Business context and reporting period
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (then named Hannon Armstrong Sustainable Infrastructure Capital, Inc.; NYSE: HASI) filed this Form 10-K for the year ended December 31, 2014. The company finances energy-efficiency, renewable-energy, and other sustainable-infrastructure projects through loans, leases, real estate, securities, and equity investments. It elected REIT status beginning in 2013.
Results reflect a business expanding after its April 2013 IPO: the company raised additional equity in 2014 and retained more originated assets on its balance sheet. Accordingly, the 2014 comparison with 2013 is affected by a larger portfolio and the different business mix; pre-IPO Predecessor results are not directly indicative of the post-IPO company.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Investment revenue | $30.1 million | $17.4 million |
| Investment interest expense | $16.7 million | $9.8 million |
| Net investment revenue | $13.5 million | $7.6 million |
| Gain on sale of receivables and investments | $13.3 million | $5.6 million |
| Fee income | $1.9 million | $1.5 million |
| Net income (loss) | $9.8 million | $(12.6) million |
| Net income (loss) attributable to controlling shareholders | $9.6 million | $(10.5) million |
| Basic and diluted EPS | $0.43 | $(0.68) |
- Total revenue, net of investment interest expense and credit-loss provision, was $28.6 million, versus $3.6 million in 2013. Other expenses were $18.8 million, including $2.5 million of acquisition costs.
- Net investment margin was 2.76%, up from 2.47%; average portfolio yield declined to 5.57% from 5.68%, while average debt cost declined to 3.99% from 4.28%.
- Non-GAAP Core Earnings were $20.3 million, or $0.93 per share, versus $7.3 million, or $0.43 per share, in 2013. This measure includes adjustments and is not GAAP net income or operating cash flow.
- Operating cash flow was $5.1 million; investing cash flow was $(319.3) million; financing cash flow was $340.5 million. Cash and cash equivalents ended the year at $58.2 million, compared with $31.8 million a year earlier.
- At year-end, total assets were $1.01 billion, total liabilities $736.2 million, and total equity $274.0 million. Balance-sheet debt included $315.7 million drawn on the credit facility, $208.2 million of asset-backed nonrecourse notes, and $112.5 million of other nonrecourse debt. Deferred funding obligations were a further $88.3 million.
- The company reported a 1.9:1 debt-to-equity ratio under its stated calculation, which excludes off-balance-sheet securitizations and on-balance-sheet match-funded nonrecourse debt. It raised its leverage target to 2.5:1 effective March 2015.
- The on-balance-sheet portfolio was approximately $900 million; managed assets, including assets in non-consolidated securitization trusts, were approximately $2.5 billion. Portfolio mix was about 71% debt instruments, 13% leased real estate, and 16% minority wind-project equity. Average remaining life, excluding match-funded transactions, was approximately 13 years.
Material changes versus the prior comparable period
- Net income improved by $22.4 million, from a 2013 loss to 2014 profit. Management attributed the change chiefly to portfolio growth, higher net investment revenue, increased transaction gains, and the absence of the $11.0 million credit-loss provision recorded in 2013.
- The monthly average portfolio balance rose to approximately $540.5 million from $305.7 million. The company said this reflected its strategy of retaining a larger share of originated transactions.
- 2014 transaction activity exceeded $875 million. Approximately 75% was added to the balance sheet and 25% was securitized or syndicated. Since the IPO through year-end 2014, it completed more than $1.5 billion of financing and investment transactions.
- The company acquired AWCC and other real-estate interests, reporting more than 10,500 acres leased to over 20 solar projects and lease-payment rights for 57 wind projects. In October it invested approximately $144 million in a non-controlling wind-project investment and borrowed $115 million against that investment.
- Two 2014 follow-on offerings generated net proceeds of approximately $129 million combined. The share count and equity base increased materially.
Outlook, commentary, risks, and unusual items
- Management expected a larger share of revenue to come from recurring net investment revenue as the portfolio grew, and expected average margins to benefit from increased equity funding and lower-cost borrowings. No specific earnings or revenue guidance was provided.
- The year-end pipeline exceeded $2.0 billion in prospective debt and equity opportunities for the following 12 months; the filing cautions that transactions may not close.
- The revolving credit facility was amended to provide maximum total advances of $1.35 billion and extended to July 2019. At year-end, $315.7 million was drawn; the company reported compliance with applicable financial covenants.
- Key risks include changes to government incentives and regulation; borrower, project, tenant, and power-purchaser credit or performance; interest-rate and refinancing exposure; illiquid assets and valuation uncertainty; competition; commodity prices, including low natural-gas prices; and maintaining REIT qualification and the Investment Company Act exception. The company also relies on leverage and on access to credit facilities and securitization markets.
- The EnergySource geothermal loan remained impaired: after a $9.8 million charge-off, the company retained a $1.2 million allowance and estimated a net recoverable balance of $0.8 million. Recovery was expected from a land sale, capped at $2.0 million, but timing and ultimate recovery were uncertain. Certain officers and directors held an indirect minority interest in EnergySource.
- A separate wind-project debt investment had experienced reported default events, including a February 2015 event involving insufficient funds for a scheduled allocation. Payments to the company’s holders were current; management said the project had cash for the next semiannual payment and concluded the security was not impaired at December 31, 2014.
- 2014 dividends were characterized for tax purposes as 94.6% return of capital and 5.4% ordinary income. The quarterly distribution declared in December rose to $0.26 per share, payable in January 2015. Future distributions remain at the board’s discretion.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor gave an unqualified opinion on the financial statements; its report did not express an opinion on internal control. The filing reported no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether portfolio expansion can sustain recurring net investment revenue and margins, and how much reported profit depends on transaction-sale gains and adjusted Core Earnings.
- The terms, availability, covenant headroom, borrowing-base eligibility, and refinancing needs of the credit facility and nonrecourse debt, including the higher leverage target.
- Actual recovery and timing on the EnergySource loan, and developments in the wind-project default situation after the reporting date.
- Performance and cash distributions from the Strong Upwind investment, for which 2014 income was not recorded because results were reported one quarter in arrears.
- Whether the pipeline converts to funded transactions, and the resulting effects on portfolio concentration, asset liquidity, and capital needs.
- The sustainability and tax character of distributions, alongside continued REIT qualification and compliance with the Investment Company Act exception.