HA Sustainable Infrastructure Capital Inc (HASI) 2016 Q1 法說會逐字稿

Good afternoon, everyone. Welcome to Hannon Armstrong's conference call on its Q1 2016 financial results conference. 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 30 minutes for prepared remarks and Q&A. (Operator Instructions). At this time, I'd like to turn the conference over to Ms. Amanda Cimaglia, Investor Relations Director for the Company. Please go ahead.

Thank you, operator. Good afternoon, everyone. By now you should have received a copy of the earnings release for the Company's 2016 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 this 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 in 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 undertake 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 three. Jeff?

Thanks, Amanda. Good afternoon. Today we're announcing core earnings for the quarter of $0.32 per share, a 19% increase from Q1 of last year. We financed $213 million in the quarter, up from $104 million in the first quarter of last year. We increased our leverage, now at 2.3 to 1; and at 66% fixed rate debt, we continue to be within our 50% to 70% target range. Our $0.30 dividend produces a 6.1% annualized yield and is generated from a mix of clean energy assets principally efficiency, wind, and solar. Finally, we reaffirm our 2016 guidance of a 14% to 19% increase in our annual core earnings per share as well as double-digit growth for 2017.

Turning to page four, we have now been public for three years and have produced a total shareholder return of over 100% in that period. Performance that is supportive of our investment thesis, which is we will earn better risk adjusted returns by investing on the right side of the climate change line and by making those investments in the senior or preferred equity position of the capital stack.

Let me detail that thesis a bit more. By investing on the right side of the climate change line, we mean our investments will be in assets that are neutral to negative on incremental greenhouse gas emissions. We believe that in a world increasingly defined by carbon, we don't sacrifice returns to have positive environmental impact, but rather we will do better than if we ignore carbon.

As we have done for years, we analyze each investment for its greenhouse gas impact and in Q1, the aggregate investments reduced GHGs by 176,000 metric tons, equivalent to 86,000 metric tons of coal. Examples of Q1 investments that are senior or preferred include senior debt type structures in commercial and governmental efficiency, senior investment for wind, and a land transaction for solar. As we have for decades, we continued to provide capital to the leading companies in our markets, capital that helps them grow their clean energy businesses.

Moving to slide five, we provide a bit more detail on the growth prospects in our three key asset classes. The efficiency market continues to grow at a steady rate in the governmental market and a bit faster in the commercial market due to pace albeit from a much smaller base. Based on data from Navigant, we estimate the US ESCO market will be approximately 22% larger in 2018 than 2015.

In our last call, I said the extension of the ITC and PTC was an unexpected positive for the solar and wind businesses and we've seen estimates for both NREL and Greentech Media that showed just how positive. Greentech Media estimates that by 2018, solar volumes will be approximately 50% greater reflecting the result of the ITC extension and NREL has estimated that wind market size will double after taking into account the PTC.

Turning to page six, our pipeline is strong, remains at more than $2.5 billion for the next 12 months. Now that our renewable energy clients have unprecedented visibility on US tax policy for the next five years, we are seeing new ways to participate in the wind and solar market as these clients prepare more ambitious business plans. As these plans are implemented over the next several years, this should lead us to increase the volumes of wind and solar transactions in our pipeline, which will balance out our robust efficiency pipeline.

Our pipeline drives growth in the balance sheet portfolio and also allows us to optimize the portfolio as markets change. The forward-looking yields on our portfolio have ticked up to 6.3% from 6.2% and we continue to use our pipeline to help us build a portfolio with the best risk adjusted yields.

You will note the difference in the size of efficiency transactions in our pipeline, 65% versus the balance sheet 28%. This difference exists because we securitize a significant volume of the longer-dated lower coupon transactions. This generates fee income and reduces capital requirements compared to putting everything on the balance sheet.

In summary, we had a strong quarter. Our investment thesis is solid and our markets are growing. Now, I will turn it over to Brendan to detail our financial performance.

Thanks, Jeff. Turning to Q1, for the quarter, we generated $12.2 million of core earnings or $0.32 a share as compared to $7.4 million last year or $0.27 a share, a 19% increase on a per share basis. This is largely the result of the greater than 50% increase in the size of our portfolio, which now stands at approximately $1.4 billion. Investment interest expense rose to $11 million from $6 million last year as a result of the almost $400 million of fixed rate debt we added in the last four months of 2015. This debt allowed us to stay at the high-end of our 50% to 70% fixed rate debt target with our fixed rate debt at 66% at the end of the quarter.

Our other investment revenue was approximately $6 million in the quarter as compared to $3 million last year due to an increase in securitization activity. Our core total revenue, net of investment interest expense was approximately $16 million in Q1, an increase from $11 million in the same quarter last year. Our other expenses core rose to approximately $4 million, comparable to last quarter and $3 million this time last year.

We expect core expenses to be slightly above $16 million for 2016. We remain very efficient as total headcount was 34 people. The chart at the bottom makes the case as we've discussed that originations in our business are lumpy and while we have a strong pipeline, any one quarter does not make a trend.

A quick update on the wind equity investments. As we have discussed, the best way to think about how we account for the wind equity in core earnings is as an amortizing loan. Thus we record in core earnings, interest based on our estimated yield. The projects are tracking to our projections.

Year-to-date, we have recognized in core revenue $7 million from our wind equity investments. This represents approximately 42% of the cash we received in the quarter from the wind projects. The difference between core earnings and cash is effectively the change in principal and reduces the investment balance for future core yield calculations.

Turning to slide eight, our focus on high credit quality assets is reflected in our portfolio that consists of 41% of our assets from government obligors and 57% commercial transactions with only 2% of our assets or $17 million not considered investment grade. Given the nature of the wind equity investments, we do not include the equity investments in the analysis. Our portfolio is widely diversified with over 110 projects and an average outstanding balance of approximately $12 million per project.

We successfully collected the principal balance in a small gain, roughly equivalent to a make-whole on the wind project that we've reported on over the last year as a non-investment grade project and our non-investment grade transactions currently reflect a diversified portfolio of performing distributed solar projects with a private developer. Our exposure to projects other than the residential solar portfolio that involves yieldcos is approximately 8% and we do not expect any negative impact from the SunEdison bankruptcy.

Turning to slide nine, we wanted to focus on the balance sheet. Presently, 61% of our assets are fixed rate debt with the remaining consisting of floating rate debt, equity method investments, and real estate. As we have discussed, new assets are originated at current rates, which is in effect similar to a bond ladder.

On the debt side, we are at approximately 66% of debt is at fixed rates and our leverage is 2.3 to 1 against our 2.5 to 1 leverage target, up from 2.1 to 1 last quarter. We have discussed that given continued low short-term rates, we continue to focus on increasing our fixed rate debt to be 50% to 70% fixed rates and we raised approximately $400 million of fixed rate debt in the last part of last year. As of March 31, 2016, we estimate that a 25 basis point increase in LIBOR would increase quarterly interest expense by about $200,000 or less than $0.01 a share, certainly a manageable number.

One of the points that this quarter highlights is the robust nature of our business model. We saw an increased amount of volatility at the end of the year into the first quarter in the financial markets. As we have discussed, the long-term contractual nature and preferred position of our portfolio limits our exposure on the investment returns side and we were able to execute on both the securitization and the leverage side.

The ability to securitize transactions reduces our reliance on the equity markets in times of volatility. As you may have noticed, we moved away from the April equity raise that we had completed each of the last three years. We remain focused on increasing our leverage, but continually monitor our pipeline and the capital markets in an attempt to raise equity when it best maximizes long-term shareholder value.

As we have discussed, we will be putting in place an ATM. We expect this to be done in the next week or so. We plan to use this as a valley filler, to help us increase leverage as the larger equity raises results in a lower leverage until we can reinvest and re-lever. We believe that the ATM will benefit shareholders and do not expect it to be a primary source of equity. I will now turn it back to Jeff who will wrap up the presentation.

Thanks, Brendan. Turning to slide 10. To close, we continue to execute on our business plan and continue to produce for our shareholders. Our long-term cash flows from the senior slice of capital provides a stable dividend delivering an attractive and growing dividend yield.

Our portfolio is continuing to diversify with respect to the number of transactions, customer segments, and technologies and we pride ourselves on good governance and alignment of the managers of the business with the owners of the business, you, the shareholders. Again, it is an honor to work with my colleagues at Hannon Armstrong and I thank them publicly for another outstanding quarter as we continue to invest in the future of energy. We appreciate you listening to our update and we'll now open the call up for a few questions.

Thank you. (Operator Instructions) Philip Shen, ROTH Capital Partners.

So, you mentioned that there were greater securitizations in Q1 due to the market conditions. Historically, you talk about having $300 million or so as your efficiency securitizations in a given year. Could we expect a higher level in 2016 given the current market conditions and if so, how much more could we see?

This is Jeff, Phil. I mean, it's certainly possible. Where you're getting the $300 million is when we talk about doing $1 billion of transactions a year, putting $700 million on the balance sheet and $300 million in securitizations. That's just a basic model for the business. It could be higher, could be lower. Again, wherever the best return for us is.

Okay, that's fair. Moving on to the wind business, it appears the wind asset line fell by $15 million to $304 million. Can you talk about what happened there and just give us a general update on what you're seeing in wind, if you see something big perhaps next quarter or two? Thanks.

That's I think primarily the cash we get back. We get as I said, about $16 million. We got about $16 million of distributions this quarter.

Okay, great. Thanks. In terms of the wind market outlook, clearly the pipeline and opportunity set has increased. When you think about greenfield versus recycling of cap opportunities, what is the mix now? It seems like it's more of a recycling opportunity, but do you expect to see more greenfield opportunities with the PTC extension looking forward?

Absolutely. As I think I've said a number of times, I've never imagined the renewable energy business looking as bright as it does right now. So I think our clients finally have the ability to do a proper business plan with five or seven or eight years of planning horizon, which is how these capital intensive businesses should be run. So we expect lots of newbuild, lots of new solar, lots of new wind and of course, little old energy efficiency will continue to chug along.

Great. Jeff, Brendan, thank you very much.

Carter Driscoll, FBR.

Talk more specifically about solar. There's been a lot at least ruminations about maybe some projects being pushed out. I know you are very positive on ITC longer-term, probably it has less of an effect on you. But are you seeing anyone extending projects beyond what was the initial push in 2016 and 2017? There seems to be a lot of consternation industry-wide versus 2017. So just be interested to get your particular take.

Yes, if you look at our pipeline, I think 8% of our $2.5 billion pipeline is solar. So that implies a relatively small exposure to solar.

We expect it to grow not shrink, but frankly Carter, I don't think we would have that visibility on the marginal project getting shoved from 2016 to 2017. I think we're certainly seeing a robust pipeline, that that marginal project is not going to rise to the surface of where we are affected by it.

I think one thing also to think about is that these are large infrastructure projects. So the turning on and responding to regulatory policy doesn't happen overnight. So just the fact that the regulatory policy changed in December, it takes a while to go from that change to a project actually being in a position where it's being financed. We're at the tail end of that. So it takes a while for us to kind of see the impact of those changes.

And then maybe just as a follow-up, it looked like there may have been movement in the Northeast in terms of supporting offshore wind projects. Anything you care to comment on there? It seems to be certainly moribund geographically certainly and particularly in the United States. Anything you care to add as to whether that could be on the horizon longer-term?

I would say that offshore wind will always be on the horizon, but we'll see when those projects happen.

Got you. All right, I'll get back in the queue. Thanks, guys.

Tyler Frank, Robert W. Baird.

Can you discuss sort of how large you think the ATM might be and what we should expect throughout this year in terms of potential equity raises?

Sure, I think the ATM is going to be somewhere in the $60 million to $80 million range. We're still deciding exactly where it's going to be in that range.

The equity raises, back to the rough model Jeff was talking about before, yes, if we do $1 billion in transactions and put $300 million in securitizations, that gives you $700 million. If you do 2.5 leverage on that remaining $700 million, that's $500 million of debt and $200 million of equity.

We had some equity starting the year. We're getting some cash flow back. So I think you would look at equity raises as being somewhat below the $200 million range in total.

So we continue to focus on trying to how we get -- we set the 2.5 to 1 leverage target. So we continue to focus on what tools can we put in place to get us up towards that leverage target. We put a lot of fixed rate debt in last year with good advance rates. So we're continuing to work up to that target and, as I say, we'll continue to monitor both the capital markets and the cash flow needs and based on that, decide if and when we raise equity.

Got it and then your comments about the ITC extension and then how you expect that to drive additional projects both wind with the PTC and then solar with the ITC. What are the puts and takes around rising interest rates at least from your angle? Do you think rising interest rates would more than offset the increase in projects or do you feel like the regulatory environment is favorable up until a certain level of interest rates?

I mean that's a lot of calculations to do. I think the way we've always looked at it is efficiency is the most insulated from interest rate increases because the internal rates of return are higher. Next is wind, and after that is solar. So there's just -- you've got some pluses, you've got some minuses if interest rates have risen and I'm not sure we are smart enough to know what happens to the overall market.

Got it, I don't think a lot of us are. Well, thanks, guys.

Jeff Osborne, Cowen and Company.

I just want to talk about the core earnings expectations for the second quarter. Was there any one-time items in the first quarter? I'm still working my way through the numbers here, but I always thought just by principle your EPS would be below the dividend per share in the first half of the year and then exceeding that in the second half. So I just want to make sure that we don't straight line the estimates based on the reported results here.

Yes, I mean, I think what we've tried to do and Jeff reconfirmed the guidance for the year. So things like securitizations add a little lumpiness at times to revenue. So I don't know that you can straight line a quarter. I think you can look at what we're giving in guidance in total. We don't give quarter-to-quarter guidance in part because things are a little bit lumpy quarter-to-quarter.

And what we've always said on the dividend is that forward-look the dividend for the year, so the dividend is $1.20; we would expect to earn that within the framework, and that's within the framework of our guidance. So I don't know that you can extrapolate any one quarter. I think it's a combination of the portfolio build and then what we do in securitizations; and if you look back over the history, that's moved around a little bit quarter-to-quarter.

Got it. Okay, that's helpful. Can you just -- I may have missed this, but last call you mentioned a couple of deals that you renegotiated to more favorable terms. Were all of those able to be renegotiated and flow through and signed this quarter or did you lose any with the higher terms?

No, they were all closed in Q4 2015 and I think we weren't as clear on that as we could have been. So the difference was did they close in October or December, that's what cost us the net interest margin in Q4, but they were all closed.

Got it and then just assuming that the capital markets may be challenging here for the next couple months into the election and whatnot. Is there any discussion either within the management ranks or potentially at the Board level to increase the debt-to-equity ratio because that certainly would then change the equity needs?

Yes, so I think as we've talked the 2.5 to 1 is an internal target. We have the capability to go above that. Right now, we've yet to achieve the 2.5 to 1. So I think the first target would be for us to be able to achieve it and sustain that achievement before we talk about increasing it.

And we do think about the fact that we've taken a large amount of the interest rate risk off the table. So with the higher rates may mean that you could go to higher levels, but I think that's just something we'll evaluate along with a number of other factors at the time. So right now, our target remains at 2.5 to 1 and our goal is to work towards that target.

Perfect, I had one last quick one Brendan, I might have missed this as well, but the $16 million that you talked about you received from the High Lonesome Mesa NRG project. Was there any P&L impact or was that all just a cash payment, any taxes on that or --?

So, I talked about we got the $13 million project that we've been carrying as non-investment grade and so I said there's a small gain on that which would be roughly equivalent to what you would have gotten on a make-whole on the project.

Got it. Thank you.

(Operator Instructions) Michael Morosi, Avondale Partners.

Matt Wyatt here for Michael today. Congratulations on the quarter. Just a question about renewable yields in the portfolio. When you look at those over time, they've kind of ticked up from 6.6% last year, kind of mid-year to 7% this year and I know this can vary quarter-to-quarter but that's a pretty meaningful increase over time. Can you kind of talk about what's driving that and how you expect that to develop?

Well, what's driving it, there's two kinds of investments we've talked about: the land leasing business underneath the solar projects and the wind equity business that are generally above the average renewable energy yields. Other yields obviously are below average like on senior debt. So there's a little bit of business mix in there, but also we've said that with yieldcos somewhat coming back to earth that it's been a more rational market in which to price transactions.

So, some of it is it's a better time to do business than it had been. As to where it goes, honestly we don't know and we'll let you know as soon as we know.

I understand and then just kind of touching on the securitizations this quarter. I know you talked about kind of maybe potential opportunities going forward as efficiency is a larger portion of that pipeline, but in terms of cleaning up what's remaining on the balance sheet, are you happy with where that stands or do you see any more opportunities there?

No, I think the balance sheet is where we want it to be in terms of fixed rate. It's incremental transactions. If equity markets are closed we'll have a bias towards more securitization than putting things on the balance sheet, but generally we like our portfolio right now.

And just to clarify, we do two kinds of securitizations. One is the ones where we take it off balance sheet into a trust and get a gain on sale and that's what we did more of this quarter. We've also done securitizations with on-balance-sheet transactions where we continue to hold the assets on the balance sheet and that effectively is a form of debt; and we did, for example, a land transaction at the end of Q3 in that area.

We continue to see opportunities in both areas. We continue to see a lot of demand for the paper from the lifecos and other institutional investors both in the trust structure and in the on-balance-sheet structure. So we think there is a robust financing market for our business.

Sure; absolutely. Thanks for the questions, guys.

Noah Kaye, Oppenheimer.

Maybe would like to pick up on the comment about the momentum on C-PACE. Maybe you could put that in just a bit of context for us. You provided the share of the 12-month pipeline that's from efficiency, about 65%. Is it kind of possible to benchmark kind of where C-PACE might stand within that?

And then I think the related question would be, presumably there would be a higher weighted yield on the efficiency from a C-PACE type customer than from a governmental customer. So maybe just sort of how we should think about that trend.

I think there's data out there that says that the commercial PACE market, not residential but commercial, is on the order of a couple $100 million for everybody. So presumably we haven't done all of it -- and I assure you we haven't -- it's going to be small. That said, it's got a very large addressable market and 20% of the greenhouse gases come from the commercial office building sector. So it's an area we continue to invest in.

And as for the yields, yes, compared to the yields on US government efficiency transactions, C-PACE generally is going to be a nicer yield.

Sure and in terms of kind of the flow and the origin of deal opportunities on C-PACE, would you say it's coming more from some of the, I guess sort of institutional partners that you've been able to work with like the Green Bank? Or is it more of a mix and partly coming from some of this traditional building efficiency players that are looking at these opportunities and looking to you for financing and then being able to leverage the C-PACE structure? Maybe we'd just sort of understand how that works?

It's very much and I think I've said in prior calls the real challenge for the industry is to figure out how to originate at scale from the service provider to us, the finance provider. So Connecticut Green Bank is certainly a good origination source for us.

We've also talked about transactions with a Top 10 REIT. That's another way for us to originate transactions.

I think the whole industry is sorting out who can make money in the value chain and how and we're trying a lot of different things and we'll see which ones really get traction.

Great. And then maybe it's just another a bit from the prepared remarks that we did pick up on. Just talking about with the policy certainty you were seeing it sounds like a greater variety of opportunities -- ways to play within the financing ecosystem of how these wind and solar deals get done, maybe potentially different areas of the capital stack. I would love to try and get a little bit more elaboration on that obviously without tipping your strategy to try to understand how we think about the opportunity.

We were purposely vague on it. It's a competitive market and I just simply think our clients now have a much better chance to be thoughtful about raising capital and optimizing it instead of rushing to the next cliff from ITC or PTC. So, I think everybody gets a chance to do the business the way it should be done.

All right. Appreciate it. Thank you very much, and nice quarter.

Zach Liggett, FIM Group.

Thanks for taking my question. Most of mine have been answered. I was just curious, a little more on the competitive environment. You'd mentioned the yieldcos, but beyond the yieldcos, are there any new other broad categories of new players in your spaces that are impacting pricing or any other changes?

Well, I wouldn't say they're new. I think you've got insurance companies and pension funds who are natural owners of long-dated high credit quality transactions. They've always been in the market. They grumbled a lot about the yields -- compression with the yieldcos. We don't typically find ourselves competing with those entities. They generally like larger transactions.

Hancock just did a $200 million plus deal with SolarCity. Congrats to both of them. That's probably not one we would've wanted to compete on.

So it's pretty much the same players, maybe a few less players than there were in 2015, but it's -- anybody who is looking for capital is going to find lots of good sources of capital.

And I think the key is where we try to play in the capital stack. So we focus on kind of smaller projects than the insurance companies like, but we'll go longer than the banks and we'll do a variety of structures, so land or preferred equity. So it creates opportunities for people to tailor the capital stack as Jeff talked about a few minutes ago and we're very good at helping people do that.

So, I think that's the area of opportunity that we see. The big insurance companies, the big infrastructure funds, they don't want to do a transaction less than a couple hundred million dollars, where we're perfectly happy with an average deal size of $12 million to $15 million, to do smaller transactions that fill a hole in the capital stack.

That's great and then the headcount to achieve that. Do you need to increase staff if you're going to continue to do the smaller deals or are you pretty stable on that front?

We've been doing smaller deals for a very long time, a couple decades.

We've increased the headcount almost 50% since the IPO. So we're at 34 from 22 in three years. That gives you an idea kind of what we think of headcount.

Great. Thank you.

And at this time, I'll turn the conference back to you all for closing remarks.

Thanks, you asked great questions once again. We look forward to speaking with you again soon.

That will conclude today's call. Thank you all for joining us.