Hannon Armstrong: The Right Play for Sustainable Infrastructure

09/26/2019 5:00 am EST

Focus: REITS

Stephen Leeb

Founder and Research Chairman, Leeb Group

We are recommending a relatively small renewable energy infrastructure financing REIT — Hannon Armstrong Sustainable Infrastructure Capital (HASI), notes Stephen Leeb, editor of The Complete Investor.

Hannon Armstrong invests in, and services, projects that reduce carbon emissions. It finances its investments through “sustainable yield bonds” (SYB), a term that it has trademarked and that specifies that the bonds are linked to carbon reduction targets.

SYBs benefit from the requirement that companies must comply with environmental, social, and governance (ESG) guidelines set by institutional investors.

The company invests in a wide assortment of projects that reduce use of fossil fuels. These include, for instance, HVAC equipment that reduces a building’s carbon output; solar panels; and projects that connect energy from solar and wind installations to an electricity-transmitting grid.

The market for renewable energies and carbon reduction is enormous and rising. It is estimated that over the next 30 years, at least $10 trillion to more than $15 trillion will be invested in wind and solar energy, depending on the percentage of incremental power that these renewables supply.

Added to this will be an enormous push to invest in energy conservation in ways big and relatively small. The sweet spot for Hannon Armstrong resides in the less-than-massive projects that will proliferate.

The company has established itself as a reliable go-to source for investments that are too small for major infrastructure companies but still require high-level expertise, which is a strong suit of the company.

Hannon Armstrong has strong, indeed, proprietary relationships and partnerships with large companies such as Honeywell, Johnson Controls, and First Solar. These relationships nearly assure that the company can count on a growing flow of projects.

The company’s earnings come from the cash flow generated by its investments as well as from sales of investments that are lower yielding. Given the growing demand for renewable projects, lower-yielding investments are invariably sold at a profit.

Over the past five years, profits have grown from $0.21 a share to an estimated $1.37 a share in 2019. Earnings growth in 2020 will slow to mid-single digits because of additional share offerings.

The company’s upside comes from a yield of nearly 5%, which is well above that of similar assets, such as other REITS, yieldcos, etc. Indeed, the stock would have to rise nearly 20% from its current price for its yield to be in line with that of the average REIT or yieldco.

We expect 5% dividend growth over the next two to three years and then accelerating dividend growth as an ever-larger pool of investments begins to pay off. The stock is a compelling idea.

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