HGH - Heartland Group Holdings

[justakiwi]

Moved to Newbies

[forest]

Westpac demerged their BT fund management business from the parent bank a few years ago, despite funds management being seemingly very profitable. Today people, if they go into a bank branch, want instant (or at least 24 hour) service. Retirement Savings and Reverse Mortgages are not things where a fast solution is necessarily a desirable solution, It may be that with ever increasing legal requirements that getting staff qualified in these specialist areas is not straightforward. Thus Heartland's approach: centralizing expert staff at a call centre, may be the way of the future? Jeff at the AGM certainly said that when questioned on the subject. I don't see why the likes of big banks couldn't take a similar approach though. These days with video conferencing technology, customers could be ushered into a special room at the branch and hooked up live with a bank employee expert at a video call centre. That to me would be a more credible solution than being handed a Seniors Australia card and being told to go home and ring them.

Personally I have a real problem with dealing with any financial institution with no local branch. When things go well it can seem easy. But when things go wrong,..? I would like to think I can go in and 'thump on a desk' somewhere local.



The problem is that as a wholesale institution if you want a two year bond and the people paying that interest are on average on a 6-8 year term there is a cashflow timing mismatch after two years. Heartland might have to offer higher interest rates to new providers of cash bonds. The banks might up their securitization interest rates ti Heartland. Or maybe Heartland Bank might be required by parent HGH to pay a 'special dividend', so that HGH could use such money to recapitalise their Australian operations (wouldn't the RBNZ like that)? It is not clear if recovering such cost increases from Reverse Mortgage holders could be done in a way that does not anger them and torpedo future reverse mortgage business in Australia . Hence Jeff's mission to lock in a longer term lending source at a low fixed rate.

SNOOPY

Thinking about the interest rates Snoopy, if rates go up and HGH needs to pay more for their funds would't they simply charge more interest on the reverse morgages?
The way I see it that the risk of short term funding and longer term reverse morgages is greatly reduced because of the possibility of adjustments of intetest rates of the reverse morgages.
It would be a concerne if no funding was available some time in the future but I think that is unlikely.

[percy]

Thinking about the interest rates Snoopy, if rates go up and HGH needs to pay more for their funds would't they simply charge more interest on the reverse morgages?
The way I see it that the risk of short term funding and longer term reverse morgages is greatly reduced because of the possibility of adjustments of intetest rates of the reverse morgages.
It would be a concerne if no funding was available some time in the future but I think that is unlikely.

Term of loans.
Average term of a REL is under 10 years.
Average term of a standard mortgage is most probably 20 to 30 years.

[Snoopy]

Thinking about the interest rates Snoopy, if rates go up and HGH needs to pay more for their funds wouldn't they simply charge more interest on the reverse mortgages?
The way I see it that the risk of short term funding and longer term reverse mortgages is greatly reduced because of the possibility of adjustments of interest rates of the reverse mortgages.

Yes Forest, that is how I see it too. You just pass on your increased costs, and there is not much existing reverse mortgage holders can do about that. I was trying to look one step ahead of that and consider what would happen next, and also look around to see what might cause these changes:

Q1/ Why would a lender want to increase their interest rate return?
A1/ Because they perceive an increased security risk on their loan.

Q2/ Why would the loan security be reducing?
A2/ Because house prices are no longer going up, and may be falling slightly.

Q3/ If house prices are not going up what will that do to the demand for REL loans?
A3/ Existing reverse mortgage holders may pull out all stops to repay their loan early, and growth in new REL loans may slow because the loan holders equity base will erode much more quickly.

A3 is a pretty bad result for Heartland Australia.

It would be a concern if no funding was available some time in the future but I think that is unlikely.

I am not saying that having reduced funding available is likely. I am saying it is a possibility and so should be planned for as a contingency. Some would say if something is not likely then you should not worry about it. I would say that even if something is not likely, and in the unlikely event of something happening the contingency is severe, the you should very much worry about it. Jeff is onto the problem so let''s see what he can do to fix it. In the meantime as an investor, you should discount your HGH buy price to reflect the unlikely but serious consequence that shareholders will face if Jeff is unsuccessful in sorting this out.

SNOOPY

[percy]

Yes Forest, that is how I see it too. You just pass on your increased costs, and there is not much existing reverse mortgage holders can do about that. I was trying to look one step ahead of that and consider what would happen next, and also look around to see what might cause these changes:

Q1/ Why would a lender want to increase their interest rate return?
A1/ Because they perceive an increased security risk on their loan.

Q2/ Why would the loan security be reducing?
A2/ Because house prices are no longer going up, and may be falling slightly.

Q3/ If house prices are not going up what will that do to the demand for REL loans?
A3/ Existing reverse mortgage holders may pull out all stops to repay their loan early, and growth in new REL loans may slow because the loan holders equity base will erode much more quickly.

A3 is a pretty bad result for Heartland Australia.



I am not saying that having reduced funding available is likely. I am saying it is a possibility and so should be planned for as a contingency. Some would say if something is not likely then you should not worry about it. I would say that even if something is not likely, and in the unlikely event of something happening the contingency is severe, the you should very much worry about it. Jeff is onto the problem so let''s see what he can do to fix it. In the meantime as an investor, you should discount your HGH buy price to reflect the unlikely but serious consequence that shareholders will face if Jeff is unsuccessful in sorting this out.

SNOOPY

Snoopy.
You need to reread HGH's November 2018 Heartland Investor Day Presentation,pages 15 to 33.
The answers to all your current and future concerns are covered there,and much more.

[Snoopy]

Snoopy.
You need to reread HGH's November 2018 Heartland Investor Day Presentation,pages 15 to 33.
The answers to all your current and future concerns are covered there,and much more.

This presentation Percy?

http://nzx-prod-s7fsd7f98s.s3-websit...018/290747.pdf

This is a very good summary of how the loans work from a consumer perspective. However I did raise an eyebrow when I saw the case of Jack and Bev (p30) who used part of their reverse mortgage to 'pay off another mortgage'. Did someone at Heartland not tell them that a reverse mortgage interest rate is higher than a regular mortgage? Surely they would have been better off just paying off the small remaining mortgage, then taking out a much smaller reverse mortgage capital sum for their own lifestyle benefit? Perhaps cashflow was an issue with those residual mortgage payments? But if they wanted more regular cashflow they could plug into the state government reverse mortgage scheme at a better rate that Heartland could offer. What were those Heartland advisors thinking? Very poor advice given to this poster couple Jack and Bev by the look of it!

None of those pages you referenced Percy talks about the funding the reverse mortgage portfolio by Heartland Australia. For that you had to go on to page 42. The future funding strategy is listed as follows:

"1/ Continue to develop multiple warehouse facilities,"

Job done. Heartland have broadened their Securitization program beyond just CBA Bank to include Westpac and ME bank.

2/ "Potential A$ Medium Term Note programme (senior unsecured) utilising Heartland Australia Group’s BBB-rating (Fitch)."

Job partly done. Following on from as issue of $A50m in subordinated notes in March 2019 (two year term) , Heartland announced the day after the AGM (November 2019) that they have completed a senior unsecured bond placement of A$100 million with a key Australian institutional fixed income investor. In both cases these are medium term investments only, so the timing mismatch is not fixed. More $A bonds to come?

3/ "Broadening providers of senior funding and introducing mezzanine investors •Potential rated Reverse Mortgage Backed Note programme•

Job NOT done (although Jeff is on to it).

The presentation does show that the average term for an Australian Reverse Mortgage is 6.6 years (p25, slightly less than I thought). But it does not resolve any of my concerns about the funding mismatch at Heartland Australia. Nevertheless Jeff is on the job to fix things, so I have in no way given up hope.

SNOOPY

[Beagle]

Good, just leave him to do his job. The glass is half full mate and all equities involve risk.

[Snoopy]

Good, just leave him to do his job. The glass is half full mate and all equities involve risk.

Yes they do and the price you pay should reflect that risk. Heartland is my newest NZX investment. I bought an initial stake in January 2019 and have participated in two DRPs since. My average acquisition price is $1.39. My fair value estimate of the worth of each HGH share is $1.63. I am quite happy to sit in my current position

Technically I should add a couple of cents to that as we are half way to earning that upcoming interim dividend, which I am guessing will be 4c. So if I could accumulate some more shares at $1.63 to $1.65 I would be in. But I won't be in at $1.87. That doesn't mean that HGH won't be worth $1.87 one day. But, to me, that price does not reflect the risk inherent in HGH today. I am not a seller at $1.87- all share investments should be given room to breathe with the market- , but I am definitely not a buyer. YMMV and it obviously does. Good luck Beagle.

SNOOPY

[RTM]

Good, just leave him to do his job. The glass is half full mate and all equities involve risk.

Great post.
And additionally, make sure HGH is an appropriate percentage of ones portfolio.

[Beagle]

Good buying Snoopy. I managed to get a small top up at $1.32 about a year ago and some more at under $1.50 but I have no idea what my average price is as its a complicated mess of shares transferred over from the former Heartland Bank, DRP shares acquired over the years and sales when the share price really did get overpriced a few years ago as well as my latest top up at $1.85.

There's been a few people mentioning they are hoping for a dividend increase this year but I think with the new more stringent RBNZ capital requirements and taking into account last year's dividend increase I think that's unlikely this year and I'm quite relaxed about that.