HA Sustainable Infrastructure Capital, Inc. (HASI) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company invests in energy efficiency, renewable energy, and other sustainable infrastructure, using loans, equity investments, real estate, and securitizations. The filing was signed November 6, 2020.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $48.6 million | $38.8 million | $138.0 million | $103.3 million |
| Interest expense | $26.1 million | $16.6 million | $65.9 million | $46.9 million |
| Income from equity-method investments | $16.5 million | $6.0 million | $32.5 million | $18.1 million |
| Net income | $21.3 million | $9.2 million | $57.7 million | $35.7 million |
| Net income attributable to controlling stockholders | $21.2 million | $9.1 million | $57.5 million | $35.5 million |
| Diluted EPS | $0.28 | $0.13 | $0.78 | $0.54 |
| Operating cash flow | Not presented quarterly | $51.9 million | $31.6 million |
- Revenue drivers: Q3 revenue rose 26%, mainly from higher interest income on a larger, higher-yielding receivables portfolio and increased securitization gains. Nine-month revenue rose 34%. Gain on sale of receivables and investments was $13.6 million for Q3 and $34.4 million for the nine months.
- Expenses and returns: Q3 total expenses increased 17% to $41.5 million; nine-month expenses increased 26% to $109.9 million. Higher borrowing costs and compensation contributed to the increase. The company reported no conventional operating margin; reported income before equity-method investment results was $7.1 million in Q3 and $28.1 million for the nine months.
- Supplemental measures: Core earnings were $25.3 million ($0.33 per share) in Q3, essentially unchanged in dollars from Q3 2019, and $82.5 million ($1.12 per share) for nine months, up from $66.0 million ($1.01 per share). These are non-GAAP measures and are not substitutes for GAAP income or cash flow.
- Cash flows: Nine-month investing cash flow was a use of $138.2 million, including substantial equity-method contributions; financing cash flow provided $885.3 million, principally from debt and equity issuance. Cash and cash equivalents were $881.5 million at quarter-end, versus $6.2 million at December 2019.
Balance sheet, portfolio, and financing
- Total assets were $3.34 billion and stockholders’ equity was $1.10 billion at September 30, 2020. The reported leverage ratio was 2.0:1, compared with 1.5:1 at year-end 2019; the company’s stated limit was 2.5:1. Approximately 99% of consolidated debt was fixed-rate or hedged, within its 75%–100% target range.
- Consolidated debt was approximately $2.19 billion by the company’s leverage calculation: $1.28 billion of senior unsecured notes, $289 million carrying value of convertible notes, $600 million carrying value of non-recourse debt, and $23 million of credit facilities. Non-recourse debt principal was reported as approximately $613 million. The $450 million combined revolving credit facilities mature in July 2023; $23 million was drawn at quarter-end. The company reported covenant compliance.
- The on-balance-sheet portfolio was approximately $2.2 billion across more than 205 assets, with a weighted-average remaining life of about 16 years, excluding match-funded transactions. Managed assets, including assets in unconsolidated securitization trusts, were $6.43 billion. Unlevered portfolio yield was 7.7%, versus 7.6% at year-end 2019.
- The receivables allowance was $31 million at quarter-end. The company adopted the expected-credit-loss standard (Topic 326) on January 1, 2020 and recorded an approximately $17 million pre-tax cumulative adjustment to retained earnings. It cited new commitments and, to a lesser extent, possible COVID-19 effects in subsequent reserve increases. Two commercial receivables totaling about $8 million remained on non-accrual and were fully reserved.
- During the nine months, HASI raised about $188 million net from common stock issuances, issued $775 million principal amount of senior notes and $144 million of 0% convertible notes, and paid $74 million of dividends and distributions in cash. The quarterly dividend declared in August was $0.34 per share.
Material changes, outlook, and risks
- Transaction volume was approximately $716 million in Q3 and $1.1 billion for the nine months, versus $287 million and $810 million, respectively, in 2019. Management reported a pipeline exceeding $2.5 billion, but cautioned that transactions may not close.
- In July, HASI invested about $150 million in Jupiter Equity Holdings and expected to invest approximately $540 million in total, subject to additional project contributions. The contemplated portfolio comprises 13 wind and solar projects; future funding and project timing are not assured.
- Management said 2020 results had not been materially adversely affected by COVID-19 as of the filing and reported no material loan delinquencies. It nevertheless emphasized significant uncertainty around economic conditions, project construction and operations, borrower payments, financing markets, securitizations, and asset values. The remote workforce had not materially affected day-to-day operations.
- No specific earnings or revenue guidance was provided. Management stated it believed liquidity was sufficient for investments, debt service, operations, and distributions. Future results remain dependent on investment originations, financing access and costs, credit performance, securitization activity, interest rates, energy prices, and government policies. REIT qualification requires annual distributions of at least 90% of REIT taxable income, subject to applicable rules.
- Other notable exposure: a guarantee relating to a joint-venture financing had a maximum obligation of approximately $60 million and was repayable at maturity in February 2021; a separate agreement provides for the other partner to reimburse 15%. The filing reported no litigation expected to have a material adverse effect.
Key facts for investors to verify
- How recurring earnings and cash distributions compare with reported equity-method income, which is affected by tax allocations and HLBV accounting; review the company’s core-earnings reconciliation alongside GAAP results.
- Whether the $2.5 billion-plus pipeline converts to funded transactions, and whether the Jupiter investment reaches its expected scale and project schedule.
- Changes in credit quality, expected-loss allowances, borrower performance, and the fully reserved $8 million of non-accrual receivables as pandemic-related conditions evolve.
- Debt costs, refinancing needs, leverage, covenant headroom, and the company’s ability to sustain liquidity and distributions while funding portfolio growth.
- Potential exposure under the $60 million guarantee and the timing and amount of any reimbursement from the joint-venture partner.