HGH - Heartland Group Holdings

[audiav]

I’m in the market for a mortgage so very interested. Will arbitrage this by continuing to top up my HGH holdings.

[iceman]

I’m in the market for a mortgage so very interested. Will arbitrage this by continuing to top up my HGH holdings.

Makes perfect sense to try to get one of these mortgages. I would if I was looking for one.

[Snoopy]

In that Heartland announcement They said that 6% of loans are dairy related.

but i am puzzled as to why they added these sentences, especially the 2nd one - "The average loan to value ratio (LVR) for Heartland’s dairy exposures is 61%. However, it is important to note that LVRs are only one of the indicators of loan quality"

Do we interpret that as Heartland themselves think the 61% is a high/risky number but its all OK because other things are alright. If so why even mention all this as everybody was excited at being told the exposure was low.

One thing I have learned over many years announcements have to be read carefully to really try to understand what is being said.

Just adding to Rogers note - even if 5% of these dairy loans go bad that's a decent chunk of the $50m profit gone.

I still hold until the annual accounts. I believe there is more risk with heartland than a while ago and will manage accordingly.

If anybody is interested have a look at sector analysis in recent accounts and track impairment expense under rural for the last 3 to 4 quarters.

How did you extrapolate from 5% total rural loan impairment that 10% of dairy loans are impaired, W69?

Rural loans are ~$500m (they report rural two different ways but its about that) and have said a while ago dairy loans are ~$240m. So if dairy is all/most of the problem thats where I get the 10% from.

Impairment doesn't mean bad - in Heartland terms it is overdue and manageable (?)

(Might be completely wrong with my assumptions, that's why i used lot of ifs)

The above quotes relate to the FY2015 financial year. Dairy loans at Heartland currently 'off the radar' but I think we still have an issue.

What got me thinking was the report on dairy farm sales in the South Island on the RNZ rural program this morning. In Southland over the past year, the price of dairy farms has dropped from $45,000/ha to $35,000/ha over the last year. Actual numbers of properties sold are down 60% from a year ago.

In Canterbury there is no equivalent measure because there are no dairy farm sales at all. That is right - none. The explanation for this was that the typical Canterbury dairy farm is nominally much more valuable overall, around $10m. The overseas buyers that have that sort of money to invest are now locked out of the market, and local buyers don't have that kind of money available. Concomitant with this, the Australian controlled banks have tightened up their loan requirements. Buyers now require 60-70% equity, up from 45-55% last year.

60-70% equity is now well above the average (100% - 61%= 49%) figure that Heartland quoted five years ago. I know Heartland have reduced their dairy exposure from five years ago. But if the easy cases have been dealt with, that means the more difficult cases still on the Heartland books are unlikely to attract alternative financing. The current 'no sales' and 'no financing available' looks like setting the scene for a dairy farm price crash to me.

Heartland has since gone on other risky loan directions so that the remaining dairy farm loans form a smaller proportion of the overall risky loans. It hasn't made the risky dairy loan problem go away though. It only means it is a smaller piece of a larger troublesome loan market. I think the dairy farm loan comeuppance at Heartland is coming....

SNOOPY

[RTM]

It hasn't made the risky dairy loan problem go away though. It only means it is a smaller piece of a larger troublesome loan market. I think the dairy farm loan comeuppance at Heartland is coming....

SNOOPY

Lets say you are right Snoopy. If you are...then are they effectively first mortgages meaning that Heartland could end up owning some cheap dairy farms ? What % equity do you think the mortgagee has in the farms ? Are the farms effectively going to be half price ? Is that what you are trying to tell us ?

And will this hurt HGH....or is someone new just going to get a really cheap farm...compared with say 5-10 years ago and HGH will come out of it relatively whole ?

[Simsee]

Wouldn’t there have been a heap of work done around returns based on the milk solids price which appears to be holding up well? I really struggle to see where there is major cause for concern

[Snoopy]

Lets say you are right Snoopy. If you are...then are they effectively first mortgages meaning that Heartland could end up owning some cheap dairy farms ? What % equity do you think the mortgagee has in the farms ?

On average it was 39% in 2015

Are the farms effectively going to be half price ? Is that what you are trying to tell us ?

Forestry seems to be on a roll in this June 2019 article.

https://www.stuff.co.nz/business/far...rice-in-a-year

"North Island forestry land rose from a median of $6656 a hectare to $13,128/ha."

If we look at recent farm sales information.

https://www.interest.co.nz/rural/resources/farm-sales

"The median price per hectare was only $21,221 in January 2020, -44% lower than December 2019, and -22% below January 2019."

So it does appear possible that dairy land repurposed for another use could fall in value by more than 40%, forcing Heartland to take a haircut.

SNOOPY

[kiora]

The above quotes relate to the FY2015 financial year. Dairy loans at Heartland currently 'off the radar' but I think we still have an issue.

What got me thinking was the report on dairy farm sales in the South Island on the RNZ rural program this morning. In Southland over the past year, the price of dairy farms has dropped from $45,000/ha to $35,000/ha over the last year. Actual numbers of properties sold are down 60% from a year ago.

In Canterbury there is no equivalent measure because there are no dairy farm sales at all. That is right - none. The explanation for this was that the typical Canterbury dairy farm is nominally much more valuable overall, around $10m. The overseas buyers that have that sort of money to invest are now locked out of the market, and local buyers don't have that kind of money available. Concomitant with this, the Australian controlled banks have tightened up their loan requirements. Buyers now require 60-70% equity, up from 45-55% last year.

60-70% equity is now well above the average (100% - 61%= 49%) figure that Heartland quoted five years ago. I know Heartland have reduced their dairy exposure from five years ago. But if the easy cases have been dealt with, that means the more difficult cases still on the Heartland books are unlikely to attract alternative financing. The current 'no sales' and 'no financing available' looks like setting the scene for a dairy farm price crash to me.

Heartland has since gone on other risky loan directions so that the remaining dairy farm loans form a smaller proportion of the overall risky loans. It hasn't made the risky dairy loan problem go away though. It only means it is a smaller piece of a larger troublesome loan market. I think the dairy farm loan comeuppance at Heartland is coming....

SNOOPY

What % rural loans are secured over land,livestock,P&M?
https://www.heartland.co.nz/rural-lo...tock-finance?m

[Snoopy]

What % rural loans are secured over land,livestock,P&M?
https://www.heartland.co.nz/rural-lo...tock-finance?m

I don't know the answer to this, although Heartland have lots of competition for livestock funding from PGW's 'GoLamb' and 'GoBeef' financing and Allied Farmer's equivalent programs. In fact, I think Heartland are taking a beating from this competition, who, unlike Heartland, have their own sale yards through which they sell livestock.

The one liner used in the past was that 'Heartland' could always 'kill the cows' and recover their 'debt due' from the meat, if the sharemilkers could not repay their livestock loans. But with cool store warehouses bulging from the bottleneck in meat exports to China, it looks like 'killing the cows' may no longer be possible as a last resort loan exit strategy. Oh dear.

To my way of thinking, the fire sale recovery of land and livestock as a method of recovering difficult loans looks to be in question. Perhaps as Heartland digitises, they can convert their retail premises into cattle barns so that they can maintain their 'livestock assets' until demand improves?

Plant and Machinery will always have value, although that 'realisable value' will always be tied to the ability of the farming community customers to pay.

SNOOPY

[kiora]

I don't know the answer to this, although Heartland have lots of competition for livestock funding from PGW's 'GoLamb' and 'GoBeef' financing and Allied Farmer's equivalent programs. In fact, I think Heartland are taking a beating from this competition, who, unlike Heartland, have their own sale yards through which they sell livestock.

The one liner used in the past was that 'Heartland' could always 'kill the cows' and recover their 'debt due' from the meat, if the sharemilkers could not repay their livestock loans. But with cool store warehouses bulging from the bottleneck in meat exports to China, it looks like 'killing the cows' may no longer be possible as a last resort loan exit strategy. Oh dear.

To my way of thinking, the fire sale recovery of land and livestock as a method of recovering difficult loans looks to be in question. Perhaps as Heartland digitises, they can convert their retail premises into cattle barns so that they can maintain their 'livestock assets' until demand improves?

Plant and Machinery will always have value, although that 'realisable value' will always be tied to the ability of the farming community customers to pay.

SNOOPY

Heartland announces half year profit of $39.9 million
18 February 2020
"Rural
Rural lending NOI was $15.5 million, a decrease of $0.3 million (2%) compared to 1H2019.
Rural Receivables decreased by $36 million (11% annualised decrease) to $621 million. Rural
Relationship Receivables reduced by $22 million (8% annualised decrease) as optimisation of noncore Rural Relationship lending to reduce low margin concentration continues. At the same time,
Livestock Receivables decreased by $13 million (22% annualised decrease) to $108 million."
Craigs
Rural -11% annualised. Good growth in Livestock lending, although this is
seasonal with December a low-point. The drought in parts of NZ may drive
greater livestock sales and provide a short-term boost for HGH. Relationship
receivables declined $22m, and we expect this to reduce further over time
driven by farm sales.
Competition from Wrightsons???
https://www.pggwrightson.co.nz/Services/Finance
Heartland provide the finance for PGG Go Lamb

[Snoopy]

Competition from Wrightsons???
https://www.pggwrightson.co.nz/Services/Finance
Heartland provide the finance for PGG Go Lamb

I think you will find that is wrong.

Have a look at the PGG Wrightson half year profit release. CEO Steve Guerin says that a large proportion of PGW's debt has gone to fund 'GoBeef' and 'GoLamb''. Heartland own 'PGG Wrightson Finance', but the relationship between PGW and HGH is not very productive. HGH do not know the PGW customers well, and cannot approve loans in a timely manner. PGG Wrightson Finance do not fund 'GoLamb' or 'GoBeef'. In fact those two 'brands' were created to create a separate rural lending identity by stealth, separate from the 'official' PGG Wrightson finance company owned by Heartland.

SNOOPY

discl: PGW and HGH shareholder