HA Sustainable Infrastructure Capital, Inc. (HASI) Earnings Call Transcript & Summary

Greetings and welcome to HASI's First Quarter Earnings Conference Call and Webcast. [Operator Instructions] As a reminder: This conference is being recorded. It is now my pleasure to introduce your host, Neha Gaddam, Senior Director of Investor Relations and Corporate Finance.

Thank you, operator. Good afternoon, everyone, and welcome. Earlier this afternoon, HASI 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 Factors 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 in our posted earnings release and slide presentation. Joining me on today's call are Jeff Lipson, the company's President and CEO; Marc Pangburn, CFO. Now I'd like to turn the call over to Jeff, who will begin on Slide 3. Jeff?

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 Marc and me during this transition. Of note, we've had 2 significant milestones in the last 2 months: number one, our first Investor Day, which occurred on March 21. And number two, we rang the closing bell at The New York Stock Exchange on April 13, 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 $0.53 per share and GAAP EPS of $0.26. We have declared a quarterly dividend of $0.395 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%, increased our pipeline to greater than $5 billion and increased the portfolio by 9% in the quarter. As we turn to Slide 4, 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 3 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 5. 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 3 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 Marc 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 to 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 [ lengths of storage adoption ] and our clients remain the industry leaders in this rapidly growing business. Resi, community and C&I 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 of 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, Annmarie 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 Marc, 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 HASI or on our markets. Now we'll turn it over Marc Pangburn to detail our financial results.

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 6. In the first quarter, we recorded distributable earnings per share of $0.53 and GAAP earnings per share of $0.26. 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. We're -- we also recorded $19.5 million of gain on sale, fees and securitization income. I'd like to highlight 2 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 base ] [indiscernible] no meaningful interest rate exposure. Second, the growth in our portfolio in managed assets provides stability in our earnings profile. Let's turn to Slide 7 to review our recently closed transactions and portfolio. We're reporting record level of Q1 transaction closings of $389 million. Asset yields are increasing. The weighted average yield on new investments in Q1 is greater than 8%. Additionally, these closings came across 6 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 8, 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 2 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 forecasted 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 9, starting on the top left. Our liquidity remains strong with a total of over $490 million of cash and undrawn revolver capacity. Our banking group remains highly supportive, and we have experienced no disruption on 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, noncyclical assets and focus on the energy transition. We raised over $14 billion of capital across 8 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 forecasts for 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.

Good job, Marc. 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 HASI 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 Reed joined our Board as an independent director. She brings significant perspective on regulatory and public policy matters as the 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 HASI's growth and success. I will conclude by reinforcing the key pillars of HASI's strategy, climate, clients, assets, a simple business model which will continue to offer our unique value proposition to investors providing access to the energy transition with a diversified portfolio and noncyclical business model. That concludes our prepared remarks, so we can open up the line for questions, operator. Thank you.

[Operator Instructions] Our first question is from Noah Kaye of Oppenheimer.

One of the more interesting nuggets you shared at Investor Day, at least as it relates over the next several years, is that your 8 largest customers have 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 and your visibility to continuing to pick up the pace of originations as we move throughout the year here and particularly in some of the asset classes like grid connected that I think investors are looking at?

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 transmission. 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 of 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 are not seeing a very significant impact on our pattern of investing right now.

Okay. And I guess, moving to the funding side, it looked like, the transactions that were funded this quarter, 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.

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, continued to evaluate those markets for which ones are relatively attractive at the time. And then we'll continue to pursue whichever provides the best margins for the business. We obviously don't want to talk about our funding plans for the future, but that's our approach.

Nice to see the origination volumes in the quarter. I'll turn it over.

Thanks, Noah.

The next question is from Julien Dumoulin-Smith of Bank of America.

This is actually Cameron Lochridge on for Julian. 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 and to '24; and how that impact -- or could impact the expected EPS growth, again, post '24? And on that note, when would we expect to get some sort of guidance on '25 EPS and beyond?

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 2025 guidance in our fourth quarter call in February of '24. 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 2025.

Perfect. Appreciate it. And then for a follow-up: At Investor Day, you talked about RNG as a -- renewable natural gas, as a growth driver going forward, a potential growth driver going forward. I'm just kind of curious to get your thoughts specifically around some of the EPA's proposed renewable volume obligations; as well as your thoughts on e-RINs and their potential to be shifted out beyond, call it, a '23 activation date so called. Anything you can share on that and kind of how that's trending?