The Right Time For An IPO In The Mortgage Industry? Quicken Loans IPO Report

(Jordi Brown & Ali Soufraki)

Source: Quicken Loans

Company Description and Business Model

Based in Detroit, Quicken Loans operates in the non-bank mortgage lending industry as it constantly seeks to revamp the traditional home loan application process. Quicken Loans’ use of innovative technology has given the company a defensible comparative advantage by enabling it to offer its renowned “10 minute mortgage application system”. Consequently, Quicken Loans has swiftly established itself in a strong market position in the home buying and loan acquiring space.

Regarding the company’s business model, Quicken Loans offers three unique platforms that distinguish the mortgage giant from other competitors. First comes the mortgage offering itself: their extensive FinTech applications provide personalised financial information to prospective borrowers within seconds. Next, Quicken also provides each and every user with the ability to check their loan status 24/7. Unlike its competitors, Quicken prides itself on granting their users the ability to stay informed on their loan application at all times. Thirdly and finally, Quicken Loans permits users to manage the entire online process straight from their mobile phone, in the fastest application process in the industry.

This report will dissect Quicken Loans’ recently announced plans to launch its Initial Public Offering this year.

Company Management Analysis

 Spearheading the company’s operations is the notorious American billionaire, Dan Gilbert. In addition to his owning of the Cleveland Cavaliers, Dan Gilbert founded and has since moulded Quicken Loans into a mortgage industry titan over the past four decades. With significant control throughout Quicken Loans’ history, Dan Gilbert will not lose any of his own imprint on the company as the IPO filing reports that Gilbert will maintain up to 79% of the voting power on the company’s common stock.

Accordingly, Gilbert’s desire to retain complete voting control over the company may put off some investors, wary that the billionaire’s interests may collide with their own. Further caution may be warranted by Quicken’s desire to not pay out any dividends “for the foreseeable future”, discouraging those looking for regular dividend pay-outs (Rocket Companies, Inc., 2020).

Market Composition

In direct competition with Quicken Loans, the privately-owned Better.com offers a similarly digitised online mortgage platform. With similarly innovative technology behind them, Better.com pride themselves on detailing mortgage rates in seconds- with a mere click of the button. The company was founded in 2014 and completed their- most recent- Series C funding round, accumulating to $160M USD in Venture Capital funding.

Furthermore, Quicken Loans competes with Roostify in the online mortgage lending space. Akin to Quicken Loans and the aforementioned Better.com, Roostify presents an alternative online service that aims to facilitate the home-buying and loan closing process.

It is thus clear how Quicken Loans’ defensible, competitive edge derives from their superiorly established market position relative to their competition.

Industry-Relevant Market Capitalisations

CompanyMarket Cap (USD billions)
LendingTree4.611
Mr Cooper Group1.24
Fannie Mae2.293
Genworth1.09

Investment Rationale and the Impact of COVID-19

Its undoubtedly worth noting what the current economic uncertainty means for those looking to take out new mortgages. Effectively, Gilbert is asking the market to invest in a mortgage lender during a global pandemic that will strip people’s ability both to take mortgages out in the first place and to pay them off. Indeed, 4.1 million Americans are still in forbearance due to the coronavirus (Leonhardt, 2020).

So how can Quicken Loans convince investors to take the plunge? Well, the company has always been more interested in re-mortgaging rather than selling new mortgages – only 27% of the mortgages they sold in 2019 were for new homes (Passy, 2020). COVID-19 has led to prolonged lockdowns and will almost certainly lead to recession – two things that will slow demand for the buying of houses. However, it seems less clear what effect the coronavirus will have on remortgages. Indeed, consumers may take advantage of the historically low in interest rates and refinance their houses. Therefore, we can expect a strong performance for Quicken Loans, at least in the short term. This, however, has to be tempered with the reality that a mortgage company predominantly focused on refinancing will have its fortunes tied to interest rates.

Therefore, while the new mortgage operations may be detrimented, one could expect the volume of refinancing projects to soar due to the current rock-bottom interest rates and overwhelming sense of macroeconomic uncertainty. As interest rates continue to plunge (and perhaps even threaten to go negative if President Trump gets his way), the refinancing industry will certainly continue to boom. As analysed above, Quicken Loans’ established position as a market leader will position them well to thrive off of the current economic climate. Delving into the company’s financial data, Quicken Loans has grown loan volume at 20% compound annual rate over the past ten years, accentuating its dominant market position to take advantage of this potential market movement.

Data from FRED. Graph by Orchid.

Figure 1 depicts the average interest rate of a 30-year Fixed Rate Mortgage in the United States. As of July 2020, this rate has fallen below 3% for the first time in Quicken’s history. Source: Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, July 19, 2020.

Financially, it’s worth noting how potential investors will be buoyed up despite the company’s most recent balance sheet. In the second quarter of 2019, the company made a loss of $54 million dollars; for the same period a year later though, a strong profit in the region between $3.35 billion and $3.55 billion is expected (Nivedita & Franklin, 2020).

The IPO

In terms of the IPO itself, Quicken Loans plans to issue shares on the New York Stock Exchange under parent Rocket Companies’ name (NYSE: RKT). The company will sell Class “A” shares to investors but a holding company in the hands of Gilbert will own enough Class “D” shares to retain a supermajority of voting power (Armstrong, 2020).

How much can we expect Quicken to raise? As of the time of this article, only a preliminary listing has been made with the US Securities and Exchange Commission, so it remains unclear what the price per share will be or even when the listing will take place. The listing itself provides an initial market capitalisation of $100m, but this is just a placeholder figure (Rocket Companies, Inc., 2020). Ultimately though, the long-term profitability and success of Rocket’s IPO will be tied to interest rates – if they rise, the lust for refinancing will die out.

Glossary

Initial Public Offering- the process of a private company offering its shares to the public

Class “A”, “B, “C, “D” shares – different share classes allow for things such as voting rights and dividends to be distributed unequally. For example, a Class “A” share may provide 1 vote, but a Class “B” share 100 votes (Catchpole, 2019).

Dividends – the paying of a company’s profits to its shareholders (O’Sullivan & Sheffrin, 2003)

Remortgaging/refinancing – the process of taking another mortgage on a property to pay off the first, often done to take advantage in a fall in interest rates

Venture capital – investment funding that seeks stakes in privately-owned companies with strong growth potential

References

Armstrong, R., 2020. Dan Gilbert will keep strong grip on Quicken Loans after IPO. [Online]
Available at: https://www.ft.com/content/6e25dfaf-f905-4033-8580-26e2efbc50cd
[Accessed 19 July 2020].

Catchpole, H., 2019. What types of share can a company have?. [Online]
Available at: https://www.informdirect.co.uk/shares/types-of-share-a-company-can-have/
[Accessed 19 July 2020].

Leonhardt, M., 2020. Millions of Americans have their mortgages in forbearance programs—here’s why those using private lenders may face bigger challenges. [Online]
Available at: https://www.cnbc.com/2020/07/15/privately-held-mortgage-forbearance-may-be-difficult-for-americans-to-navigate.html
[Accessed 19 July 2020].

Nivedita, C. & Franklin, J., 2020. Quicken Loans parent expects profit to surge ahead of U.S. IPO. [Online]
Available at: https://www.reuters.com/article/us-rocket-companies-inc-ipo/quicken-loans-parent-expects-profit-to-surge-ahead-of-u-s-ipo-idUSKCN24I24O
[Accessed 19 July 2020].

O’Sullivan, A. & Sheffrin, S. M., 2003. Economics: Principles in Action. In: Upper Saddle River, New Jersey: Pearson Prentice Hall, p. 273.

Passy, J., 2020. Quicken Loans is going public: 5 things to know about the mortgage lender. [Online]
Available at: https://www.marketwatch.com/story/quicken-loans-is-going-public-5-things-to-know-about-the-mortgage-lender-2020-07-08
[Accessed 19 July 2020].

Rocket Companies, Inc., 2020. AMENDMENT No. 1 TO FORM S-1. [Online]
Available at: https://www.sec.gov/Archives/edgar/data/1805284/000104746920004131/a2242056zs-1a.htm#bg15201_table_of_contents
[Accessed 19 July 2020].

Featured Image: Quicken Loans Logo


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