HA Sustainable Infrastructure Capital, Inc. — Q2 2017 Form 10-Q
Business context and period. The filing is for Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE: HASI), for the quarter and six months ended June 30, 2017. The company invests in debt and equity tied to energy efficiency and renewable energy projects, along with related real estate. It reported a $2.1 billion on-balance-sheet portfolio and $4.6 billion in managed assets at quarter-end.
Financial performance and position
- Q2 revenue: $28.3 million, up 29% from $21.8 million a year earlier. Interest income on financing receivables was $13.6 million; rental income $4.9 million; gains on asset sales $7.7 million; and fee income $0.7 million.
- Q2 earnings: Net income was $12.4 million versus $3.8 million; net income attributable to controlling stockholders was $12.3 million versus $3.7 million. Diluted EPS was $0.23 versus $0.09. Equity-method investment income rose to $8.4 million from $1.1 million and was a major contributor to earnings growth.
- Six-month results: Revenue was $52.1 million versus $42.3 million; net income was $19.7 million versus $7.0 million; controlling-stockholder income was $19.5 million versus $6.9 million; diluted EPS was $0.38 versus $0.16. Equity-method investment income was $12.5 million versus $1.3 million.
- Supplemental Core Earnings: $17.9 million, or $0.34 per share, for Q2 versus $12.7 million, or $0.32 per share. For the six months, $33.4 million, or $0.66 per share, versus $24.9 million, or $0.64. This non-GAAP measure includes adjustments for equity-method investments and other items; it is not GAAP income or a measure of cash available for distributions.
- Margins and funding costs: Q2 average portfolio yield was 5.7% versus 6.1%; average debt cost was 4.6% versus 4.1%; net investment margin was 2.4% versus 3.2%. For the six months, net investment margin was 2.5% versus 2.9%. Higher interest expense, reflecting greater average borrowings and higher floating rates, offset part of the revenue growth.
- Cash flow, six months: Operating cash flow was $13.6 million versus $10.1 million. Investing used $288.8 million, driven by $119.0 million of real estate purchases and $214.5 million of equity-method investments. Financing provided $321.6 million, including borrowings and stock issuance. Cash, cash equivalents and restricted cash totaled $105.6 million at period-end; balance-sheet cash and cash equivalents alone were $41.7 million.
- Assets, debt and liquidity: Total assets were $2.29 billion and stockholders’ equity $663.3 million. Credit facilities were $392.5 million, nonrecourse debt $921.8 million, and deferred funding obligations $273.4 million. Management reported 2.0x debt-to-equity leverage, against a 2.5x target, and 54% fixed-rate debt, below its 60%–85% target range. The revolving facility had $290 million outstanding and matures in July 2019. A separate $102 million recourse term loan was extended in July 2017 to September 20, 2017.
Material changes versus prior comparable periods
- Quarterly transaction volume increased to approximately $400 million from $257 million; six-month volume rose to approximately $690 million from $470 million. The pipeline of potential transactions was over $2.5 billion, with no assurance that opportunities will close.
- Total assets grew from $1.75 billion at December 31, 2016 to $2.29 billion at June 30, 2017. Equity-method investments increased to $551.0 million from $363.3 million; real estate to $298.1 million from $172.3 million; and nonrecourse debt to $921.8 million from $692.1 million.
- Interest expense increased 36% in Q2 and 32% for the six-month period. Company-reported net investment margin narrowed year over year in both periods.
- Common shares issued and outstanding were 51.7 million at June 30, compared with 46.5 million at year-end 2016. The company raised approximately $99 million of net equity proceeds during the first half.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it expects to continue funding growth with debt and equity, and believes identified liquidity sources are adequate for short- and long-term needs. It intends to operate as a REIT and generally distribute substantially all REIT taxable income.
- Two financing receivables with a combined carrying value of approximately $10 million became past due in Q2. The company deemed them impaired, placed them on non-accrual, and filed a legal claim in July after project owners sought to renegotiate or terminate land-lease payments. No credit-loss allowance was recorded; recovery, including through collateral, is uncertain.
- SunPower, which services residential solar leases backing certain company loans, had disclosed a covenant issue; it amended its own loan agreement in June to remove the leverage covenant. The company said the underlying special-purpose entities were performing in line with expectations, but lenders could apply about $1 million of quarterly residual cash flow to loan principal.
- Interest-rate exposure increased: floating-rate borrowings were $599 million, or 46% of reported debt. Management estimated that a 50-basis-point LIBOR increase would add about $0.7 million to quarterly interest expense, before potential mitigating actions.
- Other material risks include refinancing and liquidity risk, asset illiquidity and obligor concentration, credit deterioration, commodity-price exposure, reliance on government policies and maintaining REIT and Investment Company Act status. The company reported no securitization credit losses in the first half and no legal proceedings expected to have a material adverse effect.
- A first-quarter land acquisition included up to $7 million of additional consideration subject to project contingencies. The board declared a $0.33-per-share dividend payable July 13, 2017.
Important facts for investors to verify
- Whether the past-due $10 million receivables are recovered and whether the July legal action leads to any allowance or loss.
- How equity-method earnings and the company’s Core Earnings adjustment compare with cash distributions and longer-term realized returns.
- Progress toward target leverage and fixed-rate funding, and refinancing of the $102 million term loan due September 20, 2017.
- Whether the pipeline converts into completed investments and whether growth supports margins amid higher interest costs.
- Performance of SunPower-serviced collateral, lender cash sweeps, and any further effects on the company’s solar-related financing.
- Future dividend coverage by taxable income and cash generation; REIT distribution requirements do not guarantee a particular dividend.