Business context and reporting period
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI) filed this unaudited Form 10-Q for the quarter ended March 31, 2015. The company provides debt and equity financing for energy efficiency, renewable energy, and other sustainable infrastructure projects and operates as a REIT.
Portfolio growth reflects the strategy of holding more originated assets on balance sheet, the 2014 AWCC acquisition and related land purchases, and a $144 million investment in wind projects through Strong Upwind. At quarter-end, the on-balance-sheet portfolio was approximately $885 million; managed assets, including securitized assets, were approximately $2.6 billion.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Investment revenue | $10.8 | $5.9 |
| Net investment revenue | $4.7 | $2.4 |
| Total revenue, net of investment interest expense and provision | $7.8 | $5.7 |
| Net income | $2.1 | $2.8 |
| Net income attributable to controlling shareholders | $2.1 | $2.8 |
| Basic and diluted EPS | $0.07 | $0.17 |
| Net cash provided by operating activities | $15.0 | $22.5 |
- Net investment margin increased to 3.3% from 2.1%. Average portfolio yield rose to 5.6% from 5.3%; average debt cost declined to 3.4% from 4.1%.
- Compensation and benefits increased to $3.9 million from $1.6 million, primarily due to higher equity-based compensation and additional headcount. Equity compensation expense was $2.2 million versus $0.5 million.
- Cash and cash equivalents were $65.5 million at March 31, 2015, versus $58.2 million at December 31, 2014; restricted cash was $14.7 million. Total assets were $994.7 million, total liabilities $724.0 million, and equity $270.7 million.
- Credit-facility borrowings were $321.2 million; asset-backed nonrecourse notes were $208.6 million and other nonrecourse debt was $111.0 million. Deferred funding obligations were $72.3 million. Management reported a debt-to-equity ratio of approximately 2.0:1, excluding off-balance-sheet securitizations and on-balance-sheet match-funded nonrecourse debt.
- Q1 operating cash flow was $15.0 million; investing activities provided $24.3 million and financing activities used $32.0 million. Financing outflows included debt and deferred-funding repayments and $7.2 million of dividends and distributions.
Material changes versus the comparable period
- Net investment revenue nearly doubled, reflecting higher average financing-receivable balances, new rental income from acquired real estate, and portfolio growth. Investment interest expense also increased, including $1.7 million related to financing the wind-project investment.
- Net income declined 25% to $2.1 million despite higher revenue, as expenses rose, particularly compensation, and the wind investment generated a small equity-method loss under GAAP accounting.
- EPS fell to $0.07 from $0.17; weighted-average basic shares rose to 26.4 million from 15.9 million, reflecting the expanded equity base.
- Core Earnings, a company-defined non-GAAP measure, increased to $7.4 million, or $0.27 per share, from $3.4 million, or $0.20. The 2015 figure includes adjustments for the wind investment, equity compensation, and amortization; it is not GAAP net income or a measure of cash available for distributions.
Outlook, commentary, risks and unusual items
- Management reported a pipeline exceeding $2.0 billion and approximately $104 million of transactions completed in Q1; it cautioned that pipeline transactions may not close. Transactions completed from January 1 through April 27 were approximately $167 million, compared with $132 million for the same period in 2014. No specific earnings or revenue guidance was provided.
- In March, management raised its leverage target to 2.5:1. An April credit-facility amendment increased certain facility and borrowing limits; the amended facility’s stated aggregate maximum advances were $1.35 billion, subject to project-related conditions and step-down provisions. The filing reported compliance with applicable covenants at quarter-end.
- After quarter-end, HASI completed a $81 million common-stock offering on May 4. A $0.26-per-share dividend was declared in March and paid April 9.
- A $14 million investment in senior secured debt securities for an operating wind project was exposed to defaults related to tax-credit arrangements and missed funding obligations. The trustee reported that reserve funds enabled the May 2015 principal payment; holders were negotiating with the project owners. HASI concluded the investment was not impaired at March 31, but foreclosure rights could be exercised if negotiations fail.
- Recovery of the remaining $0.8 million EnergySource loan depends on a pending land sale; the company noted that timing and ultimate recovery are uncertain. Certain executives and directors have an indirect minority interest in EnergySource.
- Key risks include borrower and project credit performance, refinancing and interest-rate exposure, asset illiquidity and concentration, commodity prices, government policy, and maintaining REIT status and the Investment Company Act exemption. A proposed Treasury definition of real property could affect REIT asset classification if finalized.
- The company reported no material litigation, no credit-loss provision in Q1, and no material securitization delinquencies. Disclosure controls were assessed as effective, providing reasonable—not absolute—assurance.
Important facts for investors to verify
- Track the wind-project debt default, negotiations, reserve balances, and any impairment or recovery developments.
- Confirm completion and proceeds of the EnergySource land sale and the company’s final recovery.
- Review actual portfolio growth, pipeline conversion, securitization activity, and whether rising expenses keep pace with recurring investment revenue.
- Assess leverage, available borrowing capacity, funding costs, covenant compliance, and the effect of the April facility amendment and May equity offering.
- Evaluate the distinction between GAAP earnings and Core Earnings, including the wind-investment adjustment, and the sustainability of dividends relative to taxable income and cash flows.