HGH - Heartland Group Holdings

[winner69]

Looks like Heartland will be borrowing to pay that dividend. (Of 4.5 cents)

SNOOPY

DRP will reduce the cash needed eh Snoopy (about a third took it up last time)

Another question Snoops - ROI pretty impressive ....seems this is a result of higher leverage to me.....what say you?

Would mean return on total invested capital is down ..too much marketing spend

[BlackPeter]

Did you shareholders look at the cashflow statement? Profit may have been $39.865m. But operating cashflow for the same period was 'minus' $59.655m. So around $20m of cash lost over the last six month! Granted this is better than the net $45m of negative operating cashflow over the comparative half year last year. But look at the comparative dollars used to pay tax half year on half year.

HY2019: $1,944m + $0.381m = $2.325m (c.f. 28% tax on half year profit = $9.272m)
HY2018: $9.624 + $4.630m = $14.254m (c.f. 28% tax on half year profit = $11.162m)

Tax is always a timing issue. But it does look like the normalised current half year tax actually paid was around $7.0m light, and last year was $3m too heavy.

I see the payment to suppliers and employees was down by $10m too - another timing issue? That doesn't seem sustainable for a growing company. So add in both of these correction factors ( A sum of -$20m, which changes Operating Cashflow for FY2019 to -$80m) and underlying operating cashflow does not seem to have improved. This isn't surprising because one of the core growth areas, reverse mortgages are strongly cashflow negative while the business is being grown. This does suggest that more cash from some source to fund this negative operating cashflow growth is required.

Fortunately Heartland has found this cash with a net $103,167m raised in subordinated notes last November 2019. But this will not be the last cash raised by Heartland, that is for sure. IMO more money will need to be raised over the next six months and we still haven't got over the problem of borrowing medium term capital to finance longer term loans. Let's hope Jeff is still working on this. But it is disappointing that nothing more as regards matching long term funding to long term loans has been announced.

On a positive note It is good to see the 'collectively impaired asst expense' down so much, by $4m. That means the small guys are getting better at paying their loans back right?



Looks like Heartland will be borrowing to pay that dividend.

SNOOPY

Isn't this how banks operate? Banks typically do borrow money from third parties to lend it out to other people and they make money by charging a higher interest rate than they pay.

Banks are not supposed to lend out only their own money or money they first earned ....

If Heartland need to borrow more money to lend more money out, than this is how you recognize a successful bank :

[jonu]

Isn't this how banks operate? Banks typically do borrow money from third parties to lend it out to other people and they make money by charging a higher interest rate than they pay.

Banks are not supposed to lend out only their own money or money they first earned ....

If Heartland need to borrow more money to lend more money out, than this is how you recognize a successful bank :

Agreed. BP. Since when do banks raise share capital for lending? Wouldn't they be going offshore and possibly be getting negative rates in Europe?

[jonu]

LOL... Like nobody else does that. Better enlist the helpful commentary of the other Beagle...oh wait, he just has

I'll take that as a yes Beagle

[Snoopy]

Isn't this how banks operate? Banks typically do borrow money from third parties to lend it out to other people and they make money by charging a higher interest rate than they pay.

Banks are not supposed to lend out only their own money or money they first earned ....

If Heartland need to borrow more money to lend more money out, than this is how you recognize a successful bank :

Yes, but some banks (by that I mean all banks other than Heartland) collect interest payments from their mortgage customers on a regular basis. They can then pocket these interest payments as 'cash' and use them as part of their own capital base to use to support future lending. There is no regular cashflow from a Heartland reverse mortgage. So if Heartland want to expand their (reverse) mortgage book, cash has to be raised by issuing new shares (or new debt instruments) at a rate incrementally higher than other banks. If you compare the operating cashflow for FY2019 for Heartland vs the operating cashflow for their 'parent' bank Westpac for FY2019 you will see a very different cashflow pattern.

	Heartland FY2019	Westpac FY2019
Net cashflows from operating activities before changes to operating assets and liabilities	$63.433m	$8,396m
Net cashflows from operating activities	($49.912m)	$7,104m

Only one of these banks generates cash from their operating activities. The other is at the perpetual mercy of their wholesale funders.

SNOOPY

[jonu]

Yes, but some banks (by that I mean all banks other than Heartland) collect interest payments from their mortgage customers on a regular basis. They can then pocket these interest payments as 'cash' and use them as part of their own capital base to use to support future lending. There is no regular cashflow from a Heartland reverse mortgage. So if Heartland want to expand their (reverse) mortgage book, cash has to be raised by issuing new shares (or new debt instruments) at a rate incrementally higher than other banks. If you compare the operating cashflow for FY2019 for Heartland vs the operating cashflow for their 'parent' bank Westpac for FY2019 you will see a very different cashflow pattern.

	Heartland FY2019	Westpac FY2019
Net cashflows from operating activities before changes to operating assets and liabilities	$63.433m	$8,396m
Net cashflows from operating activities	($49.912m)	$7,104m

Only one of these banks generates cash from their operating activities. The other is at the perpetual mercy of their wholesale funders.

SNOOPY

I'm no accountant Snoopy, but would the Reverse Mortgage then show as an asset and also have some sort of deferred profit allowed for?

[Snoopy]

DRP will reduce the cash needed eh Snoopy (about a third took it up last time)

Yes it will Winner. But given we are talking about a cashflow statement for the half year, will not the DRP reinvestment effect already be built into the cashflow figures as presented?

SNOOPY

[Snoopy]

I'm no accountant Snoopy, but would the Reverse Mortgage then show as an asset and also have some sort of deferred profit allowed for?

On the Heartland balance sheet there is an item 'Finance Receivables - Reverse Mortgages'. There is no 'discount' applied to that asset on the balance sheet because it is not readily cashable at short notice. The whole asset class of 'Finance Receivables - Reverse Mortgages' represents a 'deferred profit' asset class.

On the Cashflow statement, which is the statement I was talking about, there is an entry 'Capitalised net interest income'. That is the interest income that Heartland have booked as a profit on reverse mortgages but have not yet received in cash. You won't find 'Capitalised net interest income' on the cashflow statements of other banks, apart from legacy loans that are being wound down. In the case of Westpac who do have some legacy reverse mortgage business it is so inconsequential to the Westpac group, I can find no mention of these loans in the annual report.

SNOOPY

[winner69]

Snoops ...that ‘Capitalised net interest income’ doesn’t form part of Operating Cash Flows on the ‘Statement of Cash Flows’ (because as you say they haven’t got that cash yet)

The $24,859 does show as an item on the reconciliation between Profit and Operating Cash Flow .....as a non cash item.

[BlackPeter]

Yes, but some banks (by that I mean all banks other than Heartland) collect interest payments from their mortgage customers on a regular basis. They can then pocket these interest payments as 'cash' and use them as part of their own capital base to use to support future lending. There is no regular cashflow from a Heartland reverse mortgage.

Fair enough - but actually, there is a regular cash flow, it is just a bit slower than with other banks.

Cash flows every time a REL is paid back ... and I think (from memory) the average length of a REL mortgage is something like 7 years (could be less, but not sure).

It sounds like you have a fundamental problem with REL's. If you do, you should not invest into companies which offer REL's. Easy as that.

I don't see an issue as long as they make sure that the security is good enough to cover the loan, but yes, cash needs longer before it flows back. Not a problem in my view as long as the increased interest rates are sufficient to pay for the increased risk ... but you are right to point tho the increased risks. Just one of these things ... if you don't like risk, better invest into government bonds ...