HA Sustainable Infrastructure Capital, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. The company finances energy efficiency, renewable energy and other sustainable infrastructure through loans, equity investments, real estate and securitizations; it elected REIT tax treatment.
Financial and operating highlights
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $105.6 million | $81.2 million |
| Net income attributable to controlling stockholders | $30.9 million; $0.57 per diluted share | $14.7 million; $0.32 per diluted share |
| Core earnings, non-GAAP | $66.1 million; $1.27 per share | $50.5 million; $1.20 per share |
| Cash provided by operating activities | $11.7 million | $56.9 million |
| Year-end total assets | $2.25 billion | $1.75 billion |
| Year-end total equity | $642.8 million | $574.3 million |
| Year-end cash, cash equivalents and restricted cash | $118.2 million | $59.1 million |
| Managed assets, non-GAAP | $4.74 billion | $3.93 billion |
- Interest expense increased to $65.5 million from $45.2 million. Management attributed the increase mainly to higher average debt balances and more fixed-rate debt.
- Average portfolio yield was 5.6%, down from 5.8%; average debt cost rose to 4.6% from 4.3%. Interest spread narrowed to 1.0% from 1.5%, and net investment margin declined to 2.2% from 2.9%.
- Year-end debt for the company’s leverage calculation was $1.428 billion, with leverage of 2.2-to-1 versus 1.7-to-1. Fixed-rate debt was 92% of total debt, above the company’s stated 60%–85% target range. The leverage target is at or below 2.5-to-1.
- Cash flow from investing activities was a $297.9 million use; financing activities provided $345.2 million. Financing included $150 million of convertible notes and approximately $97 million net proceeds from common-stock issuance.
- Dividends declared were $1.32 per share for 2017, versus $1.23 for 2016. The quarterly dividend was $0.33 throughout 2017, compared with $0.30 in the first three quarters of 2016.
Changes versus the prior comparable period
- Revenue increased 30%; net income attributable to controlling stockholders more than doubled. Higher interest and rental income reflected portfolio growth; securitization gains also rose.
- Income from equity-method investments increased to $22.3 million from $6.1 million, contributing substantially to GAAP earnings growth. Core earnings adjusts this GAAP figure using the company’s estimate of economic return from those investments.
- Transactions completed were approximately $972 million, down from $1.064 billion in 2016, while the year-end balance-sheet portfolio grew to approximately $2.0 billion from $1.6 billion. Managed assets rose to $4.74 billion from $3.93 billion.
- Operating cash flow fell to $11.7 million from $56.9 million; the filing cites noncash securitization gains and changes in receivables held for sale and equity-method investment adjustments among the factors affecting cash conversion.
- Debt increased and its mix shifted toward fixed rates. The company issued $150 million of 4.125% convertible senior notes due 2022 and refinanced or added non-recourse financings.
Fourth-quarter results
For the three months ended December 31, 2017, revenue was $27.1 million, expenses were $25.8 million, and net income attributable to controlling stockholders was $3.4 million, or $0.06 per share. In fourth-quarter 2016, those figures were $19.9 million, $18.8 million and $4.4 million, or $0.09 per share. The filing does not provide a single stated explanation for the year-over-year quarterly earnings decline; equity-method income was $2.9 million versus $3.4 million.
Outlook, risks and unusual items
- Outlook: Management described long-term market opportunities as favorable, citing state and local support, corporate renewable-energy commitments, improving renewable-energy economics and energy-resiliency needs. It gave no specific earnings or revenue guidance. The pipeline exceeded $2.5 billion, but the company cautioned that transactions may not close.
- Policy and tax: Management identified potential effects from the Tax Cuts and Jobs Act, the proposed repeal of the Clean Power Plan and the 30% tariff on certain solar imports, alongside other changes in federal policy. It believed these could slow near-term renewable-market growth, while maintaining a positive longer-term view. The company was still evaluating certain TCJA effects.
- Portfolio matters: A solar project in the U.S. Virgin Islands was materially damaged by hurricanes; the company believed insurance would be sufficient to rebuild or recover its approximately $10 million investment, but gave no assurance. A separate $25 million wind investment lacked a PPA and had operating issues; the sponsor indicated it expected to record a material impairment. The company anticipated that a portion could be allocated to it in the following quarter under the HLBV method and that the allocation could be material.
- Credit and concentration: Two commercial receivables totaling approximately $10 million were past due, impaired and placed on non-accrual. The company received $1.6 million in January 2018 and continued pursuing legal claims; it had not recorded an allowance at year-end. It reported no provision for credit losses in 2017 and no securitization credit losses in 2015–2017.
- Key risks: Dependence on government incentives and regulation; interest-rate, refinancing and liquidity risks; competition and potentially tighter investment terms; counterparty/project performance and credit losses; commodity prices and contract expirations; weather and equipment events; illiquid asset valuations; and maintaining REIT qualification and the Investment Company Act exemption. REIT qualification has added uncertainty around whether certain fixture-secured receivables meet tax rules for real property.
- Reporting and legal: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The company reported no legal proceedings likely to have a material adverse effect.
Important facts for investors to verify
- Review the sustainability and cash realization of the $22.3 million GAAP equity-method earnings, the $42.7 million core-earnings adjustment for those investments, and the $89.7 million of cash distributions received.
- Track the wind investment’s expected impairment allocation and the recovery, payment status and litigation outcome for the two delinquent land-lease receivables.
- Assess debt growth, refinancing maturities, covenants and the effect of narrowing investment spreads; compare leverage and fixed-rate debt with management’s targets.
- Evaluate liquidity and dividend coverage, noting that operating cash flow was well below net income and that REIT distribution requirements may constrain retained capital.
- Monitor the company’s REIT qualification analysis for fixture-secured receivables, as well as the market and financing effects of TCJA provisions, solar tariffs and other policy changes.
- Distinguish GAAP results from non-GAAP core earnings and managed assets; confirm the definitions and assumptions used before comparing them with other issuers.