HA Sustainable Infrastructure Capital, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The company finances energy-efficiency, renewable-energy and other sustainable-infrastructure projects through loans, investments, real estate leases and equity interests. It operates as a REIT.
Financial performance and position
- Q2 revenue: Investment revenue was $11.1 million, up 63% year over year, driven by portfolio growth and rental income. After investment interest expense and credit-loss provision, revenue was $7.4 million versus $7.6 million.
- Q2 earnings: Net income was $1.5 million versus $2.9 million; income attributable to controlling shareholders was $1.47 million, or $0.04 per share, versus $2.83 million, or $0.13 per share.
- First-half results: Net investment revenue rose 76% to $9.7 million; revenue after investment interest expense and provision increased 14% to $15.2 million. Net income fell 37% to $3.6 million from $5.7 million. Core Earnings, a company-defined non-GAAP measure, increased to $15.5 million ($0.53 per share) from $8.1 million ($0.43 per share).
- Margins and portfolio: Q2 portfolio yield was 5.6%, average interest spread 2.2% and net investment margin 3.4%, compared with 5.4%, 1.2% and 2.4%, respectively, a year earlier. Portfolio assets were approximately $1.1 billion; managed assets, including securitized assets, were $2.8 billion. The debt and real-estate portfolio was 99% investment grade, including 1% commercial non-investment grade. Average remaining portfolio life was about 13 years.
- Cash flow: First-half operating cash flow was $15.7 million, down from $25.0 million. Investing used $157.9 million; financing provided $105.7 million. Cash declined by $36.5 million to $21.7 million; restricted cash was another $12.9 million.
- Debt and liquidity: At June 30, the credit facility balance was $420.5 million; asset-backed nonrecourse notes were $197.7 million and other nonrecourse debt was $107.5 million. Deferred funding obligations were $95.7 million. The company reported a 1.8-to-1 debt-to-equity ratio under its stated definition and compliance with applicable facility covenants. In July, after quarter-end, the credit facility was amended to provide maximum advances of $1.5 billion and extend maturity to July 2019.
Changes, outlook and risks
- Q2 investment income growth reflected a larger portfolio, including real estate leases and financing receivables retained on balance sheet. Lower gains from asset sales and higher interest expense, compensation costs and taxes contributed to lower GAAP net income. Equity compensation expense was $2.8 million for Q2 and $5.0 million for the first half.
- The company completed about $455 million of transactions in the first half and reported a pipeline exceeding $2.5 billion. Management stated there is no assurance pipeline opportunities will close; the filing provides no formal earnings guidance.
- Wind-project equity investments generated a $0.3 million equity-method loss in the first half and incurred $3.4 million of related borrowing interest expense. A June agreement with JPMorgan resulted in a roughly $3 million payment to the company and reduced its investment and expected future cash flows from one holding company.
- Credit contingency: A project containing the company’s $13 million senior secured debt investment was in default following termination of a tax-credit agreement and failures to fund required principal payments. About $1.1 million of the project’s debt-service reserve funded a May principal payment. Investors remained in negotiations and could pursue foreclosure; the company concluded its investment was not impaired at June 30.
- Other risks include interest-rate and refinancing exposure, illiquid assets, project and counterparty credit risk, commodity prices, reliance on government policies, and REIT qualification. The company noted proposed Treasury rules could affect whether certain assets qualify as real estate for REIT tests. It reported no material litigation and no credit-loss provision in the periods presented.
Investor verification checklist
- Review the wind-project default, negotiations, reserve use and the basis for management’s no-impairment conclusion.
- Confirm the July credit-facility amendment’s availability, conditions, pricing and collateral requirements; assess leverage and liquidity against investment commitments and distributions.
- Track realized performance and credit quality of the growing portfolio, particularly internally rated residential solar loans and assets exposed to commercial obligors.
- Reconcile GAAP earnings with Core Earnings, including the company’s effective-interest adjustment for wind investments, and monitor equity-compensation dilution.
- Assess whether the pipeline converts to funded transactions and how retaining more originations affects recurring income, sale gains and cash needs.