HA Sustainable Infrastructure Capital, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement figures are generally shown in millions unless noted.
Business context
HASI invests in energy efficiency, renewable energy and other sustainable infrastructure, using loans and receivables, real estate, debt securities and equity-method investments. It also earns fees from securitizations, syndications and asset management. At quarter-end, its on-balance-sheet portfolio was approximately $1.8 billion; managed assets, including assets in unconsolidated securitization trusts, were $5.54 billion.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $31.3 | $36.1 | $64.4 | $64.3 |
| Net income | $12.8 | $17.4 | $26.5 | $16.1 |
| Net income attributable to controlling stockholders | $12.7 | $17.3 | $26.4 | $16.0 |
| Basic / diluted EPS | $0.20 / $0.19 | $0.32 / $0.32 | $0.41 / $0.41 | $0.29 / $0.29 |
| Core earnings per share (non-GAAP) | $0.30 | $0.39 | $0.63 | $0.65 |
| Net investment margin | 3.1% | 1.5% | 3.1% | 1.5% |
- Quarterly change: Revenue declined 14%, primarily as securitization gains and fee income together fell about $7 million; higher receivables interest income partly offset the decline. Lower interest expense was insufficient to offset lower revenue and equity-method income.
- Six-month change: Revenue was essentially unchanged. Higher receivables interest and rental income offset lower gains on asset sales and securitizations and higher fee income. Net income increased, supported by lower interest expense, higher equity-method income and a $1.4 million income tax benefit.
- Cash flows, six months: Operating activities provided $20.5 million; investing activities provided $90.2 million; financing activities used $87.7 million. Cash, cash equivalents and restricted cash rose $22.9 million to $82.3 million, including $37.9 million of unrestricted cash and cash equivalents.
- Balance sheet and debt: Total assets were $2.03 billion, liabilities $1.14 billion and stockholders’ equity $884.7 million. Reported debt was approximately $1.10 billion, and management reported debt-to-equity of 1.2:1 versus 1.5:1 at year-end 2018. Fixed-rate debt was 76% of total debt, within the stated 60%–85% target range. The two revolving facilities had $210 million outstanding against a combined $450 million maximum commitment.
- Portfolio and activity: HASI completed approximately $204 million of transactions in Q2 and $523 million in the first half. Its stated pipeline exceeded $2.5 billion, but completion is not assured. Managed assets were $5.54 billion, including $3.74 billion in unconsolidated securitization trusts.
Outlook, risks and unusual items
- No specific earnings or transaction guidance is provided. Management described a large pipeline and expects to use a mix of on- and off-balance-sheet securitizations, debt and equity financing. It stated that identified liquidity sources, including cash, were expected to meet short- and long-term needs.
- On July 2, 2019, HASI issued $350 million of 5.25% senior unsecured notes due 2024. It used $167 million to repay revolving borrowings and $58 million to repay borrowings under a repurchase agreement; the stated intended use of net proceeds was to acquire or refinance eligible green projects.
- Management cited the persistently flat yield curve as a reason for increased securitization use. Key risks include refinancing and interest-rate exposure, counterparty and project credit risk, illiquid assets, geographic concentration, commodity prices, changing government policy, and maintaining REIT and Investment Company Act status. A 50-basis-point LIBOR increase was estimated to raise quarterly interest expense by $0.3 million on the disclosed $269 million of floating-rate exposure.
- Two wind-project receivables totaling approximately $8 million were impaired and on non-accrual; no allowance was recorded, and HASI continued legal efforts to recover amounts due. A separate wind investment contributed an approximately $8 million equity-method loss in Q1, based on investee information received one quarter in arrears. HASI also reported approximately $8 million of insurance proceeds in Q1 relating to a hurricane-damaged solar project.
- There were no securitization credit losses during the first half and no legal proceedings identified as likely to have a material adverse effect. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $8 million of non-accrual wind receivables and the hurricane-damaged project carrying value are ultimately recovered.
- How the $350 million note proceeds are deployed, and the resulting all-in funding cost, leverage and refinancing profile.
- Whether the greater-than-$2.5-billion pipeline converts into funded transactions and whether returns and credit quality meet underwriting expectations.
- How recurring portfolio income, securitization gains and fees, and equity-method cash distributions compare with GAAP and non-GAAP core earnings; core earnings is not a measure of cash available for distributions.
- Exposure to floating rates, asset-liability maturity mismatches, mezzanine and other non-investment-grade assets, and ongoing REIT distribution requirements.