Thursday, December 12, 2019

A Current AIM Small Cap Equity Holding: Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI, $28.72): “A Strong Buy for Hannon Armstrong”

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.


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