HA Sustainable Infrastructure Capital, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The company finances sustainable infrastructure, including energy efficiency, clean energy and related projects. Its strategy is to hold more originated assets on balance sheet while continuing securitizations and other financing. Comparisons with 2013 reflect a recently public company and a business materially changed by IPO capital.
Financial performance and position
- Q2 revenue: $7.6 million after investment interest expense and credit-loss provision, up from $2.9 million. Net investment revenue increased to $3.1 million from $1.3 million; other investment revenue was $4.5 million, including $4.3 million of gains on asset sales.
- Q2 earnings: Net income was $2.9 million, or $0.13 per diluted share, versus a $5.8 million net loss, or $0.32 loss per share. Six-month net income was $5.7 million versus a $7.0 million loss; income attributable to controlling shareholders was $5.6 million versus a $5.0 million loss.
- Margins: Q2 net investment margin was 2.44%, versus 2.15%; six-month margin was 2.30%, versus 1.65%. Average portfolio yield declined to 5.35% in Q2 from 5.50%, while average debt cost fell to 4.14% from 4.55%.
- Cash flow: Six-month operating cash flow was $25.0 million, investing cash outflow $97.3 million, and financing cash inflow $79.1 million. Cash and cash equivalents ended June at $38.7 million; restricted cash was $9.6 million.
- Balance sheet and portfolio: Total assets were $664.1 million, up from $571.4 million at year-end 2013. On-balance-sheet financing receivables were $456.1 million; investments available-for-sale $67.6 million; and real estate plus lease intangibles approximately $67.2 million. Total portfolio was about $590.9 million; managed assets, including securitized assets, were $2.2 billion.
- Debt and liquidity: Credit-facility borrowings were $166.2 million, compared with $77.1 million at year-end; asset-backed notes were $97.4 million and other nonrecourse debt $145.0 million. Deferred funding obligations were $15.4 million. Management reported compliance with applicable facility covenants and a debt-to-equity ratio of approximately 1.2-to-1, excluding match-funded other nonrecourse debt.
- Non-GAAP measure: Core earnings were $4.7 million for Q2 and $8.0 million for the six months, compared with $1.1 million for each 2013 period. The company cautions that this measure is not GAAP income, operating cash flow or a measure of liquidity.
Material changes and notable items
- On May 28, 2014, HASI acquired American Wind Capital Company for approximately $106.9 million, funded with cash and credit facilities. The acquisition added land leased to three solar projects and lease-payment rights from 57 wind projects. Preliminary allocation included $50.3 million of land, $37.2 million of financing receivables and $2.1 million of goodwill; purchase accounting remained subject to final valuation. Acquisition costs were $1.1 million.
- The April follow-on offering generated $70.4 million of net proceeds from 5.75 million shares. The larger average portfolio drove higher investment income, while average debt balances also rose. Sale gains increased substantially versus 2013.
- The company sold held-to-maturity securities and reclassified remaining debt securities as available-for-sale. These investments were carried at fair value; unrealized gains contributed to other comprehensive income.
- An $11.0 million allowance remained against an EnergySource geothermal loan. The remaining balance was on non-accrual, with a stated estimated recoverable collateral value of $0.8 million; the company continued recovery efforts. No credit-loss provision was recorded in the reported 2014 periods.
Outlook, risks and contingencies
- No formal earnings or dividend guidance is provided. Management cited a pipeline exceeding $2.0 billion, but cautioned that pipeline transactions may not close. It expects a larger share of revenue from net investment income and other recurring sources as the portfolio grows.
- Management stated that identified liquidity sources should meet near- and long-term needs. REIT qualification requires annual distributions of at least 90% of REIT taxable income, limiting retained capital. A $0.22-per-share dividend was declared for payment July 10, 2014.
- Key risks include borrower and project credit performance, interest-rate and refinancing exposure, access to credit facilities and securitization markets, illiquid assets, commodity prices, government policy, REIT qualification and maintaining an Investment Company Act exemption. The portfolio includes long-dated assets; financing maturities and interest-rate structures may not always match.
- The company reported no material litigation and no defaults on senior securities. Its revolving credit facilities include liquidity, net-interest-margin and leverage covenants. An August 2014 amendment to the facility occurred after quarter-end and is a subsequent event.
Most important facts for investors to verify
- Whether AWCC’s final asset valuation and integration support the purchase price and expected returns.
- How much earnings growth is recurring net investment income versus asset-sale gains, and how the portfolio margin performs as funding costs and rates change.
- Credit quality and recovery prospects for the EnergySource loan, along with the accuracy of the $11.0 million allowance and $0.8 million collateral estimate.
- Available borrowing capacity, covenant headroom, debt maturity/refinancing exposure and liquidity after acquisition spending and dividends.
- Whether the stated pipeline converts to funded transactions, and whether dividend coverage and REIT qualification remain sustainable.