Q2 2024 HA Sustainable Infrastructure Capital Inc Earnings Call
Speaker Change: Greetings, and welcome to HACI's second quarter 2024 earnings conference call and webcast.
Operator: 2nd Quarter 2024 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. 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, Aaron Chew, Senior Vice President of Investor Relations.
Speaker Change: 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, Erin Chu, Senior Vice President of Investor Relations.
Aaron Chew: Thank you, operator, and good afternoon to everyone joining us today for HASI's second quarter commerce call. Earlier this afternoon, HASI distributed a press release reporting our second quarter 2024 results, a copy of which is available on our website, along with the slide presentation we will be referring to today. 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. In today's discussion, we also include some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is available in our earnings release and presentation.
Erin Chu: Thank you operator and good afternoon to everyone joining us today for HACI's second quarter commerce call. Earlier this afternoon HACI distributed a press release reporting our second quarter 2024 results, a copy of which is available on our website along with the slide presentation we will be referring to today.
This conference call is being webcast live on our investor relations page of the website where a replay will be available later today.
Speaker Change: 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. In today's discussions,
Speaker Change: Also include some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is available in our earnings release and presentation.
Aaron Chew: Joining me on today's call are Jeff Lipson, the company's President and CEO, Mark Pangburn, the 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 our President and CEO, Jeff Lipson.
Speaker Change: Joining me on today's call are Jeff Lipson, the company's President and CEO, Marc Pangburn, the 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 our President and CEO, Jeff Lipson. Jeff?
Jeff Lipson: Thanks, Aaron, and welcome to the team. Thanks, everyone, for joining us today for our second quarter 2024 conference call. I'm going to begin on page 3.
Jeff Lipson: Thanks, Aaron, and welcome to the team. Thanks everyone for joining us today for our second quarter 2024 conference call. I'm going to begin on page 3.
Jeff Lipson: The second quarter of 2024 was a terrific quarter for HSE as we achieved two longstanding goals of closing on a co-investment vehicle and procuring a second investment grade rating. We also were able to continue to invest in higher returns and increase our adjusted earnings 19% year over year to $0.63. Considering these results and other positive catalysts that I will discuss shortly, we are affirming our guidance for adjusted EPS growth of 8 to 10% from 2024 to 2026 and for a dividend payout ratio of between 60 and 70% during the same period.
Jeff Lipson: The second quarter of 2024 was a terrific quarter for HSE as we achieved two long-standing goals of closing on a co-investment vehicle and procuring a second investment grade rating.
Speaker Change: We also were able to continue to invest in higher returns and increase our adjusted earnings 19% year-over-year to 63 cents.
Speaker Change: Considering these results and other positive catalysts that I will discuss shortly, we are affirming our guidance for adjusted EPS growth of 8% to 10% from 2024 to 2026 and for a dividend payout ratio of between 60% and 70% in the same period.
Jeff Lipson: And a reminder that our long-term goals are 10% annual growth in EPS and a 50% payout ratio by 2030. Turning to page 4, we have now reached a level of scale in our business such that we think it is worthwhile to highlight not only the impact on our financials but the impact we're having on the energy markets as a whole. Excluding our managed assets, our portfolio investments in the first half of 2024 alone comprise 10 gigawatts of solar and wind capacity.
Speaker Change: And a reminder that our long-term goals are 10% annual growth in EPS and a 50% payout ratio by 2030.
Speaker Change: Excluding our managed assets, our portfolio investments in the first half of 2024 alone comprise 10 gigawatts of solar and wind capacity.
Jeff Lipson: To put that in perspective, that is enough electricity capacity to power more than 7 million homes. That solar and wind capacity is generating approximately 20 terawatt hours of renewable energy annually, which is about two times the annual electricity consumption of the entire city of Washington, D.C. And our portfolio has also invested in renewable natural gas projects with almost 6 million MMBTUs of capacity. That is about the equivalent annual energy required to heat more than 100,000 homes, all together, including the projects in our managed assets.
Speaker Change: To put that in perspective, that is enough electricity capacity to power more than 7 million homes, that solar and wind capacity is generating approximately 20 terawatt hours of renewable energy annually, which is about two times the annual electricity consumption of the entire city of Washington, D.C.
Speaker Change: And our portfolio has also invested in renewable natural gas projects with almost 6 million MMBTUs of capacity. That is about the equivalent annual energy required to heat more than 100,000 homes.
Speaker Change: Altogether, including the projects in our managed assets, we have invested in projects that, in aggregate, are avoiding approximately 8 million metric tons of CO2 annually, based on the year one calculation of our carbon count methodology.
Jeff Lipson: We have invested in projects that, in aggregate, are avoiding approximately 8 million metric tons of CO2 annually, based on the year one calculation of our carbon count methodology. In summary, our business already has significant scale and impact but is poised to take both this scale and impact a step further. Turning to page five, in the second quarter, several industry dynamics and HASE-specific milestones emerged that positioned the company particularly well over the next several years.
Speaker Change: In summary, our business already has significant scale and impact, but is poised to take both this scale and impact a step change higher.
Speaker Change: Turning to page 5, in the second quarter, several industry dynamics and HASE-specific milestones emerged that positioned the company particularly well over the next several years.
Jeff Lipson: First, there continues to be increasing consensus that U.S. energy demand will increase more rapidly than previously forecast, and this elevated demand for energy will result in corresponding supply increases. Much of it from clean energy sources. In fact, we have fundamentally entered a new era of power demand growth, with one of the largest drivers coming from AI-driven data centers, which are expected to become 8% of U.S. electricity consumption by 2030. And the majority of these data centers prefer clean power.
Speaker Change: This elevated demand for energy will result in corresponding supply increases, much of it from clean energy sources.
Speaker Change: In fact, we have fundamentally entered a new era of power demand growth, with one of the largest drivers coming from AI-driven data centers, which are expected to become 8% of U.S. electricity consumption by 2030.
Speaker Change: And the majority of these data centers prefer clean power.
Jeff Lipson: In partnership with some of the largest corporate buyers in the world, HACI remains determined to drive transparency in the climate impact of new load by ensuring that emissions, rather than simply megawatt hours generated, are credibly measured. In addition, it is expected that there will be continued adoption of electric vehicles, which have an 8% and growing market share and will result in a significant shift from the oil markets to the electricity market. Furthermore, another trend is the heightened prioritization of domestic manufacturing, particularly when it comes to semiconductors.
Speaker Change: Furthermore, another trend is the heightened prioritization of domestic manufacturing, particularly when it comes to semiconductors.
Jeff Lipson: Together, these sources of growth are expected to account for an increase in U.S. electricity demand of more than 800 terawatt hours from a base of approximately 4,000 terawatt hours per year. This uptick in growth is expected to occur after approximately 20 years of relatively modest demand.
Speaker Change: Together, these sources of growth are expected to account for an increase in U.S. electricity demand of more than 800 terawatt-hours from a base of approximately 4,000 terawatt-hours per year.
Speaker Change: This uptick in growth is expected to occur after approximately 20 years of relatively modest demand growth.
Jeff Lipson: In this period of lower growth over the last 20 years, clean energy has become the overwhelming source of new generation. Therefore, as we enter this period of higher growth, renewables and other low-carbon solutions will experience even more rapid growth. Solar energy represents the lowest levelized cost of electricity of any source.
Speaker Change: In this period of lower growth over the last 20 years, clean energy became the overwhelming source of new generation. Therefore, as we enter this period of higher growth, renewables and other low-carbon solutions will experience even more rapid growth.
Jeff Lipson: And solar and wind energy continue to represent the vast majority of new electricity capacity being added to the grid. Likewise, increased adoption of renewable natural gas is forecasted to occur, as natural gas will continue to be utilized to meet energy demands, and technology will continue to allow this gas to be more efficiently produced from municipal and animal waste. It is important to note that all of these trends are unlikely to be impacted by the 2024 election results.
Jeff Lipson: There continues to be active discussion and speculation regarding public policy changes and their corresponding impact on the outlook for clean energy development. However, it is our view, shared by many others, that the megatrends of the energy transition itself and the aforementioned increase in power demand will result in continued considerable clean energy deployment without meaningful disruption resulting from public policy changes. This forecasted supply of clean energy to meet surging demand will require hundreds of billions of dollars of capital investment.
Jeff Lipson: As the only public pure play investment company exclusively focused on the energy transition, ASSE is well positioned to capitalize on this trend, particularly in light of two transformative developments in the second quarter. First, we launched our CCH1 $2 billion strategic partnership with the global investment firm KKR. This partnership provides enhanced access to committed capital, diversifies our revenue with incremental fee income, and generally positions us to scale our business. The partnership is also an affirmation of the differentiation of our strategy and a reflection that our underlying portfolio of sustainable investments is difficult to replicate. The CCH-1 vehicle has been seeded with two investm- ns and is functioning as designed.
ASSE: As the only public pure play investment company exclusively focused on the energy transition, ASSE is well positioned to capitalize on this trend, particularly in light of two transformative developments in the second quarter.
Jeff Lipson: And we expect CCH1 to be the primary financing vehicle for our balance sheet investments over the next 18 months. The second positive development in the quarter was our attainment of fully investment-grade status. We were upgraded by Fitch and placed on positive watch by S&P to go along with our existing investment grade rating by Moody's. These ratings have provided us access to the investment-grade bond market, which provides more stability, lower costs, and longer tenure, among other attributes that Mark will discuss.
Jeff Lipson: Summarizing CCH-1 and the investment grade ratings into a single sentence, we have reduced our capital needs by 50% and significantly reduced the cost for the 50% we raised ourselves. Therefore, as we holistically assess industry trends and HSE's capital access, we are at a pivotal moment at the juxtaposition of several positive catalysts. As I said on Investor Day last year, we have a simple business model, but a complex business. Our business model can be encapsulated as climate clients' assets.
Speaker Change: This partnership provides enhanced access to committed capital, diversifies our revenue with incremental fee income, and generally positions us to scale our business.
ASSE: The partnership is also an affirmation of the differentiation of our strategy and a reflection that our underlying portfolio of sustainable investments is difficult to replicate.
ASSE: The CCH-1 vehicle has been seeded with two investments and is functioning as designed, and we expect CCH-1 to be the primary financing vehicle for our balance sheet investments over the next 18 months.
ASSE: The second positive development in the quarter was our attainment of fully investment-grade status.
ASSE: These ratings have provided us access to the investment-grade bond market, which provides more stability, lower costs, and longer tenure, among other attributes that Mark will articulate.
Marc: Summarizing CCH1 and the investment grade ratings into a single sentence, we have reduced our capital needs by 50% and significantly reduced the cost for the 50% we raise ourselves.
Marc: As I said on Investor Day last year, we have a simple business model, but a complex business.
Marc: Our business model can be encapsulated as climate clients' assets, but our business requires a deep understanding of energy markets, structured finance, and the ability to establish and maintain long-term relationships.
Jeff Lipson: But our business requires a deep understanding of energy markets, structured finance, and the ability to establish and maintain long-term relationships. Our talented and experienced team is uniquely qualified to meet the capital needs of the energy transition. This combination of a differentiated investment strategy and enhanced access to diversified and stable sources of capital positions HSE perfectly to capitalize on these industry trends and continue to operate with increasing scale, strong margins, and profitable growth. And with that, I'll pass along the call to Mark to discuss the quarterly financials in greater detail.
ASSE: Our talented and experienced team is uniquely qualified to meet the capital needs of the energy transition.
ASSE: This combination of a differentiated investment strategy and enhanced access to diversified and stable sources of capital positions HSE perfectly to capitalize on these industry trends and continue to operate with increasing scale, strong margins, and profitable growth.
ASSE: And with that, I'll pass along the call to Mark to discuss the quarterly financials in greater detail.
Mark Pangburn: I'll start on slide six. Before I cover the quarterly results, I'd like to take some time to emphasize one point Jeff just highlighted. Our second investment grade rating and how impactful this will be for our business. We see the change benefiting our business in three primary ways. First On Call.
Marc: Thank you, Jeff. I'll start on slide six. Before I cover the quarterly results, I'd like to take some time to emphasize one point Jeff just highlighted.
Marc: Our second investment grade rating and how impactful this will be for our business.
Marc: We see the change benefiting our business in three primary ways. First, on cost. The chart on the left shows the spread differential between BBB and BBB bonds over the last 10 years, which has averaged 120 basis points.
Mark Pangburn: The chart on the left shows the spread differential between BBB and BBB bonds over the last 10 years, which has averaged 120 basis points. To be more specific, to have the, On our previous high-yield platform, we raised approximately $3 billion in corporate debt at a weighted average spread of 339 basis points. Compare this $339 to the credit spread of our inaugural investment-grade issuance of $225 billion, a greater than 100 basis point compression in cost.
Marc: to be more specific to HESI.
ASSE: Within our previous high-yield platform, we raised approximately $3 billion in corporate debt at a weighted average spread of 339 basis points.
Mark Pangburn: Second, we can now more reliably access longer-term, longer maturity bonds, better aligning our asset and liability duration and minimizing our need for hedging activity. Third, when market dislocations occur, the IG market is meaningfully more resilient, as evidenced by the graph on the left.
Mark Pangburn: For example, during the initial COVID dislocation, the high yield market costs increased by 250 basis points more than investment grade markets. Generally, the best times to invest are during these dislocations, and now our largest funding source will be substantially more cost-effective during these times. Finally, there are intangible benefits such as the general affirmation of the credit profile of our investors.
Marc: For example, during the initial COVID dislocation, the high-yield market costs increased by 250 basis points more than investment-grade market costs.
ASSE: Generally, the best times to invest are during these dislocations, and now our largest funding source will be substantially more cost-effective during these times.
ASSE: Finally, there are intangible benefits such as the general affirmation of the credit profile of our investments.
Mark Pangburn: We believe that the combination of these factors will continue to drive attractive margins over the long term. Turning to slide 7 to cover the quarterly results. Adjusted EPS grew 19% year-over-year to $0.63, and adjusted net investment income rose 16% year-over-year to $63 million. Also of note, gain on sale fees and securitization income was $32 million, up about $12 million year over year. As a reminder, we expect gain on sale during the guidance window to be fairly consistent with 2022 and 2023. Stepping back a bit and moving to slide 8.
ASSE: Adjusted EPS grew 19% year-over-year to $0.63, and adjusted net investment income rose 16% year-over-year to $63 million.
ASSE: Also of note, gain-on-sale fees and securitization income was $32 million, up about $12 million year-over-year. As a reminder, we expect gain-on-sale during the guidance window to be fairly consistent with 2022 and 2023.
Mark Pangburn: This highlights the expansion of our managed assets since 2020. As a reminder, our managed assets include our portfolio, the investments we have securitized, and CCH1. Since 2020, our managed assets have grown by more than 80% to $13 billion through the end of Q2. This includes new closings of approximately $260 million during Q2, or $823 million during the first half, which is consistent with our first half of 2023. Perhaps more importantly, the new asset yield for portfolio investments during the first half of 2023 was greater than 8.5%, whereas today, we're investing in yields greater than 10.5% with a consistent risk profile. Moving on to slide 9.
ASSE: Stepping back a bit and moving to slide 8, this highlights the expansion of our managed assets since 2020. As a reminder, our managed assets include our portfolio, the investments we have securitized, and CCH1.
ASSE: Since 2020, our managed assets have grown by more than 80% to $13 billion through the end of Q2.
ASSE: Perhaps more important, the new asset yield for portfolio investments during the first half of 2023 was greater than 8.5%, whereas today we are investing in yields greater than 10.5% with a consistent risk profile.
Mark Pangburn: Our portfolio stood at $6.2 billion at the end of Q2, up 27% year-over-year, and we continue our focus on maintaining diversification across our assets. Two items of note: given the size of CCH1, we have not yet broken it out separately, but note that it is currently comprised of one RESI solar transaction and one CNI solar. The portfolio also decreased approximately $200 million, driven by the seeding of CCH1 and our focus on asset rotations, where we have been selling or syndicating our lower-yielding investments to reinvest at higher yields. Next, on slide 10, the narrative around our ROE and margins remains consistent with the prior quarter. Our elevated first half 24 ROE is driven primarily by gain on sale.
ASSE: Moving on to slide 9. Our portfolio stood at $6.2 billion at the end of Q2, up 27% year-over-year, and we continue our focus on maintaining diversification across our asset classes.
ASSE: Two items of note. Given the size of CCH1, we have not yet broken it out separately, but note that it is currently comprised of one RESI solar transaction and one CNI solar transaction.
ASSE: Next on slide 10, the narrative around our ROE and margins remain consistent with the prior quarter. Our elevated first half 24 ROE is driven primarily by gain on sale. Our portfolio yield continues to increase as new transactions are funded.
Mark Pangburn: Our portfolio yield continues to increase as new transactions are funded. Our cost of debt has increased relative to 23, but it is actually down to 5.6 from 5.7 in Q1 of 24. I'd also like to touch on our recent 25 bond refinances. The 2025 was a $400 million bond with a coupon of 6%. To manage interest rate risk, we entered into a forward-starting swap to lock the base rate for the expected refinancing
ASSE: Our cost of debt has increased relative to $23, but is actually down to $5.6 from $5.7 in Q1 of 2024.
Mark Pangburn: When we actually refinance the bond, we also unwind the swap. After factoring in the impact of the swap, the effective cost of refinancing was 6%, identical to the 6% coupon on the 25 itself, with an additional nine years of tenor. Finally, on Flight 11.
ASSE: I'd also like to touch on our recent 25 bond refinancing.
ASSE: The 2025 was a $400 million bond with a coupon of 6%.
ASSE: To manage interest rate risk, we entered into a forward-starting swap to lock the base rate for the expected refinancing.
ASSE: When we actually refinance the bond, we also unwound the swap.
ASSE: After factoring in the impact of the swap, the effective cost of refinancing was 6%, identical to the 6% coupon on the 25 itself, with an additional 9 years of tenor.
Mark Pangburn: In terms of the balance sheet, a few important updates. Our leverage ratio declined to 1.8 times. And after paying down our revolver, we are entering the second half of 2024 with $1.4 billion of liquidity. Additionally, on the right, we have minimal near-term maturity to continue to manage our liability platform to a laddered maturity profile. Our liquidity position and minimal near-term maturities provide us the opportunity to capitalize on our pipeline and the attractive investment environment we see today.
ASSE: Finally, on slide 11.
ASSE: In terms of a balance sheet, a few important updates. Our leverage ratio declined to 1.8 times. And after paying down our revolver, we are entering the second half of 2024 with $1.4 billion of liquidity.
ASSE: Additionally, on the right, we have minimal near-term maturities and continue to manage our liability platform to a ladder of maturity profile.
Jeff Lipson: Turning to page 12, we detail various sustainability and impact items, including receiving the highest rating from S&P's Green Bond Framework and a notable award from Reuters regarding our sustainability culture. We conclude on page 13.
ASSE: Turning to page 12, we detail various sustainability and impact items, including receiving the highest rating from S&P's Green Bond Framework and a notable award from Reuters regarding our sustainability culture.
Jeff Lipson: HACI remains uniquely positioned with a differentiated business model enabling us to remain the preeminent pure play capital provider to the energy transition. Our existing liquidity and capital, paired with our improved access to growth capital and an attractive margin on our investment return, ideally positions us for success over the next several years. I would like to thank our talented team for another outstanding quarter, as we look forward to a successful second half of 2024. Operator, please open the line for questions.
ASSE: Let's conclude on page 13.
ASSE: Our existing liquidity and capital, paired with our improved access to growth capital and an attractive margin to our investment return, ideally positions us for success over the next several years.
ASSE: I would like to thank our talented team for another outstanding quarter, as we look forward to a successful second half of 2024.
Speaker Change: Operator, please open the line for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session.
Operator: Thank you. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 if you would like to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up a handset before pressing the star keys.
Speaker Change: If you would like to ask a question, please press star and then 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up a handset before pressing the star keys.
Operator: One moment, please, while we poll for questions. The first question we have is from Noah Kaye of Oppenheimer and Company. Please go ahead.
Speaker Change: One moment please, while we poll for questions.
Speaker Change: The first question we have is from Noah Kaye of Oppenheimer and Company. Please go ahead.
Noah Kaye: Thanks for taking the questions. A lot of positive developments noted in your remarks. Maybe just a first quick housekeeping one.
Noah Kay: Thanks for taking the questions.
Noah Kay: A lot of positive developments noted in your remarks. Maybe just a first quick housekeeping one.
Noah Kaye: Looking through the cash flow statement, it looked like there was a really big number in principal collections from financing receivables. Can you just give us a little bit more color on that, what drove that, and I assume we should treat that as not typical, but any information would be helpful.
Noah Kay: Can you just give us a little bit more color on that, what drove that, and I assume we should treat that as not typical, but any information would be helpful.
Mark Pangburn: Hey Noah, thanks for the question. So, there were two components to it. One was, I would just say, ordinary course amortization of some of our loans that we do have a regular run rate on, but it is larger this quarter primarily due to us identifying some loans that were at a lower yield and being able to bring in other parties to take a large piece of that. And that fits into our general asset rotation program we've been talking about looking to reinvest that cash at higher yields
Speaker Change: that we do have a regular run rate on.
Speaker Change: some loans that were at a lower yield and being able to bring in other parties to take a large piece of that and that fits into our the General Asset Rotation Program we've been talking about looking to reinvest that cash at the higher yields we're seeing today.
Noah Kaye: Okay, thanks. And then a follow-up. You have an update on the pipeline in the appendix. It looks like it primarily skews behind the meter and FTN. So, for confirmation, should we think about the likely yields on those as also, you know, 10.5 or north of that?
Speaker Change: Okay, thanks. And then a follow-up.
Speaker Change: You know you have an update on the pipeline in the appendix. It looks like it primarily skews behind the meter and FTN
Speaker Change: So, for confirmation, should we think about the likely yields on those as also, you know, ten and a half or north of that?
Speaker Change: which would imply, you know, continuing, in fact, increasing spreads given the favorable trends on cost of debt.
Mark Pangburn: So thanks for the question, Noah. I think you should think of the pipeline yield as being consistent with the recent closings. So I think most of what's in the pipeline is at that same level at which we've been closing transactions in 2020. Great.
Speaker Change: So thanks for the question, Noah. I think you should think of the pipeline yield as being consistent with the recent closings. So I think most of what's in the pipeline is at that same level at which we've been closing transactions in 2024.
Noah Kaye: I appreciate not breaking CCH out early in the life of the vehicle, but you did disclose the actual assets, I believe, in the vehicle in the release. Roughly what kind of size would it have to get to before you would think about breaking it out? And just to clarify for us what that would mean in terms of a separate revenue line or equity and contribution, rather, I should say.
Noah Kaye: Great. And maybe just one last one.
Speaker Change: Great. And maybe just one last one.
Speaker Change: early in
Speaker Change: Please see the complete disclaimer at https://sites.google.com or at https://sites.google.com
Speaker Change: Roughly, what kind of size would it have to get to before you would think about breaking it out? And just to clarify for us what that would mean in terms of a separate...
Mark Pangburn: Sure. So in terms of how we would break it out, I think there are 2 components to that. One is in the deck itself in our various pie charts, and it will likely either become a slice of a pie, or we just create a new pie chart as it grows. In terms of how it will show up in the financial statements, the, you know, the revenue streams from CCH1, for example, the recurring asset management fee and the upfront fees were just too small to break out as line items on the financial statement, but we will certainly continue to consider the right time to break.
Speaker Change: Sure, so in terms of how we would break it out, I think there's two components to that. One is in the deck itself, in our various pie charts, and it'd likely either become a slice of a pie, or we just create a new pie chart as it grows.
Speaker Change: Um, in terms of how it will show up in the financial statements, the, you know, the revenue streams from
Noah Kaye: All right, very helpful. I'll turn it over.
Operator: The next question we have is from Brian Lee of Goldman Sachs. Please go ahead. Hey, this is...
Operator: Hey, this is Tyler Bissedon on behalf of Bryan. Thank you for taking our questions. First, are there any implications from SunPower no longer providing leases and PPAs on existing FundStrong funding? Additionally, you were involved in a portion of the $300 million project financing commitment SunPower announced earlier this year, so is there any underutilized capacity on these existing funds that may be able to get returned or redistributed?
Speaker Change: Hey, this is Tyler Bissedon for Bryan. Thank you for taking our questions.
Speaker Change: Additionally, you were involved in a portion of the $300 million of project financing commitments SunPower announced earlier this year. So is there any underutilized capacity on these existing funds that may be able to get returned or redistributed?
Tyler Bissedon: So thanks, Tyler, for the question. I may answer that a little broader than you even asked it, just to assume there'll be other questions related to SunStrong. And I would ask folks to turn to page 18 in the appendix.
Jeff Lipson: And I think the, sort of, five things to understand about Sundström and HASSI are, number one, it's a very small portion of the existing portfolio. Number two, it's been a very small portion, less than 3% of origination since 2021, so it's not likely to impact us from an incremental business point of view. Third, all of our MES loans that are part of SunStrong are fully collateralized by underlying cash flows from leases and a little bit from loans as well. Number four, all of the...
Speaker Change: Number two, it's been a very small portion, less than 3% of origination since 2021, so it's not likely to impact us.
Speaker Change: Third, all of our MES loans that are part of SunStrong are fully collateralized by underlying cash flows from leases and a little bit from loans as well.
Jeff Lipson: Leases continue to perform as the homeowners themselves are obviously unimpacted by any disruption of sun power. And number five, the servicer can be changed based on the underlying document. And so there is.
Speaker Change: Number four, all the.
Speaker Change: Leases continue to perform as the homeowners themselves are obviously unimpacted by any disruption of sun power.
Speaker Change: And number five, the servicer can be changed based on the underlying documents. And so there is...
Jeff Lipson: Some chance there'll be a successor service. So when you take those five things together, we don't feel like the investments in Sundström are at risk. We're at elevated risk given the challenges with the, and hopefully embedded in there are answers to your questions related to this specific facility that we have. We're not funding at this point under that.
Speaker Change: So when you take those five things together, we don't feel like the investments in SunStrong are at risk, or at elevated risk, given the challenges with the service.
Tyler Bissedon: Thank you, super helpful. And then there's been a lot of investment happening in the data center world as it relates to power demand, which you discussed in your opening remarks. So where can we expect to see this trend show up most for you? Have you seen any specific opportunities you can call out? Additionally, can you discuss a bit more specifically how your agreement with KKR can allow you to better capture this growth? Any thoughts there would be appreciated. Thank you.
Jeff Lipson: Let me answer that last part and then I'll let Susan Nickey answer sort of the first part of the question. The KKR benefit is really more round access to committed capital, which allows us to scale the business and rely less on capital markets. So that vehicle will just allow us to generally scale the business in all aspects. As it specifically relates to where we might see elevated business from data center development, I'm going to ask Susan to answer that question. Thanks.
Speaker Change: Let me answer that last part and then I'll let Susan Nickey answer sort of the first part of the question.
Susan Nicci: The KKR benefit is really more around access to committed capital, which allows us to scale the business and rely less on capital markets. So that vehicle will just allow us to generally scale the business in all asset classes.
Susan Nickey: Thanks, Jeff. Yeah, the data center demand growth is really driving the increase in forecasts for energy, and it seems like every week we'll hit get another another another forecast, which is continuing to escalate. So how that translates to us again is that we finance the largest developer sponsors who are building projects to satisfy that energy demand. We're seeing that translate into our pipeline, and a lot of the data centers are certainly the big companies, the Googles, the Amazons, and other names who are the corporate offtakers that Jeff referred to in the beginning, who are looking for not only that energy, but clean energy. So that's overall driving our pipeline growth and also continuing to impact things in a different way in other parts of the sectors, also positively.
Tyler Bissedon: All right, thank you very much.
Speaker Change: Another forecast which is continuing to escalate. So how that translates to us again as we finance the largest developer sponsors who are building projects to satisfy that energy demand
Speaker Change: All right, thank you very much.
Operator: The next question we have is from Julien Dumoulin-Smith of Jeffreys. Please go ahead.
Speaker Change: Thank you.
Operator: Hey, good evening. This is Hannah on behalf of Julien.
Hannah: So just a quick question around managed assets. How should we think about the pace of growth given that they've been growing over 20% year over year for a few quarters now? And how should we also think about the distributions and transfers from the KKR partnership impacting that pace of growth?
Mark Pangburn: Sure, happy to take that. I'll actually take the second one first.
Susan Nicci: Sure, happy to take that. I'll actually take the second one first. In terms of the
Mark Pangburn: In terms of the Transfers to the CCH1 entity, I would expect that to be a one-time dynamic where we had some assets on our balance sheet and used those assets to seed the partnership. On a go-forward basis, new investments would just be closed directly into CCH1, so there would not be a transfer. But in terms of how to think about the growth of managed assets, I would tie that to our annual closed transactions, in that, you know, whether they end up in our portfolio, in CCH1, or being securitized, you can think about all three of those prongs showing up in managed assets and also in the closed transactions.
Speaker Change: transfers to the CCH1 entity. I would expect that as a one-time dynamic where we had some assets.
Speaker Change: on our balance sheet and use those assets to seed the partnership. On a go-forward basis, new investments would just be closed directly into CCH1, so there would not be a transfer dynamic.
Susan Nicci: I would tie that to our annual closed transactions.
Jeff Lipson: Got it. Thank you. And then, generally, how are you thinking about new partnerships going forward, especially given that your shares have recovered a bit in the past few months? Is the strategy still to go out and search for new partnerships?
Speaker Change: Got it, thank you. And then just as a follow-up, generally how are you thinking about new partnerships going forward, especially given that your shares have recovered a bit in the past few months? Is the strategy still to go out and search for new partnerships?
Jeff Lipson: Well, it's unaffected by the share price. Our business on the investment side of our business has been very client-centric, so that often involves joint ventures and other partnerships with our clients, and that's an unchanged element of our strategy. On the liability side, we've obviously done this recent transaction with KKR. That is, think of that as more or less exclusive for the next 2 billion and 18 months. And so we won't be seeking any partnerships on the liability side just yet. We're just going to focus on operationalizing what we have with KKR.
Speaker Change: Well, it's unimpacted by the share price.
Speaker Change: Our business on the investment side of our business has been very client-centric.
Speaker Change: So that often...
Speaker Change: involves joint ventures and other partnerships with our clients and that's an unchanged element of our strategy.
Speaker Change: On the liability side, we've obviously done this recent transaction.
Speaker Change: with KKR.
Speaker Change: Think of that as more or less exclusive for the next 2 billion and 18 months, and so we won't be just yet seeking any partnerships on the liability side. We're just going to focus on operationalizing what we have with KKR.
Hannah: Okay, perfect. Thank you.
Speaker Change: Okay, perfect, thank you.
Operator: The next question we have is from Ben Kallo of BID. Please go ahead.
Speaker Change: Thank you.
Speaker Change: The next question we have is from Ben Kallo of BID. Please go ahead.
Operator: Hey guys, good evening. Could you just talk? Jeff said that, you know, KKR is providing capital, but have you seen any change in maybe kind of deal flow or size of deals or terms around deals? I know it's new, so that's my first question.
Ben Kallo: Hey guys, good evening. Could you just talk, I know, Jeff, you said that
Speaker Change: You know, KKR providing capital, but...
Benjamin Kallo: Well, we've not seen any changes in deal sizes or terms of deals as specifically related to having the CCH1 program in place. So that's really invisible to our investment side of the business, to our client relationships; it really just is a capital, you know, element to our business. And so, no, it hasn't impacted how we've operated on the investment side of the business.
Speaker Change: Well, we've not seen any changes in deal sizes or terms of deals as specifically related to having the CCH1 program in place.
Speaker Change: So that's really invisible to our...
Speaker Change: investment side of the business to our client relationships. It really just is a capital element to our business. And so no, it's not impacted how we've operated on the investment side of the business.
Jeff Lipson: And then, you know, I know you guys have operated under different White Houses, but, you know, maybe could you just expand upon what you guys are hearing in D.C. I know it changes day by day, but anything you can clearly give us on IRA.
Speaker Change: And then, you know, I know you guys operate under different, you know, White Houses, but, you know, maybe could you just expand upon what, you know, you guys are hearing in D.C. I know it changes day by day, but anything you could clarify for us on IRA?
Benjamin Kallo: I had the potential for you to change.
Jeff Lipson: Sure, and thanks Ben for the question. I'm not sure we're hearing anything different than others are hearing, but it's our general view, as I said in my prepared remarks, shared by others, that substantial changes in public policy related to clean energy are somewhat unlikely, just given the economics, given the job creation, given how difficult it is to change the tax code. So it's our view that if there were, for instance, a Republican sweep, there may be some changes to things like EB tax credits and things like that, but nothing that would significantly impact our business.
Speaker Change: and potential for a yoke to change.
Speaker Change: Sure. And thanks, Ben, for the question.
Speaker Change: I'm not sure we're hearing anything different than others are hearing, but it's our general view, as I said, my prepared remarks shared by others.
Speaker Change: that substantial changes in public policy related to clean energy are somewhat unlikely.
Speaker Change: Just given the economics
Speaker Change: Given the job creation, given how difficult it is to change the tax code. So, it's our view that if there were, for instance, a Republican sweep, there may be some...
Speaker Change: changes to things like EV tax credits and things like that.
Speaker Change: But nothing that would significantly impact our business. We really deem that very unlikely.
Jeff Lipson: We really deem that very unlikely. And, you know, the energy transition, as I said, the demand growth, the economics are just too overwhelming such that public policy is not going to impair the deployment of clean energy and, therefore, the addressable market. Great, thank you guys very much.
Speaker Change: and, you know, the energy transition, as I said, the demand growth.
Speaker Change: The economics are just too overwhelming such that public policy is not going to impair the deployment of clean energy and therefore the addressable market for HSE.
Speaker Change: Great. Thank you guys very much. Have a good night.
Operator: The next question we have is from Maheep Mandloi of Mizuho. Please go ahead.
Speaker Change: The next question we have is from Ahib Mandloy of Mizuho. Please go ahead.
Maheep Mandloi: Hey, thanks for the questions. I apologize for the background noise.
Speaker Change: Hey, thanks for the questions and apologies for the background noise here.
Maheep Mandloi: Just a question on the SunPower joint venture. Thanks for the details you gave on that. I'm just curious if it impacts your pipeline, or just trying to understand how much of that 5.5 billion pipeline is from residential solar as opposed to this. And part of that question is also how does the refinancing of the SunStrong ABS, do you think it's impacted by the decision to stop the residual PPS.
Ahib Mandloy: This first one on the SunPower joint venture, thanks for the details you gave on that. I'm just curious if it impacts your pipeline, or just trying to understand how much of that 5.5 billion pipeline is from residential solar exposed to this, and part of that.
Speaker Change: The question is also how does the refinancing of the SunStrong ABS, do you think it's impacted by their decision to stop the PPS?
Jeff Lipson: So maybe I'll take the first part and Mark can take the second part. As it relates to pipeline, very, very minimal impact. Again, as we showed on page 18, Sunstrong-related originations have been less than 3% of total originations since 2021. The portion of your question that was about how much ResiSolar is in the pipeline, when you see our pie slice of behind the meter being relatively large, a decent percentage of that is ResiSolar.
Speaker Change: Bye.
Speaker Change: So maybe I'll take the first part and Mark can take the second part. As it relates to pipeline, very very minimal impact again as we showed on page 18.
Speaker Change: Sunstrong-related originations have been less than 3% of total originations since 2021.
Speaker Change: The portion of your question that was how much resi-solar is in the pipeline, when you see our pie slice of behind the meter being relatively large, a decent percentage of that is resi-solar. It's still an asset class.
Jeff Lipson: It's still an asset class that we will continue to invest in, and so our partners there have portfolios that they continue to show us, and the asset class continues to perform well, so our overall strategy there remains intact. As it relates specifically to the Sunstrong ABS portion of the question, I'm going to ask Mark to answer.
Speaker Change: that we will continue to invest in. And so our partners there have portfolios that they continue to show us.
Mark: And the asset class continues to perform well, so our overall strategy there remains intact. As it relates specifically to the SunStrong ABS portion of the question, I'm going to ask Mark to answer that.
Mark Pangburn: Sure. So ultimately, the ABS investors are focused on asset-level performance and the support that the various service providers, you know, perform to, excuse me, to ensure that asset-level performance. And I would note that the ABS is at this point, six years since issuance, and that asset portfolio has continued to perform extremely well. And as we've all, as we've identified previously, the services that SunPower is providing are done through service contracts, and they can be replaced with other service providers. So I'd expect the ABS investors to continue to focus on performance.
Maheep Mandloi: I get it and appreciate that. And maybe, just building on Ben's question on the elections, any way to kind of think about the impact of the 5.5 billion pipeline if EV or the other tax reasons you think are at risk in this election?
Jeff Lipson: So again, I think something like the EV tax credit would not affect our pipeline at all. And, you know, again, it's to repeat a bit. I think any changes that we feel are likely would not be ones that would impact our clients' development or correspondingly impact our pipeline.
Mark: So again, I think something like the EV tax credit would not affect our pipeline at all. And, you know, again, it's to repeat a bit, I think any changes...
Mark: correspondingly impact our pipeline.
Operator: The next question we have is from Jeff Osborne of TB Cohen. Please go ahead. So, good evening.
Operator: Good evening. Just a couple of quick ones on my side. If I was following the comments right, I think you mentioned the gain on sale guidance would step down in the second half. Could you just discuss what's driving that?
Jeff Osborne: Sure. So what we've identified is that both in 24 and, just generally, within the forecast that we perform, we are forecasting relatively flat gains on sale relative to 22 and 23. And I think you're identifying that our first half of 24 has been a pretty strong half in terms of gain on sale, which would imply the back half comes down a bit. And, you know, there's, of course, plenty of time in the second half of the year to continue to originate and securitize transactions. But at the end of the day, these can be somewhat lumpy, to use a term we've used before.
Mark: Both in 24 and just generally within the forecast that we perform.
Mark Pangburn: And so we've been pretty successful in the first half of the year. And, you know, hopefully, we'll continue that success. But we're not, you know; we have not been.
Jeff Osborne: Was it just a quick follow-up on that, was the change in the REIT status a driver of the success in the first half at all, or not at all?
Jeff Osborne: No, that has had no impact. Got it.
Jeff Osborne: And then I think the portfolio yields have been spotted here sequentially. How should we think about that for the second half, just with the pipeline that you mentioned?
Speaker Change: Got it. And then I think that the portfolio yields have been spotted here sequentially. How should we think about that for the second half, just with the pipeline that you have?
Jeff Lipson: Jeff, I think the trend will be as we continue to fund these more recent vintage closings, that'll have a positive effect on portfolio yield. So the dynamic so far is, you know, we have reported in the first half closing transactions at that higher yield, but many of those haven't funded yet. So, you haven't really seen it show up in portfolio yield yet. But, you'll see it gradually show up. Again, it's a $6 billion portfolio now. So, new closings only impact portfolio yield so much. But as these new ones fund, it'll start to push up here instead.
Speaker Change: closing transactions at that higher yield, but many of those haven't funded yet.
Jeff Osborne: Got it. And the last one I have is just on the investment grade rating, the obvious longer duration capability, which will be great at lower rates, but does it change your approach to debt as a whole at the board level? Would you consider using more debt now that you can get it at a lower cost and for a longer duration, in terms of just the total maximum leverage ratio or just your broader approach to debt?
Speaker Change: Got it. And the last one I have is just on the investment grade rating. The obvious longer duration capability, which will be great in lower rates, but does it change your approach to debt as a whole at the board level? Would you consider using more debt now that you can get it at a lower cost and for longer duration in terms of just total maximum leverage ratio or just your broader approach to debt?
Jeff Lipson: No, no change there. In fact, the rating agencies are very focused on leverage. And so to maintain the investment grade rating, we have to keep leverage where it is. So there's no view of increasing leverage. The only real change, as Mark said, is the lower cost and longer duration. Perfect. That's all I had.
Jeff Osborne: Perfect. That's all I have. Thank you.
Operator: The next question we have is from Ryan Fink of B Raleigh Securities. Please go ahead.
Speaker Change: The next question we have is from Ryan Fink of B Raleigh Securities. Please go ahead.
Operator: Hey, guys, thanks for taking my question. Just to follow up on Jeff's first one, if you know, we're looking at full-year guidance after two strong quarters in the first half, understanding gain on sale was pretty high. Could you just help us think about the next two quarters? And if the strong performance in the first half could imply upside to the guidance?
Ryan Fink: Hey guys, thanks for taking my question.
Ryan Fink: Just to follow up on Jeff's first one, if, you know, we're looking at full-year guidance after two strong quarters in the first half, understanding gain on sale was pretty high. Could you just help us think about the next two quarters and if the strong performance in the first half could imply upside to the guy?
Ryan Fink: Uh, I think that's, um... I think that's premature, Ryan, and the guidance obviously speaks to 2026. So, you know, the first two quarters of a 12 quarter guidance period, we're off to a good start. But I don't think that that causes us to bump up the guidance just yet. And I think our Cadence has been to address guidance and changes in guidance in our February call, so that's likely what we'll do.
Speaker Change: I think that's premature, Ryan, and the guidance obviously speaks to 2026, so, you know, the first two quarters of a 12-quarter guidance period, we're off to a good start, but I don't think
Ryan Fink: We'll have more to say, or we may or may not have more to say, but if we do have something to say, we'll say it then. It's not something we usually adjust on the July and the November calls.
Jeff Lipson: And then, just one more on election understanding. We've talked about what might happen if there's a change in administration and the little impact you expect there, but maybe, can you talk about your customers' cadences ahead of the election, if that coming out in November has affected them at all?
Ryan Fink: Yeah, fair enough.
Speaker Change: Just one more on the election understanding, we've talked about what might happen if there's a change in administration and the little impact you expect there, but maybe can you talk about your customers' cadences ahead of the election, if that coming out in November has affected them at all?
Susan Nickey: Again, with the demand growth, and really often it's sometimes the insatiable demand by corporates, and a number of our clients are the global leaders in corporate PPAs and procurement. They are continuing to develop and follow those clients and being able to provide them power, not only on the grid connected side, but also behind the meter and other markets opening up in community solar.
Speaker Change: Again, with the demand growth, and really often it's sometimes the insatiable demand by corporates, and a number of our clients are the global leaders in corporate PPAs and procurement.
Speaker Change: They are continuing to develop and follow those clients and being able to provide them power, not only in the grid-connected side, but also in behind the meter and other markets opening up in community solar.
Ryan Fink: So we see that, again, the macro trends are pervasive. And states also have always been an important driver in opening up markets. We see that in community solar and some of the other policies they're adopting to meet the demand and capture this great economic growth opportunity for their states.
Ryan Fink: Understood. Thanks. I'll turn it back on.
Speaker Change: So, we see that, again, the macro trends are pervasive and...
Speaker Change: States also, we have always been an important driver in opening up markets. We see that in community solar and some of the other policies they're adopting to meet the demand and capture this great economic growth opportunity for their states.
Mark: Understood. Thanks. I'll turn it back.
Speaker Change: Thank you.
Operator: The next question we have is from Mark Strouse of J.P. Morgan. Please go ahead.
Mark: The next question we have is from Mark Strouse of J.P. Morgan. Please go ahead.
Operator: Yes, thank you very much. I joined late, so I apologize if this was already addressed, but just kind of going back, I think, on that previous question, looking at the medium-term targets here and just thinking about kind of the impact to your cost of debt with the investment grade credit rating, is it... Is it really just your cadence of not updating guidance until the 4Q calls, or are you kind of signaling that there's something out there potentially that could still kind of get you towards the lower end of that existing reign?
Mark Strouse: Yes, thank you very much. I joined late, so I apologize if this was already addressed, but just kind of going back, I think, on that previous question, looking at the median term targets here and just thinking about kind of the...
Speaker Change: the impact to your cost of debt with the investment grade credit rating.
Speaker Change: Is it really just kind of your cadence of not updating guidance until the 4Q calls, or are you kind of signaling that there's something out there potentially that could still kind of get you towards the lower end of that existing range?
Mark Strouse: I don't know that it's really either. You know, we're comfortable with the guidance that we've put out there. Again, we'll look at it again in February. Mark already identified in an answer to a question that we had a particularly strong first half in gain on sale, and that may dip down a little bit in the second half. There's nothing thematic there. It's just more coincidental how many securitized transactions we close in the first half versus the second half of the year. It's more coincidental than anything. And so I don't think there's any real hidden agenda or anything.
Speaker Change: I don't know that it's really either. We're comfortable with the guidance that we've put out there. Again, we'll look at it again in February .
Speaker Change: identified in answer to a question that we had a particularly strong first half in gain on sale.
Speaker Change: And that may dip down a little bit in the second half, there's nothing thematic there, it's just more coincidental of how many securitized transactions we close in first half versus second half of the year is more coincidental than anything.
Jeff Lipson: It's just the eight to 10% through 2026 we feel good about. And, as always, there are upsides and downsides out there. And we're constantly assessing them and reforecasting our business, but we're comfortable with the guidance we have out there.
Speaker Change: And so I don't think there's any real hidden agenda or anything. It's just the 8 to 10% through 2026 we feel good about. And as always, there's upsides, there's downsides out there, and we're constantly...
Speaker Change: Assessing them and reforecasting our business, but we're comfortable with the guidance we have out there right now.
Mark Strouse: Is it fair to say, thank you Jeff, is it fair to say though you feel better about that range since the investment grade credit rating?
Speaker Change: Is it fair to say, thank you, Jeff, is it fair to say, though, you feel better about that range since the investment grade credit rating?
Jeff Lipson: Yes, I will affirm that we do feel better about the business, about the financial performance, about margins, having achieved investment grade. So the answer to that is yes. Excellent. Okay. Thank you, Jeff.
Speaker Change: Yes, I will affirm that. We do feel better about the business, about the financial performance, about margins, having achieved investment grade. So the answer to that is yes.
Mark Strouse: Next one. Okay.
Operator: Thank you, Jeff. Thanks, Marc. Ladies and gentlemen, we have reached the end of the Q&A session. And with that, today's conference call is over. Thank you for joining us, and you may now disconnect your lines.
Music: ?? ?? ?? ??
Speaker Change: Next one. Okay. Thank you, Jeff.
Mark: Thanks, Mark.
Speaker Change: Ladies and gentlemen, we have reached the end of the Q&A session and with that it concludes today's conference call. Thank you for joining us and you may now disconnect your lines.
Mark: [inaudible]
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