Q4 2020 Hannon Armstrong Sustainable Infrastructure Capital Inc Earnings Call
Good afternoon, and welcome to Hannon Armstrong conference call on its fourth quarter and for year 2020 financial results later.
Leadership will be utilizing a slide presentation for this call, which is available now for download on the company's Investor Relations page at investors thought Hannon Armstrong Dot Com today's call is being recorded and we have allocated 30 minutes for prepared remarks, and Q&A all participants will be in a listen only mode.
If you need any operator assistance. Please press star zero on your telephone keypad.
At this time I would like to turn the conference call over to Chad Reed, Vice President Investor Relations and ESG for the company.
Thank you operator, good afternoon, everyone and welcome earlier this afternoon Hannon Armstrong distributed a press release detailing our fourth quarter and for the year 'twenty 'twenty results, a copy of which is available on our website.
This conference call is being webcast live on the Investor Relations page of our website, where a replay will be available later today.
Before the call begins I would like to remind you that some of the comments made in the course of this call are forward looking statements and within the meaning of section 27, a of the Securities Act of 1933 as amended and section 21 E of the Securities and Exchange Act of 1934 as amended.
The company claims the protections of the Safe Harbor for forward looking statements contained in such sections.
The forward looking statements made in this call are subject to the risks and uncertainties described in the risk factors section of the company's form 10-K, and other filings with the SEC.
Actual results may differ materially from those described during the call and.
In addition, all forward looking statements are made as of today and the company does not undertake any responsibility to update any forward looking statements based on new circumstances or revised expectations.
Please note that certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
A reconciliation of GAAP to non-GAAP financial measures is available on our posted earnings release and slide presentation.
Joining me on today's call are Jeff Eckel, the company's chairman and CEO and Jeff Lipson, our CFO N T O O with that I'd like to turn the call over to Jeff who will begin on slide three Jeff. Thank.
Thank you Chad and good afternoon, everyone. Today, we are reporting that 'twenty 'twenty distributable earnings previously known as core earnings totaled $1 55 per share an increase of 11% over 2019, and the seven per cent three year compound annual growth rate exceeding the high end of our previous guidance.
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We grew our portfolio of 38% year over year to 2.9 billion, we closed $1 9 billion of transactions in 2020.
A record interesting almost $800 million in Q4.
And finally, we're providing three year guidance of 7% to 10% compound annual growth in distributable earnings.
Let's turn to page four and discuss guidance and dividend in more detail.
Given the earnings trajectory of our existing portfolio and the strength of the pipeline. We are guiding as I said to a 7% to 10% growth in distributable earnings per share through 2023 relative to a 'twenty 'twenty baseline of $1 55 per share if.
If you look at the chart. This is equivalent to a 2023 midpoint of $1 98 per share.
Just to be clear there may be lumpiness in the yearly earnings, but we expect at the end of 'twenty 'twenty three to be within our guidance range.
Given the expectation for accelerated earnings growth, we intend to grow the dividend at a rate of 3% to 5% annually from 2021 to 'twenty three.
With distributable earnings growing faster than our dividend, we can continue to retain capital for accretive investments and remain attractive on a total return basis.
So today, we're also announcing a 3% increase in our dividend to <unk> 35 per share for the first quarter of 2021.
Now turning to slide five we would like to address some of the key macro themes that are top of mind for our investors and analysts.
First evidence of a changing climate continues to Mount Twenty-twenty tied for the warmest year on record.
In addition, there were 416 natural disasters across the globe last year, resulting in economic losses of approximately $250 billion.
The deep freeze in Texas, causing the massive power outages.
May be an example of climate change induced extreme weather events.
But regardless of the cause we are concerned for the people affected and hope powers restored as soon as possible.
We're also grateful for our partners operating our wind and solar assets in Texas for their commitment and competence and managing through this disaster.
Clean energy assets have generally performed well in 2020 and our portfolio has proven very resilient, despite the pandemic pandemic and recession.
Our portfolio of long duration non cyclical climate positive asset has performed as expected.
While it is too early to fully understand the net impacts of the Texas events on our portfolio. We are confident our diversity and preferred structures mitigate the impact of this week's events.
The climate solutions market continues to grow as our pipeline, our deep relationships with large clean energy and infrastructure clients combined with our flexible permanent capital solutions have led to a greater volume of investment opportunities at attractive risk adjusted returns.
In addition, the demand for ESG equities is growing driven by institutional investor mandates and the strong performance of proven ESG leaders.
We continue to believe that ESG reporting is a material disclosure all companies should make we also support the efforts for global standardized performance metrics prevent green and social washing.
As ESG investing matures, we believe that the competitive advantages of ESG leaders will become more apparent and that this will be reflected in their market performance.
Finally for the first time in several years Federal policy is acting as a tailwind rather than a headwind for our industry and our business as the competitive competitiveness of renewables energy efficiency and sustainable infrastructure improves corporates and governments are setting ever more aggressive clean energy and net zero.
<unk>. In addition from rejoining the Paris agreement to the appointment of key personnel. The by the administration is taking aggressive action across the executive branch to move policy and the climate positive direction.
We also believe there is momentum for a price on carbon by way of a carbon dividend plan, we have long advocated for.
Turning to slide six we provide an update on our 12 month pipeline, which we are reporting is greater than $3 billion up from the prior quarter of $2 5 billion.
It is notable that we increased the pipeline from last quarter, even as we converted almost 800 million from that pipeline to closings in Q4.
We continue to help our clients grow by striving to make the financing transactions as aerodynamic as possible through programmatic relationships, we see strong growth in virtually every one of the approximately 10 end markets, where we invest.
The bulk of our pipeline remains behind the meter and is weighted toward energy efficiency opportunities in the government and industrial sectors. We do expect president Biden to drive the federal E. S. P. C program to return to the levels achieved during the Obama administration.
In addition, the behind the meter solar pipeline remained strong, including residential C&I and community solar projects and increasing number of which include a storage component.
The grid connected portion is similarly, well balanced between onshore wind grid connected solar and solar land.
Lastly, we continue to see interesting climate resilience opportunities as reflected in our sustainable infrastructure pipeline.
On slide seven we detail the $663 million preferred equity transaction, we close at the end of last year, alongside Clearway energy and a two gigawatt connected grid connected portfolio seven onshore wind solar and solar plus storage projects the.
The portfolio enjoys highly contracted generation predominantly investment grade Counterparties, a 14 year weighted average contract life and significant geographic diversity.
The portfolio also reserve represents our first grid connected solar plus storage investment and provides the potential for continued programmatic deal flow with clear way a large ambitious partner focused on the U S market.
As at the end of last year, we had funded $200 million of this larger commitment and we anticipate funding the balance is the remaining projects achieve commercial operations over the next few years.
On slide eight we provide an overview of our $93 million preferred equity investment and a 78 megawatt.
Behind the meter portfolio of more than 60 distributed solar plus storage projects.
Co investors include Morgan Stanley is tax equity and N G as sponsor equity.
With a weighted average contract life of 24 years, the portfolios with highly credit worthy consumer C&I and rural electric co op off takers.
We also highlight the unique structure of this transaction, which combines tax equity financing and a forward flow of projects.
With $37 million funded to date, we anticipate funding the balance of the commitment as projects reach completion milestones milestones over the next year or so.
Turning to slide nine what these investments also highlight is our quarterly and annual headline closed transaction number is perhaps not the most useful metric for evaluating our performance going forward. Historically, we've said that we expect to close at least $1 billion of transactions each year and last year, we announced 1.9.
Billion of closed transactions. However, as of December 31st nearly $600 million of that headline number will be funded in future periods under forward flow funding commitments.
We would suggest that portfolio growth and NII growth will perhaps be more useful metrics for tracking our performance, we will still disclose closed transactions for the foreseeable future, but think these additional metrics may prove useful.
Now I'll turn it over to Jeff L to discuss our portfolio performance and financial results.
Thanks, Jeff and welcome everyone to the call turning to slide 10, we detail our balance sheet portfolio at year end 2020, and compare it to year 2019.
First the portfolio are significantly larger it's grown by approximately 38% from $2 1 billion to $2 9 billion over the last year as we've added approximately 50 incremental investments.
We've achieved this growth while maintaining our portfolio yield of seven 6% and with no meaningful change in average investment size, which stands at $12 million.
Secondly, our portfolio diversity is stronger than ever no asset class comprises more than 28 per cent of the portfolio and we've added a new asset class grid connected solar.
Finally, our portfolio is even longer dated as we've extended our weighted average life for 17 years.
We remain pleased we remain very pleased with the quality and diversity of our portfolio and believe this is a key driver of its consistently strong performance and resilience.
As we turn to slide 11, our high quality assets have continued to perform within our expectations throughout 2020.
This performance was driven in part by the structural seniority of our investments and the credit quality of our albacores.
This quarter, we've added a table detailing the structural seniority and obligor credit attributes associated with each of our asset classes.
Nearly all of our investments were in our preferred senior Super senior position.
And in addition, our <unk> are typically investment grade government or a corporate entities, who are credit worthy consumers.
The structure of our investments most notably our structural seniority as a very meaningful impact in reducing our exposure to both operating and commodity price risk.
Moving to slide 12, let's begin with a quick explanation of the transition to distributable earnings which is summarized in the bottom left prior.
Prior to 2020, we utilized core earnings as our primary non-GAAP performance measure.
In 2020, we implemented the current expected loss standard known as Cecil and we utilized core earnings pre seasonal as our primary non-GAAP earnings metric, which we had communicated would be a transitional metric.
However, the SEC has recently clarified that rights subject to certain conditions.
We use distributable earnings as their primary non-GAAP performance measure, which excludes most seasonal provisions and we have elected to use a share billable earnings as our primary non-GAAP measure.
For simplicity. Please think of distributable earnings is equivalent to the core earnings pre seasonal metric that we use in the first three quarters of 2020.
Fundamentally we believe that distributable earnings as we have defined it remains the best indicator of our economic performance and it's useful to both our investors and the leadership team.
Waiting our performance and calibrating our dividend.
Summarizing our results we reported distributable earnings per share of $1 55 in 2020, an 11% increase compared to $1 40 in 2019.
Higher revenue from both gain on sale and our larger portfolio.
Only partially offset by higher interest expense.
I'll also note that distributable net investment income increased 7% year over year to $88 million in 2020.
This increase was despite the fact, we maintained an outsized low yielding cash balance during much of the year.
In addition, we recorded significant gain on sale income in 2020, as our access to private institutional debt remains strong.
Our cash collected on equity method investments was also robust in 2020 as we continue to receive both the return of and return on capital from the portfolio.
To conclude our dual revenue model continued to generate strong results in 2020, despite the pandemic and recession.
Yeah.
As we turn to slide 13, we reflect multi year growth rates at or above, 15% and manage assets and NII.
We achieved this while continuing to generate a steady portfolio yield and our return on equity above 10%.
Our closed transactions have averaged $1 3 billion over the last five years, 30% above the previously disclosed target.
Although the chart on the bottom right is a good reminder, that our volumes can be lumpy, which is one of the reasons why we think three year guidance is appropriate for our business.
Moving to slide 14, we detail our balance sheet as of year end 2020.
In the fourth quarter, we funded $739 million of investments, resulting in a 30% increase in the portfolio as compared to 930.
We anticipate these fundings will result in significant net investment income growth in 2021.
Even after this elevated level of investment we had nearly $300 million of cash on our balance sheet at year end for scheduled fundings and further organic growth in the portfolio.
On slide 15, we highlight our continued access to the capital markets.
In 2020, we raised $1 2 billion in debt and equity, including $775 million in unsecured green bonds $144 million of zero coupon convertible green bonds and nearly $300 million in equity.
Following the filing of our year end financials, we intend to refresh our at the market equity issuance registration up to $500 million.
We're also excited to announce the closing just last week of a $50 million unsecured sustainably sustainability linked revolving credit facility with JP Morgan.
We anticipate expanding this facility in the future by adding additional relationship banks, which will further provide funding flexibility.
So during a prolonged pandemic and recession, we actually enhanced our ability to flexibly access the capital markets and other sources of capital.
In addition, we continue to manage our leverage maturity profile and interest rate risk at prudent levels.
In summary, we were pleased with our 2020 performance, including our earnings funding platform in asset quality, and we remain poised to take advantage of favorable market conditions.
With that I'll turn the call back over to Jeff.
Thanks.
Turning to slide 17, we highlight our ESG initiatives.
Regard to the E. In 2020, we achieved the highest carbon reduction in our history almost seven times greater than 2019. This was driven in part by our elevated transaction volumes, but also by the higher efficiency with which we use capital to reduce carbon reflected in a carbon count of one point of the three for the year.
With regard to the S. In ESG, we are pleased to declare a social dividend of $1 million to capitalize our newly formed Hannon Armstrong Foundation. The foundation will provide a long term strategic strategic focus for our philanthropic efforts to find the intersection of climate change.
And social Justice.
Hope to provide more updates on this effort in future earnings calls.
Finally, with regard to governance as our company grows it is important to grow our board of directors and number competencies and diversity as you may have seen in yesterday's press release I am pleased to welcome two New Board members play Armbrister President of Johnson C. Smith University, and Nancy Floyd founder of one of the first clean energy.
Venture capital platforms 30 years ago.
With our new board members and our previously announced leadership realignment, we are well positioned to best serve our clients investors and employees to deliver on our climate positive investing vision.
We will conclude on slide 17.
I want to summarize why we believe we offer a compelling value proposition to investors.
Our programmatic growth platform is backed by a robust pipeline of projects developed by the leading clean energy and infrastructure companies.
That drives our diversified and high quality portfolio, that's been tested in 2020 and perform quite well.
With a durable capital structure backed by a prudent approach to leverage an array of funding sources and are transparent and quantitative carbon reporting provides confidence to ESG investors and.
And we have a proven track record as a public company for nearly eight years, along with a stable and growing dividend for these reasons, we significantly outperformed the S&P 500, ESG index as well as REIT and Neil Cole indices over the last five years.
To sum up we're thrilled about the accomplishments in 2020 and the opportunities in front of us and confident in our ability to execute on them in the months and years ahead.
And I would like to close by thanking the staff of Hannon Armstrong for their outstanding efforts in 'twenty 'twenty truly a remarkable group.
Operator, please open the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your attached home phone.
They are using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
Our first question today comes from Mark Strouse with JP Morgan.
Yeah. Good evening, Thank you very much for taking our questions.
Martin, Jeff Yeah, Hi, Jeff.
Jeff I know you said that it's too early to kind of know what the impact of what's happening in Texas in two questions there.
How do you go about kind of framing.
That potential risk I guess I mean, what what is your exposure in your portfolio to Texas, and then bigger picture.
You know I think you're good spokesperson for the industry I mean, what you're hearing a lot of different debate going on about who's to blame for for what's happening.
Just curious for for your high level thoughts.
Thanks, Mark as I said, it's too early to know the net impact.
You've got some generators that are selling power at high rates and others that are or not.
I would say our clients and this is a very real time.
The effort, we have daily calls with them. They are doing a phenomenal job getting the plants restarted in truly difficult conditions were very grateful to have them as partners.
I think the third piece and we've mentioned it in the in the script is the preference features in our invest and investments mitigate.
The impacts from the Texas events.
Just really not that meaningful so we being you know a kind of conservative folks we have a worst case estimate that assumes everything goes bad and.
The.
Nothing goes well.
And.
What we've found is the impact is not material and I think the best evidence of that is we're showing a three year guidance even in light of the ERCOT issues. We've seen this week.
It's yeah, it's just to us the strongest possible statement, we can make that a we feel very very good about.
Where we are with even with the impacts of Texas.
On the ERCOT issues.
I've always been perplex by their desire to remain island, having done island power solutions in the Ninety's. It its just its tough way to run a utility.
I think I'm certainly, hoping the American clean Power Association will.
Be getting the the true story out there.
I think the other thing Mark debt I would say as.
I've never been a big fan of people, saying, 100% clean energy.
I get the aspiration and that comment, but that's not how utility systems work.
You need a mix of generation and this I think just reinforces that.
So you know obviously, you're gonna be fingers pointing for a long time. This is a real disaster for a lot of people and just should not happen.
So with that why don't I stop and see if I've answered your question.
Yeah that was very helpful. Thank you one more follow up for for Jeff L. A.
The guidance, obviously points to higher growth for for earnings than it does for the dividend payout.
Payout ratio coming down just given your given your ballot when your proven ability to access capital markets I mean, even during 2020.
Can you just kind of give a bit more color into the rationale for being a bit more conservative with the payout ratio. Thank you.
Sure Mark So we've been previewing for some time that EPS will grow faster than Dps and I think we've been saying that very consistently for at least a couple of years.
New guidance, just reinforces that message in a more quantitative way and we just think it's a more prudent way to run the business.
To retain more capital when we have such a good pipeline and expect to have a strong pipeline.
For a long time, so you're right, we could just re access capital and recycle it and remain confident in our capital markets platform.
But theres a balance there and retaining some capital we do think it makes sense and we are putting force and accelerated growth in dps.
Not quite as high as EPS.
Right. Okay makes sense. Thank you very much.
Thank you.
Our next question comes from Philip Shen with Roth Capital Partners.
Hi, everyone. Thank you for taking my questions.
Wanted to touch base with you guys on the outlook for originations.
Jeff I know you talked about.
Having a maybe a bit of a shift in focus to overall portfolio growth in NII.
But that said you know origination still I think are important and was wondering if you could share what the implied originations might be embedded in the three year guidance. So if you're at this 1.9 billion a year.
Should we be thinking more along the lines of $1 5 billion.
Or do you think you know 2021 for example could be.
Higher than the $1 9 billion.
Thanks, Phil I think well.
You said you still think originations are important total weight.
We've average one 3 billion over five years, that's not a bad number.
I think we've proven we can do $1 9 billion.
We're certainly not we don't need to do that to hit our guidance numbers.
So you know I mean, I think something on the order of 1 billion to $1. Five you know that's that's that's in that range.
And there's always this.
This tension between can you originate more and take a lower return and the answer is yes, you could but ultimately we're running the business for the long term return on equity and.
Stability of the business so.
Hopefully that answers your question Phil.
And Phil if I can share a little bit yeah, just to reinforce them or.
Or at least slight movement away from that number keep in mind.
As Jeff said in his comments.
Our implied in his comments, there's a big difference between originating let's say $1 three in a year and it all funds and originating 1 billion three which includes a future flow component in.
Perhaps only half of it funds and so that's why that number is a standalone number is not quite as meaningful as we think people have been using it and that's the reason why we are deemphasizing that just a little bit and if you look at the 1 billion nine but we still haven't funded 600 debt.
That's two 1 billion, three which I think makes your point Jeff.
Yeah.
Yep.
Very helpful. Thanks, guys.
Shifting over to a gain on sale from a modeling standpoint.
You guys have been pretty consistent in this kind of mid teens type level is.
Is this something we shouldn't be counting on going forward I know there are lots of puts and takes in the market and it depends on.
A lot of factors, but are in the near term are coming quarters.
Do you do you expect that to remain kind of in the mid teens millions.
It's tough to say that is the lumpiness as part of the business as you know we start every quarter at zero pretty much and we are.
Have had some very successful quarters, including the fourth quarter and some a little bit less of gain on sales. So.
In total I view, the 66 million.
We did it 2020 as a bit of an outsized number I don't think we want to promise that debt.
The number will be.
System as it relates to gain on sale going forward.
But I think you should expect some lumpiness I think you should expect it to continue to be material, though.
There are several asset classes that we do.
I remain active in.
And have a bullish outlook for lend themselves well to securitization and likewise, our securitization partners.
Continue to express strong demand for that type of investments. So it will continue to be material, but lumpy.
Okay. Thanks, Jeff one.
One last one if I may on slide 11, you guys have a really nice.
A depiction of how well performing your asset base has been.
Through this challenging past year, and then your commentary Geoff on the.
Hum.
Challenges in Texas.
Still kind of in spite of that you're issuing robust three year guidance.
So with that.
You know that that's yet another shock to arguably your portfolio and it sounds like you, you'll you'll likely perform well so as I think through.
Your credit situation and the potential for an investment grade rating.
Can you talk us through what the potential of that might be for this year I know the rating agencies.
They can't signal exactly but just from your perspective, if you could update us on the potential.
That would be fantastic. Thanks.
It's difficult to handicap, Phil I wouldn't characterize it in terms of likely or unlikely a reasonably likely I would only.
Say that it's a.
Conversation, we will have in detail this year and I think performing well.
In a recession.
We will certainly work in our favor.
The business is also achieving more scale, which is something the agencies look to we've achieved more unsecured credit, particularly with this new JP Morgan facility, which again is a positive attribute for the rating agencies. So.
I think we have a good case, but I would hesitate to handicap it in terms of likelihood.
Okay, great. Thanks, Jeff L, Jeff and I'll pass it on.
I liked the Jeff L is catching on here.
Yes.
And our next question will come from Noah Kaye with Oppenheimer.
Hey, good afternoon, how are you.
Yeah.
For the first time in a while.
The 12 month pipeline.
<unk> has increased to <unk> 3 billion.
So just a question does that.
Include or is that inflated by versus a traditional $2 5 billion number you've given the past has been inflated by.
The announced investments that have yet to be funded.
Would you call that out as an unusually inflating debt.
This year's pipeline.
Or do you feel like this is just structurally what we could anticipate in the future.
The large pipeline.
First of all we went from more than two and a half billion to more than $3 billion and more than 3 billion subtract. The approximately 800 million debt. We closed on in Q4, So we would never double count.
That's an aspect from your question.
No.
I think as we said on the I think the third slide.
Climate solutions investing is is growing and our pipeline is growing.
So this is just a fundamental good news that.
Theres more business out there.
You know your pipeline is just structurally expanded because of the investment opportunities from climate Yep, Great I think the yield curve you know finally steepening.
Hum.
Good time to have 99% fixed rate debt going into that.
It certainly has been impacting equities today, but can you remind investors of how.
Steepening yield curve.
Impact your business in terms of.
Spreads deal flow, how do you think you're positioned now for potential interest rate increases relative to say, where you were in the past.
Okay.
So I think the duration of our liabilities we've extended.
Particularly with the most recent 10 year deal I think there was a time you look at this business.
And you would say the duration of the liabilities was a bit shorter than the duration of the assets. So the steepening yield curve would help.
By the same token we would have some risk in doing that I think we've taken out some of that risk, but that's also in some ways reduce the benefit of a steepening yield curve. So I don't think it'll have a big benefit for the business I think it's.
It's more second tier impacts that a steepening yield curve.
Is usually indicative of a strong economy, it's usually indicative.
Of some movement in credit spreads and I think ultimately, it's the credit spread differential between our investments and our debt that drives profitability not the yield curve itself.
Yeah. Thanks for.
Hence.
I wanted to come at the acts of Texas, and a little bit of a different way.
In the past.
Whether it's been superstorm, sandy or the PGA need wildfires.
Because of the arc of.
Investments in the power industry has been tending to bend towards increased resiliency.
Localization distributed energy energy, plus renewables onsite plus storage.
Hi.
Obviously too early to tell but you.
Do you see potential for this week's events too.
Spur on those types of funding.
Opportunities.
And that kind of pipeline.
Because certainly I think.
Resiliency increased resiliency in the grid is.
Is paramount.
Given what we're seeing this week.
No I don't I don't see how it couldn't.
It particularly is.
The U S continues to electrify we.
We need a much more reliable grid and we need more distributed decentralized energy resources I just.
Yeah, that's a trend that's been going on for a long time.
We're our pipeline is is dominated by behind the meter solutions.
Part because it is a different quality of power service.
This is just a hideous vet in Texas should not be happening.
But yeah, it's it's a very hard for me to see why it wouldn't expand the shift of distributed energy resources.
Okay Alright.
Alright, Thank you very much take care.
Thanks Noah.
Our next question comes from Greg Lewis with B P. I G.
Yeah. Thank you and good afternoon, and I guess I just wanted to follow up on Noah's question.
Clearly the pipeline is expanding and looking at the behind the meter.
As a percentage basis, it went down a little bit but on an absolute basis. It went up is there kind of any way to understand it and knowing that you you mentioned, California earlier for from last year. This event.
Is there a growing pipeline of battery storage behind the meter that is just kind of quietly accelerating is that kind of what's helping grow out the pipeline.
I wouldn't say it's.
Necessarily storage.
But if you listen to Sunrun or Sunpower Nova.
Or anybody in the C&I.
Markets you know storage is.
Increasingly part of the solution.
It would be I think we'd be hard pressed to say that's why our pipeline is up.
But it just makes.
Solar that much more valuable.
Yeah, Okay, Great and then just and then just thinking about the opportunity set clearly it's growing.
Grid connected which is as we think about as you know.
<unk> yields a little bit lower than behind the meter.
Like as we think about putting the portfolio with them.
And I on maximizing yield.
It is.
Some other grid connected just not going to be as attractive as we will need at the beat it to sort of throw it into the investment in the portfolio.
No that's quite possible.
And we've always said when there are very large common equity positions.
That are highly competitive with global institutional investors.
That's probably not a great opportunity for us and somebody else should.
Should win that business, we certainly like a little bit more structure in.
More of a partnership field and then an auction so oh I see.
Certainly see grid connected as needing a lot of capital there is a lot of capital chasing those.
Investments and that's a good thing for our clients.
Whether.
They have the best risk adjusted return for US we take case by case.
Okay perfect. Thank you very much thank.
Thank you.
Our next question comes from Chris Souther with B Riley.
Hey, guys. Thanks for taking my question here.
Maybe you could just touch on to piggyback on the question around gain on sale.
How should we think about the impact not necessarily in the shorter term, where it's tougher to predict but.
In the three year targets that you are giving out how much.
Should we think about that being baked in as part of the growth there.
Well I think.
We're clearly given the fundings we did in the fourth quarter are going to grow NII next year, I think thats fairly obvious.
In terms of the gain on sale you know, we're not going to disclose.
Specific growth targets, but what I said earlier in terms of you should expect it.
To continue to be a material contributor to our earnings and our earnings are going to be growing 7% to 10%.
Should logically include debt, that's going to remain very active part of the business.
I would I would add though debt.
We've always wanted to drive to higher NII relative to to gain on sale just because gain on sale can be more episodic just a more reliable business, we seem to be well positioned from 'twenty to 'twenty.
To do that and I've always said I want a gain on sale to be earnings noise to the upside.
I think that's we're in a marginally better positioned for that to be true.
Incrementally credit here.
Sure.
Yeah that makes a lot of sense. So looking at the other side do you think you'd be able to talk about the.
For the balance sheet growth that we should be thinking about.
To get to the low or high end of the targets that you've given today.
Well it kind of broad strokes, maybe or is that not something you'd want to provide at this point.
We're not going to disclose growth target specifically on the portfolio.
But I think.
Again, you can probably triangulate that a bit when you think about the.
That we are guiding towards a relatively flat yields you can see where we're guiding to on earnings.
Jeff mentioned, roughly a $1 2 billion five of.
New investments per year.
Think there's an ability with the numbers we've put out for you to triangulate what portfolio growth will look like without us disclosing that specifically.
Okay got it.
That's helpful and just maybe just the last one on the operating expense is just how should we think about the trend there.
Throughout this year and then going forward it would be helpful.
I think on a percentage increase basis, you should think about.
Fairly significant increases.
In operating expenses, because we are increasing our staffing.
Materially to keep up with this growth.
But as a percent of revenue.
I think you share division that coming down which is actually the more important metric I think we will be growing revenues faster than we're growing expenses. Despite.
Expenses growing on a percentage basis set a somewhat significant clip.
Awesome. Thanks, guys.
Our next question comes from Ben Keller with Baird.
Hey, Jeff and Jeff.
I'm going to ask me about three questions.
The first is a business for the mildest second was about technology towards bigger picture.
So business fundamentals financials the Roe.
So we got asset yield study.
For capital costs go down.
You got leverage in their model, so where should the oil where you go.
Forward, how should we think about that going forward. That's my first question.
Okay.
You should think about a steady upward trajectory in row.
Think again, you laid out most of the variables that impacts Roe.
Some of them are steady some are improving.
So I don't expect.
It is suddenly going to be a 15% ROE business, but I think we'll see some steady increases in a row and the thing that quality problem.
Rob Roy is.
Well I was going to say Ben the thing that really changes our ROE in any one period is the amount of gain on sale.
And.
The NII is going to produce a steadier.
Ro.
Noise is going to be around gain on sale.
Okay.
Technology parts fuel cells Jeff.
Jeffrey Jeff.
What are you guys what are your views on that.
<unk> was a bigger picture.
Sure.
Well I wish I'd bought plug power, one I had a chance.
Got it.
I kind of missed that one by a mile.
Sure.
Then we always look at things from a carbon lunch first I think the amount of progress in the hydrogen fuel.
Fuel cells is outstanding.
We would fundamentally figure out what the carbon count on on it is.
I think they are proving to be you know after almost 30 years of trying.
This technology seems a quite viable now so.
I congratulate those those companies they've been at this a long time and.
You know have really built something that that can work.
<unk>.
To us it should be part of.
Micro grids and distributed generation future and.
And again, so long as it's got a.
Septimal carbon story for us.
Thank you the bigger picture I guess it was I.
I think I've asked this before but if I go to slide 16.
Last night I was doing something.
Young person you'd covenants for the field house about when do investors start valuing ESG.
Yeah.
Metrics like that.
Do you guys have always.
You'll put out your your your card reported.
And you've been a leader on that front.
Just from your perspective is when do people, how do we start valuing that.
Or do people do that or is that already being valued.
And I know, that's my job, but from your perspective.
What what's the tipping point there.
Well I would argue that we may have reached its fundamental to our strategy Ben.
Having a verifiable and transparent carbon story.
With some day reduce our cost of capital as investors increasingly recognize the risk to investing.
When they disregard carbon.
Don't think they are disregarding carbon our climate change anymore, and I think you've seen it on the on the equity side and the fixed income side.
What I don't think is happening is.
A real refined.
Analysis of the of the carbon impact of companies, it's if you're green, you're you're really green.
I think over time, a metric like carbon count can be useful.
I think on governance.
To me, it's more binary you either have good governance or you've got a lousy governance and.
Sure.
It's harder to say, but I think a lot of companies run away from.
For the government businesses.
The <unk> is clearly harder.
We're all learning how to.
To value we have implicitly valued.
The social aspects.
As it relates to our employees because.
This.
For the same reasons climate change matters to them and why they want to work here.
The social aspect of the business matters as well.
And.
I think every company has work to do and we.
We are.
Well advanced and starting on that work.
But maybe just jumping into the well where's the FCC.
Do you think they are billing and reporting this in.
These different metrics.
Well different things out there so what do you think's going to happen.
But we do have a new disclosure in our 10-K that will be filed.
Some point in the future soon.
On human capital disclosures, that's a new SEC requirement I think we are going beyond what the SEC required and adding a few more dimensions.
Dimensions too.
For the human capital.
Question with other than I think it's just an absolutely great that the FCC is doing it.
Because they do more do more share.
Under their new leadership I suspect they will.
Great. Thank you guys.
You bet.
Our next question comes from Julien Dumoulin Smith with Bank of America.
Hey, good afternoon, Tim Thanks for the time and the opportunity to connect.
Hey, congrats on with guidance, let me try to leave it a little open ended but I'd be curious how you would describe there so.
This three year view, when we get there.
What does that mix look like with regards to your portfolio and what kind of yield do you think you have but more importantly, what is that mix look like right. When you think about where this where the whether.
Whether it's 1 billion or $1 five per year.
The net debt portfolio that you're aspiring to maybe ask a little bit differently from Phillip and then separately, what's the composition here really critically.
No I don't.
We certainly don't have any.
Goal for any specific portfolio mix other than we don't want to be over concentrated.
And any one asset class and.
A few years ago, everyone was worried that we were going to have only.
Residential solar well.
We don't have only residential solar.
And perhaps now people will worry will have too much onshore wind.
We're not going to.
Uh huh.
Tip fee or unbalanced the the portfolio here in those ways I think one of the great advantages of our business model Julien is the ability to.
Look at all sorts of asset classes, whether in the power sector or not.
Both forgetting.
Incremental reach.
Returns, but also diversity I think.
We love, having more than 230 total investments in our pipeline.
I've been saying this for a long time, there is no one asset or asset class that are going to bring us down.
So don't have any prescription as to what it's what it is going to look like.
If I had to venture a guess I would say probably not going to look a whole lot different than it.
And it does now.
Got it excellent.
And then I'm thinking a little bit more broadly here as you think about this trajectory right now and perhaps into the future and otherwise how do you think about the REIT.
Right and does that matter or not over time relative to the portfolio as you see evolve.
You see it evolve specifically.
Direct renewable investments that may not qualify I'm, just curious how sustainable the trajectory. If you don't invest for renewables and how you think about that balance.
Do we bother with the REIT status relative to the opportunity set in renewables directly versus maybe some of the more historical investments you guys have made.
Good question, Jeff L. So.
I would.
Julian say.
Reiterate to some extent in answering that what Jeff just said, which is to use some slightly different words.
We have multiple paths to achieving this guidance, we have many many different paths, which will take us to $2 or more per share in 2023 in terms of the portfolio in terms of the yield in terms of the amount of gain on sale and then also to your question in terms of corporate staff.
So theres not one path to getting there there's multiple is highly likely.
As it relates to REIT status that'll be a path that allows us to continue to be a REIT, but.
But I also think we are there are scenarios, where we're not a REIT.
You don't want to do is miss out on some really good investment opportunities.
Net we perhaps can do.
If we read our Quinn too too much of so I think it's likely will be a REIT over this three years, but it's not 100% and thats one of those several elements of there are multiple paths to achieving this guidance.
Okay, Alright fair enough.
But.
Let me maybe ask it this way.
Obviously, you have over $4 billion of securitization assets from our balance sheet.
How much latitude even have left over the next three years it sounds like there's probably still some amount.
Again, obviously, depending on the per foot pop you choose but there there's latitude today and more importantly, I think as you say, there's probably a good amount of latitude still lack that depending on the securitization asset portfolio relative to the balance sheet.
Yes, and just to correct. One thing I think you said securitization assets on the balance sheet I think you meant to say off the balance sheet.
But yes there is.
There is still.
Remains material.
Flexibility.
As it relates to the REIT tests at this point, so I think without getting into it.
Too many specifics so I think that's the best way to characterize it and remember Julien.
Off balance sheet assets are valued for REIT purposes at growth.
And the <unk>.
Bad REIT assets are valued at the net equity level. So that's always been a I think a misunderstood aspect and the power of having the.
The efficiency assets.
As part of the business.
Yeah I hear you.
Uh huh.
Jeff One last question for you if you don't mind.
Did I Miss you on quantifying that mesquite impact from exit or did you not I just wanted to make sure I heard you right there.
You heard it exactly the way we intended it to be told that.
The.
We issued guidance with it.
It's just flat too early to say any specifics Julien.
But we have.
Yeah.
Given guidance with.
Full knowledge of the impact of.
The Texas issues.
Right, Okay understood I'll take it with that thank you guys.
Okay.
Our next question comes from Stephen Byrd with Morgan Stanley.
Hey, guys good afternoon.
Hi, Steve.
Hi, most of my questions have been addressed and maybe just one on potential further democratic legislation.
We've been seeing various drafts and have some sense for the different elements that might be in a another round of legislation and we're fairly bullish about the prospects for for more support at the federal level I guess when you look at the landscape of.
Areas for potential additional federal support.
Is there anything that stands out to you is especially beneficial or sort of noteworthy is do you think about your business in the context of this are the democratic support for clean energy.
See what I was going to say I would wait to get a note from you that describes this in far more detail then.
I would ever be able to understand their day.
Congratulating you on your recent note and look forward to them all the time.
Yes.
You know the last for years, where from a federal energy policy standpoint, we're a bit of.
A dark period.
And yet the business was good I don't know what.
The federal government will do and what is possible with a split Senate.
But it's going to be a heck of a lot better than.
The last for years.
We certainly see the federal energy efficiency and resiliency mandates as being completely in our wheelhouse.
If president of Baidu can do what president.
President Obama did and it's just a wonderful thing that's a program that we still do business there, but it's atrophied without any executive branch leadership.
And that's just that's executive order type stuff.
I am.
Continue to believe that a price on carbon.
A dividend is the way to unlock markets to really attack attack carbon not just in the electric sector, but in.
<unk> in the industry and transport.
We hear things that that's not the craziest notion.
I don't know what your mood ring says on that but ours is turning a little more.
What do we say blue or green.
Not black or yellow.
And Steven I actually do have a mood ring when that I put on when whenever we'd have to debate but.
Anyway, I'm using eight ball, but same idea yeah. Okay.
Yeah.
Okay, well, thank you very much.
Thanks, Steven and stay well.
This will conclude our question and answer session as well as today's conference call. Thank you for attending today's presentation. You may now disconnect.