Business context and reporting period
Hannon Armstrong Sustainable Infrastructure Capital, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2014. The company finances sustainable infrastructure projects, including energy efficiency, clean energy and other resource-efficiency projects. It operates as a REIT and reported one business segment.
Comparisons with first-quarter 2013 require caution: that period largely reflects the Predecessor before the April 2013 IPO and does not represent the company’s post-IPO capital, business scope or financing strategy.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue, net of investment interest expense and credit-loss provision | $5.7 million | $0.8 million |
| Net investment revenue | $2.4 million | $0.5 million |
| Net income (loss) | $2.8 million | ($1.2 million) |
| Net income attributable to controlling shareholders | $2.8 million | Not presented |
| Basic and diluted EPS | $0.17 | Not presented |
| Net cash from (used in) operating activities | $22.5 million | ($4.2 million) |
- Investment interest income was $5.9 million, up from $2.7 million; investment interest expense rose to $3.5 million from $2.2 million. The reported average interest spread was 1.21% and net interest margin was 2.14%, versus 1.10% and 1.00%, respectively, in Q1 2013.
- Net income improvement reflected growth in the on-balance-sheet portfolio and higher securitization gains and fee income. Other expenses increased to $2.8 million from $2.0 million, including higher compensation and public-company professional costs.
- Core Earnings, a company-defined non-GAAP measure, were $3.3 million, or $0.20 per diluted share. The company cautions that this measure is not GAAP net income or a measure of cash available for distributions.
- At March 31, 2014, total assets were $590.4 million, including $395.6 million of financing receivables and $91.3 million of investments. The on-balance-sheet portfolio totaled approximately $486.8 million; managed assets, including securitized assets, were approximately $2.13 billion.
- Cash and cash equivalents were $39.6 million and restricted cash was $43.1 million. Operating cash flow included a $16.8 million favorable working-capital adjustment related to financing receivables and investments held for sale; investing activities used $31.5 million and financing activities provided $16.7 million.
- Total liabilities were $439.9 million. Borrowings included a $117.1 million credit facility, $98.7 million of asset-backed nonrecourse notes and $150.7 million of other nonrecourse debt. The company reported an overall debt-to-equity ratio of approximately 1.5 to 1 and compliance with applicable credit-facility covenants.
Material changes and notable items
- Net investment revenue increased to $2.4 million from $0.5 million as the average monthly balance of financing receivables and investments grew to approximately $445 million from $190 million. Average asset yield declined to 5.31% from 5.71%; the average debt rate declined to 4.10% from 4.61%.
- Q1 2014 included a $2.0 million gain on securitization; no securitizations were reported in Q1 2013. Fee income rose to $1.3 million from $0.3 million, principally due to higher syndication transaction volume.
- Credit-facility borrowings increased to $117.1 million from $77.1 million at year-end 2013. Financing receivables increased to $395.6 million from $347.9 million.
- On April 29, 2014, after quarter-end, the company sold 5.75 million shares at $13.00 per share, reporting net proceeds of $70.3 million.
- The company paid $3.6 million of dividends in Q1. A dividend of $0.22 per share was declared in March and paid April 9, 2014.
Outlook, risks and contingencies
- Management’s strategy is to expand the portfolio held on balance sheet while continuing to use securitizations, syndications and borrowings. It expects investment income and interest expense to grow with the portfolio and anticipates higher net investment revenue over time; no quantified earnings or dividend guidance was provided.
- The pipeline exceeded $2.0 billion at March 31, 2014, but the filing cautions that transactions may not close. Management stated that identified liquidity sources were expected to meet short- and long-term needs.
- The company identified interest-rate and refinancing exposure, credit risk, asset illiquidity and concentration, commodity-price sensitivity, and dependence on government policy and market conditions. Many assets have longer maturities than borrowings; the credit facility is variable-rate and includes borrowing-base and covenant requirements.
- A $11.0 million allowance had been recorded against an EnergySource geothermal-project loan. The remaining net exposure was estimated at $0.8 million, and no interest income was accrued or collected on the loan in Q1. Certain executives and directors held indirect minority interests in EnergySource; the company said it was assessing recovery options.
- Retained securitization residual assets were valued using Level 3 assumptions and were exposed to credit, prepayment and interest-rate risks. The company reported no securitization credit losses or material delinquencies in the quarter.
- The company intended to qualify as a REIT and maintain its Investment Company Act exemption. REIT distribution requirements may limit retained earnings. It reported no legal proceedings expected to have a material adverse effect and no defaults upon senior securities.
Important facts for investors to verify
- How much of the improvement in earnings and operating cash flow reflects recurring portfolio economics versus securitization gains, fee activity and working-capital movements.
- Whether the $2.0 million EnergySource loan allowance and $0.8 million estimated remaining exposure are adequate, and the status of recovery efforts and related-party interests.
- Portfolio credit quality, concentration and valuation assumptions, particularly for Level 3 assets and retained securitization interests.
- Availability and cost of funding, borrowing-base capacity, covenant compliance and the maturity mismatch between assets and liabilities.
- Use of the $70.3 million post-quarter offering proceeds, subsequent portfolio growth, and the sustainability of dividends alongside REIT distribution requirements.