Great one Snoopy! Wonder what background u from? Banker or accountant?
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Great one Snoopy! Wonder what background u from? Banker or accountant?
The background isn't important Kingie. To produce a bit of analysis like that my rules are.
1/ Have a clear picture of your end objective.
2/ Have the patience to follow through with the nuts and bolts that lead you to your objective (the objective is your strong motivation here).
3/ Don't get frightened if the whole thing starts to look too complicated. Realise it is all built on 'simple steps', that can usually be done one at a time (even if the whole thing takes a while).
4/ If it all starts to get too hard, 'step away for a day'. It is surprising what insights you can get by coming back to a problem.
5/ If you can summarize the whole thing in a single table or graph, that is often the best tool to use to explain it to others
SNOOPY
I agree the thing that is missing at Heartland from an investment perspective is clarity Percy. But, strange as it may seem to you, I do not need clarity. Most human activities revolve around making definite decisions. What sort of job do you want? What do you fancy for dinner? What person do you partner up with? These questions tend to have singular answers. Because so many decisions require us to make a 'definite choice', not having to choose seems strange. With investments you can choose. But you don't have to -all the time. And I would argue there are occasions where you should not choose. This is one of them IMO. Choosing the path where you think Heartland will go is too difficult, at least it is for me. But I can imagine different paths that Heartland might go down. Each different path has a different consequence. So without choosing a path, I can do a separate thought experiment on all three paths (in this instance) without committing to any one. Then if I assess the likelihood of going down the alternative paths I can come up with a 'weighted probability combination' of my three scenarios without choosing any particular one. This is investing 'without clarity'.
Some might say why not just wait until the path forwards becomes clearer? That is a legitimate alternative investment approach. But my reason for 'going early' is to capture the market price discount that has arisen because of a lack of clarity. Remember, markets do not like uncertainty. The market price discount will disappear if I wait, but the risk will reduce as well. In the end it comes down to what kind of risk you are comfortable with. For example, investing on the 'Unlisted market', e.g. Paz, contains risks that are not present with putting money an NZX listed company. Different people have different appetites for different types of risks. And there is nothing wrong with that!
SNOOPY
Thanks Snoopy! To be honest...HGH is a well managed company. My first share investment. Sold before it crashed...now I am starting to accumulate
Beagle, I invite you read my post 13540 which neatly summaries the driving forces behind my 'optimistic scenario'. This includes after a couple of years a 20% fall in the new car financing market, a 10% fall in the financing revenue of used cars. A short sharp 20% fall in business in O4B over FY2021, recovering to a 10% decline from the base case in FY2022. A 16% permanent fall in 'Business Relationship' funding. And a 10% permanent reduction in funding to downstream 'to business' lending customers. Oh and Harmoney is chopped in half, while there is no growth in rural lending. All this is in my optimistic scenario remember! This is the best result one might reasonably foresee. And of the three paths that might eventuate, I am only giving this a one in ten chance of happening.
There is one lending class though that drastically changes my 'optimistic outlook'. This is the 'reverse mortgage' business. I think it is worth spending some time explaining the extraordinary rise of 'reverse mortgages' in the 'optimistic scenario result'.
The important point here is that my 8% real growth in the reverse mortgage portfolio is not a figure pulled out of thin air. It is the actual growth rate, locked down as a track record that Heartland has already achieved. The other factor that is driving the reverse mortgage business growth is that even if no new business is written at all, then the existing loan portfolio grows by 6.7% per year. Then growth is accelerated by paying 'interest on interest' in a way that compounds until the loan is eventually repaid. It really is an incredible business model. What other business model can you think of where 'strong growth' can be achieved by having no interaction with customers?
The last part of the puzzle is the return on equity figure '0.13' that I have used above.
Look at slide 15 in the presentation below.
https://shareholders.heartland.co.nz...esentation.pdf
It shows here that 'reverse equity mortgages' are in the mid range of earnings for lending assets as part of an 11-15% range. So I picked a figure right in the middle at 13% on the incremental equity that Heartland accumulates as the growing loans feed into the system. Have I got any of that wrong? If not, then you have to accept the increase in profit figures that come out of my 'profit forecast' sausage machine as reasonable.
SNOOPY
Unlisted.Those who do not trade on it think it is "the wild west".Yet those who do not share their view have no issues.
The main complaint I hear is lack of liquidity.This comment is valid,however it is also true of NZX companies such as AWF,Market cap $41.19 mil,SCT Market cap $137.044 mil, and many others.
Over the years I have owned shares in the following companies on Unlisted;
Rural Equities. Market Cap $137.7 mil.Owners of some of NZ finest farms,Controlled by the Cushing family.A very good company.
Rangatira.Market cap $212.7 mil.Investment company with a strong history of sound investments.Another very good company.
Currently I own shares in three Unlisted companies.
PAZ.Pharmazen.Market cap $126.892 mil.Nutritional ingredients for humans and animals.Right company in the right sector at the right time.
SFF.Silver Fern Farms Co-Op.Market cap $65.346.NZ's leading meat processor.Growing demand for NZ grass feed red meat.
SYF.Syft technologies.Market cap $81 mil.Manufacturer analytical instruments.Growing world wide demand.
PAZ,SFF,and SYF.I have found their reporting excellent.I have phoned each company and have found then honest,open and very forthcoming.Each company have strong boards,great CEOs and very strong balance sheets.Each company is doing what they said they would do.All seem to have very bright prospects.
I have a very large holding in PAZ,a big holding in SFF and a small holding in SYF.
PS Equity ratios,as at their last balance dates....Very interesting.
HGH 12.9% and wait for it........PAZ.....58.49%...Different sectors,different requirements,but four and a half times HGH's.?
Silver Fern Farms CoOp equity ratio was 81.93%.Over six times HGH's.
Syft's equity ratio was 77.51% just six times HGH's.
Please keep debate going ..esp the negatives
Good for share price next week
I have pinched these two posts from the 'Banks Stocks' thread, because they refer specifically to Heartland. I don't think there is anything wrong with going after the higher end of the loan risk spectrum if you charge a consummately higher margin to deal with the risk of loan failure. From the look of the bank dashboard, that is exactly what Heartland are doing. Furthermore if your bad debts are better covered by higher profits from other risky loans in the same class, perhaps there is less need for a hefty capital base to back things up as loans go bad? The answer to the 'shortage of capital' conundrum that sees Heartland at the bottom of the 'capital adequacy' chart at 12.9% (31st March 2020 figure)? We HGH shareholders have to remember that the actual capital position of our company may be a lot worse than this, because that chart only covers Heartland Bank, and excludes the lightly capitalised 'Heartland Australia' business unit. I remain braced for a capital raising at Heartland should Jeff deem it desirable, even if I don't believe he needs to do it..
I thought the dashboard position on credit concentration was particularly interesting. That shows by spread of loans, Heartland is far less risky that ANZ, Westpac and BNZ. Is it because those three go after big corporate clients whereas Heartland does not? I pay some attention to bank credit ratings. But I note at the top of that dashboard page that 'Moodys', which does not rate Heartland, gives all the NZ banks they do rate the same credit rating of A1. And that includes some NZ registered banks that I have never heard of including the 'Bank of China', the 'China Construction Bank', and the 'Industrial and Commercial Bank of China'. 'Fitch', who do rate Heartland, give 'Kiwibank' their highest credit rating, even above ANZ, Westpac ASB and BNZ. Yet S&P Global put Kiwibank two notches below these four. I do wonder how seriously I should take these agency judged credit ratings sometimes!
Moving on to 'core funding', the bank funding from 'stable sources', it is pleasing to see Heartland at 92.7, well clear of the 75% Reserve Bank hurdle, but also well clear of the big four banks as well. Is that the magic of Heartland's high interest call account? Westpac is the worst in this regard on a score of 82.2, albeit still above the 75 hurdle. We know that Heartland has contracted out all of their banking services to Westpac to the extent that Heartland Bank accounts are Westpac bank accounts, but under a Heartland brand. I wonder how the core funding figure of Westpac would look with the Heartland accounts removed?
I think Heartland comes out of the dashboard comparison very well, even if we shareholders know that Heartland 'Bank' are really a finance company with a bank badge stuck on for marketing purposes. Can I say that now that Percy is no longer on the Heartland share register?
SNOOPY
Interesting question - Winner:
Whilst I'm accumulating HGH particularly at current levels - I can't help but notice that the Reverse Mortgage
component of the business will long continue to be a draw on working capital being sent into that sector.
Sure retained earnings goes a certain extent towards funding it, further borrowings & Notes etc a further extent.
Obviously with no fixed date on realising the said Reverse Loans & Interest capitalised presumably to Loans
over their likely life -- this undoubtedly provides some interesting working capital balancing exercises for the very
capable & experienced HGH team working at the cliff face in this area.
Potential Loss Exposure in this sector I would imagine be very low.
I've looked at Snoopy's figure and compared to recent HGH Reports summarising the Loan exposures by sector
We look at "Growth" all too often
In Reverse Mortgages, and I guess with Developmental Margins in the Rest Homes Sector - we see growth
& Surpluses reported. But what is sometimes not always easily separated is the "Real Realised Growth"
ie - not locked in, realised - fluid & sitting in Current Assets / Working Capital, available to be spent or otherwise.
The Bean Counters of today's world (I'm probably one) have really not done everyone any favours by throwing yet another
puzzle into the equation with term lease payables, Lease Assets (hopefully more or less balancing out the other side)
notional interest factors on the said Lease equations etc
At the end of the day on a winding up these mysterious mythical figments of Bean Counter's imaginations will evaporate
into thin air - in the meantime the enterprises Assets & Liabilities are reported Grossly overstated by these imaginative
judgements of future asset & liability.
For goodness sake - a lease is a lease is a lease generally only payable periodically if there are assets sitting in kitty to do so
By similar token - an internally doctored up (or down) revaluation is just that - is it a gain, a profit (ie sale to outsiders) in the Property Accumulating & Developing Rest Home empires ?
This explains to all why most if not all Rest Homes pay little 'real tax', do not have Imputation credits to attach to dividends,
which means where one of these beasts decides to throw out a dividend, those on receiving end are likely to get wacked with the full 33% Dividend With holding tax to be passed to IRD
No wonder many (not used to certain bean counter creativity at work) get so confused with some of today's mysterious
accounting reporting by companies they are looking at .. ;)
Not sure I agree with you 'rolling up' non cash gains on reverse mortgages (interest earned but not yet paid back to Heartland in cash) and non-cash gains from property revaluations in retirement villages (based on market movement of property entirely outside the control of the property owner) and putting them in the same bucket:
1/ The interest earned on reverse mortgages is recognised by the IRD as 'taxable income', whereas the property value gains are not taxable, which is why retirement village shareholders get hit with resident withholding tax on dividends paid out of property valuation gains.
2/ Retirement villages can expand their capital base by simply waiting for their property assets to appreciate. But Heartland want to expand their capital base to allow them to take on more reverse mortgages. More mortgages over and above the turnover rate of existing mortgages and any retained profit earned from those (Heartland have ambitious reverse mortgage growth plans). That means Heartland must raise more capital, EITHER from shareholders, via cash issues and the DRP, OR raising long term bond money to finance such deals.
In fact Heartland have so far been unable to raise long term bond money. They are instead setting up medium term bonds of 2-3 year duration, then hoping they will be able to renew those to more closely match the 5, 6 and 7 year periods that reverse mortgages typically run for. This is a real weakness in the Heartland business model as I see it. Albeit one that Jeff is working on to try and set up those longer term supportive bonds. I am thinking that with the further collapse of interest rates worldwide, Jeff's job will be getting easier? Although if the housing market takes a severe hit, then those seeking cash income via a bond may balk at a security backed by property, even if, as in the case of Heartland the gearing on the properties that are being mortgaged is low.
I am unsure on the tax position of interest earned on reverse mortgages. Can anyone clarify? The profits on a reverse mortgage are not collected until the reverse mortgage is wound up, but a tax liability is incurred by Heartland every year. Does Heartland have to effectively borrow money every year to pay this tax or is it all bundled up in some kind of deferred tax arrangement with the income tax department? if the former, that is quite a large cash liability with no cash coming in to pay it. Yet another cash draw that must be added to the cash borrowed to fund outsized growth plans!
I was interested in your remark nztx on 'growth realised as cash' verses 'other growth'. Are you suggesting that if the growth realised is not in cash it should really be reclassified as a secondary inferior class of growth?
You are implying that growth realised - fluid & sitting in Current Assets / Working Capital, is better able to be spent on expansion, but this is not so is it? The retirement village model in New Zealand seems to have no problem growing without ever realising the results of their growth in cash.
SNOOPY
Interesting point, and no tax specialist either.
However - why would anybody in our tax system need to pay tax on gains not yet collected? If you are a trader, you pay tax on realised trading gains (revenue minus cost), and I would assume it is the same with interest payments.
If & when you get the payment, you pay tax. If the payment is however outstanding (for whatever reason) you don't and you don't owe tax either. Why would there be a need for a deferred tax arrangement?
Anyway - keen to learn more about the hidden secrets of our tax system :);
Hear hear! Great to see someone else thinking this. I have been looking at the impact on some businesses and it is nuts. Surely a "leased asset" doesn't meet the definition of an "asset" - unless they have been busily redefining that too. Not only does it make the return on assets wonky but it also muddies the FCF calculations whereby portions of lease payments will be classified as interest in the cash flow statement.
Once upon a time a very long time ago - Leased Assets (if memory serves correct) only hit Assets Schedule, if there was
opportunity for the party leasing the Asset as part of their lease contract to have option or opportunity to acquire the asset
at end of it's lease term. Everyone knew where they stood & then understood how the financials generally worked
Also a very long time ago - Assets being subject of Revaluation saw increases (or decreases) in fixed assets affected
taken directly to Shareholders Funds via the Revaluation Reserve - none of the fanciful take the revaluation movement
into P&L account as part of direct operating Surplus or Loss (as seems to be happening in today's wacky world now)..
Again - Everyone knew where they stood & then understood how the financials generally worked with this as well
Do users of today's Financial Reports really need to be half beancounters to disentangle these sort of mythical judgements
and Beany's magical formulas so as to be able to compare with the Reports of other businesses for example selling apples & recognising their profits on how many apples they manage to sell in any one period ?
Let's face it - is interest 'capitalised' and added onto a Reverse Mortgage Loan - but not received in Cold Hard Cash coming in "Real Income" or merely deferred interest income - to be actually received in a later point in time when the Reverse Mortgage gets settled out - from say a property sale etc ? ;)
What IRD decide in the circumstances (whether recognised as income at time it's charged to the Reverse Loan) and how the Market or Viewers / Investors may look upon it could well be two different things
- Interest, but not yet received
- Recognised as revenue but directly added to the Reverse Loan Book
- Real Cash Income or Not ?
- Somewhere the increasing Reverse Loan Book, plus Capitalised Interest into it needs to be funded from somewhere - presumably dividends are paid from it, maybe the tax man, overheads etc - if regarded as Income at time billed / charged ..
Re this tax ....don't speculate, just go to Note 9 last years Financial Statements
That'll show you what happens (and evenhelps if one looks at the Cash Flow Statements
http://nzx-prod-s7fsd7f98s.s3-websit...427/308226.pdf
Those accounts you referenced Winner are for Heartland Bank. My question relates largely to Heartland Group Holdings which holds the Australian Reverse Equity Mortgage assets. So the accounts I need to look at are those for HGH, not those referenced above.
Moving on to the HGH accounts, and note 8 on taxation, the total tax expense is $27.896m, and that includes $3.306m of deferred tax for the current year. But is that anything to do with the reverse mortgage portfolio? Or is it something to do with the separation of Heartland Bank from HGH?
Moving onto the Cashflow statement, the actual cash paid was $25,895m. That is tax not paid in cash was $27.896m, - $25,895m = $2.001m. That difference is not the same as the deferred tax. So it looks like something complicated is going on.
Lastly moving onto the Segmented result, the Australian tax bill is $5.115m. So some of that must be deferred? But doesn't the Australian O4B business fit into the Australian category too?
The accounts look to be too mixed up to produce an answer to my question and there is no specific mention of any deferred tax liability on reverse mortgages. After studying the accounts, I am afraid I am none the wiser ;-(. Is my question unanswerable given the disclosures HGH have made?
SNOOPY
Sorry Snoops - should have realised needed group accounts
Current / Deferred Tax is complicated I agree
However I am pretty confident that interest on reverse mortgages (even though capitalised) are treated as taxable income in the year that it is earnt (not paid) and most of would be paid when due in current year. There no doubt will be some (minor) adjustments for impairments etc that could end up as deferred tax.
Do what percy would do and give Jeff a ring
Table in the accounts is headed.
"Deferred tax assets comprise...."
This is NOT difficult folks :ohmy: