This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Good afternoon, and welcome to Hannon Armstrong's conference call on its first quarter 2021 financial results. Leadership will be utilizing a slide presentation for this call, which is available now for download on the company's investor relations page at investors.hannonarmstrong.com. Today's call is being recorded, and we have allocated 30 minutes for prepared remarks and Q&A. All participants are in a listen-only mode. If you need any operator assistance, please press star zero on your telephone keypad. At this time, I would like to turn the conference call over to Chad Reed, Vice President, Investor Relations, and ESG for the company. Please go ahead.
Hannon Armstrong 's
Thank you, operator. Good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing our first quarter 2021 results, a copy of which is available on our website. This conference call is being webcast live on the Investor Relations page of our website, where a replay will be available later today. Before the call begins, I would like to remind you that some of the comments made in the course of this call are forward-looking statements, and within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934 as amended. The company claims the protections of the safe harbor for forward-looking statements contained in such sections. The forward-looking statements made in this call are subject to the risks and uncertainties described in the risk factor section of the company's Form 10-K and other filings with the SEC. Actual results may differ materially from those described during the call. In addition, all forward-looking statements are made as of today and the company does not undertake any responsibility to update any forward-looking statements based on new circumstances or revised expectations. Please note that certain non-GAAP financial measures will be discussed on this conference call. A presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. 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 Heckel, the company's chairman and CEO, and Jeff Lipson, our CFO and COO. With that, I'd like to turn the call over to Jeff, who will begin on slide three. Jeff? Thank you, Chad, and good afternoon, everyone.
Hannon Armstrong
Today we are reporting gap earnings of 61 cents per share and distributable earnings of 43 cents per share. 38% portfolio growth year-over-year to $2.9 billion and 19% growth in our managed assets to $7.4 billion. The establishment of a $400 million unsecured revolving credit facility, a 10 basis point increase in our portfolio yield to 7.7% from the Q4 levels, and the declaration of a dividend of 35 cents per share. We continue our leadership on ESG reporting with our carbon count disclosures and our 2020 impact report. Turning to slide four, we remain confident in our ability to achieve the three-year guidance target we established last quarter due to expected portfolio growth, stable or improving margins, and improvements in our operating leverage. These three factors will be the drivers for growth in distributable earnings per share of 7 to 10 percent through 2023 and the dividend growth at a rate of 3 to 5 percent annually also through 2023. With distributable earnings growing faster than our dividend, we can continue to retain capital for accretive investments and believe the combination of earnings growth and dividend yield remain attractive on a total return basis. On slide five, we provide an update on our 12-month pipeline, which we are again reporting as greater than $3 billion. Our pipeline is driven by both new and existing programmatic relationships with the leading clean energy and infrastructure companies, and we see strong growth in virtually every one of the approximately 10 end markets where we invest. Energy efficiency opportunities continue to dominate the behind-the-meter or BTM pipeline as government and corporate obligors save money with energy efficiency improve their reliability, all the while reducing greenhouse gas emissions. The solar pipeline is up as well, inclusive of the residential CNI and community solar markets. The grid-connected pipeline continues to expand in each of the markets, led first by grid-connected solar, solar land, and then offshore wind. Lastly, we continue to source attractive climate resilience opportunities as reflected in our sustainable infrastructure pipelines. and expect this opportunity to grow further as the impacts of severe weather continue to challenge state and local government stormwater management efforts. We've been asked frequently lately about project delays due to COVID, silicon chip shortages, or delays in anticipation of government stimulus, and are pleased to report that we see no noticeable project or transaction delays and expect a very active 2021. Turning to slide six, we detail our $2.9 billion balance sheet portfolio as of the end of the first quarter. As I said at the beginning, the portfolio yield ticked up slightly from last quarter, but otherwise is fairly steady at 7.7% on over 220 investments with an average size of $13 million and a weighted average life of 18 years. With no asset class comprising more than 28% of the portfolio, the diversity of our portfolio remains a strength. a little more detail on the portfolio. The behind-the-meter assets represents roughly half of our portfolio and generates a yield of 8.4 percent. The strong credit profile of these assets is driven by the fact that virtually all of these assets save money for the obligor. The grid-connected portfolio represents, grid-connected investments represent the other half of the portfolio with an expected forward-looking yield of 7.1 percent. This market continues to be driven primarily by onshore wind in solar land with utility-scale solar, a small but growing piece of the pie, as reflected in the pipeline discussion on the prior slide. We remain pleased with the diversity of our portfolio and believe this is a key driver of its consistently strong performance. Now I'll turn it over to Jeff L. to detail our portfolio performance and financial results.
Jeff L.
Thanks, Jeff. Turning to slide seven, we note our high-quality assets continue to perform within our expectations in the first quarter. This performance is driven in part by the structural seniority of our investments and the credit quality of our obligors. In nearly all of our investments, we are in a preferred senior or super senior position. In addition, our obligors are typically investment-grade government or corporate entities or credit-worthy consumers. The structure of our investments, most notably our structural seniority, has a very meaningful impact in reducing our exposure to both operating and commodity price risk. As we discussed last quarter, this structural seniority was a significant factor in limiting the impact of the Texas weather events on our results. Moving to slide eight, we detail our balance sheet as of the end of the quarter. In the first quarter, we funded $168 million of investments, many of which are ongoing fundings of previously closed transactions. We also executed several securitization transactions, including a low yielding, highly leveraged government transaction, consistent with our past practice of taking transactions with this profile off balance sheet. The net result was a portfolio balance of $2.9 billion, similar to year end 2020. Our funding expectation of previously announced transactions is shown on the lower left. We expect these incremental fundings, along with the strong pipeline that Jeff referenced earlier, will generate further growth in net investment income. As of the end of the quarter, we have over $200 million of cash on our balance sheet, and subsequent to the quarter, we added substantial incremental liquidity with our revolver, which I will discuss in a moment. Summarizing our results on slide nine, we recorded distributable earnings per share of 43 cents in the first quarter, roughly flat with the same period last year. Higher revenue from gain on sale was offset by higher interest expense due to the volume of debt that we've issued since the first quarter of 2020 and higher compensation. I will also note that distributable net investment income increased to $30 million as higher income from equity method investments was partially offset by the aforementioned higher interest expense. To conclude, we enjoyed another strong quarter as our dual revenue model continued to perform. On slide 10, we highlight our establishment of a $400 million sustainably linked unsecured revolving credit facility with 10 relationship banks. Given significant interest among other lenders, we replaced a similar $50 million facility we had established in the first quarter with JPMorgan as a sole lender. The support we received from the top tier banks should be viewed as an affirmation of our strategy and strong confirmation of the credit profile of our portfolio. Having a revolver in place will facilitate a more efficient balance sheet, as we will no longer be required to raise all the capital prior to the funding of an investment, and we'll have the flexibility to reduce the earnings drag of outsized cash balances. The facility provides for interest rate reductions if we achieve certain levels of our carbon count metric on a quarterly basis. Therefore, in addition to further enhancing our liquidity and funding flexibility, the facility also provides market validation of our carbon count scoring tool. With the facility in place, we also highlight in the graphic on the right the four prongs of our funding platform. This diverse liquidity profile provides substantial flexibility in financing our business. We've been successful in reducing our cost of capital over the last few years and have worked closely with our institutional debt investors and bank partners to build and maintain a scalable liquidity platform. In terms of equity, we utilized our ATM platform to raise $103 million in the first quarter. Additionally, I'll note that leverage is 1.6 times a quarter end. We prudently manage interest rate risk, and we maintain a laddered maturity profile. Let's now turn to slide 11 for a discussion of an issue on the minds of some investors. Since the beginning of the year, the 10-year Treasury rate has ticked up over 65 basis points in anticipation of a strong economic recovery. This rate movement has led to several questions about the impact on our profitability of movements in interest rates. The first thing I'd mention is that, as depicted in the chart, we have successfully achieved strong earnings growth in a variety of rate environments since IPO. The 10-year Treasury has been above 3% and below 1% in that time, and our earnings have maintained their consistent upward trajectory. Likewise, curve steepness, as depicted by the green line, has fluctuated significantly, but with no meaningful impact on our results. Secondly, I'll reiterate that changes in Treasury rates have no impact on our existing assets and liabilities. We have a portfolio of 2.9 billion almost exclusively fixed-rate investments and over 2 billion of fixed-rate debt. None of the rates or cash flows of these assets or liabilities are altered by subsequent changes in Treasury rates. And third, as we close on new investments and new debt issuance, rates are known to us at the time of closing, and we can continue to lock in our margins. At times, these margins may expand or contract a bit, but our investment profile and the history of our investment and debt markets suggest that margins typically remain within an acceptable range. Also, given the diversity of the asset classes in our portfolio, we can pivot to better risk-adjusted returns if a certain asset class is experiencing margin compression. The last bar on page 11 depicts our 2021 distributable earnings per share, assuming we achieve the midpoint of our run rate guidance. We expect to reach We expect to achieve this result regardless of what happens to the yield curve. And with that, I'll turn the call back over to Jeff.
Hannon Armstrong
Thanks. Turning to slide 13, we highlight publication of our 2020 impact report, which we're proud of, and I really urge you to read it. It's a terrific piece of work. The report features enhanced disclosures and advocates for a common ESG reporting framework that includes standardized reporting on avoided emissions, particularly for financial institutions. We would certainly love for them to embrace the carbon count metric. In addition, yesterday we announced the Hannah Armstrong Foundation's first grant to establish the Climate Solutions Scholarship Program. The program provides financial assistance for high-achieving, sustainability-focused undergraduate students from underrepresented communities. At launch, the participating schools include Morgan State University, Maryland's largest historically black college and university, and Miami University in Oxford, Ohio. The needs-based scholarships will cover the cost for up to five students interested in pursuing careers related to climate change and sustainability. We believe this grant serves as an important step forward in our journey to drive meaningful and sustainable impact, as well as a potential pipeline of new professionals in the industry. We'll conclude on slide 14. Our four key strengths are the strong programmatic investment platform with the firms who are driving the energy transition to a low-carbon future. We are grateful for the opportunity to support these companies in this effort. Second, our well-diversified funding platform allows us to satisfy our clients' capital requirements, whether the assets are a good fit for our balance sheet or not. This flexibility allows us to solve our customers' financing problem with a full range of behind-the-meter and grid-connected assets these programmatic clients generate. Third, it is terrific to have a policy tailwind for the first time in four years. We expect recent and anticipated executive orders and proposed federal legislation to contribute to continued growth in our existing markets and asset classes. As we showed over the last four years, we don't need the tailwind, but if the country is going to meaningfully address climate change, public policy will be a key piece of the solution. As Jeff Bell showed, we have a proven track record in a variety of interest rate environments over our eight years as a public company, with consistent growth and distributable earnings independent of the level of interest rate or the shape of the yield curve. This track record should give investors comfort in how we will manage the business into the future. To sum up, the opportunity for growth has never looked more promising, and we are confident in our ability to execute in the months and years ahead. Operator, please open the line for questions.
Operator
We will now begin the question and answer session. To ask a question, press star then 1 on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from Noah Kay with Oppenheimer. Please go ahead.
Noah Kay
Good afternoon. Thanks for taking the questions. A lot of positive commentary and actual reported results from some of the leading performance contracting companies. Seems like, you know, just having moved past some of the logistics difficulties during the pandemic of doing contracting, we're starting to see improved contracting flow. Just wanted to get your color on whether you're seeing that as well and how you look at the flow in the energy efficiency business over the balance of the year. I know you addressed that, you know, it's a large part of the 12-month pipeline, but just curious for any incremental color you can provide.
Hannon Armstrong
Yeah, I think, I know, I think the, you know, the comment that, you know, our behind-the-meter pipeline is dominated by energy efficiency speaks to that robustness that you're commenting on about the ESCO markets. it's a good business, and they're doing a good job, and I think things are starting to move at the federal level, but also state and local level as some, you know, maybe they experienced some delays in COVID last year, but things are starting to happen again.
Noah Kay
And, you know, you've always said that the timing of originations is lumpy, but you know, and I think this dovetails off of my previous question, you know, confidence in kind of increasing pace of originations over the balance of the year?
Hannon Armstrong
I think we're quite confident, Noah. What we did in Q1 was about what we did in Q1 last year. And if you look at last year, it ended rather well with high volumes. I don't think anybody should be surprised if the same thing happens this year.
Noah Kay
And just one last question. You may have seen that, and it was actually on Earth Day, a lot of announcements on Earth Day, but the European Commission announced that as part of the new climate law package in June, they're going to add buildings to the emissions trading system for carbon. In other words, building decarbonization is going to be properly incentivized. You know, there's always been a U.S.-focused business. Just curious for perspective on that, whether there's potential for, you know, similar legislation in the U.S. to benefit, whether or not, you know, your ambition might start to stretch overseas as you look at the potential for building carbon pricing to actually impact the bottom line.
Hannon Armstrong
Great question, Noah. As you know, we've been big fans of carbon pricing in whatever form it might take and applaud the EU for adding buildings, which is, I think, the build environment is 40% of greenhouse gas emissions or something like that. So if we're actually going to get at it, you should be incentivizing it. I'm not familiar with any comparable legislation in the U.S., but it certainly is a good idea. And would provide yet another revenue stream and benefit to the energy services industry. Thanks very much for taking the questions.
Operator
The next question comes from Ben Callow with Baird. Please go ahead.
Ben Callow
Hey, guys. Jeff Lipson, can you just talk a little bit more about interest rates because all of our sector stocks have gotten crushed partly because of interest rates, I think. And maybe just remind us how they impact you and how we think about the yield curve. I know you have this slide here. I know you guys talked about it, but any color you can give there.
Jeff L.
Sure, Ben. You know, I think the primary item to, you know, consider is, as I said, we have fixed-rate assets that are funded by long-term fixed-rate liabilities, and we have been extending our liability duration, you know, particularly with the 10-year debt offering we did in 2020. And so, we have locked in margins on a large segment of the portfolio. And then, as we go forward and add new investments, our funding costs are available to us at the time of close. So, we can look at those and invest accordingly to maintain our margin. So, it's not as if rates moving up, down, steeper, flatter, have this sudden impact on the portfolio. The existing portfolio margins are pretty much locked in. and the new investments, we can lock them in at the, lock in our margins at the time we close. And then, you know, I'd add to that, we have our, you know, off-balance-sheet distribution network as well, and we can lean on that a little heavier, if need be, to take more things off-balance-sheet if we really had some kind of disconnect between funding costs and our investment markets, but we don't, we don't, we certainly don't expect that.
Hannon Armstrong
Male Speaker And, Ben, I would, I would add to that that the, what we fundamentally look at is the economic rate of return in these assets. And I'm perplexed why a 50 or 100 basis point move in interest rates threatens the viability of those assets. These assets are not so fragile that 50, 100, or 200 basis points is going to kill them. So I think the... Well, that was going to be my question.
Ben Callow
Sorry to interrupt, but what is that kind of threshold that you think about across the different asset classes? And I have a bigger picture question for you guys, too, after that.
Hannon Armstrong
Well, I would say the entire industry, renewable energy industry and energy efficiency industry, has operated successfully in higher interest rate environments than now. And they have done it by continually taking costs out of their systems. It's not easy. It's hard work. But I have no doubt they're going to continue to do that. To me, it's perplexing that a couple hundred basis points rise in market rates, which we haven't seen, but let's say it happens. that the viability of the entire industry goes away. I don't have a precise number to your specific question. I just, you know, obviously we're not betting against this industry. We think this industry has good ability to prosper in a higher and choppier interest rate environment.
Ben Callow
No, it's good context to remember just the history of that, so thank you. you know, question that you've gotten for forever, uh, uh, maybe on competition, uh, but you know, you're not small anymore. Um, and you, you know, you raise a lot of capital and you're doing bigger deals and, and, uh, and you know, it used to be that you were a niche player and people didn't want to do small deals like this. Uh, but now where do you stand with that competition front? Because, uh, You know, every headline is, you know, people want more money into the sector here. And so, you know, how do you guys stay that same nimble as well as have the growth?
Hannon Armstrong
Good question. I mean, we have competition in every market and every asset class. But I still haven't seen anybody who's put their financial services offering together the way we have. that can nimbly go with the same team from a grid-connected transaction to a behind-the-meter transaction. And our clients are doing both. You know, you have some companies that are just doing wind and solar, and I'm sure we'll have more competition over time. We need a lot more capital in this industry to make a meaningful difference on climate change. That said, I'm hard-pressed to see where somebody is coming in with a better offering than we have right now. Our cost of capital has come down. Our price of capital has come down. I think we're extremely competitive. And then at the end of the day, service does matter. Knowledge of the industry matters. And our portfolio management business continues to be a very sticky aspect of client management.
Ben Callow
Let me ask this way. Who would buy you? if they were going to buy you? Ben, I'm not going to answer that. All right. I had to try. All right. Thanks, guys. Thanks, Ben.
Operator
The next question comes from Philip Shen with Roth Capital Partners. Please go ahead.
Philip Shen
Hey, guys. Thanks for taking my questions. In your prepared remarks, you Hey, guys. Thanks. You talked about how the shortages that people are seeing out there, whether they be chip shortages or what have you, are not impacting your business yet. I was wondering if you might be able to elaborate on that more. As you mentioned, you're getting a lot of inbounds on this, so there is the interest to hear and get more color on this. Specifically, when I've been in touch with EPCs recently, they're saying capacity through the whole kind of system is very tight, whether it be EPC capacity or even truckers in the U.S. that drive blades and get materials from one point to another. So are you getting any sense that some of your investments and the timing that you might have expected earlier might be getting pushed out a little bit into 2022? Any color on this would be very helpful. Thanks.
Hannon Armstrong
Phil, I recently checked with a number of our clients on this very question. And I think one of the themes is prices are going up a little bit. And, you know, it's some of the risk of development that they've got and we don't wear. But they're basically getting the material they need. I won't say, you know, it's absolute and everybody's got everything just in time, but... generally that's not the thing that our clients seem to be worrying about. And maybe what they're worrying about are next year's projects, looking at the supply chain for next year's transactions. That may be, but we're not seeing it in the business we think we're going to do in 2021. Okay, thanks.
Philip Shen
And that was my follow-up on that topic. You know, what are they worrying about? Anything else you have in mind on that topic?
Hannon Armstrong
No, you know, I think those are normal things for developers of these assets to worry about. What's the price and is there a margin in it? And, you know, they're generally doing a good job with it, but definitely prices are going up in a variety of, whether it's labor or steel or copper or chips, obviously.
Philip Shen
Yep, aluminum, et cetera. Okay, great. Last quarter you guys talked about it was too early to get a full understanding of the impact of the Texas events on your portfolio. So I was wondering if you could give us an update on the situation, you know, what's the risk? You may have a write-down at some point or pay any kind of settlement for power that wasn't supplied from your facilities. You know, you highlight that 99% of your assets are performing. but wanted to see if you could share some more there. Thanks.
Jeff L.
So there's not too much update from what we said last quarter, Phil, in terms of the overall impact on the portfolio is going to be minor. There's no sort of, you know, contingent items still hanging out there. There's, you know, various force majeure, you know, resolutions going on and payments in cash for power when the power couldn't be provided. But as we said last quarter, the punchline of all that for us is some very minor reductions in the expected lifetime IRR of some of our investments, very, very minor. So that's the, you know, that's the impact for us. It really hasn't changed from last quarter.
Philip Shen
Okay, so as we look across Texas and ERCOT, how many megawatts of projects are actually behind on payments to you guys? How much is actually late? And if there were late payments, are they already caught up or is there any continuation of that potential threat?
Jeff L.
There's no late payments to us. Again, we're supplying power and You know, as we talked about last quarter and some of the developers have talked about, we did have to make certain payments for the days we could not provide power, but nobody's late in a payment to us.
Philip Shen
Great. Okay. That's really helpful. And then one last housekeeping question on compensation and benefits. I think it looks like it increased $5 million quarter over quarter. What drove this? Is this a one-time thing? Should we be modeling this level going forward?
Jeff L.
It was driven by higher headcount. It was driven by a higher percentage of our compensation being paid in cash, which runs through distributable, whereas equity does not. And then there's also a bit of one-time in there as well, which will not recur in the subsequent quarters.
Philip Shen
So we should have an increase in that line item, but maybe not as much as $5 million. Is that a fair way of putting it? That's exactly right. Okay, great. Thank you both. Thanks, Bill.
Operator
The next question comes from Steven Bird with Morgan Stanley. Please go ahead.
Steven Bird
Hey, thanks for taking my questions. Hi, Steven.
Jeff L.
Thanks, Steve.
Steven Bird
Hi. Congrats on the scholarship announcement as well. That's fantastic. So a lot's been addressed. I wanted to maybe just focus on energy efficiency a little bit further. Obviously, you're bullish on the outlook. I was just curious, you know, given the Biden administration's focus on a variety of things, but certainly energy efficiencies on the list, is that bullishness reflective of sort of what you expect there? Or is it possible we could see a further step change upward in terms of sort of government demand beyond what you're seeing already in your sort of bullish overview of where you see energy efficiency going?
Hannon Armstrong
Good question, Stephen. I think, you know, we reflect on our pipeline that we're reporting as of 3-31. We didn't factor in a lot of new stuff. The way we build our pipeline, there's got to be a lot of granularity. So it's very doubtful that you know, with an inauguration in January, we would have seen deals happen and go to our pipeline. So I think what we're talking about is just sort of normal course business. We're certainly very encouraged by the type of appointments the administration has made in the appropriate agencies and the experience these people have. They actually know how to turn the dials and push the levers of energy efficiency. So you haven't seen anything go up, but I would also caution against, you know, people always talk about energy efficiency as that low-hanging fruit, and that just means they've never picked grapes on a vine because low-hanging fruit is not there. It takes a long time to engineer these solutions. I think the one thing I would point to in our comments was the industrial sector which has always been a real challenge for the energy services business to be effective in. But we're starting to see signs that the service providers are offering a really interesting value-add service to industrial customers and corporate customers that hit a lot of their sustainability goals, inclusive of on-premise energy efficiency.
Steven Bird
Well, that's helpful. Yeah, it does seem like, I mean, as you say, it's not easy to get these projects done, but the trend does seem to be pretty clear, pretty favorable. That's helpful. I seem to ask you about legislation every quarter. I wanted to kind of focus in a different way. I think we're constructive around the prospects for support for clean energy. One thing I haven't really focused on very much would be just tax rate impacts for you all, if we did see a higher corporate tax rate. I wondered if you could just remind us sort of how to think about the impacts to Hannon Armstrong if we did see a higher corporate tax rate.
Jeff L.
Well, I guess there's two answers to that. The impact on Hannon Armstrong as an entity and the impact on our outlook for additional projects and investments. So for us, of course, we're a REIT, so we're not a taxpayer. It doesn't affect us. We do have taxable REIT subsidiaries, but we have enough in the way of tax planning strategies. We don't expect our taxable REIT subsidiaries to be taxpayers for the foreseeable future. So virtually no impact on us. On our investment outlook, it would potentially create more tax equity capacity, which would be certainly positive for the volume of transactions that could get done.
Steven Bird
Yep, so that could help. And that's been a limit to some extent, right, is tax equity capacity. Right, yes. Okay, that's all I have. Thank you. Thank you. Thank you.
Operator
The next question comes from Julian Zumolin-Smith with Bank of America. Please go ahead.
Julian Zumolin - Smith
Hey, good afternoon.
Jeff L.
Hi, Julian.
Julian Zumolin - Smith
Hey. So if I can just go back to Ernie real quickly, just to understand that. So it sounds like it was fairly immaterial in the quarter itself here. And really, as best I understand your response earlier, obviously you guys have more of a credit exposure here than necessarily an equity exposure. But how do you think about that as an ongoing exposure? It sounds like whether it is counterparty issues and projects or otherwise, that seems relatively immaterial as well to the extent to which not everything is necessarily resolved thus far. Is it fair? I'm trying to rehash a little bit what you said a moment ago here, but I want to make sure I heard that right.
Hannon Armstrong
You're talking about Texas?
Jeff L.
Yes. Julian, you are breaking up a little bit, but I think we got most of that. So on Texas, again, to reiterate, the ongoing exposure is very limited. Most of these situations have now been settled up. And for us, with very limited impact on our portfolio, there's still, as I mentioned, a few loose ends being tied up on various of the hedges and arrangements, but it's mostly behind us at this point.
Julian Zumolin - Smith
Excellent. Thanks for that clarification. I just wanted to make sure I heard that right. And the real question I had for you guys is, how do you think about the scaling and the cadence of the balance sheet through the course of this year? Specifically, Obviously, quarter on quarter here, not too much of a change in the balance sheet. How do you think about what this balance sheet looks like in size and composition by the end of this year, if you can speak to that a little bit more? Obviously, I'm seeing community solar see a little bit of a step up here. What is that pie going to look like, if you will?
Hannon Armstrong
Well, Julian, based on the remarks, you would expect to see more grid-connected solar in which is a small slice of the pie. But that's, as I said, one of the largest elements in our grid-connected pipeline. Solar land is next and wind. So I would expect to see more grid-connected solar and perhaps less wind added to the portfolio. Behind the meter assets, A lot of those are securitized, probably not added to the portfolio. Some will, of course, in the government sector and in the federal, state, and local government, as well as the solar. In terms of the level, I did say on the last call, judged by our growth in the portfolio over the full year, not the quarter, And I would reiterate that. I think we will have a significantly larger portfolio, and that will be one of the key drivers of our earnings to hit our guidance.
Julian Zumolin - Smith
Yeah, hence the question, just quarter over quarter here. Any sense on securitization percentages, since that's one of those transposition, that's how you transpose your growth into the portfolio?
Hannon Armstrong
Yeah, it remains as unpredictable to you as it is to us. It is when the transactions happen.
Julian Zumolin - Smith
Okay, fair enough. I got you. Thank you guys very much. Best of luck, and congrats again.
Jeff L.
Thanks, John.
Operator
The next question comes from Greg Lewis with BTIG. Please go ahead.
Greg Lewis
Yeah, thank you, and good afternoon. I wanted to touch a little bit on, you know, how the trend is of the ability to recycle cash. And so as we think about, you know, the ability for you guys to kind of monetize some of the, you know, some of your portfolio, is that at all interest rate sensitive from your customer side?
Jeff L.
At all is sort of a tough threshold. I would say it's, not particularly sensitive to interest rates. Most of the folks who are the buyers of our off-balance sheet transactions, I wouldn't say they're completely immune from interest rates, but less sensitive than, for instance, capital markets.
Greg Lewis
And so as we think about where we are today, would you say the appetite is as strong as it was, I don't know, pre-COVID? in terms of those opportunities to lay off existing assets to buyers?
Jeff L.
It's extremely strong, as strong as pre-COVID, if not stronger.
Hannon Armstrong
Yeah, it's been proven. So, sure.
Jeff L.
And we could even take more off balance sheet than we'd like to maintain, as we spoke about a moment ago, a nice size and growing balance sheet. But We could even, if we so chose to do so, take even more off balance sheet. The appetite is quite large.
Greg Lewis
Okay, great. Thanks.
Jeff L.
That's all for me. Thank you.
Operator
As a reminder, if you have a question, press star then one to be joined into the queue. The next question comes from Chris Suther with B. Reilly. Please go ahead.
Chris Suther
Hey, guys, thanks for taking my question here. Just one quick one. As the grid-connected piece of the pipeline continued to go up, maybe you could just talk a little bit about the timeframe for the projects you're looking at originating there would be for funding. So, you know, some of the deals that you closed last year, it was funding through kind of 2022. You know, should we expect, you know, if you're able to close some grid-connected deals this year, would it be a similar, you know, over the next year, two years type, uh, you know, timeframe we'd be looking at before those would be kind of added to the balance sheet. Just want to get a sense of how the, how those opportunities are looking at this point.
Hannon Armstrong
It's a good question, Chris. Um, and we may not have, uh, all the information yet, but clearly there's a forward flow element to a lot of the grid connected transactions. We do the, there's always going to, or generally going to be a, an upfront funding of some projects that have commercially matured, and then a pipeline of future. How those lay out over the next few quarters, kind of hard for us to say at this point. What we do like is the number of programmatic platforms that we're developing started to create good diversity among the quarters. not every company is going to hit the same set of projects in any one quarter. So I think we'll start to see perhaps a bit smoother quarter-to-quarter additions to the portfolio.
Chris Suther
Got it. No, that's very helpful. And then looking at the various kind of solar pieces within, you know, your portfolio and pipeline, I just want to get a sense of, you know, where kind of storage is starting to fit in there, you know, as far as I imagine – an okay portion of the residential solar starting to include it, but maybe just kind of walk through where storage is starting to fit within the portfolio. If you could break out a number, kind of taking apart the different solar areas that you're kind of looking at between resi, utility, and community there.
Hannon Armstrong
I think they all have storage. I think community solar is much more site-specific. as to whether storage is valued. I know Massachusetts is one market for community solar that puts a price on capacity, and so there's value to add storage. Other markets are less interesting for community solar storage. Resi and CNI generally, we can echo what the sun powers of the world say, but the uptake is pretty strong.
Chris Suther
Got it. Okay. That's helpful to think about. Thanks.
Julian Zumolin - Smith
Thanks, Chris.
Operator
This concludes our question and answer session, which also concludes today's conference call. Thank you for attending today's presentation. You may now disconnect.
Disclaimer