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spk10: transparency in the climate impact of new load by ensuring that emissions, rather than simply megawatt hours generated, are credibly measured. In addition, there is expected to be continued adoption of electric vehicles, which have an 8 percent and growing market share and will result in a significant shift from the oil markets to the electricity markets. Furthermore, another trend is the heightened prioritization of domestic manufacturing, particularly when it comes to semiconductors. Together, these sources of growth are expected to account for an increase in U.S. electricity demand of more than 800 terawatt hours from a base of approximately 4,000 terawatt hours per year. This uptick in growth is expected to occur after approximately 20 years of relatively modest demand growth. In this period of lower growth over the last 20 years, clean energy became the overwhelming source of new generation. Therefore, as we enter this period of higher growth, renewables and other low-carbon solutions will experience even more rapid growth. Solar energy represents the lowest levelized cost of electricity of any source, and solar and wind energy continue to represent the vast majority of new electricity capacity being added to the grid. Likewise, increased adoption of renewable natural gas is forecasted to occur, as natural gas will continue to be utilized to meet energy demand, and technology will continue to allow this gas to be more efficiently produced from municipal and animal waste. It is important to note that all of these trends are unlikely to be impacted by the 2024 election results. There continues to be active discussion and speculation regarding public policy changes and the corresponding impact on the outlook for clean energy development. However, it is our view shared by many others that the megatrends of the energy transition itself and the aforementioned increase in power demand will result in continued considerable clean energy deployment without meaningful disruption resulting from public policy changes. This forecasted supply of clean energy to meet surging demand will require hundreds of billions of dollars of capital investment. As the only public pure play investment company exclusively focused on the energy transition, TASSI is well positioned to capitalize on this trend, particularly in light of two transformative developments in the second quarter. First was the launch of our CCH1 $2 billion strategic partnership with the global investment firm, KKR. This partnership provides enhanced access to committed capital, diversifies our revenue with incremental fee income and generally positions us to scale our business. The partnership is also an affirmation of the differentiation of our strategy and a reflection that our underlying portfolio of sustainable investments is difficult to replicate. The CCH1 vehicle has been seeded with two investments and is functioning as designed and we expect CCH1 to be the primary financing vehicle for our balance sheet investments over the next 18 months. The second positive development in the quarter was our attainment of fully investment grade status. We were upgraded by Fitch and placed on positive watch by S&P to go along with our existing investment grade rating by Moody's. These ratings have provided us access to the investment grade bond market which provides more stability, lower costs and longer tenure among other attributes that Mark will articulate. Summarizing CCH1 and the investment grade ratings into a single sentence, we have reduced our capital needs by 50% and significantly reduced the cost for the 50% we raise ourselves. Therefore, as we holistically assess industry trends and HACCP capital access, we are at a pivotal moment at the juxtaposition of several positive catalysts. As I said on investor day last year, we have a simple business model but a complex business. Our business model can be encapsulated as climate client assets but our business requires a deep understanding of energy markets, structured finance and the ability to establish and maintain long-term relationships. Our talented and experienced team is uniquely qualified to meet the capital needs of the energy transition. This combination of a differentiated investment strategy and enhanced access to diversified and stable sources of capital positions HACCP perfectly to capitalize on these industry trends and continue to operate with increasing scale, strong margins and profitable growth. And with that, I'll pass along the call to Mark to discuss the quarterly financials in greater detail.
spk11: Thank you, Jeff. I'll start on slide 6. Before I cover the quarterly results, I'd like to take some time to emphasize one point Jeff just highlighted, our second investment grade rating and how impactful this will be for our business. We see the change benefiting our business in three primary ways, first on cost. The chart on the left shows the spread differential between double B and triple B bonds over the last 10 years, which has averaged 120 basis points. To be more specific to HACCP, within our previous high-yield platform, we raised approximately $3 billion of corporate debt at a weighted average spread of 339 basis points. Compare this 339 to the credit spread of our inaugural investment grade issuance of 225 basis points, a greater than 100 basis point compression in cost. Second, we can now more reliably access longer term, longer maturity bonds, better aligning our asset and liability duration and minimizing our need for hedging activities. Third, when market dislocations occur, the IG market is meaningfully more resilient, as evidenced by the graph on the left. For example, during the initial COVID dislocation, the high-yield market costs increased by 250 basis points more than investment grade market costs. Generally, the best times to invest are during these dislocations, and now our largest funding source will be substantially more cost effective during these times. Finally, there are intangible benefits such as the general affirmation of the credit profile of our investments. We believe that the combination of these factors will continue to drive attractive margins over the long term. Turning to slide 7 to cover the quarterly results. Adjusted EPS grew 19% -over-year to $0.63, and adjusted net investment income rose 16% -over-year to $63 million. Also of note, gain on sale, fees, and securitization income was $32 million, up about $12 million -over-year. As a reminder, we expect gain on sale during the guidance window to be fairly consistent with 22 and 23. Stepping back a bit and moving to slide 8. This highlights the expansion of our managed assets since 2020. As a reminder, our managed assets include our portfolio, the investments we have securitized, and CCH1. Since 2020, our managed assets have grown by more than 80% to $13 billion through the end of Q2. This includes the new closings of approximately $260 million during Q2 or $823 million during the first half, which is consistent with our first half 2023. Perhaps more important, the new asset yield for portfolio investments during the first half of 2023 was greater than 8.5%, whereas today we're investing at yields greater than .5% with a consistent risk profile. Moving on to slide 9. Our portfolio stood at $6.2 billion at the end of Q2, up 27% -over-year, and we continue our focus on maintaining diversification across our asset classes. Two items of note. Given the size of CCH1, we have not yet broken it out separately, but note that it is currently comprised of one Rezi Solar transaction and one CNI Solar transaction. The portfolio also decreased approximately $200 million driven by the seeding of CCH1 and our focus on asset rotations, where we have been selling or syndicating our lower yielding investments to reinvest at higher yields. Next on slide 10. The narrative around our ROE and margins remain consistent with the prior quarter. Our elevated first half 2024 ROE is driven primarily by gain on sale. Our portfolio yield continues to increase as new transactions are funded. Our cost of debt has increased relative to 23, but is actually down to 5.6 from 5.7 in Q1 of 24. I'd also like to touch on our recent 25 bond refinancing. The 2025 was a $400 million bond with a coupon of 6%. The managed interest rate risk, we entered into a forward starting swap to lock the base rate for the expected refinancing. We actually refinanced the bond. We also unwound the swap. After factoring in the impact of the swap, the effective cost of refinancing was 6%, identical to the 6% coupon on the 25 itself with an additional nine years of tenor. Finally on slide 11. In terms of a balance sheet, a few important updates. Our leverage ratio declined to 1.8 times. And after paying down our revolver, we are entering the second half of 2024 with $1.4 billion of liquidity. Additionally, on the right, we have minimal near-term maturities and continue to manage our sustainability platform to a laddered maturity profile. Our liquidity position and minimal near-term maturities provide us the opportunity to capitalize on our pipeline and attractive investment environment we see today. With that, I'll pass back to Jeff for closing remarks.
spk10: Thank you, Mark. Turning to page 12, we detail various sustainability and impact items, including receiving the highest rating from the S&P's Green Bond Framework and a notable award from Reuters regarding our sustainability culture. Let's conclude on page 13. HACCI remains uniquely positioned with a differentiated business model enabling us to remain the preeminent pure play capital provider to the energy transition. Our existing liquidity and capital paired with our improved access to growth capital and an attractive margin to our investment return ideally positions us for success over the next several years. I would like to thank our Talnet team for another outstanding quarter as we look forward to a successful second half of 2024. Operator, please open the line for questions.
spk05: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 if you would like to remove the question from the queue. For participants using speak 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 we have is from Noah Kay of Oppenheimer & Company. Please go ahead.
spk12: Thanks for taking questions. A lot of positive developments noted in your remarks. Maybe just a first quick housekeeping one. Looking through the cash flow statement, it looked like there was a really big number in principal collections from financing receivables. Can you just give us a little bit more color on that? What drove that? I assume we should treat that as not typical, but any information would be helpful.
spk11: Thanks for the question. So there were two components to it. One was I would just say ordinary course amortization of some of our loans that we do have a regular run rate on. But it is larger this quarter primarily due to us identifying some loans that were at a lower yield and being able to bring in other parties to take a large piece of that. And that fits into the general asset rotation program we've been talking about looking to reinvest that cash at the higher yields we're seeing
spk12: today. Okay, thanks. And then a follow-up. You have an update on the pipeline in the appendix. It looks like it primarily skews behind the meter and FTN. So for confirmation, should we think about the likely yields on those as also 10.5 or north of that, which would imply continuing, in fact, increasing spreads given the favorable trends on cost of debt?
spk10: So thanks for the question, Noah. I think you should think of the pipeline yield as being consistent with the recent closings. So I think most of what's in the pipeline is at that same level at which we've been closing transactions in 2024.
spk12: Great. And maybe just one last one. You know, appreciate not breaking CCH out early in the life of the vehicle, but you did disclose the actual assets, I believe, in the vehicle, in the release. Roughly what kind of size would it have to get to before you would think about breaking it out? And just to clarify for us what that would mean in terms of a separate revenue line or equity and contribution, rather, I should say.
spk11: Sure. So in terms of how we would break it out, I think there are two components that one is in the deck itself in our various pie charts and it likely either become a slice of a pie or we just create a new pie chart as it grows. In terms of how it will show up in the financial statements, the revenue stream from CCH one, for example, the recurring asset management fee and the upfront fees were just too small to break out as line items on the financial statement. But we will certainly continue to consider the right time to break those out in
spk12: the future. All right. Very helpful. I'll turn it over. Thank you. Thanks, Noah.
spk05: The next question we have is from Brian Lee of Goldman Sachs. Please go ahead.
spk08: This is Tyler Bisseton for Brian. Thank you for taking our questions. First, are there any implications from SunPower no longer providing leases and PPAs on existing Fund Strong funding? Additionally, you were involved in a portion of the $300 million of project financing commitments SunPower announced earlier this year. So is there any underutilized capacity on these existing funds that may be able to get returned or redistributed?
spk10: So thanks, Tyler, for the question. I may answer that a little broader than you even asked it just to assume there'll be other questions related to SunStrong. And I would ask folks to turn to page 18 in the appendix. And I think the sort of five things to understand about SunStrong and HACI is number one, it's a very small portion of the existing portfolio. Number two, it's been a very small portion, less than 3% of originations since 2021. So it's not likely to impact us from an incremental business point of view. Third, all of our MES loans that are part of SunStrong are fully collateralized by underlying cash flows from leases and a little bit from loans as well. Number four, all the leases continue to perform as the homeowners themselves are obviously unimpacted by any disruption of SunPower. And number five, the servicer can be changed based on the underlying documents. And so there is some chance there'll be a successor servicer. So when you take those five things together, we don't feel like the investments in SunStrong are at risk or at elevated risk, given the challenges with the servicer. And hopefully embedded in there are answers to your questions related to this specific facility that we have. We're not funding at this point under that facility.
spk08: Thank you. Super helpful. And then there's been a lot of investment happening in the data center world as it relates to power demand, which you discussed in your opening remarks. So where can we expect to see this trend show up most for you? Have you seen any specific opportunities you can call out? Additionally, can you discuss a bit more specifically on how your agreement with KKR can allow you to better capture this growth? Any thoughts there would be appreciated. Thank you.
spk10: Let me answer that last part and then I'll let Susan Nicky answer sort of the first part of the question. The KKR benefit is really more around access to committed capital, which allows us to scale the business and rely less on capital markets. So that vehicle will just allow us to generally scale the business in all asset classes as it specifically relates to where we might see elevated business from data center development. I'm going to ask Susan to answer that.
spk01: Thanks, Jeff. The data center demand growth, we're really seeing driving the increased forecast for energy. And it seems like every week we'll get another forecast which is continuing to escalate. So how that translates to us again is we finance the largest developer sponsors who are building projects to satisfy that energy demand. We're seeing that translate into our pipeline and a lot of the data centers are certainly the big companies that Google's, Amazon's, other names, who are the corporate off takers that Jeff referred to in the beginning who are looking for not only that energy, but they want the energy. So that's overall driving our pipeline growth and also continuing to impact things in a different way in other parts of the sectors also positively.
spk08: All right. Thank you very much. Thank you.
spk05: The next question we have is from Julian. Please go ahead.
spk06: Hey, good evening. This is Hannah on for Julian. So just a quick question around managed assets. How should we think about the pace of growth given that they've been growing over 20 percent year over year for a few quarters now? And how should we also think about the distributions and transfers from the KKR partnership impacting that pace of growth?
spk11: Sure, happy to take that. I'll actually take the second one first in terms of the transfers to the CCH1 entity. I would expect that as a one time dynamic where we have some assets on our balance sheet and use those assets to seed the partnership on a go forward basis. New investments would just be closed directly into CCH1. So there would be there would not be a transfer dynamic. But in terms of how to think about the growth of managed assets, I would tie that to our annual closed transactions in that, you know, whether they end up in our portfolio in CCH1 or being securitized, you can think about all three of those prongs showing up in managed assets and also on the closed transaction
spk06: side. Got it. Thank you. And then just as a follow up, generally, how are you thinking about new partnerships going forward, especially given that your shares have recovered a bit in the past few months? Is the strategy still to go out and search for new partnerships?
spk10: Well, it's unimpacted by the share price. Our business on the investment side of our business has been very client centric, so that often involves joint ventures and other partnerships with our clients. And that's an unchanged element of our strategy. On the liability side, we've obviously done this recent transaction with KKR. That is think of that as more or less exclusive for the next two billion and 18 months. And so we won't be just yet seeking any partnerships on the liability side. We're just going to focus on operationalizing what we have with KKR.
spk06: Okay, perfect. Thank you.
spk04: Thank you.
spk05: Next question we have is from Ben Kylo of BID. Please go ahead.
spk04: Hey, guys. Good evening. Could you just talk? I know Jeff, you said that KKR providing capital, but have you seen any change in maybe deal flow or size of deals or terms around deals? I know it's new. So that's my first question.
spk10: Well, we've not seen any changes in deal sizes or terms of deals as specifically related to having the CCH1 program in place. So that's really invisible to our investment side of the business, to our client relationships. It really just is a capital element to our business. And so, no, it's not impacted how we've operated on the investment side of the
spk04: business. And then, you know, I know you guys have operated under different White Houses, but maybe could you just expand upon what you guys are hearing in D.C.? I know it changes day by day, but anything you can give us on IRA and potentially change.
spk10: Sure. And thanks, Ben, for the question. I'm not sure we're hearing anything different than others are hearing, but it's our general view, as I said, my prepared remarks shared by others that substantial changes in public policy related to clean energy are somewhat unlikely. Just given the economics, given the job creation, given how difficult it is to change the tax code. So it's our view that if there were, for instance, a Republican sweep, there may be some changes to things like EB tax credits and things like that. But nothing that would significantly impact our business. We really deem that very unlikely. And, you know, the energy transition, as I said, the demand growth, the economics are just too overwhelming, such that public policy is not going to impair the deployment of clean energy and therefore the addressable market for HACI.
spk04: Great. Thank you guys very much. Have a good night.
spk05: The next question we have is from Ahid Mandloey of Mizuho. Please go ahead.
spk07: Hey, thanks for the questions and apologies for any background noise here. Just a question on the SunPower joint venture. Thanks for the details you gave on that. It is curious if it impacts your pipeline or just trying to understand how much of that pipeline, 5 billion pipeline is from residential solar and is supposed to be. Part of that question is also how does the refinancing of the SunStrong ABS, do you think is impacted by the decision to stop the losses in PPS?
spk10: Maybe I'll take the first part and Mark can take the second part. As it relates to pipeline, very, very minimal impact again, as we showed on page 18. SunStrong related originations have been less than 3% of total originations since 2021. The portion of your question that was how much Resi Solar is in the pipeline when you see our pie slice of behind the meter being relatively large, a decent percentage of that is Resi Solar. It's still an asset class that we will continue to invest in and so our other partners there have portfolios that they continue to show us and the asset class continues to perform well. So our overall strategy there remains intact as it relates specifically to the SunStrong ABS portion of the question. I'm asked Mark to answer that.
spk11: Sure, so ultimately the ABS investors are focused on asset level performance and the support that the various service providers perform to, excuse me, to ensure that asset level performance. And I would note that the ABS is at this point six years since issuance and that asset portfolio has continued to perform extremely well. And as we've all as we've identified previously, the services that SunPower is providing are done through service contracts and they can be replaced with other service providers. So I'd expect the ABS investors to continue to focus on the performance of the
spk07: assets. I get an appreciation for that. And maybe just building on Ben's question on the elections. Any way to kind of think about the impact of the 5.5 billion pipeline? If EV or the other taxors into think other choices for these elections?
spk10: So again, I think something like the EV tax credit would not affect our pipeline at all. And, you know, again, it's to repeat a bit, I think any changes that we feel are likely would not be ones that would impact our clients development or correspondingly impact our pipeline.
spk07: Thank you.
spk10: Thank
spk04: you.
spk05: The next question we have is from Jeff Osborne of TD Cohen. Please go ahead.
spk09: Good evening. Just a couple of quick ones on my side. If I was following the comments, right? I think you mentioned the gain on sale guidance would step down in the second half. If I heard you right. Could you just discuss what's driving that?
spk11: Sure. So what we've what we've identified is that both in 24 and just generally within the forecast that we perform, we are forecasting relatively flat gain on sale relative to 22 and 23. And I think you're you're identifying that our first half of 24 has been a pretty strong half in terms of gain on sale, which would imply the back half comes down a bit. And, you know, there's, of course, plenty of time in the second half of the year to continue to originate and securitize transactions. But at the end of the day, these are these can be somewhat lumpy to use the term we've used before. And so we've been pretty successful in the first half of the year. And, you know, hopefully we'll continue that success. But we're not, you know, we have not been forecasting.
spk09: Just a quick follow up on that was the change in the read status, a driver of the success in the first half at all or no, not related.
spk11: No, that has had no.
spk09: Got it. And then I think the portfolio yields have been flat a share sequentially. How should we think about that for the second half? Just with the pipeline that you have.
spk10: So, Jeff, I think the trend will be as we continue to fund these more recent vintage closings that will have a positive effect on portfolio yields. So the dynamics so far is, you know, we have reported in the first half closing transactions at that higher yield. But many of those haven't funded yet. So you haven't really seen it show up in portfolio yield yet. So you'll see it gradually show up again. It's it's the six billion dollar portfolio now. So new closings only impact portfolio yield so much. But as these new ones fund, it'll start to push up here in the second half.
spk09: Got it. No, that's when I had just on the investment grade rating, obvious longer duration capability, which will be great and lower rates. But does it change your approach to debt as a whole at the board level? Would you consider using more debt now that you can get it at a lower cost and for longer duration in terms of just total maximum leverage ratio or just your broader approach to death?
spk10: No, no change there. In fact, the rating agencies are very focused on leverage. And so to maintain the investment grade rating, we have to keep leverage where it is. So there's no view towards increasing leverage. The only real change, as Mark said, is the lower cost and longer duration.
spk09: Perfect. That's all I have. Thank you. Thank you.
spk05: The next question we have is from Ryan Sinks of B-Radi Securities. Please go ahead.
spk02: Hey, guys, thanks for taking my question. Just to follow up on Jeff's first one, if we're looking at full year guidance after two strong quarters in the first half, understanding gain on sale was pretty high. Could you just help us think about the next two quarters and if the strong performance in the first half could imply upside to the guide?
spk10: I think that's, I think that's premature, Ryan, and the guidance obviously speaks to 2026. So, you know, the first two quarters of a 12 quarter guidance period, we're off to a good start. But I don't think that that causes us to bump up the guidance just yet. And I think our cadence has been to address guidance and changes in guidance in our February call. So that's likely what we'll do. We'll have more to say. We may or may not have more to say, but if we do have something to say, we'll say it then. It's not something in the July and the November call we usually adjust.
spk02: Yeah, fair enough. And then just one more on the election understanding. We've talked about what might happen if there's a change in an administration and the little impact you expect there. But maybe can you talk about your customers' cadences ahead of the election? If that coming up in November has affected them at all?
spk01: You know, again, with the demand growth and really often it's sometimes they insatiable demand by corporates and a number of our clients are the global leaders in corporate PPAs and procurement. They are continuing to develop and follow those clients and being able to provide them power not only in the grid connected side, but also in behind the meter and other markets opening up in community solar. So we see that again, the macro trends are pervasive and states also we have always been an important driver in opening up markets. We see that in community solar and some of the other policies they're adopting to meet the demand and capture this great economic growth opportunity for their states.
spk02: Understood. Thanks. I'll turn it back.
spk05: Thank you. The next question we have is from Mark Strauss of JP Morgan. Please go ahead.
spk03: Yes, thank you very much. I joined late, so I apologize if this was already addressed, but just kind of going back, I think on that previous question, looking at the median term targets here and just thinking about kind of the. The impact to your cost of debt with the investment grade credit rating. Is it. Is it really just kind of your cadence of not updating guidance until the four two calls or are you kind of signaling that there's something something out there potentially that could still kind of get you towards the lower end of that existing rain.
spk10: I don't know that it's it's really either. You know, we're comfortable with the guidance that we've put out there again. We'll look at it again in February. Mark already identified an answer to a question that we had a particularly strong first half in gain on sale. And that may dip down a little bit in the second half. There's nothing thematic there. It's just more coincidental of how many secured securitized transactions. We closed in first half for second half of the year is more coincidental than anything. And so I don't think there's any real hidden agenda or anything. It's just the. Eight to ten percent through twenty, twenty six. We feel good about. And as always, there's upside, there's downsides out there and we're constantly. Assessing them and re forecasting our business, but we're comfortable with the guidance we have out there right now.
spk03: Is it fair to say thank you, Jeff, is it fair to say, though, you feel better about that range since the investment grade credit rating.
spk10: Yes, I will affirm that we do feel better about the business about the financial performance about margins having achieved investment grades. So the answer to that is yes.
spk00: Excellent. Okay. Thank you. Thanks.
spk05: Ladies and gentlemen, we have reached the end of the Q&A session and with that, it concludes today's conference call. Thank you for joining us and you may now disconnect your lines.
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