HA Sustainable Infrastructure Capital, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company invests in renewable energy, energy efficiency and other sustainable infrastructure, using loans and receivables, equity investments, real estate and securitizations. Unless noted, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $40.8 million | $33.1 million |
| Interest income | $23.9 million | $17.7 million |
| Interest expense | $18.1 million | $15.4 million |
| Income from equity method investments | $16.6 million | $4.5 million |
| Net income | $24.4 million | $13.7 million |
| Net income attributable to controlling stockholders | $24.3 million | $13.6 million |
| Basic / diluted earnings per share | $0.36 / $0.35 | $0.22 / $0.21 |
| Net cash from operating activities | $11.7 million | $3.5 million |
Revenue rose about 23% and net income about 78% year over year. Higher interest income and fee income contributed to revenue growth; equity-method earnings were a major contributor to the increase in net income. Management attributed the equity-method increase primarily to co-investors’ realization of tax attributes, which increased the company’s earnings allocation under the HLBV method.
Net investment margin was 3.5%, versus 3.1% a year earlier; average interest spread was 2.7%, versus 2.1%. These are management-defined portfolio measures, not GAAP margins. Core earnings, a non-GAAP measure, were $30.2 million, or $0.43 per share, including the new expected-credit-loss provision; the company reported $30.8 million, or $0.44 per share, excluding that provision.
Balance sheet, cash flow and liquidity
- At March 31, 2020, total assets were $2.52 billion, total liabilities $1.49 billion and stockholders’ equity $1.04 billion. Cash and cash equivalents were $173.0 million; cash, cash equivalents and restricted cash totaled $200.3 million.
- Debt reported on balance sheet totaled about $1.44 billion: $633.3 million non-recourse debt, $504.7 million senior unsecured notes, $153.1 million credit facilities and $148.1 million convertible notes. The company reported leverage of 1.4 to 1, below its 2.5-to-1 limit, and fixed-rate debt of approximately 89%.
- Cash flow from investing activities was negative $45.5 million, including substantial equity-method investment funding; financing activities provided $127.5 million, including $114.8 million net proceeds from common-stock issuance. Cash increased by $93.7 million during the quarter.
- The company reported approximately $2.1 billion of on-balance-sheet Portfolio assets and $6.2 billion of Managed Assets, including approximately $4.1 billion held in unconsolidated securitization trusts. Managed Assets is a non-GAAP measure.
- Revolving credit facilities had a combined maximum commitment of $450 million and mature in July 2023. The company said it was in compliance with debt covenants at quarter-end.
Material changes and notable items
- Effective January 1, 2020, the company adopted the expected-credit-loss standard, Topic 326. Adoption resulted in an approximately $17 million pre-tax cumulative adjustment to retained earnings. The quarter-end receivables allowance was $26 million, including a $1 million increase during the quarter, primarily reflecting potential COVID-19 effects on commercial receivables.
- Transactions completed were approximately $186 million, down from approximately $319 million in Q1 2019. The company reported a pipeline exceeding $2.5 billion, but cautioned that there is no assurance transactions will close.
- Quarterly dividends were raised to $0.34 per share from $0.335. The $0.34 dividend was paid April 10, 2020.
- After quarter-end, the company issued $400 million of senior unsecured notes bearing 6.00% interest and maturing in 2025. It also raised an additional $35 million through its at-the-market equity program through April 2020.
Outlook, risks and contingencies
The filing gives no specific full-year earnings or investment guidance. Management said Q1 results were not materially adversely affected by COVID-19, reported no material loan delinquencies, and said liquidity was ample to continue operations and invest. It also emphasized that the pandemic’s duration and ultimate economic, market and portfolio effects were uncertain and could adversely affect business, asset values, cash flows, originations and financing access.
Other material risks include borrower and counterparty credit deterioration, illiquid assets, refinancing and interest-rate exposure, commodity-price effects on some projects, and disruption to construction or project operations. A 50-basis-point increase in LIBOR was estimated to increase quarterly interest expense on the $153 million of variable-rate borrowings by approximately $0.2 million. The company disclosed a guarantee related to a joint-venture financing with a maximum obligation of approximately $60 million; a separate agreement provides for the other partner to reimburse 15% of that obligation. Management reported no legal proceedings expected to have a material adverse effect and no COVID-19-specific balance-sheet contingency as of March 31.
Important facts for investors to verify
- Whether the $16.6 million of equity-method income, materially affected by tax-attribute allocations and HLBV accounting, translates into recurring cash returns; compare GAAP earnings with cash distributions and core earnings.
- How COVID-19 affects commercial receivables, the $26 million credit-loss allowance, borrower payment performance and project operations in subsequent quarters.
- Use of proceeds and liquidity effects of the post-quarter $400 million notes, including their 6.00% coupon, and the extent of any subsequent revolving-credit repayment or re-borrowing.
- Progress and realized economics of the more-than-$2.5 billion pipeline, given lower Q1 transaction volume and no assurance of completion.
- Performance and liquidity exposure from securitization residual assets, off-balance-sheet managed assets, and the approximately $60 million joint-venture guarantee.
- Dividend sustainability alongside REIT distribution requirements, investment needs and reliance on debt and equity capital.