Business context and reporting period
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI) filed this unaudited Form 10-Q for the quarter ended June 30, 2013. HASI provides debt and equity financing for energy efficiency, clean energy, and other sustainable infrastructure projects. The company completed its IPO on April 23, 2013, raising approximately $160.3 million net of underwriting discounts and IPO and formation costs. Periods before the IPO reflect the Predecessor; management cautions that these historical results are not necessarily indicative of HASI’s post-IPO business.
Financial highlights
| Metric | Q2 2013 / June 30, 2013 | Comparable period / prior year-end |
|---|---|---|
| Revenue, net of investment interest expense | $2.86 million | $1.54 million in Q2 2012 |
| Net investment revenue | $1.33 million; net investment margin 2.15% | $0.48 million; margin 0.94% in Q2 2012 |
| Net loss | $5.77 million; $0.32 loss per share | $2.24 million loss in Q2 2012 |
| Six-month net loss | $6.99 million | $2.53 million loss in first half 2012 |
| Total assets / equity | $391.3 million / $163.2 million | $212.8 million / $5.9 million at December 31, 2012 |
| Cash and restricted cash | $14.8 million unrestricted; $29.2 million restricted | $8.0 million and $0.1 million, respectively, at December 31, 2012 |
| Debt | $194.1 million nonrecourse debt; no credit facility balance | $196.0 million nonrecourse debt and $4.2 million credit facility at December 31, 2012 |
For the six months ended June 30, 2013, operating cash use was $3.8 million, investing cash use was $143.8 million, and financing provided $154.4 million. Financing receivables were $297.3 million and other investments $37.0 million. Managed assets, including securitized assets not on the balance sheet, totaled $1.76 billion, up from $1.62 billion at year-end.
Material changes and unusual items
- Q2 net investment revenue rose $0.85 million year over year, reflecting higher average investments and lower average nonrecourse debt. Q2 total revenue net of investment interest expense increased $1.32 million.
- Net loss widened despite stronger revenue, primarily due to compensation and benefits, including $6.2 million of noncash equity compensation. This included a one-time $5.8 million charge related to reallocating Predecessor equity to employees in connection with the IPO. Public-company and professional costs also increased.
- Six-month securitization gains fell to $0.88 million from $1.63 million in 2012, while net investment revenue rose to $1.81 million from $0.98 million; total revenue net of investment interest expense was approximately flat at $3.62 million.
- The company reported no credit losses, material delinquencies, past-due or impaired financing receivables, or allowance for credit losses at June 30.
Outlook, liquidity, and risks
- Management expects to retain more originated assets on balance sheet, increasing both investment interest income and interest expense, and expects net investment revenue to grow with portfolio expansion and improved per-asset margins. These are expectations, not formal earnings guidance.
- The company reported a pipeline exceeding $2.0 billion, with no assurance that proposed transactions will close. It expects to use both securitizations and additional borrowing to fund growth, and described a target of up to 2:1 recourse debt to equity for its overall portfolio.
- In July 2013, HASI entered senior secured revolving facilities with stated commitments of $200 million and $150 million, and maximum total advances of $400 million and $300 million, respectively. Rates are LIBOR plus 1.50% and 2.50%; the facilities mature in July 2018. Borrowing capacity depends on agent-approved collateral and valuation haircuts. Approximately $8.1 million of facility costs will be amortized over 60 months. Covenants include minimum liquidity, a net-interest-margin test beginning June 2014, and a nonrecourse-debt-to-equity limit below 4:1.
- HASI intends to qualify as a REIT beginning with tax year 2013; qualification requires meeting technical requirements and distributing at least 90% of REIT taxable income. The board declared a $0.06-per-share second-quarter dividend, payable August 29, 2013.
- Key risks include interest-rate and refinancing exposure, asset illiquidity and concentration, borrower/project credit risk, changes in energy and commodity markets or government policy, and REIT qualification. Financing and other investment fair values rely on Level 3 assumptions; a 10% adverse change in discount rates was estimated to reduce residual-asset fair value by about $1.84 million.
- Management reported disclosure controls were effective as of June 30. No material litigation was reported.
Important facts for investors to verify
- Reconcile IPO proceeds, post-IPO deployment, and remaining available liquidity, including the $28.1 million restricted for a deferred funding obligation.
- Track utilization, eligible collateral, costs, and covenant compliance under the July revolving facilities; facility commitments are not the same as available borrowing capacity.
- Assess whether portfolio growth, retained-asset yields, securitization gains, and funding costs support the expected improvement in recurring earnings.
- Review the valuation assumptions and sensitivity of Level 3 assets, including securitization residuals, and the quality and concentration of underlying obligors.
- Confirm REIT qualification and the sustainability and tax characterization of distributions. The filing provides no formal forward earnings or dividend guidance.