Experts: Gilbert can afford Quicken IPO and Detroit development role
Billionaire businessman Dan Gilbert is known in Detroit as much for his role in redeveloping downtown as he is for founding and leading Quicken Loans, the nation's largest mortgage lender.
While a proposal, made public Tuesday, to take Quicken and several related subsidiaries public under the name Rocket Companies could be momentous for the company and bring attention to its hometown, experts and observers say the deal would likely have little effect on Gilbert's downtown real-estate plays.
But the deal will limit the flow of resources from the Rocket Companies to Gilbert's Bedrock commercial real estate firm, experts said. And taking Rocket Companies public means the company will be accountable to shareholders on a quarterly basis, which could result in pressure for shorter-term results.
Bedrock has been a major player in redeveloping the Detroit's urban core over the last decade. The company's portfolio includes about 100 properties spanning more than 18 million square feet between real estate in Detroit and Cleveland. The firm is connected to the newly named Rocket Companies by Gilbert but is not included in the proposed initial public offering and operates as a separate business that is unlikely to see either positive or negative impacts from the deal, experts say.
"I think Bedrock is going to continue to do what it has done. It's actually not all that related to the Quicken Loans business," said Erik Gordon, a professor at University of Michigan's Ross School of Business, whose areas of expertise include entrepreneurship and technology commercialization, private equity and corporate governance. "The relation is Dan Gilbert, but otherwise they are unrelated businesses. I think that will continue."
Rocket Companies on Tuesday filed a federal securities form with its proposal for going public. It did not report the number or price of shares that would be offered on the New York Stock Exchange. Experts, however, have estimated an IPO could raise tens of billions of dollars and be one of the largest of the year.
Quicken closed $145 billion in loans last year. And Tuesday's filing provides a more detailed look into the mortgage lending giant's finances than ever before made public. In 2019, the company made nearly $894 million on revenue of more than $5.1 billion.
The deal would make public a holding company consisting of personal finance and consumer service brands including Rocket Mortgage, Rocket Homes, Rocket Loans, Rocket Auto, Rock Central, Core Digital Media, Rock Connections, Lendesk and Edison Financial.
The filing spells out business agreements with some of Gilbert's other companies, including Bedrock, that allow for the continuation of certain support services. And, the filing notes, Bedrock is the landlord of several Gilbert-affiliated companies. Quicken paid $69.6 million to Bedrock for lease agreements in 2019, $66.2 million in 2018 and $60.5 million in 2017.
But the deal would create further separation between Bedrock and the mortgage-lending side of the business: "After the reorganization and IPO, (Gilbert) will still control both, but it will be harder for him to shift resources to Bedrock from the new public company because, although he will have control of the new company, he will also have responsibilities to the new stockholders to not use his power to cheat them," said Gordon.
The new Rocket Companies is acquiring its assets from Gilbert's holding company, and will then use proceeds from the IPO to pay for those assets; so, Gordon explained, some of the IPO proceeds that flow back to the holding company could end up benefiting Bedrock.
But, going forward, there will be a "Chinese wall" between Rocket Companies and Gilbert's private companies, said Sudip Datta, a professor of finance at Wayne State University's Mike Ilitch School of Business: "Right now (Gilbert) can move money from here to there, because everything belongs to him as a private businessperson."
It's hard to say to what degree that type of activity occurs now, because the businesses are private, but it's safe to say Quicken is the "cash cow" of the family, he said.
However, Datta agrees that Gilbert likely remains committed to his investments in downtown Detroit: "He won't be able to fund those non-Quicken ventures from Quicken Loans, but he is a wealthy man, and he seems very committed to Detroit." Plus, those real-estate ventures are more lucrative today than they were when Gilbert first began investing in the city's urban core — so Bedrock is likely in a position to stand on its own, he said.
The proposed deal would keep control over the company squarely in Gilbert's hands. Under a proposed multi-tiered stock system, he would maintain 79% of the voting power and would have final say over the election of board directors, any changes to the company's certificate of incorporation, bylaws, and any proposed merger or sale of the company's assets, according to the filing.
This structure, experts said, means that while Rocket Companies will be accountable to shareholders, investors who participate in the IPO know they're buying into a company that will remain in Gilbert's control: "I don't think the performance of the company will deviate much, because he has a lot of skin in the game still," said Datta.
A Bedrock representative referred The Detroit News to Rocket Companies for comment. A spokeswoman for Rocket Companies declined to comment for this story.
Eric Larson, chief executive officer of the Downtown Detroit Partnership, was "comforted" and "pleased" at Gilbert maintaining a controlling interest: "I have a fairly high degree of confidence the type of commitment that Dan personally and the company organizationally has made will remain, and that the benefit Dan saw in moving the organization to downtown Detroit a little over 10 years ago has only increased and been enhanced."
Quicken, which is the city's largest employer with some 20,000 workers, moved its headquarters from Livonia to downtown Detroit's One Campus Martius in 2010.
Larson said he remains optimistic both about downtown development, even amid the coronavirus pandemic, and about Quicken's presence in the city, noting recent hiring surges and ongoing work by Bedrock at the former Hudson's site. If anything, he hopes to see Gilbert's companies absorb even more downtown office space: "I don't think Quicken Loans' public offering and Bedrock's continued interest in developing in the city are tied. I think because of the link between the two, the projects that Bedrock is involved in will continue to have a demand."
Rick Sharga, a mortgage industry veteran and CEO of California-based CJ Patrick Co., a real-estate consulting firm, agreed: "They are related businesses but I don't think either has a dependence on the other." Nor does he believe Gilbert's investments in downtown Detroit will have much of a bearing on how investors evaluate the Rocket Companies deal.
Investors are sure to evaluate the management structure of Rocket Companies, and perhaps will take note of the fact that Gilbert oversees a vast business empire, including Bedrock. But Gordon and Sharga agreed the structure is not likely to give prospective investors pause, as have other management structures, such as Jack Dorsey overseeing both Twitter and Square. Gilbert may be responsible for the biggest decisions, but is known to appoint strong CEOs to oversee the various arms of the business. And, they said, Quicken and Gilbert's other ventures are viewed as successful.
"Dan Gilbert has controlled both (Quicken and Bedrock) all the time, and they've both done very well," said Gordon. (Rocket Companies CEO Jay Farner) and (now-former Bedrock CEO Matt Cullen) both are well-regarded, real CEOs, and that seems to be Dan's approach."
But one connection Gordon does see between the businesses is the strategy and philosophy behind them. Gilbert began buying real estate in Detroit at a time when it was a riskier proposition: "What he showed with Bedrock is not just loyalty to Detroit, but he’s shown this entrepreneurial ability to bear high risk for potential long-term reward," said Gordon.
Prospective investors might look for a similar approach from the new Rocket Companies. With Gilbert poised to maintain firm control, they're betting on his vision: "Anybody who buys shares ... should expect that company will be willing to take some risks and will have a long-term horizon."
Staff Writer Candice Williams contributed.