Rocket Companies, Inc. (RKT) CEO Jay Farner Presents at Credit Suisse 25th Annual Technology Conference (Transcript)

Rocket Companies, Inc. (NYSE:RKT) Credit Suisse 25th Annual Technology Conference December 1, 2021 3:45 PM ET

Company Participants

Jay Farner - CEO

Conference Call Participants

Timothy Chiodo - Credit Suisse

Timothy Chiodo

Okay. Thank you. Welcome, everyone, to the afternoon session here on Wednesday. This is the second day of our 25th Annual Credit Suisse Technology Conference. We're very happy to have with us today the team from Rocket. With us today specifically on stage, we have the CEO, Jay Farner.

Jay, I want to thank you and your full team for traveling here to Arizona.

Jay Farner

Yes, absolutely happy to be here.

Question-and-Answer Session

Q - Timothy Chiodo

All right. Excellent. So we're going to get right into the questions. And I think the best place to start is with the term fintech, and really, in many ways, Rocket is the original fintech company. So maybe for those that are maybe newer to the story, you could back up and let us know how Rocket essentially became that first fintech, a little bit of history.

Jay Farner

Yes, of course. Well, for those out there watching who don't know Rocket that well, we've been in business for 36 years, started as Rock Financial, Quicken Loans for many, many years and now Rocket Companies. And the mission of our organization since the mid-90s was leveraging technology and then the Internet to grow our business.

And at that point in time, obviously, we're just a small mortgage lender. We've now worked our way to the largest mortgage lender in the country. And I think that for us, although it is important to have a great client experience and the front end, the app, the website, need to be very user-friendly, real fintech is about the back-end platform.

It's about the way that you're able to move, in our case, move data and information to drive efficiencies. For our business, it allows us to process, underwrite and close mortgages at a lower cost than our competitors so we can dedicate more dollars towards marketing and things that grow our business, which is why we've had such incredible growth these last 20-plus years.

And so that's how we think about fintech. And now we're expanding that platform and building additional businesses, leveraging the data and the client base that we've got. We've got Rocket Auto, where we're selling 5,000, 6,000 cars a month. We've got Rocket Loans, where we're doing personal loans for our clients who maybe at this point in time, a cash out on a mortgage may not make sense.

We've got our Rocket Homes business, which has millions of clients visiting our website, looking at MLS listings, getting preapprovals, approvals, getting linked with our Rocket Homes agents. And then we've got our new Rocket Solar platform, taking the data that we've got in appraisals about homes for our millions of clients and now building the technology required to let the clients know how much money they can save by adding solar to their properties.

So it's -- I think a true fintech is about building out that technology platform that drives great efficiency and great scale to your business. And I think the final thing that I'll mention, we were incredibly proud. We did $145 billion or so. If I'm thinking about my years properly in 2020, we were able to more than double that in 2021, approaching $330 billion in closed loan volume.

That's fintech, right? If you've got 100 people in a room, and you want to double your business and so you bring 200 people in and that takes 5, 6 months to do that, you've got a business. When you go from being the largest mortgage lender in the country at $145 billion, and boom, you immediately double if we think back to March and April, beginning of COVID, you doubled the number of loans you're closing. We certainly didn't double our staff in 3 weeks. It was the technology that brought that scale. And I think that's how, for us at least, we measure what a true fintech is.

Timothy Chiodo

So this one might be a tough follow-up. But if you had to put a rough number on or maybe a range in terms of this efficiency and your technology, how many years ahead would you say you are relative to some of your closest peers?

Jay Farner

Yes, it's a great question. So, as we think about the Rocket Mortgage front-end application, we've seen a lot of people catch up to us on the front-end experience. And we continue to refine that to make sure that we're giving our clients the experience they deserve. On the back end, the Rocket Logic technology, so maybe taking a step back, we started thinking about the business as a workflow management opportunity 15, 20 years ago. And the technology we built at that time to manage the workflow was far superior to anything else in the industry.

We are now building technology called Rocket Logic that allows us to think about this as a point-of-sale decisioning process. And so someone might say, "Well, that -- and mortgage point of sales existed for quite some time." Well, through Fannie Mae or Freddie Mac, you can, of course, get some sort of response.

But through Rocket Logic and leveraging all the data that we've got, we're talking about knowing that, that loan is going to close the day you originate that loan. And that back-end technology, I think, puts us years ahead of our competition.

But then let's take a wider look because that's mortgage alone. The real secret, we believe, is the lifetime value of the client. In the mortgage business, you spent a lot of time reacquiring a client. So every 5 or every 6 or every 7 years, you go out and you spend more money to bring that client in.

No one, even the banks, have really thought about mortgage and got the retention levels that we have, north of 90%. And so when you think about the lifetime value of that client, Julie Booth talked about it in one of our calls recently, $18,000 is I think is the example that she used as the lifetime value of a client.

Then you think about creating a platform that allows you to bring different products and services. It allows you to engage clients. So if we do some marketing that brings in a first-time homebuyer that's 12 or 24 months away from purchasing, we can keep them engaged, bring value to them, so we go ahead and capture that client.

That platform, I don't see anybody really building out a true Amazon of fintech the way that we are. So that -- And that's not easy to do. That is incredibly challenging to do.

And so again, I say that we're years ahead of our competition. And in fact, I don't really think we have competition in that space. I don't think -- I don't see other people talking about that broad platform the way that we are.

Timothy Chiodo

Okay. Excellent. I want to move into some -- putting a little bit more numbers around some of these questions here in terms of share gain targets. So on the Q3 earnings call, you talked a little bit more about that goal to exceed 10% market share.

And then also, you've previously talked about the goal to be the number one retail purchase volume originator in the country in the market. Maybe you could talk a little bit about how Rocket will achieve or exceed those goals?

Jay Farner

Yes. So as the company grows, we've been thinking about the fact that we've got to be able to reach every client who's in market all the time. And so again, if you'll compare us to any of our peers, you'll notice that we're the only company that has access through multiple channels.

So we have our retail purchase channel that we've been doing for since the beginning of time, but we've actually carved that out. I mean, it's really a separate business inside of our Rocket Companies.

We've got our retail refinance channel. And in times like this, where we've seen some volatility in the market, this really allows us -- you probably saw our Cyber Monday advertising that we've done. We had great days, Black Friday through the weekend, Cyber Monday. That all comes from our ability to lean into retail as we see other people kind of pull away as rates fluctuate.

But we've got our pro network that allows us to leverage the thousands of real estate agents, insurance agents, so they can originate on our platform. We've got our TPO network. Our wallet share in our broker space is now north of 50%, the highest it's ever been in the TPO space. We've got our premier partners, so the Morgan Stanleys, the Charles Schwabs, the State Farms, the Credit Karmas of the world.

So the reason I point all these different -- these are really different distribution channels that we've built is that as markets are shifting and changing, and we're saying we're going to go north of 10% ownership here in the next year. You've got to be able to reach the client wherever they're at in any one of those channels.

And you don't just light those up overnight. It takes years to build the technology, to build the processes, to build the teams that allow you to be excellent in each one of those channels. And so that differentiates us from anybody else in the market.

I think that's why we're so confident to be able to go out and say, "We're going to go north of 10%." You don't hear a lot of other people saying they're going to be growing their market share in the next year or if you do, you don't hear a lot of substance around how they're going to achieve that. It's these different channels that we've built that will allow us to achieve that.

Timothy Chiodo

I want to dig into one of those to a little bit more to the extent you could just elaborate on Rocket Homes because it seems to have the potential to help you even more so in the purchase market.

Jay Farner

Yes, that's absolutely right. We talked about being the largest -- you brought this up on the last question, the largest retail purchase lender in the country here in the next 12, 18 months. And we're well on our way to do that.

By the end of Q3 of 2021, and people would say, "That was a refinance year." Our purchase volume was larger than any other year ever. So by putting a focus on retail purchase, we were able to continue to grow while we, of course, took advantage of refinance as well.

And Rocket Homes plays a very important role to that growth because Rocket Homes gives us access to clients who are thinking about purchasing. Rocket Homes gives us access to a real estate network that allows us to increase the conversion by pairing our clients with great agents.

Rocket Homes gives us access to ForSaleByOwner.com, which allows us to bring in first-time homebuyers, which is why we built the Rocket technology to bring them certainty. And then our platform gives us the ability to advertise and market to the purchase segment. And most people can't do that.

If you talk to lenders, you'll see that they're buying refinance leads all day long. Remember, we own LowerMyBills. So we're selling lead flow to ourselves, but we're also selling to all the lender, retail lenders in the country. And they're happy to buy refinance leads. They can monetize those leads.

So ask the question, why won't they buy purchase leads? Purchase leads are more challenging to monetize. Why? Because you can't get somebody on the phone and immediately say, "Hey, we're going to save $100 a month. You should buy a home today."

They have to find the right home. They have to be confident in their ability to qualify. They have to be viewed as a cash buyer. So all of the things that we've been doing, weaving together the platform, the homes network, the marketing, the brand, those things allow us to get a better conversion rate on that purchase retail lead flow while we're also building out the distribution channels so we're at the point of sale.

When they call their insurance agents saying, "Hey, I'm ready to buy a home," that insurance agent can originate the loan. When they call the realtor, and the realtor says, "You should use Rocket" or in some cases, realtors say, "No problem. I'll use Rocket and originate the loan." We're right there at the point of sale.

And so all of these things together is what allowed for our growth in purchase and will continue to allow for our growth to reach that goal. They're saying the market will be roughly $2 trillion in 2022 for purchase. And so when we talked about being the largest lender in purchase, we were not even thinking the market would be $2 trillion.

And so that gives us great opportunity to see incredible growth there in a space where as lenders are either profitable or not profitable, they can either lean in or they can shrink. And you don't want to see people pulling away if you have a $2 trillion purchase market.

The great news about our profitability, it means we can keep investing. We can keep building out technology. We can keep marketing. And so we can grab that market share that other people are starting to leave behind as they shrink because their refinance share is going down, their profitability is going down, and so they've got to find a way to reduce expenses. So all the right forces are coming together in 2022 for us to achieve that purchase goal.

Timothy Chiodo

You really -- that really is a nice segue into this next topic, which is really -- let's take it back for a second just away from Rocket. And let's just talk about the mortgage industry overall, which clearly you're one of the most knowledgeable folks in the country on that topic.

The forecasts that are out there that you alluded to some of them overall for the market total, not just purchase, the range is sort of $2.5 trillion to over $4 trillion. So maybe you could just talk about how you think '22 might play out for the industry as a whole and maybe what the forecasters are missing?

Jay Farner

Yes. Great question. And this is -- it's always a wide range. This is probably one of the wider ones that we've seen, but it's always a wide range. We look at it. We try to figure out, but taking all the experience that we've got, where will the rates be? How much rate in term business will still exist?

I think there'll still be hundreds of billions of dollars of rate and term refinance available. We know that, unfortunately, the divorce rate in this country is north of 50% now. That demands a refinance every time a situation like that occurs.

Cash out is booming. We're at $24 trillion or so in equity. The purchase price, I think I saw in September, October, the average purchase price the Fed just published was $400,000 on a property. So the amount of equity that's been created, if people are buying these homes, they're spending more time in their homes, they want to now renovate. They want to upgrade. They want a new kitchen. They want a new bathroom, cash out refinance.

That's why, for us, our loan volume here in Q3 and going into Q4, well north of 50% of the volume that we're doing is not rate-sensitive. And so getting back to your question, it's -- when you think about the rate and term, when you think about the cash-out opportunities, when you think about the equity that's been built up, when you hear these numbers of $2 trillion in purchase, we feel very confident that there's a 3 handle on the market share or larger.

And again, for us, we're going to run the business properly to make sure that if the market does contract that we're highly profitable. But we're also going to run the business, investing in the technology to allow us to grow, investing in all of those channels and making sure that we continue to have scale. So it's closer to $4 trillion. We have the ability to capture 10% of that.

So it's a great outlook for our business. We're excited about it. We're excited about the year, and we're positioned to make sure that we're doing well, whether it's closer to 3 or closer to 4, it will be a great year for us.

Timothy Chiodo

All right. And you kind of alluded to some of this as we get into some of the more Rocket specifics, but mostly what we've been talking about has been more around volumes and originations. Maybe just a quick comment you could make to maybe even just directionally around gain on sale margins, given any expectations that you might have for what happens with interest rates.

Jay Farner

Yes. So we've seen rates tick up. We've seen them tick down. It's impossible to predict right now based on all the factors that are driving our markets where we'll be in the short run.

From a gain on sale margin perspective, I think Julie talked about a range of like 2.65 to 2.95. That's about as far as we go out is the following quarter.

What I can tell you is that the way we've structured our business, we've got an excellent business in those ranges. And we've consistently been able to demonstrate that our margin is at the top tier or stronger than most of our competitors in any interest rate market.

That's why even in the most challenging times, we've never had a year where we've not been a profitable organization. And a lot of that comes down to our focus on maintaining a very strong margin, and I don't see that changing.

Timothy Chiodo

Okay. Great. And then a follow-up on mix related to this topic of 2022. How should we think about purchase refi mix evolving and then also D2C and partner?

Jay Farner

Yes. So as we probably said many times, we don't talk specifically about purchase and refi mix. We talk about rate-sensitive versus not rate-sensitive. And there's a very important reason we do this.

If we were a mono line business, and you only have one way to generate your originations, then you would be very fixated on whether you're going to do purchase or refi. When you have 7 different ways to drive mortgage business, and you're spending marketing dollar, you don't go towards purchase or refi. You go towards the best return on your money.

And so we see in times that rates are rising, we see nonrate-sensitive products come into favor, but that could be the best dollar to be spent, it could be purchased. The best dollar that could be spent could be cash out refinance.

And so I think that's where we differentiate from the market that gets kind of hung up on, am I going to win purchase or am I going to win refinance? So that would be, I guess, the first part of the question. I rephrased the -- or remind me the second portion of the question.

Timothy Chiodo

It was around D2C and partner.

Jay Farner

Well, D2C is great. And here's why D2C is great. We're in control of it. And as I mentioned, Cyber Monday or these -- we have the ability to lean in and market when other people decide to take a break.

People take a break because rates tick up. And so they stop originating for a while. People take a break because it's Thanksgiving. People take a break because the holidays are coming.

And so if you're beholden to one channel, and you can't lean in and drive that channel forward, you're going to also see your originations affected. D2C is critical for us because it gives us the ability to say, "No, we're going to go out and dedicate our marketing resources to a Cyber Monday event to ensure that we have great originations the last few days of November when typically, there's not a lot of business going on."

I just saw some of the data from Wells Fargo about applications being down. So that channel is -- it is the lifeblood of our -- it's the heartbeat of our organization because of the control. It gives us to pivot the marketing message, digital, sponsorships through traditional linear print, but all those things will mobilize the message, what gives us the best return on our marketing dollar.

And we can do that quickly. We've got 300 people in our marketing team. That's something that can be done in a week, not in a month or 90 days. So we can move as we see these markets fluctuate.

We get an announcement in the 10-year treasury drops a little bit, text messages are going out. E-mails are going out. We've got millions of clients we've been talking to, and we can immediately jump on and take advantage of that opportunity.

Timothy Chiodo

Excellent. We'll bring that to life. I really appreciate that. So I think you really just hit home on D2C there.

Why don't we move to another exciting area of Rocket, which is your partnership opportunities. So maybe just talk about some of these premier enterprise partners that you have for the audience. But then underneath the hood, what are some of the advantages that essentially makes Rocket the partner of choice.

Jay Farner

Yes. Well, we've invested many decades in building an incredible brand, but most importantly, building incredible culture. And so when we bring people to Detroit or to Phoenix or to Charlotte or wherever they want to visit our team members and they see, I think, how we operate as a company, it becomes quite obvious that we are the right organization to partner with.

Pair that up with a brand that is one of the most recognized brands in the country when it comes to home. I was talking to a Canadian couple here this morning. And we were just discussing what you do. And I mentioned Rocket, and they live in Toronto, like absolutely. And I think that speaks to the reach of our brand.

And so that brings a lot of comfort to large partners like a Morgan Stanley, like a Charles Schwab, like an Intuit, like a State Farm knowing that they're with someone who cares so deeply about their brand, they're going to invest in the technology and the client experience to ensure that they maintain that A+ rating for a brand. And so that gives us a unique opportunity to create these partnerships that no one else can.

And we've had some great ones. Charles Schwab is an amazing partnership we've been doing for years and years now, and it continues to grow. The margins are excellent. The client experience is tremendous. The NPS scores that we generate there are some of the highest that Charles Schwab has, period.

We've got newer ones like Morgan Stanley, where we haven't even scratched the scratch of the surface of what that partnership can be. We've got the Intuit partnership that was with Mint. But now with them joining forces with Credit Karma, it adds our -- or increases our ability to grow that partnership tremendously. Credit Karma is leaning into purchase, which is helpful to us as well.

So these premier partnership relationships are, again, another differentiator for our business. And then I'll go back and say, "Okay, great. If you'll notice, the things we're adding to our platform are not in competition with those partners."

Charles Schwab isn't helping people with their solar needs. Charles Schwab isn't helping people with their automobile needs. So not only do we bring on a partner that we can help with a mortgage, but we've added another partner to our servicing book that we can also add other additional value to through our other services.

So every time -- you go back to lifetime value. Every time we add a consumer, we've got to think about not just the mortgage revenue we're receiving today, the title revenue, the appraisal revenue, we've got to think about the future revenue through these additional channels.

Timothy Chiodo

You listed many brand name partners. I think many of us in the audience are just familiar with those companies that you're working with.

One more I just want to dig into a little bit is Salesforce. So you recently announced that partnership for Mortgage as a Service. Maybe just talk about the significance of that signing and what that could mean for the business over the next 3 to 5 years.

Jay Farner

Well, we've got some exciting things happening. Our technology group is really motivated by this because now taking our API, our Rocket API and embedding that into the Salesforce Financial Services Cloud gives us the reach into something north of 10,000 of these mid-tier or larger banks, credit unions.

And they have the same concern that many of our partners have. They want to provide mortgage. They want to help with home ownership. Think about the $2 trillion we just talked about of home purchases. They've got clients who are going to be buying homes. And people are going to come to them and ask if they can assist.

And our ability to be the back end for them to help them through the origination, but more importantly the processing, the underwriting, the closing will help them differentiate their brand but will also give us access to all of these clients, these millions of clients that work with these banks and these credit unions.

Here's why Salesforce is important. Of course, it's being embedded in their technology. But if you're familiar with Salesforce and their excellence around driving adoption of their software, we've now got 2 sales forces selling our product. We've got our group that will be working with them, but we now have their group out going to credit unions, going to banks saying, "Hey, you should bring on the Financial Services Cloud. And oh, by the way, in that cloud, you get access to Rocket."

And so it's -- we're kind of doubling our efforts. We have our business development people working this, but now we have all of their fintech salespeople working to help drive Rocket as well. So that's kind of 2 exciting things. Not only will we be there, but we've got an incredible sales force helping to drive our business forward.

Timothy Chiodo

Excellent, Jay. I just want to pause. We have a bunch of other questions here, but I want to make sure the audience had a chance. If anyone wanted to ask a question, feel free to raise your hand or grab the microphone. And we can queue for those a little bit if someone changes their mind and wants to ask a question.

But Jay, why don't we step into talking a little bit about the platform approach. You definitely touched on this in your sort of opening comments. Rocket, not just the core mortgage business, but you have Rocket Auto, Rocket Homes, you mentioned solar. Let's talk about these opportunities. What they mean on a stand-alone basis, but more importantly, in terms of a flywheel effect for the overall business.

Jay Farner

And one of my favorite books years and years ago was Good to Great and trying to understand how you truly build great businesses. And that's exactly what we're creating this virtuous cycle where we can bring great experiences to our clients, and that's the platform.

And we've seen it done before. We study companies like Amazon to understand. They chose books. We chose mortgages. But the mission doesn't change, right? How do you eliminate the friction that exists in these complicated purchasing real estate financial transactions? That's our mission. And that's what the platform is doing.

And as I mentioned earlier, I don't know of anybody else in the mortgage industry that's making such heavy investments in the platform to be able to bring all these services to bear. Sometimes I -- in talking to the third-ranked analyst in the country at this point in time, I wonder to myself, we've been better off with auto -- auto on its own, if I sat here and said we're selling 6,000 cars a month, people would be blown away with that number.

I mean, there's less -- I think I can count the networks on 2 hands that do that kind of volume. But inside a mortgage, it doesn't get much attention. If I talked about the fact that we're doing thousands and thousands of real estate transactions a month, people would say, well, it's one of the largest real estate companies in the country. But again, inside of mortgage, I think it gets buried with $330 billion of loan originations.

So I want to point that out because these aren't just little businesses that we're trying out. These are businesses that have now cracked the top 10 of being the largest in the country. And the technology that we've built behind them, the brand that we've built behind them is incredible.

And so you're probably going to ask me this question, I'm going to get to it anyway. That's why we're buying the stock back, okay? Because if you take whatever is $15 a share back off the cash, it's trading at $12, we're run rating for like a $2 or north of $2 EPS. I mean, we're at a 6-month. We're a 6 month on a fintech platform that we've spent hundreds of millions of dollars in technology, all proprietary, no one else has, billions of dollars in a brand.

And so after consulting with folks like you and making sure we have enough flow, we can still buy back tens of millions of shares. I think we announced 94 million last earnings call. That number has got to be close to 150 million, 160 million now. And we're just getting more aggressive in accelerating because we think there's enough float out there for those who want to buy it.

But I look across the entire market at the -- and I'm obviously closer to it than others at what's happening. Of course, rates are going to go up, they're going to go down. But 10% of a market, whether it's 3 or 4, is still honoring our long-term mission of acquiring clients, putting them on our base and over the long haul, extracting great value from them while giving them great service. And so I still look at it and say it's probably the best buy of any stock that I see out there.

Timothy Chiodo

Well, you definitely did -- you stole my thunder a little bit there. I don't think there's much more to say on that topic. I mean, really what I want to get at is your cash flow is really strong. And you recently stepped up to buy back some, and oftentimes, we get questions, what about a dividend or a special dividend, but I think you just covered it quite well. Buyback is, at the moment, your preferred use of --

Jay Farner

We're very fortunate. We've got a lot of cash. So we can continue to do the buyback, and we can -- we did a dividend, as you know, in March. And we continue to think about dividends as well.

So all of those things are on the table for us. Always first, which is how do we add to the platform? How do we invest dollars, especially at this moment in time? How do we invest dollars in building out that platform to increase the value of this organization over the long haul? That will be our first decision. But we can do that, and we can continue to buy back our shares and consider a dividend as well.

Timothy Chiodo

All right. That sounds good. I think we covered that one quite well. But should -- we only have another minute or 2. But yes, why don't we go to the audience if there's a question? Please.

Unidentified Analyst

I was just wondering if you could maybe talk a little bit about where you see an incremental [indiscernible] product opportunity set. And in the context of what you make with capital is something you need to buy or you just build it?

Jay Farner

It's a great question. We have over 3,000 technology folks. And so we dedicate a lot of them to how do we continue to reduce the cost to produce a mortgage and speed up the process. I would love a day where 90% of our loans that we originate closes, right?

So you think about those opportunities that are incredible for us. And then you're thinking about all these other opportunities you can dedicate your tech resources. And that's where the balance comes in to say, is it better to buy? Because not only are you buying a product, but hopefully, you're buying a great tech team that you can bolt on to your organization because we've got -- there's not a shortage of opportunity or ideas. It's really the ability to lean into all of them and prioritize them.

So I would say that making an acquisition is as -- is equal, in many cases, to building it ourselves because of all the opportunity that we currently have internally. I love the -- think about the clients that we talk to.

A small percent are ready to transact right now. So -- but we've already spent the marketing dollar on that client. So other ways that we can get the client to continue to engage with us for 6 months, 12 months, 2 years until they're ready to transact is critical for us.

And so anything that brings value to that client, whether it's savings or budgeting or financial planning or those sorts of things are very exciting. Home MLS and home listings are important too, because people love to spend their time on the Internet looking at property. But I'd love to be able to not only get them excited about the property, but then help them create those building blocks to get ready for the actual purchase.

Timothy Chiodo

Well, thank you for the question. And I just want to say to the -- on behalf of everyone at Credit Suisse, I want to thank Jay, Julie, Sharon and team for traveling out here to join us in Arizona. It's a pleasure hosting you, and thanks for joining us on stage.

Jay Farner

Yes. You had to pull our arm because it's like 30 degrees and snowy in Detroit.

So -- but we did it anyway. We came out. So thank you, everybody. Appreciate it.

Timothy Chiodo

Thanks a lot.