Business context and reporting period
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE: HASI) filed this Form 10-Q for the quarter ended September 30, 2018. The company invests in and provides services to energy-efficiency, renewable-energy, and other sustainable-infrastructure projects, using equity, loans and receivables, real estate, and debt securities. It operates as a REIT.
At September 30, 2018, the on-balance-sheet portfolio was approximately $2.1 billion across more than 175 investments; managed assets, including assets held in unconsolidated securitization trusts, totaled $5.3 billion. Transactions completed were approximately $553 million in the quarter and $861 million in the first nine months.
Financial results and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $34.9 million, up 35% from $26.4 million | $98.6 million, up 27% from $78.5 million |
| Net income | $16.6 million, versus $8.0 million | $32.7 million, versus $27.6 million |
| Net income attributable to controlling stockholders | $16.5 million; diluted EPS $0.30 | $32.5 million; diluted EPS $0.60 |
| Core earnings (non-GAAP) | $19.6 million; $0.36 per diluted share | $54.7 million; $1.01 per diluted share |
| Net cash provided by operating activities | Not presented for the quarter | $29.8 million, versus $21.5 million |
Quarter revenue growth primarily reflected a $7.3 million increase in gains on sales of receivables and investments, principally from securitization activity; equity-method investment income also rose, partly due to an investee project company’s negotiated power-purchase-agreement settlement. For the nine-month period, gains on sales and fee income increased, while interest income from receivables declined.
Interest expense was $19.7 million for the quarter and $57.4 million for nine months, up from $17.6 million and $46.7 million, respectively. The company reported a 1.6% net investment margin for both periods in 2018, down from 2.5% in the comparable 2017 periods. Nine-month investing cash flow was negative $38.0 million (versus negative $271.2 million); financing cash flow was negative $13.0 million (versus positive $350.1 million). Cash, cash equivalents, and restricted cash totaled $96.9 million at period-end, including $34.4 million of cash and cash equivalents.
At September 30, total assets were $2.295 billion, total liabilities $1.649 billion, and stockholders’ equity $646.6 million. Debt to equity was approximately 2.4:1, compared with 2.2:1 at year-end 2017; approximately 77% of debt was fixed-rate. Reported debt included $289.3 million of credit facilities, $1.096 billion of non-recourse debt, and $146.7 million carrying value of convertible notes. Deferred funding obligations were $83.5 million.
Material changes versus the prior comparable period
- Quarter revenue increased 35% and net income more than doubled; nine-month revenue increased 27% and net income increased 18%.
- Higher securitization gains supported growth, with nine-month gains of $31.3 million versus $15.2 million. Securitized assets held in unconsolidated trusts rose to $3.3 billion from $2.7 billion at December 31, 2017.
- Interest expense increased as debt balances grew and the proportion of fixed-rate debt changed. Average debt cost was 4.8% for the nine-month period versus 4.6%; the reported net investment margin narrowed.
- Credit-facility borrowings increased from $69.9 million at year-end to $289.3 million on the balance sheet at quarter-end. Non-recourse debt decreased from $1.211 billion to $1.096 billion.
- Operating cash flow improved, while cash balances including restricted cash declined by $21.2 million from the start of the year.
Outlook, risks, contingencies, and unusual items
- Management reported a pipeline of more than $2.5 billion of potential debt and equity opportunities that could close over the next 12 months, but cautioned that there is no assurance they will be completed. No quantitative earnings or revenue guidance was provided.
- Management said it expected to increase use of securitization structures in the short to medium term in response to higher short-term rates and a flatter yield curve. It described available liquidity as adequate for short- and long-term needs and leverage as near its 2.5:1 target; fixed-rate debt was within its stated 60%–85% target range.
- In the third quarter, the company made a roughly $110 million subordinated mezzanine loan to a SunPower subsidiary at 12%, with contractual maturity in 2043 and a payment-in-kind feature if cash is insufficient. It already held approximately $308 million of senior debt in the related portfolio. Subsequent to quarter-end, it agreed to acquire a 49% interest in SunStrong for $10 million and entered into an additional mezzanine facility with a maximum limit of $32 million at 11.75%. It also provided guarantees, including a specified exposure that may reach $300 million and declines over time.
- Two commercial receivables totaling approximately $8 million were impaired and on non-accrual status following project revenue declines and a dispute over land leases. The company had received a $1.6 million payment and was pursuing legal claims; it recorded no loss allowance, citing expected recovery. Separately, an equity-method wind investment had an $8 million non-cash loss recorded in the first quarter. A hurricane-damaged U.S. Virgin Islands project involved an approximately $11 million investment; management expected insurance and other project assets to support recovery, but gave no assurance.
- The company reported no securitization credit losses in the first nine months, although approximately $1.1 million of payments to securitization trusts were more than 90 days past due. It reported no legal proceedings expected to have a material adverse effect and stated that it was in compliance with debt covenants.
- Key risks include refinancing and interest-rate exposure, illiquid assets, counterparty and project credit risk, commodity prices, weather and natural disasters, and changes in government policies, tax rules, or REIT qualification. A 50-basis-point LIBOR increase was estimated to add $0.4 million to quarterly interest expense on variable-rate borrowings, before any mitigating actions.
- The quarterly dividend was $0.33 per share, declared in September and paid in October. The company stated that REIT status requires annual distributions of at least 90% of REIT taxable income, subject to applicable rules.
Most important facts for investors to verify
- Whether securitization gains, transaction volumes, and the reported pipeline are repeatable and convert into sustainable recurring earnings and cash flows.
- The economics, priority of repayment, payment-in-kind terms, and guarantee exposure associated with SunStrong, including the post-quarter-end agreements.
- Collectability and legal status of the approximately $8 million impaired, non-accrual receivables and the recovery outlook for the hurricane-damaged project.
- Debt maturities, refinancing availability, covenant headroom, and the effect of interest-rate changes on funding costs and net investment margin.
- How the company’s non-GAAP core earnings reconcile to GAAP results and cash distributions, particularly given the different timing and measurement of equity-method investment income and cash returns.