The $11 billion real estate play

Wednesday 06 September 2023

Portfolio insights

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But there’s more to ICE than financial services, as I remarked in the article:

“Intercontinental Exchange is currently working to revolutionise the mortgage ecosystem through a series of strategic acquisitions. One such acquisition is of Black Knight, a key player in the mortgage space. Although a decision from the FTC is still pending, we are of the opinion that the acquisition will proceed following the divestiture of Optimal Blue (a subsidiary of Black Knight).”

The Black Knight acquisition closed on 5 September, securing for ICE a critical piece of the puzzle in its ambition to digitise the analogue US mortgage ecosystem. Announcing finalisation of the deal, ICE revealed:

“Based on the Closing 10-Day Average ICE VWAP for the ten consecutive trading days ended on (and including) August 30, 2023, which was $115.355, the Per Share Cash Consideration is $75.867, the Per Share Stock Consideration is 0.6577 shares of ICE common stock, and the aggregate value of the consideration to be received by Black Knight stockholders (including rollover equity awards) is approximately $11.9 billion.”

The Black Knight deal brings the cumulative investment in the mortgage industry to more than US$23 billion, as ICE previously acquired Mortgage Electronic Registration Systems (MERS) in 2018, Simplifile in 2019 and Ellie Mae in 2020.

The acquisition of Black Knight is significant for several reasons, quite apart from the quantum.

US mortgage ecosystem is ripe for disruption

The loan underwriting process in the US is complex, expensive and slow with the typical mortgage taking around 60 days to complete. And despite the rapid digitisation of so many industries, this one remains anachronistic, principally because so many participants profit from the inefficiency.

The lengthy loan application process,  based on paper documents like tax returns and credit scores means lenders face fluctuating borrowing costs, especially as interest rates have surged over the past two years through the application process. Once a loan agreement is finalised, the lender and borrower need to track loan repayments, and regulatory guidelines mandate the retention of related documents for many years.

ICE seeks to disrupt this model by leveraging its expertise in market infrastructure, data analytics and technology solutions. By doing so,  it aims to make it more efficient, transparent and digital-friendly. Today, only a small percentage of mortgages are transacted digitally as CEO Jeff Sprecher remarks;

“There’s only a single-digit percentage of mortgages today in this country that have gone through a digital note process. That’s the opportunity,” – CEO Jeff Sprecher 2023

ICE lowers costs for all stakeholders and improves efficiency

Not only is the current process slow, it is also expensive with the cost of loan origination more than doubling from US$4,000 in 2009 to US$9,000 in 2021. This makes sense when the industry’s  staff expenses account for a whopping 73% of total costs. ICE believes it can lower expenses by more than US$2,600 per loan through digitisation and automation, resulting in reduced friction, improved transparency and a better experience for consumers. And for ICE it expands its total addressable market in mortgage technology to US$14 billion while providing both revenue and cost synergies for shareholders.

Data is the new oil

There is also a strategic rationale for ICE beyond digitisation. It stands to benefit from its access to unique data and analytics across the mortgage workflow through:

  • Access to more timely information enhancing the underwriting process and providing customers with deeper insights into rapidly changing market dynamics
  • Greater transparency with detailed access to portfolio valuation, performance and risk for servicers and investors
  • Ability to leverage ICE’s expertise in fixed-income and capital markets, especially to the mortgage-backed security (MBS) market

ICE valuation rises

Black Knight raises ICE’s revenue and operating profit. There is also a combination of revenue and cost synergies to be realised over coming years. ICE has acquired nearly 20 companies over the last decade, and management has a good track record of realising synergies ahead of schedule.

Following the acquisition of Black Knight, we updated our model, leading to an increase in our valuation. While the mortgage market remains under pressure in the US following the rapid rise in rates, we are excited about ICE’s long-term prospects and look forward to following its progress as it expands services while improving the mortgage ecosystem for all stakeholders.

About the Author
Lachlan Hughes, CFA

Lachlan Hughes, CFA

Chief Investment Officer

Lachlan founded Swell Asset Management in 2014, wanting to create a unique investment offering – a global portfolio with a genuine long term focus. He is the CIO, with responsibility for all investment decisions of the Swell Global Portfolio. Previously he was a Senior Analyst with NovaPort Capital, a boutique fund manager owned by Challenger Limited. Prior to that, Lachlan was a corporate lawyer working with King & Wood Mallesons, The Bank of New York (London), and Allco Finance Group.

Lachlan earned the right to use the CFA designation granted by the CFA Institute in 2010. His professional qualifications include a Bachelor of Commerce (Finance) and a Bachelor of Laws.