'Shortage of Capital' FY2017 5 year Perpective
Quote:
Originally Posted by
Snoopy
I didn't think my post would be outdated in just ten days. But with the announcement of today's (foreshadowed) capital raising in Australia for 'about $A20m', which at $NZ1= =$A0.909c is equivalent to $NZ22m, it is time to update the Heartland 'capital flow' table.
Financial Year |
Capital Notes Issued during FY |
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 |
388.704m |
$0m |
$13.951m |
7.2% |
2014 |
0 m |
75,562 m |
463.266m |
$64.774m |
$19.930m |
8.0% |
2015 |
0 m |
6,624 m |
469.980m |
$9.163m |
$30.188m |
9.9% |
2016 |
0 m |
6,579 m |
476.469m |
$6.798m |
$37.690m |
10.7% |
2017 |
$22.000m (f) |
30.973m+ |
512.902+ m |
$45.277m+ |
$39.485m (f) |
tbc |
Total Cash Raised |
$22.000m |
|
|
$126.012m + |
Total Cash Returned |
|
|
|
|
$141.244m |
(f) indicates forecast result.
The picture this table draws is truly astonishing. If you add up the amount of capital that stakeholders have put into the business over the last five years, it now exceeds the total dividend flow that Heartland has paid out over that same time period!
Put another way, those mother shareholders who put their capital into Heartland probably expected this 'growing baby' to suckle at the parent shareholders' teat, while it built up its strength to prosper as a fully fledged 'grown up' Company. However, this aggressive little Heartland pup clearly did not want to make that break with Mum and Dad shareholder investor. While apparently distributing a generous flow of dividends, the aggressive Heartland jaws subsequently latched back onto those shareholder funds again by way of DRPs and cash issues. And now, from a total stakeholder perspective (including the new Aussie bondholders) those aggressive jaws have not only sucked the stakeholders dry. They have taken a solid bite out of the teat that feeds it!
Plenty here have claimed over the years that Heartland was not 'short of capital'. At one stage even Heartland themselves talked about the possibility of a capital return. However, following a 'look at what I do ' method rather than the 'look at what I say' method of investment, it is now clear what Heartland's true capital appetite was. Heartland have been very clever to raise all of this new capital at what were largely premium prices. Kudos to Heartland management for that. But those stakeholders looking for a 'solid net dividend return' may have to pause for thought.
Winner has looked at what Heartland has asked of their funding stakeholders over the last year. It must be time to update the Heartland hunger for 'capital flow' table for the last five years:
Financial Year |
Capital Notes Issued during FY |
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 |
388.704m |
$0m |
$13.951m |
7.2% |
2014 |
0 m |
75,562 m |
463.266m |
$64.774m |
$19.930m |
8.0% |
2015 |
0 m |
6,624 m |
469.980m |
$9.163m |
$30.188m |
9.9% |
2016 |
0 m |
6,579 m |
476.469m |
$6.798m |
$37.690m |
10.7% |
2017 |
$22.000m |
40.215m |
516.684m |
$50.991m |
$41.977m |
10.6% |
Total Cash Raised |
$22.000m |
|
|
$131.726m |
Total Cash Returned |
|
|
|
|
$143.736m |
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.
2/ ROE figures calculated using normalised 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 five years, it exceeds the total dividend flow that Heartland has paid out over that same time period by $10m. Note that the five year time period I have chosen deliberately excludes the establishment capital raising that was used to create Heartland in the first place. Winner says that Heartland should pay out less of their profit as dividends, and so reduce their need to raise new capital at the same time. But as this table shows, Heartland have been quite adept at raising new capital to the extent that all of the capital paid out as dividends (and $10m more) over the last five years has now been 'reclaimed'.
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. The rest is taken back later (not necessarily from the same individuals it was paid to) via share cash issues and bond issues. The net effect is that in the five years ended June 30th 2017 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. So what we have here is a share with 'ponzi type' characteristics. 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. This is the primary reason I don't invest in Heartland. A great business will generate lots of cash. Heartland generates none.
SNOOPY
A Review of Reverse Mortgages
Quote:
Originally Posted by
fish
The capital raising as I understand it is to enable more money to be lent so that real profits can grow.
Reverse mortgages by their very nature requires capital to be raised so it can be lent against the family home.
Only a small percentage of the value of the family home can be lent so the repayment should never be in doubt.The uncertainty is when that repayment will be made.Until this starts to happen and if they want to grow this they will need money.
Therein lies the risk-but the possible returns on the margin they make is massive.
I have been looking at last years presentation to investors just before the rights issue (presentation dated 9th November) and the FY2017 Annual Review. I have pulled the following information from these sources.
--------
Q/ What is a Reverse Mortgage?
A/ A reverse mortgage allows home owners over 60 to access a portion of equity in their home. What sets it apart from the usual home loan is that no regular repayments are required because the debt is repaid from the future sale of the property. And importantly, the homeowner continues to own the home. The funds are able to be used for a range of purposes including home improvements, travel, medical insurance and aged care or for extra cashflow in retirement.
-------
Although the loan is designed to last for as long as you are able to remain in your home, you may repay all or part of it at any time without penalty providing you with flexibility. The amount borrowed plus any interest and fees is repaid when you move permanently from your home.
Reverse Mortgages EOFY2017 |
Australia |
New Zealand |
Finance Receivables |
$516m |
$405m |
Average Loan Size |
$112k |
$97k |
YOY Growth (Finance Receivables) |
19% |
12% |
Notes
1/ Broker distribution network expanding significantly in Australia.
2/ The banking group has an Australian bank facility totalling $600m, drawn to $440m secured over the shares in Australian Seniors Finance (Heartland's Australian reverse mortgage operation).
3/ Total Concentration of credit risk in Australia: $522m. This means that just $6m of receivables in Australia are not reverse mortgages.
4/ Overall finance receivables growth over FY2017 for the whole Heartland business is +14.4%. Australian Reverse Mortgage growth is substantially above this. New Zealand slightly below.
Scale of Mortgages to Property Valuation |
Reverse Mortgage <= 60% LVR |
$885.278m |
Reverse Mortgage 60% <= 80% LVR |
$32.829m |
Reverse Mortgage 80% <= LVR |
$4.641m |
The problem that I have with the Reverse Mortgage Business is that it is highly cashflow negative until the maturing mortgages start to equal the new ones being taken out each year, So eventually this cashflow 'problem' should fix itself. Having new mortgages coming on matched by old mortgages will do it. But if new mortgages coming on exactly equal old mortgages coming off, then that means the business is not growing. Yet Heartland is priced on a 'growth multiple'. So if the business is not growing, the PE ratio should reduce and the share price should fall accordingly.
The way I see it:
1/ If Heartland is priced for growth AND
2/ There is a push to increase reverse the mortgage business to meet shareholder growth expectations THEN
3/ The number/value of new reverse mortgages coming on will always exceed the number/value of old reverse mortgages coming off.
This means the Reverse Mortgage business is set to be perpetually cashflow negative.
SNOOPY
PS I wouldn't feel that 60% of any home value would be classified as a 'small proportion'.