HA Sustainable Infrastructure Capital, Inc.

Q1 2023 Earnings Conference Call


spk01: Greetings and welcome to HACI's first 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. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neha Gadam, Senior Director of Investor Relations and Corporate Finance.
spk00: Thank you, Operator. Good afternoon, everyone, and welcome. Earlier this afternoon, HACI distributed a press release detailing our first quarter 2023 results, a copy of which is available on our website. This conference call is being webcast live on our Investor Relations page of the website, where a replay will be available later today. Some of the comments made in this call are forward-looking statements, which 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 stated, and today's discussion also includes some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is available on our slide presentation. Joining me on today's call are Jeff Lipson, the company's president and CEO, Mark Pangburn, CFO. Now, I'd like to turn the call over to Jeff, who will begin on slide three. Jeff?
spk05: Thank you, Neha, and good afternoon, everyone. First, I'm pleased to report that the leadership transition we announced last quarter has been smooth and successful, and I'd like to thank Jeff Eckel, our board of directors, my colleagues, as well as our clients and shareholders for providing their support of Mark and me during this transition. I'll note we've had two significant milestones in the last two months. Number one, our first investor day, which occurred on March 21st. And number two, we rang the closing bell at the New York Stock Exchange on April 13th, commemorating the 10th anniversary of our IPO. As we begin our second decade as a public company, I want to begin with an assessment of the long-term trajectory of our business. Our business is as strong, if not stronger than ever. During the first 10 years as a public company, we've built a managed asset balance of over $10 billion and achieved annual average growth of 11% in earnings and a total shareholder return in excess of 15% per year, which was well above the S&P 500 over the same period. As we think about the next 10 years, we are optimistic this demonstrated track record of success can be built upon to achieve even greater success. This optimism is in part driven by the fact that we are in the early stages of the energy transition and our addressable market will continue to grow substantially as our clients will continue to construct and develop projects that facilitate this transition. We believe our differentiated business model and our strategic relationships with our clients will result in ongoing growth in the size and profitability of our business. Consistent with this trajectory, in the first quarter, we are announcing distributable earnings of 53 cents per share and gap EPS of 26 cents. We have declared a quarterly dividend of 39.5 cents per share, and we are reaffirming our earnings and dividend guidance. We also had record level of first quarter transaction closings at an average yield greater than 8 percent, increased our pipeline to greater than 5 billion, and increased the portfolio by 9 percent in the quarter. As we turn to slide four, let me take a moment to reiterate some of the themes from Investor Day. The feedback from this event has been very positive, as investors appreciated many new disclosures and clarifications. In my introductory remarks that day, I used the phrase, we are a business that is well positioned, but at times not well understood, and that we intended to simplify the story. By the end of the day, I believe we were successful in that effort. and investors had an improved understanding of our company. With that context, I'll summarize a few of the key themes. First, the simplification of our strategy into the three pillars of climate, clients, assets has resonated and has facilitated an understanding of the differentiated nature of our business model as a climate positive investor partnering with programmatic clients and investing at the asset level in energy transition projects. We expect this differentiated business model will result in ongoing growth in the size and profitability of our business. We also engaged in some myth busting and provided a simplified framework of our risks and opportunities. Next, we continue to prove the resiliency of our business model. Over the last 10 years, we have persisted in posting strong results despite the challenges of interest rate volatility, inflation, supply chain disruptions, macroeconomic uncertainty, shifting public policy, and other real or perceived headwinds. On Investor Day, we also provided significant detail, including several client testimonials describing the unique nature of our client relationships and the programmatic aspect that results in repeat business over many years. This client focus is a significant differentiating facet of our business model, and we believe will be a strategy that allows our business to scale efficiently over time. Following Investor Day, we also received particularly consistent and positive feedback regarding our leadership team as this event became a forum for the investor community to meet and hear from several talented members of our team. The execution of our business plan and our consistently strong financial performance are indeed the result of a deep, talented, and motivated team. Our mission-driven culture results in remarkably high retention and commitment. And lastly, Investor Day allowed us to provide our thoughts on valuation, cash flow, and a long-term dividend framework. We discussed the very unique value proposition we provide to clients and investors, notably including access to the energy transition in a diversified, lower-risk business model with an attractive dividend yield and multiple. Our Investor Day had several other important messages and detailed content, and I encourage investors to view it if they have not done so already. Turning to slide five, we are reporting a larger 12-month pipeline of greater than $5 billion, up from greater than $4.5 billion last quarter. The larger pipeline is primarily the result of three items. One, our clients accelerating their pipelines. Two, the growth in our investment team, allowing us to review a larger volume of transactions. And three, certain asset classes beginning to see the impacts of the IRA. The larger pipeline will also allow us to be selective, as we remain focused on margin and profitability as Mark will discuss further. Although various timing headwinds exist in our markets, the diversity of our asset classes and diversity of our clients provide confidence that we will be able to invest in a generally consistent pattern. In fact, our clients, as leaders in their industries, are expected to increase their market share, which we expect will result in additional transactions for us to consider. I will also note in our grid-connected segment, development cycles do not entirely drive our volumes. We also invest in transactions in which our clients are recycling capital on operating projects. The grid-connected business also continues to benefit from higher PPA prices, which have increased more than 25% over the past year. We also remain active in our behind-the-meter business, as the recent press releases regarding transactions with Mitsui Forefront and SunPower indicate. Our RESI Solar pipeline includes several transactions, and we do not envision NEM 3.0 will be a significant headwind as we continue to see increasing levels of storage adoption and our clients remain the industry leaders in this rapidly growing business. RESI, Community, and CNI Solar all continue to benefit from higher utility rates, and all of our solar businesses will likely benefit from the easing of the panel import backlog. Another catalyst to pipeline growth has been our focus on incremental asset classes, which we now refer to as our fuels, transport, and nature business. This segment has added several investments to the pipeline, particularly in fuel-related transactions. On Investor Day, Anne Marie did an excellent job describing when various asset classes will likely become investable for us, and she is building a team and identifying opportunities accordingly. This segment remains on track towards our goals. To wrap up this slide, our diverse pipeline provides resilience to timing headwinds, and it consistently provides short- and long-term opportunities as we continue to identify transactions that fit both our risk and return profile, providing us confidence in our ability to meet our profitability objectives. Before turning the call over to Mark, I will touch briefly on the current challenges in the banking sector. Support from our banks has been unimpacted by the recent regional bank failures. The banks in our revolving line of credit and our term loan all continue to be stable and supportive, and we expect no direct impact of these bank failures. Any wider impact on the economy of potentially tightening credit markets are unlikely to have any unique impact on HSE or on our markets. Now I'll turn it over to Mark Pangborn to detail our financial results.
spk04: Thank you, Jeff. It has been an exciting quarter for me to transition to the CFO role. To leverage Jeff's themes around strength of the business, we are delivering on EPS growth, higher asset yields, and access to capital, all while managing a diverse and quickly growing base of managed assets. I'm excited and optimistic for our growth prospects over the next decade. Let's start on slide six. In the first quarter, we recorded distributable earnings per share of 53 cents and gap earnings per share of 26 cents. Over the last year, we grew our portfolio by 25% to 4.7 billion and managed assets 15% to 10.4 billion, both driven by the continued strong investment opportunity in the energy transition. From this base, we are reporting distributable net investment income of 47.1 million, up 11% year-over-year despite higher costs of capital. where we also recorded $19.5 million of gain on sale, fees, and securitization income. I'd like to highlight two important forward-looking themes on this slide. First, changes in interest rates are expected to have a limited impact on these performance metrics, with NII variability being minimized with our hedging activities and our fee-based income having no meaningful interest rate exposure. Second, the growth in our portfolio and managed assets provides stability in our earnings profile. Let's turn to slide seven to review our recently closed transactions and portfolio. We're reporting record level of Q1 transaction closings at $389 million. Asset yields are increasing. The weighted average yield on new investments in Q1 is greater than 8%. Additionally, these closings came across six asset classes showcasing the diversity of our pipeline. Record closed transactions and increasing yields are contributing to one of our key themes from Investor Day, profitable growth. Next, our portfolio grew 9% last quarter alone to reach 4.7 billion. A majority of these additions came from funding previously closed investments as the table on the bottom right demonstrates. The diversity of our business remains a key strength, further reinforced by the increasing contribution from FTN. As previously identified, we anticipate portfolio yield to increase over time as our recent closings with higher yields begin to contribute to the overall portfolio. On our investor day, I stated that approximately 75% of the distributable NII needed to achieve our 24 guidance relates to previously closed transactions. Rolling forward to the end of Q1, approximately 80% relates to closed transactions. On slide eight, I'll cover profitability. To reiterate comments from Investor Day, our business model paired with the enormous investment opportunity in the energy transition positions us well for continued profitable investments, both in the short term and the long run. Today, our portfolio yield is 7.5% with yield on Q1 closings above 8%. Our cost of debt is 4.8%, which has increased as anticipated. In the future, taking into consideration new asset yields, new assets at higher yields, refinancing activities, and hedging activities, we anticipate both our portfolio yield and cost of debt to increase while continuing to maintain sufficient margins to achieve our profitability metrics. We're highlighting two important considerations on this slide. Both relate to our long-term profitability metrics. First, our incremental investments are maintaining profitability in current market conditions. Our expanding pipeline allows us to grow and invest selectively. Second, based on our existing swaps and forecast refinancing costs, we continue to expect to maintain margins in our portfolio to achieve our ROE targets. We're taking additional actions to expand margins by growing our investment in FTN and positioning the company for a second investment grade rating over time. Turning to slide nine, starting on the top left. Our liquidity remains strong with the total of over 490 million of cash and undrawn revolver capacity. Our banking group remains highly supportive. We have experienced no disruption in our lending relationships. While the overall banking market remains in flux, we expect to be well positioned on availability of capital relative to the overall economy given our strong execution non-cyclical assets, and focus on the energy transition. We've raised over $14 billion of capital across eight different funding sources. Our diversified funding platform allows us to grow the business even during times of market volatility. In the lower left quadrant, we show the details of our recent swaps, which were entered into to mitigate interest rate risk and manage our future cost of funds. By entering into these swaps, we have better aligned our assets and liabilities, converted our floating rate term loan A into a 10-year fixed rate obligation, and locked in the underlying base rates for our expected 25 and 26 bond refinancings at approximately 3%. As discussed on the previous slide, based on forecaster refinancing costs and base rates detailed here, we continue to expect to achieve our ROE targets while also minimizing the impact of changes in rates. In summary, we continue to demonstrate profitability, earnings growth, and portfolio growth. We have the liquidity and access to capital required to capitalize on our diverse pipeline and are deploying the tools necessary to navigate market volatility. With that, I'll turn the call back over to Jeff.
spk05: Good job, Mark. Thank you. Turning to slide 10, I will note we released our 2022 impact report that details our approach, targets, and performance across a broad array of material ESG issues, including the progress of the HACI Foundation. And we encourage investors to read the report. In fact, reading the impact report is an important step in understanding our company. I'd also note we're delighted that Kimberly Reid joined our board as an independent director. She brings significant perspective on regulatory and public policy matters as a former chair and president of the Export-Import Bank of the United States. Now let's wrap up on slide 11. We are pleased with the performance in the first quarter and our outlook for the future remains optimistic. I thank our talented and dedicated team in continuing to drive HACI's growth and success. I will conclude by reinforcing the key pillars of HACI strategy, climate, clients, assets. A simple business model, which will continue to offer a unique value proposition to investors, providing access to the energy transition with a diversified portfolio and non-cyclical business model. That concludes our prepared remarks, so we can open up the line for questions, operator. Thank you.
spk01: Thank you, Sam. Ladies and gentlemen, we will now begin the question and answer session. if you would like to ask a question please press star and then one on your telephone keypad a confirmation tone will indicate your line is in the question queue you may press star and then two 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 thank you our first question is from noah k of oppenheim
spk03: Thanks for taking the questions. One of the more interesting nuggets you shared at Investor Day, at least as it relates over the next several years, is that your eight largest customers had approximately $50 billion in project capital needs through 2025. Maybe picking up on the comments you had earlier, Jeff, can you talk to us a little bit about the project development environment those customers are seeing in your your visibility to continuing to pick up the pace of originations as we move throughout the year here, and particularly in, you know, some of the asset classes like grid connected that I think investors are looking at. Thanks.
spk05: Thanks, Noah. In my prepared remarks, I did touch on some timing headwinds, and some of that is in grid connected, whether it be panels or permitting or transmissions. There are some timing headwinds there, but I think we're seeing those in the transactions we're looking at being relatively immaterial, and most of the projects are moving forward. As a reminder, we tend to work with the largest infrastructure and energy companies, and I think that makes a difference in terms of being able to move projects forward. And then to reiterate something else I said, we have so much to invest in, it doesn't tend to impact our pattern. and our consistency of investing, even if there are some delays in certain projects. Some of what we do is recycle capital on operating projects when our clients request that we do so. So it's a relatively minor impact. It is out there and we should recognize it, but we're not seeing a very significant impact on our pattern of investing right now.
spk03: Okay, thanks. And I guess moving to the funding side, it looked like the the transactions that were funded this quarter, you know, you largely drew on credit facilities and commercial paper. Can you talk about how you're thinking through the range of funding options going forward here? It looks like you have roughly 400 million at least of additional transactions you expect to fund over the course of the year.
spk04: Sure. Thanks, Noah. So what I'd ask you to focus on is some of the comments we made on Investor Day around the diversified funding platform and reiterated here to a much smaller extent on that front. We have raised capital from a number of different markets, continue to evaluate those markets for which ones are relatively attractive at the time, and then we'll continue to pursue whichever provide the best margins for the business. We obviously don't want to talk about our funding plans for the future, but that is our, that's our approach.
spk03: Thanks very much. Nice to see the origination volumes in the quarter. I'll turn it over.
spk01: Thanks, sir. Thank you. The next question is from Julian of Bank of America. Please go ahead.
spk02: Hi there. This is actually Cameron for Julian. Thank you for taking our questions. I wanted to real quick start on the backlog growth or the pipeline growth up nicely quarter over quarter. Just any kind of early indications of what that might mean for origination trends, transaction trends as we go through the rest of this year into 24, and how that impact or could impact the expected EPS growth, again, post-24 trend. And on that note, when would we expect to get some sort of guidance on 25 EPS and beyond? Thank you.
spk05: Thanks, Cameron. So, I did allude to that our investment is in a generally consistent pattern, but not entirely consistent. So, there is some lumpiness on timing and we tend to try and not get too ahead of ourselves on when transactions are going to close. That's completely out of our control. But we do expect this greater than $5 billion pipeline to result in a significant ongoing volume of closed transactions to follow on with our success from the first quarter throughout both this year and next year. We're very comfortable with the guidance that we have out there for this year and next year. And we would most likely speak to twenty twenty five guidance in our fourth quarter call in February of twenty four. That's our that's our ordinary cadence. Unless something comes up that drives us to speak about it positively or negatively before that, that's when you should expect us to update our expectations for twenty twenty five.
spk02: Perfect. Thank you for that. Appreciate it. And then for a follow up, you know, I'd invest today. You talked about RNG as a renewable natural gas as a growth driver going forward, a potential growth driver going forward. Just kind of curious to get your thoughts specifically around some of the EPA's proposed, you know, renewable volume obligations, as well as your thoughts on, you know, ERINs and their potential to be shifted out, you know, beyond, call it a 23 activation date, so-called. Anything you can share on that and kind of how that's trending? Thank you.
spk04: So, on that front, what I would actually point us back to is our pipeline. Generally speaking, developing and the direction of development for any asset, including RNG, is taken on by our clients and our role is to generally speaking underwrite cash flows of the assets and provide financing either at construction start or the operations phase. And so we have talked a lot about RNG on that front and that is heavily driven by what we see in our pipeline. We continue to believe the long-term trajectory of that market is very interesting. in terms of specific development activities i wouldn't say we necessarily have a strong view one way or the other understood okay great well thank you appreciate it um that's all i have thank you thank you the next question is from chris sather of b run please go ahead hey guys uh thanks thanks for taking my questions here um
spk07: It's just you called out in the press release a mixed change on the game and sale and securitization. Can you just kind of walk through a little bit of what is changing there within the mix?
spk04: So what we've done is continue what we introduced at Investor Day to break out gain on sale and fees and also securitization income, which is the recurring portion of that sea stream. Does that answer your question? Is that what you're referring to?
spk07: Yeah, the press release seemed to suggest that it might be some different kinds of assets that you are securitizing. Maybe that's not the case.
spk05: No, I think the universe of assets that we securitized in the quarter were consistent with prior periods. There's sometimes a general mixed change between government and non-government that I think may be incorporated in the sentence that you're referring to.
spk07: Okay. Got it. And then you called out in your prepared remarks, you know, the opportunities around, you know, customers looking to recycle capital with some of your investments. how large that opportunity is within the pipeline? And I assume it's mostly kind of a grid-connected pipeline, but are there other sectors where you're kind of looking at similar opportunities there?
spk05: It is mostly in grid-connected. I don't know that we'd be able to characterize offhand how much of what's in there is construction versus recycled on operating projects. It's, I would say, mostly construction. But my point in calling that out during the prepared remarks was the recycled capital component does allow us to invest in a more consistent pattern when sometimes there's development delays. But I would say most of it is new build. Got it.
spk07: Okay. Maybe just my last one here. You had commented at the analyst day around, you know, the evaluation process for kind reapplying for REIT status, just any update there would be helpful, and then I'll open the queue.
spk05: So, it's not really reapplying. It's just whether we would continue to select it. And we have selected REIT status for 2023. I think what we've indicated on Investor Day is that we are taking a very deep dive, assessing whether that's the best long-term structure for us. And we'll have more to say about that as the year goes on. I would say we, in any event, will have a very tax-efficient structure, whether it's REIT or otherwise. So I don't think investors should focus on future tax liabilities being meaningful. And I think that's the important point. Everything else will fall into place in terms of the optimal long-term structure for the business. But we'll have more to say about that as the year goes on.
spk01: Thank you very much. The last question is from Jeff Rossetti of Cowen. Please go ahead.
spk06: Good afternoon. Jeff, I believe in your prepared remarks, you called out the pipeline growth being attributed to programmatic clients, growth in the investment team and IRA. I just wanted to see if you could drill down a little bit. further on those and if you're seeing any benefit from IRA earlier than expected.
spk05: Not sure earlier than expected, but I think that goes a little bit with number three and number one go together a little bit in terms of our clients in certain asset classes are accelerating their pipelines because of IRA. Some of that's in grid connected, some of that's in storage, some of that is in RNG, where you're seeing some acceleration there. So it's the first indication in some cases of the benefit of IRA, which as we've said and others have said, will be more pronounced probably more in the 2025 timeframe, but in certain asset classes we're starting to see some benefit now.
spk06: Got it. And I think you also called out the forefront investment. And so I just wanted to get your, just get any more detail about that in terms of how the, if there's anything unique about the investment and just your thoughts. I know you called out solar plus storage. Just wanted to see how you were looking at it, looking at battery attach rates right now. just any impact from NEM 3.0 in California?
spk04: Sure. I'll try to break it down into two parts and please let me know if I missed anything. On Forefront, there was nothing inherently different about that opportunity. We're very excited about it. It was a follow-on from an initial investment that was already made and as we As you know, we talk about the programmatic nature of our client partnerships, so the fact that it was a follow-on was something that we're very excited about. The assets and the structure fits very much within the day-to-day work that we do. You also talked about NEM, and when Jeff made the comment around battery attachment rates, that was more focused on residential solar. than the forefront opportunity. And so on NEM 3.0, obviously, excuse me, we've seen the same trends that everyone else has in terms of a lot of volume coming through and a lot of backlog being built before the transition to NEM 3.0. And whatever happens after that, One of the areas that we are particularly focused on and feel very strongly about in terms of how we approach the markets is the clients that we partner with are the market leaders. And when periods of volatility come up, we firmly believe they will navigate those and potentially pick up some market share, which again all translates into pipeline opportunities for us.
spk06: Thank you.
spk04: Pleasure. Thanks, John.
spk01: Thank you very much. Ladies and gentlemen, we have no further questions in the queue and we would like to thank you for your participation. This does conclude today's teleconference.

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