Q1 2024 Hannon Armstrong Sustainable Infrastructure Capital Inc Earnings Call
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Unnamed Source: 2014 University of Georgia College of Agricultural and Environmental Sciences
Operator: Greetings, and welcome to HASE's First Quarter 2024 Earnings Conference Call-In Webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neha Gaddam, Senior Director, Investor Relations and Corporate Finance.
Neha Gaddam: Greetings and welcome to the Huskies first quarter 2024 earnings conference call and webcast.
Operator: At this time all participants are in a listen only mode. A brief question.
Operator: And answer session will follow the formal presentation.
Neha Gaddam: Thank you, operator. Good afternoon, everyone, and welcome.
Operator: If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Neha Gaddam: As a reminder, this conference is being recorded.
Neha Gaddam: It's now my pleasure to introduce your host they have gotten senior director Investor Relations and corporate finance.
Neha Gaddam: Thank you operator, good afternoon, everyone and welcome earlier this afternoon halfway distributed a press release detailing our first quarter 2024 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.
Neha Gaddam: Earlier this afternoon, HASE distributed a press release detailing our first quarter 2024 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 of the comments made in this call are forward-looking statements, which are subject to 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, and today's discussions also include some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is available in our posted earnings release slide presentation.
Neha Gaddam: The comments made in this call are forward.
Neha Gaddam: Statements, which are subject to 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 posted earnings.
Neha Gaddam: Joining me on today's call are Jeff Lipson, the company's president and CEO, Mark Pangburn, CFO, and Susan Nickey, our chief client officer. Susan will be available for the Q&A portion of our presentation. Now, I'd like to turn the call over to Jeff, who will begin on slide three.
Jeff: Slide presentation.
Jeffrey A. Lipson: Thank you, Neha, and good afternoon, everyone. Thank you for joining the call. Today is truly a milestone moment in the evolution of. Since our investor day in 2023, roughly one year ago, we have consistently talked about a strategic emphasis on a more efficient and scalable capital structure. Today we announce a $2 billion strategic partnership with KKO that provides a very meaningful step towards accomplishing this goal. The partnership is an ideal pairing of HACI's ability to source, underwrite, and manage a diverse portfolio of climate-positive investments and KKR's market leadership in raising and managing sustainable core infrastructure funds.
Neha Gaddam: Joining me on today's call are Jeff Lipson, our company's President and CEO, Mark thing, Brian CFO, and Susan Nicky our Chief client Officer.
Jeffrey A. Lipson: Susan will be available for the Q&A portion of our presentation.
Jeffrey A. Lipson: Now I would like to turn the call over to Jeff who will begin on slide three Jeff.
Speaker Change: Thank you Nate and good luck.
Jeffrey A. Lipson: Okay.
Jeffrey A. Lipson: Thank you for joining the call.
Jeffrey A. Lipson: Today is truly a milestone moment in the evolution of patchy.
Jeffrey A. Lipson: Since our Investor day in 2023, roughly one year ago, we have consistently talked about a strategic emphasis on a more efficient and scalable capital structure.
Jeffrey A. Lipson: Today, we announced the $2 billion strategic partnership with KKR.
Jeffrey A. Lipson: This arrangement creates an efficient platform to hold most of our balance sheet investments going forward. We are thrilled with this partnership and the opportunities it will facilitate. We have named the partnership Carbon Count Holdings 1 and will refer to it as CCH1 going forward.
Jeffrey A. Lipson: That provides a very meaningful step towards accomplishing this goal.
Jeffrey A. Lipson: The partnership is an ideal pairing of husky's ability to source underwrite and manage a diverse portfolio of climate positive investments and kkr's market leadership, and raising and managing sustainable core infrastructure funds.
Jeffrey A. Lipson: I'll come back to CCH1 in a moment, but I'll briefly mention a few other highlights from the first quarter, including 68 cents of adjusted earnings, over 500 million in closed transactions, and a 24% year-over-year growth rate in our managed assets. We are also declaring a 41.5 cent dividend, and we are affirming our guidance, which had already assumed a co-investment transaction and is therefore not changing. We also had a very successful quarter upsizing and extending our debt, which Mark will detail in his remarks. Turning to page 4, I want to put today's announcement in historical context.
Jeffrey A. Lipson: This arrangement creates an efficient plant.
Jeffrey A. Lipson: The hold most of our balance sheet investments going forward.
Jeffrey A. Lipson: We are thrilled with this partnership and the opportunities that will facilitate.
Jeffrey A. Lipson: We have named the partnership carbon count.
Jeffrey A. Lipson: Carbon count holdings one.
Jeffrey A. Lipson: When we referred to it at CCH, one going forward.
Jeffrey A. Lipson: I'll come back to CCH, one in a moment, but I'll briefly mention a few other highlights from the first quarter.
Jeffrey A. Lipson: Including 68 cents of adjusted earnings.
Jeffrey A. Lipson: Over $500 million of closed transactions and a 24% year over year growth rate in our managed assets.
Jeffrey A. Lipson: We were also declaring a 41 and a half cent dividend and we are affirming our guidance, which had already assumed a co investment transaction and is therefore not changing.
Jeffrey A. Lipson: Prior to 2013, TASI was funded almost exclusively by securitization, typically with life insurance companies. Following the IPO, we utilize public equity to build a balance sheet with higher return investments. In 2019, we obtained corporate debt ratings and incrementally utilized the unsecured bond market. Today's announcement provides incremental access to private infrastructure capital, supplementing all these other sources of funds. In a business like ours, diversified sources of capital are the foundation for long-term success.
Jeffrey A. Lipson: We also had a very successful quarter, upsizing and extending our debt, which mark will detail in his remarks.
Jeffrey A. Lipson: Turning to page four I want to put today's announcement in historical context.
Jeffrey A. Lipson: Prior to 2013 and see whats funded almost exclusively by Securitizations typically with life insurance companies.
Jeffrey A. Lipson: Following the IPO, we utilized public equity to build a balance sheet with higher return investments.
Jeffrey A. Lipson: This slide is a simple representation of a capital strategy that has positioned us for profitable growth even during periods of volatility and macroeconomic headwinds. Our securitization program, our balance, and the CCH1 partnership will work in tandem, resulting in a powerful and resilient business. Continuing on slide five, CCH1 has many benefits, three of which are noted on this slide. First, it will reduce our reliance on capital markets, which have experienced a high level of volatility over the past four years.
Jeffrey A. Lipson: In 2019, we obtained corporate debt ratings and incrementally utilize the unsecured bond market.
Jeffrey A. Lipson: Today's announcement provides incremental access to private infrastructure capital supplementing supplementing all of these other sources of funds.
Jeffrey A. Lipson: In a business like ours diversified sources of capital are the foundation for long term success.
Jeffrey A. Lipson: This slide is the simple representation of a capital strategy that has positioned us for profitable growth, even during periods of volatility and macroeconomic headwinds.
Jeffrey A. Lipson: Our securitization program our balance.
Jeffrey A. Lipson: Going forward, we will obtain 50% of the funding for the investments in CCH1 outside of the capital market, substantially reducing our risk to market disruption. Second, CCH1 will allow us to increase our investment capacity and ultimately accelerate our growth in managed assets. This additional capacity is coming at a perfect time, as forecasts of energy demand continue to be revised upward, with a large portion expected to be renewable and other sustainable sources.
Jeffrey A. Lipson: And the CCH, one partnership will work in tandem, resulting in a powerful and resilient business.
Jeffrey A. Lipson: Continuing on slide five CCH, one has many benefits three of which are noted on this slide.
Jeffrey A. Lipson: First it will reduce our reliance on capital markets, which have experienced a high level of volatility over the past four years.
Jeffrey A. Lipson: Going forward, we will obtain 50% of the funding for the investments in C. C. H, one outside of the capital markets substantially reducing our risk to market disruptions.
Jeffrey A. Lipson: Our additional access to capital will allow us to meet the growing needs of our clients as they continue to move forward with projects that are required to meet this increased demand. And third, CCA will provide more diversity to our income statement with stable free revenue to complement our net investment income and gain on sailing. The result of these and other benefits of the partnership is an even more dynamic and resilient HACI that is well-positioned for long-term success. Turning to page 6, I'll speak about CCH1 in a little more detail.
Jeffrey A. Lipson: Second Cta CCH, one will allow us to increase our investment capacity and ultimately accelerate our growth in managed assets.
Pat: This is Pat.
Jeffrey A. Lipson: Cassidy is coming at a perfect time as forecast of energy demand continued to be revised upward with a large portion of expected to be renewable and other sustainable sources.
Jeffrey A. Lipson: Our additional access to capital will allow us to meet the growing needs of our clients as they continue to move forward with projects that are required to meet this increased demand.
Jeffrey A. Lipson: It is structured with 50% ownership by each of HSE and one of KKR's core infrastructure funds. NASI will source the investments for CCH1 consistent with our existing strategy. In fact, we are not making any changes to our investment strategy as part of this arrangement. This transaction can be viewed as an endorsement of our existing strategy and the attractiveness of the diverse portfolio that we're able to originate. We will continue to interface with our clients, both before and after an investment has closed, consistent with current practices.
Jeffrey A. Lipson: And third Ccs.
Jeffrey A. Lipson: Provide more diversity to our income statement with stable fee revenue to complement our net investment income and gain on sale income.
Jeffrey A. Lipson: The result of these and other benefits of the partnership is it even more dynamic and resilient hassey that is well positioned for long term success.
Jeffrey A. Lipson: <unk>.
Jeffrey A. Lipson: Turning to page six.
Speaker Change: I'll speak about CCH, one and a little more detail.
Jeffrey A. Lipson: It is structured with 50% ownership by each of healthy and one of Kkr's core infrastructure funds.
Jeffrey A. Lipson: Each party has made a $1 billion commitment to CCH1, and we expect the $2 billion to be deployed over approximately 18 months. Additionally, two investments closed by HASE totaling just under $200 million in commitments are being utilized to seed the partnership at formation. As compensation for sourcing and managing the investments, HSE will be paid fees by CCH1. It's fundamentally a simple structure that allows PASI and KKR to focus on their respective core competencies and allow the partnership to benefit accordingly. More detailed information regarding CCH1 is provided in an FAQ in the appendix to the earnings material. Now, we'll turn the call over to Mark Pangburn.
Jeffrey A. Lipson: As he will source the investments for CCH, one consistent with our existing strategy.
Marc T. Pangburn: In fact, we are not making any changes to our investment strategy as part of this arrangement.
Marc T. Pangburn: This transaction can be viewed as an endorsement of our existing strategy and the attractiveness of the diverse portfolio that we were able to originate.
Marc T. Pangburn: We will continue to interface with our clients both before and after an investment has closed consistent with current practice.
Marc T. Pangburn: Each party has made a 1 billion dollar commitment to CCH, one and we expect that to bill.
Marc T. Pangburn: To be deployed over approximately 18 months.
Marc T. Pangburn: Two investments close by Hassey totaling just under 200 million in commitments are being utilized to seed the partnership at formation.
Marc T. Pangburn: As compensation for sourcing and managing the investments assay will be paid fees by C. C. H one.
Marc T. Pangburn: Thank you, Jeff. I'll see you on slide 7. We have increased our 12-month pipeline to greater than $5.5 billion. Demand growth continues to drive investment opportunity in all of our markets. While AI is the latest trend, electrification and resiliency are long-term themes driven by a multitude of factors, including decarbonization goals, increasing extreme weather events, and the increasing reliance on electricity.
Jeff: It's fundamentally a simple structure that.
Marc T. Pangburn: Patsy and KKR to focus on their respective core competencies and allow the partnership to benefit accordingly.
Marc T. Pangburn: More detailed information regarding CCH, one is provided in an F. A Q in the appendix to the earnings materials.
Marc T. Pangburn: Now I will turn it over the call to Mark fingers.
Marc T. Pangburn: We see these themes materialize in our pipeline, our client's pipeline, and the underlying demand for energy transition assets. As identified on the right, there has been notable growth in our pipeline for community solar, grid-connected solar, and renewable fuels. Other asset classes, including residential solar, have remained consistent with prior quarters. In Q1, plus $562 million of transactions across six different asset classes, with an average yield for on-balance sheet investments of approximately 10%. Moving on to slide 8.
Speaker Change: Thank you Jeff.
Marc T. Pangburn: Slide seven.
Marc T. Pangburn: We have increased our 12 month pipeline to greater than 5.5 billion demand growth continues to drive investment opportunity in all of our markets.
Marc T. Pangburn: AI is the latest trend electrification and resiliency or long term themes driven by a multitude of factors, including deep decarbonization goals.
Marc T. Pangburn: Increasingly extreme weather events and the increasing reliance on electricity.
Marc T. Pangburn: We see these themes materialized in our pipeline, our client's pipeline and the underlying demand for energy transition assets.
Marc T. Pangburn: Before I jump into the slide, I'd like to highlight one change in naming convention. Our non-GAP metric was previously referred to as distributable. It was a term adopted by REITs. Given our move away from the REIT structure, we will be using adjusted on a go-forward basis. The definition is unchanged.
Marc T. Pangburn: As identified on the right. There has been notable growth in our pipeline for community solar grid connected solar and renewable fuels.
Marc T. Pangburn: Other asset classes, including including residential solar have remained consistent with prior quarters.
Marc T. Pangburn: In Q1.
Marc T. Pangburn: Our adjusted EPS increased by 28% year-over-year to $0.68, and adjusted MAI grew by 37% to $64 million. A significant contributor to earnings growth in Q1 was higher gains on sale, fees, and securitization income, which totaled $35 million, an 81% increase every year. As a reminder, gain on sale is variable quarter to quarter, and we expect gain on sale during the guidance window to be consistent compared to 22 and 23. On the right, given the updates Jeff provided on CCH1, we are reorganizing our top line metrics into three categories. The presentation of NII is unchanged.
Marc T. Pangburn: $562 million of transactions across six different asset classes with an average average yield for on balance sheet investments of approximately 10.
Marc T. Pangburn: Percent.
Speaker Change: Moving onto slide eight before I jump into the slide I'd like to highlight one change in naming convention our non-GAAP metric was previously referred to as distributable.
Marc T. Pangburn: It was a term adopted by rights given our move away from the REIT structure, we will be using adjusted on a go forward basis. The definition is unchanged.
Marc T. Pangburn: Our adjusted EPS.
Marc T. Pangburn: Increased by 28% year over year.
Marc T. Pangburn: So 68 cents.
Marc T. Pangburn: Justin NII grew by 37% to $64 million.
Marc T. Pangburn: In future periods, income relating to our 50% ownership in CCH1 will be reflected here. We have split our income streams relating to our capital light activities into recurring and upfront. Recurring will be comprised of securitization income and ongoing CCH1 management fees. Upfront will be comprised of gain on sale fees and upfront CCH1 fees.
Marc T. Pangburn: A significant contributor to earnings growth in Q1 is higher gain on sale fees in securitization income.
Marc T. Pangburn: Which totaled $35 million and 81%.
Marc T. Pangburn: Every year.
Marc T. Pangburn: As a reminder.
Marc T. Pangburn: Gain on sale sale is variable quarter to quarter, and we expect gain on sale during the guidance window to be consistent compared to 22 and 'twenty three.
Marc T. Pangburn: On the right given the updates Jeff provided on CCH, one we are reorganizing our top line metrics.
Marc T. Pangburn: Turning to slide 9, we show impressive growth in both portfolio and managed assets. Our portfolio grew by 36% year-over-year to 6.4 billion, while managed assets grew 24% to 12.8 billion. In future periods, our 50% ownership in CCH1 will be included in our portfolio, while the full balance will be included in managed assets. The growth of our investments is testament to the strength of our programmatic origination platform. On Page 10, we've added ROE to our margin chart given the expansion of our capital light activities.
Speaker Change: Okay Borys.
Marc T. Pangburn: The presentation of NII is unchanged in future period income relating to our 50% ownership in CCH, one will be reflected here.
Marc T. Pangburn: We have split our income streams relating to our capital light activities into recurring and upfront.
Marc T. Pangburn: Recurring will be comprised of securitization income.
Marc T. Pangburn: And ongoing CCH, one management fees.
Marc T. Pangburn: Upfront will be comprised of gain on sale fees.
Marc T. Pangburn: Upfront CCH one fees.
Marc T. Pangburn: Turning to slide nine we show impressive growth in both portfolio and managed assets our portfolio grew by 36% year over year 6.4.
Marc T. Pangburn: ROE has increased this quarter primarily due to the gain on sale discussed in slide 8. As it relates to portfolio yield and debt costs, we are showing temporary compression due to the newly issued debt and the time delay to fully deploy these funds. This dynamic was expected and has been factored into guidance. I'll add that we continue to see elevated returns for new transactions, with Q1 transactions coming in at approximately 10.5%.
Marc T. Pangburn: While managed assets grew 24% to $12 8 billion.
Marc T. Pangburn: In future periods, our 50% ownership in CCH, one will be included in our portfolio. While the full balance will be included in managed assets.
Marc T. Pangburn: The growth of our investments is the testament to the strength of our programmatic origination platform.
Marc T. Pangburn: Turning to slide 11, we highlight our robust funding platform that underpins business growth. With over $800 million in liquidity, minimal, near-term debt maturities, and a leverage ratio of 1.9 times, our liquidity and liability management is... Our interest rate risk management has ensured 97% of our debt is fixed or hedged while also managing future refinancing rate exposure. Alongside the strong execution in the first quarter, we further strengthened the debt platform with an upsize and extension of three bank facilities, our Revolver, Terminal A, and CP facility.
Marc T. Pangburn: Page 10, we've added <unk> to our margin chart, given the expansion of our capital light activities. Our ROE has increased this quarter, primarily due to the gain on sale discussed on slide eight.
Marc T. Pangburn: As it relates to portfolio yield and debt costs, we are showing a temporary compression due to the newly issued debt and the time delay to fully deploy these funds. This dynamic was expected and it's been factored into guidance.
Marc T. Pangburn: I'll add that we continue to see elevated returns for new transactions.
Marc T. Pangburn: With Q1 transactions coming in approximately a 10, 5%.
Marc T. Pangburn: This aggregates to a borrowing capacity of greater than $1.6 billion, and the maturity extensions are detailed in the box on the lower right. With our activities this year, we have provided ourselves with the flexibility to opportunistically approach the debt markets for further 2025 refi extensions. With that, I'll turn the call back to Jeff.
Jeff: Turning to slide 11, we highlight our robust funding platform that underpins business growth with over 800 million in liquidity minimal near term debt maturities and leverage ratio of one nine times, our liquidity and liability management.
Marc T. Pangburn: Our interest rate risk management has ensured 97% of our debt is fixed or hedged while also managing future refinancing rate exposure.
Jeffrey A. Lipson: On page 12, we share a few sustainability and impact highlights from the first quarter. We published our Best-in-Class 2023 Sustainability Impact Report, donated two and a half million dollars to the Hasse Foundation to support climate justice initiatives, and achieved independent verification of scope 3 category 15 emissions. Let's wrap it up on slide 13.
Marc T. Pangburn: Alongside the strong execution in the first quarter, we further strengthened the debt platform with an upsize and extension of three bank facilities, our revolver term loan a and C. P facility this aggregates to our borrowers.
Jeffrey A. Lipson: After the of greater than 1.6 billion and the maturity extensions are detailed in the box on the lower right.
Jeffrey A. Lipson: Our strategy continues to produce strong results despite the higher interest rate environment and other real or perceived headwinds. The elevated demand for energy will continue to facilitate an emphasis on supply, particularly from renewable and sustainable sources, which will create increasing opportunities for the business to invest. The CCH1 transaction is the optimal structure, the ideal partner, and is occurring at the perfect time, allowing us to scale our business. On our Investor Day, we discussed reducing our reliance on equity rates.
Jeffrey A. Lipson: With our activities activities. This year, we have provided ourselves the flexibility to opportunistically approached the debt markets for further 'twenty twenty-five refi extensions.
Jeffrey A. Lipson: With that I'll turn the call back to Jeff.
Speaker Change: Thanks Mark.
Jeffrey A. Lipson: On page sure a few sustainability and impact highlights from the first quarter.
Jeffrey A. Lipson: We published our best in class 2023 sustainability impact report.
Jeffrey A. Lipson: Donated $2 $5 million to the <unk> Foundation to support climate Justice initiatives.
Jeffrey A. Lipson: Last quarter, we discussed the trajectory of our payout ratio and our intention to retain more capital as one step in this direction. Today's announcement is another significant step in that direction as we continue to act on executing on our stated goals. Today, Hathi is a powerful enterprise and better positioned for long-term success with an even more diversified access to capital. I thank our outstanding team for closing the CCH1 transaction and several other important initiatives this quarter. And I welcome our new partners from KKR as we jointly provide capital for the energy transition. That concludes our prepared remarks. Operator, please open the line for questions. Thank you.
Jeffrey A. Lipson: And achieved independent verification of scope III category 15 emissions.
Jeffrey A. Lipson: Let's wrap up on slide 13.
Jeffrey A. Lipson: Our strategy continues to produce strong results, despite the higher interest rate environment, and other real or perceived headwinds.
Jeffrey A. Lipson: The elevated demand for energy will continue to facilitate an emphasis on supply, particularly from renewable and sustainable sources, which will create increasing opportunities for the business to invest.
Jeffrey A. Lipson: The CCH one transaction is the optimal structure.
Jeffrey A. Lipson: Ideal partner and is occurring at the perfect time, allowing us to scale our business.
Jeffrey A. Lipson: In our Investor day, we discussed reducing our reliance on equity raises and last quarter, we discussed the trajectory of our payout ratio and our intention to retain more capital as one step in this direction.
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to move your question from the queue. For participants using speaker equipment, it will be necessary to pick up your handset before pressing the star keys. Our first question is from Noah Kaye with Oppenheimer and Company.
Noah Duke Kaye: Today's announcement is another significant step in that direction as we continue.
Noah Duke Kaye: Of executing on our stated goals.
Noah Duke Kaye: Today has he is a powerful enterprise and better positioned for long term success with an even more diversified access to capital.
Noah Duke Kaye: I, thank our outstanding team for closing the CCH, one transaction and several other important initiatives this quarter.
Noah Duke Kaye: Alright, well, thanks for taking the questions and congratulations on closing the structure with KKR. And I think the FAQ that you provided in the appendix is really helpful, so that avoids me having to ask those questions.
Noah Duke Kaye: And I welcome our new partners from KKR as we jointly provide.
Noah Duke Kaye: To the energy transition.
Noah Duke Kaye: That concludes our prepared remarks, operator, please open the line for questions.
Noah Duke Kaye: Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like.
Noah Duke Kaye: But I will ask one question related to the structure, which is, is there any color we can get on? What is the yield or return profile threshold for investments that would go into the structure? Are there any stipulations or parameters that we should think about for the types of investments that will go in?
Speaker Change: This is your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Our first question.
Jeffrey A. Lipson: Thanks, Noah, for the question. I think the best way to think about the structure is that it will be very consistent with the HACI underwriting across the board, including risk and yield. And so I don't think you should think about CCH1 as having a different yield than our balance sheet otherwise would have. So we're really not changing our outlook on the business or the way we source investment.
Noah Duke Kaye: Is from Noah Kaye with Oppenheimer and company.
Speaker Change: Alright, well, thanks for taking the questions.
Speaker Change: And congratulations on closing.
Jeffrey A. Lipson: With.
Jeffrey A. Lipson: Yet the structure with KKR.
Noah: And I think the Q that you provided in the appendix is really helpful. So that avoids me having to ask those questions, but I will ask one question related to the structure, which is.
Speaker Change: Is there any color we can get on the kind of the yield or return profile threshold for investors.
Jeffrey A. Lipson: A question around the balance sheet and specifically the real estate investments. The balance sheet real estate investments have gone from $350 million in 2Q down to almost nothing. Can you give us a little bit more on the rationale for unwinding the exposure there and whether or not real estate as an asset class is one that you will continue to add to? Certainly, it seems like a lot of the unbalanced sheet going forward will be the equity method, but just trying to get some color. Thanks, Noah.
Speaker Change: That would go into the structure are there any stipulations or parameters that we should think about for the types of investments that that will go in.
Speaker Change: Thanks, Noah for the question I think the best way to think about.
Jeffrey A. Lipson: The structure is that it'll be very consistent with the hassey underwriting across the board.
Jeffrey A. Lipson: Including risk and yield.
Jeffrey A. Lipson: And so I don't think.
Speaker Change: You should think about CCH one.
Jeffrey A. Lipson: As having a different yield and our balance sheet otherwise would have so we're really not changing.
Jeffrey A. Lipson: Our.
Jeffrey A. Lipson: Outlook on the business or the way we source investments.
Jeffrey A. Lipson: Yes, we continue to seek investments within the solar real estate asset class and like that asset class a great deal. New assets that are originated today in that asset class are generally securitized, and they are, relative to what goes on to our balance sheet today, somewhat low yielding and somewhat highly levered. And so that is a much better asset to go through our securitization program. And what you're seeing with the reduction in real estate on the balance sheet is us rotating out of those on the balance sheet programs into the securitization platform. Yeah, and at the same time, you know, just to sneak one more in. I mean, you did grow up.
Jeffrey A. Lipson: Uh huh.
Speaker Change: A question around the balance sheet and specifically the real estate.
Jeffrey A. Lipson: Investments the balance sheet, our real estate investments have gone from $350 million.
Jeffrey A. Lipson: <unk> are down.
Jeffrey A. Lipson: Down to almost nothing and just could you give us a little bit more.
Jeffrey A. Lipson: Ron.
Jeffrey A. Lipson: The rationale for unwinding, the exposure, there and whether or not real estate as an asset classes is one that you will continue to add to it.
Jeffrey A. Lipson: Certainly it seems like a lot of the on balance sheet going forward will be equity method, but just trying to get some color.
Jeffrey A. Lipson: Your financing receivables balance, right? That suggests that, in that asset class, you're still finding opportunities to get the kind of yield that you know, that you spoke to, that you referenced in your prepared remarks. Just trying to understand the types of receivables that would carry, you know, these types of rates. For when it's receivable, it really just goes into our loan bucket, which is applicable to all of them.
Speaker Change: Thanks Noah.
Jeffrey A. Lipson: Yes, we continue to.
Jeffrey A. Lipson: Seek.
Jeffrey A. Lipson: Investments within the solar real estate asset class and like that asset class great deal.
Jeffrey A. Lipson: New assets originated today in that asset class or generally securitize they are rarely.
Jeffrey A. Lipson: Relative to what goes onto our balance sheet today, somewhat low yielding and and somewhat highly levered.
Jeffrey A. Lipson: And so that is a much better asset to go through our securitization program and what you're seeing on the reduction in real estate on the balance sheet is us rotating out of those on balance sheet programs into the securitization platform.
Jeffrey A. Lipson: Yeah, I would say just to take that step further; most of what we do in Red Sea Solar, for instance, and most of what we do in R&G is loan-informed and, therefore, will show up in the receivables line on the balance sheet.
Speaker Change: And at the same time it just to sneak one more in I mean, you did grow.
Noah Duke Kaye: Very helpful. I'll pass it on.
Jeffrey A. Lipson: Or your financing receivables balance right. So.
Operator: Thank you. Our next question is from Chris Souther with B Reilly.
Noah Duke Kaye: That suggests that that asset class you are still finding opportunities to get the kind of yields that.
Christopher Curran Souther: Hey, guys. Thanks for taking my questions here. Just on the elevated gain on sale in the quarter, is that related to KKR or the real estate sales as the driver there? I just wanted to kind of see what had caused the elevated numbers there in the quarter.
Christopher Curran Souther: You know that you're that you spoke to that you referenced in your prepared remarks, just trying to understand the types of receivables that would carry these types of rates.
Christopher Curran Souther: Sure when its receivables it really just goes into our alone bucket, which.
Jeffrey A. Lipson: Chris, it was more the latter. The KKR transaction just closed and had no impact on the first quarter and will have no impact going forward on the KKR line. So a big part of that was what Mark spoke about a moment ago, rotating some of these real estate investments from on-balance sheet to off-balance sheet.
Christopher Curran Souther: As applicable really to all of our asset classes.
Chris: Yeah, I would say just to even take that step further most of what we do.
Jeffrey A. Lipson: And whereas the solar for instance, most of what we do in R&D are.
Jeffrey A. Lipson: Our loan informed and therefore will show up.
Jeffrey A. Lipson: Receivables line in the balance sheet.
Jeffrey A. Lipson: Yeah.
Speaker Change: Very helpful I'll pass it on.
Christopher Curran Souther: I got it. Okay, that makes sense. And then, you know, as we're looking at kind of the economics of the KKR partnership, the FAQ is obviously very helpful, but should we think about the origination and management fees for that partnership as similar to the securitization business has been historically, or is it materially different? And then just to kind of follow up on that is, you mentioned on the last call and then again on this call not needing incremental gain on sale, so I guess KKR upfront origination doesn't count as gain on sale, but I kind of took that to mean, you know, episodic upfront revenue was not going to be the main driver around.
Speaker Change: Thank you.
Christopher Curran Souther: Thank you. Our next question is from Chris Souther with B Riley.
Speaker Change: Hey, guys. Thanks for taking my questions here.
Christopher Curran Souther: Just on the elevated gain on sale in the quarter or is that related to.
Christopher Curran Souther: To KKR or the real estate sales is the driver there I just wanted to kind of.
Christopher Curran Souther: See what had caused the elevated.
Christopher Curran Souther: Members there in the quarter.
Christopher Curran Souther: Chris It was a it was more of the latter the KKR transaction, just closed and had no impact on the first quarter.
Christopher Curran Souther: And have no impact will have no impact going forward on the.
Christopher Curran Souther: The airline so.
Christopher Curran Souther: A big part of that was what Mark spoke about a moment ago.
Christopher Curran Souther: You know, the guidance going out to 2026, so I'm just kind of curious, is the upfront stuff just, you know, between now and the end of 2025, so that's... Yeah, the reason it doesn't change in 2026 is because it would all be, you know, set up by the end of 2025? Or am I thinking about that incorrectly with the timing?
Christopher Curran Souther: Rotating some of these real estate investments from on balance sheet to off balance sheet.
Speaker Change: Got it okay that makes sense and then yes.
Christopher Curran Souther: As we're looking at kind of the.
Christopher Curran Souther: Economics of the KKR partnership.
Christopher Curran Souther: Perfect.
Speaker Change: This is very helpful but.
Christopher Curran Souther: Should we think about the origination and management fees with that partnership is similar to the securitization business has been historically or is it materially different.
Jeffrey A. Lipson: All right, Chris, there are a few things to unpack. I'll maybe answer the first part of the question, and Mark can answer the second part. So the first part of the question: there's no relationship between the gain on sale fees and the orientation and size of those fees and the fees related to CCH1. One is very market-driven around the yield on the underlying investment versus the cost of funds from the life code that we work with, and it is variable depending on those factors.
Jeffrey A. Lipson: And then just kind of a follow up around that as you mentioned.
Jeffrey A. Lipson: On the last call and then again on this call.
Speaker Change: Not needing incremental gain on sales so I guess the KKR.
Jeffrey A. Lipson: Current origination doesn't count as gain on sale.
Jeffrey A. Lipson: I kind of took that to mean.
Jeffrey A. Lipson: Besotted upfront revenue was not going to be the main driver around.
Jeffrey A. Lipson: The guidance going out to 2026, so I'm just kind of curious as do you.
Jeffrey A. Lipson: The fees in this vehicle are generally fixed in nature, where we'll get an upfront fee for each investment, and we'll get a management fee, you know, based on the balance, which presumably will go up over time. So I won't in any way equate those to the second part of your question. I'll let Mark answer that.
Mark: Upfront stuff is just between now and the end of 2025. So that's.
Mark: The reason it doesn't change 20, 26% because it would all be.
Mark: Set up by the end of 2005 or am I thinking about that incorrectly with like the timing.
Mark: Alright, Chris there are a few things.
Marc T. Pangburn: Sure. So Chris, I think you're referring to my commentary where I identified that the gain on sale remains variable. So, you know, we tied our forecast to the guidance window. And the main message we're trying to communicate there is that we continue to forecast a consistent level of gain on sale as it relates to guidance. And while we have an elevated amount of gain on sale this quarter, just by nature of the income stream, it is lumpy by nature, and we'll move up and down quarter by quarter.
Jeffrey A. Lipson: To unpack I'll, maybe answer the first part of the question and Mark can answer the second part so.
Marc T. Pangburn: The first part of the question there is no relationship between that.
Marc T. Pangburn: The gain on sale fees and the orientation and size of those fees and fees related to CCH. One one is fair.
Marc T. Pangburn: Market driven around the yield on the underlying investment.
Marc T. Pangburn: First is the cost of funds from the lifestyle that we work with and it is variable depending on those factors.
Marc T. Pangburn: The fees in this vehicle are generally fixed in nature, where we'll get an upfront fee for each investment.
Christopher Curran Souther: Okay, got it. That's helpful. All up in the queue. Thanks, guys.
Christopher Curran Souther: We'll get a management fee.
Operator: Our next question is from Mahit Manloi with Mizuho.
Christopher Curran Souther: Based on the balance, which presumably will go will go up over time.
Operator: So I wouldn't I wouldn't in any way equate those to the second part of your question I'll, let mark answer that.
Mahit Manloi: Hi, Jack Curley here on the line for Maheap. SLAT 15 of the debt provides all the detail on the CCH1 partnership and answers a lot of the initial questions. So thanks for that. The key question remaining is whether the three-year guidance includes any of the other similar transactions with other private infrastructure capital providers. And also, does the KKR transaction impact any of your debt needs?
Mahit Manloi: Yes.
Speaker Change: Sure So Chris I think you're referring to my commentary where identify the gain on sale remains variable.
Mahit Manloi: So.
Mahit Manloi: You know tied are.
Mahit Manloi: Our forecast to the guidance window and the main message. We're trying to communicate there is we continue to forecast a consistent level of gain on sale as it relates to guidance.
Jeffrey A. Lipson: Well, for the first part of the question, we wouldn't need to close on any other Co-investment Partnerships in order to achieve our guidance. I think the point I was making was, a transaction like this was already contemplated, so it doesn't change our existence. To the second part of the question, sorry, I'm not forgetting.
Mahit Manloi: And while we have a elevated amount of gain on sale this quarter.
Speaker Change: Just buy it.
Jeffrey A. Lipson: Of the income stream. It is it is lumpy by nature, and will will move up and down quarter by quarter.
Speaker Change: Okay got it that's helpful hop in the queue. Thanks, guys.
Speaker Change: Thanks, Chris.
Jeffrey A. Lipson: Does it impact your equity or debt? Oh, the equity needs. Yeah. Okay.
Jeffrey A. Lipson: Next question is from Mohit Malloy with Mizuho.
Jeffrey A. Lipson: So I think, you know, a simple framework for that is that it's a 50-50 partnership. Without this partnership, all those investments would have gone on our balance sheet. So a strong benefit of that is it reduces our equity needs by Okay, thanks a lot. And if I may, one more follow-up. How should we think about the economics around the transaction?
Jeffrey A. Lipson: Okay.
Jeffrey A. Lipson: Hi, Jack really here on the line for <unk>.
Jeffrey A. Lipson: Slide 15 of the deck provides a lot of that keeps you honest CCH world partnership and answers a lot of the initial question. So thanks for that question remaining is if the three year guidance includes any of the other similar transactions with other private infrastructure capital providers and also does the KKR transaction impact any of your.
Jeffrey A. Lipson: causing us to reconsider our guidance. So they've been relatively minor. And I'll let Mark answer the other part of the question.
Jeffrey A. Lipson: Our debt needs.
Mark: Well the first part of the question, we wouldn't need to close on any other.
Marc T. Pangburn: Sure, and I think the question was just generally about the economics of CCH1 and to reiterate what Jeff said, it's a very simple 50-50 structure, and so whatever investment would have gone onto our balance sheet that instead goes into the CCH1 partnership will earn 50% through our ownership interest and then, in addition to that, be paid again some upfront and ongoing payments.
Marc T. Pangburn: Co investment partnerships in order to achieve our guidance I think the point I was making was.
Marc T. Pangburn: A transaction like this was already contemplated so it doesn't change our exists.
Marc T. Pangburn:
Speaker Change: To the second part of the question.
Speaker Change: Sorry, I'm not forgetting.
Marc T. Pangburn: It doesn't impact your equity or debt or the equity needs yet okay.
Marc T. Pangburn: So I think a simple framework for that.
Marc T. Pangburn: Is that it's a 50 50 partnership without this partnership all of those investments would have gone on our balance sheet. So a strongman of that as it reduces our our equity needs by 50%.
Mahit Manloi: Thanks. I'll hop back in the queue. Thank you.
Operator: Our next question is from Mark Strouse with J.P. Morgan.
Mark Wesley Strouse: The way to think about that.
Mark Wesley Strouse: Hi, this is Michael on behalf of Mark. Thanks for taking our questions on CCH1.
Mark Wesley Strouse: Okay. Thanks, a lot.
Mark Wesley Strouse: Maybe one more follow up.
Michael: How should we think about the economics around the transaction, but causing us to reconsider our guidance so they've been relatively minor.
Speaker Change: Let mark answer the other part of the question.
Michael: Jordan and just I think the question was just general.
Michael: On the economics of CCH one end.
Jeffrey A. Lipson: I would say it's more all-encompassing than what we would describe as limited exclusivity. I think you should think of it as we're showing them most of what we are sourcing for the balance sheet, and they are, in some cases, committed based on some pre-agreed-upon criteria, and in other cases, have the ability to decline transactions, and in those cases, we can do them on our own. So I think that's the framework.
Jeffrey A. Lipson: Is there any color you can provide on how the exclusivity piece works? Also, I know this doesn't change the overall investment strategy here, but is there a certain asset class within the portfolio that this structure is best suited for, or is it more of a kind of all-income? I would say it's more of an all-encompassing exclusivity we
Michael: To reiterate what Jeff said it it's a very simple 50, 50 structure and so whatever investment would have gone onto our balance sheet that instead goes into the CCH one partnership will earn 50%.
Jeffrey A. Lipson: Through our ownership interest and then in addition to that would be paid.
Jeffrey A. Lipson: Some upfront and ongoing management fees.
Speaker Change: Thanks, I'll hop back in the queue.
Speaker Change: Thank you.
Jeffrey A. Lipson: Our next question is from Mark Strouse with JP Morgan.
Michael: Hi, This is Michael.
Speaker Change: On for Mark Thanks for taking our question.
Jeffrey A. Lipson: On CCH one is there any color you can provide on how the exclusivity piece of work.
Operator: Our next question is from Davis Sunderland with Bayer.
Davis B Sunderland: Also I know it doesn't change the overall investment strategy here, but is there a certain asset class within the portfolio that the structure is best suited for or is it more kind of all encompassing.
Davis B Sunderland: Hey, Mark, hey, Jeff. Thanks for the time. Appreciate you taking the question. Surprise, surprise, another KKR question. I just wanted to ask if in the guide, or you noted that in the guide, there was a joint investment that was already contemplated in the guidance. Maybe it was forecasted that this would come to fruition as early as it did, or maybe any details you can share about how this came to be would be helpful. And I have one quick follow-up.
Speaker Change: I would say, it's more all encompassing the exclusivity.
Mark: Liberty, we would describe as limited exclusivity I think you should think of it as we're showing them most of what we are.
Davis B Sunderland: Sourcing for the balance sheet and they are.
Jeffrey A. Lipson: Sure, David, thanks for the question. You know, I think the main point there is that by the time we were issuing our guidance in the February call, we were engaged in early conversation with KKR, and we were able to model what we thought the partnership would become and include it in that guidance number. So now that it closed, we don't we don't need to change it. I think that's the key point.
Jeffrey A. Lipson: In some cases commitments.
Jeffrey A. Lipson: On some pre agreed upon criteria.
Jeffrey A. Lipson: And in other cases have.
Jeffrey A. Lipson: The ability to decline transactions and in those cases, we can do them on our own. So I think that's the framework.
Speaker Change: Great. Thank you.
Davis B Sunderland: And then lastly, I think Noah may have already asked this, so apologies for the repeat, but just wanted to clarify, is there any different risk threshold or any other? I guess, restrictions or guidelines for the assets in that TCH1 that we should contemplate. Thank you.
Speaker Change: Thank you.
Davis B Sunderland: Our next question is from David Sutherland with Baird.
Speaker Change: Hey, Mark Hey, Jeff. Thanks for the time I appreciate you taking my question.
Davis B Sunderland: Surprise surprise another take care question I just wanted to ask yes in the guide or you noted that in the guide there was a.
Jeffrey A. Lipson: Thanks for the question. Definitely not.
Jeffrey A. Lipson: Joint investment that was already contemplated in the guidance.
Jeffrey A. Lipson: So I'll go back to what I said in the prepared remarks that our business and the way we source underwrite investments, the way we price risk, are all unchanged. And this, in many ways, is an endorsement of that strategy in that the objective here is to have HASSI do what it does and allow KKR to participate in that business, not change. Okay, that's great.
Jeffrey A. Lipson: Maybe was it.
Jeffrey A. Lipson: Forecasted that this would come to fruition as early as it did or maybe any details you can share about how this came to be would be helpful. I have one quick follow up.
Speaker Change: Sure David Thanks for the question.
Jeffrey A. Lipson: The main point there.
Jeffrey A. Lipson: Is that by the time, we were issued our guidance in the February call.
Davis B Sunderland: That's great. Thanks, Jeff. Congratulations, guys. Ladies and gentlemen...
Jeffrey A. Lipson: We were engaged in early conversation with KKR and we're able to model what we thought.
Operator: Ladies and gentlemen, we have reached the end of the question and answer session and are out of time for today's call. Thank you for your participation. You may disconnect your lines at this time.
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Davis B Sunderland: The partnership would become and included in that guidance number. So now that are closed we don't we don't need to change. It I think that's the key point.
Speaker Change: Okay that makes sense and then lastly, I think knowing they have already asked this I apologize for the repeat but just want to clarify is there any different risk threshold or any other.
Music: Guess restrictions or outlines for the for the assets in that th one that we should contemplate thank you.
Speaker Change: Thanks for the question.
Music: Definitely not so I'll go back to what I said in our prepared remarks that.
Music: Our business and the way we source underwrite investments the way we price risk is all unchanged and this in many ways is an endorsement of that strategy and that in that the objective here is to.
Music: Have has Egypt.
Music: He has done and allow KKR to participate in that business has not changed.
Music: So that's the way to think about it.
Speaker Change: Okay. That's great. Thanks, Chuck Congrats guys.
Speaker Change: Thank you. Thank you.
Music: Ladies and gentlemen, we have reached the end of the question and answer session.
Music: Time for today's call.
Music: For your participation you may disconnect your lines at this time.
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