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Hannon Armstrong: A BDC for Renewable Gains
09/05/2018 5:00 am EST
Hannon Armstrong Sustainable Infrastructure (HASI) is a business development company (BDC); its primary business is lending money to smalle-scale renewable energy and efficiency projects, explains Roger Conrad, editor of Conrad's Utility Investor.
Back in February, the firm announced it wouldn’t raise its dividend this year. We didn’t like the freeze but agreed with management’s desire to instead build coverage and fund growth, while absorbing the expense of converting then-hefty variable rate debt to fixed rates.
Since then, the renewable energy business development company organized as a real estate investment trust has rewarded our patience. The 27 percent lift in second quarter revenue testifies to its continuing success. The company boosted its project pipeline to $2.5 billion and stayed on track to close $1 billion in transactions by year-end.
Hannon’s key profitability metric is “core earnings per share,” a measure that takes into account tax advantages inherent in REIT structure and excludes non-cash items that affect portfolio value. Management has guided to growth of 2 to 6 percent this year, a lower rate than previous years due to the expected cost of converting variable rate debt.
As it’s turned out, however, the 14.7 percent boost in the second quarter earnings has this BDC on track to top the mid-point of guidance at $1.32 per share. Variable rate debt is now just 11 percent of the total, down from 46 percent a year ago and below a target range of 15 to 40 percent. Portfolio quality is the highest in the BDC universe, with only 0.4 percent in non-investment grade loans.
In addition to still robust federal government and distributable solar activity, the company has successfully entered two related business lines this year: storm water infrastructure and owning land under renewable energy facilities. That’s while sticking to projects that realize at least a baseline 10 percent return on equity. And the company’s proven ability to securitize certain assets is limiting equity finance needs as well.
And management has a 37-year track record of timely investing and navigating volatility in capital markets and politics. And sometime in the next year, Hannon will also be in position to resume dividend growth. That’s a strong value proposition for an this aggressive holding yielding nearly 7 percent.
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