Hannon Armstrong's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 8.13 | About: Hannon Armstrong (HASI)

Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI)

Q3 2013 Results Earnings Call

November 7, 2013 5:00 PM ET

Executives

Steve Chuslo - General Counsel

Jeff Eckel - Chief Executive Officer

Brendan Herron - Chief Financial Officer

Analysts

Ben Kallo - Robert W. Baird

Joel Houck - Wells Fargo

Ken Bruce - Bank of America Merrill Lynch

Patrick Buckley - UBS

Paul Strigler - Esplanade

Operator

Good afternoon. And welcome to Hannon Armstrong Sustainable Infrastructure Capital’s 2013 Third Quarter Earnings Conference Call. Management will be utilizing a slide presentation for this call, which is available now for download on Hannon Armstrong’s 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. (Operator Instructions)

At this time, I would like to turn the conference call over to Steve Chuslo, General Counsel at Hannon Armstrong.

Steve Chuslo

Thank you, Operator. Good afternoon, everyone. By now you should have received a copy of the earnings release for the company’s third quarter 2013 results. If you have not, a copy is available on our website www.hannonarmstrong.com. Today’s speakers are Jeff Eckel, Chief Executive Officer; and Brendan Herron, Chief Financial Officer.

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. 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-Q 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.

I would like -- I would now like to turn the call over to Jeff Eckel, the Chief Executive Officer.

Jeff Eckel

Thank you, Steve, and good afternoon, everyone. I’d like to welcome you to Hannon Armstrong’s third quarter 2013 earnings call. I am joined by our CFO, Brendan Herron. Hannon Armstrong is pleased to declare dividend of $0.14 per share for shareholders of record as of November 18th, 133% increase from our prior quarterly dividend of $0.06. This equates to a 4.5% annualized yield based on our closing price yesterday of $12.39 per share and continues our progress towards our ramped target yield of more than 7% on our IPO price by the end of 2013.

I like to highlight a few elements from the quarter. The dividend is paid from core earnings and we are on page three at this point, which more than doubled from the prior quarter to $2.3 million or $0.14 per share.

Core earnings were generated by our execution of over $200 million of investments in sustainable infrastructure projects. IPO to date approximately 75% of these transactions were generated by our existing global 1000 relationships.

Our 12-month pipeline remained above our target of $2 billion allowing us to remain selective in our capital deployment and continue to optimize for yield, credit and tenant. We benefit from the ability to source new energy investments in all three of our target markets, energy efficiency, clean energy and other infrastructure asset classes.

Thus we are not dependent on any one market for originations. We believe this mix of long-term sustainable infrastructure investments will indeed provide our investors with a sustainable yield.

Moving to slide four, we’d like to use this call to review some of the factors that make the market for financing sustainable infrastructure projects so robust. We’ll start with a review of two investments in Q3 in order to help investors better understand our business. Then discuss the strength of our originations from our portfolio dropped down platform. Next I’ll describe the growth potential on all three asset classes and explain why our business prospers even in a rising interest rate environment. Brendan will then review our financials in more depth and show how the earnings can grow by double digits from operating and financial leverage. Finally, I will close with our priorities for Q4 and beyond.

Among the investments that were made in Q3 we’re page five now, we’d like to highlight two. The project on the left is a $21 million energy efficiency project on an Army base Mid-Atlantic region. This was the 11th project we have financed at this space since 1998 and is helping the U.S. Army make progress towards its net zero, water and energy goals. Nine different upgrades were engineered ranging from high payback lighting and water efficiency measures, longer payback investments, such as steam system optimization. The overall internal rate of return or IRR on the measures is estimated at 10%.

In addition, the project makes a significant contribution to cutting the army’s greenhouse gas emissions, a statistic we track in every transaction. The project on the right is a 30 megawatt solar project in Georgia, the largest solar project in the Southeast U.S.

We made a $15 million floating-rate construction loan to help this project get into operation and sell its power to Georgia Power and offset some of Georgia Power's coal-fired generation. The floating-rate feature of the loan is one of the ways we continue to mitigate interest rate risk in our portfolio.

There are two current market trends we want to highlight. First, we experienced minimal disruptions on our federal business from the temporary shutdown of the government and continue to see robust originations in this market. Second, we are seeing dramatic growth in the distributed and small scale utility solar markets.

Shifting to slide 6, we’ll review these trends further. The energy efficiency market continues to grow, as the fundamental economic value of lighting, heating and cooling upgrade continues to appeal to all users, whether they are the federal government, state and local government or increasingly commercial, industrial, electricity users.

The Department of Energy projects that the ESCO industry could double or triple by the end of this decade. In short, good project economics drive this market. In the clean energy market, distributed solar in a residential, commercial and industrial sector is showing impressive growth.

We remain active in this area and are anticipating significant volumes in the market. Utility grade renewables like the 30 megawatt solar project we discussed continued to produce good risk-adjusted returns from fully contracted utility off take agreements.

Microgrids, which combine distributed generation with energy efficiency and controls technology continues to develop as energy users are demanding superior energy security and reliability then that can be provided by the utility grade. Hannon Armstrong has been financing Microgrids since 2005, when we completed the largest Microgrid transaction in the U.S. And we continue to see new opportunities in this market.

Finally, water continues to be an area of interest for us and we are seeing transactions such as the army project we reviewed, include water efficiency measures in bundled projects.

On slide 7, we want to reemphasize the power in our origination platform. The companies on this page are all clients of Hannon Armstrong, most of them for more than a decade and they represent some of the largest and most sophisticated engineering companies in the world, developing building and operating the distributed energy projects we finance. IPO to date as I have said, 75% of our originations have come from existing clients. These companies all have large growth plans for selling energy efficiency and distributed generation systems. Together with a new client since our IPO, we believe we have a diversified source of repeatable originations, a portfolio drop down origination platforms so to speak.

We have the added benefit of being able to individually underwrite these transactions, which we believe is important for our shareholders. We look forward to continuing to provide financing for those projects, so our Global 1000 client base can accelerate their sales and achieve revenue recognition.

On the next page, we try to answer investor question we continue to get, and that's how our business will do in a higher interest rate environment. While history is no assurance of the future, it does provide solid evidence that Hannon Armstrong has been able to prosper in a higher interest rate environment.

Since 2000, 66% of our transaction has completed with a 10-year treasury above 3%. The 10-year closed to 267 yesterday, which means almost 90% of our transactions have closed in a higher interest rate environment than we experienced today.

The chart on the right provides an illustrative example of why we think we will do well with higher rates. A typical project like the army project we reviewed is made up of many different technologies, each with a separate, simple payback. Some of the technologies like lighting a control systems have very short paybacks, say two to four years. Some are longer like ground source heat pumps, maybe 10 years and some are even longer like solar, which generally has the longest payback.

If interest rates rise such as the bundle of technologies no longer pencils out, the longer payback projects get dropped from the transaction, until the project fits within the prevailing interest rate environment. Hopefully, this provides some clarity on why we don't mind if interest rates go higher on the asset side of our business.

Again, economic transaction gets financed because they have an IRR above the cost of capital. We will continue to mitigate interest rate risk through floating-rate transactions, which match our liability side and as we’ve said, we are targeting 10% to 15% of our assets to flow.

As we said last quarter, we are planning an asset-back securitization or ABS transaction on the order of $100 million in the near-term that will further reduce our interest-rate exposure. ABS transaction like this, were build on our decade-long history of securitizations and provide another source of leverage for our balance sheet while mitigating interest rate exposure.

Now I will turn it over to Brendan to discuss the financials in more detail.

Brendan Herron

Thanks Jeff. For those of you who are not as familiar with us, as background we provide capital mostly debt to sustainable infrastructure projects including energy efficiency, clean energy such as wind and solar and water and communications projects that we call as sustainable infrastructure.

We make our money by holding our assets on our balance sheet or by selling off originated projects to institutional investors in exchange for fee income. As you will see from the results, we’ve put all the IPO proceeds to work and begun using leverage with our new credit facility. Leverage at the end of the quarter was approximately half a ton and will increase as we move towards our 2 to 1 leverage target.

Given the change in the business model at IPO to hold more assets and generate net investment revenue, we believe the appropriate comparison of our results is to the prior quarter. So we’ll be discussing our results on a sequential quarter-to-quarter basis for the next several quarters.

Turning to the Q3 results. We achieve approximately 100% growth in net investment revenue to $2.6 million as a result of the change business model where we’re holding an increasing amount of assets on our balance sheet, using a blended debt in equity.

We closed our new credit facility in July. This functions as a warehouse facility and allows us to borrow a maximum of $700 million. It was the maximum outstanding at any anyone point time of $350 million.

Included in the cost of investment interest expense is the non-cash amortization of deferred financing costs associated with the facility, of approximately $300,000 for the quarter or just under $0.02 per share. As the facility closed during the quarter, this non-cash amortization is expected to be approximately $450,000 for future quarters or approximately $0.03 per share.

As previously discussed, we target fee income to largely offset our other expenses, which you did this quarter with $2.2 million of investment revenue. This compares to other expenses on a core basis of $2.4 million. The core expenses excludes approximately $0.5 million of non-cash stock-based compensation intangible amortization charges for the quarter.

It is important to note that quarter-over-quarter, other expenses were flat at $2.4 million. We expect other expenses to grow at a significantly lower rate than the assets and net investment revenue. This is where we begin to see the power of the internally managed platform and the operating leverage of the business.

Core earnings more than doubled to $2.3 million or $0.14 per share, compared to $1.1 million last quarter or $0.07 per share. A few other comments, we saw limited impact from the government shutdown. In the long-term, the shutdown highlights one of our substantial business opportunities that is serving as a substitute for government appropriations that are challenged at all levels of government.

In the short-term, we saw minor delays in payment and don't anticipate delays in new projects. We actually expect an increase in the securitization of federal government projects in Q4 that will offset the delay in fees from a syndication project that we had originally targeted for Q4 and will now likely be delayed into late 2014.

As we have mentioned many times, infrastructure projects experience delays and I think it is important to have a diversified pipeline of opportunities. Switching to a different kind of lockout, our IPO-related lock-up expired in October, although insiders are still restricted by the close period.

In conjunction with the lock-up expiration, we have certain S-11 Shelf filing requirements under our Registration Rights Agreement. Also approximately $128 million, 128,000 restricted stock units will be converted to shares in mid-November, net other required tax with holding.

It is important to note these lock-up related transactions only cover approximately 13% of the outstanding shares, a small percentage compared to many other IPOs. We also announced today that we’ll be changing the timing of our dividend announcement to match other yield oriented companies and to comply with their REIT dividend requirements.

Thus going forward, we anticipate we will announce our quarterly dividend in the last month of quarter, payable on the following month. Thus for Q4, we anticipate announcing a dividend in December.

Turning to slide 10. We want to explain our three key earnings drivers as we look forward to 2014 and beyond. Growth in assets, operating leverage, and financial leverage. Jeff has described the growth potential of macro environment we operate in. We anticipate the projected doubling of the ESCO market and the continued growth in Green Energy will allow us to continue to originate high quality assets.

The growth in the assets highlights our second key driver, our internal management structure, that provide significant operating leverage as assets will grow faster than expenses. Thus shareholders should receive the full value of the growth in assets and equity.

Finally we will continue to apply financial leverage as it work towards our 2 to 1 leverage target. Because of the need to put up the IPO capital to work, our leverage for 2013 will be well below that target.

In 2014, we anticipate, we’ll be able to more efficient -- be more efficient in the use of leverage using existing and new sources of debt as well as the results of being shelf eligible for capital raises.

The 2 to 1 leverage target is an internal target and we have the capability to utilize higher leverage. For example, it’s likely that any ABS transaction will provide both fixed rate debt and higher leverage.

In total, we are targeting 13% to 15% earnings per share annual growth in addition to the 7% yield over the next couple of years for total returns of 20% or more. We obviously have been ramping rapidly and have based the 13% to 15% target on a year-over-year run rate basis using the Q4 7% dividend target as the base line.

To make this clear, we would expect annualized Q4 EPS 2014 to be 13% to 15% higher than this Q4 of 2013 target. This target of 20% in total return is achieved using assets with a stable earnings stream and low economic correlation.

Turning to Slide 11. These earnings drives us highly while we believe we offer a unique value to various yield-oriented investors, including those investing especially finance or infrastructure yield curve, MLP or even sustainability. For especially finance investors, we offer an investment great portfolio with low economic correlation, fully contracted revenues with an average life of 13 years.

For the yield curve infrastructure MLP investors, we offer a fully contracted sustainable infrastructure investment in a growing market and a senior position in the capital stack. For socially responsible investors, we offer the opportunity to invest in projects that positively impact the environment, help reduce green house gas submissions while maximizing both economic and environmental returns.

To all investors, we offer an origination platform with access to high quality assets in a growing market, a 7% yield and a targeted annually EPS growth of 13% to 15%. Investors get all of this in an internally managed tax efficient platform that is well positioned for future growth.

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

Jeff Eckel

Thanks, Brendan, and once again thank you to the Hannon Armstrong team for another terrific effort and results. The priorities for the rest of 2013 and thereafter obviously, we’re going to continue to focus on execution of our business plan in Q4 to ramp the dividend to -- over 7% in the quarter.

The pipeline is the primary driver of our dividend growth and we are continuing to optimize it with the opportunities in our target markets that are presenting themselves to us since the IPO. We’re focused on closing the approximately $100 million ABS transaction to provide protection in arising interest rate environment and finally, all of these efforts will combine to grow our earnings with double-digit rates.

We appreciate you taking the time to hear our story again and we’ll now open the call up for few questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question comes from Ben Kallo with Robert W. Baird. Please state your question.

Ben Kallo - Robert W. Baird

Hi. Thanks for taking my questions. Congratulations.

Jeff Eckel

Thanks, Ben.

Brendan Herron

Thanks, Ben.

Ben Kallo - Robert W. Baird

In the quarter, we saw a pretty nice number on securitizations. How do we think about that, how lumpy is it going forward or does that -- that number also gaining momentum with just do you guys been out there in market place?

Jeff Eckel

Its -- I mean its pretty typical number for us in a quarter and again we basically lived on securitization fees for all over a decade and it always had to cover SG&A. So I don’t think it’s particularly higher number. There is a lot of federal business that’s happening right now and it will spread over the next few quarters and I think the -- actually relatively flat.

Ben Kallo - Robert W. Baird

Okay. Great. And then just for clarifications. As you change the timing of the dividend, so should we expect that the dividend that is declared in December will meet or exceed that 7% rate?

Jeff Eckel

That’s what we said.

Ben Kallo - Robert W. Baird

And then finally, it sounds like towards the end there has been some projects that have got pushed out into next year. I guess, as you have this big pipeline, how do you, I guess that’s your job but how do you parse through your $2 billion in pipeline and you’re your available capital deploy, while some of these things are getting pushed out, some are maybe you pulled in?

Jeff Eckel

Yeah. We do have to actively manage it, but having 10 times of the last quarter’s originations in the pipeline is how we protect ourselves when project moves out, which projects move out every quarter, we just never can predict which ones, so we have to have lots of coverage on them. As to the capital and that’s where having the ability to leverage the capital is really helpful feature of our business right now.

Ben Kallo - Robert W. Baird

I guess, my follow-on also have been cleared. The amount of renewal projects you see in that pipeline increased recently and then, how do you view that in our stack of projects that you like to pursue?

Jeff Eckel

Let’s see -- the renewal projects are increasing. I think we’re showing energy efficiency increase more a lot of that is in the federal and state, local market. But the overall pool is growing. What we’re really focused on is the -- not the gross number but which of the transactions we can transact at the right return to the right risk. And that’s what having multiple projects, we can choose a bit.

Ben Kallo - Robert W. Baird

Great. Thanks, guys.

Jeff Eckel

Thank you.

Operator

Our next question comes from Joel Houck with Wells Fargo. Please state your question.

Joel Houck - Wells Fargo

Thank. Good evening, guys.

Jeff Eckel

Hey, Joe.

Joel Houck - Wells Fargo

Back on the securitization gain, I think on the earlier part of the call you indicated that Q4 gain would more than offset the earnings performance. You had indicated that you have thought you are going to receive that’s been pushed off in the Q4. I just wanted to clarify I hear that correctly.

Brendan Herron

Correct. So we expect that we’ll have an increase of securitization fees from this quarter and that will offset what we had originally targeted in Q4. So, as Jeff said, we always expect, we always experience and expect projects to push out. And so we always are looking for things that fill backfilling, that’s what's going to backfill in this quarter.

Joel Houck - Wells Fargo

But then would you expect the securitization gains to normalize as we go into next year, where they -- if they would necessarily build off of that higher Q4 number?

Brendan Herron

No, I think what we have said all along is our goal. And if you think about in a historical business, our goal is that, the fees would be somewhere around SG&A. So, I think this quarter we achieved $2.2 millions versus the $2.4 million in SG&A. So, I think that’s a reasonable kind of level to match those. In some quarters, it will be higher than that and some quarters that may be lower than SG&A, but our goal is to try to get fee come around the SG&A level. But we don’t see. It’s not going to ramp. The growth in the business is going to come from adding assets to the balance sheet, not from ramping fee income.

Joel Houck - Wells Fargo

Okay. And maybe and if you could speak to the yields you were getting on the clean energy and other infrastructure capital that you deployed in the quarter.

Jeff Eckel

I don’t think -- we talk about the yields in total, Joe. So, I mean, I think that we’ve always said that we want to be about 350 over the 10-year and we are running right around that target on an overall portfolio basis.

Joel Houck - Wells Fargo

Okay. 350 over 10-year?

Jeff Eckel

Correct.

Joel Houck - Wells Fargo

Okay. And then lastly, maybe I know you talked about target leverage at 2:1 and is that 2:1 kind of a traditional leverage and ABS, you could use the ABS market to go higher than 2:1 or is it going about 2:1 driven by what you kind of see in your distinct facilities?

Brendan Herron

Yeah. The 2:1 has kind of been has always our leverage -- number that we thought was a number that allowed us to offer a very attractive total return while managing the risks. And so, right now we are saying a 20% total return and managed in 2:1 leverage.

I think what you see is push leverage above 2:1 is -- if there is wan an opportunistic situation that we are looking at or where we have taken risk off the table. So an example is in the ABS transaction that will be -- likely be a higher than 2:1 target that may offset some other assets that aren’t leveraged and in that case we have taken the interest risk off the table for those assets. So, where you see us push the leverage above 2:1 is either being opportunistic or in a situation where we have taken some risk off the table like interest rate risks.

Joel Houck - Wells Fargo

Okay. Got it. And then the target 13% to 15% in EPS growth you’ve talked, I guess, specifically about end of 2014? What should we read into them in terms of more three to five year growth rate? Is that something that could be sustained beyond a year or should we -- should we -- would it be a normalization I guess with the growth rate as you get bigger?

Brendan Herron

I think what we are seeing in this call is looking at a couple of years, you can look at this kind of a growth rate and I don’t know that I want to comment much beyond that. But right now we are saying that for the next couple of years we would expect this growth rate?

Joel Houck - Wells Fargo

All right. Great. And again nice job in the quarter.

Brendan Herron

Thanks, Joel.

Operator

Thank you. Our next question comes from Ken Bruce with Bank of America Merrill Lynch. Please state your question.

Ken Bruce - Bank of America Merrill Lynch

Thanks. Good evening, gentlemen.

Steve Chuslo

Yeah.

Ken Bruce - Bank of America Merrill Lynch

First question on, in terms of the amount of securitizations upside, did you state how -- what that level was in the quarter?

Brendan Herron

The securitization income in the quarter was $1.8 million.

Ken Bruce - Bank of America Merrill Lynch

I am sorry, not the income, but how much was securitized and of course, you originated a little over $200 million, I guess, I am trying to back into, how much of that was actually done into the portfolio, looks like the portfolio grew by $80 million, so I’m just trying to understand how much was into the portfolio? How much was actually securitized in the quarter?

Brendan Herron

Yeah. It was about 50-50 this quarter.

Ken Bruce - Bank of America Merrill Lynch

Okay. And then as and there was no advisory work done this quarter, is that correct?

Brendan Herron

I have listed an amount…

Jeff Eckel

Amount.

Brendan Herron

… couple of hundred thousand dollars.

Ken Bruce - Bank of America Merrill Lynch

Okay. And just as you look at the $200 and I guess, I don’t want to make too much of two quarters, but is that roughly what you are thinking the run rate is in terms of originations per quarter independent of what advisory work is done?

Brendan Herron

I mean, I think, we are happy with that number, that’s higher than what we have built the models on. And as we said -- we have had a couple of good quarters. There are -- it is always the riskier things move out in the quarter and we don’t get the closings. We don’t think that origination is the right, certainly quarter-to-quarter originations is the right target to measure the business. It certainly a milestone but it’s really a couple of quarter run rate versus a quarter-to-quarter run rate just because of the lumpiness is the nature of what we originate.

Ken Bruce - Bank of America Merrill Lynch

Okay. And I don’t want to read too much into the comments around how to think around the fee income, but let me try to understand just how you look at the business and is it your -- is it your expectation that fees that you can generate in the business in any given quarter are going to be in essence just sufficient to cover your G&A cost, your operating cost in the quarter in that in essence it is going to be determined how much is going to be securitized in any one quarter and then essentially the remainder goes into the balance sheet, that’s what going to drive the earnings growth over time, am I thinking through that properly, just in terms of the how much gets securitized versus retained in the portfolio?

Brendan Herron

No. I think the decision to securitize versus retain really is an economic analysis that we do on each transaction based on what the deal looks like, whether we think there is a likely buyer of the deal, what the return will be if we sold it off to a likely buyer and what the return will be thus if we held it in the portfolio.

And that's really we do it at that level and as the first screen before we look at. So we are not working and say, okay, we are going to fill up ex-amount of fee income first and then hold the rest.

We look at each transaction individually and say, does this make sense to whole or does this makes sense as to securitize. And then we make a decision based on that as to how to best maximize value for the shareholders.

Ken Bruce - Bank of America Merrill Lynch

I see. That makes sense. And then, lastly, just in terms of the energy efficiency part of the market, which seems to be having a little bit more near-term momentum? Is that being driven by the state opportunities or is it more federal at this stage? Is there -- can you give us some sense as to how the -- how that part of the pipeline is shaping up?

Brendan Herron

The federal business is propelled by $2 billion goal that President Obama set that we talked about in prior discussions and they are now starting to achieve it and they are still a long way to go to get to the $2 billion, but they are starting to issue task order.

So that's sort of a near-term boost to the business that we have been expecting. And the state local business continues. There was the press release issue this quarter on the $20 plus million Louisville -- City of Louisville transaction that we did and very nice transaction for the City of Louisville, as well as Johnson Controls and ourselves.

Ken Bruce - Bank of America Merrill Lynch

Okay. Thank you. And lastly, I am not even sure how to frame the question around this, but you guys have made a little bit of a habit of coining terms last quarter with sustainable yield this year -- this quarter portfolio drop down? Clearly you are trying to speak to a more traditional MLT energy-type investors or at least may that's the way I am reading into it? Is that a correct interpretation of kind of what you are pointing investors at this point?

Brendan Herron

I think what we are finding, Ken, is that our story resonates in different ways with different investors and the socially responsible investors really do look at the greenhouse gas emissions and are rigor in analyzing that.

The utility or yield co-investors in the energy market are much more focused on the industry contacts of our business and the fact that we start to be part of an explanation of why utility kilowatt sales are falling or staying flat or not growing. Is that energy efficiency is really cannibalizing utility load. And they are used to yield curve type terms like drop down and things like that.

And then especially finance investors that you know so well, they certainly have different matrix that they are measuring and we really are trying to feel to offer it.

Ken Bruce - Bank of America Merrill Lynch

Well, I look forward to what term you coin for the specially finance investor. But congratulations on a good quarter, it looks like things are off to a very nice start. So congratulations. Thank you.

Brendan Herron

Yeah. Thanks, Ken.

Operator

(Operator Instructions) Our next question comes from Patrick Buckley from UBS. Please state your question.

Patrick Buckley - UBS

Hi Jeff, Brendan. This is Patrick Buckley. I am standing in for Matt. He is out right now. Congratulations on good quarter. I just had a quick question about SG&A. I know that you have discussed it as it is going slower than net interest income going forward. I wanted to see if there are any, before saw any lumpiness or any kind of nonrecurring charges, the reason I ask is in some previous material you had the fourth quarter, you had some guidance that was little bit higher than what you -- how you performed in this quarter. So I wanted to see your thought that you kind of have achieved run rate for this quarter going forward?

Jeff Eckel

So I think it will pick up a little bit in the fourth quarter. There is -- there are probably some bonus accruals and things that will hit more in the fourth than other quarters depending on what the board things, the performance has been for the year. The bonuses this year are discretionary. But I think overall, I think our projection was originally for about 10.6 or running at 9.6 right now. So I think in the next couple quarters you will see as ramp more to that 10.6 number over the -- where we’re running right now.

Patrick Buckley - UBS

Okay, thanks. I appreciate it. Again congratulations.

Jeff Eckel

Thanks.

Operator

Thank you. Our next question comes from Paul Strigler with Esplanade. Please state your question.

Paul Strigler - Esplanade

(Inaudible) sort of the composition of the investment portfolio what percent is equity investments today?

Jeff Eckel

Paul, I think your -- the initial portion of your question didn’t come through.

Paul Strigler - Esplanade

Sorry, I was just trying to figure out -- I know most of your investments are on the debt side but what percent of the portfolio was on the equity side today?

Brendan Herron

So today the vast majority is debt 90%, 95%. I think you will see us -- we wanted to get debt portion of the business working in a way that we were happy before we start to make a lot of equity investment. So I think that adds a piece so you will see this continue to add during the course of next year. So I think that will be more of 2014 focus than the 2013 focus.

Paul Strigler - Esplanade

And then just one of your thoughts on one of your, I don’t know if I call them peers but sort of solar city has at least been lumped in the broad group with you guys. Now few days ago, they’re trying to get a residential asset-backed security out the door, a sort of in terms of your asset-backed security, sort of, what kind of yield are you targeting and is a vehicle like that at all interesting to you?

Jeff Eckel

I think, what we probably have done a very good job of this. We’ve done about $3 billion of securitizations of these clean energy assets. That has included solar. I think solar city is the innovation there as they’re doing it on a residential market but in terms of the physical assets that doesn’t seem to break a lot of new ground with us. So we applaud their efforts. I think it’s a terrific way to put capital on the residential solar business. That’s not source of capital that we need and the asset back that we’re doing is perhaps on a higher credit quality set of assets.

Paul Strigler - Esplanade

And so I mean, what sort of yields are you targeting. I know you’ve done a lot of securitizations for other folks for your projects but for your investment portfolio, what sort of yields are you targeting?

Jeff Eckel

So on the asset acquisition side, I think we’ve talked about before is a blended portfolio, 350 over the 10 year. So that takes it little bit over six at this point in time with where the numbers are. On the debt side, the assets back, I’m not sure we’re prepared to talk exactly as to where we are on that and I think you have to wait till we announce that transaction.

Paul Strigler - Esplanade

Okay. Great. Thanks a lot guys.

Jeff Eckel

Thank you.

Operator

(Operator Instructions) I will now turn the conference back over to management for closing remarks. Thank you.

Jeff Eckel

Thank you all and we’ll get back to work tomorrow and keep trying to make money. Thanks so much.

Operator

Thank you. This does conclude today’s conference. All parties may disconnect. Have a great evening.

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