HA Sustainable Infrastructure Capital, Inc. (filed as Hannon Armstrong Sustainable Infrastructure Capital, Inc.) — FY 2018 Form 10-K
Business context and reporting period
This is an annual report for the fiscal year ended December 31, 2018, with quarterly results also provided. The company finances energy efficiency, renewable energy and other sustainable infrastructure through debt, equity, real estate and securitization-related activities. It reported one business segment and operated as a REIT.
During 2018, the company completed approximately $1.2 billion of transactions, versus $1.0 billion in 2017. At year-end, its on-balance-sheet Portfolio was approximately $2.0 billion and total Managed Assets, including assets in unconsolidated trusts, were $5.284 billion, up from $4.736 billion.
Financial and operating metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $137.8 million | $105.6 million |
| Total expenses | $116.0 million | $95.9 million |
| Net income attributable to controlling stockholders | $41.6 million | $30.9 million |
| Basic and diluted EPS | $0.75 | $0.57 |
| Core earnings per share (non-GAAP) | $1.38 | $1.27 |
| Operating cash flow | $58.8 million | $11.7 million |
| Cash, cash equivalents and restricted cash at year-end | $59.4 million | $118.2 million |
Revenue growth included higher receivables interest income ($67.7 million), rental income ($24.6 million), securitization gains ($32.9 million) and fee income ($5.9 million). The reported net investment margin was 2.4%, versus 2.2%; average interest spread was 1.6%, versus 1.0%. These measures exclude certain equity-method investment income and related debt costs as described in the filing. Core earnings are a company-defined non-GAAP measure and are not equivalent to GAAP income or cash flow.
Year-end assets were $2.155 billion, liabilities $1.350 billion and stockholders’ equity $804.5 million. Debt included $258.6 million of credit facilities, $834.7 million of non-recourse debt and $148.5 million of convertible notes; deferred funding obligations were $72.1 million. The company reported debt-to-equity leverage of 1.5:1, down from 2.2:1, and fixed-rate debt of approximately 74% of total debt, within its 60%–85% target range. These leverage figures exclude unconsolidated securitizations.
Operating cash flow increased year over year. Investing activities provided $50.8 million, including substantial receivable collections, while financing activities used $168.4 million. The resulting year-end cash balance included $38 million of restricted cash; unrestricted cash and cash equivalents were $21.4 million.
The company declared $1.32 per share in dividends for 2018, unchanged from 2017. The filing reports that 2018 cash dividends were characterized as 100% return of capital for federal tax purposes.
Material changes versus the prior comparable period
- Revenue increased 30% and net income attributable to controlling stockholders increased 35% year over year; EPS rose from $0.57 to $0.75.
- Interest expense increased 18%, to $76.9 million, alongside higher average debt and a $9 million expense associated with early repayment of debt. Compensation and benefits rose 30%, to $25.7 million, and general and administrative expense rose 18%, to $13.5 million.
- In the fourth quarter, approximately $300 million of residential solar assets and related $250 million of non-recourse debt were prepaid. The company recognized approximately $9 million of prepayment fees and $4 million of unamortized loan fees in interest income, offset by approximately $9 million of debt repayment costs in interest expense.
- The company replaced its prior credit facility in December with two revolving facilities totaling $450 million, maturing in 2023. It also repaid approximately $250 million of non-recourse debt following the associated asset repayment.
- Equity-method investment income was broadly flat at $22.2 million, but the company’s cash distributions from those investments increased to approximately $114.6 million from $89.7 million. The filing notes that GAAP equity-method earnings can differ materially from cash distributions and economic returns.
- Quarterly 2018 results varied: controlling-stockholder net income was a loss of $1.2 million in Q1, followed by income of $17.3 million in Q2, $16.5 million in Q3 and $9.1 million in Q4.
Outlook, management commentary, risks and unusual items
Management described long-term growth prospects as positive and reported a pipeline exceeding $2.5 billion of potential equity, debt and real-estate opportunities that could close within 12 months. The filing gives no specific earnings or revenue guidance and cautions that pipeline opportunities may not be completed. Management said it intended to continue funding projects that meet underwriting standards and to pursue additional equity, debt and securitization financing.
Key risks include changes to government incentives and regulation; competitive pressure on investment terms and returns; interest-rate, refinancing and yield-curve risk; low natural-gas and wholesale power prices; illiquid assets and project, tenant or counterparty credit risk; and weather-related damage or operating disruption. The company also identified REIT qualification and its exemption from Investment Company Act registration as important regulatory requirements.
Credit-sensitive exposures warrant attention. The portfolio included approximately $273 million of residential-solar mezzanine loans classified as non-investment grade and $8 million of impaired, non-accrual receivables tied to two wind projects. The company reported no allowance for credit losses at year-end, while noting that recovery on the non-accrual loans depended on projected project cash flows and continued legal claims. It also disclosed that PG&E’s January 2019 bankruptcy and rating actions involving California utilities had reduced borrowing capacity on certain assets and prompted review of two non-recourse debt ratings.
Other notable matters: the company recorded a non-cash $8 million equity-method loss related to a wind project in Q1 and a non-cash $5 million loss on selling a solar investment in December. A project in the U.S. Virgin Islands had been materially damaged in the 2017 hurricanes; management said insurance and other project assets were expected to support recovery of its approximately $10 million carrying value, without assurance. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls were effective. No legal proceedings likely to have a material adverse effect were reported.
Most important facts for investors to verify
- Review the sustainability and cash economics of the $273 million residential-solar mezzanine exposure, including payment priority, collateral, and the conditions for payment-in-kind interest.
- Track the recovery and legal status of the $8 million non-accrual wind-project receivables and the impairment outlook for the wind investment recorded as a non-cash loss.
- Assess the impact of California utility credit downgrades and PG&E’s bankruptcy on collateral borrowing capacity, debt ratings and portfolio obligor risk.
- Reconcile reported cash and leverage with restricted cash, debt maturities, covenant requirements, and the $3.3 billion of securitized assets outside the consolidated balance sheet.
- Compare GAAP earnings, non-GAAP core earnings and cash distributions from equity-method investments; confirm how much investment cash represents return of capital rather than return on capital.
- Verify that the $2.5 billion pipeline converts to completed transactions on acceptable risk-adjusted terms, and monitor reliance on securitizations, new borrowing and equity issuance.
- Check the filing’s subsequent-event disclosures and dividend details, including the board-approved 2019 dividend increase, whose revised amount is not clearly stated in the supplied text.