Hannon Armstrong Sustainable Infrastructure Capital Inc. Q1 2023 Earnings Call
Greetings and welcome to <unk> first quarter.
Earnings Conference call and webcast.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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It is now my visits you introduce your host Nighthawk <unk> senior director of Investor Relations and corporate finance.
Thank you operator, good afternoon, everyone and welcome earlier this afternoon halfway distributed a press release detailing our first quarter 2023 results a copy of which is available on our website. This conference call is being webcast live on our Investor Relations page of the website, where a replay will be available later today some.
The comments made in this call are forward looking statements, which 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 stated in today's discussion also includes some non-GAAP financial measures.
A reconciliation of GAAP to non-GAAP financial measures is available on our part.
My presentation.
Joining me on today's call are Jeff slips is the company's president and CEO Mark Pangbourne CFO .
I would like to turn the call over to Jeff who will begin on slide three Jeff.
And good afternoon, everyone.
First I'm pleased to report that the leadership transition transition, we announced last quarter.
Been smooth and successful.
I'd like to thank Jeff Eckel, our board of directors and my colleagues as well as our clients and shareholders for providing their supportive mark can be during this transition.
Although we've had two significant milestones in the last two months number one our first investor day, which occurred on March 21st.
And number two we rang the closing bell at the New York Stock Exchange on April 13th commemorating the 10th anniversary of our IPO.
As we begin our second decade as a public company.
To begin with an assessment of the long term trajectory of our business.
Our businesses are strong if not stronger than ever.
During the first 10 years as a public company, we felt a managed asset balance of over $10 billion and achieved annual average growth of 11%.
And earnings and a total shareholder return in excess of 15% per year, which was well above the S&P 500 over the same period.
As we think about the next 10 years. We are optimistic this demonstrated track record of success can be built upon to achieve even greater success.
Optimism is in part driven by the fact that we were in the early stages of the energy transition.
Our addressable market will continue to grow substantially as our clients will continue to construct and develop projects that facilitate this transition.
We believe our differentiated business model and our strategic relationships with our clients will result in ongoing growth in the size and profitability of our business.
Consistent with this trajectory in the first quarter, we are announcing distributable earnings of 53 per share and.
GAAP EPS of 26 cents.
We have declared a quarterly dividend of 39 and half cents per share.
And we are reaffirming our earnings and dividend guidance.
We also had record level of first quarter transaction closings at an average yield greater than 8%.
Increased our pipelines are greater than $5 billion.
And increase the portfolio by 9% in the quarter.
As we turn to slide four let me take a moment to reiterate some of the themes from Investor day.
The feedback from this event has been very positive that's investors appreciated many new disclosures and clarifications.
In my introductory remarks that day I used the phrase we are a business that is well positioned but at times not well understood.
And that we intended to simplify the story.
At the end of the day I believe we were successful in that effort and investors had an improved understanding of our company.
With that context, I'll summarize a few of the key themes.
Yeah.
First the simplification of our strategy into the three pillars of climate clients assets has resonated.
It has facilitated an understanding of the differentiated nature of our business model as a climate positive investor partnering with programmatic clients and investing at the asset level in energy transmission projects.
We expect this differentiated business model will result in ongoing growth in the size and profitability of our business.
We also engaged in some myths Boston and provided a simplified framework of our risks and opportunities.
Next we continue to prove the resiliency of our business model.
Over the last 10 years, we have persisted in posting strong results. Despite the challenges of interest rate volatility inflation supply chain disruptions macroeconomic uncertainty shifting public policy and other real or perceived headwinds.
On Investor Day, we also provided significant detail, including several client testimonials, describing the unique nature of our client relationships and the programmatic aspect that results in repeat business over many years.
This client focus is a significant differentiating facet of our business model and we believe will be a strategy that allows our business to scale efficiently over time.
Following Investor Day, we also received.
Particularly consistent and positive feedback regarding our leadership team.
As this event became a forum for the Investor community to meet and hear from several talented members of our team.
The execution of our business plan and our consistently strong financial performance or indeed, the result of a deep talented and motivated team.
Yeah.
Our mission driven culture results in a remarkably high retention and commitment.
And lastly, Investor day allowed us to provide our thoughts on valuation cash flow and a long term dividend framework.
We discussed the very unique value proposition, we provide to clients and investors, notably including access to the energy transition in a diversified lower risk business model with an attractive dividend yield and multiple.
Our Investor day had several other important messages and detailed content.
And I encourage investors to view it and if they have not done so already.
Okay.
Turning to slide five we are reporting a larger 12 month pipeline of greater than 5 billion up from greater than $4 5 billion last quarter.
The larger pipeline is primarily the result of three items.
One our clients accelerating their pipelines.
Two the growth in our investment team, allowing us to review a larger volume of transactions.
Three certain asset classes are beginning to see the impacts of the IRA.
The larger pipeline will also allow us to be selective as we remain focused on margin and profitability as mark will discuss further.
Although various timing headwinds exists in our markets the diversity of our asset classes and diversity of our clients provide confidence that we will be able to invest in a generally consistent pattern.
In fact, our clients as leaders in their industries are expected to increase their market share, which we expect will result in additional transactions for us to consider.
I will also note in our grid connected segment development cycles do not entirely drive our volumes. We also invest in transactions in which our clients are recycling capital on operating projects.
The grid connected business also continues to benefit from higher PPA prices, which have increased more than 25% over the past year.
We also remain active in our behind the meter business is the recent press releases regarding transactions with Mitsui forefront and sunpower indicate.
Our BSI solar pipeline includes several transactions and we do not envision them 3.0, it will be a significant headwind as we continue to see increasing levels of storage adoption that our clients remain the industry leaders in this rapidly growing business.
Rajiv community in CNI solar all continue to benefit from higher utility rates and all of our solar businesses will likely benefit from the easing of the panel import backlogs.
Another catalyst the pipeline growth has been our focus on incremental asset classes, which we now refer to as our fuels transport and nature of business.
This segment has added several investments to the pipeline, particularly in school related transactions.
On Investor Day, Emory did an excellent job describing with various asset classes will likely become investable for us and she is building a team and identifying opportunities accordingly.
This segment remains on track towards our goals.
To wrap up this slide our diverse pipeline provides resilience to timing headwinds and it consistently provide short and long term opportunities as we continue to identify transaction transactions that fit both a risk and return profile.
Abiding us confidence in our ability to meet our profitability objectives.
Before turning the call over to Mark I will touch briefly on the current challenges in the banking sector.
Support from airbags has been unimpeded by the recent regional bank failures.
The banks in our revolving line of credit and our term loan all continued to be stable and supportive and we expect no direct impact of leaseback failures.
Any wider impact on the economy of potentially tightening credit markets are unlikely to have any unique impact on hep C or in our markets.
Now I'll turn it over to Mark Pangbourne to detail our financial results.
Thank you Jeff.
It's been it has been an exciting quarter for me to transition to the CFO role.
The leverage Jeff themes around strength of the business, we are delivering on EPS growth higher asset yields and access to capital all while managing a diverse and quickly growing base of managed assets I'm excited and optimistic for our growth prospects over the next decade.
Let's start on slide six in the first quarter, we recorded distributable earnings per share of 53, and GAAP earnings per share of 26 months over.
Over the last year, we grew our portfolio by 25% to $4 7 billion in managed assets, 15% to $10 4 billion, both driven by the continued strong investment opportunity in the energy transition.
From this base, we are reporting distributable net investment income of $47 1 million up 11% year over year, despite higher cost of capital.
We also recorded $19 5 million of gain on sale fees and securitization income.
I'd like to highlight two important forward looking themes on this slide.
First changes in interest rates are.
Are expected to have a limited impact on these performance metrics with NII variability being minimized with our hedging activities.
And our fee based and <unk> no meaningful interest rate exposure.
Second the growth in our portfolio and managed assets provide stability in our earnings profile.
Let's turn to slide seven.
To review, our recently closed transactions and portfolio.
We're reporting record level of Q1 transaction closings at $389 million asset yields are increasing the weighted average yield on new investments in Q1 is greater than 8%.
Additionally, these closings came across six asset classes are showcasing the diversity of our pipeline.
Record closed transactions.
And increasing yields are contributing to one of our key themes from investor day profitable growth.
Next to our portfolio grew 9% last quarter alone to reach $4 7 billion. A majority of these additions came from funding previously closed investments as the table on the bottom right demonstrates.
The diversity of our business remains a key strength further reinforced by the increasing contribution from F. T N.
As previously identified we anticipate for portfolio yield to increase over time as our recent closings with higher yields begin to contribute to the overall portfolio.
On our Investor Day, I stated that approximately 75% of the distributable NII needed to achieve our 24 guidance relates to previously closed transactions.
Rolling forward to the end of Q1, approximately 80% relates to closed transactions.
On slide eight I'll cover profitability.
To reiterate comments from Investor day, our business model paired with the enormous investment opportunity in the energy transition and positions us well for continued profitable investments both in the short term and the long run.
Today, our portfolio yield of seven 5% with yield on Q1 closings above 8%.
Our cost of debt is four 8%, which is increased as anticipated.
In the future taking into consideration new asset yields new assets at higher yields.
Refinancing activities and hedging activities, we anticipate both our portfolio yield.
And cost of debt to increase while continuing to maintain sufficient margins to achieve our profitability metrics.
We're highlighting two important considerations on this slide both relate to our long term profitability metrics.
First our incremental investments are maintaining profitability in current market conditions.
Our expanding pipeline allows us to grow and invest selectively.
Second based on our existing swaps and forecasted refinancing costs, we continue to expect to maintain margins in our portfolio to achieve our Roe targets.
We're taking additional actions to expand margins by growing our investment in F. T N and positioning the company for a second investment grade rating overtime.
Okay.
Turning to slide nine starting on the top left.
Our liquidity remains strong with a total of over $490 million of cash and Undrawn revolver capacity.
Our banking group remains highly supportive and we've experienced no disruption in our lending relationships, while the overall banking market remains in flux, we expect to be well positioned on availability of capital relative to the overall economy, given our strong execution non.
Non cyclical assets and focus on the energy transition.
We've raised over $14 billion.
A capital across eight different funding sources are diversified funding platform allows us to grow the business even during times of market volatility.
In the lower left quadrant, we show the details of our recent swaps, which were entered into to mitigate interest rate risk and manage our future cost of funds.
By entering into these swaps, we have better aligned our assets and liabilities.
Converted our floating rate term loan a into a 10 year fixed rate obligation.
And locked in the underlying base rates for our expected 25, and 26 bond refinancings at approximately 3%.
As discussed on the previous slide based on forecast of refinance refinancing cost in base rates detailed here, we continue to expect to achieve our REIT targets, while also minimizing the impact of changes in rates.
In summary, we continue to demonstrate profitability earnings growth and portfolio growth, we have the liquidity and access to capital required to capitalize on our diverse pipeline.
And are deploying the tools necessary to navigate market volatility with that I'll turn the call back over to Jeff.
Good job Mark. Thank you turning to slide 10, I will note, we released our 2022 impact to report.
That details our approach targets and performance across a broad array of material ESG issues, including the progress of the hefty Foundation.
And we encourage investors to read the report.
In fact reading the impact report is an important step in understanding our company.
I'd also note we are delighted that Kimberly Reid joined our board as an independent director.
She brings significant perspective on regulatory and public policy matters as a former chair president of the export import bank of the United States.
Now, let's wrap up on slide 11.
We are pleased with the performance in the first quarter and our outlook for the future remains optimistic.
Thank our talented and dedicated team and continuing to drive <unk> growth and success.
I will conclude by reinforcing the key pillars of hassey strategy climate clients assets.
Our simple business model, which will continue to offer a unique value proposition to investors, providing access to the energy transition with a diversified portfolio and non cyclical business model.
That concludes our prepared remarks, so we can open up the line for questions operator. Thank you.
Okay.
Thank you Tim.
Ladies and gentlemen, we will now begin the question and answer session.
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Yeah.
Thank you. Our first question is from none okay of Oppenheimer.
Yeah, Thanks for taking the questions one more interesting nug.
Nuggets.
You shared at Investor day at least as it relates over the next several years is that your your eight largest customers had approximately $50 billion and project capital needs through 2025.
Maybe picking up on the comments you had earlier, Jeff can you talk to us a little bit about the project development environment those customers you're seeing are in your your visibility.
<unk> to continuing to pick up the pace of originations as we move throughout the year here and particularly in our you know some of the asset classes like grid connected.
That Ah I think investors are looking at thanks.
Thanks Noah.
In my prepared remarks, I did touch on some timing headwinds and some of that is in grid connected.
Whether it would be panels or permitting or transmission. There are some timing headwinds there, but I think we're seeing those in the transactions, we're looking at being relatively immaterial and most of the projects are moving forward. As a reminder, we tend to work with the largest.
Infrastructure and energy companies and I think that makes a difference in terms of being able to move projects forward.
And then to reiterate something else I said, we have so much to invest in it doesn't.
Tend to impact our pattern and our consistency of investing even if there are some delays in certain projects. Some of what we do is recyclable capital and operating projects with our clients' requests that we do so.
So it's a relatively minor impact it is out there and we should recognize it but we're not seeing a very significant impact on our pattern of investing right now.
Okay, Thanks, and I guess moving to the funding side. It looked like the the transactions that were funded this quarter are you largely drew on our credit facilities and commercial paper can you talk about how you're thinking through the range of funding options going forward here. It looks like you have.
Roughly 400 million at least of our additional transactions you expect to fund over the course of the year.
Sure. Thanks Noah.
So what I'd ask you to focus on is some of the comments, we made on Investor day around the diversified funding platform and reiterated here to a much smaller extent on.
On that front.
We have raised capital from a number of different markets continue to evaluate those markets for which ones are a relatively attractive at the time and then we'll continue to pursue whichever provides the best margins for the business.
We obviously don't want to talk about our funding plans for the future, but that is our that's our approach.
Thanks, very much and nice to see the origination volumes in the quarter I will turn it over.
Excellent.
Yeah.
Thank you.
The next question is from Julien Dumoulin Smith of Bank of America. Please go ahead.
Hi, there this is actually Cameron lochridge, one for Julian and thank you for taking our questions or a quick start on the the backlog growth the pipeline growth up.
Up nicely quarter over quarter.
Just any kind of early indications of what that might mean for origination trends.
Jackson trends as we go through the rest of this year in 'twenty for and and and how that impacts or could impact. The you know the.
EPS growth again post 'twenty four.
And on that note when when would we expect to get some sort of guidance on you know 25, EPS and beyond thank you.
Thanks, Kamran. So you know I did allude to that our investment is in a generally consistent pattern, but.
But not entirely consistent so there is some lumpiness on timing and we tend to try and not get too ahead of ourselves on when transactions are going to close that's completely out of our control.
But we do expect this is greater than $5 billion pipeline should result in a significant ongoing volume of close transactions to follow on what our success from the first quarter.
Throughout both this year and next year.
We're very comfortable with the guidance that we have out there for this year and next year and we would most likely speak to our 2025 guidance in our fourth quarter call in February of 24, that's our that's our ordinary cadence unless something.
It comes up that drives us to speak about it positively or negatively before that that's when you should expect us to update our expectations for 2025.
Perfect. Thank you for that I appreciate it and then.
For a follow up you know at the Investor Day.
You talked about Orangey as renewable natural gas as a as a growth driver going forward a potential growth driver going forward.
Just kind of curious to get your thoughts.
Pacific around some of the Epa's proposed a renewable volume obligations as well as your thoughts on you know.
He brings in and their potential to be shifted out beyond call. It 23 activation data so cold.
Either you can share on that and kind of how that's trending thank you.
[laughter].
So.
On that front, what I would actually point us back to is our pipeline.
Generally speaking developing in the direction of development for any asset, including RMG is taken on by our clients and our role is to generally speaking underwrite cash flows of the assets and provide financing either at.
Construction start or or the operation space and so we have talked a lot about R&D on that front and that is heavily driven by what we see in our pipeline. We continue to believe the.
Long term trajectory of that market is very interesting in terms of specific development activities I Wouldnt say, we necessarily have a strong view.
The other.
Understood. Okay, great. Thank you appreciate it.
That's all I have.
Thank you.
Thank you. The next question is from Chris Soccer Offbeat run. Please go ahead.
Hey, guys. Thanks.
Thanks for taking my questions here.
You called out in the press release, the mix change on the gaming securitization can you just kind of walk through a little bit.
What has changed within the mix.
Secured it so what we've done is continue.
What we introduced at Investor day to breakout gain on sale and fees and also securitization income, which is the recurring portion of that fee stream.
Is that is that does that answer your questions, though what you're referring to.
The press release seem to suggest that it.
It might be some different kinds of assets that you are securitized.
Maybe that's not the case.
Okay.
No I think the universe of assets that we securitized in the quarter were consistent with prior periods, there's sometimes a general mix change between government and non government that I think maybe are incorporated in the sense that you're referring to.
Okay got it and then you called out in your prepared remarks.
The opportunities are out.
Customers looking to recycle capital with some of your investments can you frame.
How large that opportunity is within the pipeline and I assume it's mostly kind of a grid connected pipeline, but.
Are there other sectors, where you're kind of looking at some more opportunity there.
It is mostly in grid connected.
I don't know that we'd be able to characterize off hand, how.
How much of what's in there is construction versus recycled on operating projects.
It's I would say mostly construction.
But my point in calling that out during the prepared remarks was the recycled capital component does allow us to invest in a more consistent pattern when sometimes there's development delays, but I would say most of it is nobel.
Got it Okay, and maybe just my last one here.
You had commented at the analyst day around the body.
Yeah.
Got it.
Reapplying for REIT status, just any update any update there would be helpful.
Thank you.
Yeah.
So is that really reapplying, it's just whether we would continue to select it and we have selected REIT status for 2020 three I think what we've indicated on Investor day is that we are taking a very deep dive assessing whether that's the best long term structure for us and we'll have more to say about that is.
As the year goes on I.
I would say we in any event, we will have a very tax efficient structure, whether it's read or otherwise. So I don't think investors should focus on future tax liabilities being meaningful and I think that's the important point everything else will fall into place in terms of the optimal.
Long term structure for the business, but we'll have more to say that it is about that as the year goes on.
Understood.
Yeah.
Thank you very much.
Next question is from Jay for City of Cowen. Please go ahead.
Hi, good afternoon.
Jeff I believe in your prepared remarks, you called out the pipeline.
Pipeline pipeline growth being attributed to.
Programmatic clients growth in the investment team and IRA I just wanted to see if you could drill down a little bit further on those and if you're.
Seeing any.
The benefit for minor arrived earlier than expected.
That's your earlier than expected but in.
I think that goes a little bit with the number three and number one go together a little bit in terms of our clients are in certain asset classes are accelerating their pipelines because of I R. A some of that's in.
Grid connected some of that's in storage some of that is in our N G.
Where youre seeing some some acceleration there so it's the first indication.
Cases of the benefit of Io array, which as we've said and others have said will be more pronounced probably more than a 2025 time frame, but in certain asset classes, we're starting to see.
Starting to see some benefit now.
Oh.
I think you also called out the.
Forefront.
Investments and so I just wanted to get your.
Any more detail about that in terms of how the.
If there's anything unique about the investment and just your thoughts on I know you called out solar plus storage just wanted to see how are you looking at it looking at battery attach rates right now and just any impact for a minimum three point all in California.
Sure.
I'll try to break it down into two parts and please let me know if I missed anything.
On forefront there was nothing inherently different about that opportunity. We're very excited about it. It was it was a follow on from an initial investment that was already made and as we.
As you know we talk about the programmatic nature of our client partnerships. So the fact that it was a follow on with something that we're very excited about the assets and the structure fits very much within the day to day work that we do.
You also talked about you also talked about NIM and when the when Jeff made the comment around battery attachment rates that was more focused on residential solar.
Oh, then than our than the than the forefront opportunity and so on any M. Three point obviously.
Excuse me.
We've seen the same trends that everyone else has in terms of a lot of volume coming through.
And a lot of backlog being built before before the transition to any M 3.0.
And.
Whatever happens after that one of the areas that we are particularly focused on in and feel very strongly about in terms of how we approach. The markets is the clients that we partner with are the market leaders.
And when periods of volatility come up we firmly believe they will navigate those navigate those and potentially pick up some market share, which again all translates into pipeline opportunities for us.
Thank you.
Pleasure Thanks sure.
Okay.
Thank you very much ladies and gentlemen, we have no.
Further questions in the queue.
We would like to thank you for your participation.
It does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Okay.
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