HGH - Heartland Group Holdings

[percy]

HBL trading XD [ex dividend] today.

[Beagle]

Forecast eps 13.5 cps. Forecast dividends 9.5 cps fully imputed, (gross 13.194 cps)
HBL at a year low of $1.67. Forward PE just 12.37 and forward gross yield 7.9%. PE probably lower than most of the Aussie banks and yield definitely the highest on a net basis to Kiwi investors taking into account imputation credits. 8% forecast EPS growth this year and outstanding long term prospects for loan growth through reverse home mortgages.

Looks like RBNZ is going to cut and we're in for years of ultra low interest rates. Opportunity knocks at under $1.70 to lock in good yield and dividend growth in the years ahead ? You folks be the judge.

[dabsman]

I don't get it how cheap these are so picked up another bunch at $1.67 and $1.68. $2 end of year I reckon

[Snow Leopard]

I still have a few shares in the bank and today I got a reminder to vote at the meeting.

Voted against the restructure as per Snoopy's instructions, against re-electing the men and for re-electing the women and could not care about the auditors.

If this gets back down to under-priced I will add to the few.

[Snoopy]

I am not sure that shareholders fully understand the potential risks that Heartland will be exposing them to by wanting to grow the reverse mortgage business at a faster rate than the rest of the business.

I am not sure that I fully understand the potential risks that Heartland will be exposing shareholders to by wanting to grow the reverse mortgage business at a faster rate than the rest of the business. But after pondering on the proposal for a few days, here is my 2c worth on the topic.

There is no free lunch when a financial institution turns 'ordinary loans' into 'securitized loans'. That is the only bit that I am absolutely sure about. But where does the risk go if Heartland packages up their reverse mortgages in Australia and on sells them to Australians?

Heartland will make money because the interest they contract to receive from the reverse mortgage holder will be at a higher rate than the interest they pay out on the soon to be created Aussie bond supporting that loan.

The largest risk will be taken by the Aussie Bondholders. The Aussie bondholders will be being paid a higher than normal interest rate by Heartland (albeit still below what Heartland are getting for their reverse mortgage). But if some of those reverse mortgage loans end up being sold up and the capital released does not discharge the reverse mortgage, then those bondholders will take most -if not all- of the capital hit.

So far this sounds really good for Heartland. They clip the ticket on their REL loans and outsource much of the capital risk. Heartland's job is to match make REL loans with third parties that want to support them. But what happens if the 'matching' becomes difficult?

The ideal situation would be that the maturity terms of each reverse mortgage 'package' exactly matches the maturity terms of the equivalent third party funding package. But what would happen if there was a property market collapse? Suddenly all of those reverse mortgages that had 'responsibly' been limited to 60% of the value of the property value might overnight increase to 80% of the value of the property. And 'interest owed' by the property occupier would still be accumulating, leveraging the homeowners position even further. In that circumstance, the third party bondholders might rightly assess their risk has gone up. And they might elect to redeem rather than roll over their bonds at the end of the bond term. What would Heartland do in that circumstance?

One option (the only option?) would be to redeem the reverse mortgages early. Doesn't sound so bad. Until you realise what it means is 'sell houses' and throw old people out onto the street!

SNOOPY

[percy]

The average REL loan in NZ is just over $30,000 spread over 15,000 clients.
This works out between 5% and 10% of the house capital value.
This indicates RELs are very modest sized loans, compared to the security [house] taken over.
A lot of RELs have been taken out to do up houses ie new kitchen and bathroom so the house can be sold,therefore they have been repaid when the house has been sold.
You will not see old people put out onto the street.

[Snoopy]

The average REL loan in NZ is just over $30,000 spread over 15,000 clients.
This works out between 5% and 10% of the house capital value.
This indicates RELs are very modest sized loans, compared to the security [house] taken over.
A lot of RELs have been taken out to do up houses ie new kitchen and bathroom so the house can be sold,therefore they have been repaid when the house has been sold.
You will not see old people put out onto the street.

I think the issue is not what happens with the 'average' loan. $30,000 on a $600,000 house is only 5% of the capital value - not an issue. But an average is made up of a whole series of numbers that are higher and lower than the average. I would be concerned about those loans at the more highly leveraged end of the loan book. Even if only one or two pensioners were tipped out onto the street, would 'you' (as an institutional investor) be willing to back such a mortgage scheme by stumping up with wholesale funding for it? I see the situation as akin to investing in Casinos. 99% of customers can go for an evening at a casino and not suffer financial hardship and come away with their dignity intact. It is the 1% problem gambler that provides the ethical dilemma for investors. It will only take one or two elderly mortgage holders ending up on the street to taint the whole business.

I wouldn't expect this to happen in NZ. Heartland have a reputation to uphold and would likely bail out any pensioners that got themselves into REL trouble, out of fear that such suffering would damage the reputation of the rest of their business. But what I am talking about is what is proposed in Australia by the as yet unnamed umbrella company set up to do reverse mortgages 'over there'. Because Heartland hasn't given it a name yet, I will christen it "Heartless 'Stick it up the Ozzie Pensioners' Not a Bank Limited." There is no reputation to 'protect' with that one.

SNOOPY

[freddagg]

We can only guess at how it might work out. Ultimately, it comes down to whether you trust the directors to do their job or not.
I do trust them and have voted for the restructure, if I didn't trust them I would sell my shares.

[percy]

I think the issue is not what happens with the 'average' loan. $30,000 on a $600,000 house is only 5% of the capital value - not an issue. But an average is made up of a whole series of numbers that are higher and lower than the average. I would be concerned about those loans at the more highly leveraged end of the loan book. Even if only one or two pensioners were tipped out onto the street, would 'you' (as an institutional investor) be willing to back such a mortgage scheme by stumping up with wholesale funding for it? I see the situation as akin to investing in Casinos. 99% of customers can go for an evening at a casino and not suffer financial hardship and come away with their dignity intact. It is the 1% problem gambler that provides the ethical dilemma for investors. It will only take one or two elderly mortgage holders ending up on the street to taint the whole business.

I wouldn't expect this to happen in NZ. Heartland have a reputation to uphold and would likely bail out any pensioners that got themselves into REL trouble, out of fear that such suffering would damage the reputation of the rest of their business. But what I am talking about is what is proposed in Australia by the as yet unnamed umbrella company set up to do reverse mortgages 'over there'. Because Heartland hasn't given it a name yet, I will christen it "Heartless 'Stick it up the Ozzie Pensioners' Not a Bank Limited." There is no reputation to 'protect' with that one.

SNOOPY

Heartland's stated policy is fewer large loans and more smaller size loans,so I would doubt the average would be a few $1mil loans and a huge number of $3,000 loans.Does not make sense.More likely the odd $80,000 loan and a greater number of $20,000 loans.
Some would be $50,000 for a medical operation.
People taking out RELs have a unencumbered home.They are not gearing up to buy more property.

[percy]

We can only guess at how it might work out. Ultimately, it comes down to whether you trust the directors to do their job or not.
I do trust them and have voted for the restructure, if I didn't trust them I would sell my shares.

From day one when Heartland was formed, the directors have done what they said they would do.
With a lot of their own "skin in the game", directors and management have always acted prudently,honestly,and been part of our community.
Sound leadership.Good trustworthy team.
The opportunity to back their strong organic growth in Australian RELs should be taken.
To miss this opportunity would not be in Heartland shareholders best interest.
I too will be voting in favour of all resolutions.