HGH - Heartland Group Holdings

[Snoopy]

Snoopy wrote "Is that how you see it Winner?"
That was very clear whose opinion was asked for.
Clarity would have been.is that how others see it?

Ok fair point. Other contributors views are definitely welcome, and I am sorry if I have hinted otherwise.

SNOOPY

[winner69]

Snoops

Some reckon ANZ cost of capital is about 8.5%

So one of your sentences above could read ......ANZ charging 4.5% for a residential mortgage and the weighted cost of capital was 8.5% you would have to question whether mortgage lending charges properly reflected the risk from a ANZ shareholder perspective.

As I said above you can’t really compare the two rates ..maybe in the ANZ context above you can see why.

[Snoopy]

Snoops

Some reckon ANZ cost of capital is about 8.5%

So one of your sentences above could read ......ANZ charging 4.5% for a residential mortgage and the weighted cost of capital was 8.5% you would have to question whether mortgage lending charges properly reflected the risk from a ANZ shareholder perspective.

As I said above you can’t really compare the two rates ..maybe in the ANZ context above you can see why.

O.K. so maybe I am looking at this the wrong way.

You have a whole office load of guys and gals at Seniors Finance. Someone in the Northern Territory wants a new reverse mortgage. Seniors check with their Ozzie bankers CBA to see if they will pay out the money in cash, while Seniors (Heartland) takes out a first mortgage on the house. "Sure" say CBA "$440m borrowed already, but borrowing headroom doesn't max out until $600m". "Go right ahead"

So Seniors hands over the reverse mortgage loan to our 'Crusty NT Couple'. But no more guys or gals had to be hired to do the deal. No more office space had to be rented out to do the deal. So although the Heartland WACC was 7.4%, the actual cost of writing out that new deal was a phone call and a couple of e-mails - close to zilch. And because the overheads have not increased, the difference between what CBA charge Seniors, say 4.5% and what the end line NT customer ends up paying say 7.8% - (7.8%-4,5%=) 3.3% is all 'profit' for Heartland. 3.3% profit may not sound like much. But 3.3% profit over a zero incremental asset/cost base is one heck of a return. And it doesn't take too many deals like this to really ramp up the return on the original Seniors asset base.

However, if Heartland wanted to sell Seniors to another company that did not have a finance operation, then you would have to look at things differently. In this instance you would have to look at the whole Seniors asset base as a cost centre, to be cost allocated across all the Senior's loans. So in this instance using the WACC of Heartland as an estimate to measure the efficiency of a whole business unit is valid.

Does that make sense?

SNOOPY

[percy]

NZ REL's are financed by HBL.

[winner69]

Snoops .....third paragraph good ...fourth paragraph says a prospective would look at it as a business and see if returns exceed their hurdle rate (maybe their cost of capital)

Back to Heartland it’s good they make a 11% ROE when WACC is about 7.4% eh .....excessive returns over and above their cost of capital which are rewarded in its share price being significantly above its book value.

I would hazard a guess that the HER business is one of Heartlands better ‘value creating’ bits ...but have no numbers to support that

[percy]

Snoops .....third paragraph good ...fourth paragraph says a prospective would look at it as a business and see if returns exceed their hurdle rate (maybe their cost of capital)

Back to Heartland it’s good they make a 11% ROE when WACC is about 7.4% eh .....excessive returns over and above their cost of capital which are rewarded in its share price being significantly above its book value.

I would hazard a guess that the HER business is one of Heartlands better ‘value creating’ bits ...but have no numbers to support that

It is...…………….

[Snoopy]

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

Five O'Clock and the lawn is still too wet to mow. Don't want to substitute other chores, so time to rip into Winner's exercise.

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. Just as well the Crusty kids weren't banking on much of an inheritance then!

Now we look at the adjusted income on a per year basis: $79,582 /10 = $7,958 averaged per year.

And on loan capital of $100,000, that equates to an annual interest rate of 7.95%

And that proves, I am not sure what?

SNOOPY

[percy]

Payable $212,322 plus exit fees.
The power of compounding interest.

ps.It is not The Crusty kids' money.It is their parents.
pps.If you borrow at 4.5% and lend at 7.82% you are making nearly 74% gross .
Leaves a bit of room for a few overheads,??.Think NIM.
ppps.Better to own a bank than having money in the bank.?...lol.

[Snoopy]

Snoopy wrote "And that proves, I am not sure what?"
Payable $212,322 plus exit fees.
The power of compounding interest.

Well I got that wrong then! I had thought the answer might be "the greed of Heartlanders."

From:

https://www.stuff.co.nz/business/mon...interest-rates

-------

Consumer Affairs Minister Kris Faafoi has unveiled proposals to cap the amount lenders can earn off loans.

Faafoi is on a mission to reduce the damage "predatory" lenders do in poorer communities, and released a consultation document with three options for capping borrowing costs.

The first, dubbed "Cap Option A" would be to limit the total accumulation of interest and fees over the life of the loan to 100 per cent of the original loan principal.

---------

Well a $212,000 payment is more that 100% of the loan principal. So could Heartland be looking at a government imposed cap on its lending arrangements?

ps.It is not The Crusty kids' money.It is their parents.

In this case it is neither the parents nor the kids money. It has become Heartland's money.

pps.If you borrow at 4.5% and lend at 7.82% you are making nearly 74% gross .
Leaves a bit of room for a few overheads,??.Think NIM.

Well 7.82 - 4.5 = 3.32 percentage points. That makes a NIM of 3.32 percentage points. But wait, Heartlands overall net interest margin was 4.34 percentage points over FY2017. So doesn't that indicate that Heartland's REL business could actually be lower margin than the other business units?

SNOOPY

[percy]

HBL do a bit of magic...….lol.

ps.TRA's NIM is over twice HBL's.

NB.TRA and HBL are the good guys.!