HA Sustainable Infrastructure Capital, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The company invests in debt and equity tied to sustainable infrastructure, including energy efficiency, renewable energy, and related land leases. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
- Q3 revenue: $26.4, up 37% from $19.0 in Q3 2016. Revenue included $15.4 of financing-receivable interest, $5.3 of rental income, $3.5 of gains on sales, $1.3 of investment interest, and $0.9 of fee income.
- Q3 earnings: Net income attributable to controlling stockholders was $7.9, or $0.14 per share, versus $3.3, or $0.07 per share, a year earlier. Equity-method investment income rose to $6.9 from $1.3, while interest expense increased to $17.6 from $10.6.
- Nine-month results: Revenue was $78.5 versus $61.3; net income attributable to controlling stockholders was $27.5 versus $10.2; and earnings per share were $0.52 versus $0.23. Equity-method income was $19.4 versus $2.7.
- Margins: Net investment margin was 2.5% in both Q3 and the first nine months, compared with 3.3% and 3.1%, respectively, in the comparable 2016 periods. The filing attributes pressure principally to higher borrowing costs and interest rates. The measure excludes equity-method investment earnings and related debt.
- Assets and equity: Total assets were $2.31 billion at September 30, versus $1.75 billion at December 31, 2016. Stockholders’ equity was $654.7, versus $574.3. On-balance-sheet portfolio assets were approximately $2.0 billion; managed assets, including securitized assets, were $4.57 billion.
- Debt and leverage: Debt reported for the company’s leverage calculation was $1.40 billion, compared with $975 million at year-end 2016; debt-to-equity leverage rose to 2.1:1 from 1.7:1. Management’s target leverage was 2.5:1. About 71% of debt was fixed-rate, within its stated target range of 60%–85%. Balance-sheet debt included $1.08 billion of non-recourse debt, $174.7 million of credit facilities, and $145.9 million of convertible notes.
- Liquidity: Cash and cash equivalents were $90.8; cash, cash equivalents, and restricted cash totaled $159.5. Operating cash flow was $21.5 for the first nine months, versus $51.0 in 2016; investing cash outflow was $271.2 versus $78.2; and financing cash inflow was $350.1 versus $45.7. Investing outflows included $230 million for equity-method investments and $143 million for real estate purchases.
Material changes and capital activity
- Total assets grew substantially, including increases in equity-method investments ($540.2 versus $363.3 at year-end 2016), real estate ($313.6 versus $172.3), and investments ($130.5 versus $58.1). Financing receivables were $1.06 billion, relatively close to the $1.04 billion year-end balance.
- The company issued $150 million of 4.125% convertible senior notes due 2022, receiving $145 million net of issuance costs. The notes are unsecured and convertible into common shares; the initial conversion rate equates to approximately 5.5 million shares.
- During the nine months, it raised approximately $98 million net from common-stock issuances, including a March public offering and ATM sales. It paid dividends and distributions of $50.6 million in the cash-flow statement. The quarterly dividend declared in September was $0.33 per share.
- Transactions completed totaled approximately $751 million for the first nine months, compared with $712 million in 2016; Q3 volume was approximately $62 million versus $242 million. The company reported a pipeline exceeding $2.5 billion for potential closings over the following 12 months, with no assurance that opportunities would close.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management said it expected to continue using debt, equity, and securitizations to finance growth and considered available liquidity adequate for anticipated needs. It also expected to add debt over time toward its target leverage.
- Two financing receivables totaling approximately $10 million became past due, were deemed impaired, and placed on non-accrual. The borrower sought to renegotiate or terminate land leases after project revenue declined; the company filed a legal claim in July 2017. It recorded no loss allowance, citing expected recovery, including possible recovery through collateral. Recovery is uncertain.
- A solar project in the U.S. Virgin Islands associated with an equity-method investment was materially damaged by hurricanes. The company’s investment was approximately $10 million; management believed insurance would be sufficient to rebuild or recover the investment, but gave no assurance.
- SunPower, which services certain residential solar lease portfolios, had disclosed a covenant issue under another loan; it later amended that loan and removed the leverage covenant. The company said the bankruptcy-remote project entities were performing as expected. Its lenders could apply approximately $1 million of quarterly cash flow after debt service to reduce principal, and management continued monitoring the situation.
- Key risks include credit deterioration, borrower and project concentration, asset illiquidity, refinancing and interest-rate exposure, commodity prices, changes in government policy, and maintaining REIT and Investment Company Act status. A 50-basis-point LIBOR increase was estimated to add about $0.5 million of quarterly interest expense on $411 million of variable-rate borrowings, before any mitigating actions.
- Management reported no material adverse legal proceedings other than ordinary-course, non-material matters; it did disclose the claim concerning the two past-due receivables. The company reported compliance with credit-facility covenants and effective disclosure controls.
Important facts for investors to verify
- Whether the approximately $10 million impaired, non-accrual receivables are recovered and whether any allowance or further legal action becomes necessary.
- The insurance outcome and recovery timeline for the hurricane-damaged project and the company’s approximately $10 million investment.
- Performance and servicing continuity of the SunPower-related solar portfolios, including the lender cash sweep and collateral performance.
- Whether the $2.5 billion-plus pipeline converts into completed transactions, and the returns, financing terms, and credit quality of resulting investments.
- How rising interest expense and leverage affect net investment margin, liquidity, and dividend capacity; also distinguish GAAP net income from management’s non-GAAP core earnings.
- The funding and repayment schedule for deferred funding obligations ($225.8 million) and debt maturities, as well as the dilution potential of the convertible notes and future equity issuance.