Yahoo Finance Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI) Q1 2024 Earnings Call Transcript
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI) Q1 2024 Earnings Call Transcript May 7, 2024
Hannon Armstrong Sustainable Infrastructure Capital, Inc. misses on earnings expectations. Reported EPS is $0.00094 EPS, expectations were $0.57. HASI isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to HASI's First Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions]. It is now my pleasure to introduce your host, Neha Gaddam, Senior Director, Investor Relations and Corporate Finance.
Neha Gaddam: Thank you, operator. Good afternoon, everyone, and welcome. Earlier this afternoon, HASI distributed a press release detailing our first quarter 2024 results, a copy of which is available on our website. This conference call is being webcast live on our Investor Relations page of the website, where a replay will be available later today. Some of the comments made in this call are forward-looking statements, which are subject to 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. And today's discussions also include some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is available on our posted earnings release and slide presentation.
Joining me on today's call are Jeff Lipson, the company's President and CEO; Marc Pangburn, CFO; and Susan Nickey, our Chief Client Officer. Susan will be available for the Q&A portion of our presentation. Now I'd like to turn the call over to Jeff, who will begin on slide 3. Jeff?
Jeffrey Lipson: Thank you, Neha, and good afternoon, everyone. Thank you for joining the call. Today is truly a milestone moment in the evolution of HASI. Since our Investor Day in 2023 roughly one year ago, we have consistently talked about a strategic emphasis on a more efficient and scalable capital structure. Today, we announced a $2 billion strategic partnership with KKR that provides a very meaningful step towards accomplishing this goal. The partnership is an ideal pairing of HASI's ability to source, underwrite, and manage a diverse portfolio of climate-positive investments and KKR's market leadership in raising and managing sustainable core infrastructure funds. This arrangement creates an efficient platform to hold most of our balance sheet investments going forward.
We are thrilled with this partnership and the opportunities that we'll facilitate. We have named the partnership Carbon Count -- CarbonCount Holdings 1, and we'll refer to it as CCH1 going forward. I'll come back to CCH1 in a moment, but I'll briefly mention a few other highlights from the first quarter, including $0.68 of adjusted earnings, over 500 million of closed transactions, and a 24% year-over-year growth rate in our managed assets. We are also declaring a $0.415 dividend, and we are affirming our guidance, which had already assumed a co-investment transaction and is therefore not changing. We also had a very successful quarter upsizing and extending our debt, which Marc will detail in his remarks. Turning to page 4, I want to put today's announcement in historical context.
Prior to 2013, HASI funded almost exclusively by securitization, typically with life insurance companies. Following the IPO we utilize public equity to build a balance sheet with higher return investments. In 2019, we obtained corporate debt ratings and incrementally utilize the unsecured bond market. Today's announcement provides incremental access to private infrastructure capital, supplementing -- supplementing all these other sources of funds. In a business like ours, diversified sources of capital are the foundation for long-term success. This slide is a simple representation of a capital strategy that has positioned us for profitable growth even during periods of volatility and macroeconomic headwinds. Our securitization program, our balance sheet, and the CCH1 partnership we'll work in tandem, resulting in a powerful and resilient business.
Continuing on slide 5, CCH1 has many benefits, three of which are noted on this slide. First, it will reduce our reliance on capital markets, which have experienced a high level of volatility over the past four years. Going forward, we will obtain 50% of the funding for the investments in CCH1 outside of the capital markets, substantially reducing our risks to market disruptions. Second, CT -- CCH1 will allow us to increase our investment capacity and ultimately accelerate our growth in managed assets. This additional capacity is coming at a perfect time as forecasts of energy demand continued to be revised upward with a large portion expected to be renewable and other sustainable sources. Our additional access to capital will allow us to meet the growing needs of our clients as they continue to move forward with projects that are required to meet this increased demand.
And third, CCH1 will provide more diversity to our income statement with stable fee revenue to complement our net investment income and gain on sale income. The result of these and other benefits of the partnership is an even more dynamic and resilient HASI that is well-positioned for long-term success. Turning to page 6, I'll speak about CCH1 in a little more detail. It is structured with 50% ownership by each of HASI and one of KKR's core infrastructure funds. HASI will source the investments for CCH1, consistent with our existing strategy. In fact, we are not making any changes to our investment strategy as part of this arrangement. This transaction can be viewed as an endorsement of our existing strategy and the attractiveness of the diverse portfolio that we are able to originate.
We will continue to interface with our clients, both before and after an investment has closed consistent with current practice. Each party has made a $1 billion commitment to CCH1, and we expect the $2 billion to be deployed over approximately 18 months. Two investments closed by HASI totaling just under $200 million in commitments are being utilized to seed the partnership at formation. As compensation for sourcing and managing the investments, HASI will be paid fees by CCH1. It's fundamentally a simple structure that allows both HASI and KKR to focus on their respective core competencies and allow the partnership to benefit accordingly. More detailed information regarding CCH1 is provided in an FAQ in the appendix to the earnings materials.
Now I will turn over the call to Marc Pangburn.
Marc Pangburn: Thank you, Jeff. I'll start on slide 7. We have increased our 12-month pipeline to greater than $5.5 billion. Demand growth continues to drive investment opportunity in all of our markets. While AI is the latest trend, electrification and resiliency are long-term themes driven by a multitude of factors, including decarbonization goals, increasing extreme weather events, and the increasing reliance on electricity. We see these themes materialize in our pipeline, our clients' pipeline, and the underlying demand for energy transition assets. As identified on the right, there has been notable growth in our pipeline for community solar, grid connected solar, and renewable fuels, while other asset classes, including residential solar, have remained consistent with prior quarters.
In Q1, we closed $562 million of transactions across six different asset classes with an average yield for on-balance sheet investments of approximately 10.5%. Moving on to slide 8, before I jump into the slide, I'd like to highlight one change in naming convention. Our non-GAAP metric was previously referred to as distributable, which was a term adopted by REIT. Given our move away from the REIT structure, we will be using adjusted on a go-forward basis. The definition is unchanged. Our adjusted EPS increased by 20% year over year to $0.68. Adjusted NII grew by 37% to $64 million. A significant contributor to earnings growth in Q1 is higher gain on sale, fees, and securitization income, which totaled $35 million, an 81% increase year over year.
As a reminder, gain on sale is variable quarter to quarter, and we expect gain on sale during the guidance window to be consistent compared to '22 and '23. On the right given the update Jeff provided on CCH1, we are reorganizing our top-line metrics into three different categories: the presentation of NII is unchanged. In future periods. Income relating to our 50% ownership in CCH1 will be reflected here. We have split our income streams relating to our capital-light activities into recurring and upfront. Recurring will be comprised of securitization income and ongoing CCH1 management fees. Upfront will be comprised of gain on sale, fees, and upfront CCH1 fees. Turning to slide 9. We show impressive growth in both portfolio and managed assets.
Our portfolio grew by 36% year over year, $6.4 billion, while managed assets grew 24% to $12.9 billion. In future periods, our 50% ownership in CCH1 will be included in our portfolio, while the full balance will be included in managed assets. The growth of our investments is a testament to the strength of our programmatic origination platform. On page 10, we've added ROE to our margin chart given the expansion of our capital light activities. ROE has increased this quarter primarily due to the gain on sale discussed on slide 8. As it relates to portfolio yield and debt costs, we are showing a temporary compression due to the newly issued debt and the time delay to fully deploy these funds. This dynamic was expected and has been factored into guidance.
I'll add that we continue to see elevated returns for new transactions with Q1 transactions coming in approximately at 10.5%. Turning to slide 11, we highlight our robust funding platform that underpins business growth with over $800 million in liquidity, minimal near-term debt maturities, and a leverage ratio of 1.9 times, so liquidity and liability management is evident. Our interest rate risk management has ensured 97% of our debt is fixed or hedged, while also managing future refinancing rate exposure. Alongside the strong execution with our first quarter, we further strengthened the debt platform with an upsize and extension of three bank facilities: our revolver; term loan A; and CP facility. This aggregates to a borrowing capacity of greater than $1.6 billion and the maturity extensions are detailed in the box on the lower right.
With our activities this year, we have provided ourselves the flexibility to opportunistically approach the debt markets for further 2025 refi extensions. With that, I'll turn the call back to Jeff.
Jeffrey Lipson: Thanks, Marc. On page 12, we share a few sustainability and impact highlights from the first quarter. We published our best-in-class 2023 Sustainability Impact Report, donated $2.5 million to the HASI Foundation to support Climate Justice initiatives, and achieved independent verification of Scope 3 Category 15 emissions. Let's wrap up on slide 13. Our strategy continues to produce strong results, despite the higher interest rate environment and other real or perceived headwinds. The elevated demand for energy will continue to facilitate an emphasis on supply, particularly from renewable and sustainable sources, which will create increasing opportunities for the business to invest. The CCH1 transaction is the optimal structure with an ideal partner and is occurring at the perfect time, allowing us to scale our business.
On our Investor Day, we discussed reducing our reliance on equity raises. And last quarter, we discussed the trajectory of our payout ratio and our intention to retain more capital as one step in this direction. Today's announcement is another significant step in that direction as we continue down the path of executing on our stated goals. Today, HASI is a powerful enterprise and better positioned for long-term success with an even more diversified access to capital. I thank our outstanding team for closing the CCH1 transaction and several other important initiatives this quarter. And I welcome our new partners from KKR as we jointly provide capital to the energy transition. That concludes our prepared remarks. Operator, please open the line for questions.
Operator: [Operator Instructions]. Our first question is from Noah Kaye with Oppenheimer & Co.
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