Looks as though ANZ taught Jeff and Chris too well...lol.
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The analysis of what is an appropriate level of capital for 'Heartland' to hold has become more complicated. In 'Heartland Bank' terms, it has become easier. That is because the reverse mortgage Australian loans have been hived off into a separate entity. But we shareholders can no longer buy shares in 'Heartland Bank' directly. We can only buy into a parent entity 'Heartland Group Holdings' that still includes those Australian Reverse Equity loans. A comparison of the 'Heartland Bank' end of year position and the 'Heartland Group Holdings' end of year position sheds further light on this matter.
Heartland Group Holdings less Heartland Bank equals Heartland Troublesome Holdings Assets $4,926.404m (100.0%) $4,138.735m (100.0%) $787.699m (100.0%) Liabilities $4,250.736m (86.3%) $3,535.345m (85.4%) $715.391m (90.8%) Equity $675.668m (13.7%) $603.390m (14.6%) $72.278m (9.2%)
These figures show that while the financial risk position of 'Heartland Bank' has been shored up, the financial position of HGH shareholders is going the other way. The above figures were taken as at the 30th June balance date. That is before the 2nd July announcement of an incremental $A250m of incremental reverse mortgage funding. That means the ceiling on the Australian Reverse mortgage business is now $A850m. Yet no more shareholder equity to back up this aggressive expansion into Australia has been raised. It is clear then that the equity ratio of 'Heartland Troublesome Holdings' will be considerably weakened at the next reporting date. And the consummate risk taken on by parent HGH holders has increased significantly.
The question for HGH shareholders is therefore no longer:
"What is the appropriate capital ratio for Heartland Bank?"
It is now:
"What is the appropriate capital ratio for Heartland Group Holdings?"
There is regulatory oversight to help us choose an answer to the former question. But there is no longer any regulatory oversight to help us answer the latter question. In this context, any revisionist minor adjustment to the appropriate capital position in 2015 being miscalculated at Heartland Bank seems trivial. What the appropriate capital position going forwards for Heartland Group Holdings is the real question that should concern HGH shareholders.
SNOOPY
I did not wish to imply that all reverse mortgage loans are troublesome. Rather the point I was trying to make was that it is the overgearing of that Australian Reverse Mortgage Portfolio that is potentially troublesome. No matter how secure the underlying loan in market terms, the security of that loan from an investor perspective can be reduced as the lending entity borrows more and more. This is not just my view. It is the view of the NZ Reserve Bank which had placed restrictions on how much Heartland Bank could weaken their capital position by boosting their offshore exposure to Australian Reverse mortgage loans before the associated capital risk to shareholders funds became too great. Heartland's solution was to offload the Australian reverse mortgage assets into a separate investment vehicle. That greatly decreased the risk profile of Heartland Bank going forwards. But it made no difference whatsoever to the risk profile that will be experienced by Heartland Group Holdings shareholders. Indeed with the subsequent increase in Australian mortgage funding announced on 2nd July 2019, I would argue that the capital risk going forwards for HGH shareholders has substantially increased.
SNOOPY
Nice summary, thanks Snoopy.
Fair enough ... though as long as they make sure that they have enough headroom in their loan to equity ratio (and it is my understanding they do), they should be fine. They do provide loans which are typically paid back within a decade (average remaining lifetime of mortgagees) and are secured by mortgages with quite significant headroom.
Sure - property prices can drop, but how likely is it that they drop long term (even a a short blip like 2008 would be quite immaterial for them) by a significant amount (say 30% plus)?
On a second thought - there is one big risk I could see, and this is that at least parts of Australia become an undesirable (or uninhabitable) destination due to climate change really starting to bite ... so, yes, if too many of their securities become e.g. uninhabitable due coastal erosion and floods insurance companies don't want to pay for anymore or if these properties are in soon to be ghost towns due to drought destroying the agricultural base, than yes, there would be a real issue.
It might be interesting to do some analysis based on the environmental risk profile of their securities ...
HGH call account rate slashed to just 1.6%...ouch.
You're welcome mate. I have a strong dislike for major reductions in call account interest rates with no notification by the bank but Heartland are by no means the only offender. I just shifted $100K over to them the other day which is the only reason I looked afterwards to make sure the money had arrived. Might shift it back and buy some more yield stocks now as its getting close to the point where their call account is practically worthless, other than as a relatively safe place to store money.
Time to update the banking covenants for Heartland.
In a change of methodology from last year, I am going to consider 'Heartland Group Holdings' and not just 'Heartland Bank'. This is because the entity that shareholders can buy into is no longer just 'Heartland Bank'. We shareholders can only buy into 'Heartland Group Holdings' so it makes sense to only analyse that company.
What follows is an assessment of Heartland's total liabilities/borrowings (including the accumulated funds looked after for Mum and Dad's known as term deposits) in relation to Heartland's own underlying assets.
In March 2019, Heartland Australia had an unsubordinated capital note issue of $A50m. If this was still part of Heartland Bank, approximately 72% of the face value of the Notes would be recognised as Tier 2 Capital by our banking regulators. So we must add the 'Tier 1 capital' (being shareholder equity) to 72% of the 'Tier 2 capital' to obtain the total recognised 'tier' capital for liquidity purposes
Total 'Heartland Bank' Equity at balance date was $603.390m plus Total 'Heartland Australia' Equity at balance date was $72.278m plus Tier 2 capital as apportioned (NZD1 = AUD0.9566) $37.633m equals Total Tier Capital $713.301m
Total Heartland liabilities at balance date were $4,250.736m
So: Equity / Total Liabilities
= $713.301m / $4,250.736m = 16.8% = 17% (with rounding)
Result: PASS TEST
I have been a little generous compared to what the Reserve Bank might do, in including 'intangible assets' as 'underlying equity'. The Reserve Bank effectively punishes a financial institution for spending on having up to date computer software (software is an intangible asset). Yet I see up to date software as a really good idea in keeping track of troublesome loans. The multi year picture is fairly steady with small deviations either side of my 17% equity ratio target.
{Note that I have changed my equity target for Heartland to the 17% equity (down from my 20% target) that Heartland had when former Reserve Bank Governor Wheeler originally approved Heartland as a bank. I had previously used 20% as the figure appropriate for a more marginal finance company without a strong history.}
The historical picture of this ratio is tabulated below.
FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Target Total Tier Capital/ Loan Book 19.3% 17.7% 17.6% 16.6% 16.4% 16.9% 17.7% 16.8% >17%
SNOOPY
This is an assessment method of looking at the underlying earning power of Heartland Group Holdings, compared to the interest bill they face while making their earnings. Updating for the full year result FY2019:
The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs
EBIT (high estimate) = $334.330m - $85.589m= $248.741m
Interest expense is listed as $136.747m.
So (EBIT)/(Interest Expense)= ($248.741m)/($136.747m)= 1.82 > 1.20
Result: PASS TEST
The historical picture of this ratio is tabulated below. It looks to be getting better and better.
FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Target EBIT/ Interest Expense 1.15 1.22 1.44 1.52 1.65 1.79 1.82 1.82 >1.2
SNOOPY
The underlying debt of the company (debentures and other loan supporting borrowings removed) is the first factor in an attempt to assess the underlying shareholder owned skeleton upon which all the receivables that are loaned ultimately sit.
According to the full year (FY2019) statement of financial position the debt excluding borrowings is:
$22.498m + $7.532m + $10.372m = $40.402m (1)
-----
To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the 'Investment Properties' (the rump of the problem property portfolio) and the unspecified 'Investments' (held on behalf of policy beneficiaries) from that total:
$4,926.404m - ($3,029.231m +$1,318.819m + $11.132m + $354.928m) = $212.294m
We are then asked to remove the intangible assets from the equation as well:
$212.294m - $72.679m = $139.615m (2)
----
Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities [ (1)/(2) ]:
$40.402m/$139.615m= 28.9% < 90%
Result: PASS TEST
The historical picture of this ratio is tabulated below.
FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Target Underlying Gearing Ratio 20.2% 14.7% 40.5% 58.4% 37.4% 37.6% 39.4% 28.9% < 90%
SNOOPY
The $10.372m figure I refer to above is a 'Derivative Financial Position'.
Something I look for in any set of annual accounts is when a change is presentation happens with no explanation. This year there is an entry for 'Derivative Financial Instruments' in both the asset and liability breakdown of the balance sheet. If you go back to the FY2018 account presentation these entries are not there, although they have been retrospectively written into the FY2018 accounts when the FY2018 balance sheet was restated for comparison purposes in the current year (FY2019).
'Derivative Financial Positions' have really jumped up in size too, and are now over ten times larger on the asset side and around five times larger on the liabilities side (FY2019 Balance Sheet vs FY2018 Balance Sheet). In the FY2019 accounts there is a comprehensive explanation of what these are under note 12. However there appears to be no information as to whether the corresponding numerical entries are 'Fair Value Hedges' or 'Cashflow Hedges'.
Why does this matter? Because when I calculated 'Banking Covenant 3', I feel that:
1/'cashflow hedges' are part of the 'interest rate cashflows' WHEREAS
2/ 'fair value hedges' are interim changes in capital valuations that should nevertheless all come out in the wash at the end of the life of the derivative.
This means that when I consider the capital position of the company I should probably consider type 2/ hedges but not type 1/ hedges. Or maybe my thinking is wrong on this? Can anyone offer some insight as to why these 'Derivative Financial Positions' have suddenly appeared on the balance sheet and what part of the Heartland business they relate to?
SNOOPY
Updating this number for the full year FY2019 for 'Heartland Group Holdings'. The equity ratio is an assessment of the balance sheet risk of the total company, with all finance receivables and the supporting borrowings (whether they be from debenture holders or parent supporting banks) included.
Equity Ratio = (Total Equity)/(Total Assets)
Using numbers from the Heartland AR2019
= $675.668m/ $4,926.404m = 13.7%
The customer loan base (finance receivables) growth year on year (+9.1%) has in relative terms has reversed again and is now growing more rapidly that the company equity (+1.7%). This means the balance sheet has been made 'more stressed' over the year.
The historical picture of this ratio is tabulated below.
FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Target Equity Ratio 16.0% 14.6% 15.0% 14.3% 14.1% 14.1% 14.8% 13.7% -
So Heartland is now more stressed, from an equity ratio perspective, than at any time in its history.
SNOOPY
Since Heartland is using relatively less underlying equity to generate their profits, or alternatively the same amount of equity to generate more business, I would expect Heartland to be more profitable as a result
If nothing goes wrong in the loan portfolio, it is a good thing. But the more leveraged the total business, it will take a lesser downturn in the quality of the underlying loan assets to cause Heartland to need to raise more capital to shore up their capital base. That is a bad thing. Whether the net effect is 'good' or 'bad' will depend on how likely it is that you see the loan portfolio will deteriorate to an extent that more shareholder capital will need to be raised at a discount. That factor is not entirely under the control of Heartland. It also depends on 'market forces'.
An alternative way of looking at this figure could be to say that because the underlying quality of the ever expanding portfolio of 'reverse mortgage' loans are very high, less equity capital is needed to support them.
I wouldn't be concerned about a single 'Banking Covenant' statistic on its own. Best to look at them all together to get a feel for the overall picture. You will notice that unlike the other covenants, BC1 to BC3, there is no 'target' figure for BC4. The statistic thrown up for FY2019 may be the worst ever, but it is not so different to FY2016 and FY2017. I am not selling any of my own HGH shares because of this. You may need to keep an eye out for other signals. For example, if you heard that Jeff had taken a one way dive off the harbour bridge, that could be a sell signal? If it was the Sydney Harbour Bridge, that would be a definite worry!
SNOOPY
Thanks Snoopy.
I’ll sleep well then.
Assuming HGH's equity ratio is the biggest of your concerns, I think you can.
Snoopy's numbers just demonstrate that they are doing a good job in increasing their REL business in Australia, which is a good thing, looking at the earnings.
As discussed earlier - these loans should be pretty safe ... unless HGH manages to overvalue the securities they held (like TRA did with their car loans ;)), underestimate the mortality rates (people living much longer than they statistically ought to) or unless the value of these securities takes a material plunge - like parts of Australia which are inhabited now becoming due to climate change (or other reasons) uninhabitable or at least undesirable to live in.
Not sure we or anybody can at this stage fully appreciate the last of these points ... so, yes, there will be risks related to climate change, which may or may not eventuate, but if they do they might be BIG and destroy property values big time. Might be sensible to put not all eggs into the HGH basket.
To try and unravel my own mystery, I have just re-read note 12 on 'Derivative financial Instruments' in the HGH annual accounts.
At the bottom of the explanatory notes there is this key sentence.
"A fair value gain or loss associated with the effective portion of a derivative designated as a cash flow hedge is recognised initially in the hedging reserve. The ineffective portion of a fair gain or loss is recognised immediately in the Consolidated Statement of Comprehensive Income."
If we now go to the 'Statement of Comprehensive Income', the following entry appears under 'Other Comprehensive Income'.
Effective portion of change in the fair value of derivative financial instruments, net of income tax ($4.762m)
That should translate to a pre income tax figure of: ($4.762m)/(1-0.28) = ($6.614m)
From the previous explanatory quote, this $4.762m must be the ineffective portion of the cash flow hedge. But the total 'Derivative Financial Liability' is listed in the balance sheet valued at $10.372m (presumably after tax is paid?).
So by a process of elimination, the remaining 'Derivative Financial Liability' must be 'fair value asset related'.
This amounts to: $10.372m - $4.762m = $5.610m
Have I got that right?
SNOOPY
What a total disgrace.
Geoff and Jeff you really have let us shareholders down.
10am start for a HGH agm is totally unacceptable.
4pm Friday is the only time for a HGH agm.
No way can I get stuck into the fine wines at 10 am.
:lol: I'm sure that won't stop you :lol:
I very much doubt Australians will all of a sudden start living to 110 ,or Australia will become uninhabitable.
Do not think all the population of Brisbane,Sydney and Melbourne would want to move to NZ.
The Tasmanians would n't want them either.
ps.I am getting bored.Wish the Aussie market would hurry up and open.The hour delay thankfully is only for this week.!
Well, a scenario of e.g. Melbourne or Sydney running out of drinking water isn't that far fetched, is it? Would you think this would depress local property prices? What percentage of HGH's REL's would be effected?
Here are some articles to combat your boredom ;);
https://www.abc.net.au/news/2017-07-...decade/8735400
https://www.abc.net.au/news/2019-09-...water/11519970
Similar - hope HGH does not sell too many REL's into the smaller towns in the rural East - many of these small townships are dying and nobody might want to buy the houses when the current occupiers left and the drought killed the economical base for the agriculture.
https://www.theguardian.com/environm...ce-proud-towns
https://www.theguardian.com/australi...er-by-november
And sea levels are rising - I probably don't need to explain what happens to the value of a REL mortgaged house after the sea took it (or the ground below it) over.
https://www.environment.gov.au/clima...tralias-coasts
if all these worst case scenarios go down it aint gonna be HGH that gets in the poo.
I reckon CBA Suncorp ANZ, would explode pretty quickly if all that **** goes down with property in Aussie.
Great links BP, Thanks.
One hopes that Heartland are taking all these things into consideration when lending the money.
They are professional bankers...right...so should be assessing risk really carefully. Your links should all be factors.
The relatively short term of RE loans should help.....the stuff in these links is going to happen over years....not instantaneously. Hopefully.
Even so...maybe my portfolio 9% is a bit high. Hope I can fix this by other stuff growing...don't really want to sell as I do like the dividend cheque. Also don't like another potential fix.....HGH share price dropping !
I etched a line on the big rock down on the beach which I use to assess how much the sea level is rising ......measurements suggest sea levels aren’t risingQuote:
BlackPeter
And sea levels are rising - I probably don't need to explain what happens to the value of a REL mortgaged house after the sea took it (or the ground below it) over.
Just casual observations of a constant over a few decades
Perhaps you could drop these guys a note and provide them with some guidance.
https://science.howstuffworks.com/en...uestion356.htm
Seems like it all a big guess eh
Mind you storm surges seem to be more common and often surge stronger and higher than they used to ....suppose that is because of climate change ....but when peace returns every returns to normal and the sea level is about where it was years ago.
Glad we sorted this issue - and I am sure your local and time-boxed data collection can be extrapolated globally to all shorelines. As we all know - one data point makes an excellent trend :p;
But wait - how come the National Ocean Service is contradicting your observation?
https://oceanservice.noaa.gov/facts/sealevel.html
Must be time for Trump to hire you and sort these stupid scientists out ...Quote:
Global sea level has been rising over the past century, and the rate has increased in recent decades. In 2014, global sea level was 2.6 inches above the 1993 average—the highest annual average in the satellite record (1993-present). Sea level continues to rise at a rate of about one-eighth of an inch per year.
Eminently pragmatic percybut the South Island is rising.
So your watermark isnt a constant level.
I go into the water by my house up to my ankles - usually to rescue my bulldog who cant swim and forgets. Still comes up to my ankles so I don't see any global warming. It was also very cold so I'm quite looking forward to the warming
I'm thinking of putting more money into HGH but I'm just holding off - not sure why. I'd like to see more history in the REL business but I know when they prove how profitable they are over the longer term the share price will be double...
MMmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm?
I don't think I have the fortitude to start at 9am,however I will give it my very best effort.
How will I manage to get on my ear on Devonshire teas?
Brings back rather fond memories of a bookshop owner who offered me a cup of coffee, when I was selling him books.
Half a cup of coffee topped up with Kahlua.!.
Like another?
Yes please.!
Industry Group Risk
From AR2019 note 22, the greatest 'business group' risk in dollar terms is agriculture, with $741.947m worth of assets. This represents an increase of just $0.281m over the previous year.
$741.947m/ $4,845.570m = 15.3% of all loans
While the size of the agricultural portfolio has barely changed, this significant percentage decrease of the total is due to many more reverse mortgage loans and finance and insurance loans being written.
Indeed reverse mortgage loans, for the first time, are being declared separately as an asset class. $1,318.819m of Reverse Mortgages are declared on the HGH balance sheet. Subsidiary 'Heartland Bank' declares $561.211m of NZ based Reverse Mortgages on the books. That means we can find the size of Heartland's Australian Reverse Mortgage book by simple subtraction:
$1,318.819m - $561.211m = $757.608m
This means that 'Australian Reverse Equity Mortgages' (Aussie REM), if you regard that as a credible loan category, can be thought of as the largest category of 'Account Receivables'
$757.608m/ $4,845.570m = 15.6% of all loans
Regional Risk
From AR2019 note 22, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $1,214.744m worth of assets. This represents:
$1,214.744.m/ $4,845.570m = 25.1% of all loans
The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 8.1% in numerical terms over the year for the second year in a row. (Auckland still covers 23.3% of all loans).
The multi-year picture is shown below:
2012 2013 2014 2015 2016 2017 2018 2019 Largest Regional Market Auckland (30%) Auckland (30%) Auckland (25%) Auckland (26%) Rest of NI (25%) Rest of NI (26%) Rest of NI (26%) Rest of NI (25%) Largest Industry Group Market Agriculture (24%) Agriculture (21%) Agriculture (16%) Agriculture (17%) Agriculture (18%) Agriculture (19%) Agriculture (17%) Aussie REM (16%)
Overall Heartland looks less risky than at any time in its history from a 'Customer Concentration Test' perspective.
SNOOPY
The objective of this post is to consider cash flow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.
The following information for FY2019 is derived from note 23 in AR2019 on 'Liquidity Risk'.
1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities'.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is derived from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.
Loan Maturity Expected Behaviour Multiple FY2014 Financial Receivables Maturity: Contracted/ Expected FY2015 Financial Receivables Maturity: Contracted/ Expected FY2016 Financial Receivables Maturity: Contracted/ Expected FY2017 Financial Receivables Maturity: Contracted/ Expected FY2018 Financial Receivables Maturity: Contracted/ Expected FY2019 Financial Receivables Maturity: Contracted/ Expected On Demand 100% $50.254m / $50.254m $37.012m / $37.012m $84.154m / $84.154m $57.040m / $57.040m $49.588m / $49.588m $80.584m / $80.584m 0-6 months 132% $477.190m / $629.445m $664.557m / $877.215m $743.389m / $961.274m $618.271m / $816.118m $609.268m / $804.234m $1,020.160m / $1,346.611m 6-12 months 132% $367.564m / $483.727m $450.638m / $594.842m $484.420m / $639.962m $521.215m / $688.004m $469.632m / $619.914m $646.123m / $852.882m
Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.
Deposit Maturity Expected Behaviour Multiple FY2014 Financial Liabilities Maturity: Contracted/ Expected FY2015 Financial Liabilities Maturity: Contracted/ Expected FY2016 Financial Liabilities Maturity: Contracted/ Expected FY2017 Financial Liabilities Maturity: Contracted/ Expected FY2018 Financial Liabilities Maturity: Contracted/ Expected FY2019 Financial Liabilities Maturity: Contracted/ Expected On Demand 3.01% $629.125m / $18.922m $748.332m / $22.450m $718.587m / $21.630m $836.829m / $25.189m $924.072m / $27.815m $895.210m / $26.946m 0-6 months 32.4% $748.129m / $242.431m $1,213.450m / $395.102m $892.944m / $289.314m $1,191.957m / $386.194m $1,345.316m / $435.882m $1,531.594m / $496.236m 6-12 months 36.4% $538.050m / $195.682m $686.159m / $249.762m $837.844m / $304.975m $729.145m / $265.409m $572.731m / $208.474m $620.836m / $225.984m
Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.
If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.
Loan-Deposit Maturity FY2014: 'Expected' combined Loan and Deposit Cashflow FY2015: 'Expected' combined Loan and Deposit Cashflow FY2016: 'Expected' combined Loan and Deposit Cashflow FY2017: 'Expected' combined Loan and Deposit Cashflow FY2018: 'Expected' combined Loan and Deposit Cashflow FY2019: 'Expected' combined Loan and Deposit Cashflow On Demand $31.332m $14.562m $62.524m $31.851m $21.765m $53.620m 0-6 months $387.014m $482.113m $691.960m $429.924m $368.352m $850.375m 6-12 months $288.045m $345.080m $334.987m $422.595m $411.440m $626.898m Total $706.391m $841.755m $1,089.471m $884.370m $801.557m $1,530.893m
Once again lots of numbers here. Now there are six years of consecutive data on display, we can start to get a view on what 'normal' numbers should look like. So what numbers in the above table(s) are worthy of further attention?
The purpose of this exercise is to work out if Heartland has an identifiable chance of running out of cash. The above table(s) are indicative of what might be expected to happen if Heartland management took a 'hands off the tiller' approach to cashflow management. Heartland management does not do this. Instead:
]
1/Heartland management is a frequent raiser of new capital. That boosts cashflow in.
2/ Heartland management can manipulate 'expected' behaviour of customers by offering higher interest rates for debenture depositors over time periods that cash is needed (for example).
So while the above tables will not be an accurate picture of what really happens to cashflow over the next twelve months, they are useful in hinting where deposit rates (a customer nudge factor) might be heading for 'current period' deposits.
A customer might not be happy if Heartland decides not to offer them a loan. But they will likely be even more unhappy if they have loaned Heartland money, be it in a short term debenture or a cash account, and Heartland does not have the cash to pay them back. Whether cash is available depends on the balance between cash coming into the company and cash going out. This 'balance' is reflected in the bottom table, and this is the table that deserves our attention.
If a cash depositing customer is denied their cash on maturity, this would be equally annoying whether it happened on a 6-12 month term deposit a 3-6 month term deposit or a cash deposit. So it is the individual figures in the tables that are important, not the totals. Even if an individual figure comes out negative (which none have), it is not certain that Heartland will default. It is not certain because 'expected' behaviour can be changed with incentives: Incentives like offering a higher than market interest rate for a defined period of management concern, for example.
The 'On Demand' net position has strengthened considerably, only being bettered by FY2016. This signalled a likely reduction in Heartland's 'on call' account holder interest rates (a drop which has subsequently happened). Depositors looking to invest with Heartland for up to six months are likely to be similarly disappointed.
The following current 'on call' rates, from institutions with comparable credit ratings, I have lifted from the 'interest.co.nz' website:
Heartland 'Direct Call' ($1 minimum) 1.60% Co-Operative bank ($100,000 minimum) 0.75% SBS bank ($100,000 minimum) 0.75% TSB Horizon Savings ($1 minimum) 0.90%
Heartland's call rate has dropped from 2.75% to 1.6% over the year. Other comparable deposit takers have dropped their rates too, albeit not as much in percentage terms. This is exactly what I predicted last year, when more outsourcing of debt via Australian bond issues was mooted. Cash fund depositors may think they have taken a 'hit' already. With more alternative Australian bond issues confirmed to fund the Australian expansion, I predict Heartland's on call rate to be significantly lower again in twelve month's time.
Expected cashflow for the 0-6 months has turned right around with Heartland now expecting an avalanche of cash to come due. This indicates we can expect Heartland's rates offered for six month term deposits to be toward the bottom end of their comparative peer group.
Heartland ($1,000 minimum) 2.80% Co-Operative bank ($5,000 minimum) 2.80% SBS bank ($5,000 minimum) 2.80% ANZ bank ($10,000 minimum) 2.80%
There seems to be a 'consensus at the bottom'. Maybe the other BBB rated banks are also suffering from an excess of short term 'term deposit money'? If you have just $1,000 to invest then Heartland is competitive. But more than that and you would have to look very closely at investing in those lesser tier banks. I have thrown ANZ , a AA- rated bank, in there and can confirm that BNZ, ASB, Westpac and Kiwibank also offer a 2.8% return on a $10,000 investment over six months. If you have that $10,000 to invest, and there is no interest premium price to be paid by loaning your money to a lower credit rated BBB rated bank, why do it? And if Heartland doesn't really want to attract short term deposit money anymore, what does that say for their lending outlook going forwards?
SNOOPY
[QUOTE=Snoopy;
Overall Heartland looks less risky than at any time in its history from a 'Customer Concentration Test' perspective.
Correct.
Adding to "less risk" has been HGH's strategy of replacing large Rural loans [mortgages] with a lot more smaller loans [livestock].Not only do they reduce HGH's risk, they have a better margin and a shorter loan term.
Loan book improvement has also been part of their strategy with motor vehicle lending,and their business lending, has like Rural lending, seen large loans replaced by a greater number of smaller loans.
RELs.HGH have looked to "spread" their sources of funding,and also sought longer terms.As the REL business is growing so rapidly, this is a very much ongoing work in progress.
The growth in RELs [together with generally tighter lending criteria]will see HGH's net interest margin reduce slighty,however it will still remain at twice other banks'.
Quality rather than quantity,means we remain "well positioned."
[QUOTE=percy;773073]Did I read somewhere or did I imagine that heartland were going to securitise their rel,s.....I,m sure it was in one of their update but I can't find it....maybe too tired..night shift..off to bed..zzzzzzzzQuote:
Originally Posted by Snoopy;
Overall Heartland looks less risky than at any time in its history from a 'Customer Concentration Test' perspective.
Correct.
Adding to "less risk" has been HGH's strategy of replacing large Rural loans [mortgages
I think you read right Ziggy. The current information on 'Securitized Loans' can be found under Note 15 of AR2019, headed 'Borrowings'. In fact Heartland have been securitising their 'Australian Seniors Finance' 'Reverse Equity Loans' from day 1. The securitisation facility has a lid of $650m on it, and it was already drawn to $631m. The whole facility currently expires on 30th September 2022, which means the supporting bank has given their blessing to this arrangement for a further three years.
Heartland Group Holdings has issued $A50m in two year unsubordinated notes. That money can go towards supporting Australian REL loans. Then on 2nd July, Heartland announced the completion of an A$250 million committed reverse mortgage funding facility and said:
"Heartland now has access to committed Australian reverse mortgage loan funding of A$850 million in aggregate."
According to my maths $A650m + $A250m = $A900m
So it looks like, since balance date, the previous bank securitisation facility must have been reduced by $50m, back down to the $A600m figure from 2018. Heartland also state that the new facility provides:
"provides additional diversification of funding"
This would indicate the new facility must be with a different supporting bank in Australia. Did the original supporting bank reducing their level exposure force Heartland to go elsewhere for their new securitization facilities?
SNOOPY
An additional bank.
http://www.equity.co.nz/files/SKL_CMO_ABA_HGH.pdf
They say HGH really bad apparently...
Lest we forget where the old ticker share price got to. Presumably as its the same company still it will return to the previous levels
http://chart.findata.co.nz/?e=NZX&s=...BB&w=940&h=480
http://chart.findata.co.nz/?e=NZX&s=...BB&w=940&h=480
You can buy/sell whatever you want.
I myself am happy to hold a modest holding in SKL,and a large holding in HGH,
ABA I do not have an opinion on,while CMO has been a great performer for those who hold,however I hold TRA,which I expect will be a great performer over the next few years..
Time to update the "Liquidity Buffer ratio" for FY2019.
Dear old Colin has now 'left the building', but what better way to immortalise his contribution to society than continuing with the 'Meads Test', and the 'solid as' quote with which he will alwys be identified? When Colin told us all those years ago that a certain finance company was 'solid as' with reference to investing debenture money, the end result was that this cash became tied up in illiquid property developments. So although the company had enough money to pay out their debenture holders 'on paper' and appeared to be operating profitably, the debenture holders could not get their cash back. The 'Meads Test' (as coined by Snoopy) is one method of finding out if a finance sector company really is 'solid as'. The basic data I need to check this out has already been calculated (see above). So let's get going.
To check out the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:
(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding) > 10%
On the numerator of the equation, we have borrowings.
HGH Borrowings
1/ Term deposits lodged with Heartland. $3,153.681m 2/ Bank Borrowings $25.002m 3/ Securitized Borrowings total $659.135m 4/ Certificate of Deposit $34.836m 5/ Unsubordinated Notes $337.681m Total Borrowings of (see note 13) $4,210.334m
Note 15 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.
Banking facilities are provided by CBA Australia, and another unnamed supporting bank, but for both Australia and New Zealand. These facilities are, I believe, in relation to the Australian part of the 'Seniors Reverse Mortgage Portfolio'. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These CBA loans have a maturity date of 30th September 2022. That means they are classed as ‘long term’ for accounting purposes (talking from a 1st July 2019 looking forwards perspective). And that means Heartland can’t rely on CBA Australia as a source of short-term funds.
The information given in note 15 on the securitized borrowing facilities is as follows:
Securitized bank facilities total all in relation to the Heartland ABCP Trust 1: $nil dissolved on on 29th August 2018 plus Securitized bank facilities total all in relation to the Heartland Auto Receivables Warehouse Trust 2018: $NZ150m (undrawn) plus Senior Warehouse Trust Securitisation Facility 2018: $A650m maturing 30th September 2022 less Current level of drawings against these facilities $A631m equals Borrowing Headroom $NZ150m + $NZ20m (1) = $NZ170m {A}
(1) Using 30th June exchange rate NZD1 = AUD0.95639
HGH Lendings vs HGH Borrowings
Customers owe HGH 'Finance Receivables' of $4,348.050m There is no breakdown in AR2019 (note 15) as to what loans are current or longer terms. However, if we look at note 23 'Liquidity Risk', we can derive the expected maturity profile of total finance receivables due over the next twelve months.
On Demand 0-6 Months 6-12 Months Total Expected Receivables Due $80.584m + $1,020.160m +$646.123m = $1,746.867m less Expected Deposits for Repayment $26.946m + $435.882m + $225.984m = $688.812m equals Net Expected Cash Into Business $53.638m $584.278m $420.139m $1,058.055m {B}
If more money is expected to be coming in from customer loans being repaid, than is expected to be having to be repaid to the debenture holders, then this is a good thing for debenture holder liquidity. That is the case here.
Summing up:
(Total Current Money to Draw On {A})/(Expected Net Current Loans Outstanding {B})
= $170m / $1,058.055m
= 16.1% > 10%
=> Pass Short term liquidity test
Of course there are other ways to satisfy liquidity requirements. Issuing new shares or corporate bonds are two, and Heartland has done both in the past. But sometimes these are not options when market conditions change. This is why it is important to retain some 'headroom' with your existing borrowing arrangements. It appears that from the annual report, that Heartland now has enough borrowing headroom in reserve. That should give HGH shareholders confidence as we move into an era of lesser business confidence in general.
SNOOPY
Heartland just reduced the rate on its reverse rate mortgage to 6.95 % fyg.
Year Dividends Paid 'per share' Significant Event During Year' FY2013 1.5cps(sp) + 2.0cps 17th December 2012: Heartland becomes a bank FY2014 2.5cps + 2.5cps 1st April 2014: Seniors 'Reverse Mortgage' Business Acquired FY2015 3.5cps + 3.0cps 10th September 2014: invests in Harmony P2P startup 28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings) FY2016 4.5cps + 3.5cps FY2017 5.0cps + 3.5cps FY2018 5.5cps + 3.5cps FY2019 5.5cps + 3.5cps 1st November 2018: Heartland Group Holdings restructure set up FY2020 6.5cps + ?.?cps Average FY2015.5 to FY2019.5 inclusive 8.80cps
I have chosen to use the last ten half years of operation as indicative, as this period includes the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards.
SNOOPY
Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation
(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )
8.8c / (0.72 x 0.075) = $1.63
A reminder here that NTA was
($675.668m - $72.679m) / 569.338m = $1.06 cps
at the full year FY2019 balance date. This means my 'fair valuation' is at a good premium (+54%) to net tangible asset value.
This $1.63 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target range of $1.30 to $1.96. $1.59, where the share is trading today, looks a few cents below fair value. My target accumulation price (10% below fair value) is now $1.47.
SNOOPY
https://www.goodreturns.co.nz/articl...5+October+2019
In other news, gosh, term deposit rates have really hits the skids. Nothing over 2.90% even if you invest for several years !
Don't bother shopping the other banks for term desposits, all the well recognised ones are all under 3%
https://www.heartland.co.nz/savings-...interest-rates
Rates at Heartland are negotiable for amounts of $250K or more.
Read through the Heartland Annual review today.
My mate Crackity reckons you should read annual reports from the back these days. He's more cunning than a hungry Beagle. Doing so would save the reader 39 pages of seriously OTT ESG caproate spiel. If you must read from the front, just start at page 40 and save yourself a ton of pc rubbish.
Yes it was nauseating to say the very least.
Just bought more based on reverse mortgages pick up/.
My white liberal heart bleeds for you both. The world keeps changing.
But perhaps even a couple of ageing reactionaries and a tree hugging pakeha liberal can all take comfort from the financial performance of the organisation, even if we disagree about the contribution of the "social services" rhetoric.
Well I feel better now. Thanks.
And I agree....more than happy with my Heartland shares. The only thing that really annoys me is that at ~10% of my portfolio....I really can't justify any more. Even using Horus's trick of using the cost price instead of the current price.
Cheers
RTM
Come on horus, don't leave us hanging....where did this info come from, or pure speculation on your part...hgh had $ 250 million facility but dished out $124 million in Australia last year but only received $24 mill back so will there come a tipping point ot does reverse portfolio just keep getting bigger
There's normal inclusivity in this heightened ESG world we live in and then there's Heartland.
I am not so naďve as to think there is not commercial purpose behind it. To the best of my knowledge Heartland are alone on the NZX in terms of wanting to be seen as the Maori employer of choice and the frequency of the Te Reo lessons distributed throughout the annual review suggests there is serious Iwi money invested in Heartland and they have told the directors what they expect in return.
I was going to add to my 5% portfolio position in HGH but after reading the annual review, I'm not.
With heaps of iwi money invested with them can’t see Heartland sponsoring the replica of the Endeavour
It was in a paper, forget which one about NZ reverse mortgages picking up.
Winner has been a tremendous advocate for encouraging diversity and inclusiveness within companies and helped us understand the benefits of same and that is fine and I appreciate him sharing his experience and wisdom. All that is fine but to be clear, what makes me very uncomfortable with HGH is that they single one particular ethnicity out for very special treatment, that's something quite different.
Perhaps someone who lives in Christchurch could take the board to task over this at the annual meeting ?
I have read their annual report/review documents, and while they have obviously done a great deal of work on the Māori side of things, that doesn’t mean they are excluding other cultures. I have no doubt whatsoever that they employee people from many different cultures. They are thinking outside the square and aim to create a culturally diverse workforce/team, which they are to be commended for. I particularly like the fact that they employ many young people. Heartland seems to be a genuine and passionate employer and are doing much more than most businesses whose cultural inclusiveness is often nothing more than lip service.
For us liberal pakehas, we are a bicultural country before we are a multicultural one. In that regard, te reo is one of the country's official languages, and it is perfectly appropriate to recognise the status of tangata whenua as an important part of New Zealand's unique identity.
Era cualquier cosa. We should get back to discussing investment fundamental's.
Time to review one of the least popular overviews among Heartland's loyal shareholders: Heartlands hunger for stakeholders 'capital in' verses their generosity in paying stakeholders out.
Financial Year Capital Notes Issued during FY Capital Notes Gross Interest to Bondholders New Shares Issued during FY Total Shares on the Books EOFY Net Money Raised During FY (excl. Capital Notes) Dividends Paid ROE 2013 0 m 0 m 0 m 388.704m $0m $13.951m 7.2% 2014 0 m 0 m 75,562 m 463.266m $64.774m $19.930m 8.0% 2015 0 m 0 m 6,624 m 469.980m $9.163m $30.188m 10.2% 2016 0 m 0 m 6,579 m 476.469m $6.798m $37.690m 10.8% 2017 $22m $0.253m 40.215m 516.684m $50.991m $41.977m 11.1% 2018 $150.000m $1.100m + $5.289m 43.904m 560.588m $71.726m $47.895m 10.2% 2019 $125.000m + ($22m) + $52m $0.3767m + $6.750m + $1.082m 8.750m 569.338m $16.655m $50.599m 11.1% Total Cash Raised $327.000m $220.107m Total Cash Returned $14.851m $242.930m
Notes
1/ The Australian 2017 'Subordinated Unsecured Capital Notes' issue for $A20m, which at $NZ1= =$A0.909c is equivalent to $NZ22m, was confirmed on April 7th 2017, and therefore issued in FY2017. It was repaid in October 2018 (FY2019).
1b/ On September 17th 2017 (during FY2018), $150m of unsubordinated notes were issued.
1c/ On 12th April 2019 (during FY2019) a further parcel of $125m of unsubordinated notes were issued.
1d/ On 8th March 2019 (during FY2019) $A50m of unsubordinated notes were issued by Heartland Australia at $NZ1 = $A0.960, and is equivalent to $NZ52m of funding at issue date.
2a/ $A20m of Australian Subordinated Capital Notes were issued at a gross coupon rate of 4.15%. This implies a gross annual interest bill of: $A20m x 0.0415 = $A0.9130m. I am guessing this will have been hedged back to an equivalent $NZ amount at the bond establishment date. This implies an annual NZD payment of: $A0.9130m/0.909= $NZ1.100m. In the first year this bond was established (FY2017) it was active for only 84 days of that year. That means for FY2017, the gross interest payment associated with this bond would be: $NZ1.100m x (84/365) = $NZ0.2531m. This bond was repaid by the end of October 2018. This means the gross interest bill over 2019 was: $NZ1.100m x (123/365)= $NZ0.3767m.
2b/ $150m of HBL010 bonds were issued at a 4.5% coupon rate. This implies a gross annual interest bill of: $150m x 0.045 = $6.750m. However during the year the bond was issued (FY2018), the bond was only on issue for 286 days of the year. This means the implied gross interest bill for that year was: $6.750m x (286/365) = $5.289m
2c/ $125m of HBL020 bonds were issued at a 3.55% coupon rate. This implies a gross annual interest bill of: $125m x 0.0355 = $4.438m. However during the year the bond was issued (FY2019), the bond was only on issue for 89 days of the year. This means the implied gross interest bill for that year was: $4.438m x (89/365) = $1.082m.
2d/ The $A50m fixed note offer was established on 15th March 2019 "with a key Australian institutional fixed income investor". The investor was not identified and neither was the interest rate disclosed. Given this new bond was only issued 3.5 months from the end of the financial year the interest due in dollar terms would be small. Rather than guess, I am going to leave this new bond interest out of my cash flow picture for now.
3/ ROE figures calculated using normalized earnings based on equity on the books at the end of the financial year.
If you add up the amount of capital that 'funding stakeholders' (bondholders and shareholders) have put into the business over the last seven years, it exceeds the total dividend and interest flow that Heartland has paid out over that same time period by $289m. Some might consider that the bonds I have mentioned here are an equivalent of debt rather than equity and so shouldn't be included in this calculation. But these bonds are non bank funding from stakeholders (who could also be shareholders) and, in that sense, they are an alternative to shareholder equity. They are also listed as a 'funding source' in AR2019 note 28 'Concentrations of Funding', whereas banking arrangements are not.
(Note that the seven year time period I have chosen deliberately excludes the establishment capital raising that was used to create Heartland in the first place.)
As the table shows, Heartland have been quite adept at raising new equity capital to the extent that of the capital paid out as dividends over the last seven years, all but $22.823m has been 'reclaimed'. If we add the bond money net of interest returned from non-bank funders, then the net cash non bank stakeholder position changes dramatically to the net $289m that I previously stated was 'sucked up'!
Heartland management has been quite clever at pandering to the dividend hounds. Probably there are several holders of Heartland today who would not invest in Heartland if there was no dividend on offer, Some of the generous dividend is reclaimed immediately via the DRP. Most of the rest has been taken back via cash issues. The table shows, Heartland have been quite adept at raising new equity capital to the extent that of the capital paid out as dividends over the last seven years, all but $22.823m has been 'reclaimed'.
If we add the bond money net of interest returned from non-bank funders, then the net cash non bank stakeholder position changes dramatically to the net $289m that I previously stated was 'sucked up'! later (not necessarily from the same individuals it was paid to) via a combination of share cash issues and bond issues. The net effect is that in the seven years ended June 30th 2019, Heartland has paid out a net nothing. Yes the underlying business base has grown over that time, even if no net cash has been generated. Does this matter? As long as there are confident funding stakeholders willing to put up more cash, the Heartland business will continue to grow, But as soon as Heartland loses the confidence of its funding stakeholders, the cash needed to expand the business will dry up and growth will stop. And we all know what would happen to the share price if that were to happen. A great business will generate lots of cash. Heartland (still) generates none in my view.
SNOOPY
Can’t be right Snoops ..... but seeing shareholders have pumped in $220m of new capital to get divies of $242m it must beQuote:
snoop
A great business will generate lots of cash. Heartland (still) generates none
a t
Posters should google "How banks create money."
Berkshire Hathaway doesn't pay any dividends. But they don't come back to shareholders multiple times asking for new capital either. It is the ability to generate cash internally so that a business can fund their own business expansion that I look for. Berkshire Hathaway has a track record of doing that. Heartland does not. To fix this situation Heartland could stop paying dividends. It does look like the amount of money they pay out in dividends would be enough to fund their expansion plans. But Heartland choose not to do this.
I don't see Heartland paying dividends as a problem necessarily. With our imputation credit system, it is tax efficient for Heartland to pay dividends. Whereas with Berkshire Hathaway in the US, if they did the same then their US shareholders would be 'double taxed'. But it does look like Heartland are trying to have their cake and eat it with the current dividend and capital raising policy. They are stringing investors along with the illusion that they have a sustainable dividend payout. But this is only true if they can raise the capital they need for expansion in other ways. And that will only be possible if capital markets are supportive. Right now capital markets are supportive. But cut off the capital funding tap and the sustainability of that dividend must come into question.
Not quite sure where you are going with this. Hasn't the NTA per share growth of Heartland effectively stalled?Quote:
Why do you think that companies assets do not count ...?
SNOOPY
PS I don't consider Heartland a 'terrible company'. If I thought, that I wouldn't have bought my Heartland shares earlier this year! But my purchase was on a modest PE multiple of nearer 10 than 15. The purchase price really does matter with Heartland IMO. The lower the purchase price the less the investment risk going forwards.
What I am saying is that there is an underlying cash flow risk for the business going forwards. That risk can be fixed by shareholders putting their hands in their pockets and answering a rights issue call. I am saying that shareholders holding now should be prepared for a rights issue if capital market conditions change.
HGH are doing a good job of feeding the dividend hounds that like to eat and those that like to bury their bones for consumption later can elect the dividend reinvestment scheme.
FWIW I agree. I am not suggesting that Heartland change their business model. But if capital market conditions change, then it could be that the dividend has to be cut, annoying the dividend hounds. And it could be Heartland have a discounted rights issue that devalues the worth of those 'buried Heartland bones', annoying the DRP brigade. After further thinking this through, I would say that if dividend payments were stopped then the business model would be more robust. But doing that would really annoy the dividend hounds and cause the share price to plunge. So there is no clear better way forwards. Maybe it would have been better with hindsight if Heartland had never paid a dividend. In that situation, the dividend hounds wouldn't be able to complain about losing something they never had. But managing a business with hindsight is always easier. If only it were possible!
SNOOPY
If you go to the 'Heartland Bank Disclosure Statement for 30th June 2019' , note 33 gives a detailed explanation of 'Capital Adequacy'. There is a table in there on 'balance sheet exposures'. This has a breakdown of all the receivables assets on the bank books, the average risk weighting of those assets and a 'risk weighted exposure'. From that Heartland calculates the minimum Common Equity Tier 1 capital required to support the loan book.
But here is the rub. Subordinated capital notes can be recognized at tier 2 capital that can improve the overall capital ratio of the bank. Yet none of the unsubordinated notes that exist today support the capital ratio of Heartland at all. These unsubordinated notes leverage the debt risk of Heartland, but do not increase the size of the finance receivables book that Heartland can support. At least that is how I see things. Have I got it wrong?
SNOOPY
What Snoopy was essentially saying that having a high payout ratio as well as raising new share capital (not counting the bonds) affects the value of the company on book value per share basis ....and therefore the share price
Heartlands Book Value (Net Assets) per share has increased from 99 cents in 2014 to $1.187 in 2019 - ie at a rate of 3.7% pa (in raw $ terms the increase is from $452m to $676m)
Of that increase in Book Value per share about 70% has come from New share capital and the other 30% from Retained Earnings
A lower payout ratio over the years would probably have seen a much higher share price than it is today (beause its Book Value would have been higher from higher level of retained earnings)
Fair enough, though you could say that about a lot of "growth" companies. Heartland is currently growing their REL portfolio, and yes, this will require additional capital - though not ad infinitum. I think the average duration of a REL is something like 8 to 10 years - i.e. give it another 6 years or so and they should get enough capital back through REL which they can recycle.
Obviously - they might find by then something else they want to grow ;):
Given that the HGH share price does not really price in growth (at a forward PE of 11.5 based on analyst forecasts) am I not concerned, if shareholders are paying for this extra growth through CR / DRP or similar. On top of that - their forward earnings CAGR is 6 (backwards 11.7), which makes them really cheap ...
Still - you are obviously right - there might be as well a time when HGH is too dear (as it used to be last year), and then it is a good time to sell, but in my view this is not now :):
Referring to asset value: NTA was rising consistently from 86 cents in 2014 to $1.04 now. That's a CAGR of 4 - not too bad. On top of that they do have as well more shares on issue - i.e. I don't think that net assets / market cap did drop in average (but I admittedly didn't check the latter).
I have heard this 'recycling capital' for reverse mortgages argument before. My answer I have recycled below
Then Jantar tried to put me straight.
i don't think I commented at the time because i am not sure I fully understood what Jantar was getting at. What Jantar is saying is that the compounding cashflow from the reverse mortgage interest is what is really driving the profits.
Using the above model, Heartland could double their Seniors investment capital in dollar terms on each $100,000 loaned over ten years. (I note the Seniors interest rate has reduced a bit since I went through my above example.) So the corollary is that if Heartland retain all their 'reverse mortgage capital' inside their 'reverse mortgage business unit' then the size of the reverse mortgage portfolio can double in ten years. Doubling in ten years is equivalent to an annual compounding growth rate of:Quote:
Seniors interest rate is 7.82%. It is variable but since we don't know how it will vary in the future I will keep it fixed for the purpose of this exercise. To keep the figures easy, Mr & Mrs Crusty will look to take out a $100,000 reverse mortgage loan.
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Interest Payable $7,820 $8,432 $9,091 $9,802 $10,568 $11,395 $12,286 $13,247 $14,282 $15,399 $112,332 Time Discount Factor Face Value 7.4% 7.4%^2 7,4%^3 7,4%^4 7.4%^5 7.4%^6 7.4%^7 7.4%^8 7.4%^9 Time Discounted Interest $7,820 $7,851 $7,881 $7,912 $7,935 $7,974 $8,005 $8,037 $8,068 $8,099 $79,582
Here is a graphic demonstration of compound interest. Mr & Mrs Crusty end up paying back $112k interest on top of the $100k that they borrowed! Or put another way each dollar they spend in their ten years of retirement costs them $2.12.
$100,000 x (1+g)^10 = $200,000 => (1+g) = 2^0.1 => g=7.2%
On average if Heartland want to grow their reverse mortgage portfolio faster than this 7.2%, then they need more capital. But if they want to take money out of the reverse mortgage portfolio (to go towards paying a dividend for example) they will have to be content with a growth rate of rather less than 7.2%.
Over FY2018, Australian reverse mortgages in gross receivable terms, grew by 31% and the NZ reverse mortgages receivables grew by 12%. This was followed up by more compounding REL receivables growth of 24% for Australia and 11.4% for New Zealand over FY2019. So the Seniors portfolio is growing way faster than its own self funding underlying organic rate of around 7%. But how long will this growth continue? As at EOFY2019 the Australian Reverse Mortgage market share that Heartland has is 24% of all REL loans. Given no other major player is active in recruiting new business for lump sums in Australia, I think we could see Heartland's REL market share double to near 50% in Australia. At the underlying organic growth rate, that means Heartland will have to continue to raise new capital if they want to take less than ten years to reach that 50% market share target. Consequently I don't see any free cashflow coming out of the reverse mortgage business for many years. In fact I see a cash issue (or an Australian bond issue?) on the horizon as being the more likely way to speed up growth.
SNOOPY
I think the potential situation is rather worse than putting Heartland into the same growth bucket as other growth companies.
Let's say you have a property worth $1m and take out what ends up being a a ten year reverse mortgage for $100,000. The bill at the end of ten years is $200,000, with all the compounding interest rolled up. But as a long term property owner, you might be expecting your property might have appreciated to be worth $1.2m over ten years. So in headline dollar terms you still have your $1m nest egg intact to pass on to your children. You feel good, and your children can't feel hard done by, as your very generous nest egg to them is intact.
Now let's look at an alternative property market scenario where property prices flat line for ten years. In that case your nest egg drops to $800,000. The wider economy is much cooler under this scenario, so your children are not getting ahead as much. Such a scenario might make you think twice about taking out that reverse mortgage in the first place. Do you really need that world cruise? Why not hang onto your old car rather than upgrade to a new one? So demand for reverse mortgages could drop. But the value of the underlying asset on which the reverse mortgage is based also drops in relative terms. So the existing reverse mortgages become more risky.
What I am saying here is that in a recession the reverse mortgage gets a double whammy. The first hit being a drop in demand for new reverse mortgages. The second hit being a new capital risk to the existing REL portfolio. I don't think most growth companies would face a 'double hit' like that in a recession.
SNOOPY
Hmm - but didn't you say before that the biggest risk for REL's might be in the unconstrained growth (creating cash flow issues for Heartland)?
If the problem is now that maybe some potential customers might be a bit more careful in drawing on REL's to prevent the nest egg to shrink, than this just means that the REL market might grow a bit slower mitigating the cash flow issues you predicted for Heartland.
Sound like a "double whammy" Heartland shareholders should find it easy to live with ;).
As indicated earlier - I do see risks (as in any other business) and I could imagine that some of the more significant issues for them could be the potential reduction of the value of their securities through climate change issues.
However - any other bank lending money secured with mortgages is carrying exactly the same risk, so it is hard to avoid unless you remove banking from your portfolio.
The time frame and cash flow of REL's should not be an issues at all as long as Heartland makes sure they know how to use the death tables and there is enough headroom between maximum loan and security valuation for potential property slumps. So far I have not seen evidence for that not being the case.
In other parts of the world (e.g. Germany) it is quite usual for banks to give you e.g. mortgages with a 30 year time frame up to 60% of the property value, and while the banking industry used to have their issues over time, I never heard that any bank got into trouble because of this particular policy.
I think you are chasing a red herring :).
I am not going to go through a full Buffett review this year, because I know that Heartland will not pass the return on equity requirement. Notwithstanding this, that doesn't mean that Heartland is not a worthwhile investment according to other criteria. And it is always interesting to look at the trend of what I deem to be 'normalised profit'. See if you agree with the various adjustments I have made.
Financial Year Net Sustainable Profit (A) Shares on Issue EOFY (B) eps (A)/(B) 2015 $48.163m - $0.588m - $0.098m = $47.477m 469.980m 10.1c 2016 $54.164m - $1.136m - $0.322m = $52.706m 476.469m 11.1c 2017 $60.808m - 0.72x$1.2m - $0.628m - $0m = $59.316m 516.684m 11.5c 2018 $67.513m + 0.72x$1.3m - ($4.8m + $0.6m) -$0.156m - $0m = $62.893m 560.587m 11.2c 2019 $73.617m + 0.72x($1.8m + $1.3m + $1.1m) -$1.936m -$0.173m - $0m = $74.532m 569.338m 13.1c
Notes
1/ Profit of $588k from investment sale and $98k from Property Plant and Equipment sales removed from FY2015 result
2/ Profit of $1.136m from investment sale and $322k from Property Plant and Equipment sales removed from FY2016 result
3/ Profit of $0.628m from investment sale removed from FY2017 result. A $1.2m insurance write back that made the impaired asset expense for FY2017 unusually low and hence artificially inflated profits has been removed from the FY2017 result (refer FY2018 annual report).
4/ Profit of $0.156m from investment sale removed from FY2018 result. The after tax effect of $1.3m in 'one off costs' (system integration $0.5m, legacy system write off $0.3m and corporate restructure $0.5m) have been added to the FY2018 profit. Profits from the sale of the 'bank invoice finance business' of $0.6m and $4.8m recovered from a legacy MARAC property loan have been removed from the FY2018 profit.
5/ Profit of $0.173m from investment sale removed from FY2019 result. The after tax effect of $4.2m in 'one off costs' (corporate and ASX listing $1.8m, one off currency costs of $1.3m and the Australian bond break fee of $1.1m) have been added back to the FY2019 profit. Lastly i have removed the $1.936m book gain on the fair valuation of an investment property.
6/ I have been unable to locate property plant and equipment sales profits/losses for FY2017 and FY2018 and FY2019.
Result: Pass Test
SNOOPY
There are two ways of thinking about inclusiveness and diversity, positive and negative.
The negative way is the “woke”, campus radical, activist, no-justice-no-peace sort of way that just leads to resentment, anger and a view it is really, really bad for business.
The positive way is that the more ideas and perspectives we have coming in from all over, the more likely we are to think of things nobody else has, walk down paths nobody else has trod. In other words it gives you a competitive advantage.
Rather than shoot the messenger, could I suggest looking at the message?
"HGH –OVER-PRICED! Tougher times ahead and NEGATIVE NET OPERATING CASHFLOWS OVER THE PAST 3 YEARS IS A CONCERN! Times could get tougher, making net negative operating cashflows a likely continuing trend,until such time as the NZ and Australian economies get back on a relatively strong growth trend. "
It is rather a shallow and rather odd analysis. A lot of the negative cashflows must be from the growth of the reverse mortgage business which requires cash to be shelled out up front, with repayment only at the end of the contract. The analysis then goes on to say fair value based on future cashflows is $1.54, based on 2018 results. So with the share price trading at around $1.60 after 2019 results, they would have to deem today's price fair. So what they are saying is that, despite trading at fair value, the 'shock risk' is too great.
The average duration of Heartland's REL book is 6.6 years in Australia and 7.5 years in New Zealand. Heartland fund this with two issues of NZ five year bonds, $125m maturing on 12th April 2024 and $150m maturing on 23rd September 2022. There is a two year $A50m Australian bond maturing on 8th March 2021. But all these funding arrangements are on average too short to match the average loan term. I wonder why the Australian bond was for such a short duration and for such a small amount? $A756.7m was the balance date size of the Australian REL portfolio at balance date. The balance date securitization arrangements that further support the Australian REL portfolio expire in just three years (30th September 2022).
Heartland admit their funding program is a work in progress
"Long term reverse mortgage-backed structure being developed."
We also learn of a change in the way the risk of a reverse mortgage is assessed:
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IFRS9 also introduced a change in the way Reverse Mortgages are valued.
o Under IFRS they are classified as ‘fair value through profit or loss’.
o Currently, it has been determined that fair value equals current carrying value. However, should consistent evidence of a market value emerge, this may result in a revaluation.
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Generally IFRS9 has resulted in a more conservative treatment of bad debts. But in the case of reverse mortgages, it would seem that all provisions for bad debts have been abolished until markets change. Yet when markets change it will be too late! What sort of new risk policy is this?
What will happen in three years time if market conditions change and the supporting bank arrangements that allow these reverse mortgages to continue are pulled back? How will Heartland continue in business? I think there is a real 'risk question' with serious consequences, albeit an unlikely 'risk question', to answer here.
SNOOPY