HA Sustainable Infrastructure Capital, Inc. (Hannon Armstrong) — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016; financial results are compared with Q1 2015. The company finances energy-efficiency and renewable-energy projects through loans, investments, real estate and minority equity stakes. It reported approximately $1.4 billion of on-balance-sheet portfolio assets and $3.2 billion of managed assets, including assets in unconsolidated securitization trusts.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 or prior date |
|---|---|---|
| Total revenue | $20.5 million | $13.9 million |
| Revenue after investment interest expense and credit-loss provision | $9.2 million | $7.8 million |
| Net income | $3.2 million | $2.1 million |
| Net income attributable to controlling shareholders | $3.2 million | $2.1 million |
| Diluted EPS | $0.07 | $0.07 |
| Operating cash flow | $9.9 million | $15.0 million |
| Investing cash flow | $(43.8) million | $24.3 million |
| Financing cash flow | $17.9 million | $(32.0) million |
| Cash and cash equivalents | $26.6 million | $42.6 million at Dec. 31, 2015 |
| Total assets / liabilities / equity | $1,477 million / $1,053 million / $424 million | $1,470 million / $1,038 million / $432 million at Dec. 31, 2015 |
The net investment margin fell to 2.7% from 3.3%; average interest spread narrowed to 1.4% from 2.3%. Average debt cost rose to 4.2% from 3.4%, while average portfolio yield was 5.5% versus 5.6%. Total debt was approximately $968 million, including a $322 million credit-facility balance, $552 million of asset-backed nonrecourse debt and $94 million of other nonrecourse debt. Debt-to-equity leverage was 2.3:1. Approximately 66% of debt was fixed-rate or hedged. The credit facility was amended in January, with a July 2019 termination date; the company reported compliance with applicable covenants.
Material changes versus the prior comparable period
- Revenue rose 43%, supported by higher financing-receivable interest income as the average balance grew to $0.9 billion from $0.6 billion, increased rental income, and greater gains on sales and securitizations.
- Investment interest expense increased 83% to $11.3 million, including approximately $4 million related to nonrecourse borrowings financing wind equity investments. Higher expense offset part of the revenue growth.
- Net income increased approximately 50%, but diluted EPS remained $0.07; weighted-average common shares increased to 37.0 million from 26.4 million.
- Operating cash flow declined, while investing cash flow shifted to an outflow, reflecting substantially higher purchases of financing receivables and investments. Financing cash flow turned positive, including $90.8 million of credit-facility proceeds.
- Comprehensive income was a loss of $13,000, compared with income of $2.2 million, primarily reflecting a $3.5 million unrealized loss on interest-rate swaps.
Outlook, commentary, risks and unusual items
- Management reported a pipeline exceeding $2.5 billion of potential debt and equity opportunities that could close over the next 12 months, but cautioned that completion is not assured. No formal earnings guidance was provided.
- Management said identified liquidity sources were expected to meet short- and long-term needs. The company cited a leverage target of 2.5:1 and a target fixed-rate debt range of approximately 50%–70%.
- Q1 transactions completed totaled approximately $213 million, versus $104 million in Q1 2015. The portfolio was 41% government-obligor, 57% commercial investment-grade and 2% commercial non-investment-grade debt and real estate, excluding equity investments. No financing receivables, investments or leases were impaired or on nonaccrual; no credit-loss provision was recorded.
- A wind-project foreclosure and sale was completed in 2016; the company recovered the full value of a $13 million debt investment and recognized a $0.8 million gain.
- Key risks include credit exposure to commercial obligors and project counterparties, interest-rate and refinancing risk, illiquid assets, borrower and project concentration, commodity-price sensitivity, and maintaining REIT qualification and the Investment Company Act exemption. A 50-basis-point LIBOR increase was estimated to raise quarterly interest expense by $0.4 million on $333 million of variable-rate borrowings.
- The board declared a $0.30-per-share dividend, paid April 7, 2016. REIT distribution requirements limit retained earnings; future distributions remain subject to board discretion and operating results.
Important facts for investors to verify
- Whether portfolio growth and the stated pipeline convert into completed transactions and recurring earnings.
- How funding costs, leverage and refinancing needs affect margins, liquidity and distributions, particularly as the credit facility is variable-rate.
- The assumptions and cash-flow economics behind Core Earnings, a non-GAAP measure: Q1 Core Earnings were $12.2 million, or $0.32 per share, versus $7.4 million, or $0.27 per share. The company cautions that this measure is not GAAP net income, operating cash flow or a measure of funds available for distributions.
- Credit quality and valuation of assets, including Level 3 fair-value measurements and the company’s growing exposure beyond government obligors.
- Potential dilution from equity compensation and restricted shares; the filing reported 1.87 million unvested restricted shares at March 31, 2016.