HA Sustainable Infrastructure Capital, Inc.

This afternoon, Hinton Armstrong distributed a press release detailing our fourth quarter and full year 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 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 factors 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. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core financial results and guidance. A presentation of this information is not intended to be considered an 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 Eichel, 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.

Today we are delighted to report another outstanding year here at Hannon Armstrong, with distributable earnings up 21% to $1.88 per share, net investment income up 52% to $134 million, our portfolio up 24% to $3.6 billion, and we've also increased our reported pipeline to more than $4 billion. up a billion dollars from our last report. And this comes after closing 1.7 billion in 2021. In addition, despite macroeconomic and industry headwinds, which we'll discuss, we have the confidence in our business to increase guidance for annual growth and distributable EPS to 10% to 13% and extend that guidance one additional year to 2024. We're also guiding to 5% to 8% annual growth in our dividend through 2024. And consistent with that, declaring a dividend today of 37.5 cents, which represents a 7% increase over our dividend last quarter. On this page, we also highlight the carbon count of one transaction in order to generate more understanding of this important climate reporting metric. Our featured transaction is a 452 megawatt grid-connected solar project in Texas being developed by Clearway. and is incremental to the $660 million framework agreement with them we announced in late 2020. This particular project has an above average carbon count of 1.3 because the power generated by this project largely offsets natural gas power generation in Texas. While every investment we make improves our climate future, not every investment is equally efficient. In doing so, we believe measuring and reporting with this level of rigor is where the market needs to go. Turning to slide four, we'll give more color on the increase in extension of our distributable EPS guidance. As you may recall, we gave 7% to 10% growth guidance this time last year through 2023. Given the strength we see in the climate solutions market, as reflected in our pipeline, it is appropriate to increase guidance. The chart on this page reflects an extrapolation of the high and low ranges of our increased guidance. Actual results in any one year may be outside this span, of course, but we are confident in the overall trend through 2024. We're also updating our dividend growth guidance, as I said, to 5% to 8% annually from the prior 3%, 5% range. Turning to slide five, we'd like to address the key industry challenges that are top of mind for investors and the impacts on both the industry and HACI. First, while rising interest rates and higher costs is a reversal of a long period of declining costs enjoyed by the clean energy industry, the industry is adapting to this new reality. There is really only one way to address rising costs in a capital-intensive industry like clean energy, raise the PPA price. And our clients are doing just that, with industry reports of a 5% increase in Q4 PPA prices and anecdotal evidence of prices continuing to increase in 2020. Most indications are that corporate PPA buyers understand that They are the ones to bear that price risk and generally accept it in order to meet their corporate sustainability goals. That doesn't mean these are easy or fast negotiations for our clients, but they are happening, and the end result is the clean energy industry will make the adjustment it needs to absorb higher costs. On the flip side, those same PPA counterparties are seeing higher natural gas and electricity prices from conventional energy suppliers, making higher clean energy PPA prices more palatable. Importantly, the HACI portfolio is largely unaffected, as most capital budgets and operating costs are fixed. And since new investments are made after factoring in any higher costs, there is minimal impact on our returns of future investments. Next, the pandemic and other industry-specific challenges have resulted in a very real supply chain delay for our clients and serves as a reminder of how hard our clients work to develop these projects. Fortunately, there are signs of improvement in some markets, but of course, challenges remain. These supply chain delays have had only a minimal impact on our business. We estimate transactions in our pipeline pushed out only one to two months on average through 2021 and into 2022. The failure of Congress to pass Build Back Better was disappointing to the industry, but our industry does not rely on any single piece of legislation to prosper. As a matter of fact, a little over a year ago, the industry expected the ITC and PTC to ramp down, and it is prepared for that still. That said, we consider passage of some climate provisions, like tax credit extensions, still viable and a tailwind to our already growing markets. Lastly, California's initial net metering 3.0 proposal was not positive for residential solar, of course, but many observers believe that the final rule will be more constructive for the industry. Whatever the final rule, the value proposition for residential solar plus storage remains strong. Given the structural seniority HACI enjoys in our residential solar investments, NEM 3.0 has minimal impact on our existing portfolio or future investments we may make. Moving to slide six. We provide an update on our 12-month pipeline, which we are now reporting, as I said, greater than $4 billion, up from the prior quarter of more than $3 billion. We currently have more than 40 programmatic clients who drive our pipeline into behind-the-meter, grid-connected, and sustainable infrastructure markets, and we are adding new clients each year as the climate solutions market grows. The bulk of our pipeline remains behind the meter and is weighted toward energy efficiency, while the grid-connected portion is weighted toward solar. Lastly, we note that newer investment opportunities comprise an increasing portion of our sustainable infrastructure pipeline, which itself has become a more meaningful portion of our overall pipeline. Slide 7 highlights an underappreciated strength of our business model, the diversity of our markets. When you compare the 2021 chart on the left with the 2020 chart on the right, it's clear that the success of each year was driven by different markets. In 2021, public sector behind the meter carried the day and wind in 2020. In each of these markets, there are multiple generally uncorrelated asset classes. In any given period, one of these asset classes may produce investment opportunities while others may not. That diversity in our origination platform and the breadth of our client base provides assurances that despite one asset class facing challenges, we should continue to find attractive climate solutions investments, which leads to consistent growth of the business. Now I'll turn it over to Jeff Hell to detail our portfolio performance and financial results.

Thanks, Jeff. Summarizing our 2021 results on the top of slide eight, we are reporting impressive growth in each of our key earnings metrics. In the upper left, we note distributable earnings per share growth was 21%, driven by a larger portfolio, higher equity method investment income, lower debt costs, and increased gain on sale income. In addition, as shown on the upper right, distributable net investment income was $134 million in 2021, reflecting annual growth of 52%, driven primarily by a larger portfolio and strong margins. And gain on sale from securitized assets was $80 million in 2021, representing a 21% annual increase and demonstrating our continued successful longstanding partnerships with our private debt investors. These substantial annual growth rates and distributable NII and gain on sale continue to demonstrate the success of our dual revenue model. On the bottom of slide eight, we display longer term trends. We have grown both our managed assets and balance sheet portfolio at a compound annual growth rate of greater than 15% over the last five years, while maintaining our portfolio yield and achieving a return on equity in the 10 to 11% range. Turning to slide nine, We detail our $3.6 billion balance sheet portfolio as of the end of 2021, which has grown 24% from $2.9 billion at year end 2020. Our portfolio yield remains steady year over year at 7.5% and now includes over 280 investments. The average investment size and weighted average life of the portfolio remained unchanged in 2021. With no asset class comprising more than 30% of the portfolio, The diversity of our business remains a persistent strength. Finally, we highlight the structural seniority in each of our asset classes, which coupled with the credit quality of our obligors leads to strong credit performance. Currently 99% of our investments continue to perform within our expectations. Turning to slide 10, we detail our fourth quarter portfolio reconciliation. We funded over $400 million of investments with the resulting portfolio balance of nearly $3.6 billion, an increase of 12% from the end of the third quarter. Funding expectations of previously closed transactions is shown on the right, with over $700 million expected to fund over the next two years. This amount is in addition to the portfolio growth we expect from investments in our current pipeline. We also note that the grid-connected NG portfolio, which we announced in July 2020, is now fully funded and is no longer reflected in this table. On slide 11, we highlight that we extended and upsized our carbon count unsecured revolving credit facility. Earlier in 2022, we increased our available capacity from 400 million to 600 million, extended the tenor from one to three years, and enhanced our carbon count pricing discount. Recapping our capital raising from 2021, we had a very successful year, issuing debt at 3.375 percent, equity at over $61 per share, and establishing two incremental unsecured funding sources. Our liquidity platform is well positioned to continue to efficiently and successfully fund the expected growth in our portfolio. We also continue to manage our market risk, utilizing modest leverage and maintaining substantial standby liquidity. Turning to slide 12, we address interest rate risk, which is certainly not unique to our business, and we take this risk very seriously in our enterprise risk management processes. allow me to make four points regarding interest rates on our business model. Number one, we have an investment portfolio of over $3.5 billion and fixed rate debt of approximately $2.5 billion, neither of which is impacted by subsequent changes in interest rates. Number two, while rising rates represent a real risk, we have demonstrated the ability to actively manage our exposures successfully, as shown in the chart on the left. In fact, since 2014, our first full year as a public company, we have delivered earnings growth at an 11% compound annual rate during a period in which 10-year treasuries were over 3% and well below 1%. Neither the level of rates nor the shape of the yield curve, both of which are depicted on this graph on the left, has meaningfully diminished our ability to grow earnings. This is in part because we actively manage our margins to our targeted ROE. Number three, in the graph on the right, we demonstrate how our margins have improved as we have maintained our portfolio yield despite a competitive investing environment while decreasing our cost of funds. Over the last four years, our interest expense as a percent of our average debt balance has dropped by 80 basis points to 4.6% as we have optimized our debt platform and taken advantage of tightening corporate debt spreads and the strong bid for credible green bonds. We remain confident over the long term our margins will be strong and relatively stable given the combination of our diverse investment strategy and attractive debt platform. even in periods of increasing investment volumes. We also expect these margins will facilitate continued strong growth in net investment income. And finally, number four, I'd note our securitization strategy has functioned well during our 40-year history, including in much higher interest rate environments. So we remain confident we can continue to utilize this source of capital as part of our funding and market risk strategies. In conclusion, our increase and extension of earnings guidance and our dividend increase reflect our confidence in the business model in a variety of interest rate environments. And with that, I'll turn the call back over to Jeff.