HA Sustainable Infrastructure Capital Inc (HASI) 2015 Q1 法說會逐字稿

Good afternoon and welcome to Hannon Armstrong's conference call on its Q1 2015 financial results. Management will be utilizing a slide presentation for this call, which is available now for download on their Investor Relations page at investors.hannonarmstrong.com. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A. All participants will be in a listen-only mode. If you need any operator assistance, please press star zero on your telephone keypad.

At this time I would like to turn the conference call over to Amanda Cimaglia, Manager, Investor Relations for the Company.

Thank you, operator. Good afternoon, everyone. By now you should have received a copy of the earnings release for the Company's 2015 first-quarter results. On the call today, we have Jeffrey Eckel, our President and CEO, and Brendan Herron, our CFO. As a reminder, a replay of the call will be available later today on the Investor Relations page of our website.

Before we begin, I would like to remind you that some of the comments made on today's call are forward-looking statements and within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. The Company claims the protections of the Safe Harbor for forward-looking statements contained in such sections. The forward-looking statements made on this call are subject to the risks and uncertainties described in the Risk Factors section of the Company's Form 10-K and other filings with the SEC. Actual results may differ materially from those described during the call.

In addition, all forward-looking statements are made as of today, and the Company does not take any responsibility to update any forward-looking statements based on new circumstances or revised expectations.

With that, I'd like to turn the call over to Jeff who will begin on slide 3. Jeff?

Thank you, Amanda, and good afternoon. We are announcing core earnings of $0.27 per share or $7.4 million for the quarter above our quarterly dividend of $0.26, which when annualized is approximately 5.5% dividend yield. Volume year to date is up more than 25% over this time last year.

As most of you know, we raised an additional $81 million in a primary offering last week and enjoyed strong institutional and retail support for the transaction, for which we were grateful.

We reaffirmed our annual earnings growth guidance in the 14% to 16% range for both 2015 and 2016.

Turning to page 4, we show how our high-quality pipeline of efficiency wind and solar transactions will continue to drive growth in the business. Our 2015 pipeline remains at more than $2 billion, representing over 150 discrete investment opportunities. To reiterate prior calls, we do not expect to close $2 billion in new business in 2015, but the depth and diversity of the pipeline gives us a terrific opportunity to continue to build an attractive, diversified balance sheet.

If we simply maintain our market share in the markets we are already in, we estimate our pipeline is in excess of an additional $4 billion of investable assets in over 300 transactions in 2016 and 2017, bringing the total addressable market to over $6 million of potential investments through 2017.

With an average transaction size in our 2015 pipeline of approximately $15 million, we have a large number of diversified assets, which when added to the approximately 80 assets currently on our balance sheet gives us a broad base to sustain our dividend.

We believe we will achieve our 14% to 16% annual growth rate for core earnings-per-share for 2015 and 2016 through a mix of balance sheet growth, increasing financial leverage, margin expansion and, as importantly as those three factors together, the operating leverage from our internally managed business. Being internally managed with no fees going to related third parties, 100% of the enterprise value drops down to the shareholders.

Turning to page 5, the chart on the left conveys the approximate size of our three primary markets -- efficiency, wind and solar. Efficiency is by most measures the most economic of all the clean energy technologies and will continue to be a primary market for HASI. We see growth in all the efficiency sectors -- governmental, industrial, and then perhaps the largest efficiency market of all, commercial pace.

Wind is by far the largest renewable energy market to date, and we see significant opportunities in utility scale wind projects, whether newbuilds or from the approximately 65 gigawatts of installed capacity in the US. Solar continues its rapid rise in both the retail and utility markets, and we are investing in both.

The chart on the right shows how HASI complements the industry incumbents. The efficiency, wind and solar market also require financing that is compatible with relatively small assets and/or have tenors that are generally longer than many banks are comfortable with and shorter tenors and smaller transaction sizes than most insurance investors are seeking. This is the opportunity we are addressing in the marketplace.

We are also seeing additional opportunities to partner with the industry incumbents as well. This flexibility in deal size and tenor is one of our competitive advantages, in addition to a lower cost of capital relative to BDCs, private equity and hedge funds.

We are conscious that growth presents new risks and will take a clear-eyed view of the risks and rewards in all three markets to grow our business.

Turning to slide 6, we summarized our strategy in three connected activities. It all starts with our clients for whom we originate programmatic investments with a positive greenhouse gas profile. This means we avoid one-off investments without a plan for replicable execution or those that increase greenhouse gas emissions.

Our ability to execute on programmatic transactions is only as good as the team we have in HASI. With an average tenure of over 12 years at Hannon, our clients enjoy the stability and the relationship with us not offered by many financial service firms. We believe our ability to aggregate assets with a verifiable greenhouse gas profile will over time allow us to lower our cost of capital by offering investors in our Company excellent returns from assets on the right side of the climate issue.

Investors in HASI shares receive an annual sustainability report card in our annual report, detailing the greenhouse gas reduction per $1000 of investment. Investors in our sustainable yield bonds have a similar GHD metric on each issuance that will provide transparency beyond that contained in the green bound principles.

In a world increasingly defined by carbon, we believe this disclosure will lead to better risk-adjusted returns for investors and a lower cost of capital for HASI. When we put these three activities together, we are able to serve our clients even better as we provide the financing necessary to achieve the rapid adoption of the clean energy technologies they are selling.

Now I'll turn it over to Brendan to detail our financial performance.

Thanks, Jeff. Turning to the Q1 results, we generated $13.7 million of core investment revenue, a 100% increase from Q1 of last year. The core investment income increase is due to an increase in the size of our balance sheet to approximately $1 billion at the end of Q1 from just under $600 million at the same time last year. The increase in core investment revenue was partially offset by higher interest expense as we increased our leverage to 2 to 1 from 1.5 to 1 at the same time last year. And we ended the quarter with 39% of our non-matched funded debt at fixed rates.

We also realized fee income of $3.1 million in the quarter. Our core total revenue net of investment expense was $10.7 million in Q4, an increase from $5.7 million in the same quarter last year.

Other expenses core increased slightly to $3.3 million from $2.3 million last year due to additional headcount and expenses related to the growth of the business. We remain very efficient as total headcount is approximately 30 people. Core earnings rose to $7.4 million compared to $3.4 million in the same quarter last year. Core EPS grew 35% over Q1 2014 to $0.27 per share.

During the offering, we announced we had closed $167 million through April 27, 2015 as compared to $132 million in the same period last year. As we have discussed, originations in our business are lumpy, and any one quarter does not make a trend. On a look forward basis at March 31, 2015, our average portfolio yield is approximately 6.1% with energy efficiency yielding approximately 4.5% and renewable energy yielding approximately 6.8%.

A couple of things to note: a quick update on the wind equity investment. Included in the core earnings is $2.8 million of earnings from the wind equity investment. The project is tracking to our models, and in the quarter we collected $6.3 million in cash from the investment.

Secondly, Jeffrey affirmed our 14% to 16% earnings growth guidance over the $0.93 core EPS in 2014. In preparing this guidance, we include the impact of dilution from plant equity raises. As you can imagine, depending on the timing of the raise, the dilution can have an impact of $0.01 to $0.02 in the quarter of the raise. As we put the capital to work, we overcome that dilution.

Turning to page 8, one of the things that makes our business unique is our focus on a diversified portfolio of high credit quality assets. Our debt and real estate portfolio continues to be 98% investment-grade rated at March 31, 2015. This consists of 46% of our assets from government obligors and 52% commercial transactions with only 2% of our assets or $15 million not considered investment grade. Given the nature of the wind equity investment, we do not include the equity investment in this analysis.

As Jeff mentioned, our portfolio is widely diversified with over 80 projects and an average outstanding balance of approximately $10 million per project.

Turning to page 9, we wanted to focus on the strength of our balance sheet. Our assets are approximately $1 billion with an average portfolio yield of 6.1% in the diversified portfolio. Assets fell slightly in Q1 as we had several repayments, as well as the return of capital from the wind project.

On the debt side, we remain at approximately 40% of our non-matched funded debt at fixed rates and have achieved our 2-to-1 leverage target. Given continued low short-term rates, we are continuing to focus on increasing our fixed rate debt to be 50% to 70% and over time move our leverage toward the 2.5 to 1 target.

I will now turn it back to Jeff, who will wrap up the presentation.

Thanks, Brendan. Turning to page 10, the chart on the left supports our belief that the HASI dividend yield is attractive relative to other investment options. In addition to having a higher yield than the alternatives shown here, we point out that we have none of the exposure to oil that many MLPs have and none of the asset concentration risks of infrastructure funds. We compare favorably to utilities in both yield and growth, and when compared to yieldcos, we believe our growth story is inclusive of their growth story and that many need the kind of capital we provide, and we are more diversified given our exposure to efficiency markets.

To close, we were pleased with our recent capital raise, and we used that capital to execute on our investment proposition, delivering attractive dividend yields from long-term cash flows, grow that dividend from a large growing clean energy market all with a diverse portfolio of high-credit quality obligors which will in total generate an attractive total return for our investors.

Again, it is an honor to work with my colleagues and co-investors at HASI, and I thank them publicly for another outstanding quarter. We appreciate you listening to our update, and we will now open the call up for a few questions.

(operator instructions). Philip Shen, ROTH Capital.

Jeff, Brendan, thank you for taking my questions. So I'd like to start off with your renewable energy yields. Our checks with developers, yieldcos, and other buyers of assets suggest there is an incredible level of competition for those assets, especially solar assets, thereby depressing yields. With that backdrop, it's remarkable that we're seeing Hannon steadily improve your renewable energy yields from 6.2% in Q3 to 6.6% in Q4 and then 6.8% in Q1.

So a two-part question here. One, can you update us on the competitive dynamics that you face in the parts of the capital stock that you compete in, and two, how do you expect your yields to evolve for the renewable sector as we go through 2015?

I think, Phil -- this is Jeff -- I think the competition is very heated for the equity and particularly solar assets or fully contracted wind assets. We typically like transactions where we are more senior in the capital stack. So in the solar, we readily admit we are not really looking for the solar equity ownership position. We readily admit the solar senior debt and fully contracted well sponsored projects is a pretty competitive market. So we have stayed focus on the land business which continues to be very productive, and because it's niche-y, it generally yields a little bit more.

On the wind side, working with the tax equity transaction like the JPMorgan strong upwind transaction, again, these are not easy transactions to do. They are not commodity transactions. Fortunately there is a large volume of them, we believe, but we are certainly earning our yield on those transactions, and they are, again, seeing them in the capital stack.

We don't defy gravity on yields, but we manage what we can manage, and that is defined in the niches where we can get paid for doing a little bit more work.

Great. And how do you expect the yields to evolve? You've had a steady increase from Q3 of last year through Q1. Should we continue to expect an increase -- modest, potentially?

I wouldn't think so. It is an attractive portfolio return we are getting on renewable energy. I wouldn't necessarily say it's going up from here. I think with our niches we can maintain it.

Great. One more question from me. Conversely with the energy efficiency yields, we have seen them kind of steadily decrease from 4.8% down to 4.5%. How do you expect these yields to trend in 2015?

You know, I would sense that we're getting close to a bottom. It's getting hard to price things much lower than this relative to other alternatives. So we certainly hope it's reaching the bottom, but these are very long dated, very high credit quality transactions, and that's just a piece of paper that is very much in demand by a lot of investors. So I think it's probably priced appropriately in this market.

Can you help us understand what are the key drivers impacting the slight declines?

It's a lot of transactions, looking at Brendan here --

I think it's a combination of base rates having come back down a little bit. They have kind of gone up and gone down, so the price is off of base rates, and it really depends on transaction mix as to what's coming in or going out at any one point in time that impacts that trend.

Great. Thank you, both. I'll jump back in queue.

Joel Houck, Wells Fargo.

Good afternoon. Regarding the pipeline, it's been $2 billion plus. Can you talk a little bit about the geography of that pipeline, and has it changed at all in the last quarter or two?

Geography? Yes, we cannot talk about that. That's a good question. It's generally national providers. You would expect the renewable assets to be more westerly oriented. The efficiency assets are generally very broadly distributed, particularly those related to the federal government. They are wherever the federal government is, and the federal government is, of course, in all 50 states and territories and countries beyond.

But honestly, Joel, we haven't looked at it geographically that way. We definitely orient it towards risk-adjusted returns, not so much geography.

And, Joel, to your other point, I think we've said all along we didn't want to be measured by whether the pipeline was going up or down. What's important to us is that we focus on having -- and this is the point Jeff made in the call -- that we focus on having a very well diversified, high credit quality portfolio and any debt. We continue to focus on that, and we think we're well-positioned from that perspective.

So we continue to focus on that, but I don't think we feel it important to start giving a lot more detail on the pipeline beyond that. We obviously did the equity raise expecting to put the capital to work. So we're comfortable with where we are and what opportunities we're seeing.

Maybe it might be helpful to talk about obviously you don't fund everything in the pipeline. What types of opportunities are you essentially walking away from? Whether it's the lack of return or too much risk or maybe give us a sense for what you don't like that's in the pipeline.

If it is in our pipeline, we like it.

I think the things that we are actively pursuing, Jeff talked about a few minutes ago, is we are not actively pursuing, and we don't want to be an operator of projects we are not actively competing with yieldcos on. Operations of projects and common equity where you are an operator -- we are not competing -- we don't see a lot of opportunity right now in some of the highly structured utility scale solar projects that have become very competitive.

So, as Jeff said and as we've talked all along, our businesses are focusing on a series of niches and executing programmatic relationships with various vendors, and we continue to do that, and we continue to look at how we can build relationships with various classes of vendors, and we think we've been very successful with that.

Okay. And one more if I could. The margin expansion that you referenced in your opening comments, can you give a little color to that? Is that more mix oriented, or is it more driven by the fact that your niche opportunities in the pipeline are perhaps better yielding than what is currently in the portfolio or it might be running on?

There's a little bit of that -- some of the stuff in the pipeline is reasonably well priced, but we also over time expect to be able to drive down our cost of debt and (multiple speakers) our margin, yes, whether it's fees or rates.

And just to kind of ground people from way back -- not way back -- but at the IPO time, we talked about our model where our target average yield on the asset side was 5.5%, so we are now sitting at 6.1%. So we've been very successful at finding niche opportunities that have allowed us to achieve better than expected yielding assets in a difficult environment for those.

All right. Thank you very much, guys, and congratulations on the equity raise.

Aditya Satghare, FBR Capital Markets.

Thank you and good afternoon, all. So two questions on my side. Firstly, on your pipeline, how do you think about the impact of any sort of pull forward effect from the expiration or the potential step down of the ITC in 2017? And then given the recent ruling we saw in wind projects, which qualifies in 2017, what kind of impact would you expect to see on your pipeline?

And then sort of a question on that is, does your 14% to 16% core EPS guidance include any sort of pull forward effect in terms of demand here?

Let's talk about the step down. I think there are a number of observers in the solar industry as we say the decrease complexity around solar transactions in 2017 that are not focused on monetizing the 30% ITC will actually make these transactions simpler and take a lot of transaction costs out. That won't fully offset the 20% decline in the ITC, but it certainly will benefit, you would think, on the margin investors like us who are less tax oriented rather than those who are more tax oriented. So it's going to give back more to the fundamentals of what's the cash flow and the projects, and that's going to be good for us since we are not a taxpayer.

I would say overall the solar and wind business, they noticed painfully well as to what they have to do to be cost competitive, and both technologies and the supply chains have done a good job in squeezing costs out. We think we're one of the costs in that in terms of the cost of capital, and we are trying to help the industry by lowering cost of capital available to them.

So we have factored that in, but those are just more anecdotal thoughts that to us it does not look like a curtain falls on the clean energy business. And, of course, efficiency is completely unaffected by any of that.

Got it. Second question, more high level, could you sort of maybe talk about given the environment for acquisitions today, what are some of the pockets of opportunities you see, and how should we sort of think about where potential acquisitions could come from?

I don't think we've talked much about acquisitions. Certainly it's something we look at from time to time, but frankly, getting focused on our clients and executing on the programmatic finance business, that's part of the core business. If we see something, we would certainly be capable of doing it. We feel like we showed some ability with AWCC last year, but just acquiring companies to get a lot bigger faster is probably not our preferred method that going forward.

Thanks, Jeff. Thanks for the update.

(Operator Instructions) Tyler Frank, Robert Baird.

Hi, guys. Thanks for taking the question, and congratulations on the quarter and the recent raise. I guess can you just give a little bit of clarity around how we should think about the expected portfolio breakdown going forward? Obviously with the greater yield on renewable assets, should we think that the portfolio will trend toward holding more renewables, or do you plan to keep sort of a similar breakdown as you have today?

Well, I think we've shown in our pipeline at least illustratively that it is roughly 50% efficiency, 30% wind, 20% solar, which matches up pretty well with what we're transacting.

One of the nice things in our business is we don't have to pursue any one piece of business or technology category to match our name. So we're going to keep looking in all three markets and others as they come up. But we definitely like efficiency because it's cash flow oriented, it's economic without government subsidies, it's programmatic, and if it's going to get done, it has to be done programmatically. So those are all our kinds of strengths. I think we're finding some nice opportunities in wind and solar, and I think we've got them in the right order.

Great. And then in terms of just the overall expected deal size, I know sort of that $15 million to $25 million has historically been the bread-and-butter. But should we view the wind transaction from last year has more of a one-off, given its large size, or should we potentially expect additional transactions sort of in that $100 million plus range going forward?

I think the key to think about there and also on the AWCC transaction, both of which were $100-plus million transactions, is in both cases they were actually a portfolio project. So the wind project is actually 10 different wind projects underneath it. So it gives us some diversity in the operating windfarms -- so 10 different locations, 10 different projects, so on and so forth.

AWCC had a sizable number of individual leases associated with it. So I think in those bigger transactions, we still look to try to pick up diversity within what we're doing and pick up more on a portfolio basis those types of transactions.

That being said, we continue to look at lots of opportunities in lots of different areas. So we won't rule anything out, but we do value -- and I think we talked about it a couple of times on this call -- the 80 plus projects we have in the portfolio. So we think that's valuable to have the diversity, and we will continue to focus on that.

There are no further questions at this time. I'd like to turn the call -- the floor back to management for closing comments.

Thanks, Danielle. Thanks. You asked great questions once again. We may remain really excited about the opportunity in front of us and look forward to speaking with our investors over the next quarter. Thanks so much.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.