HA Sustainable Infrastructure Capital Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to Hassy's Second Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neha Gautam, Senior Director, Investor Relations and Corporate Finance.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome. Earlier this afternoon, Hassy distributed a press release detailing our Q2 2023 results, a copy of which is available on our website. This conference call is being webcast live on Investor Relations webpage, 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 Risk Factors section of the company's Form 10 ks And other filings with the SEC.

Speaker 1

Actual results may differ materially from those stated. 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 Jess Lipson, the company's President and CEO Mark Pangburn, CFO And Susan Nicky, our Chief Client Officer. Now I'd like to turn the call over to Jeff, who will begin on Slide 3.

Speaker 1

Jeff?

Speaker 2

Thank you, Neha, and good afternoon, everyone. July 2023 is likely to be recognized as the hottest month in history to date, And 2023 is trending to be the hottest year on record. Unfortunately, climate risks continue to escalate. But these trends also highlight the enormous amount of projects capital that will be required to mitigate these risks. In this context, Hasty continues to actively engage with our clients, Providing capital, industry expertise and advocacy to address these growing challenges.

Speaker 2

Our business remains uniquely positioned to invest in the increasing number of Projects being developed with a climate positive focus. As evidence of these trends and our growing opportunity set, I'm pleased to announce that our investment volume for the first half of the year is the highest ever at $815,000,000 including $426,000,000 for the 2nd quarter. This is paired with our highest investment yields ever over the same period with a weighted average yield greater than 8.5% for balance sheet investments. This combination of larger volumes and higher yields provides significant momentum for the business and for future earnings growth. In addition, our portfolio yield has increased from 7.5% to 7.7%.

Speaker 2

We also closed on a successful capital raise, Consuming long term equity growth capital that provides the foundation for another $1,000,000,000 of accretive balance sheet investments Roughly $2,000,000,000 of total investments if we include securitized investments. And we upsized our bank revolver, Providing enhanced financial flexibility. For the Q2, we announced distributable EPS of $0.53 And GAAP EPS of $0.14 We have declared a quarterly dividend of $0.395 per share and are affirming our earnings and dividend guidance. On our Investor Day in March, we disclosed we were performing a thorough analysis of our tax and corporate structure. As a result of this process, we have determined that the growth opportunity in renewables, fuels and other non re qualifying investments Can best be obtained outside of a REIT structure.

Speaker 2

Therefore, we have preliminarily concluded our optimal structure going forward is to discontinue electing REIT status beginning in 2024. This change in tax election will not impact our dividend policy nor our strategy. And I will make a few additional comments on this matter towards the end of our prepared remarks. Moving to Slide 4, we are very excited about our investment pipeline of The pipeline has grown recently due to both growth in our business development efforts and our investment team As well as increased project volumes from our clients. Notably, the yield on the pipeline transactions targeted for the balance sheet are consistent with the higher yields on newly closed transactions in the first half that I discussed earlier.

Speaker 2

The pipeline also remains extremely diverse With no asset class comprising an outsized portion of the total. Our FTN business has grown from 12% of the pipeline in Q1 to 15% in Q2, As we continue to see strong opportunities in fuels and transport. Our behind the meter business has a large pipeline of attractive opportunities As community solar, energy efficiency and resi solar all remain active asset classes. And our grid connected business is experiencing robust growth As the IRA has triggered an increasing volume of development and recently we have also added several standalone storage transactions to our pipeline. In summary, this diverse pipeline provides substantial optimism regarding our ability to continue to grow our business And continued confidence in our business model.

Speaker 2

Turning to Page 5, we provide additional detail on our record $815,000,000 of closed As always, diversity remains the strength of the business. As displayed on the left, the transactions are from all 3 of our target markets On the right, we note 5 transactions that have been previously disclosed As a reminder of the types of projects and clients that comprise our portfolio, highlighting one transaction, our credit facility with GridPoint, Which has been established to finance a portfolio of commercial energy efficiency retrofits and has a carbon count of 5.2, Representing a very significant emissions impact. A reminder that energy efficiency is often the most impactful and economic way to address carbon emissions. A good example of a profitable investment with significant impact as we continue to execute effectively converting our pipeline into closed transactions. Now I'd like to turn it over to Mark Fangburn to detail our financial results.

Speaker 3

Thank you, Jeff. I'll begin by summarizing our financial performance on Slide 6. In the Q2, we recorded distributable earnings per share of $0.53 and GAAP earnings per share of $0.14 Over the last year, we grew our portfolio by 26 percent to $4,900,000,000 and managed assets 15% to 10,700,000,000 Our portfolio is driving a 12% increase in distributable net investment income compared to the same period last year. We also recorded $39,000,000 of gain on sale, fees and securitization income for the first half of this year and anticipate full year to be in line with prior year. Our execution has remained consistent in any number of different macroeconomic environments.

Speaker 3

To provide some context for this consistent execution, between 2019 2021, We approximately doubled our gain on sale fees and have maintained these levels. We have also more than doubled our portfolios in 2019 And continue to see a shift where a larger portion of our earnings are anticipated to be derived from NII. This shift is particularly important As we see a higher level of visibility into profitable growth. Let's turn to Slide 7. Our portfolio yield increased From $7,500,000,000 to $7,700,000,000 in the second quarter.

Speaker 3

We funded $290,000,000 of investments during the quarter and recent closings Higher yields are beginning to show their impact. As we continue to convert our pipeline and fund newer transactions at higher yields, We expect portfolio yield to continue its upward trend. On Slide 8, I'm pleased to update that our disciplined focus on margins is working. While our investment yields are increasing, our cost of debt has remained constant. Year to date, we've managed our debt costs primarily through our hedging program and more efficiently managing our revolver and cash position.

Speaker 3

During the second half of twenty twenty three, we anticipate our focus to be on further debt rates. Although we expect some increase in the cost of debt over time due to the higher interest rate environment, We see this as being offset by increasing investment yields. To provide some context behind this comment, we received investor questions On our 25 and 26 bond refinancings, we've entered into hedges relating to these refinancings to lock in base rates around 3%. Using our current trading levels for credit spread and the hedged base rates, we estimate that a refinancing would increase the total cost of debt From 4.8% to approximately 5.6%. We have more than 2 years before refinancing is required.

Speaker 3

However, Even at 5.6%, our margins on the existing portfolio are attractive and drive continued long term profitability. To reiterate my lead in on profitable growth, we are seeing a higher level of visibility into continued strong margins With both investment yields increasing and debt markets recovery. Before I move on to discuss liquidity and capital, I'd like to address 2 industry trends, not on the slides, which have recently come into focus. The first relates to We remain highly active with our residential solar clients on new investment opportunities and continue to be bullish on the long term industry fundamentals. Driven by the continued diversification of our business, Residential solar represents less than 10% of our pipeline.

Speaker 3

The second trend relates to multiple grid connected clients Reporting low quarterly wind performance. We are seeing similar data in our wind investments. However, the impact on our business is muted as we generally underwrite to a lower lifetime production forecast And our preferred equity investment structures mitigate downside risk. Our current period cash collections are lower. However, With our preferred equity structures, the cash we do not collect this period will accrue at our preferred rate and be collected in the future.

Speaker 3

Getting back to the slides on Slide 9, I'll cover liquidity and capital. Starting on the top left, our liquidity remains strong With a total of over $790,000,000 of cash and undrawn revolver capacity, we're pleased to highlight the successful upsize of our unsecured revolver by $240,000,000 to a total of $840,000,000 and an increase of our bank group to 15 banks. I cannot emphasize more what a sign of support and confidence this shows from our banking relationships, especially in the backdrop of a tight lending environment In the aftermath of SVB. The fact that our credit spread remains below 2 is evidence of the high quality assets we originate And the confidence that our lenders have in this company. Additionally, Fitch has recently placed our BB plus rating on a positive outlook, Which is an encouraging development as we continue to target a second investment grade rating.

Speaker 3

I'll take a moment to speak about the recent 345,000,000 Follow on equity offering and near term capital plan. The proceeds from the raise are foundational for the next $2,000,000,000 of accretive investments as Jeff identified earlier. Notably, this positions us well to meet our 2024 guidance. It also reduces our leverage, Enabling us to shift focus to debt capital. We will utilize our diversified funding platform for additional issuances of convertible bonds, Secured debt and corporate unsecured bonds.

Speaker 3

We have been active in all three markets. We are tracking performance. And again, With the equity raise behind us, we're moving on to debt. We're also continuing to execute on our securitization activities and pursue syndications, both of which are capital light. To conclude, we are executing on our key 2023 focus, profitable growth.

Speaker 3

We will continue to engage with our investor community to articulate the value of the business, an opportunity we are excited to capture with our unique platform. With that, I'll turn the call back to Jeff.

Speaker 2

Thanks, Mark. Turning to Slide 10, I'll give an update on our environmental, social and governance efforts, Which are embedded into our differentiated business model. We made good progress in quantifying our Scope 3 Category 15 portfolio emissions for 2022, Which certain investors have asked about, with the goal of setting a Scope 3 science based target later this year. I'm also pleased to report that the Hasty Foundation continues to make an impact at the intersection of climate change and social justice. And related to governance, a majority of our independent directors are now women or from underrepresented communities.

Speaker 2

Turning to Page 11, a few more thoughts on our corporate structure transition. Reiterating that as a C Corp, we will be better positioned to capitalize on new opportunities, particularly in our FTN business segment. And I will again clarify that our change in corporate structure

Speaker 3

will have

Speaker 2

no impact on our investment strategy or dividend policy. Quite simply, the company will continue to operate in an identical fashion in virtually all aspects of our business. We also expect the shareholder rotation will be minimal As our shares are held by very few REIT funds. As it relates to tax efficiency, we will utilize existing NOLs As well as newly generated NOLs, depreciation and tax credits, all from our traditional equity investments in order to minimize our tax obligations going forward. We expect to pay de minimis cash taxes for at least the next 5 years and expect to deploy an effective tax planning strategy in the subsequent years To maintain efficiency.

Speaker 2

In summary, the business will have a higher growth trajectory, an unchanged dividend profile and continued tax efficiency. Please note we have included an FAQ regarding the tax election on Page 14 in the appendix. Let's wrap up on Slide 12. Over the last several months, we've been responsive to investor and analyst advice to simplify our story. On Investor Day in March, we clarified we have a simple business We pair this simplified model with demonstrated success as we continue to execute quarter after quarter, achieving our profitability goals And establishing a path for continued success despite higher interest rates and other real or perceived headwinds.

Speaker 2

Our unique business Offers investors access to the energy transition with both growth and income. We are very proud of our success in the first half of twenty twenty three And have positioned the business for additional prosperity. These achievements are the result of a dedicated and talented team at Hasty that I have the privilege of working with every day. I thank all of my teammates as well as our shareholders for their support of our business. That concludes our prepared remarks.

Speaker 2

Operator, please open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. Your first question comes from Noah Kaye with Oppenheimer. Please go ahead.

Speaker 4

Good afternoon. Thanks for taking the questions. Let's start with the REIT announcement. Clearly, you put a lot of effort and thought into this and Announcing test today, but just indicating this is preliminary or I guess subject to Board approval, maybe just walk us through

Speaker 2

Thanks, Noah. I appreciate you calling in. There are a few compliance and governance items involved. And when companies are de reading, it's best to seek the Board approval and the finalization in the 4th quarter For those governance and compliance reasons, and so that will be our plan. We will we're targeting a 4th quarter Board approval.

Speaker 2

And so for now, we're calling this a preliminary decision, but I think investors should certainly expect us to start to move in this direction for 2024.

Speaker 4

And as a formal approval, one would presume you consulted already with the Board on this?

Speaker 2

Yes. We have informed the Board. We just haven't asked for their approval. That is correct.

Speaker 4

Okay. The second part of this, have you had any discussions With the agencies that provide classification systems about moving out of the REIT category Or do you plan to? And I guess what industry peer group would you ultimately expect to be placed in if you're not classified as a REIT?

Speaker 2

So we have looked at that issue. I believe the way to think about it is the SIC code you select when you file your financial statements. And the GIC code is primarily determined by MSCI and S and P. And so You don't have control over your GIC code. Those organizations generally select it for you, But we are going to advocate for a certain code to the extent you can do so.

Speaker 4

Okay. And the SIC code that you would elect would be?

Speaker 2

That's to be determined.

Speaker 4

Something we'll find out. Okay. All right, understood. I had to ask. I guess just the last question for me.

Speaker 4

Appreciate, Mark, the comments around The timing of cash collections on those wind investments and it seems like in general credit loss provisions tend to Continue to be de minimis. But the overarching question we have is, In your cash sources and uses, you've shown healthy coverage of the dividends, Fiscal 2022 and then trailing 12 months, any concern that as we move throughout the year, we may be Getting tighter on that, do you expect to have continued healthy coverage in terms of cash collections?

Speaker 3

Thanks, Noah. Yes, there's no concern. We have obviously identified a quarter dynamic that I think Everyone has seen show up throughout the industry. But at this time, I would not point to any long term trends.

Speaker 2

Okay. I'll turn it over.

Speaker 1

Thank you.

Operator

Next question, Chris Souther with B. Riley Securities. Please go ahead.

Speaker 5

Hey, thanks for taking my questions guys. Maybe just to follow-up on the wins impact there. Could you kind of break that out With the magnitude there was specifically on the wind side, and then if you had any sense of the timing of that catch up

Speaker 3

The best place To look, which I'll point you to, I think will show up actually in the queue, which will detail the cash collected from our EMI investments, Which as I think you know, are primarily the grid connected and grid connected wind investments. So that I think can help start to quantify it for you. In terms of the catch up, I think that that will largely depend on what next quarter's performance is, but assuming that Wind bounces back and starts to perform per expectations. We would not anticipate that this is a long wait period for us.

Speaker 5

Got it. Okay. I guess, it's tough for you to predict the wind. So maybe just on the pipeline mix dynamics, There's an uptick in behind the meter. I'm curious if that reflects additional partners, customers, Any specific subsectors that are getting more exciting that you could call out would be great.

Speaker 2

Mark, some new clients in there, Chris. The behind the meter side is mostly community solar, energy efficiency and resi solar. And there's a lot in the pipeline from long standing clients in those asset classes, but there are several transactions Also from some new clients as well as we expand our business.

Speaker 5

Got it. Okay. That's helpful. I'll hop in the queue. Thanks guys.

Operator

Next question, Ben Kallo with Baird. Please go ahead.

Speaker 6

Hi. Good evening. Thanks for taking my question. Just on the restructure, does it change anything, Jeff, on the way you think about Either the distribution rate for your dividend or the capital structure, I know you guys I got 2.5 leverage ratio.

Speaker 2

No, Ben, it really doesn't. I think the leverage profile of less than 2.5, it will be unchanged as a result of the tax election. And I think the trajectory of dividends will be unchanged as well. On Investor Day, Mark, for instance, Alluded to by 2,030, the payout ratio being in that 50% to 60% range. I think that's a reasonable way to think about the business with more retained capital over time That the dividend will continue to grow, but will grow at a slower pace than earnings.

Speaker 2

And so the roughly 70% Payout ratio we had this year will gradually decline accordingly. So I think that's the way to think about the business.

Speaker 6

Thank you. As we see your portfolio yield tick up, Often, we think that you might be taking on more risk. Can you just talk to that a little bit? If anything has changed, I know you gave the examples there, but maybe just how you guys continue to look at different investment opportunities. Thank you.

Speaker 2

Yes. Good question, Ben. And the answer is no. We're not taking on a different risk profile in order to obtain the higher yield. The higher yield It's a function of higher base rates.

Speaker 2

So in many of the investments we've made for many years At the same risk profile, we're now achieving a higher yield naturally with the base rates higher and with more revenue to the projects, because of some of the dynamics there. And then in some of the new asset classes, particularly in FTN, we're also achieving a higher yield because they're a bit less mature than some of our traditional asset classes. But from a risk profile perspective, they're really very, very similar. On Investor Day, we talked about the six attributes that virtually all of our investments have. And as we've expanded into FTN.

Speaker 2

We've maintained those six attributes as our risk profile and the way we think about the business. So We have not taken on more risk in order to achieve this higher yield.

Speaker 6

Thank you.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

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