HA Sustainable Infrastructure Capital, Inc. (Hannon Armstrong) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company invests in renewable energy, energy efficiency and other sustainable infrastructure, using equity, lending, real estate and securitization structures. It is a REIT and reports one business segment.
Financial results and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $58.5 million | $51.7 million | +13% |
| Income before equity-method income | $9.1 million | $3.5 million | +$5.6 million |
| Equity-method investment income | $47.6 million | $54.5 million | -13% |
| Net income | $45.7 million | $51.2 million | -11% |
| Net income attributable to controlling stockholders | $45.3 million | $51.0 million | -11% |
| Diluted EPS | $0.51 | $0.61 | Lower |
| Distributable earnings (non-GAAP) | $45.7 million; $0.52/share | $35.7 million; $0.43/share | Higher |
Revenue growth reflected higher interest income ($30.2 million, up 20%) from a larger average portfolio and higher rates, and fee income ($4.6 million, up 76%). Gains on sales were $17.1 million, versus $17.5 million. Expenses were $49.3 million, up 2%; higher general and administrative costs reflected additional investment in corporate infrastructure. Income-tax expense rose to $11.0 million from $6.8 million. Management attributed lower equity-method income primarily to fewer tax attributes recognized by co-investors, affecting the company’s HLBV allocations.
GAAP net income includes equity-method accounting effects that may differ from project cash distributions. Distributable earnings is a company-defined non-GAAP measure, not a substitute for GAAP income or cash flow. Distributable net investment income was $42.5 million, versus $30.1 million.
Balance sheet, cash flow and liquidity
- At March 31, 2022, total assets were $4.22 billion, total liabilities $2.61 billion and stockholders’ equity $1.61 billion. Cash and cash equivalents were $133 million, compared with $226 million at year-end; cash, cash equivalents and restricted cash totaled $155 million.
- Portfolio carrying value was approximately $3.75 billion, including $1.87 billion of equity-method investments and $1.32 billion of commercial receivables. Managed assets, including off-balance-sheet securitized assets, were $9.04 billion, up from $8.78 billion at year-end.
- Operating cash flow was negative $31.9 million, investing cash flow negative $95.5 million and financing cash flow positive $31.5 million. The resulting decrease in cash, cash equivalents and restricted cash was $95.9 million. Operating cash use included a $43.5 million increase in receivables held-for-sale and investment-related noncash adjustments.
- Total debt was approximately $2.52 billion; the company reported leverage of 1.6-to-1, below its board-approved maximum of 2.5-to-1. Approximately 96% of debt was fixed rate. Debt included $1.775 billion of senior unsecured notes, $424 million of non-recourse debt and $144 million of convertible notes.
- Reported liquidity included $133 million of unrestricted cash, $550 million of unused capacity under a new $600 million unsecured revolver, $24 million available under secured facilities and $25 million available under the green commercial paper program. The company stated it believed liquidity was adequate for its needs.
- Q1 cash distributions and dividends were approximately $32 million in the cash-flow statement. A quarterly dividend of $0.375 per share was declared for payment in April; another $0.375 dividend was declared in May for July payment.
Changes, outlook and notable items
- Transactions completed increased to approximately $331 million from $188 million a year earlier. The company reported a pipeline exceeding $4.0 billion, but cautioned that pipeline opportunities may not close. No specific earnings guidance was provided in the supplied filing text.
- Portfolio yield was 7.3%, down from 7.5% at December 31, 2021. Management cited revised performance expectations for some assets affected by grid congestion in their power markets.
- The company entered a new $600 million unsecured revolving credit facility in February, maturing in 2025, replacing a $400 million facility. It issued $50 million of common stock through its ATM program in Q1.
- In April, the company issued $200 million of 0% green exchangeable senior notes due 2025, with an effective annual accretion rate of 3.25%. This is a subsequent event, not a Q1-period borrowing.
- Two commercial receivables with a combined carrying value of approximately $8 million remained on non-accrual; the company said it would continue pursuing legal claims. The total receivables allowance was $37 million. There were no securitization credit losses or material payments to securitization trusts more than 90 days past due in the quarter.
- Unrealized losses on available-for-sale securities were $22.7 million, primarily reflecting interest-rate movements; accumulated other comprehensive income moved from positive $9.9 million at year-end to negative $12.3 million. Management said it intended and was able to hold the affected investments and residual assets until recovery.
- Principal risks include borrower and project credit, interest-rate and refinancing exposure, illiquid assets, commodity prices, geographic and obligor concentration, and weather and other environmental impacts. The company noted continuing uncertainty from COVID-19. It reported no legal proceedings expected to have a material adverse effect and no material COVID-related contingency beyond receivables allowances.
- Management reported effective disclosure controls as of March 31, 2022, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess the quality and sustainability of equity-method earnings, including HLBV allocations and their difference from cash distributions.
- Review receivables credit performance, the $37 million allowance, the two non-accrual loans and exposure to mezzanine lending and solar-company counterparties.
- Confirm available revolver and commercial-paper capacity, borrowing costs, covenant compliance and refinancing needs as debt maturities approach.
- Evaluate the effect of grid congestion and interest-rate changes on portfolio yield, fair values and securitization residual assets.
- Track conversion or dilution effects from outstanding convertible securities, the April 2025 exchangeable notes, equity issuance and future dividends.