Business context and reporting period
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE: HASI) reported its unaudited first quarter ended March 31, 2017. The company invests in debt, real estate and equity related to energy efficiency and renewable energy projects, and operates as a REIT.
Its on-balance-sheet portfolio was approximately $1.9 billion, across financing receivables, investments, real estate and equity-method investments. Managed assets, including assets in unconsolidated securitization trusts, totaled $4.2 billion. The company completed approximately $288 million of transactions in the quarter and reported a pipeline exceeding $2.5 billion; pipeline opportunities may not close.
Financial performance and position
Unless otherwise noted, amounts are in millions of dollars.
- Revenue: $23.8, up 16% from $20.5 in Q1 2016. Financing-receivable interest income rose to $14.1 from $11.5; rental income was $4.1 versus $2.8; gains on sales declined to $3.9 from $5.5.
- Profit: Net income was $7.2 versus $3.2; income attributable to controlling stockholders was $7.2 versus $3.2. Basic and diluted GAAP EPS were $0.14 versus $0.07. Equity-method income increased to $4.2 from $0.3.
- Supplemental earnings: Management-reported Core Earnings were $15.5, or $0.32 per share, versus $12.2, or $0.32 per share. Core Earnings is a non-GAAP measure and should not be treated as cash flow or a substitute for GAAP earnings.
- Margins: Average portfolio yield was 5.6% versus 5.5%; average debt cost was 4.5% versus 4.2%. Average interest spread narrowed to 1.1% from 1.4%, and net investment margin to 2.6% from 2.7%.
- Cash flow: Operating cash flow was $5.2 versus $9.9. Investing used $221.8 versus $44.0, reflecting increased investment in real estate and equity-method projects. Financing provided $240.2 versus $18.1. Cash, cash equivalents and restricted cash totaled $82.8 at quarter-end; unrestricted balance-sheet cash was $16.3.
- Debt and leverage: Reported debt was $1.196 billion, up from $975 million at year-end 2016; the company’s debt-to-equity ratio was 1.9:1 versus 1.7:1. Fixed-rate debt was 64% of total, within its stated 60%–85% target range. Credit facilities were $406.5 and nonrecourse debt was $789.8. A separate $102 million recourse term loan matures August 9, 2017.
- Liquidity: The revolving facility matures in July 2019 and had $305 million outstanding. The company said identified liquidity sources were adequate for short- and long-term needs. It raised approximately $68 million in common equity during the quarter.
- Portfolio quality: No financing receivables, investments or leases were impaired or on nonaccrual; no provision for credit losses was recorded. There were no securitization credit losses or material securitization delinquencies in the quarter.
Material changes versus Q1 2016
- Net income more than doubled, with higher revenue and a $3.9 million increase in equity-method investment income contributing to the improvement. Higher interest expense and compensation costs partly offset gains.
- Interest expense increased to $13.8 million from $11.3 million, primarily due to higher average debt outstanding and a greater amount of fixed-rate debt.
- Portfolio growth included a substantial increase in real estate and equity-method investments. In 2017, the company acquired a portfolio covering more than 4,000 acres and long-term leases to over 20 solar projects for approximately $138 million; up to a further $8 million may be payable subject to contingencies.
- Common shares issued and outstanding increased to 50.2 million at March 31 from 46.5 million at December 31, 2016. The company issued shares through public and at-the-market offerings.
Outlook, commentary and risks
- No specific earnings or full-year financial guidance is provided in the supplied filing text. Management cited a large transaction pipeline but cautioned that there is no assurance that opportunities will be completed.
- Management’s stated leverage target is 2.5:1; quarter-end leverage was below target, and management said it expected to add debt over time. The company also expects continued use of debt, securitizations and equity offerings to fund growth.
- SunPower, the originator and servicer for residential solar lease collateral supporting certain company loans, disclosed it was not meeting a debt-to-EBITDA covenant and did not expect to comply in 2017. The filing says the solar-lease special-purpose entities were performing as expected and are the repayment source; lenders may apply approximately $1 million of quarterly cash flow to reduce principal. HASI said it was monitoring the matter and did not then anticipate other impact.
- Key risks include credit and project performance, interest-rate and refinancing exposure, asset illiquidity and obligor concentration, commodity-price exposure, financing availability, and changes in government policy or incentives. A 50-basis-point increase in LIBOR was estimated to raise quarterly interest expense by approximately $0.5 million on $435 million of variable-rate borrowings, before any mitigating action.
- The company reported one historical credit loss of approximately $11 million net of recoveries on roughly $4 billion of transactions originated since 2012; it cautioned that past loss experience may not continue. No litigation was reported as probable of having a material adverse effect.
- The board declared a $0.33-per-share dividend, paid April 13, 2017. As a REIT, the company must generally distribute at least 90% of REIT taxable income, which can constrain retained capital.
Important facts for investors to verify
- Confirm the composition and timing of the $2.5 billion-plus pipeline and the amount that converts into completed, balance-sheet investments.
- Monitor the SunPower servicer and covenant situation, related lender-directed principal reductions, and performance of the underlying solar-lease entities.
- Review refinancing and liquidity needs, particularly the August 2017 term-loan maturity, revolving-facility availability and debt growth.
- Reconcile Core Earnings with GAAP net income and assess the assumptions behind the equity-method investment adjustment.
- Track portfolio credit quality, equity-method investment cash distributions, and the sustainability of the dividend relative to taxable income and available cash.