HA Sustainable Infrastructure Capital, Inc. (Hannon Armstrong; NYSE: HASI) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; balance-sheet comparisons are against December 31, 2017. Dollar amounts are in millions unless otherwise stated.
Business context
The company invests in and provides services for energy efficiency, renewable energy and other sustainable infrastructure projects. Its portfolio includes equity-method investments, government and commercial receivables, real estate and debt securities. It also earns income from securitizations, advisory and asset-management services.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $35.8 | $28.3 | $63.7 | $52.1 |
| Interest expense | $19.0 | $15.4 | $37.7 | $29.1 |
| Income from equity-method investments | $10.6 | $8.4 | $8.3 | $12.5 |
| Net income attributable to controlling stockholders | $17.3 | $12.3 | $16.0 | $19.5 |
| GAAP diluted EPS | $0.32 | $0.23 | $0.29 | $0.38 |
| Core earnings per share (non-GAAP) | $0.39 | $0.34 | $0.65 | $0.66 |
- Q2 revenue rose 27% year over year, led by higher securitization gains and fee income; six-month revenue increased 23%.
- For the six-month period, total assets were $2.218 billion, total liabilities $1.572 billion and stockholders’ equity $646.4 million. Cash and cash equivalents were $41.8 million; cash, cash equivalents and restricted cash totaled $110.1 million.
- Six-month operating cash flow was $14.5 million and investing cash flow was $40.3 million; financing cash flow was negative $62.9 million. Cash, cash equivalents and restricted cash declined $8.0 million from the start of the year.
- Debt for leverage reporting was $1.449 billion, with a 2.2-to-1 debt-to-equity ratio, below the company’s 2.5-to-1 target. Fixed-rate debt was approximately 89% of total debt, above its stated 60%–85% target range. The $103 million revolving credit facility matures in July 2019.
- The six-month average net investment margin fell to 1.5% from 2.5% a year earlier; average interest spread declined to 0.8% from 1.1%. Average debt cost increased to 4.7% from 4.6%.
Changes versus prior comparable periods
- Q2 GAAP net income rose to $17.4 million from $12.4 million. Higher revenue and equity-method income more than offset increased expenses.
- Six-month GAAP net income declined to $16.1 million from $19.7 million. Revenue growth was offset by higher expenses and a $5 million decrease in equity-method income, including a project-level write-down recognized in Q1.
- Interest expense increased 27% in Q2 and 31% for the six-month period, primarily due to higher average borrowings and interest rates. Receivables interest income declined, while rental income and investment income increased.
- Transactions completed were approximately $200 million in Q2 and $308 million for the six months, compared with approximately $400 million and $690 million, respectively, in 2017. Managed assets nevertheless increased to $4.916 billion from $4.736 billion at year-end 2017.
Outlook, risks and unusual items
- Management reported a pipeline exceeding $2.5 billion of potential debt and equity opportunities that could close within 12 months, but cautioned that there is no assurance they will be completed.
- Management expected to increase use of off-balance-sheet securitizations in the short to medium term amid a flattening yield curve. It stated that identified liquidity sources were expected to meet short- and long-term needs.
- Q2 equity-method income included one-time HLBV allocations associated with tax-law changes. The company recognized an $8 million non-cash HLBV loss in Q1 on a wind investment; it reported no further write-down in Q2 and carried that investment at $15 million.
- An approximately $8 million balance of two past-due wind-project receivables was deemed impaired and placed on non-accrual. The company is pursuing legal claims and recorded no allowance, citing expected recovery from project cash flows. A separate investment associated with a hurricane-damaged U.S. Virgin Islands solar project had a carrying exposure of approximately $11 million; management expected insurance and project assets to support recovery, without assurance.
- The company reported no securitization credit losses in the six-month periods presented. Its $62 million of securitization residual and servicing assets remain exposed to credit, prepayment and interest-rate risks.
- Interest-rate exposure remains relevant: a 50-basis-point LIBOR increase was estimated to raise quarterly expense on $159 million of variable-rate borrowings by $0.2 million. Risks also include refinancing, illiquid assets, obligor concentration, credit deterioration, commodity prices and changes to government policy.
- SunPower-related loan terms allow approximately $1 million of cash flow after principal and interest each quarter to be applied to reduce one loan’s balance. Management reported compliance with credit-facility covenants. It reported no legal proceedings likely to have a material adverse effect and said disclosure controls were effective.
Important facts for investors to verify
- Whether the $2.5 billion pipeline converts to funded investments and whether transaction volume recovers.
- How higher funding costs and debt levels affect net investment margin, earnings and dividend coverage.
- Progress on the impaired wind receivables, the wind investment recovery, and the hurricane-damaged solar project.
- Performance and valuation of securitization residual assets, and the company’s reliance on off-balance-sheet financing.
- Terms and refinancing plans for the revolving credit facility before its July 2019 maturity, alongside the 89% fixed-rate debt mix and stated leverage targets.
- Core earnings are a company-defined non-GAAP measure and are not cash flow; compare them with GAAP results and cash distributions.