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Home Capital Group Inc HMCBF


Primary Symbol: T.HCG

Home Capital Group Inc. is a Canada-based holding company that operates through its principal subsidiary, Home Trust Company (Home Trust). Home Trust is a federally regulated trust company offering residential and non-residential mortgage lending, securitization of residential mortgage products, consumer lending and credit card services. In addition, Home Trust and its wholly owned subsidiary, Home Bank offer deposits through brokers and financial planners, and through a direct-to-consumer brand, Oaken Financial. Its mortgage lending includes classic single-family residential lending, insured residential lending, residential commercial lending, and non-residential commercial lending. Its consumer lending loan portfolio comprises credit cards, lines of credit and other consumer retail loans. In addition, the Company manages a treasury portfolio to support liquidity requirements and invest excess capital.


TSX:HCG - Post by User

Bullboard Posts
Comment by TraderBenon Aug 30, 2017 12:22am
56 Views
Post# 26635585

RE:RE:Interesting Turtle Creek Message to their Investors Re: HCG

RE:RE:Interesting Turtle Creek Message to their Investors Re: HCGCanader, I was looking for an indiation of how they plan on voting.  A bit of foreshadowing in the closing paragraph "a company has to ensure it can withstand the negative short term 'voting' in order for the long term 'weighing' effect to take over" . {Then next sentence references Buffet and proving the naysayers wrong.}"   So am I interpreting this corretly when I think short term dilution for long term benefit?  ie  They ar voting yes.  Just my opinion.  I still can't say how the share price would react with a yes vote or similarly with a no vote.  My gut tells me stakeholders are willing to overlook some share dilution to hold a company that Buffet has a 40% stake.  Anyone else, this statement wouldn't apply.  But this is BUFFET.  And he brigs more than capital, Buffet  brings his brand and a whole lot of cash.

I only have a small position but if it drops closer to $10.50 before Sept 12 I will be adding.  I am confident it will not go below Buffet's price with the information currently available to investors. The short thesis has run out of steam in my opinion, although I do respect Cohodes and made a lot shorting Concordia.


canader wrote: Sneaky buggers,

Not even the smallest breadcrumb as to which way they plan on voting.

But, I liked what they had to say, regardless

TraderBen wrote:

You have heard us speak favourably of Home Capital in the past – a regulated trust company and bank that has grown from very humble beginnings in the mid-1980s to become Canada’s largest alternative lender. It has a history of careful underwriting with a focus on the value of the collateral underlying its loans. Over the last decade, its loan losses have averaged less than 0.1% per annum – a rate indicative of the prudence of its underwriting. However, the company has had more than its share of difficulties over the past couple of quarters.

We prefer to own companies that don’t need access to the capital markets to pursue their business strategy – so that no matter what may happen to a company’s share price in the short term, there is no impact on the underlying business value in the long term. However, in the case of Home Capital, while the company did not need to access the public market for equity, it did rely on the confidence of depositors to lend it money. If that confidence were ever to be shaken, then the business of Home Capital could be harmed. Despite our assessment that the probability of that occurring was small, that is precisely what happened.

As a regulated trust company and bank, Home Capital offers CDIC insured (government guaranteed) deposit accounts and issues CDIC insured term GICs to investors. Furthermore, it had done a good job of matching the term of its assets with its liabilities – in other words, it funded shorter maturity mortgages with longer maturity GICs. But its funding activity also included approximately $2 billion in High Interest Savings Accounts (HISAs) – effectively demand deposits. On April 26, Home Capital surprised the market by announcing that their HISA balances had declined by $600 million since the start of the month and that they expected further declines to occur – in fact, over the ensuing days, the balances declined an additional $1.2 billion. All told, within the span of a few weeks, Home Capital’s $2 billion of HISAs had shrunk to just $200 million. Home Capital had just suffered a classic ‘run on the bank’ for that portion of their deposit base. In response to the ‘run’ on the HISAs, the company also announced on April 26 that it had secured an expensive $2 billion bridge facility from HOOPP (a large Canadian pension plan). The facility dealt with the immediate liquidity issues, but given the ‘off market’ cost of the facility, it exacerbated the confidence problem. Despite being government guaranteed, sales of GICs plummeted, forcing Home to take further steps to stabilize the business.

1. Turtle Creek Equity Fund Class I Series 1.0
2. The S&P/TSX Composite index and the S&P MidCap 400 are total return indices. 3. Turtle Creek United States Equity Fund Class I Series 1.0

Turtle Creek Q2 2017 Quarterly Manager Commentary

What surprised most market participants, including us, was the speed and severity of the loss of confidence in the company. The fact that it happened in the face of an exceptionally strong credit environment made it all the more unusual. In particular, there had been:

  • No collapse in house prices;

  • No hikes in interest rates;

  • No jumps in unemployment;

  • No increases in mortgage arrears; and,

  • No deterioration in the overall profitability of the company.

    In other words, the run on the bank was not triggered by credit issues at Home Capital. Rather, the public lost faith in the company as a deposit taking institution because of a feeling that there was something wrong. Accusations, confusion and rumours swirled around the company and the belief that this regulated financial institution was a financially strong organization was very quickly replaced with the belief that the company was near collapse. Home Capital certainly made some mistakes that contributed to the loss in confidence (for example, removing its CEO without a replacement lined up), but it ultimately was a combination of many outside forces and factors which destroyed confidence.

    Our approach at Turtle Creek was to continue as we always have: to logically and rigourously assess the situation and to think probabilistically. We recognized that there was a small risk that Home Capital’s equity value could be wiped out if drastic actions were taken by regulators in order to have the company ‘dealt with’. But what was far more likely was that constructive changes could be made in terms of management and the board, confidence would slowly restore, and while earnings in the near term would be sub-optimized, Home Capital’s very strong balance sheet would allow it to survive this crisis. After all, Home Capital’s book value, despite being impacted by current events, was still multiples above where its share price was trading.

    As it turns out, we were correct in our probabilistic assessment. Within a week of the HOOPP financing, Home Capital’s board underwent substantial changes with the addition of a number of very experienced financial industry executives. This new board has taken a series of steps to stabilize the business and restore confidence. First, the company entered into an arrangement to, if necessary, sell-on up to $2 billion of new residential mortgage originations to allow Home Capital to continue to originate and renew mortgages. In fact, very little has been done under this arrangement and with Home Capital’s deposit base stabilizing, the company may have no further use for it. Second, the company announced the sale of $1.2 billion of commercial mortgages at, essentially, par value, providing not only liquidity but evidence as to the quality of Home Capital’s book. Third, and most significantly, the company issued treasury shares to Berkshire Hathaway such that Berkshire is now a 20% shareholder of Home Capital (dropping Turtle Creek down to being the second largest shareholder). As a result of these steps, sentiment toward Home has improved substantially. Purchases of Home Capital GICs have rebounded to pre-crisis levels and the company’s deposit base has begun to grow again. Most recently, an experienced industry executive, Yousry Bissada, has been appointed Chief Executive Officer. We believe Mr. Bissada has the experience and industry profile to continue the job of rebuilding confidence in the company.

Page 2

Turtle Creek Q2 2017 Quarterly Manager Commentary

Since the start of the crisis at the end of April, we have had conversations about Home Capital with a large number of our investors. The most common question has been to ask what we have learned from this experience.

Rather than walking away with a number of new insights, instead, this experience has served to confirm some of our long held beliefs. For instance, we have always made note of the boards that govern our companies but recognize it is very difficult to assess their quality: how well they function, how hard working the directors are, the boardroom chemistry, just to name a few considerations. We have served on many public and private company boards in the past, and recognize that looking at the backgrounds of each director doesn’t help much in determining board effectiveness. It is difficult to know in advance just how well a board will behave in a crisis. On the face of it, Home Capital’s former board seemed capable enough. The crisis proved that assessment incorrect.

Home Capital’s crisis of confidence also provides a great example of how few investors are truly reflective and independent in their thinking – with most overreacting to every new rumour or innuendo. Coincidentally, through this period, we have been reading a book called ‘The Knowledge Illusion’ authored by two cognitive scientists. They point out that while as a group, humans have done amazing things, we are error prone and sometimes irrational. The fundamentally communal nature of intelligence and knowledge explains why we often assume we know more than we really do and why false beliefs are so hard to change. We were reminded of this fact almost daily as the Home Capital drama played out. If you have the time to read the book, we highly recommend it.

To be fair, we did gain one insight: we have a remarkable investor base. A year ago, we announced that we would soon be closing our flagship fund to additional capital. In the months that followed we received substantial new capital from both existing and new investors and closed the fund earlier this year. A few months later, Home Capital was the lead news story across the financial press and we weren’t sure how our new investors would react. As we said at the outset of this commentary, we think it is important that our investors develop a sound understanding of our investment approach. A key element of that understanding includes the reality that unit price volatility, at times, is inherent in managing a focused portfolio of mid-cap public companies. While we try our best to manage expectations regarding this volatility, it is our experience that, until an investor experiences a drop themselves, you don’t know how they will react. To our pleasant surprise, virtually all of our new investors have been remarkably understanding and supportive.

We have always believed in Benjamin Graham’s observation that in the short run the market is a voting machine but in the long run, it is a weighing machine. However, a company has to ensure it can withstand the negative short term ‘voting’ in order for the long term ‘weighing’ effect to take over. It seems only fitting then, that the most famous student of Ben Graham has become the largest shareholder of Home Capital – giving the company the time to prove the naysayers wrong.

Page 3 





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