AMPS - Altus Power: Assessing An Alt-Energy Play

2023-07-26 16:13:24 ET

Summary

• Shares of solar energy and storage concern Altus Power, Inc. are down 35% from their post-SPAC merger valuation as multiples compressed for high growth no-profit companies.
• That said, the company is profitable on both a GAAP EPS and Adj. EBITDA basis, with the latter metric forecasted by management to reach $100 million in FY23.
• With its two largest shareholders providing Altus Power, Inc. with a substantial real estate pipeline to tap, the recent buying by one of those shareholders merited a deeper dive.
• A full investment analysis follows below.

We all shine on...like the moon and the stars and the sun...we all shine on...come on and on and on ...”? John Lennon.

Today, we take a foray into the alternative energy space with an analysis on a Busted IPO with a somewhat unique niche in the sector. This power generator has seen some recent buying by a beneficial owner. The stock has had a nice run since Morgan Stanley named it as one of its top two solar picks on July 17th, and the company just picked up some additional assets as well. Can the momentum continue? An analysis follows below.

Company Overview:

Altus Power, Inc. ( AMPS ) is a Stamford, Connecticut-based developer and owner-operator of large-scale photovoltaic ((PV)), energy storage, and electric vehicle charging systems, serving the private and public sectors, as well as the residential customer. The company’s owner-operator portfolio consists of 678 megawatts of solar PV in 24 states – approximately 70% from NY, NJ, MD, and MA – consisting of 300 power purchase agreements (PPAs) with industrial and commercial entities and community solar projects servicing 20,000 residential customers. Altus was formed in 2013 and went public when it merged into special purpose acquisition company ((SPAC)) CBRE Acquisition Holdings, Inc. in December 2021. Its opening trade executed at $10.14 a share. Its stock now trades right around $6.50 a share, translating to an approximate market cap of $1.05 billion.

The company is "capitalized" by two classes of stock. The 159.0 million publicly traded Class A shares confer economic interest and one vote per share. As part of the merger with CBRE, the SPAC was issued Class B shares (Alignment Shares) that automatically convert to a variable number of Class A shares – depending on the trading price of the Class A and dividends paid to Class A shareholders – at specific intervals over each of the first seven fiscal years post-merger. As such, the Class B shares are technically a derivative security. CBRE owns a 15% stake in the Class A shares.

Operating Model

The company generates revenue primarily from two sources: power sales and solar renewable energy credits (SRECs). Power sales consist of PPAs and Net Metering Credit Agreements (NMCAs).

PPAs typically consist of a private businesses or public institutions purchasing electricity from Altus as opposed to a utility. One example would be the company installing solar panels on the roof of a large industrial complex. Altus pays for the solar panels and their installation, as well as a lease payment to the complex for the use of its roof or land. The industrial complex does nothing except enter into an agreement to purchase energy from Altus. The PPAs can be fixed or floating rate, are typically twenty years in length, and are invoiced monthly. In return, for allowing installation of solar panels on its property, the industrial complex pays lower utility bills. Power sales under PPAs provided Altus with FY22 revenue of $24.9 million, up 58% from FY21 and 25% of its total.

A second source of revenue are NMCAs, where Altus typically constructs solar farms and sells the energy at a variable rate to subscribers (typically residential) who are unable to construct on-site solar facilities. The utility then credits Altus – who in turn credits its subscribers – for excess energy sold back to the grid. NMCA arrangements accounted for FY22 revenue of $27.2 million, up 18% from FY21 and 27% of total.

The third (and largest) contributor to Altus’ top line are SRECs, which the company receives from certain jurisdictions (currently MA, MD, and NJ energy boards) for power generated by solar energy systems it owns. These are sold directly to utilities so they can maintain compliance with renewable energy generation mandates or into SREC markets. SRECs were responsible for FY22 revenue of $40.5 million, up 43% from FY21 and 40% of total.

Cost of operations include lease payments to properties, maintenance of the panels, depreciation of the installed solar and energy storage equipment, followed by general and administrative.

At the bottom line, tax credits are provided at the federal, state, and local government levels for the installation of solar energy systems. Most substantially, the Inflation Reduction Act of 2022 expanded and extended investment tax credits (ITCs), providing a 30% ITC on the cost of installed solar and storage equipment between 2022 and 2032. Projects may be eligible for additional bonuses up to 10%-20%. Through tax equity financing, the company has raised over $100 million since inception.

Pipeline & Project Delays

Altus enjoys significant sponsorship from Blackstone Inc. ( BX ) , which provides financing through a scalable credit facility, enabling competitive bids in asset acquisition and development. The loans are non-recourse, secured by cash flows from the company’s long-term assets. As more assets come online, the more money available for borrowing. Management currently describes its pool of unlevered assets as “significant.”

Furthermore, Blackstone and SPAC sponsor CBRE provide Altus access to their network of portfolio companies; thus, facilitating pipeline introductions. One example of this synergy was a deal announced in May 2023 with Iron Mountain ( IRM ) for a 2.6 megawatt solar and storage installation on the roof of its record storage center in Massachusetts. The deal was facilitated by CBRE and will likely have tenacles into other Iron Mountain properties.

Altus’ current pipeline is north of one gigawatt, of which 50% is under development – of those, 25% are currently in construction or pre-construction as of March 31, 2023. Despite these in-built advantages, the company has experienced longer sales cycles as it engages bigger projects such as Iron Mountain, as well as elongated timelines for the completion of projects due to permitting and utility interconnection delays plus shortages of key components.

To keep growing against the challenging backdrop, Altus acquired ~102 megawatts of capacity for a total consideration of $115.4 million in FY22.

Q1 2023 Financials & Outlook

With the aid of acquisitions, the company grew FY22 Adj. EBITDA 43% to $58.6 million on total revenue of $101.2 million (up 41% over FY21). That trend more or less continued when it announced 1Q23 financials on May 15, 2023. Altus earned $0.03 a share ((GAAP)) and Adj. EBITDA of $16.0 million on revenue of $29.4 million versus $0.39 a share ((GAAP)) and Adj. EBITDA of $8.8 million on revenue of $19.2 million in 1Q22, representing an 83% increase at the Adj. EBTIDA line and a 53% increase at the top line. The decrease in the GAAP bottom line represented differences in non-cash charges relating to a change in the fair value of the company’s Alignment Shares over the two periods. Furthermore, Altus’ installed portfolio capacity grew 88% year-over-year to 678 megawatts, aided by the aforementioned acquisitions and the addition of solar assets totaling 220 megawatts in New York for a cash consideration of $293 million in 1Q23.

Management maintained its FY23 Adj. EBITDA guidance of $100 million on implied revenue of ~$175 million, representing 72% and 73% improvements over FY22, respectively.

Balance Sheet & Analyst Commentary:

After generating cash from operations of $14.2 million in 1Q23, Altus held unrestricted cash and equivalents of $69.5 million. However, owing to its rapid expansion and coverage of all solar and energy storage equipment and install costs, it held debt of $868.3 million, for an eye-popping net leverage of 12.1. Again, the loans are non-recourse, secured by cash flows from the company’s long-term assets. Despite the significant net leverage, various lending facilities totaling more than $360 million are available to Altus beyond its expandable financing with Blackstone. Management stated that no equity issuances would be necessary to fund its FY23 programs.

Street analysts are as optimistic as the lenders, featuring three buy and three outperform ratings and a median twelve-month price target of $10. On average, they expect the company to earn $0.07 a share ((GAAP)) on revenue of $172.5 million in FY23, followed by $0.23 a share ((GAAP)) on revenue of $267 million in FY24.

No lender is more bullish than Blackstone. Through one of its investment vehicles, it added 239,000 shares of AMPS at an average price of $5.50 on June 6th and 7th, upping its beneficial ownership position to 13.2%.

Verdict:

To a certain degree, it becomes a question of how much more debt and tax equity can the company’s current portfolio support before it has to tap the equity capital markets. The answer appears to be plenty – at least for FY23. Also, with commercial real estate causing much hand wringing across financial intermediaries, it is important to note that Altus has no exposure to office space, electing commercial, industrial, educational, and retail as its primary properties for solar installations.

That said, with an EV/TTM Adj. EBITDA near 30 and an EV/FY23E Adj. EBITDA of just under 20, shares of Altus Power, Inc. are not cheap. Factor in its high net leverage ratio, a price-to-FY23E sales of approximately 6, and a PE on FY24E EPS of over 25 times, Altus is too unattractive to be investible. Even with the tax credits, these projects have long payback periods. Apologies to Blackstone and CBRE, but there are better places to invest one’s money.

You need to spend time crawling alone through shadows to truly appreciate what it is to stand in the sun. ”? Shaun Hick.

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