Hannon
Armstrong Sustainable Infrastructure Capital, Inc. (HASI,
$28.72): “A Strong Buy for Hannon Armstrong”
By:
James F. Oddo, 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) engages in
focusing on solutions that reduce carbon emissions and increase resilience to
climate change by providing capital and specialized expertise to companies in
the energy efficiency, renewable energy and other sustainable infrastructure
markets.
• On-balance sheet
portfolio yield improved by 30bps sequentially and 130bps y/y to 7.7%.
Residential solar's share of the portfolio increased 7pts sequentially to 29%,
while federal/state/local efficiency investments decreased 4pts reflecting a
continuation of prior quarter trends.
• HASI announced several
developments that could support inroads into the relatively nascent C&I
market, including a partnership with Empower Energies for C&I solar and
agreement to provide long-term financing for energy management-as-a-service
projects with GridPoint. In addition, management continues to see C-PACE as a
potential $100M annual investment.
• HASI reported 3Q19 core
earnings of $0.38/share, vs. consensus $0.35E. The company originated $287M of
transactions in 3Q19, vs. $553M in 3Q18. The 12-month pipeline, balance sheet
portfolio, and portfolio yield were >$2.5B, $1.9B, and 7.7%, respectively. Debt-to-equity ratio was
1.5:1, up from 1.2:1 at end-2Q19.
Key
points:
HASI is a capital and
services provider focused on assets that reduce greenhouse gas emissions and
lower the impact of climate change. The company maintains proprietary
partnerships with leading vendors (e.g., Johnson Controls, Honeywell, First
Solar) and financial partners, specializing in standardized, repeatable deals,
with an objective to invest in profitable, niche opportunities in renewables
and energy efficiency assets. HASI’s investments are typically too small in
size for most larger financial institutions or require superior domain
expertise that small/mid-sized sources of capital may lack. HASI’s existing
portfolio and pipeline are diversified among supply-side investments (e.g.,
land beneath solar/wind projects) and demand side (e.g., energy efficient
lighting or HVAC systems in buildings), different from most public-equity
investment options that focus on one particular industry.
Management
has over 30 years of investment experience in renewable and energy efficiency
assets. Before going public in 2013, HASI dealt primarily in the securitization
business and began adding projects more materially to the balance sheet
following the IPO. The company has historically averaged a levered return on equity
of ~10.0-10.5% (~6% unlevered).
Main
driving factors include: Uniquely positioned to benefit from decarbonization, significant
industry investment activity forecasted over next several decades, long company
history in renewables and energy efficiency investing, and their flexible
business model provides some protection from flattening yield curve provides
investors with access to downstream ownership of assets.
What
has the stock done lately?
HASI
reported 3Q core earnings per share of $0.38 on revenue of $22mm, above
expectations. Transaction volume of $287mm was slightly above our estimate of
$275mm, over 90% of which was added to the balance sheet portfolio, improving longer-term
visibility. The company’s portfolio increased to $1.9bn, from $1.8bn last
quarter, and the average yield increased to 7.7%, up ~110bps q/q and ~190bps
y/y.
Past
Year Performance:
HASI performance this past year was outstanding.
HASI saw a 27.44% increase in share price. HASI's market valuation implies a 3
year target price of $35/share, resulting in a 21% upside.
Source: FactSet
My
Takeaway
I view HASI as a strong specialty
finance play on the growth of energy efficiency and renewables with a strong
management team, a differentiated investment strategy, an increasing deal
pipeline, and a track record of earnings and dividend growth. I believe HASI’s
business model will enable the company to navigate interest rate risk and
identify high-yield niche investments.
Source: FactSet
