Business context and reporting period
Hannon Armstrong Sustainable Infrastructure Capital, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2016. The company finances energy-efficiency and renewable-energy projects through debt and equity investments and operates as a REIT.
At quarter-end, its on-balance-sheet portfolio was approximately $1.4 billion and managed assets, including assets in unconsolidated securitization trusts, were $3.46 billion. The portfolio included about $400 million of energy-efficiency investments and $972 million of renewable-energy transactions.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $21.8 million | $13.5 million | $42.3 million | $27.4 million |
| Net income | $3.8 million | $1.5 million | $7.0 million | $3.6 million |
| Net income attributable to controlling shareholders | $3.7 million | $1.5 million | $6.9 million | $3.6 million |
| Diluted earnings per share | $0.09 | $0.04 | $0.16 | $0.10 |
- Revenue grew 61% in the quarter and 54% for the six-month period. Higher financing-receivable interest income and securitization-related gains were key contributors.
- Investment interest expense rose to $11.0 million in Q2 from $6.1 million, and to $22.3 million for the first half from $12.3 million. Management cited higher average borrowings and more fixed-rate debt.
- Net investment margin was 3.2% for Q2 versus 3.4% a year earlier, and 2.9% for the first half versus 3.4%.
- Core Earnings, a company-defined non-GAAP measure, were $12.7 million, or $0.32 per share, for Q2 and $24.9 million, or $0.64 per share, for the first half. The filing cautions that this measure is not a substitute for GAAP net income or operating cash flow.
Cash flow, debt and liquidity
- For the six months ended June 30, operating activities provided $10.1 million, investing activities used $8.6 million, and financing activities used $24.8 million. Cash and cash equivalents fell $23.4 million to $19.3 million.
- At June 30, total assets were $1.48 billion and stockholders’ equity was $502.2 million. Credit-facility borrowings were $245.6 million and nonrecourse debt was $624.0 million. Management reported total debt of $870 million and debt-to-equity leverage of 1.7:1; this debt measure excludes off-balance-sheet securitizations.
- The revolving credit facility had a $500 million limit on borrowings outstanding at one time, with maximum total advances of $1.5 billion, and a July 2019 termination date. The company reported compliance with applicable financial covenants.
- Approximately 70% of reported debt was fixed-rate, at the upper end of the company’s stated 50%–70% target range. Management estimated that a 50-basis-point rise in LIBOR would increase quarterly interest expense on $257 million of variable-rate borrowings by $0.3 million.
- The company raised approximately $91 million net in a June public stock offering and about $1 million through its ATM program in Q2. It declared a $0.30-per-share dividend payable July 14, 2016.
Material changes, outlook and risks
- Transactions completed were approximately $257 million in Q2 and $470 million in the first half. The company held about 40% of its 2016 transactions on balance sheet and securitized about 60%, a higher securitization share than historically, to reduce funding needs.
- The company reported a pipeline exceeding $2.5 billion of potential debt and equity opportunities that could close over the next 12 months, but cautioned that completion is not assured. No specific earnings or revenue guidance was provided.
- Management cited growth in financing receivables, real estate, and securitization gains as revenue drivers; higher borrowing costs and staffing expenses partly offset that growth. A completed wind-project foreclosure and sale returned the full value of a $13 million debt investment and generated a $0.8 million gain.
- Credit indicators included no impaired or nonaccrual financing receivables or leases, no provision for credit losses, and no securitization credit losses or material delinquencies during the periods reported. The company nevertheless faces borrower, project, counterparty and concentration risks, particularly as it expands commercial and equity investments.
- Key disclosed exposures include interest-rate and refinancing risk, asset illiquidity, energy commodity prices, and dependence on government policies and financing markets. The company also depends on maintaining REIT qualification and its Investment Company Act exemption. Management reported no material litigation and effective disclosure controls as of June 30, 2016.
- The company stated that it believed identified liquidity sources would meet short- and long-term needs. However, REIT distribution requirements limit retained earnings, and future dividends remain subject to board discretion and operating results.
Important facts for investors to verify
- Whether portfolio growth and securitization gains can sustain earnings as interest expense rises and net investment margin narrows.
- How much usable borrowing capacity remains under the credit facility and how the company will fund its pipeline and future distributions.
- The credit quality, cash distributions and expected returns of renewable-energy equity investments, including the impact of their nonrecourse financing and partnership allocation structures.
- Whether the pipeline converts into completed transactions on acceptable terms, and whether the increased use of securitizations persists.
- The potential effects of interest rates, commodity prices, policy changes and asset illiquidity on portfolio values, funding costs and cash available for dividends.