HA Sustainable Infrastructure Capital, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The company provides debt and equity financing for energy-efficiency and renewable-energy projects and operates as a REIT. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Investment revenue | $12.4 | $8.2 | $34.4 | $20.9 |
| Net investment revenue | $5.7 | $4.3 | $15.4 | $9.7 |
| Total revenue, net of investment interest expense and provision | $8.4 | $7.8 | $23.5 | $21.1 |
| Net income | $2.1 | $2.6 | $5.8 | $8.3 |
| Net income attributable to controlling shareholders | $2.1 | $2.6 | $5.7 | $8.1 |
| GAAP diluted EPS | $0.06 | $0.11 | $0.16 | $0.40 |
- For Q3, net investment revenue grew 33%, but net income fell 19%. Higher investment revenue was offset by higher interest and operating expenses and lower gains on asset sales.
- For the nine-month period, net investment revenue rose 57%, while net income declined 30%. Investment revenue growth was offset by higher financing costs, lower gains and fee income, and higher compensation expense.
- Net investment margin was 3.2% in Q3 versus 2.8% a year earlier, and 3.3% for the nine months versus 2.5%. Portfolio yield was 5.4% in Q3 (5.5% prior year); average debt cost was 3.3% (3.9% prior year).
- Non-GAAP Core Earnings were $8.5 million, or $0.26 per share, in Q3 and $24.0 million, or $0.79 per share, for nine months. These include adjustments, notably for wind-project equity investments; the company cautions they are not a substitute for GAAP income or cash flow.
Balance sheet, cash flow, and funding
- At September 30, total assets were $1.208 billion, up from $1.010 billion at year-end 2014; total equity was $341.4 million, up from $274.0 million.
- Financing receivables were $736.3 million, real estate and related intangibles $155.2 million, and equity-method investments $165.3 million. The reported on-balance-sheet portfolio was approximately $1.1 billion; managed assets, including securitized assets, were $2.9 billion.
- Cash and cash equivalents were $30.7 million, down from $58.2 million at year-end; restricted cash was $14.4 million. Nine-month operating cash flow was $21.8 million, investing cash outflow $173.9 million, and financing cash inflow $124.6 million. Cash decreased by $27.5 million.
- Debt included $378.1 million drawn under the revolving credit facility, $288.3 million of asset-backed nonrecourse debt, and $104.8 million of other nonrecourse debt. Deferred funding obligations were $78.4 million. The company reported a debt-to-equity ratio of approximately 2.0:1, using its stated calculation that excludes specified securitizations and match-funded nonrecourse debt.
- The revolving facility had maximum total advances of $1.5 billion and a July 2019 termination date; $378 million was outstanding at a 2.3% weighted-average short-term rate. The company stated it complied with applicable financial covenants.
- In September, a nonrecourse securitization issued $101 million of Class A bonds at 4.28% and $18 million of Class B bonds at 5.0%, anticipated repayment October 2034; the company retained the Class B bonds.
Changes, outlook, and notable matters
- The company completed approximately $595 million of transactions in the first nine months, versus $503 million a year earlier; approximately $140 million closed in Q3. Its pipeline exceeded $2.5 billion, but management cautioned that pipeline opportunities may not close.
- Management described a strategy of retaining more originated assets on the balance sheet, supporting recurring investment income but increasing leverage and interest expense. The company had raised its leverage target to 2.5:1 in March 2015 and said it expected a long-term fixed-rate debt mix of approximately 50%–70%; approximately 43% was fixed-rate at quarter-end.
- The board declared a quarterly dividend of $0.26 per share, payable October 8, 2015. A follow-on equity offering closed October 19, after quarter-end, raising approximately $99 million net. The company also reported 38,269,566 common shares outstanding as of November 4, including unvested restricted shares.
- Material credit issue: The company held $13 million of senior secured debt securities in a wind project that faced indenture defaults tied to a tax-credit agreement termination and reserve-funding shortfalls. The trustee issued a notice of acceleration and proposed foreclosure on November 3, 2015. The company said it expected further negotiations but gave no assurance of an outcome; it had concluded the securities were not impaired as of September 30.
- The company reported no credit-loss provision for the periods and no material securitization delinquencies. It collected a final $0.8 million recovery on the EnergySource loan and charged off the remaining $1.2 million against an existing allowance without a current-period income-statement impact.
- Key risks include borrower and project performance, interest-rate and refinancing exposure, asset illiquidity and concentration, commodity prices, changes in government support and regulation, and maintaining REIT and Investment Company Act status. A 50-basis-point rise in LIBOR was estimated to increase quarterly interest expense by $0.5 million on the then-outstanding variable-rate facility.
- No material litigation was reported. Management said disclosure controls were effective as of September 30 and reported no material change in internal control over financial reporting during the quarter. The filing provided no specific earnings or revenue guidance.
Investor verification priorities
- Track resolution, collateral value, reserve balances, and potential impairment relating to the wind-project debt acceleration and proposed foreclosure.
- Reconcile reported leverage and borrowing availability with facility terms, collateral requirements, covenants, and the company’s excluded-debt definitions.
- Assess whether portfolio growth, funding costs, credit quality, and operating expenses support sustained GAAP earnings and cash available for dividends; distinguish these from Core Earnings.
- Verify the proceeds and share-count effects of the October 2015 equity offering and monitor dilution from restricted-stock awards.
- Evaluate the conversion of the stated transaction pipeline into closed investments and the company’s ability to maintain REIT qualification as asset composition and regulations evolve.