Thank you for standing by, and welcome to the Rocket Companies Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I'd now like to turn the call over to Sharon Ng, Head of Investor Relations. You may begin.

Good afternoon, everyone, and thank you for joining us for Rocket Companies' earnings call covering the third quarter 2024. With us this afternoon are Rocket Companies' CEO, Varun Krishna; and our CFO, 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 disclaimer. On today's call, we provide you with information regarding our third quarter 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 the call will be posted later today. Our commentary today will also include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our 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, everyone, and welcome to the Rocket Companies third quarter 2024 earnings call. Two months ago, at our first ever Investor Day, we unveiled our vision for Rocket's future. Today, I want to kick off our call by emphasizing and extending one key theme, optimism. Optimism is the ability to see the glass as half full. Over the past few months, the market has thrown our industry almost every curveball imaginable, with inflation easing, the Fed cut rates for the first time in four years, but in an interesting twist, while the Fed lowered rates, mortgage rates did not follow suit. Instead, both the 10-year treasury yield and the 30-year fixed mortgage rate actually increased. In my experience, it's always important to take the long view and put things in perspective. Despite the housing market being challenging, we are seeing signs of rejuvenation. The 30-year fixed mortgage rate has declined from nearly 8% a year ago. This is helping improve purchase affordability and opening up refinancing opportunities to lower monthly payments. Plus, housing inventory has increased from 3.4 months to 4.3 months, showing a 26% improvement. We're still below the five-month to six-month range, that's considered a balanced, healthy market, but inventory is moving in the right direction. While affordability and inventory are certainly still challenges, the market is showing signs of improvement compared to last year and we're right there with consumers navigating their needs together and in service of our mission to help everyone home. Our mindset reflects the importance of optimism in a world that continues to be riddled with uncertainty. That is because home ownership is and always will be the cornerstone of the American dream. Every day, we make 30-year bets on clients who are betting on themselves. Our role in opening…

Thank you, Varun, and good afternoon, everyone. I'd like to start by setting the stage and framing how we're responding to market realities and seizing opportunities as they come and why we are uniquely positioned to capture a bigger slice of the homeownership market. It's been an interesting couple of months for the industry. For most of the third quarter, 30-year fixed mortgage rates have trended lower from nearly 7% in July to touching 6% during a two-week window mid-September. However, stronger than expected economic indicators, caused the 10-year yield in 30-year fixed mortgage rates to quickly jump back to 7%. In short, the market's been anything but predictable. Since interest rates are impossible to predict with any certainty, the key is scaling up quickly to capture the market opportunity when it presents itself. The third quarter was a perfect example of this. When rates briefly dipped to near 6%, clients who had financed homes in the past two years jumped at the chance to lower their payments. We also saw a lift in our purchase pipeline as affordability improved, reaching our highest daily production volumes in the past 24 months during that brief window. It was a game on moment and we scaled up quickly to capture this volume surge. Every layer of our Rocket Superstack, our ecosystem experience, technology, and brand played a role in powering execution across the board. We captured more top of funnel leads through all of our channels, including direct-to-consumer, broker, partnerships and of course, our service clients. We launched innovative mortgage products like our Welcome Home Rate Break promotion to meet the moment, supercharged our bankers with tools to serve more clients, and boosted conversion throughout the funnel. Altogether, this meant we captured and converted more leads with speed and scale. Without adding…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And your first question comes from the line of Jeff Adelson from Morgan Stanley. Your line is open.

Hi, good evening. Thanks for taking my questions. Maybe Brian, you could start with the drivers behind the revenue outlook for the fourth quarter. It looks like you're looking for roughly a 10% to 20% decline in the range there sequentially. Can you just break out maybe what you're seeing on volume versus gain on sale margin there or what other assumptions are sort of embedded in that guide? Thanks.

Jeff, thanks for your question. Let me start and then I'll ask Brian to chime in on the gain on sale margins. And I'd start by just saying that we feel very good about our guide and there's a few things that I think are important to just keep in mind when it comes to Q4, you typically expect the fourth quarter to be a little bit smaller than Q3. And when you really think about why that is, primarily it's due to just home buying slowing down a little bit post Labor Day. You've got kids going back to school, you've got the holiday season. So mortgage financing is just not typically as top of mind. The second thing that I would share is you've seen interest rates tick up a little bit and that has obviously an impact on mortgage applications. And so these two factors can compound and just have an effect on the quarter. But at the end of the day, the market size is going to be whatever it is; it's still a big market. And our big focus is really just on growing our share with great execution. And when you just put that together, we definitely believe, we have a strong and confident guide. And I'll also just callout that the guide is 27% higher year-over-year for this quarter. And that guide reflects obviously our continued focus on market share gains and just our resilience to be able to grow in any market. And then let me ask Brian to comment further.

Sure. Thanks, Varun. Yes, I'll touch on the gain on sale margin piece. We do expect a slight expansion in gain on sale margin in Q4 compared to the third quarter. There's a little bit of conservatism built in there and that's just typically because we see some competitors do some pricing plays around the holidays. If you think about it and you're in their shoes, they have about the same amount of capacity either way. And this volume ticks down to Varun's point every once in a while, we see some pricing pressure there. So we've considered that in the guide. And if you kind of just zoom out, we've said for a long time now that we expect gain on sale margins to expand. That doesn't happen in an exactly linear basis, but we are getting back to levels, particularly on a channel. If I look at direct-to-consumer and partner individually that are really close to the historical healthy levels that we've seen pre-pandemic.

And just on the volume assumption for the quarter, are you maybe just sort of embedding that the level of refi or just the current level of interest rates holds for the rest of the quarter? I know the app index for refi is down about 50% and total is down about 35% since quarter end last quarter. So just curious, are you assuming things maybe get a little bit better or just hold where they are right now?

Yes. I mean, Jeff, if we think about what we do when we set the guide, we obviously take into consideration all the information we have up to this point in the quarter. There's no question about that. It has been a volatile start to the quarter. To Varun's comments, rates have sort of moved in the opposite direction. So all of that is baked in the MBA applications and we look at that, we look at optimal blue. But the most important thing, if I were to leave you with a takeaway is, we truly believe this guide is taking share in the fourth quarter.

Okay. Great. Thank you.

Your next question comes from the line of Ryan Nash from Goldman Sachs. Your line is open.

Hey, good afternoon, everyone. So maybe as we look ahead, industry forecasts are obviously calling for a nice pickup next year in originations, call it up to 30% and so I wanted to drill in a little bit on your expectations into 2025, obviously I'm sure things are fluid given how rates are moving around, but maybe just curious how you think about the size of the market, how much progress you can make on your market share goals? And then, just given your comments about the $150 billion and not needing to any fixed cost, how do you think about the relationship between revenue and cost growth in an improving mortgage market? Thanks.

Thanks for the question, Ryan. I'd start by saying that the mortgage market obviously is not easy to predict. But in general, when you look at multiple factors, our outlook is optimistic. And there's a few factors that I'll just comment on, then I'll ask Brian to jump in as well. And I think the first thing to start with obviously is the rate environment. And there's a multitude of things that go into that, obviously things like an unemployment, CPI, consumer confidence, and in general, those things signal economic health. But the reality is inflation is still a part of the system. And until it's clear that it's working its way out of the system, you can expect that there's going to be a little bit of pressure on the 10-year treasury and then correspondingly the 30-year fixed rate mortgage. The next thing we look at is the housing market. Obviously, the housing market is a big part of the GDP. And the good thing there is that we're seeing definitely some signs of rejuvenation. You've got more inventory. You've got more homes that are selling at or below list. You've got equity at an all-time high. And when you look at housing inventory, we went from 3.4 months to 4.3 months. The number of homes listed for sale, that's up 29%. Affordability is up 5%. So some really good things happening there that gives us confidence in 2025. And then, we look at the size of the market. To your point, good things happening there. The forecasts are expecting that the market will be up over $2 trillion, that's up 28% compared to this past year. And that's still a huge market, right? And so regardless of conditions, there's plenty of share up for grabs. And then, what I would also say is the most important thing we really look at is just our execution, our ability to execute in any market. And that's something that we feel tremendously confident in. And a big part of that is our Superstack and what we believe is a tailwind to be able to execute against our Superstack relative to competitors. And so putting all that together, that gives us a lot of optimism for 2025, being better than 2024. And we know that 2024 was certainly better than 2023. And that's kind of how we think about our outlook. And then on the expense side, I'll ask Brian to jump in.

Yes, sure. Thanks, Ryan, for the question. I mean, when it comes to operating leverage, I think the first starting point is think about what we've done this year. To Varun's point, I do think 2024 will be a bit better than 2023. But I still think if you look back, we're five years ahead and you look back at 2024, I still think it's going to be looked at as a pretty down market in the big scheme of things. We'll see how the fourth quarter shakes out. So all that being said, in every single quarter, this year we printed double-digit EBITDA margins. If I take the kind of year-to-date, three quarters in margin, that's about 20%. And we've done the good work on the cost side over the past couple of years. We've talked a lot about that. But what I'm most proud of is the expansion in EBITDA margins is really through top-line growth. It's been taking share and doing the things that we said we'd do. So to Varun's point, if you look ahead to 2025, and you believe that it's going to be healthier, which we do than 2024, by 20% to 30% a $2 trillion, market is a really healthy market. So you believe in some expansion there. And then of course, our share gain goals that we shared at Investor Day are exactly what we're seeking to achieve. The third quarter is another example of that. The guide in the fourth quarter keeps us right on track to achieving those share gain. So if I say, hey, the EBITDA margins this year in 2024 in a pretty tough market were 20%. A little bit of help from the market and taking share gets us very excited about the opportunity to increase operating leverage next year.

Got it. Maybe as a follow-up, just thinking about opportunities, Brian, you talked about $70 billion of bulk MSR and flow year-to-date. Maybe just talk as you look ahead to 2025, what do you think the bulk purchase market for MSRs look like? And maybe just talk about how much more capacity you have and what is the appetite to continue to add in this area of the business? Thank you.

Yes. Thanks, Ryan. So I'll start here. Varun you may want to add in, but it's definitely an area that we're very excited about. When we talked about our capital waterfall and we talked about being interested in deploying capital MSRs still remain right at the top. It's right in our bread and butter. You mentioned the $70 billion. One of the things I'm most excited about and you guys have all seen the news. We're very proud of this Annaly deal. Annaly is a world class asset manager and in our business this flywheel effect that we have been driving for decades now is really impressive. 85% recapture rates, we're collecting the servicing cash flows very efficiently. But when you really think about the revenue opportunity of the next loan compared to the cash flows you're collecting, it's 20x that. So I expect us to continue to double down there on those opportunities, both from the bulk acquisition market. But I think the subservicing aspect is also very interesting to us because if you were in a seat where you didn't have an in-house origination capability, but you were a really good asset manager, protecting those cash flows has to be your number one priority. And if you're thinking about choosing between subservicers, you have one sitting here that has a J.D. Power multiple year winning experience and does it really good. And then you also have something that I don't think others can offer, which is this recapture rate. And recapture rate is the thing that allows an asset manager to protect against CPR or protect against prepayment risk. So I expect it to be a big part of our strategy going into 2025.

I would just add that this example with MSRs and extensibility is just showcasing the power of the platform. And it's just something that really illustrates in a cool way how we scale beyond our four walls because we've earned the right to take these capabilities to benefit others like Annaly. You'll also see us doing the same thing with integrating our technology as a platform to serve as the mortgage platform for banks. The same platform is being extended to create value for brokers via TPO. And then on top of that, as Brian talked about, these recapture capabilities are only going to get better with investments in technology, AI, insights, notifications, CRM capabilities, mobile, data-driven personalization. And as we invest in our platform, each of the parties that we extend the capabilities to become beneficiaries of that innovation. And so really the power of that platform really lies in its extensibility. And the idea that you can write something once you can run it anywhere, benefit multiple parties is something that we're very excited about.

Thanks for the color guys.

Your next question comes from the line of Mark DeVries from Deutsche Bank. Your line is open.

Yes. Thanks. Brian, touched on this at a high level, but was hoping to get a little more detail on how your rate locks moved during the period in the quarter when mortgage rates were down closer to 6%, both purchase and refi? And how they moved as rates headed back up? And also, any context around kind of how gain on sale margins compared in the busier period versus slower periods.

Yes. Thanks Mark. Appreciate the question. So I think there was a two-week window in the month of September and I think that's what you're referring to where mortgage rates came down to the low-6s. And I think it's such a good case study into our strategy at work. There were two really notable things. One, first is when rates get down into the low-6s, it proved that we are off to the races. You have about two years of mortgage production north of that. So there's definitely a bunch of consumers that can benefit from a rate and term refinance. And we saw that. So that's the first thing to note is that your -- that's your sort of Mendoza line, there is you get into those low-6s and it's -- you're off to the races. But the second thing is, if you think about how to capture that opportunity that gives us a bunch of proof points into what we're building and how impactful it is. Because in this case, you had a very, very short window with very high intent consumers and a ton of consumer demand. So the ability to scale up very quickly and capture that is exactly what differentiates us between us and our competitors. If you think about it, it's not just about being able to handle it from a processing, underwriting and closing perspective. But obviously that's very important because the client coming in with high demand and a client coming in with low demand expects the same level of service, the same closing time. So that is important. But it's also just about taking that demand and effectively allocating it to your bankers and keeping your bankers very, very efficient and productive. Because the more clients they can interact with and…

The only thing I would just add is that you asked a little bit about capacity, Mark, and this is why we're so obsessed with AI and the investments that we've made in Rocket Logic, which is our proprietary LOS is driving big efficiency gains. We're on track to save our team members 800,000 hours annually. That's up 14% in just two months. So -- and it's almost $30 million in savings. And we're achieving that while keeping obviously our fixed costs roughly the same. And so just the reason we're obsessed with AI is because when you think about all the bread and butter aspects of our business, analyzing client interactions, automating underwriting, applying models to capital market infrastructure, automating document processing, credit modeling, appraisal reviews, these are all the capabilities that make the mortgage business work. And they're all benefiting from the implementation of AI. And so just continuing to invest in that, I mean this is why we've spent upwards of $0.5 billion over the past five years on this investment. And we've made progress. We will continue to do so and we think there's significantly more gains to be had in the future as well.

Got it. Thank you.

Thanks, Mark.

Your next question comes from a line of Derek Sommers from Jefferies. Your line is open.

Hi, good afternoon, everyone. I was wondering if you could share any incremental detail on the Annaly partnership, maybe portfolio characteristics or how the recapture economic share is going to work.

Yes. Thanks for the question, Derek. We don't disclose obviously the economics of our partnerships, but I think it's safe to say, when you look at the things that Annaly is good at being a great world class asset manager, protecting against prepayments is very important to us and that's where we come in. So clearly there's a subservicing agreement, as you'd expect. We hope we do that very efficiently if you just look at our own servicing. But I think the more interesting part about this deal is really the recapture opportunities and we think that's the superpower that we can offer. So we're happy to do that for Annaly. It truly makes a win-win with the partnerships. And if you think about it, there's economics on the subservicing side and then of course, there's economics on the recapture side. So it's really bringing two great firms together and sort of solving our challenge of hey, we need more servicing and it's a great capital light way to do it. And their challenge of hey, we have a lot of servicing but we have to protect against it. So it's truly a win-win.

Got it. Thank you. And then just to change gears for a second, on second lien products, what kind of behavior are you seeing with the consumer there? Are you viewing this product as potentially interest rate agnostic?

I'll start and then Varun you want to add too. Yes, I think there's a lot of room to run in that product. There's no question about it. If you just kind of study the note rates of all the mortgages outstanding, there is definitely a chunk that's north of 6 and as we just kind of touched on is available for rate and term refinance with just a little bit of rate movement. But of course, there's another big chunk that's, 3%, 3.5% out there, and likely will remain out there for quite some time unless the homeowners is planning on moving. So if you think about it for them, the home equity product is a great product, it's going to make a lot of sense for a long time. I do think we saw in that couple week period during the quarter where rate and term refinances become back in favor and even to some extent cash out can start making more sense as rates start touching 6%. So -- and again, we're sort of happy to do that product for a client where it makes sense as well. But generally speaking, we think the client makes sense for a lot of consumers out there, particularly those consumers that are sitting on those very low rates. And by the way, the thing we talk about a lot internally is by layering on that second makes a ton of sense for the client, but it does bring up the weighted average note rate of the two loans. And then if and when rates do move a little bit, you have an interesting refinance opportunity in terms of the consolidation of those two liens.

Yes. I would just add that in general, our approach is to innovate and meet our clients where they are. And so if we see a market opportunity, we will build products and services to meet our clients there. And so there's room to grow there. But this is an example of where we just really focus on delivering value to our clients. And then the other thing I would also call out is that it's important that we build products not just for our existing client base, but also for our new client base. What we've seen is for products like this, this actually attracts clients to the Rocket brand and to the Rocket franchise. And so by bringing them in, we can then offer them additional products and services that allow us to become their lender for life and that's a really great thing about this product offering.

Got it. Thank you for taking my question.

And your final question comes from a line of Doug Harter from UBS. Your line is open.

Thanks. Just hoping we could talk about expenses and just take it from a different angle. Given the capacity you said of about $150 billion, is there opportunity given the outlook for volumes to take out fixed costs, even if that means, that that capacity comes down somewhat?

Hey, thanks for the question, Doug. I mean, the way I'd answer that is our primary focus is capturing share and growing into the market. We just talked about our views on 2025 and admittedly Q4 has been a bit more volatile than anyone would like, but still very bullish on the 2025 outlook being higher. So right now our focus is being able to continue to capture share, grow into a larger market and do it with a relatively flat fixed cost base. And what that does is it really just increases operating leverage. Even if I look at just the numbers from Q2 to Q3, I think Q2 or, excuse me, Q3 expenses were up mid-3% from Q2. But if I just look at on a rate lock basis, volume was up 20%. So you can see us doing exactly what we said we'd do in terms of building that operating leverage. Of course, it provides option value. There's no question for different markets. But our goal in life here is to avoid the traditional yo-yo effect of the mortgage market. And if you think about how most people grow capacity, they do it through hiring. And we will hire some people too. We have the best team members in the business and the best loan officers in the business. But that being said, hiring is not always the most efficient way for anything. It takes a long time. You have to recruit people. You have to train people. You have to license people. So you need a very long runway. That two-week period in the third quarter was such a good example of where you couldn't hire someone, there was no chance. So if that was your only way to increase capacity, maybe that with a little bit of overtime, you were going to miss out on a really big opportunity. So I think the simplest way I can say it is our focus is growth and our focus is increasing operating leverage. The good news is the most folks believe 2025 is going to be better and we absolutely believe we'll take share. So we expect growth from both of those angles.

Appreciate that, Brian. I guess, how do you think about recognizing the importance of having capacity to take advantage of those pockets like you saw in 3Q? How do you think about what is the right level of kind of spare capacity versus kind of having too much capacity for the market opportunity, even factoring in the growth ambitions?

I would just say, Doug that I think what we have right now is the perfect capacity and we're not looking to sort of expand or detract. And at the end of the day, it's a huge market. Our team members provide incredible value and they're going to become very scaled and successful as a result of the investments that we're making in technology. And so we feel really good about our capacity. We think that it will allow us to take share. We think it will allow us to grow, especially as the impact of technology continues to make our team members more and more efficient. It's a big market. We're very ambitious about our growth aspirations, and so we feel really good about where we are.

Great. I appreciate the answers. Thank you.

Thanks.

And that concludes our question-and-answer session. I will now turn the call back over to Varun Krishna for closing remarks.

Well, thank you, everyone for listening to our call. We're excited and we look forward to speaking with you again next quarter. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.