Business context and reporting period
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE: HASI) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. It invests in energy efficiency, renewable energy and other sustainable infrastructure, using receivables, equity investments, real estate and securitizations. At quarter-end, its on-balance-sheet Portfolio was approximately $2.1 billion; managed assets, including assets in unconsolidated securitization trusts, totaled $6.2 billion.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $48.6 million | $31.3 million | $89.4 million | $64.4 million |
| Net income | $12.1 million | $12.8 million | $36.5 million | $26.5 million |
| Net income attributable to controlling stockholders | $12.0 million | $12.7 million | $36.3 million | $26.4 million |
| Diluted earnings per share | $0.16 | $0.19 | $0.51 | $0.41 |
| Operating cash flow | Not separately presented for quarter | $39.6 million | $20.5 million | |
| Investing cash flow | Not separately presented for quarter | $13.9 million | $90.2 million | |
| Financing cash flow | Not separately presented for quarter | $409.9 million | $(87.7) million |
Q2 revenue growth reflected higher interest income and gains on asset sales, partly offset by lower fee income. Six-month growth also reflected increased interest income and asset-sale gains. Q2 net income declined year over year as equity-method investment income fell to a $0.6 million loss from $7.6 million of income; six-month equity-method income rose to $16.0 million from $12.1 million.
At June 30, cash and cash equivalents were $541.8 million, compared with $6.2 million at year-end 2019. Total assets were $2.84 billion and stockholders’ equity was $1.07 billion. Debt was approximately $1.72 billion, with a reported debt-to-equity ratio of 1.6:1 (versus 1.5:1 at year-end). Approximately 98% of debt was fixed-rate. The company reported a 2.3% Q2 net investment margin, down from 3.1% a year earlier; for the six-month period it was 2.9%, versus 3.1%.
Material changes versus prior comparable periods
- Q2 revenue increased 58%, while net income decreased 8%; six-month revenue increased 39% and net income increased 33%.
- Q2 interest expense rose to $21.7 million from $14.9 million, reflecting higher average borrowings and borrowing costs. The six-month expense increased to $39.8 million from $30.3 million.
- The company recorded a $2.5 million Q2 provision for receivable losses and a $3.2 million provision for the six months; none was recorded in the comparable 2019 periods. Adoption of the expected-credit-loss standard on January 1, 2020 reduced retained earnings by approximately $14.1 million, net of tax.
- Transaction volume was approximately $178 million in Q2 and $364 million for the first half, compared with $204 million and $523 million, respectively, in 2019.
- In April, the company issued $400 million principal amount of 6.00% senior unsecured notes due 2025. It also raised approximately $159 million net from common-stock issuances in the first half. Senior unsecured notes outstanding increased to $900 million from $500 million at year-end.
Outlook, commentary, risks and unusual items
Management said first- and second-quarter results were not materially adversely affected by COVID-19, but emphasized that the pandemic creates significant uncertainty for operations, markets, counterparties, financing and asset values. It cited no material loan delinquencies at quarter-end and said the cost-saving attributes of projects may support borrower payments. It nevertheless increased its expected-loss allowance partly for anticipated pandemic effects and warned that further disruption could adversely affect results and cash flows.
Management reported unrestricted cash of $542 million and described liquidity as substantial, supported by the equity issuance, the $400 million notes issuance and continued access to securitization markets. The company stated that it expected identified liquidity sources to meet investment, debt-service, operating and distribution needs. It did not provide quantified full-year earnings guidance. Its pipeline of potential transactions was more than $2.5 billion, but management cautioned that proposed transactions may not close.
After quarter-end, on July 1, 2020, HASI invested $150 million in a renewable-energy partnership and agreed to invest up to approximately $540 million, subject to additional projects being acquired. The contemplated portfolio comprises 13 wind and solar projects with expected contracted cash flows; the company expects equity-method accounting. HASI also disclosed a guarantee of up to approximately $60 million relating to a joint-venture financing, with the partner responsible for 15% of that obligation to HASI.
Other risks include credit exposure, including growing mezzanine and equity investments; asset illiquidity and geographic or obligor concentration; interest-rate and refinancing risk; low energy prices and commodity exposure; project delays; and the need to maintain REIT status and its Investment Company Act exemption. Two commercial receivables with a combined carrying value of about $8 million were fully reserved and remained on non-accrual. The filing reported no legal proceedings expected to have a material adverse effect and stated that the company was in compliance with debt covenants.
Important facts for investors to verify
- How the $29 million receivables allowance, including COVID-related assumptions and unfunded commitments, changes as economic conditions and borrower performance evolve.
- Whether the July renewable-energy partnership reaches its expected scale and contracted cash flows, and how the up-to-$540 million investment and associated guarantees affect liquidity and returns.
- Available borrowing capacity, cash requirements, and repayment or refinancing needs across recourse, non-recourse and unsecured debt; also monitor covenant compliance and the 1.6:1 leverage ratio.
- The sustainability of reported earnings: GAAP Q2 equity-method income was negative, while company-defined core earnings adjusted equity-method results and other items. Core earnings is non-GAAP and is not a measure of cash available for distributions.
- Whether the $0.34 quarterly dividend is supported by taxable income and cash generation, given REIT distribution requirements and the company’s investment and financing needs.