and uncertainties. We undertake no obligation to update these statements as a result of new information or further events, except as required by law. This call is being broadcast online and is accessible on our Investor Relations website. A recording of this call will be posted later today. Our commentary today will also include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for reported results can be found in our earnings release issued earlier today as well as in our filings with the SEC. And with that, I'll turn things over to Varun Krishna to get us started. Varun?

Thanks, Sharon. Good afternoon, and welcome, everybody, to the Rocket Companies earnings call for the third quarter of 2023. It is such an honor to be here with you today, and I'd like to begin by sharing why I chose to join this great company. Rocket is a business I've admired from afar for a long time. And in my view, it's among those on a short list of companies that are working on a truly worthy problem to solve. We are at the heart of helping Americans achieve the dream of home ownership and financial freedom. Now according to a bank rate report, 74% of consumers surveyed ranked homeownership as the number one aspect of their American dream, surpassing aspirations such as retirement or a successful career. Homeownership represents stability in financial security and it often serves as the single best way for people from all walks of life to create intergenerational wealth for their family. Now I was also drawn to the huge market potential. The more than $5 trillion home buying total addressable market is massive. Maybe take just one part of it, the mortgage market, which itself is sizable at roughly $2 trillion and yet independent of rates and inventory remains highly fragmented. According to Inside Mortgage Finance, through the first nine months of this year, the top 10 mortgage lenders comprised just 38% of the total origination market share. Home buying represents, in some ways, the last frontier. It's a category that is often associated with antiquated, manual processes that remain highly complex, inefficient and time-consuming. Across the industry, the average time to originate a mortgage is more than 40 days from application to close. For documentation alone, our proprietary platform, which is responsible for extraction, classification and application process 39 million documents over the…

Thank you, Varun, and good afternoon, everyone. On today's call, I'll cover our third quarter operating highlights and financial results as well as our fourth quarter outlook. As Varun mentioned, we are focused on serving our clients through innovation and leveraging our robust data assets in the power of generative AI to deliver seamless personalized experiences. We posted strong results for the quarter, and I'm proud of how well our team members executed to serve our clients in this tough market. For many in this environment, homeownership might feel like it's becoming less and less achievable. Affordability, which hit the historic low in Q3 is a major concern for those looking to buy a home and inventory levels are not cooperating, which is extending the time to buy. At Rocket, we want to give our clients the confidence they need to transact and help them achieve their dream of homeownership. Our innovative products such as BUY+ One+, which address home affordability and our home equity loan, which helps clients take advantage of equity in their home, continue to resonate. BUY+, our Rocket exclusive collaboration between Rocket Mortgage and Rocket Homes helps clients save thousands of dollars in upfront costs when they work with the Rocket Homes' partner real estate agent and obtained financing with Rocket Mortgage. This product is a great example of the power of the Rocket ecosystem. Since we launched BUY+, we've seen our acumen rate defined as clients who use both Rocket Mortgage and Rocket Homes roughly double. It's worth noting that this combination is something that only Rocket can offer at scale through our integrated real estate and mortgage experience. One+, our 1% down program increases access to homeownership for low to-moderate income Americans and further broadens our purchase portfolio. One+ has gained significant traction since…

Thank you. [Operator Instructions] And our first question comes from the line of Kevin Barker with Piper Sandler. Kevin, please go ahead.

Good afternoon. Thanks for taking my questions. I just wanted to maybe touch base here with Varun and maybe get his first impressions of the company given that he's been there for -- I know you've been there for a few weeks and got to meet several of the folks in different departments. Maybe just give us a view of what you've seen and what the opportunities you see within Rocket today?

Kevin, thank you for your question. Great to have you here. An amazing first couple of weeks here, I had the chance to really go deep into our business and immerse myself. I have read and responded to hundreds of team members. And I spent countless hours just going deep into the business, into the product, talking to our clients and just understanding every aspect of all that is that we do. I can just tell you that I'm very impressed with the leadership, our team members, our culture, and it's early days. I think there are some opportunities as well, how we can increase our focus, our prioritization. How big we can bet big on technology as a key part of our future strategy. And we're in the midst of writing that next chapter with the leadership team. So I look forward to sharing more with you but it's been super exciting, and we're just getting started.

And then maybe a follow-up regarding the servicing transaction maybe for Brian. Could you just give us a little more detail on what the gross yield was on the MSR portfolio you purchased, maybe what the weighted average coupon was? I believe that you mentioned it was higher coupon than your existing portfolio now, which makes it opportunistic for refis? Thanks.

Yes. Thanks, Kevin. Happy to take that question. I mean, first, just to take a step back, servicing continues to be a strategic asset for us. It's a nice hedge, of course, to the origination business, and we definitely like the returns on the cash flows right now. It's proving to have a very valuable ROIs. But as you know, and we've talked about before, we really look at it through this LTV lens. And the LTV is really based on these industry-leading recapture. So if you think about what we're trying to accomplish, we're trying to acquire portfolios. We're trying to acquire clients that have a high LTV that we believe we have an opportunity to recapture. We've mentioned that we've sold some servicing that we believe the LTV is low on. This is an example of buying some servicing that has a higher LTV. To answer your question on the note rate, it was north of 6%. But we're creating servicing every single day through our organic originations, and those are at prevailing rates, higher note rates. We're also looking to acquire servicing at higher note rates and slowly, but surely, you end up taking up that average note rate and then if rates -- if and when rates do decrease, you have a really nice refinance opportunity.

Just a quick follow-up on that. Just given your 97% client retention rate and a market that -- it seems like it's a buyer's market out there for MSRs. Why not become much more aggressive in buying higher coupon MSRs in order to increase the pool of available refis for you?

Yes. That's exactly what we're trying to accomplish. We are -- as we've said, we're very active in this space. We get a lot of looks. This is a good example of a competitive process that we won. It's something -- it's an asset that we're looking to grow. There's no question about it because of what you said the lifetime value on those is really good.

Thank you, Brian. Thank you, Varun.

Okay. Thank you. And it looks like our next question will come from the line of Ryan Nash with Goldman Sachs. Ryan, go ahead.

Hey good evening everyone. Varun, the term AI was thrown around about several times in the prepared remarks, you both yourself and Brian talking about it. Maybe just digging a little bit deeper in terms of what you see as the biggest opportunities for the company to use generative AI? And what do you think this can mean for the overall efficiency of the origination process and the company overall?

Yes. Thank you for the question, Ryan. Great to have you. I would just start by saying that I think that fintech in general, and in particular, the homeownership market is very ripe for disruption with artificial intelligence. And there are a couple of things that make Rocket in particular, unique. It's -- whether it's the vast amount of data that we have for personalization, the 50 million call logs, the thousands of attributes of data that we have on our clients. And I think what's compelling is that we have an opportunity to really transform every aspect of the home buying process, whether it's lead generation, allocation, underwriting, closing, servicing. And I think really, almost every aspect of the home buying experience can, should and will be transformed with AI. We have made some progress in this space, and I'm really excited about the foundation, but I think we're just scratching the surface. We've made some investments here in capabilities like Rocket Logic and our data platform. When you think about the role of knowledge engineering, machine learning, natural language processing, automation workflow this is a perfect fit problem for Artificial Intelligence to solve. And so I'm really excited about the foundation, but we're just scratching the surface.

Got it. No, that's helpful. And then, Brian, maybe a question for you, so we had three straight quarters of both top and adjusted EBITDA improvement, it seems like in the fourth quarter, you're going to take a little bit of a step back, at least, on the top line, but some of that will come back via the $50 million to $100 million of cost cuts. Can you maybe just give us a little bit more color on how much of the volume impact is seasonal declines? How much should we expect to see? And can you maybe just expand on the comments around increased margin pressure in the fourth quarter. Is that just because of greater competition for lower overall volumes? Or is there something else that you're seeing there? Thanks.

Yeah. Thanks, Ryan. So when I think about the fourth quarter guide, I don't think it should come as a surprise. To your point, the fourth quarter is typically a seasonally low quarter. As we think about the home buying season, it cools off. You have the additional holidays around Thanksgiving, Christmas and New Year's. And consumers are -- they're relatively inactive during those times. And because the volumes are challenged, you definitely get pressure on gain on sale margins. Firms will use price as a lever. And everything that I just described is just describing a normal fourth quarter in a normal mortgage market, and this market is, of course, more challenged. So you have those same challenges, coupled with the lowest inventory on record in September, at least according to NAR. You have affordability challenges that we haven't seen since the early '90s. So all that goes into the guide. There's no question. But just I think a couple of important takeaways. We believe even at this revenue guide level, we're taking share in the fourth quarter. And it's still a guide up from the fourth quarter of last year. So it's still top line improvement year-over-year.

Thanks for the color.

Thank you. And it looks like our next question comes from the line of Derek Sommers with Jefferies. Derek, go ahead.

Hi. Good afternoon. Could you share details about your outlook for 2024 originations? The MBA has projected a market close to $2 trillion, which would be about 19% year-on-year growth. But current market run rate is about 1.7%. So, any details on how you're thinking about volumes and mortgage rates for 2024 would be helpful. And then also kind of at what mortgage rate, we would start to see a meaningful up-tick in refinance volume.

Yeah. Thank you for the question, Derek. Great to have you, I would just start by saying that from a Rocket perspective, I like our position. The market is going to be the market, meaning that rates will go up and down, inventory will go up and down, and there's sort of a cyclical nature to the business, but we believe our strategy is incredibly durable, meaning that there's a huge fragmented market, and we are very underpenetrated. And what is a headwind for the industry, we believe, is a tailwind for Rocket in particular. It is a dynamic where it may be tougher for small players to compete, but we are incredibly well capitalized. We have liquidity. And we have a huge opportunity to accelerate growth and take share, especially when you think about the opportunity to create a more disruptive experience, leveraging technology. So, I'll ask Brian, if there's anything that he would add to that, but we're very excited about our position, given the size of the market, the level of under-penetration sort of independent of rates and inventory.

Yeah. Thanks, Varun. I think that was well. So the only other thing I'd add, Derek, when you think about where 2023 this year will end up. I know I think you said $1.7 million. I think it's less than that. We've looked at more recent forecast from banks, and we're probably more at like $1.3 million, $1.4 million. So then take your point about the MBA, who was the most recent to reforecast 2024 at $2 trillion, that's north of a 50% increase. A $2 trillion market coming off this market could actually be very healthy and very productive. That said, that's not necessarily what we're planning for. We're hoping that's true, but we're planning for a market that is more challenged. And to exactly back to Varun's point with our balance sheet, our liquidity and our capital profile, you could look at rates higher for longer scenario is a tailwind for ROCCAT as more capacity keeps coming out of the industry.

Got it. Helpful color there and one more, quick one, is the quarter-over-quarter increase in other income, primarily driven by escrow income? Or is there anything else to be aware of in that number?

Yeah. You nailed it. A lot of it is coming from just increased escrow earnings as rates continue to increase.

Got it. Thank you. That's all for me.

Thanks Derek.

And our next question comes from James Faucette with Morgan Stanley. James, go ahead.

This is Jeff Adelson on for James. Good afternoon. I guess just last quarter, Brian, you talked about the pre-approval rates increasing, I think, higher than seasonality at 20%, which was a good sign for this quarter. Is there anything you're seeing today on that front that might help you inform you about the next quarter into next year?

Yeah. Thanks for the question. I mean I think you -- what you're alluding to is the beat this quarter, maybe at the top end of our guidance that largely came from share gains. It definitely came from share gains and then a little bit of help from gain on sale margins from good pre-approval numbers. We're seeing that trend continue through the third quarter. But of course, we are starting to see the seasonality of the fourth quarter take place. But again, I think it's important to just come back to something we said earlier. When we look at this fourth quarter guide, we still believe this guide is taking share in the fourth quarter. We know people are going to buy and films we're still seeing very high demand for homes and consumers interested in buying homes, we just need cooperation from inventory to get them in homes.

Got it. That's helpful. And just given the difficult environment out there, the rate environment has turned more unfavorable in recent months, would you anticipate doing more expense reductions next year if things kind of stay where they are? Or do you feel comfortable with what you've done so far? And as part of that, if we do stay in this kind of higher for longer environment, I know you talked about some more excess capacity coming out of the system, but what do you think it would take for you to get to more consistent profitability? Or what are you looking to reach that if the environment doesn't turn?

Thank you for the question. I'll start and then maybe, Brian, you can add any perspective. I'd just start by saying that our primary focus is on growth. You have a $5 trillion home buying TAM. You have a fragmented market. The mortgage market is $1.5 to $2 trillion. And we have this crazy opportunity to be very disruptive with AI. Now we're always looking for efficiency. We think we're in a good place. But as Brian shared earlier, I mean we're well capitalized. And our perspective is we're in a position to actually invest. And we're looking for ways to increase our focus, our prioritization, but we are being very opportunistic given where we are in the market.

Yes, that's right. And the only other thing I'd add, just going back to those prepared remarks, we're happy to report. We talked about expense reduction plan of $150 million to $200 million. We're pleased to report we're at the high end of that. And we pursuit of operational efficiency that Varun has alluded to, and that's not something you start and stop. That's something that's built into your DNA.

Great. Thanks for taking my question.

Thanks, Jeff

[Operator Instructions] And our next question comes from Arren Cyganovich with Citi. Arren go ahead.

Thanks. I was wondering if you could talk a little bit about your progress making pickup in market share on the purchase side and whether or not the BUY+ program that you've put in place earlier this year is making a notable difference.

Thank you for the question, Arren. I'll start and then Brian can add any perspective. Just start by saying that our purchase products just continue to be relevant and resonate with our clients. A few examples. We have our BUY+ program. And since the launch, we've seen the attachment rate double our One+ program, which is a 1% down program. We've seen the units triple between June and September. We also have our home equity loan program, and we've seen loan units and net rate lock volume double just in the Q3 alone. And so I think the goal for us is to ensure that the programs that we're putting out are innovative. And more importantly, that they're relevant and that they resonate with the clients. And so we're excited to see that progress, and we're also excited to continue to innovate. And Brian, anything that you would add?

Yes. I think that's great. I think the only thing I'd add, we've talked about in terms of how we measure share. We, of course, use the industry forecast, but a really good indication is securitization data. When we look at that, and that's, of course, available to everyone, it shows us taking purchase share quarter-over-quarter and year-over-year. We also look at a lot of internal data to get more real-time results like Optimal Blue and CoreLogic. But the nice thing is no matter how you do that math, all three of them point in the same direction that we're continuing to take share. And we're seeing capacity continue to come out of the system, so it's no surprise.

Thanks. On that last point, from a capacity standpoint, I guess where do you think we are in that process? Do you think there's still a lot of capacity that continues to need to come out of the market?

Look, I think we talked a bit about what 2024 could look like, at least from how the industry forecasters are looking at it. And if rates are higher for longer, that bodes well for us from capacity continuing to come out I think we'd all like it to come out faster. But if you think about all these mortgage companies that went public and raised capital, at that time and put them in a different position. Time will tell in terms of how that shakes out. Again, we think about us. We think about our balance sheet, our liquidity profile, be able to keep investing through these cycles. That's the stuff that gets us excited.

Got it. Thank you.

Thanks Arren.

And our final question today will come from Don Fandetti with Wells Fargo. Don, go ahead.

I was wondering if you could just talk a little bit about the acquisition strategy. If you see any fintech opportunities to kind of feed the funnel and also just an update on Rocket Money and how you feel like that traction is moving?

Yes. I'll take this one. Thank you, Don, for your question. I think the first thing I would just point to, again, as Brian alluded to, is one of the great things about Rocket is, we have a very robust capitalization structure. We have what we call a fortress balance sheet and high levels of liquidity. And I think that gives us a lot of flexibility and it affords us the chance to be opportunistic, especially in this market where you think like valuations being down. So, what I would share is just we are actively in the process of writing the next chapter of our strategy with our leadership team, and we're going to be pursuing ways to accelerate that strategy, whether it's organic or inorganic. And so I look forward to sharing more as we write that next chapter. And so more to come. We are going to have an Investor Day in the coming quarters. And so we'll have an opportunity to go very deep on our strategy with all of our folks in the investor community. And I'd also just say with Rocket Money, we're pleased with the progress that we're making, and I look forward to sharing more with you in the quarters ahead.

Thanks.

Thank you, Don. Thanks to all who ask questions today. I will now turn the call back over to Varun Krishna for closing remarks. Varun, over to you.

All right. Thank you, everybody, for joining us today. We appreciate you, and we look forward to connecting again next quarter.

Thanks, Varun. Ladies and gentlemen, that does conclude today's conference call. You may now disconnect. Have a great day, everyone.