HGH - Heartland Group Holdings

[fish]

Snooopy much as I respect your posts I feel its a step too far to link Heartland to Ponzi type characteristics.

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.

So yes the investment-as all are is a risk-and this is riskier than the average bank.
It has no resemblance to a Ponzi scheme imho

[winner69]

Love it Snoops when you can you can use 'pandering to dividend hounds' and 'ponzi' in the same post

[Snoopy]

Snoopy much as I respect your posts I feel its a step too far to link Heartland to Ponzi type characteristics.

<snip>

It has no resemblance to a Ponzi scheme imho

Just to clarify what I said fish, I never said that I considered Heartand a ponzi scheme. It was you who put those two words together, I do not consider Heartland bank to be a ponzi scheme, and just to be clear.

I said 'ponzi type chacteristics' and to clarify what I meant I showed that:

1/ Over the last five years, Heartland has taken in more cash than it has paid out. (ponzi schemes do that).
2/ The growth of the business is dependent on a net injection of new capital over time (ponzi schemes require that).

However, where Heartland is very different from a ponzi scheme is that the new capital contributed to the Heartland business remains there, albeit in an illiquid form, whereas in an actual ponzi scheme the new capital paid into the ponzi scheme is paid out to existing members, leaving the ponzi asset cupboard bare.

The reason I consider Heartland falls short of being a great business are the same two reasons I have outlined as above:

1/ Over the medium term, Heartland has yet to demonstrate that it can generate cash from 'normal operations'.
2/ Heartland requires continual injection of new capital to grow.

Ponzi schemes are undesirable and illegal. What Heartland does is perfectly legal. What new investors have to decide is this: Is the Heartland business model, as regards cashflow, 'desirable' from an investor perspective?

SNOOPY

[Beagle]

Snooopy much as I respect your posts I feel its a step too far to link Heartland to Ponzi type characteristics.

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.

So yes the investment-as all are is a risk-and this is riskier than the average bank.
It has no resemblance to a Ponzi scheme imho

Great post and agree with all that except for the highlighted part. Snoopy, drawing a parallel / analogy with Ponzi schemes is both harsh and inappropriate in my opinion. Banks all have their niche's of operation. I think this is less risky than for example the major Australian trading banks entering into multi billion dollar syndicated lending on mining projects with no guarantee whatsoever on future commodity prices. At least reverse equity lending is on real estate is at a very low LVR ratio and is lending upon an asset which has over a very long period of time demonstrated it generally holds its value extremely well.

[beetills]

Strange but methinks Heartland shareholders are waiting with anticipation for some of these reverse mortgage takers to kick the bucket.
On the other hand some children of these reverse mortgage takers may not be so happy.
Just a thought.

[percy]

Strange but methinks Heartland shareholders are waiting with anticipation for some of these reverse mortgage takers to kick the bucket.
On the other hand some children of these reverse mortgage takers may not be so happy.
Just a thought.

Not so.
One of the main reasons it took time for HBL's RELs to gain traction was they were being repaid early.
A lot of loans were taken out for bringing houses up to scratch to be sold[ie new kitchen/bathroom]..Once sold the loan was repaid.
Others such as loans for a large medical expense,travel,etc were also repaid early.Then people having to go into care meant their house was sold,and loan repaid.
It is hard to judge the "normal" length of time or "average" size of RELs,which makes trying to work out HBL's capital requirements for REL's near impossible.[well for me.]
What we do know is the market for them is expanding,the security is sound, and the margins are better than usual mortgages,so capital is being wisely allocated to this sector by HBL..

[winner69]

Home equity release lending is very good business for Heartland

[Snoopy]

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'.

[RTM]

Fair point. But many will understand and join the DRP to avoid undue dilution. A difficult line to tread

But unfortunately many need the dividend to buy our groceries. So this is not an option.

[winner69]

Hey Snoops .....with these HER loans have you ever thought of considering the time value of the cash flows of say a 10 year duration?

Could be an interesting exercise for you on a cold winters afternoon after the chores have been done