Snoopy your last post seems to have been met by silence perhaps stunned silence. Is the WACC of 7.4% realistic?
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Snoopy your last post seems to have been met by silence perhaps stunned silence. Is the WACC of 7.4% realistic?
Snoops ...I don’t think you can compare WACC and interest rates charged as you have done
Don’t forget the IRR on a HER loan where interest and principle is collected at the end of the loan is the same as an interest only loan (same rate and duration) where interest is collected along the way with principle collected at the end.
It seems that HER loans on average have a much longer duration than a lot of their other lending and I was wondering what you thought about the capital implications are when these loans are repaid allowing for inflation.
As we seem to ‘bore’ people with these conversations I’m don’t expect you to reply on this thread.
Dairy prices down overnight with the key WMP down more than 7%
Down 7 of the last 9 auctions ...bit like Heartland share price
Just as well as NZD tumbling else farmers might be getting a bit glum
It is a forum discussion. Anyone is welcome to join in, as you have ;-)
Calculating WACC is a mechanical process based on defined input data and mathematical rules. I would class the good folks at PWC who did the calculation as highly competent. So I believe the 7.4% figure for WACC to be accurate. But your question is slightly different as you asked if 7.4% was realistic.
That 7,4% WACC for Heartland is a year old. One of the inputs into calculating this is 'share price volatility'. Between two and three years ago, the HBL share price increased from about $1.15 to $1.75. Perversely that 'volatility' (which I am sure no shareholders who held over that period would complain about) is likely to have increased the WACC of the company. Over the last year, the share price has overall gone nowhere. But with quite a large spike up and down to about $2,15 in between. So in my judgement, the share has been quite volatile over the year, even if the end result is little overall movement. In an updated calculation of WACC, I would therefore expect to show a WACC value not too different to 7.4%.
Winner is an accounting wiz. So I have little doubt that when he set me the exercise of looking at the time value of cashflows over a ten year duration for a reverse mortgage loan, he would have known what the result would be. So there would be no need for him to comment further.
I still haven't answered your point though. I personally don't like using WACC, as calculated by PWC because I don't believe that a 'suddenly increasing share price' is a risk that investors should try to avoid. So I personally would use my own judgment on what a suitable 'industry norm' 'equivalent discount factor' taking into account current market position might be. For Heartland I think it should be about 6.5%. At the current spot interest rate Reverse Mortgage charge of 7.82%, there is a difference of 1.32 percentage points. And that would not give a 'zero value' to the reverse mortgage portfolio.
SNOOPY
Ok, cutting through the 'accounting speak', if I lent some money out to an old crusty home owner at say 7.4% p.a., for ten years, would I like it better if:
1/ I got that 7.4% in interest paid back to me each year OR
2/ I got that interest paid into a bank account for ten years, then picked up all the interest in one hit at the end.
The preferable scenario is clearly 1/. However, in the case of a Heartland 'reverse mortgage agreement', the interest that you are 'not collecting' each year is itself collecting interest along the way at the same 7.4% rate. So although you are sacrificing the liquidity of your interest income for ten years, you are getting paid well for making that sacrifice. Thus in the case of a reverse mortgage agreement there ends up being no difference in the present value of the return, whether you choose scenario 1/ or 2/. And a reverse mortgage is scenario 2/.
Using a WACC 'hurdle' to evaluate the cashflows from a potential future investment, I would have thought, is fairly orthodox accounting practice. If a potential return is only equal to the WACC then that, to me, is a signal not to proceed with that investment. Or to put it even more bluntly: If Heartland were only charging 7.4% for their reverse mortgage interest cashflow and the weighted cost of capital was 7.4%, you would have to question whether the reverse mortgage interest charges properly reflected the risk from a Heartland shareholder perspective.
I imagine that over the 'long term' houses will trend up in value, living costs will trend up in value, and those who take out reverse mortgages will take out larger loans in dollar terms to fill their larger living requirement bills, All affordable because of the higher value of the houses.Quote:
It seems that HER loans on average have a much longer duration than a lot of their other lending and I was wondering what you thought about the capital implications are when these loans are repaid allowing for inflation.
I can also imagine that there are times when house prices increase a lot faster than the cost of living and there may be times of low to no house price growth even as the cost of living goes higher. In those cases, crusty homeowners may think twice about that reverse mortgage. I think it makes a difference borrowing $50,000 if your house price has just moved up by that amount in a year (psychologically you are borrowing new windfall capital that you didn't have a year previously) , verses borrowing $50,000 in a year that your house value remains the same (in this instance you are mortgaging your past hard earned nest egg.) Looked at objectively there is really no difference between the two transactions. But home owners do not always think objectively.
At least a couple have indicated that they are 'not bored', so I guess you are out voted on that Winner ;-P. If I owned Heartland shares, and reverse mortgages are highlighted as a big part of future growth, I sure as heck would think it worthwhile putting some effort into figuring out how to value them.Quote:
As we seem to ‘bore’ people with these conversations I’m don’t expect you to reply on this thread.
SNOOPY