Thank you for standing by, and welcome to the Computershare Sale of U.S. Mortgage Services Business and Investor Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key, followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Stuart Irving, Chief Executive Officer. Please go ahead.
Good morning, everyone, and welcome to today's investor conference call. I've got Nick Oldfield, our CFO, and Michael Brown from our IR team on the call. Today we're going to take you through the announcement we've made to divest 100% of our U.S. Mortgage Services business to Rithm Capital Corp or Rithm, and also touch on our recent acquisition of Morgan Stanley's U.K. and European share plans business solely in the U.K. Now, both are important strategic developments for Computershare. The transactions are firmly in line with our strategy to simplify Computershare, strengthen our core businesses, and also improve the quality and consistency of our earnings, and they're good steps forward in executing the plan. Following the presentation, we will open the line for Q&A.
And finally, just to remind you, we will be talking in constant currency and in U.S. dollars unless we state otherwise. Okay, now let me start with the sale of U.S. Mortgage Services, and I'll take you through the transaction details and then comment on the significance for Computershare. Back in August, we stated that we're undertaking a strategic review of this business, and we completed the review, and we determined that a full divestment of the business via a competitive process would be in the best interests of all our shareholders. And we are pleased to announce today that we've entered into a definitive agreement to divest 100% of the business to Rithm for an estimated consideration of $720 million.
The final sum will be adjusted for movements in the MSR portfolio up to closing, and we'll also continue to acquire MSRs between now and close, but we do expect to sell the majority of the new MSR acquisitions on a forward flow basis to Rithm as we go. Now, the sale price values the U.S. businesses at roughly 1x tangible net asset value as at 30th of June 2023 under U.S. GAAP accounting. Now, many of you will remember, I've seen that these businesses generally trade at round about 1x tangible book value rather than an earnings multiple. So we do consider this to be a fair price. The transaction is expected to result in a one-off statutory loss on sale of roughly $150 million-$180 million under IFRS accounting.
Now, this non-cash loss reflects the differences between IFRS and GAAP accounting, goodwill allocations, and also estimated transaction costs. Now, this non-cash impairment does not impact the underlying performance or cash flow of Computershare. To be clear, this is an accounting-driven loss only. If I step back and look at all the actual cash deployed into this business since we first entered into U.S. Mortgage Servicing back in 2011, including all our MSR purchases, and we can see that we're marginally ahead from a cash perspective on our investment overall. Computershare will also continue to provide some technology and operational support for the business for up to 12 months under a limited transition services agreement to allow a smooth transition for our clients and our employees into Rithm's environment. Who is Rithm, and why is the business a good fit for them?
Well, Rithm is a New York-based asset manager focused on real estate and financial services. It's listed on the NYSE with a market cap of around $5 billion. Unlike Computershare, it runs a vertically integrated model of mortgages. It's a top five non-bank mortgage originator, owns roughly $600 billion of MSR portfolio, and services the majority of its loans in-house. Importantly, it has strong mortgage industry credentials and ability to bring capital to scale the business further. And with its track record of successful M&A execution and integration, we do expect a smooth transition for the business and, of course, our customers. So what are the financial implications for Computershare? Well, first, we're affirming FY 2024 earnings guidance. Now, depending on the timing of closing, the transaction is not expected to have a material impact on our FY 2024 EPS guidance.
We continue to expect management EPS to be around $ 1.16 per share this year. The transaction is expected to be EPS accretive in the first full year following divestment. Now, we have simply compared FY 2024 guidance of around $ 1.16 per share, as we gave in August, to what that guidance would have been if we had not owned mortgage services in FY 2024 and instead used the cash proceeds to retire debt. This also includes the impact and the change in balances. Now, U.S. Mortgage Services has average cash balances of around about $2 billion and will obviously lose these as part of the transaction. So assuming a March 31st completion, average balances for 2024 will be lower, roughly by about $500 million.
Now, we have included a pro forma table in the announcement to show what our FY 2023 group results would have looked like if we had not owned U.S. Mortgage Services for the whole of last year. In summary, management EPS would have been $ 0.05 higher, and we reported, you know, against the $ 1.13 that we reported at. Unsurprisingly, given the capital intensity of the business, without it, ROIC would have been at around about 29.8% compared to the 22.7%. Free cash flow would have been AUD 544.6 million, which is quite a different set of financials. So why is today's sale strategically significant for Computershare? Now I'm sure many of you will have a clear view on this.
First, it represents an important milestone in executing our simplification strategy and drive to increase the quality and consistency of earnings. Over the past three years or so, the U.S. Mortgage business has underperformed against group margin and ROIC targets. We know it's more capital intensive compared to our core businesses, and it also has high levels of regulatory risk. It also has had periods where it's been impacted by a number of things outside of our control, a bit too macro, as I've often said. Now, if we recap our history, you'll sort of see what I mean. Now, we entered the business in the U.S. in late 2011 through the acquisition of Specialized Loan Servicing.
Over the following years, we executed our strategy to build scale and servicing, maintaining a mix of owned MSRs and capital-light sub-servicing, both performing and non-performing, all while building up our higher margin ancillary revenues to enhance returns. Now, we're always pretty clear and disciplined that we did not want to be a loan originator or take credit risk, but it is a large market with plenty of scope for growth, and we're actually making good progress. We saw the business as capable of generating around about 12%-14% post-tax free cash flow return on capital and around about 20% PBT margins. And just prior to COVID and the lockdowns, we were pretty much there at these numbers.
However, as we know, the substantial reductions in global interest rates through 2020 drove record levels of run-off, and as U.S. Mortgage rates plummeted, we saw the collapse in margin income in the business as well. At the same time, the U.S. government put in place and then extended a moratorium on foreclosure, which impacted our ability to generate revenues from non-performing loans. With lower servicing revenues and an accelerated amort profile, the business went into loss. Of course, as we all know, post the COVID period, rates rose rapidly, but origination slowed and refinancing activity dropped. MSRs became scarce and therefore increased in value and price, and our book value rose as we took out costs and returned the business to profitability. In short, lots of moving parts.
But we determined that sort of 2023 was probably a good timing window to sell the business to an operator with an appetite to deploy more capital, allowing it to continue to grow. And we're delighted to sell to Rithm, who will provide that capital, grow the book, and enjoy the synergies of being vertically integrated with a large origination engine. So as a result of the sale, the next question is: So what are our priorities for capital deployment? Well, number one, we've consistently said that complementary M&A on good financial terms is our top priority in our three core growth businesses of issuer services, corporate trust, and employee share plans. And we expect to have around about AUD 2.5 billion of M&A firepower, even post our buyback. And there are plenty of growth opportunities across these business lines.
We will also prioritize organic growth investments, and while these are not expensive overall, we will continue to focus on ways to improve our services and capability and invest in technology to keep us at the forefront of our chosen markets. Our third priority is ensuring we reward our loyal shareholders. Now, given our franking position, we will prioritize buybacks. Now, this transaction caused us to defer the AUD 750 million buyback for compliance reasons. So it'll be good that we can get a start on that next week. And finally, we'll always look to balance buybacks and dividends when it comes to capital deployment for shareholders. So overall, with this transaction, we can redeploy the capital to strengthen and enhance the core business and also reward shareholders. And it also upgrades our return on capital, EBIT margins, and free cash flow.
And of course, it improves the quality and consistency of our earnings, which are all good things. And finally, on a personal note, I am looking forward to focusing on our core business lines and not waiting for all the stars to align to get the returns that we seek in U.S. Mortgage Services. Now let me quickly move on to another transaction that we put out a notice on the other week there, which was the purchase of Morgan Stanley's U.K. and European employee share plans business. It's called Solium U.K. You know, we do expect that deal to complete in Q4 of this calendar year, subject to regulatory notifications and other customer closing conditions. The earnings contribution is not material to the Computershare Group, and we're not changing guidance as a result. But it's a small but important bolt-on for us.
It has an impressive list of 124 public market clients with over 300,000 participants and around about AUD 20 billion of assets under administration. Revenues are approximately AUD 28 million per annum, and we bought the business on less than one and a half times revenue. And it's a great fit with our strategy to really enhance our core businesses. The business increases our exposure to that underlying growth in equity-based remuneration. Now, we've talked about this structural growth trend before. You know, more companies are issuing equity to attract, retain, and incentivize employees, and they're issuing equity deeper into their organizations. Equity is not just a C-suite benefit anymore, and Solium U.K. adds to our scale in the U.K. and European markets, and post the transition period, the intent is to move the clients to EquatePlus, our market-leading platform.
So I'll close by saying that we are pleased to be able to talk about these two transactions today. They do mark a good step forward in our plans to simplify the group, improve the quality and consistency of earnings, and position us for further growth in our core. Now, let's move on to some Q&A.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. The first question comes from Kieran Chidgey with [Jarden]. Please go ahead.
Morning, guys. Maybe just starting on the earnings contribution from U.S. Mortgage Services. So we clearly you've disclosed last half down to about AUD 17 million of EBIT. But can you just talk about the line items below that, specifically the advance facility interest expense? How big that is. Just keen to get a sense of what the PBT contribution in second half 2023 was.
Yeah, it's about, it's about $20 million, Kieran.
Sorry, what? What number-
About $20 million.
For the advance facility?
Yeah, the interest expense specific to this business line was about $20 million.
Per annum?
Yes.
Okay, all right. Okay. And just on the margin income balances, that $1.8 billion or $2 billion that disappears, I presume sort of there's no impact on hedging as a result of that. The hedges stay with you, so just the, the hedge ratio goes up. That all comes out of exposed balances, does it?
Yeah, that's right.
Okay.
There's not a lot of hedging using these balances because they're, they're very, very sort of short-dated. Yeah. So should, shouldn't alter it that much. And of course, we also have, you know, these, these instruments and hedging rolling off all the time. So if we want to take the percentage back down closer to the sort of 50% number, we can do that fairly easily.
Okay. And stranded costs, just keen to understand if there's any sort of group allocation or other stranded costs we'll need to be aware of?
There are stranded costs in this business. You know, there's round about 250 or so staff that are not sort of on the SLS entity. They're shared service staff. They will also be transferring across at close. You know, and that's a lot of sort of everything from internal audit, compliance, et cetera, and technology staff. You know, we do have a TSA, which will cover some of that stranded cost for a period of time. But you know, we do have plans to look at the stranded costs, not just in isolation with this business, but of course, across the entire group, so we can remove as much of that cost as possible.
Okay. Any indication on how quantum of those costs? So when you make the comment that the transaction TPS accredited first full year, what are you assuming around those stranded costs?
Well, you've got a TSA agreement that will cover-
That covers all.
Cover the stranded costs in the first year. So, you know, we probably have, you know, about six to 12 months to, you know, work hard to try and get as much of the remaining what will remain behind. You know, that's, that's all stuff, as I said, from data centers and other bits and pieces. And, you know, staff who've got sort of partial roles that are within the CLS business and also with the other businesses that, you know, we've got a fair, you know, reasonable sort of line of sight of that. Not, not any significant impact on stranded costs in the first 12 months. But, you know, and by that time, you know, some of our new sort of cost out initiatives will kick in. So we're, we're hoping to neutralize as much as possible of that going forward.
All right, great. Thank you.
Your next question comes from Siddharth Parameswaran with JP Morgan. Please go ahead.
Good morning, gentlemen. A couple questions, if I can. Can I just clarify what exactly was your EBIT and EBITDA expectation on Mortgage Servicing, on U.S. Servicing for FY 2024 within your comments about it being EPS accretive in the first full year?
Well, in the EPS accretion, so that's what we're saying is that the saving on the interest expense, basically, the saving on the interest expense, had we applied all of the proceeds against reducing debt, would have offset the earnings contribution from the business by a couple of cents a share. So, you know, we will have about, you know, a net cash reduction of about $600 million being the sale proceeds, less $100 million or so of cash that's all that was in the business already. And, you know, we save our interest expense on that. And the interest, you know, just the net cost of interest in the second half of FY 2023 was 600, 6.34%.
And that's really what's driving the accretion calculation.
So and so did you say couple of cents? Sorry, I just wanted to be clear exactly what the figures were. So, I mean, I mean, those numbers are helpful, but just to understand exactly how much accretion you're saying there is.
Well, we're saying we guided to... So for FY 2024, we guided to $1.16 per share of earnings. And had we, for the full year of FY 2024, had we not owned this business, and had we instead applied the net proceeds from selling this business against our corporate debt, the combination of those would give us an extra $0.02 cents per share.
Okay, thanks. Thanks. Yeah, that's helpful. Okay, great. Can I just ask a question just on U.K. Mortgage Services? Just, does that, does that remain? Are we any closer to any resolution around what your plans are for that division?
We're still investigating possibilities through this process, which was quite a wide and varied process, and looking at U.S. Mortgage Services as a whole, looking at the MSR asset, looking at the platform asset. There was, you know, a number of bidders that did express an interest in our U.K. division. But, you know, we have been sort of prioritizing the U.S., which is obviously far larger. So at the moment, we're still sort of working through potential options for that business.
Great. Just a final question, just on maintaining guidance of $1.16 per share. I just wanted to be clear what's happening with balances and also interest rates. I mean, I would have thought interest rates would be slightly higher. I think about 10-20 basis points from what I can see from for FY 2024 versus what the point at which you gave us guidance a couple of months ago. I'm just keen to get your thoughts on what's included in maintaining guidance just on interest rates and also balances.
Look, what I will say is balances have been, you know, fairly stable, and continue to be fairly stable. So we're not sort of flagging any significant changes to balances, notwithstanding at close of this transaction, we will lose the mortgage services balances. You know, as far as the rates are concerned, the rate outlook is certainly sort of more positive. But, you know, we're only a sort of, you know, a few months into the financial year. We're tracking, you know, pretty much exactly where we thought that we were going to be. Yeah, and, you know, we'll see down the track what will happen as far as, you know, balances and then ultimately, any rate rises coming through.
Okay. That's very clear. Thank you.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Simon Fitzgerald with Jefferies. Please go ahead.
Hello there. Can I just ask quickly a question about the amortization and the MSRs? Nick, you mentioned at the FY 2023 results that you expected $80 million for the MSR amortization for FY 2024. Should we now be thinking about three quarters of that? And just to be perfectly clear, there's no amortization runoff that stays with you from FY 2025 onwards. You should have no MSR amortization?
... Yeah, that's correct, Simon. I mean, once we've sold this business, once it's completed, all of the MSRs will be off our books, and there'll be no legacy amortization expense coming through. You're right, that we guided to around $80 million of MSR amortization for FY 2024, and that would be broadly flat, you know, flat line across the year. So assuming we complete at the end of March, I'd expect, you know, the actual costs we incur for FY 2024 to be about three-quarters of that.
Yeah, good stuff. And then also, just to be clear on the SLS advances, they will travel with this investment, and there'll be no repayment of the proceeds against those SLS advances?
That's absolutely correct.
Okay, good. And then, just a couple more here. In terms of the TSA, Stuart, I imagine that you'll be reimbursed for any costs in regards to that. Is that how that's gonna work? I was just interested to know what sort of resources you're putting into that.
Look, yeah, it is. So I mean, obviously, you know, the U.S. Mortgage business is, has got mostly sort of ring-fence sort of tech and-
Yeah.
-the foot staff, et cetera, rather than sort of all from group.
Mm-hmm.
So, you know, the people that are sort of looking after that today will continue to look after that, you know, throughout the transition services period. Look, I know that Rithm will be pretty motivated to be able to move these loans onto their platform as soon as they receive the approval process. But you know, some of that can take a while, even post the approval process.
Mm-hmm.
So it's, you know, it's existing resources continuing to support the business through that transition services period.
Mm, mm. Okay, good.
There's a whole schedule of typical fees, you know, you know, everything from, you know, Microsoft licensing to data center costs, to cost per loan, et cetera. And, you know, the buyer can, you know, accelerate some things and, you know, extend other things, et cetera, et cetera, which is all pretty typical on a TSA.
Okay, good. And then, just on the interest expense, just to be totally clear on this, the $20 million for the second half of 2023, that was included in your overall interest expenses, just noting that-
Right.
the SLS off balance sheet, or you don't sort of mention it in the
Just to be clear, Simon, that was not-
Yeah.
That was an annual expense that we quoted, not-
Oh, right. Sorry.
And that was-
Okay, thank you.
Correct, that was included in our, that was included in our interest expense guide.
Okay, thank you. One final question. Stuart, you did give us a little bit of granular color in terms of how interest rate markets are, you know, impacting you at the moment. I understand that you've been increasing the hedge component of the exposed balances, but I just wanted to get a sense of how fast you've executed on that.
We were pretty close to... You know, we said that we wanted to sort of round about to get sort of 50%.
Mm-hmm
of our exposed balances there. And, you know, we're fairly close to that. You know, I think we've got, you know, round about $9 billion or so that's sort of in some kind of, sort of, hedged instrument. And, you know-
Mm-hmm
We had a plan to go to $10 billion, and we said that we'd execute that through FY 2024. Yep, you know, the plan will still be to sort of make in that at round about 50%. You know, we might sort of smooth out a little bit, given that we now know that, you know, roughly $1.8 billion-$2 billion of Mortgage Servicing balances may well go at the end of March just to keep that round about. Yep.
Yeah. Gotcha. All right, thank you.
Your next question comes from Ed Henning with CLSA. Please go ahead.
Hi, thanks for taking my questions. Most have been asked, but I've got a couple. Can you just clarify, is the tax rate any different, for the U.S. Mortgage Servicing business in the, in the group, as, as a first one? Also, looking forward, have you got any more line of sight on any event-based business, or is the outlook just still subdued like it was, at the result, or has there been any change? And then just the third one, you know, you talked today about focusing on the three core businesses and, you know, prioritizing, you know, acquisitions at a central price, when they're available.
Is there anything in the pipeline potentially at the moment, and given, you know, where rates are and everything, that makes it a little bit more difficult than Mortgage Servicing, or sorry, in corporate trust? So does that make it more likely you're focusing on plans and government services in the interim? Thank you.
So I'll take question two and three, and then I'll pass that to Nick on the tax question. Yep. So first of all, what we're seeing in the world of events, look, the corporate actions are still, you know, a little bit subdued. You know, it kind of goes in sort of fits and starts, but, you know, we anticipated that 2024 would be a little bit better than 2023. And that kind of stuff playing out at the moment as we sort of seeing the sort of weekly numbers coming through, so, you know, a modest improvement there. You know, pleasingly, you know, employee share plan trading, you know, which, you know, quite a large, you know, our first half 2023, you know, wasn't great.
It really sort of strengthened in the second half. You know, we are seeing, you know, pretty reasonable levels of, employee plan trading, you know, which is improvement on last year. So, so that's a sort of positive sign. So corporate actions still subdued. The employee share plan trading, you know, improved, and still on the corporate trust side, still a little bit slow in terms of, you know, debt issuance, et cetera, which is, you know, what we kind of anticipated for FY 2024.
In terms of, you know, acquisition pipeline, you know, we've said that we want to invest in our core, you know, within issuer services, you know, typically that's sort of, you know, reg agent areas, you know, and, and some of that sort of entity management side of things, rather than traditional transfer agency registry business. There continues to be sort of, you know, modest opportunities there. And also, you know, there's some interesting discussions in the corporate trust side of things and, and, you know, playing out as far as, you know, what banks want to do.
I think, you know, Computershare remains, you know, pretty well placed for some of these, especially where we can provide a model where we can acquire a business that, you know, the financial institutions, should they desire it, can continue to maintain the balances, which I think is a pretty strong proposition. So, you know, one or two of these are sort of, you know, early embryonic stages of sort of conversation and discussion. And then, of course, we've all. You know, we just talked about the Solium sort of tuck-in in U.K. and Europe, which was, you know, in the core. So look, there are assets out there. You're right in terms of, you know, I mean, what did I say?
You know, I said that it's got to be at the right price, you know, good financial terms, you know, especially some of the corporate trust business, because you don't want to pay a multiple when rates are at their highest. So, you know, there are certain things, you know, certainly enough there that we can sort of chew over and determine, you know, whether or not we can get a transaction at sort of decent terms. So, you know, I think that bodes well for the future. And Nick, do you want to cover the tax question?
Yeah, there's just to confirm, there's nothing specific in this business that it attracts a different tax rate in the U.S. to any of our other businesses there. So, you know, I don't anticipate it having a material impact on the actual tax rate with the time.
Okay. Thanks, Nick.
Thanks, Nick.
Your next question comes from Andrew Buncombe with Macquarie. Please go ahead.
Hi, guys. Thanks for taking my question, and apologies for dialing in a little bit late. If this question has already been asked, apologies. Obviously the UPB has fallen a little bit in the first couple of months of this year. If that continues over the next couple of months, will that impact the sale price, or is the sale price locked in? Thanks.
Yeah. So the sale price has sort of multiple components to it. Yeah. And, you know, there's... You've got sort of the owned MSRs, or so, which is just, you know, a little bit over $400 million. You've got the part owned, which is a little bit less than $50 million. So you've got round about $455 million, you know, of the sale price, which is MSRs. Now, the rest of that balance sheet will be very stable, you know, and, you know, you do, you know, you don't expect any adjustments, et cetera, you know, advances, liabilities, you know, the SPV values, the cash, and other operating assets and liabilities will be pretty steady.
And then, you know, what we have been able to do is basically work through a mechanism on the valuation of the MSRs at signing. And, you know, so if interest rates all of a sudden fell, like, you know, well, that's sort of based on a weighted average service fee for that sort of bunch of MSRs. And that weighted average service fee is fixed at signing. So, you know, it doesn't affect. But of course, UPB balance at closing is also part of that. And, you know, as we've mentioned, you know, we will continue to deploy capital between signing and close. We've got an MSR, you know, a arrangement, you know, where we can sell them onto the market or indeed sell them to Rithm. Yeah.
So it really depends on how, you know, the market is going. What you would expect is, you know, some of the new business pipeline, you know, that we're migrating new loans, which is third-party servicing, not MSR related, you know, may well slow down because they'll not want to move to our platform and then shift to another platform. So, you know, some of our sort of UPB sort of predictions will be a little bit less. But, you know, so there is going to be closing sort of mechanics in terms of valuations.
But, you know, we by basically sort of, you know, fixing that weighted average sort of service fee element across the types of MSRs, you know, that's going to help as far as maintaining the value and reducing the risk should any unforeseen event happen with, you know, in the U.S., you know, Mortgage Servicing right market.
That's it for me. Thank you.
Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Simon Fitzgerald... Apologies. There are no further questions at this time. I will now hand back to Mr. Irving for closing remarks.
Yeah. Well, first of all, thanks very much for joining today at really short notice. We really appreciate it. You know, look, it's a good news day for Computershare. We simplify the group and improve the quality and consistency of the earnings. And, you know, I guess me, for one, you know, I can't say I will miss the Mortgage Servicing questions going forward. So you know, that's certainly a positive for me, and I think it's a fair price and, you know, the right thing for shareholders. And, you know, it gives us a lot, you know, even more optionality than we had already to, you know, invest in our core and also to share these returns with shareholders as far as capital management is concerned.
Thanks very much and, yeah, see you all soon. Thank you.
That does conclude our conference call today. Thank you for participating. You may now disconnect.