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spk09: This conference call is being webcast live on Investor Relations page on 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 Securities Act of 1933 as amended and Section 21E of Securities Exchange Act of 1934 as amended. The company claims the protections of Safe Harbor for forward-looking statements contained in such sections. The forward-looking statements made in this call are subject to risks and uncertainties described in the risk factors section of Company Form 10-K and other filings within 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 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 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 Eckel, 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 Eckel, who will begin on slide three. Jeff?
spk07: Thank you, Neha, and welcome to the investor relations role. And good afternoon, everyone. Today we're pleased to report continued strong performance in the first quarter with distributable earnings of 52 cents per share a 21 percent increase over last year. Continued growth in net investment income, up 41 percent from last year and up 10 percent from Q4 2021. Also, a dividend of 37.5 cents per share. Strong NII growth contributed to this strong quarter and sets us up for a strong year. With our gain on sale revenue added to NII, we demonstrate again that the HACI dual revenue business model built on a diverse set of clients, technologies, and assets continues to work well despite macroeconomic and industry challenges. As such, we're pleased to reaffirm our prior guidance for annual growth in distributable EPS of 10 percent to 13 percent through 2024 and 5 percent to 8 percent annual growth in our dividend for the same period. As we do every quarter, this quarter we highlight a carbon count of some projects, in this case, two California-based solar investments, one grid-connected at a 0.8 carbon count and one behind the meter at 0.2. With the same grid emissions profile, the difference in the carbon count is the relative cost per kW, with the grid-connected solar cost three to four times lower than the behind-the-meter transaction. Now, of course, there are other advantages to behind-the-meter solar plus storage assets, such as reliability, but we believe measuring and reporting with this level of rigor on carbon count is where the market needs to go. Turning to slide four, we'd like to discuss some of the headline challenges that are top of mind of our investors. First, as we mentioned last quarter, the clean energy industry is continuing to adapt to inflation by raising PPA prices. Our clients in both grid-connected and behind-the-meter segments are increasing PPA pricing to end customers to manage higher capital costs and inflation. And while renewable PPAs are pricing higher, the alternatives in gas-fired or utility-supplied power have generally increased as well due to a near tripling of natural gas prices. As for the impact of HACI, higher inflation has minimal impact on our portfolio due to the largely fixed-price O&M contracts. And because we price our new investments at current pricing, and once the impacts of inflation on a project are understood, we can generally increase pricing with market rates. Additionally, our portfolio benefits from higher commodity prices and retail rates to the extent there are sales into the wholesale markets. For behind-the-meter generation, including residential solar, the customer value proposition is improving due to utility rising rates. In fact, the long-term prospects for elevated natural gas prices is causing us to look more favorably on common equity investments to capture some of that upside. Next, as most of you are aware, the anti-circumvention investigation initiated by the Department of Commerce is creating disruption in the solar supply chain with the threat of retroactive tariffs on panels imported from Southeast Asian suppliers. This is primarily affecting grid-connected solar projects due to their tighter PPA pricing and the sheer volume of panels those projects require. On our grid-connected pipeline, we are fortunate to have large companies as clients. who've generally been able to source panels from unaffected supply chains. Will there be softness in the solar pipeline six to nine months out? I think that is inevitable, yet manageable, given the diversity of our origination platform across the clean energy landscape. The success of the grid-connected wind and solar industries over the last few years has not been matched by investment in transmission systems to move the power to the load. This congestion and basis risk causes pricing mismatches under some PPAs, leading to revenue shortfalls from the project plan. We have experienced some of this with our portfolio and have adjusted our expected yield accordingly. The preferred nature of many of our grid-connected assets is a significant mitigate, but not a perfect mitigate for an industry-wide problem that is getting the attention it deserves from the industry. Finally, the brutal war in Ukraine by Russia is a reminder that energy security is national security. This should be a clear message that notwithstanding the near-term challenges of the clean energy industry I've just been discussing, we should not lose sight that the clean energy industry is the only viable path to both energy independence and climate change mitigation, further reinforcing our investment strategy. Moving to slide five, we provide an update on our 12-month pipeline, which we continue to report as greater than $4 billion. Consistent with last quarter, the bulk of our pipeline remains behind the meter and is weighted towards energy efficiency. The grid-connected portion is weighted towards solar projects that are either operating, in construction, or in late-stage development that have mitigated the anti-dumping issues we just discussed. Lastly, our sustainable infrastructure pipeline continues to present opportunities in environmental restoration, transportation, standalone storage, and renewable natural gas. Now I'll turn it over to Jeff Hell to detail our portfolio performance and financial results.
spk06: Thanks, Jeff. Summarizing our first quarter results on slide six, we recorded distributable earnings per share of 52 cents, had a strong quarter of distributable net investment income of over 42 million, and recorded gain on sale of approximately 22 million. On a year-over-year basis, we continue to demonstrate substantial growth in our distributable net investment income and steady realization of gain-on-sale fees as our dual revenue model continues to bolster our distributable EPS. In the upper right, we note distributable EPS year-over-year growth was 21 percent, resulting from growth in both equity method investment income and interest revenue. In addition, as shown on the lower right, our gain-on-sale from securitized assets for the first quarter was 22 million. representing an 8 percent increase year-over-year. Lastly, distributable net investment income was over $42 million in the first quarter, reflecting year-over-year growth of 41 percent, driven by a larger portfolio and ongoing strong margins. Our net investment income is expected to grow each quarter as we add assets to the balance sheet, providing ongoing stability and visibility into our future earnings growth. Therefore, we are affirming our guidance of 10 to 13 percent compound annual growth in distributable EPS through 2024. Turning to slide seven, we detail our $3.7 billion balance sheet portfolio as of the first quarter of 2022, which has grown 28 percent from $2.9 billion over the last year. Our portfolio now includes over 320 investments across eight asset classes with a weighted average life of 18 years. With no asset class comprising more than 30 percent of the portfolio, the diversity of our business remains a strength, particularly in a period in which certain asset classes are more impacted by the aforementioned macroeconomic trends. Our forward-looking portfolio yield at quarter end was 7.3%, down from 7.5% at year end. This reduction was primarily the result of a change in distributable earnings accrual rates for two grid-connected projects due primarily to congestion in the Southwest Power Pool which resulted in a modest reduction of our long-term IRR expectations for these investments. These investments continue to perform within our expectations, and the grid-connected portfolio will likely benefit long-term from higher natural gas prices. Consistent with the past several quarters, our overall portfolio continues to perform very well, with 99 percent of our investments performing within our expectations. Turning to slide eight, we detail our Q1 portfolio reconciliation. We funded over $160 million of investments resulting in portfolio growth of 5% from year end. Funding expectations of previously closed transactions is shown on the right with over $675 million expected to fund through the end of 2023. To be clear, the amounts in this table reflect closed but unfunded transactions and are entirely incremental to the portfolio growth we expect from our greater than $4 billion pipeline. On slide nine, we highlight our successful offering in April of $200 million of carbon count exchangeable notes. These notes carry a coupon of 0% and mature in 2025. The investors have an option to either exchange the notes for stock at a 32.5% premium subject to dividend adjustments, which at closing was $56.54, or receive accreted principal at 3.25% per annum at redemption. Given the volatile capital markets backdrop, we are pleased with the terms of this financing. We also issued $50 million of equity in the quarter at an average price of slightly above $48 per share. With cash proceeds from the notes and the shares, combined with availability in our credit facilities and CP program, our total available sources of liquidity increased to greater than $930 million. We have no material debt maturities until 2025 as we continue to manage our market risk by utilizing modest leverage, laddered debt maturities, and diverse funding sources. Turning to slide 10, we reiterate our management of interest rate risk, which is not unique to our business, and we take this risk very seriously in our enterprise risk management processes. Our investment portfolio of over $3.7 billion is comprised of fixed rate loans and equity method investments with yields that are largely unaffected by changes in interest rates. Combined with our debt, which is 96 percent fixed rate, our existing balance sheet is largely insulated from near-term changes in interest rates. The chart on the left demonstrates our historical ability to actively manage our interest rate risk and grow distributable earnings. Since 2014, our first full year as a public company, neither the level of rates nor the shape of the yield curve has meaningfully diminished our ability to grow earnings. This is in part because we actively manage our balance sheet and securitization program to maximize our ROE, which was 11.5 percent in Q1. The graph on the right shows our margins have been maintained as our yields have been steady despite a competitive investing environment, while our cost of funds has decreased. As noted earlier, our yield is a bit lower this quarter, but our margins continue to be strong as our interest expense, as a percent of our average debt balance, continued its downward trend in the quarter. Given current market conditions, we expect incremental term debt issued in 2022 would likely be above our current cost of debt. However, we expect our aggregate margins to remain relatively consistent and sufficient to achieve our guidance. We also expect these margins will facilitate continued strong growth in net investment income. Finally, 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 that we can continue to utilize this source of capital as part of our funding and market risk strategies. In conclusion, earnings growth remains robust Our guidance is affirmed, and our market risk and capital market strategies remain sound. With that, I'll turn the call back over to Jeff.
spk07: Thanks, Jeff. Great job. Turning to slide 11, we continued efforts to improve the carbon count methodology, and we're pleased to be recognized by Fast Company for our innovations in climate solutions investing. On the social front, our foundation advanced several climate justice initiatives, including efficiency upgrades for nonprofits, advancing our climate core fellow program, funding of resilience hubs in Baltimore, and supporting an online climate education library. Finally, we encourage you to take a deep dive into our 2021 impact report, which includes many new disclosures and details on the progress of our various ESG initiatives. It is now posted on our website along with our new and improved proxy. We'll conclude on slide 12. There are three reasons we think this is a fantastic business. First, over our nine years as a public company, we've demonstrated that our dual revenue business model continues to grow earnings in a variety of macro environments, and we're well positioned to continue that growth in the future. Second, our commitment and credibility in ESG attracts and retains the best talent committed to making a positive impact, leading to high employee retention, which in turn improves our operating leverage and our ability to solve client problems, a direct benefit to shareholders. Finally, our pipeline of climate solutions investment opportunities is large and growing. The growth is driven by the twin priorities of addressing climate change while improving our national energy security, an enormous addressable market for years to come. With that, I'll ask the operator to open the line for questions.
spk01: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question comes from the line of Mark Strauss with J.B. Morgan. Please go ahead.
spk04: Yes, good afternoon. Thank you very much for taking our questions. Just wanted to go back to your comments about the yield coming down a little bit. Kind of what drives that? How do we reconcile that with just kind of generally increasing PPA rates across the space, and how should we think about that over the near future?
spk06: You want to take it, Jeff? Sure. So, thanks for the question, Mark. We tried to highlight it was a little bit different dynamic this quarter. It wasn't a function of new assets coming on the balance sheet. It was strictly a function of the congestion in SPP causing us to lower the IRRs on a couple of investments. and that served to reduce the overall portfolio yield. But I think the trend long-term should be that these higher PPA prices and higher interest rate environments should gradually result in a higher yield over time. It was a unique dynamic this quarter that we wanted to highlight. Okay.
spk04: And then the comments about participating in the common equity investments, Can you go into more detail there? Is that kind of across your portfolio? Is that in one particular sub-segment? And does that require any kind of change to your existing partnership models that have been existing for many years now?
spk07: So, Mark, over the years, when we went public, we explicitly said that we would invest in the common equity in these assets. Over the years, we've not exactly found those returns to be all that compelling. Thus, we structured things more as a preferred. If you can't get the return, don't take the risk. And that's been our philosophy. But now we see the potential with $5 and $6 gas persistent, in our view, for quite a while as presenting some opportunities. But the fundamental principle is we don't want to make any investment where we don't get paid for the risk, but we're not unwilling to take risk if we feel we're going to get paid for it. Okay. And we don't have to make any other changes in our business model or anything. We actually have equity and, you know, pure equity in some things, relatively small, but it's not any kind of a change to the business.
spk04: Yeah.
spk07: Okay.
spk04: Very helpful. Thank you.
spk07: Thank you.
spk01: Thank you. The next question comes from the line of Chris Souder with B. Reilly. Please go ahead.
spk03: Hey, guys. Thanks for taking my question here. I just wanted to talk a little bit about transactions in the quarter and then movements within the pipeline. Can you talk about the end markets for this quarter based on the balance sheet growth and the market scale? behind the meter stuff that you'd be securitizing, but wanted to see if there were any other segments that weren't captured there. And then it's kind of a shift in the pipeline, you know, reflecting, you know, any challenges you're seeing on the utility grid side at all?
spk07: So we highlighted in the carbon count section two solar projects, one behind the meter and one grid connected. So there clearly were solar projects. We didn't call out any other projects this quarter. And you said the shift in the pipeline, I don't really see where our pipeline shifted that much. We did talk about the impact on solar as being something we might see in six to nine months, but that it would be manageable. Some deals, you know, as has happened every quarter, move out in time. There's no real big change in the pipeline. Jeff, anything you'd add to that?
spk06: No, I think you covered it.
spk03: Okay. And then, you know, looking at, you know, I guess the elevated receivables held for sale, is that kind of an indication that, you know, securitization is something that we should be expecting kind of a larger number in the next quarter? I don't think I've seen you guys break out a number that high since you started kind of breaking that out. So I'm just kind of curious if you could talk about that at all.
spk06: Sure. So, Chris, I wouldn't read anything in particular into that. It just means we had some assets on the balance sheet at quarter end that we intend to securitize. Sometimes the timing is such where we close in one quarter and securitize in the next. And in those instances, we do have the held for sale bucket a little higher. And in other quarters, we essentially securitize everything we intend to, and the held for sale is virtually zero. So as sort of a business model or trend issue, I would not read anything into that.
spk03: Okay. Appreciate it. Thanks, guys. Thank you.
spk01: Thank you. The next question comes from the line of Ben Callow with Bard. Please go ahead.
spk00: Hey, good evening, guys. Could you talk about, hey, could you talk about electricity prices and PPAs and just how quickly it flows through on both the utility side and then on the residential side? And then also, what other opportunities does it open up because of higher electricity prices and being other asset classes out there that you typically haven't played in? And I'll leave it there. Thank you.
spk07: Thanks, Ben. I think there are two kinds of developments. Those that have revenue contracts that can't be changed and that lead to a small or even negative development fee for the sponsors. Those are tough, but those are tremendous wake-up calls to the sponsors that the next deal needs to be priced better. So I think it's been a rather instantaneous development well, as soon as you figure out you have a negative development fee, you figure out that's not very fun and your next deal better be better. And I think that we're seeing that with distributed solar. We're seeing it with grid-connected solar. And some contracts are getting renegotiated and modified. So I don't see this as a particularly long lead time item. The industry doesn't have a whole lot of choice but to do it. With respect to higher utility prices, that's a great question. We're certainly seeing an uptick in efficiency interest and it's, you know, economics were in the money before. Now they're even more in the money. But you always have a kind of a hedge in energy efficiency where you've smoothed out the cost of your electricity. And now people are realizing that The natural gas portion of that price is going up, and even the demand charges are going up. Way better to conserve. So I don't know that it's going to take us into new and exotic technologies, but more of what we've been doing would be terrific. Thank you. Actually, it won't take us to exotic technologies. I'll guarantee that.
spk01: Thank you. The next question comes from the line of Julian Smith with Bank of America. Please go ahead.
spk08: Hi, guys. This is Anya stepping in for Julian. So first off, I just wanted to ask on the portfolio, just following up on that. Portfolio increased from $3.6 to $3.7 billion this quarter. And I know you mentioned that the yield declined largely due to that transmission congestion and basis risk. Are there any other moving pieces there? Just curious on those new additions to the portfolio, what kind of impact did those have on the yield? And are you seeing yields relatively flat as you just discussed based on PPA prices going up? Maybe could you just talk a little bit about that? Thanks.
spk06: Sure, Anya. You know, as we noted, we added 160 million to the portfolio in the quarter, and the portfolio is 3.7 billion. So, I think the new additions themselves had virtually no impact on the overall portfolio yield, just given the math there. You know, I think as a general trend, as we mentioned earlier, as part of PPAs rising, inflation, interest rates, we're certainly looking to achieve a higher yield on the portfolio as a trend. than we had previously, and, you know, we're optimistic about that trend.
spk08: Okay, great. Thanks. And as a follow-up, could you maybe discuss the progress on the Clearway co-investments? What are the risks of development delays on that investment at this point? Any call you could provide on procurement efforts on their side would be helpful.
spk07: I'm not sure we can provide any color. They're working hard at it, and it's a great group that will get those projects developed. I'm sure they've got a million headaches that we frankly don't know about and that they're managing. But everybody's as incentivized as anybody in the transaction to get it done. So no real color on you.
spk08: Okay, thanks. Could you also actually provide more information on the energy efficiency opportunity you just mentioned right now? Have you seen a pickup in interest already at this point? And how are you looking at that right now, just given the dynamics in the market today?
spk07: Maybe this is me being optimistic, but I can't believe this increase in utility rates and gas prices doesn't lead to an increase in efficiency. I may have spoken a little more optimistically. It absolutely should, Anya. Has it? We'll see.
spk08: Great. Thank you. I'll jump back in the queue.
spk07: Thank you.
spk01: Thank you. The next question comes from the line of Noah K. with Oppenheimer. Please go ahead.
spk05: Good afternoon. Thanks for taking the questions. First one around transmission bottlenecks and potential opportunity. You know, when we look at the report that Lawrence Berkeley put out at the end of 2021, I think it showed over a terawatt of solar storage, et cetera, in the interconnection queue. And even if we assume only, you know, 15, 20% of those projects get built, it just seems like the transmission issues will get worse and that may be a solvable problem and something that you can participate in. So can you talk a little bit about opportunities that you may have on the transmission side or in supporting sustainable infrastructure or generally how you think about these congestion issues affecting your opportunity set?
spk07: I would say, Noah, that our clients are working very hard to produce solutions transmission solutions, but that's never been a short-term business, never a short-term fix. We are seeing them add storage or add solar to wind to try to offset some of the impacts. It's not a quick fix. Some of the utilities are working on it. Their incentives may be a little out of alignment with ours, but it's absolutely got to get fixed. I don't see us being the real fix for it, though.
spk05: All right. Well, to be continued. But I think a couple of folks have been asking this question a couple of different ways, but I just want to see if we can take a shot at it. Where in the markets do you see the higher energy prices most clearly accelerating the sales cycle? And I wonder if you could touch specifically on the types of projects that historically have had long, development cycles like the P3 investments?
spk07: I'm not sure that we would be able to speak to sales cycles by asset class, but anybody who's opened up their electric bill has said, bang, this is higher than I thought it was. And particularly with the additions to the rate base that have been added by most utilities and it's not an easy number to take in a monthly bill. So what we see primarily, Noah, are the economics are even better for residential solar, for CNI solar with storage, for energy efficiency. And that, you know, typically we're all economic animals and that should provoke more business. But we really couldn't say which asset class might be moving the fastest.
spk05: Appreciate it. Thank you. Thank you.
spk03: Thanks.
spk01: Thank you. The next question comes from the line of Nate Crossett with Berenberg. Please go ahead.
spk02: Hey, good evening. Um, a couple of questions. First one, just on competition, just with rates rising, have you seen any change in the players that you normally compete against? Um, in terms of just, you know, their ability to compete for deals with higher funding costs. And then maybe you can just kind of go through your funding needs for the rest of the year. It sounds like the pipeline continues to be pretty strong. So how should we think about, you know, funding that? And it looks like you just recently did that green exchange senior note deals. Should we expect to see some more things like that?
spk07: So in competition, I don't think we've seen too much change. Most of the new entrants really are not investing in the asset level. They're actually investing in at the sponsor level and new sponsors particularly to create development platforms. That's not an area where we want to be. We like like to fund our clients and not create competitors to our clients. But there's always a new entrant every quarter we've not seen before, and then somebody exits, but it's not a significant change in the competitive profile.
spk06: And on the funding platform, we'll continue to use the diverse sources of capital in our arsenal that we've developed. As we've noted, we have substantial dry powder on the credit facility. We'll probably lean on that a little bit. If we're successful converting on a significant amount of the pipeline, you should expect us to do a term debt deal at some point this year. And we'll be a relatively consistent issuer on our ATM as well. And we'll also continue to actively securitize certain assets. So the core diverse funding strategy that we've used historically probably all those sources will get tapped this year.
spk02: Okay. And just maybe one on the portfolio yield, the 7.3, like are you guys kind of articulating that that's the lowest we would see this year? Or I guess how do you see that trending? I know you had some longer-term comments, but is this kind of like a bottom tick quarter in that sense?
spk06: We're not saying that specifically. I think what we really wanted to highlight was it was not new investments that caused portfolio yield to tick down in the quarter. We just wanted to make that point. It's not necessarily a low point for the year. There's a lot of dynamics there. For instance, securitization activity and taking things off balance sheet clearly itself impacts portfolio yield. It's which transactions, which investments pay off a little bit faster than others affects portfolio yields. So there's a lot of dynamics in that number. So we're not prepared to say specifically this is the low point of the year.
spk02: Okay, I'll leave it there. Thank you.
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