HA Sustainable Infrastructure Capital Inc (HASI) 2022 Q4 法說會逐字稿

Greetings. Welcome to the Hannon Armstrong Fourth Quarter and Full Year Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Neha Gaddam, Senior Director, Investor Relations and Corporate Finance.

Thank you, operator. Good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing our fourth quarter and full year 2022 results, a copy of which is available on our website. This conference call is being webcast live on our Investor Relations page of our website, where a replay will be available later today.

Some of the comments made on this call are forward-looking statements, which are subject to the risks and uncertainties described in the Risk Factors section of the company's Form 10-K and other filings with the SEC. Actual results may differ materially from those stated. Today's discussions also include some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is available on our posted earnings release and slide presentation.

Joining me on today's call are Jeff Eckel, the company's Chairman and CEO; Jeff Lipson, CFO and COO; and Marc Pangburn, Executive Vice President and Co-Chief Investment Officer. Before turning the call over to Jeff, I'd like to announce that we are hosting an Investor Day on March 21, during which we will discuss the company in more detail and allow investors and analysts to meet more members of our leadership team. More details on the event will be forthcoming.

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

Thank you, Neha, and good afternoon, everyone. I'm pleased to report the company continues to execute in 2022 with distributable earnings of $2.08 per share, up 11% year-over-year. We reaffirm our guidance for annual growth in distributable EPS of 10% to 13% through 2024 and 5% to 8% annual growth in our dividend for the same period. Our Board has declared a quarterly dividend of $0.395 per share, an increase of 5.3%. Please note that growing earnings faster than the dividend is intentional in order to provide more retained capital for the growth and investments we are anticipating.

As signaled in prior calls, we executed on strong volume in the fourth quarter with over $880 million in transactions, bringing total volume for 2022 to $1.8 billion. The average yield for newly closed transactions on balance sheet was more than 8% last quarter, a notable increase in the yield of new investments compared to average portfolio yield of 7.5%. These new transactions will fund over the course of 2023.

Finally, we announced our leadership transition, which will separate the role of Chairman and CEO, and thus, Jeff Lipson will become President and CEO, March 1. Jeff arrived 4 years ago as a former bank CEO and has done simply a remarkable job building out our corporate and assets enhance capabilities as well as running operations for the last 2 years. The Board and I have the highest conviction in his leadership of the company. Marc Pangburn will be promoted to CFO from his current role as Co-Chief Investment Officer. Marc has been with the company since just after the IPO in 2013 and has been instrumental in building out the company's investment portfolio and client base. I congratulate Jeff and Marc on their promotions and I'm highly confident we have the right people to lead the company.

In the nearly 10 years since the IPO, I'm pleased to report that we have outperformed the S&P 500 by almost 1.5x on annualized total shareholder return, returning more than 18% per year. We did this while investing on the right side of the climate change line and setting the standard for measuring impact and climate solutions investing. Most importantly, we have built a deep and highly skilled team of mission-driven professionals to continue to produce superior risk-adjusted returns while making a measurable impact on carbon emissions. I'm excited to focus on my role as Chairman and confident of Jeff, Marc and the rest of the leadership team's ability to execute our growth amidst the overwhelmingly supportive public policy backdrop.

Let's talk about that policy backdrop on Slide 4. The Inflation Reduction Act will positively affect our business as evidenced by our clients increasing their pipeline due to the long-term ITC/PTC policy certainty and tax credits for renewable fuels. Tax credits for battery storage has made stand-alone projects conducive for investment. An example, policy accelerating new investable asset classes for us. The transferability of tax credits will expand the tax capacity available for renewable projects as well as provide an opportunity for us to participate in those transactions.

Finally, the Infrastructure Bill and CHIPS Act provide constructive policy backdrop, renew transmission and onshoring manufacturing. In my 40-plus-year career, I never imagined this level of and length policy support for the energy transition. This is unmitigated good news for HASI.

With that, I will turn it over to Jeff. Jeff L.

Thanks, Jeff. Now that we have moved forward with our leadership transition, I would like to take a moment and recognize the enormous achievements that have occurred under Jeff's tenure. Jeff has overseen the growth of this company from a small enterprise into a significant industry trailblazer and leader in climate solutions. The investment thesis that he developed was well ahead of its time and has proven to be a superior and durable strategic focus. Jeff has built a talented team, which will carry on his legacy. Personally, I am honored to be selected as the next CEO and look forward to continuing to work closely with Jeff as Executive Chairman.

I will note, we are not announcing a strategic change as part of the succession plan. Our current strategy is working, and we will continue to grow the business with a similar approach, adapting the strategy as necessary. Before discussing our results, I'd like to recognize our incoming CFO, Marc Pangburn. Marc has been an integral part of our investment team for many years and I look forward to continuing to work with him in his new role. Marc will discuss our fourth quarter investment volume. Marc?

Thank you, Jeff, and thank you, Jeff. It is a privilege to support you both in our growth to date and on the capitalization of the opportunity ahead. I have spent the past 9 years with the company, building deep relationships with the best clients in the business. I look forward to building similar relationships with our investors and analysts.

Now on Slide 5, we are pleased to report a great quarter with approximately $883 million of closed transactions across our markets. A significant majority of these investments will remain on balance sheet with an average yield above 8%, highlighting the upward trend in yields discussed on previous calls. The diversity of clients and asset classes is a noteworthy feature of our business. In the fourth quarter, we closed 18 transactions with multiple clients, 8 programmatic clients, 2 with whom we've expanded existing relationships into new asset classes and 1 new client. These clients will continue to drive our business forward in the years to come.

I would also like to highlight the carbon count on one of our transactions we closed last quarter. It was an equity investment with AES and a 1.3 gigawatt portfolio of 18 projects across 6 states and we calculate a carbon count of 1.1, significantly higher than the portfolio average reported carbon count of 0.4, with the difference being driven by the specific location of the underlying assets. As a reminder, carbon count is heavily influenced by the energy mix of the applicable grid. These assets are displacing a larger amount of carbon emissions per dollar invested. I will conclude by restating that fourth quarter volume represents a strong diversity of clients, markets and asset classes. They provide long-term recurring income with an upward trend on yield and play a key role in the energy transition.

With that, I'll turn it back to Jeff L.

Thank you, Marc. Slide 6 displays our volume of $1.8 billion in 2022, consistent with recent history. One of the key reasons that we have successfully grown our portfolio is that our strategy incorporates multiple asset classes. If we were reliant on a single asset class, our growth would unlikely be as consistent. In 2020, grid-connected wind was a primary driver of volume. In 2021, grid-connected solar and public sector transactions led the volume growth. And in 2022, volume was spread evenly across grid-connected solar, resi solar and public sector, and we also made strong progress in sustainable infrastructure. This diversity is a result of a significant number of clients that we work closely with. Many of them involved in multiple asset classes as well as our ability to pivot towards opportunities quickly.

Our business is becoming even more diverse as recent transactions in renewable natural gas and transportation indicate. Likewise, our 12-month pipeline of greater than $4.5 billion is also well balanced as our behind-the-meter pipeline is benefiting from increasing utility rates, our grid connected pipeline is primarily solar opportunities, and our sustainable infrastructure pipeline is mostly clean fuels, transportation and nature-based solutions. This balanced profile allows investors to participate across the entire clean energy transition market.

Turning to Slide 7. We show our $4.3 billion balance sheet portfolio as of year-end 2022, which represents growth of 19% over the prior year. The average yield of our investments is 7.5%, up slightly from the third quarter. The projects underlying these investments represent over 12 gigawatts of clean energy, in addition to the non-power related investments in the sustainable infrastructure market. Our investments are non-cyclical, resilient across economic cycles and represent real assets with long-term income generation.

On the right side of the page, we detail our portfolio reconciliation. The portfolio increased nearly 10% for the quarter as we funded $458 million of investments. Funding expectations of previously closed transactions is now over $750 million, including the recently announced AES grid-connected investment, which we expect to fund in the first quarter.

Summarizing our 2022 results on Slide 8, we report distributable EPS of $2.08, an 11% growth rate versus 2021 and consistent with our guidance range. The growth is primarily driven by distributable net investment income, which grew by 34% to $180 million in 2022, reflecting a larger portfolio and strong margins. We had another outstanding year securitizing assets, resulting in gain on sale and fees of $79 million in 2022, very consistent with 2021. These fees are primarily driven by asset mix and unaffected by interest rate changes or the ABS market. We expect our gain on sale and fees to remain roughly in the same range for 2023 and over time to represent a lower percentage of revenue as we continue to grow our net investment income.

I will note, our GAAP EPS was $0.47 for 2022, a lower result in 2021. This was substantially driven by mark-to-market losses on power price swaps at the project level. As energy prices rose, the project's value was increased, which does not show up in the GAAP numbers, but the swaps incurred losses, which does result in non-cash unrealized losses. As we remind investors consistently, this project level HLBV accounting is not a good indicator of our period economics, which is better represented by our non-GAAP measures.

Slide 9 summarizes the long-term consistent success of the business, utilizing a variety of metrics. Our distributable EPS has experienced consistent growth despite all the challenges of the last few years, including the pandemic, supply chain and interest rates, achieving an 11% compound average growth rate for the 5 years ending 2022. Likewise, our distributable NII has experienced an average growth rate of 28% over the last 5 years as we have continued to build the balance sheet with accretive investments.

Our managed assets and portfolio as well as our investment margins have also experienced healthy growth over the last 5 years. The multi-year demonstrated success of our business as represented on this slide represents a strong foundation on which (technical difficulty), which brings us to Slide 10, reflecting that we continue to affirm our 10% to 13% EPS guidance despite the macroeconomic challenges and market volatility. We expect to achieve our 2024 EPS guidance, growing approximately ratably over the next 2 years.

Turning to Slide 11, we discuss our funding platform. Our liquidity as of year-end 2022 stands at over $870 million even after making all of the aforementioned accretive investments in the fourth quarter. In the upper right, we note we have been successful raising capital from diverse sources over the last 2 years. In 2022, we raised approximately $1.5 billion from our Term Loan A, our unsecured revolver, commercial paper, convertible debt and equity, whereas in 2021, we focused more prominently on unsecured bonds.

In 2023, we expect to continue to raise capital to support our growth, utilizing diverse funding sources, including securitization, incremental secured convertible and unsecured debt and revolver utilization, plus equity issuance to maintain our leverage. We have no material refinancing risk until 2026, and our leverage and fixed rate debt percentage remained consistent with historical ranges.

I will also note, we included our cash flow reconciliation in the appendix, consistent with the disclosure we began providing in the second quarter. In conclusion, our track record of earnings growth has been outstanding, and we are well positioned for further growth, while our diverse funding platform continues to provide ongoing sources of capital-owned liquidity.

And with that, I'll turn the call back over to Jeff.

Thanks, Jeff, and congratulations. The company is in great hands under your leadership. Turning to Slide 12. We note a number of ESG accomplishments as well as our periodic carbon and water count disclosures. Last quarter, in collaboration with other leading corporates, we co-founded the emissions first partnership to improve corporate and investor emissions accounting by moving beyond megawatt hour, matching and focusing more on quantified emissions impact.

We declared a social dividend to the HASI Foundation to support climate justice initiatives. And some of those projects in 2022 include energy efficiency projects for non-profits, resilient hubs for disadvantaged communities, scholarships and fellowships for climate-focused young professionals. Finally, we have enhanced our governance protocol with the announced executive succession that would separate the roles of the Chairman and the CEO.

We'll conclude on Slide 13. The business outlook is the brightest it has ever been in the company's history. The energy transition to a lower carbon world is accelerating with support of public policy in the IRA, the Bipartisan Infrastructure Bill and the CHIPS Act. Because of this, our clients' aspirations are expanding, and we believe our long participation in this industry positions us well for continued programmatic investment with our top-tier client base. We have a proven strategy executed by our mission-driven team. The announced leadership succession sets up the company to prosper in its next chapter.

I will close by thanking our clients who are doing the hard work engineering this energy transition. Our investors and analysts who have appreciated the opportunity for this business, my fellow directors who have gotten me through this succession process and finally, the HASI team, which continues to inspire me and for whom working with them day to day has been an honor.

With that, I'll ask the operator to open the line for questions. Operator?

Thank you. We'll now be conducting a question-and-answer session. (Operator Instructions) And our first question is from the line of Noah Kaye with Oppenheimer.

And I guess, let me be the first in the analyst community to congratulate you all for the leadership transitions and wishing you all the best of success.

Thanks, Noah.

I guess not to take any attention away from Analyst Day because I'm sure you'll spend some time talking about this there, but maybe just at a high level, can you talk about why now is the right time for the leadership transition? Would love to hear each of your perspectives.

Great question. Noah, we've been doing this as a public company for 10 years. I'll be 65 in April, and there seems to be some symmetry around that. But really, growth in the opportunity is such that there is a real role for me as Chairman, working on strategies, some client issues, public policy and thinking more about carbon. But this is going to be a much, much bigger business. And Jeff and Marc are the right 2 people to take this on. When I left Hannon Armstrong in '89, Mike Hannon set me note saying, I should have created more space for you to stay with us. And I feel that's true now. There's so much opportunity that it's good for this organization to evolve and grow. And this is, I think, the best way to do that.

And I would just add, Noah, I think on Investor Day, one of our themes will be how deep a team we have and you'll get an opportunity to meet more members of the team in addition to Marc and myself. And so I think we're particularly able now to make this transition effectively, given all the talent we hired, and this was entirely Jeff's unilateral decision when he decided it was the right time for him. So, I think it's really worked out well for everyone.

And now to switch over to a very in the weeds question just around the equity method income. It looks like on a non-GAAP basis, equity method income actually increased sequentially. It was -- it grew sequentially and was pretty consistent with last quarter. But can you just give us a little bit more color on how the market -- mark-to-market price swaps impacted the GAAP losses and just remind us what the underlying economics represented by the non-GAAP actually reflect?

Sure. To reiterate, the non-GAAP accounting for equity method investments is fundamentally the IRR that we expect to achieve and earn over the life of the investments taken on a ratable basis. And we do adjust that accruing IRR level for changes in the projects as we did in the first quarter of 2022. But other than for incremental changes in the project, that accruing rate tends to stay in place for a very long time and we do believe reflects fundamentally the economics of our investment, which is why the non-GAAP measure is very helpful for investors and analysts. At the GAAP level, we're required to use HLBV, as you know. And one of the items that occurs there is we have these power price swaps down at the project levels.

And as I mentioned in the prepared remarks, as power prices increase, the project level -- the project itself becomes more valuable, but there's no actual immediate accounting associated with that. But the swaps themselves become less valuable and they're more out of the money. They're doing the exact hedge that they're designed to do, but they, on a mark-to-market basis, they're now worth less. That does have immediate accounting. So, you have losses at the project level that then become part of the HLBV calculation and part of the GAAP earnings on those projects.

Likewise, if there were a second item to mention is when utility scale solar projects are put in service, there tends to be an immediate one-time increase through the ITC that also flows through HLBV financials and there were a lot more of those in 2021 than 2022, which also affects the GAAP income. So hopefully, that's a helpful way to understand the difference between GAAP and non-GAAP for the equity method investments.

And so just to reflect back, fundamentally, these projects are more valuable now they have higher revenue associated with them because energy prices are higher, and you haven't changed your IRR assumptions, regardless. Is that...

That's a good thing.

The next question is from the line of Chris Souther with B. Riley.

And congrats on the new roles all around here.

Thanks, Chris.

Maybe just -- maybe on the gain on sale, historically, that was pretty lumpy. Recently, it hasn't been. It's been like really steady until this quarter is down. I assume that's just a function of low public sector volumes in the quarter, not any change in spreads for that business. And in fact, it looks like there's the high receivables held-for-sale at the quarter-end. So, I'm just kind of curious if you could talk about both the gain on sale and how the public sector market activity looks in the near term? Obviously, it's a portion of the meter stuff, but I wanted to get a sense of how that particular segment is looking these days.

Sure. There's no real trend to report there, Chris. I think, as you know, it can get lumpy by quarter, and I think you picked up on -- there are some things that we didn't get a chance to securitize in the fourth quarter that will spill into next year. So, I won't read anything into that other than from one quarter to the next. In terms of the public sector pipeline, it remains very consistent. There are several transactions in the pipeline on the public sector side and there are several transactions not in the public sector that include investments that will also securitize. So, that's where I was comfortable saying in my prepared remarks, we expect our gain on sale to be very similar again in 2023.

And then I was curious, obviously, you guys have had significant liquidity that you've been highlighting for several quarters. But looking at kind of the current liquidity and taking the AES deal closing in the first quarter, that probably cuts it in half or so. Do you guys have like a target around liquidity that you'd have at any given point going forward? Just kind of curious, it seemed to kind of hover around where it is now or have been kind of trending up. So, I'm curious if there's -- if you guys are looking at that as like a metric we should continue to watch.

We do have a couple of liquidity targets internally that we've agreed upon with our Board. We've not disclosed them formally, but they are a function of items that you might expect, including availability on our revolver and near-term closings that we expect in our pipeline. And I would say it's a very conservative measure and we tend to maintain quite a bit of liquidity, even going back all the way to 2020 when the pandemic hit, we started to hold more liquidity much more than we had previously in 2019 and previous years. And we've maintained that trend even as obviously markets have settled in a post-pandemic way. And I suppose, given your question, we may consider disclosing a liquidity metric, but I will confirm we do have very specific minimum liquidity targets here internally.

And maybe just my last one. You called out they had a new client. I'm curious what sector.

That was in the grid connected space.

Our next question is from the line of Mark Strouse with JPMorgan.

And yes, congratulations to all of you well deserved. So, good to see. Can I start with just the comments going back to the policy support, Jeff Eckel. Just can you talk about what you're seeing in the market as far -- I mean, so that the transaction volume you have is in my opinion, pretty impressive. To the extent that you are able to tell, I mean, how much of that can you directly tie back to the IRA or some of these other bills that have been passed? And maybe more specific to the IRA, kind of your expectations for timing, what you're hearing from some of your counterparts as far as getting some guidelines from treasury, whatever it might be, if we can see a more material uplift as we progress throughout the year.

Thanks, Mark. I think we can attribute 0 in 2022 to the IRA since it only passed in 2022 and hasn't really had an impact on our client development pipeline. I think our optimism about that impact, it does come from our clients when they say we've got a gigawatt in development. And now they're saying, well, now it's 2 gigawatts. Now we see projects penciling that weren't penciling before. And we query our clients periodically and get updates on their view, and they're just really quite optimistic. Is it 2023 or 2024 or 2025? We don't know. I'm not sure our clients actually know.

You asked about the treasury guidelines, some are coming out, but that's still a gating item before you can actually implement the law, you have to have the guidance and that's just not done yet. But I think it's important to take a big step back and say with tax credit certainty for 10 years that this industry has never had. Our clients are able to plan for much, much larger businesses in the U.S., and it's, as I said, an unmitigated positive for the business. But always, timing is (technical difficulty).

Just one quick follow-up. Just fully appreciating, like you said, how diversified your end markets are. Just curious for your take on the state of the U.S. residential solar market this year. Just there have been some mixed commentary from some of the industry participants so far. Just curious kind of how you're thinking about that as your outlook for this year.

I'm going to have Marc Pangburn answer that.

Thanks, Jeff. Along the lines of Jeff taking a step back, we believe the long-term fundamentals of the U.S. residential solar market remain very strong, driven both by the IRA and increasing utility rates. Obviously, there are some short-term headwinds, which have all been identified. But as it relates to our business, we're seeing the increasing cost of capital, have a much smaller impact on leases and PPAs, which have been a majority of our focus to date. So, we expect the industry will work through these and that our business will continue to benefit from this focus on leasing PPAs.

Versus loans.

Versus loans.

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.