Business context and reporting period
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI; NYSE) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The company finances climate and sustainable-infrastructure projects through equity investments, receivables, real estate, securitizations and related services. It reported approximately $4.9 billion of on-balance-sheet Portfolio assets and $10.7 billion of Managed Assets, including $5.8 billion in unconsolidated securitization trusts.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $74.3m | $62.8m | $143.4m | $121.3m |
| Interest expense | $39.9m | $28.8m | $77.1m | $55.5m |
| Net income (loss) | $13.5m | $(18.5)m | $38.1m | $27.2m |
| Net income (loss) per diluted share | $0.14 | $(0.21) | $0.39 | $0.30 |
| Distributable earnings (non-GAAP) | $53.1m; $0.53/share | $53.5m; $0.60/share | $102.8m; $1.07/share | $99.3m; $1.13/share |
| Distributable net investment income (non-GAAP) | $54.0m | $47.9m | $101.1m | $90.4m |
Q2 GAAP net income margin was approximately 18% of revenue; the comparable prior-year quarter was a loss. For the first half, net income margin was approximately 27%, versus 22% in 2022. These are simple net-income-to-revenue calculations.
- Revenue increased 18% in both the quarter and first half. Higher interest income reflected a larger average Portfolio; securitization income also grew. Gain on sale declined, reflecting transaction mix and volume.
- Interest expense rose 38% in Q2 and 39% in the first half, driven by higher average debt and borrowing costs. Average debt cost was 4.8% for both periods in 2023, versus 4.2% in 2022.
- Equity-method income was $2.3m in Q2 versus a $19.6m loss a year earlier, but first-half equity-method income declined to $24.7m from $28.0m. Management attributed the Q2 year-over-year improvement largely to prior-year unrealized project hedge losses associated with rising power prices that did not recur.
- At June 30, total assets were $5.38bn, total liabilities $3.38bn and stockholders’ equity $1.99bn. Cash and cash equivalents were $126.9m, down from $155.7m at year-end 2022. Commercial receivables, net, were $2.13bn; equity-method investments were $2.30bn.
- Debt was approximately $3.27bn, excluding off-balance-sheet securitizations. Debt-to-equity leverage was 1.6x, versus 1.8x at year-end; 97% of debt was fixed-rate or hedged. Senior unsecured notes were $1.775bn principal, term loans $378m, non-recourse debt $399m principal, and Convertible Notes $344m principal.
- Liquidity included $127m unrestricted cash, $665m unused unsecured revolving capacity and $4m available secured capacity. The $100m green commercial-paper program was fully drawn. Management stated liquidity was adequate.
- Six-month cash from operations was $65.7m versus cash used of $26.9m in 2022; investing used $688.4m and financing provided $598.5m. Investing outflows principally reflected $429.9m of equity-method investment contributions and purchases of receivables and investments. Financing included $357.6m net common-stock proceeds.
Material changes, outlook and commentary
- The company completed approximately $426m of transactions in Q2 and $815m in the first half, compared with $340m and $671m, respectively, in 2022. Its pipeline of opportunities that could close over the next 12 months exceeded $5bn; management cautioned that there is no assurance any particular opportunity will close.
- Management cited the Inflation Reduction Act as a potential source of investment opportunities. The filing provides no specific earnings or revenue guidance.
- Portfolio yield was 7.7% at June 30, up from 7.5% at December 31, 2022. The company estimated that Q2-originated investments would avoid approximately 147,000 metric tons of carbon emissions annually.
- HASI issued 15m shares in a May public offering at $22.23 per share, generating approximately $333m net proceeds; total first-half common-stock issuance proceeds were $357.6m. Shares outstanding increased to 106.8m at June 30 from 90.8m at year-end.
- Management said it had determined that revoking REIT status effective for tax year 2024 may be advisable, subject to board approval. It expects an alternative structure could provide comparable tax efficiency using project tax attributes and existing net operating losses; this is a proposed change, not a completed decision in the filing.
- The $144m principal 0% Convertible Senior Notes were due August 15, 2023 and may be converted into common stock; the filing describes potential cash redemption following certain fundamental changes. A separate guarantee related to joint-venture financing had a maximum exposure of approximately $80m and repayment at maturity in August 2023. Management assessed performance under that guarantee as remote and recorded no liability.
Risks, contingencies and unusual items
Key exposures include credit quality of project obligors and sponsors, mezzanine lending, refinancing and interest-rate risk, illiquidity and concentration in certain projects or geographies, energy and environmental-attribute prices, and weather and other climate-related impacts. Assets and cash flows from securitizations and equity-method investments involve estimates, including Level 3 fair values and HLBV allocations. The $44m receivables allowance was up from $41m at year-end; the filing reported no receivables on non-accrual and no securitization credit losses in the first half. A $5m allowance was released after a previously troubled loan was collected in full. No legal proceedings were reported as likely to have a material adverse effect. The company reported compliance with applicable debt covenants and effective disclosure controls as of June 30.
Important facts for investors to verify
- Track funding and repayment or conversion of the August 2023 Convertible Notes, and the outcome of the joint-venture guarantee repayment due that month.
- Confirm whether the board approves the proposed 2024 REIT-status revocation and assess the tax, distribution and capital implications.
- Monitor whether the more than $5bn pipeline converts into funded transactions, and how growth is financed without further disproportionate dilution or leverage.
- Review portfolio credit performance, the $44m allowance and exposure to residential-solar mezzanine loans, related parties and equity-method investments.
- Assess the sustainability of distributable earnings and distributions alongside GAAP results and cash generation; distributable earnings is a non-GAAP measure and is not cash flow or a liquidity measure.