Q3 2021 Hannon Armstrong Sustainable Infrastructure Capital Inc Earnings Call
Page at investors bought 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 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 you May proceed Mr. Reed.
Jeff.
Chad and good afternoon, everyone. Today, we're reporting strong results for the third quarter with distributable earnings of 41 per share a 14% increase year over year and distributable net investment income of $32 million or 79% increase year over year.
<unk> of our programmatic investment relationship with Sunrun, which I will discuss in a subsequent slide.
45% growth of our portfolio year over year to $3 2 billion and 28% growth in our managed assets to $8 2 billion.
And declaration of a 35 per share dividend.
And starting this quarter, we will highlight the carbon count of one transaction in order to generate a more more understanding of this important metric as a reminder, carbon count measures the efficiency with which capital is used to reduce carbon emissions something the financial industry.
The attention to but does not currently.
As a reference point the average investment this quarter has a carbon count of three metric tons of greenhouse gas.
Reduced per thousand dollars of investment are.
Our feature transaction has a carbon count of 279 times more efficient than the average.
This is a behind the meter energy as a service investment in the digital and digital controls for HVA C. At a top retailer this.
This is part of a larger programmatic client relationship. An example of the power of Digitization in the electric sector to save customers money and reduce carbon.
While every investment we make improves our climate future not every investment is equally efficient at doing so and we believe this level of rigor is where the market needs to go.
A few words on the legislative efforts in Washington.
<unk> supply chain issues.
Cause behind the meter projects offset the retail price of electricity and that the wholesale price they can better manage the higher costs the industry has faced.
Turning to the grid connected pipeline, we have more than 15 clients in the women's solar markets, including Engie and clear way and the pipeline remains at about the same level as last quarter.
We are seeing some projects experience delays due to panel availability and the need to rework projects due to cost increases.
We have not seen cancellations in our pipeline, but some transactions have indeed moved out in time.
The transactions impacted the most are those with fixed PPA prices, but with costs, which are not yet locked down and also those involving smaller developers.
Overtime, we believe increases in PPA PPA prices that we're seeing will restore balance to the market.
The sustainable infrastructure market as the newest market for us and as a result of the fewest client smallest pipeline, but we continue to see great upside in this market transaction volume transaction size and eventually growth in the client base.
Climate resiliency is going to be a big business, because unfortunately, the weather's, becoming more extreme.
Building on the diversity of our clients theme slide five highlights an underappreciated strength of our business model. The diversity of our markets. As you can see 2021 has been dominated by behind the meter investments. While 2020 was majority of grid connected and each of these markets. There are multiple generally.
Correlated asset classes in any given period any one of these asset classes may produce investment opportunities, while others may not.
This diversity in our origination platform and the breadth of our client base provides assurances that despite one asset class facing challenges like grid connected solar this year, we should continue to find attractive climate solution investments.
Bottom line each of the markets, we invest in are important to reducing greenhouse gas emissions and we are built to invest across multiple markets and asset classes in order to earn an.
And increase the stability of the business. Our result, we continued to demonstrate.
Drove this result.
In addition, as shown on the lower left distributable net investment income was $95 million a year to date, reflecting annual growth of 42% driven by a larger portfolio and stronger margins.
Lastly, our gain on sale from securitized assets was $64 million a year to date, representing a 34% increase these.
These very significant year to date growth rates are 42% in distributable NII and 34% and gain on sale represent the ongoing success of our dual revenue model.
Our guidance of 7% to 10% compound annual growth in distributable EPS through 2023 remains unchanged.
Turning to slide eight we demonstrate that our margins have improved as we've increased our portfolio yield while decreasing our cost of funds.
Over the last three years, despite a competitive investing environment our portfolio yield has increased by 80 basis points and now sits at seven 6%.
Over the same period are interest expense as a percent of our average that balance has dropped by 70 basis points to four 7%.
As we have optimize our debt platform and taken advantage of tightening corporate debt spreads and the strong paid for credible ESG debt.
As we discussed last quarter and consistent with most broader markets the yield for certain climate positive transactions is compressing, although we have not experienced an impact of this trend.
To the extent these market pressures were to impact our portfolio yield we would not expect a significant impact on our margin as we believe any increases or decreases in our portfolio yield will be generally well correlated with our cost of funds and.
And as the chart indicates.
We are already well positioned having issued low cost step.
In summary, we remain confident that over the long term our margins will be strong and relatively stable given the combination of our diverse investment strategy and attractive that platform.
We expect these margins will facilitate continued strong growth and distributable net investment income.
Turning to slide nine we detail our 3.2 billion dollar balance sheet portfolio as of the end of the third quarter our.
Our portfolio yield remained steady quarter over quarter at seven 6%.
Crist for credible ESG and carbon reduction exposure amongst investors.
Considering the CP program, our balance sheet cash and our revolving credit facilities, we have over $960 million of potential liquidity sources to support our growth.
For the last quarter, our debt to equity ratio decreased from one nine to one six times.
Driven in part by the conversion of $136 million of.
Of our 2022 convertible notes into common shares.
In addition, we raised $49 million of equity in the third quarter with our ATM program.
Our remaining debt includes no material maturities until 2025.
In summary, we remain confident our debt platform and liquidity profile, we will continue to facilitate growth in the portfolio.
And with that I'll turn the call back over to Jeff.
Terrific job thanks, Jeff.
Turning to slide 13, we note a number of ESG accomplishments with our carbon count based commercial paper program or seeking to differentiate differentiate that products based on calculated carbon reductions.
Some green label not related to carbon as Jeff said, our credibility and reporting carbon impact stands in contrast to the amount of greenwashing going on in the financial services industry today.
On the social front, we're excited to meet with the initial cohort of our climate solutions scholars from Morgan State in Miami University in the coming weeks to support their interest and the growing climate solutions field.
Finally, we've met with multiple SEC commissioners and their staff on the necessity of mandatory ESG and especially carbon emission disclosures, so that investors consumers and employees at the information they need to evaluate the impact companies theyre investing in buying from or working for.
We will conclude on slide 14.
Three competitive advantages this quarter demonstrated.
Our multi client multi asset class investment platform affords us the ability to invest in a wide range of climate solution, providing stability to the business.
Our flexible funding platform drives strong and stable margins and.
And finally, we remain a leader on ESG and continue our advocacy for credible carbon metrics or investment frameworks.
Sum up our growth prospects remain bright and our ability to generate value for both shareholders and stakeholders remains strong.
Operator, we'd be glad to take some questions.
We will now begin the Q&A session. If you would like to ask a question. Please press star followed by one on your Touchtone pad.
Is there any reason you would like to turn that question. Please.
Again to ask a question. Please press star one we will pause briefly to allow questions to generate.
Our first question comes from Philip Shen with Roth Capital Partners. Please proceed.
In Q4 and in 2022.
On the level came down a touch in Q3, but oh any way to help us think through what that could be thanks.
So Phil I think last quarter, we had said Ah that gain on sale for 2021 would be greater than $75 million. So we'll stick with that.
Expectation for now.
And then as for 2022, we will have more to say on the fourth quarter call in terms of our expectations going forward.
We did say it will be greater than $55 million already.
But we will put a finer point on that next quarter.
Okay, great. Thank you, both and I'll pass it on.
Thank you Mr. Sean.
The next question comes from Eric Boredom with Thornburg capital markets. Please proceed.
Hey, guys. Thanks for taking my questions I was wondering if you could expand on the volume. This quarter did you have any new clients that you signed.
And then.
The total transactions is it fair to say of the 350 million $359 million of transactions closed in the quarter 200 was on balance sheet and the remaining 159 was from Securitizations or is there some equity method investments baked in there as well.
Yeah.
Why don't I take the client question first.
And Eric I think this is the first time, you and I've had a chance to talk so nice to meet you and thanks for following the business.
We don't typically disclose clients every quarter.
And whose new and who's not but over time, you'll start to get a sense of when we add new clients and today, We mentioned summit ridge, but.
They've been a client since 2019, but we've never talked about them before so.
So we're trying to provide a little more color on the client base.
To demonstrate the diversity, so we don't really disclose it but we'll give you information here as the quarters progress.
So Eric on the second part of the question.
Just to clarify transactions closed as announced on page three.
Relates specifically only that a transaction is closed not that it's funded so I don't think you can take that 359 million and fully allocated to either balance sheet or securitization.
Some of it has not funded yet.
Which is why we provide this supplemental.
Back on page 11.
As to how much of this quarter's investments are funded which was the $167 million.
We don't.
Really do any other disclosures other than.
What's been closed and what's funded so I think that gives you a way to triangulate.
Primary answer to your question, but we don't give very specific this is exactly how much.
Securitized in the quarter.
Yeah.
No. That's helpful. Thank you guys.
And then kind of going forward, how should we think about volumes into Q4 and into 2022, and then how should we think about new opportunities for <unk>.
Are you currently in conversations deploy capital into op into offshore wind projects kind of given the concerns Rob higher input costs for onshore energy.
Color there would be really appreciated.
Okay.
The primary.
Goal, we have is to follow the best energy and infrastructure companies under whatever market they develop.
We certainly are paying attention to offshore wind we're paying.
Tension of hydrogen and of course storage.
But really until our clients start to do those at scale and they become proven it's it's.
It's not one that's really on our radar.
We know who they are but there's there's work to do in the industry to get those two that's a lot and frankly the tax credit.
That's what would help us.
Given that we only saw a slight decline here, but you had given kind of a wider range on the last call. Thanks.
Yes.
Perhaps I'll start and Jeff can add.
As a reminder, Chris on our non-GAAP measure we.
Take a long term view as to the yield on an investment and accrue income accordingly.
So short term fluctuations in power prices don't affect.
The non-GAAP yield on our portfolio.
They do affect the underlying projects, but we generally view that as a short term phenomenon unless it's something.
And that causes us to change our long term yield assumption.
And at the project level.
Theres, a fair amount of hedging going on so in the same way that reductions.
Reductions in power prices.
Don't affect us very much increases don't affect us very much either so.
The earnings impacts of higher power prices on the existing portfolio is virtually zero.
And just to build on that when we do prep equity in those grid connected projects.
<unk> a conscious view that we would much rather avoid the negative impacts of $2 gas persistently low $2 gas then enjoy the upside of $6 gas.
Science I wouldn't call it.
Like a coming out party with the energy and clear way, where people finally realize we existed but you know there's there's a few new ones will expect to add a few new ones.
But generally there.
Clients, we've transacted with multiple times.
Okay, Sir and then just looking at the.
$575 million, what would you have to be funded.
I think last quarter, you'd given you kind of a glass it looked it looked at the fourth quarter is kind of a large.
A large quarter for some of those funding.
Somewhere between 150 200 million. So I'm curious how much of that do you think it's pushed into the 20th 22, giving you know some of the supply chain and pricing challenges.
That's still uncertain, Chris so some of that May find here and the remaining days of this quarter. Some of it may slip into the first quarter were not even entirely sure ourselves on a couple of these scratch and that's why we collapsed that too because you know everybody's.
Everybody's trying like heck to.
If these projects to close but this is a tough market for grid connected.
Developers.
Okay understood excess.
Thank you. Thank you Mister <unk>.
The next question comes from my like K with Oppenheimer. Please proceed.
Hey, good afternoon, thanks for taking my questions.
I think the the curve ace of dynamic for this quarter last quarter.
Really robust demand and tight supply.
You broadly speaking, but certainly for the renewable sector as well.
And you know the cost inflation that we're seeing whether steal or.
You know the the labor shortages, pushing labor prices up et cetera, et cetera, just for a very capital-intensive in history I think.
The first question here is really about.
Yes, we expect yield compression at some point and what really matters to us is not the gross yield but the net margin.
And some of that same pressure that drove yields down.
Will benefit us with our correlated cost of capital.
I don't know, Jeff If you said that was exactly.
It's a competitive I guess it has been.
Yeah, I guess the last one is really around.
The incentives that are being discussed.
And had been discussed right for many quarters now in a potential reconciliation bill.
How does that actually impact dynamics of.
Capital financing for projects at this point I mean, if we're if we're getting close to the finish line and there's a potential for a greatly simplified.
Capitals Bakken projects, whether its a direct pay as well as you know the strategy around the incentives.
Is that having any impact on.
And some of the business development for you or your customers and do we have kind of any kind of an air pocket potentially and then once we get clarity.
The floodgates open or.
Is it just not the case with them and working long hours at some of our developer clients doing two models.
Under the current tax regime and one under the proposed new one and they would probably be the great beneficiaries of Congress, passing and the president signing the send a law. So they can only do one model.
Maturity I think that's what that's what everybody else is doing now.
And development is a tough tough business and this is about as tough an environment as I've seen it along with that.
Okay.
Great I appreciate the color and for the sake of those analysts hopefully we get some clarity. Thanks so much.
To <unk> to benefit from and as <unk> or Schneider Siemens grows.
Those are our long term clients, we expect to grow as well I don't mean to eliminate other clients, but those are three that come to mind.
So it will be.
The good news it also doesn't happen overnight as.
I didn't listen to <unk> call, but I'm sure they're very cautious.
Good intentions and RFP activity at the Federal government May take 12 months to 18 months to produce.
Investable transactions.
So it doesn't turn overnight, but its going definitely in the right direction.
Okay perfect. Thank you and then next just as a follow up and just wanted to follow up on the questions on portfolio yields.
It looks like the overall.
<unk> portfolio of YOD has kind of creep down from seven.
7%, 6% and then just looking at.
BG and behind the meter investment that's kind of gone down from to eight.
Eight 1% a little bit there so.
Hi.
And then assuming that's driven by the Sunrun investment.
That implied yield on the Sunrun Bill do you think thats indicative of current yields sort of in the near future at least in the resi solar space.
Or are you already seeing rising PPA prices.
With rising prices, helping to adjust for that.
So I think the.
Yield movements that you referred to are in fact relatively minor.
I think thats what were seeing so far is not.
Anything too significant we're certainly cognizant of some spread compression as we talked about.
I think it's fair to assume for example, the Sunrun deal was done at market levels, considering we just did the deal.
So I think we would sort of stick by the theme that we had talked about in the prepared remarks that we're not seeing yield compression yet we may see it.
And we've already pre positioned ourselves with tightening cost of funds to offset it.
Okay, great. Thanks, I'll step back in the queue.
Thanks, Ed.
Yes.
Thank you.
The next question comes from Ben <unk> with Baird. Please proceed.
Hey, guys.
Thanks for taking my question.
Keith just maybe on the mix.
Sorry.
That's the the guidance.
The 10 basis point I'm not.
Oh go ahead <unk>.
No just the last question was <unk> compression yields.
So quite seven to 7.6.
<unk> again.
Sorry go ahead.
No no I'm just one <unk>.
How <unk>, how do we think that trends.
Build out happens hopefully with reconciliation bill how.
How are you thinking about tackling that market is it more direct just standalone EV charging or are you looking at more like corporate fleets with a micro grid solution solar paired with storage paired with with charging.
Well I think I've mentioned in the context of Sunrun, who.
Announced their partnership with Ford.
As you know expansion of our home service.
Also noted the tax credits that will make our storage, whether its integrated or standalone more economic as just positives.
Will.
We have done EVP storage, we haven't or excuse me E V projects they've been related to.
Integrated into other offerings.
But if there's something notable we'd be.
Delighted to talk about it but at this point, there's nothing we've disclosed.
Got it and then my last question is just one of the I think the.
Location and enjoy the rest of your day.
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