This is a follow-up to my August 4 article, Two Champions, Two Contenders And Two Newbies Added To Portfolio. This article describes one of two "newbies," or "outside the box" companies recently added to my retirement income portfolio.
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI)
I decided several months ago that I wanted renewable energy to represent one-fourth of the portfolio's energy sector exposure. I began studying some of the new "YieldCo" opportunities, which led me to a July 17, 2014 SA article by Tom Konrad: 15 Clean Energy YieldCos, Created Unequal. This was my first introduction to Hannon Armstrong. Shortly after the IPO, Konrad wrote a feature article for Forbes about HASI on April 22, 2013: A Clean Energy REIT: Hannon Armstrong Sustainable Infrastructure. Here is his conclusion:
I can't help but be enthusiastic about Hannon Armstrong Sustainable Infrastructure Capital. The REIT presses all my buttons:
It invests in sustainable infrastructure.
It has an emphasis on energy efficiency.
It's likely to pay an attractive dividend yield from long-term stable income.
What's not to like?
Hannon Armstrong Sustainable Infrastructure has been making debt and equity investments in the renewable energy business for over three decades. Through an initial public offering, HASI became a publicly traded company in April 2013. In conjunction with this IPO, HASI received a favorable private letter ruling from the Internal Revenue Service on its proposal to form a publicly traded real estate investment trust.
A New Variation on the REIT Theme
The title and subtitle of a May 30, 2013 article by Herman Trabish in the Greentech Media Newsletter are instructive: "How Hannon Armstrong Got the IRS to Approve Its Renewable REIT" and "Energy efficiency was the key to the first REIT for renewables." Trabish quotes Hannon Armstrong's CEO Jeffrey Eckel as saying HASI received its favorable ruling because of the high proportion of renewable energy assets in the portfolio (as opposed to energy efficiency assets). "The difference between renewables and energy efficiency from the IRS' perspective is pretty large. Energy efficiency assets are really building components."
Sustainable Infrastructure Transactions
Since 2000, HASI has provided or arranged over $4.5 billion of financing in more than 475 sustainable infrastructure transactions. The company says that over this period, it has become "the leading provider of financing for energy efficiency projects for the U.S. federal government, the largest property owner and energy user in the United States."
From the home page of the company's website:
We focus on profitable projects that increase energy efficiency, provide cleaner energy, positively impact the environment, or make more efficient use of natural resources.
With over 30 years of experience, Hannon Armstrong works primarily with Global 1000 clients on essential infrastructure projects involving the U.S. federal, state and local governments as well as institutions and private developers. We target projects that have high credit quality obligors, fully contracted revenue streams and inherent economic value.
Sustainable Yield ...
The title of HASI's 2013 Annual Report, its first as a public company, was Sustainable Yield. In that annual report, CEO Eckel said:
"We went public after 32 years as a private company for two reasons. First, we think climate change is the defining issue of our generation and finance has much to contribute to the adoption of low carbon technologies. Second, we believe the opportunity to finance the de-carbonization of the economy is simply enormous, as industries like the 100+ year-old electric utility sector evolve to more sustainable business models."
... On Distributed Energy Assets
Eckel said HASI is open to financing all sustainable infrastructure assets, but their focus is providing "financing for distributed energy assets, which include assets that either reduce energy consumption, like LED lighting, or reduce carbon in energy production, like solar on buildings." Eckel said the U.S. Government:
"the largest user of electricity in the country, is well on its way to reducing consumption by 30%, not with subsidies, but with lighting, heating, cooling, and distributed generation. The HASI finance opportunity includes all consumers of energy from federal, state or local governments, commercial and industrial companies and residential consumers."
The 2013 Annual Report indicated that from the IPO in April 2013 through December 31, 2013, HASI completed approximately "$632 million of transactions, of which 62% were for energy efficiency projects, 32% for clean energy projects, and the remaining 6% for infrastructure projects."
$468 Million on Balance Sheet at the Close of 2013
The 2013 year-end on-balance sheet portfolio was approximately $468 million, with approximately 96% of the transactions considered investment grade. Among the assets financed in 2013 were distributed wind projects for the U.S. Federal government in Texas and various corporate entities in California, deep energy efficiency retrofits for the City of Louisville, Kentucky and a solar farm in Georgia.
HASI's target leverage is 2:1 (twice as much debt as equity). As of 3/31/14, the company had achieved a 1.5:1 debt to equity ratio. The company's priority is to increase the amount of fixed-rate debt. As of 3/31/14, 97% of the portfolio is investment grade and 46% of their debt is at fixed rates. In 2013, HASI issued the first "green bond" in accordance with the recently established Green Bond Principles. "We estimate the HASI SYB 2013-1 has a greenhouse gas ("GHG") reduction of .61 metric tons per $1,000 bond, the first bond to calculate such impact. We believe we are setting the industry standard for analytical rigor in the green bond market, all the while we are fixing our interest rates at an attractive yield."
Since HASI is in an area of the energy sector that may be unfamiliar to many readers, I'm including Eckel's paragraph on "Sustainability."
As we have continued to grow our business, we are seeing increased interest in the sustainability thesis: sustainable investments represent a lower-risk investment in a world increasingly defined by climate change. These investors appreciate that they are investing in assets that are screened for sustainability before going to our Investment Committee and that we calculate the GHG impact of every investment. We are proud to publish our first HASI Sustainability Report Card in this report, detailing the GHG impact per investment. Assets we financed will reduce emissions by over 331,000 metric tons of GHG per year, equivalent to over 178 thousand tons of coal, and save over 628 million gallons of water annually. This, also, is our Sustainable Yield.
Three Types of Sustainable Infrastructure Projects
The corporate profile on the company website describes three types of sustainable infrastructure projects for which Hannon Armstrong provides debt and equity financing:
- Energy Efficiency Projects: projects, typically undertaken by energy services companies, or ESCOs, which reduce a building's or facility's energy usage or cost through the design and installation of improvements to various building components, including heating, ventilation and air conditioning systems, or HVAC systems, lighting, energy controls, roofs, windows and building shells;
- Clean Energy Projects: projects that deploy cleaner energy sources, such as solar, wind, geothermal and biomass as well as natural gas; and
- Other Sustainable Infrastructure Projects: projects, such as water or communications infrastructure, that reduce energy consumption, positively impact the environment or make more efficient use of natural resources.
The REIT Structure
HASI changed its organizational structure in order to allow the company to operate its business as a real estate investment trust (REIT). Their strategy in converting to a REIT and in undertaking the April 2013 IPO was "to expand our proven ability to serve the rapidly growing sustainable infrastructure market by increasing our capital resources, enhancing our financial structuring flexibility, expanding the types of projects and end-customers we pursue, and selectively retaining a larger portion of the economics in the financings we originate, while delivering attractive risk-adjusted returns to our stockholders."
In its May 12, 2014 presentation, the company targeted 20%+ annualized return to shareholders in 2014 and it stated its goal to achieve $1 billion in assets by the end of 2014. Hannon Armstrong reconfirmed its guidance for 13% to 15% EPS growth from Q4 '13 to Q4 14. In the same presentation, the company cited the following "core earnings" per share:
|2014 First Quarter||$.20|
|2013 Fourth Quarter||$.22|
|2013 Third Quarter||$.14|
|2013 Second Quarter||$.07|
The company's 2014 Q1 earnings release said the decrease in core earnings was largely attributable to approximately $0.3 million, or $0.02 per share, of higher interest expense resulting from the $100 million six-year asset-backed debt security issued at the end of December, 2013.
The 2014 Q1 earnings release emphasized the company's focus away from large scale projects to smaller projects: "The accelerating trend in electric utility markets towards smaller scale distributed energy assets, such as energy efficiency, distributed solar and co- generation, plays to HASI's historic strengths and is producing high growth investment opportunities with both existing and new origination sources." SunPower and Soltage were added as clients in 2014 Q1. The company underscored this shift at the REITWeek Investor Forum on June 3, 2014.
The 2014 Q2 earnings release and conference call are scheduled for Monday, August 11, 2014, at 5 PM EDT. The webcast of the earnings call will be available via the company website.
|Announced Date||Record Date||Pay Date||Amount Per Share|
A New, Three-Decade Old Company
The usual metrics for evaluating a REIT (5-year dividend growth rate, 5-year average price/FFO, high yield for the past five years, etc.) are not applicable for a newly public company.
The 52-week price range for HASI is $11.03 to $15.11. The indicated annual dividend is $.88. At an August 1 closing price of $13.67, the yield was 6.4%.
There are 15.9 million shares outstanding and the total market capitalization (according to Morningstar) as of 3/31/14 was $512.8 million.
After scanning the "YieldCo" horizon for alternative energy prospects, I settled on Hannon Armstrong and made a purchase on July 22, 2014 at $14.40. On August 1, HASI closed at $13.67 and it comprises 2.4% of my portfolio.
My next article will focus on another "outside the box" recent purchase: United Development Funding IV (NASDAQ:UDF), a mortgage REIT that provides financing for developers of single family housing.
This article is not a recommendation to buy Hannon Armstrong, but rather a "journal" of my decision process that led to the purchase of this stock. It is intended solely to provide an idea for a stock to study. Individual investment goals and risk tolerance vary greatly. Please do your own study and due diligence.
Disclosure: The author is long HASI, UDF, AWR, NWN, GPC, PG, EMR, MMM, KO, JNJ, SYY, PEP, WGL, ORI, T, HCP, CVX, NNN, MDP, O, KMI, WPC, SO, AVA, CBRL, WEC, GIS, DE, DLR, TCAP, STWD, BCE, MAT, ETN, TUP, LNCO, EPR, LTC, VTR, RYN, MAIN, MRK, CSG, ARCP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.