Wednesday, November 6, 2019

A Current AIM Small Cap Equity Holding: Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI, $29.51): “Making Gains in Both the Gym and the Market” By: Christian Musbach, AIM Student at Marquette University


 Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI, $29.51):
“Making Gains in Both the Gym and the Market”
By: Christian Musbach, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary:

         Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE: HASI) is a REIT that focuses on solely investing in climate change solutions and reducing carbon emissions. They are able to do this by providing capital and expertise to companies that are in the sustainable infrastructure markets. The investments made by HASI come in the form of equity, joint ventures, land ownership, lending, or other financing transactions. The company is headquartered in Annapolis, MD and was founded in 2012.

         The first driver for the pitch of HASI in early 2018 was decreasing renewable energy costs and the trends have continued.

         The second driver for the pitch of HASI dealt with the growing demand for renewable energy and this has held. Management expressed the upward trend in climate change should yield higher returns for the portfolio as investors start realizing the negative impacts. This market is expected to grow to about $75 trillion in the next three decades.

         Despite the lower earnings in Q2-19 than expected, HASI is growing. In their Q2-19 filing, they closed $523M of transactions YTD compared to $308M in 2018.

Key points:

The original pitch for HASI was driven by the decreasing costs of renewable energy. According to a study done by Forbes, the cost of wind energy and solar energy fell 13% in 2018. This decreasing trend is making renewable energy look more attractive compared to fossil fuels. The International Renewable Energy Agency (IRNA) expects the power generated from wind and solar energy to be cheaper than fossil fuels in the next year.

HASI invests in a market that has expected long-term sustainable growth. According to a report from the IRNA, the investments in renewable energy are expected to be about $75 trillion in the next three decades. This is driven by investors’ realization of the negative effects of climate change which was mentioned as a second driver in the pitch. HASI looks to act on this by continuously investing in climate change solutions. The pipeline is about $2.5 billion which is robust. The pipeline consists of supply-side and demand-side investments to be diversified. The makeup of the pipeline is as follows: 79% for behind-the-meter (BTM) markets, 12% for grid-connected (GC) markets, and 9% for sustainable infrastructure (SI) markets. Also, for 2019, they are on pace to close around $1B of transactions for the year.

The reported Q2-19 earnings were lower than expected for HASI. The EPS was $0.30 and net revenue was $16.4M. The reason for this is that 90% of the $204M in transactions closed were added to the balance sheet. In comparison, only 10% was added in Q1-19. This reduced short-term profitability, but is stronger for the long-term. In total, HASI has closed $523M in transactions YTD compared to $308M in 2018.

What has the stock done lately?

HASI has had strong revenue growth with a 38.14% increase for 2018 and a 21.78% increase in operating income. Currently, the stock price is $29.51 per share which is near the high for the 52-week range of $18.83 - $29.98. Over the past month, the stock is up 1.41%.

Past Year Performance:

Over the past year (October 2018 – October 2019), HASI is up 49.12% and 5.66% in the past three months. The stock price is expected to continue to grow based on the continual growth in their industry. The current P/B ratio is at 1.44x which is a bit shy of the 5-year average of 1.59x. HASI is in a good position and has room to grow.


1 Year Stock Chart vs. Benchmark
Source: FactSet
My Takeaway:

HASI should remain in the AIM small-cap portfolio. The environmentally-sound market that HASI invests in will be sustainable for the long-term. The short-term shortfall in earnings should not be a reason for concern because they had a high transaction volume added to the balance sheet. In the original pitch, two of the drivers specifically have held. First, the decreasing costs of renewable energy have continued. Second, the demand for renewable energy is increasing as climate change effects gain traction. The combination of the management experience paired with a sound-investment focus, HASI will remain strong for the foreseeable future.


1 Month Stock Chart
Source: FactSet