Business context and reporting period
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE: HASI) filed this unaudited Form 10-Q for the quarter ended March 31, 2018. The company invests in energy efficiency, renewable energy and other sustainable infrastructure, and earns income from investments, leases, securitizations and related services. It operates as a REIT.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 or prior period |
|---|---|---|
| Total revenue | $27.9 million | $23.8 million; up 17% |
| Net income (loss) attributable to controlling stockholders | $(1.2) million; $(0.03) per share | $7.2 million; $0.14 per share |
| Core earnings, non-GAAP | $14.3 million; $0.27 per share | $15.5 million; $0.32 per share |
| Operating cash flow | $5.3 million | $5.2 million |
| Cash, cash equivalents and restricted cash | $116.6 million | $118.2 million at December 31, 2017 |
| Total assets / stockholders’ equity | $2.22 billion / $627 million | $2.25 billion / $643 million at December 31, 2017 |
| Debt and leverage | $1.43 billion; 2.3:1 debt-to-equity | $1.43 billion; 2.2:1 at December 31, 2017 |
Revenue growth reflected higher rental income and securitization gains; interest income from receivables declined. Interest expense was $18.7 million versus $13.8 million, and the reported net investment margin narrowed to 1.6% from 2.6%. The company reported $25.8 million of investing cash inflow, compared with $221.8 million of investing outflow in Q1 2017, and $32.8 million of financing cash outflow, compared with $240.2 million of financing inflow.
At quarter-end, the balance-sheet portfolio was approximately $2.0 billion and managed assets were $4.8 billion, including $2.8 billion in unconsolidated securitization trusts. About 92% of debt was fixed-rate, above the company’s stated 60%–85% target range; leverage remained below its 2.5:1 target. The revolving credit facility had $70 million outstanding and matures in July 2019. The company paid or declared a quarterly dividend of $0.33 per share.
Material changes versus the prior comparable period
- GAAP results shifted from $7.2 million of controlling-stockholder income to a $1.2 million loss. The principal cited factor was a $6.5 million year-over-year deterioration in equity-method investment results, including an $8 million non-cash HLBV loss tied to a wind-project write-down.
- Total expenses rose 29%, principally because interest expense increased 36% as average borrowings and interest rates rose.
- Transactions completed during the quarter were approximately $108 million, versus $288 million in Q1 2017. The company attributed higher rental income and securitization-related gains partly to portfolio additions and increased securitization activity.
- Core earnings fell to $14.3 million from $15.5 million. Management’s non-GAAP measure reverses GAAP equity-method results and substitutes its estimate of the investments’ return on capital; it is not GAAP income or operating cash flow.
Outlook, commentary and risks
The filing provides no specific full-year earnings or revenue guidance. Management reported a pipeline exceeding $2.5 billion of potential debt and equity opportunities, but cautioned that transactions may not close, or may close on different terms. In response to a flattening yield curve and higher short-term rates, management said it would likely increase use of securitization structures in the short to medium term. Management stated that available liquidity sources, together with cash on hand, should meet short- and long-term needs.
- Credit and asset issues: Two commercial receivables totaling about $8 million were impaired and on non-accrual; the company is pursuing legal claims and had received $1.6 million in January. A solar project in the U.S. Virgin Islands was materially damaged by hurricanes; the company’s investment is approximately $11 million and it believes insurance should be sufficient, without assurance.
- Interest-rate and refinancing exposure: The $120 million of floating-rate borrowings would incur an estimated additional $0.1 million of quarterly interest expense from a 50-basis-point LIBOR increase, before any mitigating actions. Borrowings may mature before the assets they finance, and the revolver matures in July 2019.
- Other risks include project and counterparty credit deterioration, illiquid assets, energy commodity prices, changes in government policy and tax law, and maintaining REIT status and the Investment Company Act exemption. Management noted that credit exposure may rise as the portfolio includes more mezzanine debt, real estate and equity investments.
- The company reported no securitization credit losses in the quarter, but approximately $1.4 million of payments to securitization trusts were more than 90 days past due. It reported no legal proceedings expected to have a material adverse effect and said it was in compliance with debt covenants.
Important facts for investors to verify
- Assess the source and durability of the $14.3 million of non-GAAP core earnings relative to the GAAP loss and the cash distributions from equity-method investments.
- Monitor the impaired $8 million receivables, the disputed wind-project lease payments, and insurance recovery and rebuilding progress for the hurricane-damaged solar project.
- Review debt maturities, refinancing access, floating-rate exposure, the July 2019 revolver maturity and leverage against management’s targets.
- Track execution of the more-than-$2.5 billion pipeline, securitization volumes and the growth and valuation of retained residual assets.
- Confirm dividend coverage from recurring cash generation and taxable income; REIT distribution requirements and the company’s stated policy may constrain retained capital.