HGH - Heartland Group Holdings

[nztx]

Please keep debate going ..esp the negatives

Good for share price next week

Interesting question - Winner:

Whilst I'm accumulating HGH particularly at current levels - I can't help but notice that the Reverse Mortgage
component of the business will long continue to be a draw on working capital being sent into that sector.

Sure retained earnings goes a certain extent towards funding it, further borrowings & Notes etc a further extent.
Obviously with no fixed date on realising the said Reverse Loans & Interest capitalised presumably to Loans
over their likely life -- this undoubtedly provides some interesting working capital balancing exercises for the very
capable & experienced HGH team working at the cliff face in this area.

Potential Loss Exposure in this sector I would imagine be very low.

I've looked at Snoopy's figure and compared to recent HGH Reports summarising the Loan exposures by sector

We look at "Growth" all too often

In Reverse Mortgages, and I guess with Developmental Margins in the Rest Homes Sector - we see growth
& Surpluses reported. But what is sometimes not always easily separated is the "Real Realised Growth"
ie - not locked in, realised - fluid & sitting in Current Assets / Working Capital, available to be spent or otherwise.

The Bean Counters of today's world (I'm probably one) have really not done everyone any favours by throwing yet another
puzzle into the equation with term lease payables, Lease Assets (hopefully more or less balancing out the other side)
notional interest factors on the said Lease equations etc

At the end of the day on a winding up these mysterious mythical figments of Bean Counter's imaginations will evaporate
into thin air - in the meantime the enterprises Assets & Liabilities are reported Grossly overstated by these imaginative
judgements of future asset & liability.

For goodness sake - a lease is a lease is a lease generally only payable periodically if there are assets sitting in kitty to do so

By similar token - an internally doctored up (or down) revaluation is just that - is it a gain, a profit (ie sale to outsiders) in the Property Accumulating & Developing Rest Home empires ?

This explains to all why most if not all Rest Homes pay little 'real tax', do not have Imputation credits to attach to dividends,
which means where one of these beasts decides to throw out a dividend, those on receiving end are likely to get wacked with the full 33% Dividend With holding tax to be passed to IRD

No wonder many (not used to certain bean counter creativity at work) get so confused with some of today's mysterious
accounting reporting by companies they are looking at ..

[Snoopy]

Whilst I'm accumulating HGH particularly at current levels - I can't help but notice that the Reverse Mortgage component of the business will long continue to be a draw on working capital being sent into that sector.

Sure retained earnings goes a certain extent towards funding it, further borrowings & Notes etc a further extent. Obviously with no fixed date on realising the said Reverse Loans & Interest capitalised presumably to Loans over their likely life -- this undoubtedly provides some interesting working capital balancing exercises for the very capable & experienced HGH team working at the cliff face in this area.

Potential Loss Exposure in this sector I would imagine be very low.

I've looked at Snoopy's figure and compared to recent HGH Reports summarising the Loan exposures by sector

We look at "Growth" all too often

In Reverse Mortgages, and I guess with Developmental Margins in the Rest Homes Sector - we see growth & Surpluses reported. But what is sometimes not always easily separated is the "Real Realised Growth"
ie - not locked in, realised - fluid & sitting in Current Assets / Working Capital, available to be spent or otherwise.

Not sure I agree with you 'rolling up' non cash gains on reverse mortgages (interest earned but not yet paid back to Heartland in cash) and non-cash gains from property revaluations in retirement villages (based on market movement of property entirely outside the control of the property owner) and putting them in the same bucket:

1/ The interest earned on reverse mortgages is recognised by the IRD as 'taxable income', whereas the property value gains are not taxable, which is why retirement village shareholders get hit with resident withholding tax on dividends paid out of property valuation gains.
2/ Retirement villages can expand their capital base by simply waiting for their property assets to appreciate. But Heartland want to expand their capital base to allow them to take on more reverse mortgages. More mortgages over and above the turnover rate of existing mortgages and any retained profit earned from those (Heartland have ambitious reverse mortgage growth plans). That means Heartland must raise more capital, EITHER from shareholders, via cash issues and the DRP, OR raising long term bond money to finance such deals.

In fact Heartland have so far been unable to raise long term bond money. They are instead setting up medium term bonds of 2-3 year duration, then hoping they will be able to renew those to more closely match the 5, 6 and 7 year periods that reverse mortgages typically run for. This is a real weakness in the Heartland business model as I see it. Albeit one that Jeff is working on to try and set up those longer term supportive bonds. I am thinking that with the further collapse of interest rates worldwide, Jeff's job will be getting easier? Although if the housing market takes a severe hit, then those seeking cash income via a bond may balk at a security backed by property, even if, as in the case of Heartland the gearing on the properties that are being mortgaged is low.

I am unsure on the tax position of interest earned on reverse mortgages. Can anyone clarify? The profits on a reverse mortgage are not collected until the reverse mortgage is wound up, but a tax liability is incurred by Heartland every year. Does Heartland have to effectively borrow money every year to pay this tax or is it all bundled up in some kind of deferred tax arrangement with the income tax department? if the former, that is quite a large cash liability with no cash coming in to pay it. Yet another cash draw that must be added to the cash borrowed to fund outsized growth plans!

I was interested in your remark nztx on 'growth realised as cash' verses 'other growth'. Are you suggesting that if the growth realised is not in cash it should really be reclassified as a secondary inferior class of growth?

You are implying that growth realised - fluid & sitting in Current Assets / Working Capital, is better able to be spent on expansion, but this is not so is it? The retirement village model in New Zealand seems to have no problem growing without ever realising the results of their growth in cash.

SNOOPY

[BlackPeter]

...

I am unsure on the tax position of interest earned on reverse mortgages. Can anyone clarify? The profits on a reverse mortgage are not collected until the reverse mortgage is wound up, but a tax liability is incurred by Heartland every year. Does Heartland have to effectively borrow money every year to pay this tax or is it all bundled up in some kind of deferred tax arrangement with the income tax department? if the former, that is quite a large cash liability with no cash coming in to pay it. Yet another cash draw that must be added to the cash borrowed to fund outsized growth plans!

...

SNOOPY

Interesting point, and no tax specialist either.

However - why would anybody in our tax system need to pay tax on gains not yet collected? If you are a trader, you pay tax on realised trading gains (revenue minus cost), and I would assume it is the same with interest payments.

If & when you get the payment, you pay tax. If the payment is however outstanding (for whatever reason) you don't and you don't owe tax either. Why would there be a need for a deferred tax arrangement?

Anyway - keen to learn more about the hidden secrets of our tax system ;

[Ferg]

The Bean Counters of today's world (I'm probably one) have really not done everyone any favours by throwing yet another
puzzle into the equation with term lease payables, Lease Assets (hopefully more or less balancing out the other side)
notional interest factors on the said Lease equations etc

At the end of the day on a winding up these mysterious mythical figments of Bean Counter's imaginations will evaporate
into thin air - in the meantime the enterprises Assets & Liabilities are reported Grossly overstated by these imaginative
judgements of future asset & liability.

For goodness sake - a lease is a lease is a lease generally only payable periodically if there are assets sitting in kitty to do so

Hear hear! Great to see someone else thinking this. I have been looking at the impact on some businesses and it is nuts. Surely a "leased asset" doesn't meet the definition of an "asset" - unless they have been busily redefining that too. Not only does it make the return on assets wonky but it also muddies the FCF calculations whereby portions of lease payments will be classified as interest in the cash flow statement.

[nztx]

Once upon a time a very long time ago - Leased Assets (if memory serves correct) only hit Assets Schedule, if there was
opportunity for the party leasing the Asset as part of their lease contract to have option or opportunity to acquire the asset
at end of it's lease term. Everyone knew where they stood & then understood how the financials generally worked

Also a very long time ago - Assets being subject of Revaluation saw increases (or decreases) in fixed assets affected
taken directly to Shareholders Funds via the Revaluation Reserve - none of the fanciful take the revaluation movement
into P&L account as part of direct operating Surplus or Loss (as seems to be happening in today's wacky world now)..

Again - Everyone knew where they stood & then understood how the financials generally worked with this as well

Do users of today's Financial Reports really need to be half beancounters to disentangle these sort of mythical judgements
and Beany's magical formulas so as to be able to compare with the Reports of other businesses for example selling apples & recognising their profits on how many apples they manage to sell in any one period ?

[nztx]

Let's face it - is interest 'capitalised' and added onto a Reverse Mortgage Loan - but not received in Cold Hard Cash coming in "Real Income" or merely deferred interest income - to be actually received in a later point in time when the Reverse Mortgage gets settled out - from say a property sale etc ?

What IRD decide in the circumstances (whether recognised as income at time it's charged to the Reverse Loan) and how the Market or Viewers / Investors may look upon it could well be two different things

- Interest, but not yet received
- Recognised as revenue but directly added to the Reverse Loan Book

- Real Cash Income or Not ?

- Somewhere the increasing Reverse Loan Book, plus Capitalised Interest into it needs to be funded from somewhere - presumably dividends are paid from it, maybe the tax man, overheads etc - if regarded as Income at time billed / charged ..

[winner69]

Re this tax ....don't speculate, just go to Note 9 last years Financial Statements

That'll show you what happens (and evenhelps if one looks at the Cash Flow Statements

http://nzx-prod-s7fsd7f98s.s3-websit...427/308226.pdf

[Snoopy]

Re this tax ....don't speculate, just go to Note 9 last years Financial Statements

That'll show you what happens (and even helps if one looks at the Cash Flow Statements

http://nzx-prod-s7fsd7f98s.s3-websit...427/308226.pdf

Those accounts you referenced Winner are for Heartland Bank. My question relates largely to Heartland Group Holdings which holds the Australian Reverse Equity Mortgage assets. So the accounts I need to look at are those for HGH, not those referenced above.

Moving on to the HGH accounts, and note 8 on taxation, the total tax expense is $27.896m, and that includes $3.306m of deferred tax for the current year. But is that anything to do with the reverse mortgage portfolio? Or is it something to do with the separation of Heartland Bank from HGH?

Moving onto the Cashflow statement, the actual cash paid was $25,895m. That is tax not paid in cash was $27.896m, - $25,895m = $2.001m. That difference is not the same as the deferred tax. So it looks like something complicated is going on.

Lastly moving onto the Segmented result, the Australian tax bill is $5.115m. So some of that must be deferred? But doesn't the Australian O4B business fit into the Australian category too?

The accounts look to be too mixed up to produce an answer to my question and there is no specific mention of any deferred tax liability on reverse mortgages. After studying the accounts, I am afraid I am none the wiser ;-(. Is my question unanswerable given the disclosures HGH have made?

SNOOPY

[winner69]

Sorry Snoops - should have realised needed group accounts

Current / Deferred Tax is complicated I agree

However I am pretty confident that interest on reverse mortgages (even though capitalised) are treated as taxable income in the year that it is earnt (not paid) and most of would be paid when due in current year. There no doubt will be some (minor) adjustments for impairments etc that could end up as deferred tax.

Do what percy would do and give Jeff a ring

[Snow Leopard]

Table in the accounts is headed.

"Deferred tax assets comprise...."

This is NOT difficult folks