Q3 2020 Rocket Companies Inc Earnings Call
<unk> third quarter 2020 earnings call.
At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press Star then one on your telephone.
Please be advised that todays conference is being recorded if you require any further assistance. Please press Star then zero I will now turn the call over to the company you May begin your conference.
Afternoon, everyone Im James for Greater Vice President of Investor Relations. Thank.
Thank you for joining us for rocket companies earnings call covering the third quarter of 2020.
We are excited to share the results of another very strong quarter with you before I turn things over to Jay Foreigner, I will read our disclaimers.
Today's call is to provide you with information regarding our third quarter 2020 performance. In addition to our financial outlook.
This conference call includes forward looking statements.
More information about factors that may cause actual results to differ materially from forward looking statements. Please refer to the earnings release that we issued today.
As well as risks described in filings with the SEC, particularly in the section of these documents title risk factors. Our commentary today will also include non-GAAP financial measures.
Reconciliations between GAAP and non-GAAP metrics for our reported results can also be found in our earnings release issued today as well as in our filings with the SEC.
And with that I'll turn things over to Jay finally to get US started Jay.
Good afternoon, and welcome to our third quarter earnings call Im pleased to report rocket companies six consecutive quarter of record breaking volume highlighting the power of our platform and the strength of the rocket brand we.
We are demonstrating true leadership at a critical time for our industry and our clients I'm extremely proud of our 22000 plus team members, whose dedication and drive helped deliver the results. We will share with you today first I want to congratulate our team on being named the number one company for client satisfaction in mortgage origination.
And by JD power yesterday, this marks our 11th straight year being named to the top of the list and when you add in our seventh consecutive number one rankings for mortgage servicing we've taken home 18, JD Power Award in the last 11 years. This one in particular special to US. However, it's proof that our platform is so powerful that.
We can more than double loan originations year over year and still deliver on our commitment to servicing our clients at the highest levels again team. Congratulations our industry has reached an important moment. The COVID-19 pandemic has fundamentally changed the way Americans think of their homes for decades. Many of you there house as their most important investment.
Today, how means so much more.
It is now where we work where we teach our children and where we gather with friends.
Bringing new meaning and significance to the place where we live our home this enthusiasm around the value of home is clear and the numbers for instance, the National Association of Realtors existing home sales report showed that September sales of previously owned homes or more than 20% higher than the same month in 2019.
Also recent reports in the New York Times, and San Francisco Chronicle talent residents moving from the city centers to buy homes in the surrounding suburbs in search of more space Homeownership is on the rise across the country led by a new generation of first time home buyers as a result of shifting demographics and the ongoing pandemic.
We are seeing a rapid acceleration in the long term shift from physical and digital transactions across the industries, where we participate.
Consumers today don't just prefer they demand a completely digital experience.
At the same time, the digital transformation of the lending process has become more important than ever.
As an unprecedented number of consumers look to leverage todays favorable interest rates, we are seeing the strongest growth among our most digitally engage clients application volume through our self serve digital experience has grown significantly faster than overall volume year to date. This trend accelerated earlier this year and continued through the third quarter the rocket more.
Each platform is particularly powerful for first time homebuyers, who can receive loan approvals within minutes in the third quarter, we delivered more purchase approval letters through our digital experience than in any quarter in our company's history. In addition to becoming the overwhelming choice for millennial homebuyers rocket mortgage has continue.
To serve a large number of clients looking to take cash out of their homes reduce their loan terms or refinance due to changes in life situations such as divorce. These clients who are not rate sensitive remain an important population. When you consider rocket companies incredible footprint, serving all 50 states and more than 31.
800 counties in the United States and a growing presence in Canada. Our marketplace has reached a significant inflection point due.
Due to consumers demanding a simple digital experience and I'm proud to say rocket mortgage is executing at enormous scale.
In the third quarter, we delivered a record performance with $89 billion of close loan volume, representing a 122% increase year over year.
The growth we're achieving is unmatched in Q3, we added nearly $50 billion of year over year close loan volume.
Sooner this are incremental volume in the third quarter is so large.
That if alone would have made us the second largest retail mortgage lender in the nation.
To further illustrate the scale of this growth rocket mortgage closed nearly $1 billion of origination volume each day in the third quarter the scale and efficiency of our platform continues to drive substantial earnings power.
We achieved a 69% adjusted EBITDA margin in the quarter and have generated $5.9 billion of adjusted net income in just the first nine months of 2020.
The guidance that Julie will share with you today, some men's us among the most profitable fintech companies in the world.
And we're not stopping there our mission is simple we will continue to lead from the front as the most admired brand and technology platform in our industry recently, we hosted Tetco on our in House Technology Conference for all rocket companies technologists, drawing more than 4000 of the brightest minds in the industry.
One of the most important topics covered was ethical artificial intelligence and its ever increasing role in business. We crossed an important milestone in Q3 by generating more than $60 billion in application volume over the last two years using data science in AI. Our data science teams are now generating organically flow at higher convert.
Version rates than paid marketing channels.
We are also using automation to improve the efficiency of our operations and are now making more than 1 million decisions per day using machine learning.
All of these processes get better with scale.
Strengthening our competitive.
Of lead and reinforcing the rocket companies flywheel.
In addition to leveraging our rich data insights we continue to expand the ways. We are reaching consumers through innovations partnerships in marketing in the last 30 days alone we have announced enhancements to our rocket pro platform that great real estate professionals never before available insights into their clients mortgages now they can help guide.
Home buyers through the mortgage process from approval to close and using the rocket pro mobile app or web site, rather than calling one of our mortgage bankers, we're asking the client real estate agents can now use rocket fuel insight to check in on a loan status.
That leaves more time for mortgage bankers to help other homebuyers and the agent can focus on showing and closing houses with their clients. The reaction from those in the real estate community has been overwhelming in fact in the first day more than 1100 agents joined rocket pro insights and our momentum has only increased we anticipate nearly 15.
Thousand real estate professionals will sign up to use the platform by the end of the year, providing a significant touch point with one of the largest influencers in the home purchase lifecycle. Another program to help both homebuyers and their agents was launched in early October.
We kicked off a new relationship with realtor dot com that allows the tens of millions of homebuyers visiting their web site to seamlessly apply for a rocket mortgage the new venture was quickly followed by the announcement highlighting rocket mortgages partnership with Intuit Mint personal finance tool now.
Now mid users can easily import their personal financial information into a rocket mortgage loan application with the top of the finger, allowing them to lock in a mortgage rate in as little as eight minutes, all while staying in the mint app.
Second loans mortgage services, which serves the needs of our mortgage broker partners recently rebranded to rocket Pro TPL. This.
This transition allows our partners to continue to meet the needs of their clients, while also providing them with the ability to leverage the best known brands in consumer lending with rocket mortgage debt.
To celebrate we provided 10000 fresh purchase leads to our rocket protein GPO partners something that's never been done before in the industry as part of the rebranding we have also announced new AI and machine learning innovations in partnership with Google Technology addition.
Additional tech focused enhancements to our platform and new ways to align with and support our brokers.
Overall, the feedback we've received about the rebrand and technology Rollouts has been extremely positive.
In addition to all the fantastic partnerships, we've already shared with you. We are proud to announce that as of last week, we have forged a relationship with one of the largest financial services companies in the world. This.
This collaboration similar to the program, we created with Charles Schwab will allow us to originate mortgages for a new base of clients. We anticipate that we'll share more information in the new year. Our exceptional brand marketing also continues to be a true differentiator in the industry.
Our rocket can campaign has been incredibly successful.
And we're proud to soon be rolling out a new slate of ads, including our first exclusively targeting the growing Latin next community.
We continue to also leverage well known talent like Jason Mum on Star of our Super Bowl AD in future NFL Hall of Fame wide receiver Larry Fitzgerald in our marketing to appeal to a broad consumer base. The fact is rocket companies is leveraging the scale and flexibility of our platform to deliver first to market innovations with the best partnerships.
In real estate technology and finance.
All while reinforcing our brand with best in class marketing outside of mortgage innovation is taking place throughout our entire ecosystem in the last several months Nexus our title and closing technology Company announced it had partnered with insurance leaders farmers and lemonade to simplify homeowners insurance Verifications you.
Using its clear why platform. These.
These companies join others, including Allstate and Liberty mutual in helping provide a digital solution to lenders looking to confirm the presence of an insurance policy in real time, eliminating the need to manually call to confirm a process that is deceptively tedious.
At Amaruq, our title company, we've closed more than 100000 mortgage transactions in September our record that proves the scalability of our platform. In addition, amrok continues to be a trailblazer digitizing the title industry much like rocket mortgage did for loan originations.
In the first three quarters of 2020. The company is responsible for 90% of all E closings in the industry, providing safety and convenience to our clients amid the ongoing pandemic.
Additionally, AMAK is implementing machine learning and ethical intuit's workflow through its proprietary title decision engine or TD. This tool, which is currently being used on more than 30% of Amdocs title work automates. The traditionally manual process of reviewing documents maps and records of say.
Sale cutting down the time our team members work on files by nearly 70%. This frees us up to work on other more specialized items significantly increasing our productivity finally, I'd like to take a moment to talk about our approach to client retention and increasingly important driver of our business. After we originate alone we maintained monthly touch.
Points with our clients and generate recurring revenue by processing their payments and servicing their loan over its lifetime, Julie will give more detail in a moment, but we are sharing today that rocket mortgage consistently retains over 90% of our total servicing clients on an annual basis risk.
Retention at these levels has never been seen in the mortgage business and rivals any subscription based model across industries, including cable streaming and wireless services before I turn things over to Julie I wanted to announce an addition to our board of directors. Our board has voted unanimously to make Jonathan Meritor, the founder and president of tax day.
An independent board member and New chair of our audit Committee.
Prior to tax day, Jonathan spent 23 years and professional sports serving as the Chief Financial Officer for Major League Baseball, the Florida Marlins, The Florida Panthers and Dolphin Stadium.
In addition to our board. He also serves as an independent board member for Tyson Foods Mcgraw Hill Education, literally baseball and several others. We are very excited to have him join us and with that I'll ask Julie to share with you. The details of our financial performance in this quarter Julie Thank.
Okay and good afternoon, everyone. Thanks to the hard work of the entire rocket companies team. We achieved another quarter of incredible result in the third quarter, we achieved year over year quarterly adjusted revenue growth of 163% to $4.7 billion and adjusted net income growth of 360.
5% to $2.4 billion. We also produced another quarterly record in closed loan volume, which was up 122% year over year to $89 billion.
Based on what banks and mortgage lenders have publicly reported we believe that our closed loan volume growth was substantially higher than the overall industry in the three and nine months ended September 2020, compared to a year earlier, we generated record quarterly net rate lock volume of $94.7 billion.
Which represented a gain of 101% year over year.
As a reminder, we recognize revenue at the time, when we locked the interest rate with our client.
Typically occur approximately 30 to 45 days prior to the closing of alone.
We produced robust growth in both of our segments.
Funded loan volume in our direct to consumer channel was up by 131% to $53.5 billion, an increase in our partner network by 127% to $29.6 billion, both compared with the year earlier quarter.
We consider a loan funded when it is sold to investors on the secondary market. While we continue to benefit from the low interest rate environment. We also produced strong year over year growth in the quarter from less rate sensitive products.
Demand for these products are driven by factors, including client wanting to purchase a home take cash out of their homes reduce the terms on their mortgages chief.
Changes in their life situation and the demand for investment properties.
Although rate and term refinancing activity has been very high in 2020, we have historically had a balanced mix of originations.
For example from the first quarter of 2017 through the third quarter of 2020 more than half our overall volume was from our less rate sensitive products.
Our gain on sales of 4.52% increased substantially from 3.29% in the prior year period and remain strong by historical standards.
The sequential change from record gain on sale margins of 5.19% in the second quarter was driven primarily by changes in channel and product mix as a reminder record gain on sale margins in the second quarter reflected our ability to rapidly scale, our direct to consumer volume during a period of pandemic.
Related market disruption, particularly during April and May.
Breaking down the 67 basis point variance in Gan sale margins sequentially changes in loan pricing represented less than 10 basis points of the quarter over quarter difference in our gain on sale margins.
Approximately 40 basis points of the change resulted from differences in channel and product mix, particularly the strong growth of our partner network volume during the quarter overall, our margins exceeded the high end of our expectations and remained at historically elevated levels throughout the third quarter.
In the past we have typically seen primary secondary spreads normalize within a month or two however, since March these spreads have remained well above historical averages we.
We believe this speaks to the strength of demand in the current environment as you heard from Jay.
Managing gain on sale margins is an important advantage of the rocket mortgage business model, our centralized technology driven operating model allows us to dynamically price our products on a real time basis.
As the largest mortgage lender in the country. We also benefit from the scale and sophistication of our capital markets capabilities, including superior hedging pooling and secondary market execution plan.
Client retention is another key differentiator of the rocket companies ecosystem.
I've spoken to many of you about our ability to recapture clients, who pay off out of our servicing portfolio.
Because of our unique business model, our recapture rate is more than four times the industry average based on the latest figures from Black Knight.
Today, we are also introducing a new metric called our net client retention rate.
This metric is intended to be comparable with retention figures across multiple industries, including cable and wireless service providers.
Our new metric is calculated based on the clients who remain active with rocket as a percentage of the total starting client base as.
As we show in today's press release, our net client retention rate has consistently been above 90% over the past few years.
Retention at these levels drive substantial lifetime value advantages for the company.
Our high net retention rate allows us to benefit from the continued cash flow from our servicing portfolio and also have the opportunity to interact with our clients in the businesses throughout our ecosystem.
This metric reflects the high lifetime value of our portfolio.
A unique strength of our business is that when the net client retention rate fall. It is generally the result of lower interest rates, leading to higher refinance activity.
Because our recapture rate is 4.6 times the industry average, we generate even more revenue from increased loan origination volume.
Our hybrid capture rate, serving as a natural hedge to our retention rate in the current environment. We are driving strong repeat transaction activity, which represented 42% up overall mortgage volume in the third quarter.
We are also adding hundreds of thousands of new clients into our ecosystem, creating and expanding foundation for future growth.
Our total Q3 expenses increased by 46% year over year, primarily driven by higher variable compensation and an increase in team members in production roles to support our growth turning to our balance sheet. We remain in a strong liquidity position with total liquidity of $6.9 billion, which included three p.
$5 billion of cash as of quarter end.
We define total liquidity as cash and cash equivalents plus bond draw on NSR lines Undrawn unsecured lines of credit and self funded mortgages that can be transferred to our funding facilities at our option. These figures reflect the strong underlying cash generation of the company and our recent issuances.
$2 billion in senior notes at substantially lower interest rates than the notes they refinanced.
After the end of the quarter, we repaid the $1.25 billion of senior notes due 2025.
Overall, we are extremely proud of our long term track record of delivering profitable growth at scale and our record performance in the quarter and year to date to.
To illustrate just how math of our scale is the company has been consistently profitable on an annual basis, having generated double digit GAAP pre tax income margins every year from 2015 through 2019.
Over just the first nine months of 2020, we produced approximately $6.6 billion in GAAP pre tax income, which represented a dramatic improvement compared with a year earlier.
Our strategic objective remains to achieve 25% market share of the mortgage market by 2030, while continuing to generate industry, leading profitability over the long run.
To achieve these long term objectives, we are investing in our brands and technology. So that we can profitably grow through all market environments.
For example over the 12 months ended September Thirtyth 2020, we leveraged more than $500 million invested in technology and our approximately 2900 technology team members to further increase monthly loan production capacity and enhance efficiency, including some of the end.
Hansmann Jay discussed.
We also invested approximately $900 million in marketing over the same timeframe.
Moving on to our outlook. We currently expect to close loan volume of between $88 billion and $93 billion or an increase of 73% to 83% compared to $50.8 billion in the fourth quarter of 2019.
We expect net rate lock volume of between 80 billion and $87 billion, which would represent an increase of 82% to 98% compared to $43.9 billion in the fourth quarter of 2019.
And we expect gain on sale margin of 3.8% to 4.1%, which would be an improvement of 11% to 20% compared to 3.41% in the fourth quarter of 2019 Lastly, the company's board of directors approved a $1 billion share repurchase program effective today.
The authorization reflects the board and senior leadership conference in rocket companies long term prospects the.
The program gives us the flexibility to take advantage of opportunities. If we believe the market is undervaluing our business.
We are committed to using our substantial cash generation to create long term value for our shareholders.
With that we're ready to turn it back to the operator for questions.
At this time I will remind everyone in order to ask your question. Please press star one number one on your telephone keypad.
Your first question comes from the line of James So from Morgan Stanley. Your line is open.
Thank you very much good afternoon, Jay good afternoon Julie.
I'm wondering if we could start with the new retention metric that you highlighted and maybe you can just spend a minute or two helping us understand how you look at that and how thats different than the than the other.
Other net retention metric used in the past maybe Jay in particular, when you look at that 92%.
Well go through your mind and in terms of the different ways that you can look to take advantage of that and increase the lifetime value of those customers.
Yes, thanks for the question.
I know, we talked a lot about this during the IPO process, Bob Walters in particular about our recapture capabilities.
Sure now, adding g. references snowboards half times the industry average, so if someone's going to be paying off on our on our portfolio.
Portfolio, we are recapturing that client, which is great because it generates.
Yes, very good revenue for us.
And that recapture rate is one of the reasons, we can but you were able to have this very high retention rates.
Can you just touched on it when the retention rate.
His high of course that means longer.
Client lifetimes, and you think about the lifetime value of applied more opportunity to help them with the refinance market and helping us to purchase more opportune. It helped me better products, such as auto and personal loans.
And and here is I think something different for us.
We benefit from out of a lot of other retention.
Hi, Hi businesses that were profitable on the first transaction as you saw today very profitable.
This is actually even more unique for us because.
In all business when the retention rate rises you're probably looking at increased interest rates and so as a servicer will pull electing those monthly payments will also having the ability to market to those clients for other services.
This is Rachel already.
And we might see the retention rate dropped dead right.
A day here in that low Ninetys, which is still incredible we're still benefiting because that recapture rate allows us to generate significant revenue on the refinance of their mortgage so if retention rate and the recapture rate wouldn't together, but.
Also like a natural hedge I think Julie referenced it really allows us to win regardless of whether interest rates are rising interest rates are falling and that really supports that brought a broader ecosystem that we're building as I touched on before keeping the quiet in our in our ecosystem to be able to offer additional products and services to them thats how might that be.
At about it.
That's really helpful. And then I guess to build on that one of the key thing that we.
You look at it.
Quickly can you get people into the rocket ecosystem and can you do that it kind of the beginning of there.
Thats rolling working careers as as.
And when they're buying their first homes I think you made some comments that you're still seeing some success there, but maybe you can talk a little bit about where you are seeing success and how we should think about the trajectory on on that initial purchase volumes and how that can contribute to the lifetime value of particular, you're able to maintain those high retention rates.
Thanks, a lot.
Yes, and thanks again for the question as I referenced in the comments in the call here.
The demand for the digital experience is is stronger than ever and we're seeing significant growth there and in particular for us on the purchase side. So we're talking about millennials, we're talking about folks who have been thinking about buying a home and as I touched on told it is really driven these these clients are accelerated their desire.
To be home owners meetings in urban centers into suburban.
All places and looking for a home purchase in fact, I think Q3 is the strongest one of our strongest purchase orders and we issued more albeit that approval letters declines in Q3 than any other quarter had company's history. So that's one way that we.
Engage that client early on in their life cycle, and then I'd like you to think about the rocket auto business that we are excited about because that also tends to skew to a younger demographic and so yes, yes mortgage or home isn't the initial purchase loan or auto maybe and so all of those initiatives and our.
Ecosystem that we're working out allow us to to start that relationship building with the younger.
Client base that then we'll retain for 2030 40 years to come.
Okay.
Great. Thanks.
Your next question comes from the line of Timothy Chan from Credit Suisse. Your line is open.
Thanks, a lot. Thank you for taking the question I wanted to bring up the topic comes up often in investor discussions it's around some of the technology advantages that you have that have taken clearly years in lots of investment to build up. The question is really around can you bring to light.
All of these advantages that might be behind the scenes that are maybe tougher for the consumer to see by looking at the user interface. Some actually work with like publicity anything into sort of local or municipal systems anything along those lines would be much appreciated.
Yes, thanks for the question.
Thank you Julie referenced this as we think about the investments that we've made here in the last 12 months or $500 million. When it comes to our now nearly 3000 technologists and the platform that Weve been building I think.
Best example, that I can give you is that the growth year over year. If we look at the first nine months of 19 94 billion closed.
Now we look at $213 billion in the same nine month period in 2020.
$94 billion is a huge base largest lender in the country and now more than doubling that demonstrates the power of that platform and those investments that we've made in technology across the board.
So you talked about some of the more recent rollouts one I'll I'll draw your attention to is the rocket pro insight platform, that's giving real estate agents real time updates on the status of their their clients mortgage and that's important to them of course, because they feel in control, it's very important that that loan closings, but it also.
Frees up time for our team members to now we're focused on the next all making us more efficient there is taking those calls. It also allows divestiture to drive referral business into our platform. Another one that I believe you referenced is the mid partnership we've been partners with into it for a long period of time.
Awards.
Okay and hand in hand to have a fully integrated rocket mortgage experience.
In the mint.
Experience for their clients EBITDA had the lead that App launch that now and not only does that allow us to get to provide that experienced a mid users, but the guys that were built we can leverage across additional partnerships I know another one that we referenced it.
Investment for US is the partnership into realtor Dot com.
Well, reaching now tens of millions of prospective homebuyers all.
And again that takes.
It takes good good strong looks more technology team to be able to do that on the internal side, maybe other things are are less evident.
A significant portion of our underwriting process has been leveraging.
As we talked about machine learning a lot of our decisions around verification to the assets or verification of employment verification insurance is now done using oct using automated systems.
In fact, I think we referenced that there are over a million decisions. Each day that now automated all bringing greater efficiencies throughout our platform, which is what makes it so scalable.
That's extremely helpful. Thank you so much and then a quick follow up you actually you are one step ahead of me there and mentioned on the realtor Dot Com, which I know Mitch you mentioned in your prepared remarks, as well, but it does seem to have a tilt towards the purchase market, obviously and I was wondering if you could just expand on that partnership in terms of the potential delta to some of your other.
Large brand name partners like State farm.
Well the realtor Dot Com partnership represents yet another example of us.
Integrating our platform into their experience and so we started that process, but.
The sky's the limit on what that integration can look like when you think that that think of the data and information we have about a home values in markets. The real estate connections that various age of connections that they have.
Equity information that we have about a 2 million plus.
Folks in our servicing book and so we're really trying to create there is a seamless process. Some of the very moment that you think about purchasing a home so closing the holding so the real estate agents the mortgage approval airlocks title business.
Nexus and the and the closing the closing platforms that we've done. This is just a great way for us to wrap that all together and create a very unique and best in class experience for our well apply.
That's it for me back on please.
Your next question comes from the line of Ryan Nash from Goldman Sachs. Your line is open.
Hey, good evening guys.
EBITDA.
So James maybe to bring together a hand.
Couple of things that you touched upon in I think a big part of the narrative.
The ability to take market share and I guess.
Based on where you're running I think you're in or about 7.5% year to date, maybe closer to 8% in the quarter. Although I know you don't manage to any one individual quarter, so with that as the backup.
Maybe just talk about the sustainability of volumes at these levels and second we're obviously seeing rates moving up a bit and I think market expectations are for them to continue to increase. So can you maybe just talk about how you expect to drive market share anymore purchase oriented market will be leaning more heavily into the broker channel.
Can you maybe just talk about you talked a little bit about cash out Refinances party originations is that a big part of the volume I cannot help serve as an offset as you know in a in a.
Smaller refine market. Thanks.
Yes, great question I'm truly touched on over the last two and a half plus years. When you look at the volume breakdown of that border Canada.
Reason for a refinance or alone between purchase and cash out and and term changes in life changes like divorce 50.
50% of our production is really non interest rate sensitive. So thats a critical component we've demonstrated that for years and that will continue to happen also when we look at.
The appliance that could save a substantial amount of money here in this environment.
And we're still in a situation I believe were 70%.
Hopes out there.
It makes sense to refinance so we feel very good about the continued strength in demand.
Not only on the refinance side that are more on the home purchase side.
Homeownership is back to kind of pre crisis levels and as I referenced before millennials are very focused on homeownership moving from urban areas.
It was great welcome news that the vaccine or a vaccine maybe out its way, but we don't believe this will alter the course that has been set now for more work from home leveraging the home for our family and.
Work in all of those things all things bode very well for homeownership and so we imagine that will continue and I think as Julie gave for guidance for Q4.
Really what you're looking at if you back out a little bit of pressure we saw in October due to mark.
Marketing spend for the election, which of course makes a little bit more challenging for us from a marketing perspective, and the fact that Q4 has four or five fewer what I'll call actionable business days, you know the day before Thanksgiving or the day before Christmas Eve, which can be a bit more challenging if you back that out and look at what we're forecasting for production in Q4 is that fair.
Very similar to what we accomplished in Q3 and then as you touched on this is where our ability to reach into the market leveraging whether it's our partners at Schwab.
What's your dot com mint or our our our broker partners along with leaning into our direct to consumer advertising it really positions us to grow market share when others are pulling back because of slight changes in interest rates.
Got it and.
Maybe one for Julie I wanted to feel left out here.
So Julie can you maybe just talk about how gain on sales spreads trended across the quarter given that they came in well above the guidance.
And can you maybe just talk about what you are seeing that will drive the compression into the fourth quarter, how much of that is being driven by channel mix expectations versus competition and.
As you look out over the next few quarters based on what you're seeing today, just any sense for how long you think we can continue to operate with these elevated spreads.
Yes sure. Thanks for the question and yes in Q3, our gain on sale margins exceeded our expectations and and remained elevated by historical standards. So our margins have remained elevated for longer than expected. If you look at that change as I mentioned from Q2 to Q3 key senior loan pricing represented less.
10 basis points of that Barry.
Handling product mix were the biggest drivers of this variance about 40 basis points and this and that resulted from strong partner network growth that we saw during Q3. So as we look ahead into Q4 margins are still strong by historical standards and we are continuing to stay elevated we think that demand that we're going to continue to see the 70% thats able to refill.
And any amount of refinance volume as you take that into the next couple of years, if they're 60 or $73 million.
They are ready to be refinanced that is something that's going to take years to work through which will continue to elevate that demand, we believe going into to the upcoming years and so we feel really good about where our gain on sale margin line heading here into the fourth quarter.
Your next question comes from the line of Rick Shane from JP Morgan Your line is open.
Good afternoon, everybody and thanks for taking my questions.
One sort of business related and then one stock related.
As we look forward to the implementation of the GFC.
Verse market fees.
Coming into place I'm curious, whether or not you think.
The primary.
Primary markets, we need price or whether or not you think originators the start to absorb some of this and that will adversely impacting on sale.
Hi, guys and thanks for the question largely most of that pricing has been absorbed and we got a test run at it before the changes that we made a month or so ago. So they've largely been absorbed at this point.
Fully priced into the margins.
Great. Okay. Thank you and then.
When you know you.
You need situation you guys have announced a billion dollar potential buyback I am curious how that works with the combination of a and b shares R&D shares eligible for repurchase as well.
Yes, that's probably a question drilling or you want to feel that you want to push it to a different time I can just answer generally know the d. here is are not eligible for the purchases to be a class a share repurchase program that we have announced.
Your next question comes from the line of Robin.
Not preventing you from Zelman and associates your line is open.
Hey, Thank you and congratulations on the on the results and guidance so.
So first question on gain on sale margins Julie taking some of your commentary about flows you maybe step further.
One of the debates out there is really thinking about that outlook into 2021, 2020, Q and sort of theoretically how much compression there there could be on gain on sale margins, especially if the environment, such where rates do back up at some point in industry volumes begin to begin to fade, so definitely not looking for space.
EBITDA guidance on volumes or gain on sale margins for next year, but I'm just hoping you could maybe elaborate on the puts and takes to the gain on sale margins.
I appreciate all the color that you did provide around the differentiation with you recapture and dynamic pricing, but maybe if you can share some color on on what you've seen historically in periods that they might be somewhat analogous to today, where you have 2020, as a pretty massive year, but effectively what happens after that and why.
What are those what are the primary factors that we should think about for the puts the states.
Yes.
Now can you kind of look at maybe more normalized gain on sale margins, you'll see our direct to consumer margins range between 400, and 450 basis points and then the partner network side of things probably between 100 and 150 basis points. If you look back over time, So I think as I mentioned that the demand that we're seeing now with in Q.
And you probably have a nice upward impact on those margins relative to the sort of historical levels. We have seen into this upcoming year, how long that will last.
It'd be theme, but like I said, there's there's quite a lot of demand still out there.
The upcoming years.
Got it that's very helpful and on the on the partner segment exciting to hear about that new partnership is struck last week.
But curious on the rocket pro Tito changes this quarter I was hoping you could address just how you think about your positioning in the wholesale channel on how you think about your differentiation from others, maybe in terms of execution speed pricing platform. You can you name it.
The and how that benefits or mortgage partners and along those lines.
How does that positioning in some of the advantages are bringing into that market influence the gain on sale margin in that segment kind of above and beyond the the overall mortgage market influences on the on the margin.
Got you so much.
I would say as we think about our partner network.
Which is large and growing both the branded partnerships that we've accomplished with Charles Schwab State farm.
Into it.
But another part of your reference today that we'll be talking more about as we get into 2021.
They are incredibly important.
They reflect margin bed that is between.
Maybe your traditional third party and direct to consumer which is certainly beneficial.
And they leverage our brand and that's the unique thing also about the third party.
New channel that you're talking about brokers and I think the units that we bring to the table not only our process.
Technology, but now as Weve rebranded to rocket Pro Tivo, we are giving the brand that is so highly regarded in the industry and allowing these brokers to leverage that I think you also referenced some of that.
Sets us apart.
Ever is best for our clients, we want to help them achieve that and so.
We were able to.
Also 10000 purchase leads to our TPL partners here as we rolled out the new rocket fuel platform and we'll be able to continue to do that and so those brokers have the advantage of using great technology.
Allowing our clients to access the process that has won the 11th Jade.
JD Power award in a low for loan origination.
And now leverage the brand that people know and trust and we'll see the lead flow to allow them to grow their businesses as well so when we think about that space.
We're really focusing on all of those things that we can do to continue to grow at Dan also differentiate ourselves from them kind of the traditional players in that space.
Your next question comes from the line of Rosewall from RBC. Your line is open.
Yes, thanks very much for taking my question.
I was wondering if we could think about the expense side Tony.
The fourth quarter is there any sort of seasonality, we should be aware of or anything.
As we kind of think about adjusted EBITDA.
Yes.
Well, we don't give guidance on expenses going into the fourth quarter, certainly we will see the variable expenses.
Very every quarter with production, but theres nothing in particular that were looking at in in Q4 EBITDA.
I think of note as we think ahead here so.
No nothing really special to comment on as we look ahead.
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Okay, and then a bigger picture question.
Hello.
The efforts going into sort of the non mortgage loans going or are you. Just so busy then mortgage space that you're not really focused that much going into auto and personal.
No. We're very focused on that and then this one the key strengths of our our platform not only as the technology the client base the brands, but also the leadership and so our ability to leverage our leadership across those areas, both real estate rocket homes rocket auto.
And and rocket loans.
Just is going very well I know, we're not providing guidance right now on those businesses.
But when we think about 2021.
Yes, we're looking at businesses that will see substantial growth.
Once again, if you would like to ask your question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Aaron Cigna, which from Citi. Your line is open.
Thanks, maybe just touch a little bit on your expansion plans into Canada, and how that's progressing and and I.
Yes.
What your thoughts are in terms of the proportion of mortgage production you would expect to get.
Over the next couple of years.
Yes, we're very excited about the work that we're doing in Canada I know, we released here in the last week or two that we've made.
Acquisition.
Many clubs in low to partner with Glenn desk, and so that really allows a deeper direct access to that mortgage brokers in Canada and our focus today is really developing the best tech process between the broker and the lender and so thats simple acquisition is critical.
I've seen a lot of positive response from both the broker community in Canada, and so just things are going as planned and we continue to develop that technology.
It's.
The areas right for disruption and between lenders consumer I believe we're bringing in experienced that no one else is to the table.
Thanks, and then on the back on the share repurchase authorization.
Something that you intend to use on a regular basis or is this more kind of episodic whenever you see opportunity.
And your stock or a bit too much excess capital.
Yes, So I think this is.
Goes back to the broader concept there just how we're going to handle.
Handle capital allocation and so remember that.
Got a 35 year track record here I think of allocating capital in a pretty strategic manner as Julie touched on our first priority is always ensuring you've got a very strong balance sheet, our business is well capitalized.
And then making sure we're investing in our business for us.
There's never been a better return than investing those dollars back into our business, whether its spending the dollars on marketing to grow that brand spending the dollars on.
On technology to continue to grow that platform.
We've been able to leverage.
Clearly, we'll always considering different M&A activities.
And then finally as we go through that waterfall with as profitable as we are there are times when returning capital to shareholders is the right thing to do.
So that could come in the form of a special dividend that we've talked about we did that.
As a privately held organization from time to time, but that it will public another way for us to help them grow shareholders is to repurchase.
Our shares and I think that was an important move that the board made we're going to be thoughtful and disciplined but as always opportunistic we.
We have a strong feeling about the value of our organization and if there's an opportunity to buy back shares.
Yes, we think are undervalued and will do so.
Your next question comes from the line of Mark degrees from Barclays. Your line is open.
Thank you.
So any color you can provide us today on the percentage of blocks you're getting.
From re Fi versus purchase and also kind of broken down by EUR two channel.
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Yes.
It is not something that we have had disclosed in the past I think we disclosed our mix in our S. One kind of for 2019, and what that looks like but yes that is something that we're still seeing very strong purchase demand here and something that we're very focused on.
We're just not disclosing right now the mix between between now and the channel.
Okay.
The third question, maybe similar response, but.
What percentage of your title business are you, capturing new originations and how high do you think that can ultimately go.
Are you generate third party business leader.
Yes, I don't think we disclose the percentages, but as I referenced before.
Our AMAK had it's a record quarter as well.
And so a significant portion of the title that we we do here is we leverage through and rock and they also have a robust third party title business that is not based on rocket mortgage you're picking modes.
Well, we don't give specific percentages.
Your next question comes from the line of Jack Micenko from SFG. Your line is open.
Hey, we're going to revisit the buyback versus the special dividend.
In slow buybacks, maybe half of the shares that are currently trading.
Thought process between maybe a buyback or a special dividend.
At this point.
I mean, it really just just what's the best opportunity for us if we see.
The stock price dropped to a place that we think is advantageous.
Advantageous to the better use of our capital EBITDA by that those shares back.
Okay, and then looking at the marketing spend it grew as a percent of revenue and I know you guys.
Pretty consistent with your marketing spend was there is there anything.
This quarter as you think about.
The spend there and the timing maybe into spring selling.
21 or was it just.
You just kind of mismatch the spend versus the revenue where are you are you, making a conscious effort to really push.
More of this elevated revenue into marketing.
What's available to you.
Well as we've talked about for a long period of time. If there is a marketing dollar that can you spend that is profitable, especially on the first transaction, we will spend it.
Because the lifetime value of that client is multiples more than the initial revenue that we and profit that we generate in the first transaction.
We also of course.
Increased meat.
Media cost as we went into this quarter with the election and Im sure you were watching the television listen to radio and gathering lines much that was and it was hard to see an AD that wasn't related to to the election, so that brought costs up a bit for us as well.
Your next question comes from the line of Bose George from KBW. Your line is open.
Hey, good afternoon. Thank.
Can you guys give the recapture rate on borrowers with loans.
Just transaction and I was just wondering does that work into the retention metric.
No I don't think we give the.
Specific number for that but I will share with you as we think about the broader ecosystem rocket homes plays a critical role in providing to our mortgage clients.
The homes they can afford the equity that they have in their home.
And even getting them, what we call wocket ready or or verified approvals and so someone in our servicing portfolio.
Who's then demonstrating behavior.
Looking at homes in their area wanting that verified approval gives us a heads up will trigger to be able to work with that client to ensure that we bring them back from a purchase perspective as well and so thats why this this robust ecosystem is so important to us okay.
Okay, great. Thanks, and then actually.
I wanted to ask about Ginnie Mae buyouts is that contributing much to earnings.
As with kind of size that is thanks again.
Yeah, we have done some ginnie Mae buyouts and you can see that we have borrowed on our line of credit on our balance sheet, but it is an opportunity that we're continuing to evaluate again.
For right now that is is the amount that we're going to do is kind of what you see on our balance sheet, there about $250 million so far.
Your next question comes from the line of Don Vendetti from Wells Fargo. Your line is open.
Hi, Good evening I was just wondering if there's been a lot of activity with the non banks back pull through but just.
Yes, I may also.
Take market share, but just curious your thoughts there.
The timing on that.
That will change.
Sure and then also what Youre seeing from some of the large banks.
Well, we do see other folks who participate in the mortgage and real estate space thinking about going public I think when we think of rocket companies and our focus on helping consumers.
With some of the most exciting experiences they have in their life, whether its buying a whole more refinancing their home or buying a car. We think we're uniquely positioned.
Obviously, we've talked a lot about brands here today, we've become the household name when it comes to to thinking about a great high quality mortgage or now real estate experience spending nearly $900 million was $2 billion in marketing.
Also when we think about the client service, we're providing lubricants JD power once a few times here, but we think that separates us from others that may be.
In a similar situation.
And then of course, the dollars that we're able to invest in the technology to grow this platform and separate us from.
From others.
With now 2 million clients on our servicing book with a retention rate north of 90% recapture rate, that's four and a half times the industry. According to Black Knight.
And watching this base grow.
How we think about the spin tech platform that weve built the growth that we're seeing we think thats quite a bit different than some other folks that may be in the space doing mortgages.
Thank you.
Your final question comes from the line of Henry Coffey from Wedbush. Your line is open.
Yes, good evening and thank you for taking my question.
I know on the last call you talked about.
Your objectives in terms of building capacity for next year.
Maybe you could talk about that a little bit more in and deploy.
Depending on where the re Fi and purchase money market falls out.
How do you see that affecting your channel mix between the independent between the brokers the partner network and.
And your direct retail originations.
Well the progress is going very well.
As you look at the close volume that we were able to achieve in Q3 at our projections for Q4.
Technology to allow us to.
Our target goal has been 25% of the normalized mortgage market. So that said two trillion give or take which would be 500 billion look at just about 40, or so billion a month and so from a technology perspective from an operations perspective.
The platform is performing incredibly well when we think about the future and we talked about this a lot.
You touched on the realtor Dot Com partnership we've talked about.
Another very large partnership that we will be announcing with more detail in 2021, we talked about the rollout of rocket play TPL, giving brokers that brand and that technology. All of these things will allow us to continue to lean into the marketing gross share regardless of interest rate conditions and so.
And we just continue on our path to building all of the right long term strategy is to allow the company to achieve that long term goal of 25% market share by by 2030.
Second question is not really related but what about the quote other areas how is that playing out auto and direct lending in this.
This is a whole other follow wax that you've talked about so much.
With that I'll say, thank you for taking my question.
Yes, well as I touched on before I know, we're not providing guidance, but what I can state that.
Much like the mortgage platform building out the the different channels in our real estate from rocket homes, which now has millions of visitors a month for sale by owner Platformed The rocket auto platform.
All of those things are going as planned and we are very excited about the growth. We've seen here in Q3, and even more excited about the growth that we believe we will experience in the future.
I just have one one I'm sorry go ahead, Julie one clarify one thing I wanted to make sure that I did clarify here with US earlier question regarding the share repurchase plan. If the question was regarding D. Oar D shares.
So I just want to clarify from the share repurchase plan applied to both entered gain shares.
Thank you. Thank you drew.
Well, great. We've got I appreciate everyone, joining today and I think thats going to wrap up.
The questions, but thank you so much for taking the time.
That concludes today's conference call. Thank you everybody for joining you may now disconnect.
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Okay.
Ron.
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Okay.