Weren’t you saying (or implying) shareholders have been fronting up with cash (new capital) and then getting that cash back in a few months(dividend)....isn’t that like buying your dividend?
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Yes, I guess that is another way to look at what I was saying. I am also saying that in some circumstances this does not matter.
But I am additionally saying that the DRP will only work with 'growth' investors if the share price keeps going up. And it will only work with 'dividend' investors, if the new capital issued is deployed so that 'eps' does not decrease.
All companies are looking to increase their 'eps'. There is nothing unique to Heartland here. But the path to 'eps' increase that Heartland have mapped out is to increase in a disproportionate way their Australian REL business. A side effect of going down that path is a 'new investment capital' squeeze. Up until now there has been no problem in raising new investment capital. But a change in the global financial environment could change the ability of HBL to raise capital. And that could unravel the business strategy going forwards as I see it.
SNOOPY
actually i think there model is really smart in regards to reverse mortgage.
make little money now as snoopy says , but as they build scale the borrowed money today will be dwarfed by the cash flow received in future years when these reverse mtges mature. so in future hbl should end up having huge csahflows.
I need to be quite precise with my language here. I believe that the Australian Reverse Mortgage Business is very profitable right now. But the profits are paper profits in the sense that they cannot be cashed up by Heartland until the loan is ultimately cashed in.
'Building scale' is all about growing the size of the reverse mortgage portfolio. Growing the REL portfolio means that HBL will always have poor cashflow, because as 100 loans are paid back in the future (say), Heartland will have to fund 200 new equivalent loans to keep the growth going. So I see no end to the cashflow issue, provided the REL portfolio keeps growing.Quote:
but as they build scale the borrowed money today will be dwarfed by the cash flow received in future years when these reverse mtges mature. So in future hbl should end up having huge cashflows.
Of course if the REL portfolio stops growing, then, at some time in the future (say ten-fifteen years) the cashflow situation will resolve itself. If Heartland were to decide to wind down their reverse mortgage portfolio in the future it would then become a cashflow generating engine for the company, the exact opposite of the situation now. But if the REL growth is halted, the earnings multiple that investors are prepared to pay for Heartland will go down. At that means the share price will shrink. Therein lies the 'balancing act' and the dilemma.
SNOOPY
Bit like the problems Warren Buffett's Berkshire Hathaway would have had, if they had started paying dividends years ago.!!
Good sort of problem to have.
Think it is best understood by those who understand how compound interest works...…………….lol.
Just re-reading an old Heartland report on the ABCP Trust 1, and found the admission of potential liability I had been seeking:
To give "a receipt of deferred purchase consideration" to be passed on to Heartland Bank.
I believe 'a receipt of deferred purchase consideration ' simply means the end line customer has not paid their bill! It certainly sounds much better than getting a bad debt though!
SNOOPY
I think you may be treating this issue as too much of binary situation rather than as a variable scale. Inflation alone would mean that simply replacing 100 matured loans with 100 new ones that there would be growth in absolute terms, not not in real terms, however the cashflow would be the equivalent of the compounded interest over the period of those loans. Increasing the number or value of loans by an amount equal to say half of the cash generated would achieve both cashflow and growth.
If you take the example of 'Berkshire Hathaways'' insurance business, then what we have compared with Heartland's REL business is exactly the opposite. Berkshire accepts cash up front in insurance premiums, in the hope they won't have to pay it out later. Heartland takes on a property debt up front and hope that they will get paid back later.
Warren takes the insurance premiums and uses that free cashflow to invest in all sorts of other businesses.
Heartland takes on the immediate cashflow obligation, then has to scratch around to find the money to pay it.
The two comparative business models are polar opposites from a cashflow perspective.
Compound interest will certainly mean more 'cash back' to Heartland once those reverse mortgages are discharged to be sure. But it will do nothing to improve cashflow in the interim for Heartland shareholders.Quote:
Think it is best understood by those who understand how compound interest works...…………….lol.
SNOOPY
At the FY2018 AGM, the soon to be 'Heartland Group' articulated their vision: a core focus on markets where they have a 'best product' or the 'only product'. Three areas in particular that Heartland see their growth coming from are:
1/ Reverse mortgages,
2/ Small business lending, AND
3/ Motor vehicle finance.
The objective is to keep Heartland remote from big bank competition. A substantial sum has been invested in a new Oracle 'Flexcube' (cost $22m to be amortised over 10 years) computer platform over the last two years. The aim is to expand reach through this new digital platform and growing intermediary networks.
Reverse Mortgages
On 31st October 2018, Heartland Group is planning to de-consolidate the The Reverse Mortgages Australia business into a new subsidiary 'Heartland Australia'. The Australian REL business has had asset growth of 31% over FY18. The consolidation into an entity separate from the NZ registered 'Heartland Bank' is to allow for a more aggressive funding regime than would be allowed under NZ Reserve Bank oversight of 'NZ banks'. Heartland is continuing to broaden their intermediary network of brokers in Australia. The Australian Reverse Mortgage business receivables ledger totals $NZ677m (+31% yoy) on balance sheet date. The Australian subsidiary will also administer Personal lending and small business lending, through 'Harmony Australia and to SMEs through 'Spotcap Australia' and Heartland's own digital platform O4B (more details on this later in this post). Heartland is the third largest player in the Australian reverse mortgage market with a market share of 11.5% (researched by IBIS World).
Heartland make much of their 'Canstar' provider of the year win over all other Australian reverse mortgage providers. But what features allowed them to take out this award? In no particular order of importance canstar noted:
1/ The loan has no ongoing fees.
2/ Potential customers were offered an 8 hour approval turnaround (typical industry time 25 hours).
3/ Allow a partner who is not the lead person named in the loan to remain living in the property even if the property owner has passed away.
4/ Offer an 'equity protection option', where you could choose to protect a percentage of the eventual net sale proceeds of your home.
How does Heartland Seniors Finance in Australia compare with other reverse mortgage providers? An excellent overview of the Australian Reverse Mortgage market may be found here:
https://download.asic.gov.au/media/4...ugust-2018.pdf
Percentage of House Value Available, age 60 Percentage of House Value Available, age 80 Maximum Available New Loan Market Share (2013-2017) Commonwealth Bank (var 6.37%) 20% 35% 40% 68% P&N Bank (var 6.24%) 20% 35% 35% small% Heartland Seniors Finance (var 6.29%) 15% 35% 45% 12%
Westpac and Macquarie pulled out of the Australian reverse mortgage market in 2017. The total size of the reverse mortgage market in Australia (including legacy players with around 20% market share) was $2.5b (December 2017). There is further competition from the government operated 'Pension Loan Scheme'. From 1st July 2019, the scheme will be broadened to allow people to borrow to create an income stream 50 per cent higher than the full pension (including supplements). The advantages include the interest rate of 5.25 per cent (typically 1% lower than the private providers). Finally, income from the Pension Loans Scheme will not affect Centrelink benefits such as the age pension. Private reverse mortgages can affect the pension because of the income test from either an income stream or deeming rates applied to a lump sum.
Meanwhile back in New Zealand, the reverse mortgage business ledger in this country totalled $453m , up 12% year on year. Heartland is the largest reverse mortgage player in the NZ market (as researched by Cameron Partners). The only other bank player who advertises reverse mortgages is 'SBS Bank', with their 'SBS Advance' product. Reverse mortgage interest rates are variable, with Heartland currently charging 7.82%. (SBS are currently lower at 7.55%). There is a maximum percentage of the value of the house you can borrow.
Percentage of House Value Available, age 60 Percentage of House Value Available, age 80 Maximum Available SBS Bank (var 7.55%) 5% 30% 50% Heartland Bank (var 7.82%) 15% 35% 40%
We can see that Heartland's key advantage in NZ is 'more money available earlier'.
Small Business Lending
'Heartland Bank' will continue to operate as the other fully owned subsidiary of 'Heartland Group'. Heartland Bank claim to have NZ’s largest platform for small business lending. The on-line part of this customer focus is named 'Open for Business' or 'O4B' for short. Loan approvals may be given fast 'on line'. Asset growth on the 'O4B' business unit, loan book now $100m, was reportedly up 98% over FY18. $1,066m worth of 'business receivables' are on the balance sheet as at 30-06-2018 (EOFY2018), including working capital and plant and equipment financing outside of the O4B interface. Heartlands 'best rate' for unsecured small business loans is 9.5% per annum, but may be as high as 16% p.a. 'depending on a range of factors'. For comparison
Receivables Balance Best Interest Rate ANZ NZ Business Bank Business Services' Receivables 31-09-2017 0.1854 x $15,846m = $2,938m 9.5% Westpac NZ Business Bank Property & Business Services' Receivables 31-09-2017 $1,120m + $389m = $1,509m 13.95% ASB NZ Business Bank 'Other Personal Loans' Receivables 31-09-2017 $1,719m 10.17% Heartland Bank Balance Sheet 'Property & Business Services' Receivables 30-06-2018 $110.385m 9.5%
It is clear that Heartland are not a big three player in 'business lending'. But they are specialising in 'small business'. It is difficult to get total market figures for 'small business' funding, because so many small businesses are financed by mortgages on homes. It is possible to take out an ordinary mortgage on your house without telling the bank you are funding a business venture with it. Heartland are not concentrating on retail house mortgage funding business loans. But they are committed to the SME market. They also seem 'interest cost competitive'.
The other competitive advantage that Heartland tout is that loans can be rapidly approved (within minutes) over the net using their new banking software. Has anyone on this forum had a business loan approved in this way? I tried it myself, but they answer was 'we will get back to you'. And that sounds like the loan approval process of any other bank!
Motor Vehicle Finance
Motor vehicle financing is stronger, helped by Heartland's intermediated strategy and distribution relationships with Holden, Jaguar Land Rover and AA Finance. Motor vehicle financing sat at $955m as at FY2018 balance date. For comparison purposes:
Receivables Balance Change Since FY2016 Heartland Bank Balance Sheet Receivables 30-06-2018 $955m +180% MTF Balance Sheet Receivables 31-03-2018 $651.738m +22% Turners Automotive Group Balance Sheet Receivables 31-03-2018 $289.799m +100%
As a specialist lender targeting the motor vehicle sector, the growth in Heartland loans to this sector has been astonishing. Their loan book is much larger than the long established MTF financing and they are growing much faster than 'fast growing leader' in the pre-owned vehicle market, Turners Automotive Group. Well done Heartland!
Other Sector Comment
In rural lending, Livestock financing is up 62% in FY2018. Larger rural relationship-managed lending, with the bigger banks increasingly moving into this end of the market
market. So total rural funding is down, the receivables book total being $656m at EOFY2018.
Conclusion:
Pass Test
SNOOPY
Skimmed through this book while at a friends house the other night. Very interesting
Hope Heartland guys have read and got some insights from it
Emotional Banking: Fixing Culture, Leveraging FinTech, and Transforming Retail Banks into Brands
By Duena Blomstrom