HA Sustainable Infrastructure Capital, Inc. quarterly report, Q3 FY2016

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HA Sustainable Infrastructure Capital, Inc. — Q3 2016 Form 10-Q

Reporting period: Three and nine months ended September 30, 2016. Financial statement amounts are in thousands unless noted. The company provides debt and equity financing for energy efficiency and renewable energy projects and operates as a REIT.

Financial performance and position

  • Revenue: Q3 revenue was $19.0 million, up 27% from $15.0 million. Nine-month revenue was $61.3 million, up 44% from $42.5 million. Growth reflected larger financing-receivable and real estate balances, higher securitization and investment-sale gains, and higher rental income.
  • Profit and EPS: Q3 net income attributable to controlling shareholders was $3.3 million, versus $2.1 million; diluted EPS was $0.07 versus $0.06. Nine-month attributable net income was $10.2 million versus $5.7 million; diluted EPS was $0.23 versus $0.16. Equity-method income was $1.3 million in Q3 and $2.7 million year to date, compared with $0.2 million and a $0.2 million loss, respectively, in 2015.
  • Non-GAAP Core Earnings: $12.5 million, or $0.29 per share, in Q3 and $37.4 million, or $0.92 per share, for nine months, compared with $8.5 million, or $0.26, and $24.0 million, or $0.79, in 2015. The company cautions that Core Earnings is not GAAP net income, operating cash flow, or a liquidity measure.
  • Margins and costs: Net investment margin was 3.3% in Q3 versus 3.2% and 3.1% for nine months versus 3.3%. Nine-month investment interest expense rose to $32.9 million from $18.9 million, partly reflecting additional debt financing for renewable-energy equity investments.
  • Cash flow: Nine-month operating cash flow was $51.0 million versus $21.8 million. Investing used $65.0 million versus $173.9 million; financing provided $44.3 million versus $124.6 million. Cash and cash equivalents increased $30.3 million to $73.0 million.
  • Balance sheet and liquidity: Total assets were $1.56 billion at September 30, 2016, versus $1.47 billion at year-end 2015; equity was $497.1 million versus $432.1 million. Financing receivables were $865.5 million, equity-method investments $324.0 million, and real estate and related intangibles $165.7 million. Restricted cash deposits were $25 million.
  • Debt: Credit facilities totaled $356.4 million and nonrecourse debt was $610.3 million; deferred funding obligations were $64.3 million. Reported debt for the company’s leverage calculation was $967 million, or 1.9 times equity, below its 2.5-to-1 target. Fixed-rate debt was 67% of total debt, within the stated 50%–70% target range. A $50 million recourse loan obtained in September matures December 30, 2016; its rate rises from 4.8% to 6.8% on November 14.

Material changes and business developments

  • The company completed approximately $242 million of transactions in Q3 and $712 million in the first nine months, compared with $140 million and $595 million in the respective 2015 periods. It securitized or sold approximately 46% of 2016 transactions.
  • Managed assets increased to $3.6 billion from $3.2 billion at year-end 2015, including $2.2 billion in unconsolidated securitization trusts. The on-balance-sheet portfolio was approximately $1.4 billion.
  • In June, the company acquired interests in entities owning approximately 43 megawatts of operating solar projects. Approximately $33 million of the roughly $42 million purchase price was financed by a two-year, non-interest-bearing seller loan, recorded as a deferred funding obligation.
  • Common shares outstanding increased to 42.0 million at September 30 from 37.0 million at December 31, 2015, reflecting equity issuance. A June public offering generated approximately $91 million net proceeds; the ATM program generated approximately $1 million during the period.

Outlook, commentary, and risks

  • No formal earnings or revenue guidance is provided. Management reported a pipeline exceeding $2.5 billion of potential debt and equity transactions, but cautioned that there is no assurance that or when opportunities will close.
  • The board declared a quarterly dividend of $0.30 per share, payable October 13, 2016. The company says its liquidity sources are expected to meet investment, operating, debt-service, and distribution needs; REIT status generally requires distribution of at least 90% of taxable income.
  • A significant risk is REIT qualification under final real-property regulations effective for taxable years beginning after December 31, 2016. The company believes its fixture-secured financing receivables qualify, but acknowledges uncertainty and no assurance the IRS would agree. An adverse determination could trigger taxes, require changes to its assets or strategy, or jeopardize REIT status.
  • Other disclosed risks include credit and project concentration, asset illiquidity, interest-rate and refinancing exposure, commodity-price changes, and reliance on government policies and long-term project contracts. A 50-basis-point LIBOR increase was estimated to raise quarterly interest expense by $0.4 million on $317 million of variable-rate borrowings.
  • The company reported no impaired or nonaccrual financing receivables, no provision for credit losses, no securitization credit losses, and no material securitization delinquencies. It disclosed no litigation expected to have a material adverse effect. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.

Important facts for investors to verify

  • How much of reported revenue and earnings growth came from recurring portfolio income versus securitization, sale gains, prepayments, and equity-method accounting.
  • Whether cash distributions and the company’s Core Earnings adjustments from renewable-energy equity investments are supported by durable project cash flows; GAAP equity-method results use HLBV accounting.
  • The near-term refinancing and cost implications of the $50 million December 2016 loan maturity, variable-rate borrowings, and the company’s asset-liability maturity profile.
  • The company’s continuing ability to satisfy REIT asset and income tests under the final real-property regulations.
  • Whether the stated transaction pipeline converts to completed investments and whether portfolio credit quality, leverage, and liquidity remain within management’s targets.