HA Sustainable Infrastructure Capital, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. HASI invests in sustainable infrastructure through equity, project lending, real estate, securitizations and related services. It reported a portfolio of approximately $5.5 billion and managed assets of $11.5 billion, including assets in off-balance-sheet securitization trusts.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $89.9 million | $60.2 million | $233.3 million | $181.4 million |
| Net income | $21.6 million | $34.9 million | $59.8 million | $62.1 million |
| Net income attributable to controlling stockholders | $21.4 million | $34.5 million | $59.1 million | $61.4 million |
| Diluted earnings per share | $0.20 | $0.38 | $0.59 | $0.69 |
| Distributable earnings per share (non-GAAP) | $0.62 | $0.49 | $1.70 | $1.61 |
| Distributable net investment income (non-GAAP) | $58.8 million | $43.4 million | $159.9 million | $133.8 million |
| Operating cash flow | — | $92.3 million | $64.0 million |
- Q3 interest income increased 58% year over year, to $54.3 million, while interest expense rose 46%, to $43.3 million. For the nine-month period, interest income increased 49% and interest expense 42%.
- Q3 income from equity method investments declined to $2.8 million from $30.6 million; nine-month income declined to $27.4 million from $58.5 million. Management attributed the decrease principally to fewer tax attributes allocated to HASI under the HLBV accounting method.
- At September 30, total assets were $5.91 billion, total liabilities $3.81 billion and stockholders’ equity $2.10 billion. Commercial receivables were $2.71 billion, net of a $51 million credit-loss allowance; equity method investments were $2.56 billion.
- Debt was $3.66 billion, with a reported debt-to-equity ratio of 1.7 to 1, versus 1.8 to 1 at year-end 2022. Approximately 88% of debt was fixed-rate, within the company’s 75%–100% target range. The board-approved leverage limit was up to 2.5 to 1.
- Liquidity included $156 million of unrestricted cash, $355 million of unused capacity under the unsecured revolver and $50 million of available commercial-paper capacity. The company reported $170 million of cash, cash equivalents and restricted cash combined.
- For the nine months, investing activities used $1.42 billion, primarily for receivable and equity investments; financing activities provided $1.32 billion. The company issued $465 million of common stock and $403 million principal of 2028 exchangeable notes during the period.
Material changes and unusual items
- Revenue rose 49% in Q3, driven by higher interest income from a larger portfolio, increased securitization activity and higher gains on asset sales. Net income nevertheless fell 38%, reflecting lower equity-method income and higher expenses, partly offset by revenue growth and a tax benefit.
- HASI recorded a $9.8 million Q3 provision for losses on receivables and securitization assets, compared with a $2.5 million benefit in Q3 2022. The quarter’s allowance increase included new loans and commitments and a $3 million allowance related to estimated prepayments on certain securitization residual assets; management said the underlying credit quality of those securitized assets had not changed.
- In Q3, HASI amended certain non-recourse debt agreements and deconsolidated entities holding debt and pledged collateral. The retained interests were classified as equity-method investments. The company also recognized an approximately $19 million gain associated with deconsolidating land assets and related debt.
- Quarterly dividends were $0.395 per share in 2023, up from $0.375 in 2022. A further $0.395 dividend was declared after quarter-end, payable in January 2024.
- In the fourth quarter, the company adopted a Tax Benefits Preservation Plan intended to protect tax attributes, including approximately $465 million of NOLs and $21 million of tax credits reported at year-end 2022. The plan may trigger dilution for certain shareholders acquiring 5% or more, subject to its terms and exceptions.
Outlook, management commentary and risks
- Management reported a pipeline exceeding $5.0 billion of potential investments that could close over the next 12 months; approximately 49% was BTM, 36% grid-connected and the remainder fuels, transport and nature. The filing cautions that pipeline transactions may not close.
- HASI completed approximately $1.8 billion of transactions in the first nine months of 2023, compared with $944 million in the comparable 2022 period. Management cited the Inflation Reduction Act as a potential source of future investment opportunities.
- Management stated it had determined that revoking REIT status for tax year 2024 may be advisable and in the company’s best interests, subject to board approval. It believes an alternative tax structure could provide comparable tax efficiency; this remains a significant proposed change, not a completed election in this filing.
- Key risks include borrower and project credit performance, exposure to mezzanine lending, interest-rate and refinancing risk, illiquid assets, concentration by obligor or geography, commodity and environmental-attribute prices, and climate-related impacts. A 50-basis-point increase in benchmark rates was estimated to increase quarterly interest expense by approximately $568,000 on $454 million of floating-rate borrowings, before considering possible mitigation.
- The company reported no material litigation and stated it was in compliance with debt covenants. A guarantee connected to joint-venture financing had a maximum obligation of approximately $87 million, with maturity in February 2024; management considered the likelihood of performance remote and recorded no liability.
Important facts for investors to verify
- Whether the board approves the proposed 2024 REIT-status revocation, and the resulting tax and distribution implications.
- Credit performance and allowance adequacy for the $2.8 billion commercial receivables portfolio, including $1.4 billion of mezzanine loans to residential-solar-related entities and $464 million of loan-funding commitments.
- Execution, funding and returns on the large investment pipeline, including expected additional Lighthouse portfolio contributions of $192 million through 2024.
- Debt refinancing and interest-cost sensitivity, including the subsequent increase in the CarbonCount term loan by $165 million after quarter-end and the company’s fixed-rate and leverage targets.
- Whether distributable earnings and distributable net investment income, both non-GAAP measures, translate into sustainable cash available for dividends; they are not substitutes for GAAP earnings or operating cash flow.