2023-11-29 09:24:02 ET
Summary
- Hannon Armstrong's performance in 2023 has been disrupted by the Fed's fight against inflation, but the dividend has been maintained.
- The company is currently paying out a 6.7% annualized forward dividend yield.
- A move to discontinue its REIT status from 2024 is not a reason to sell if the dividend is maintained, which management has guided for.
Whilst Hannon Armstrong (HASI) currently forms a core holding in my climate economy portfolio, performance through 2023 has been disrupted by a rapid increase in the cost of debt brought about by the Fed's fight with inflation. HASI held a total debt balance of $3.66 billion at the end of its fiscal 2023 third quarter, driving a record quarterly interest on long-term debt. It's been tough being a shareholder with the commons down 18% year-to-date. The question that now looms is whether this is to be sold before the end of the year for tax loss harvesting or to remain a core hold as decarbonization is set to remain a pertinent part of the US economy in the next decade.
Distributable EPS being guided to come in between $2.27 to $2.53 for next year is bullish, representing growth of at least 10% against its 2020 distributable EPS baseline of $1.55 per share. For some context, HASI last declared a quarterly cash dividend of $0.395 per share , unchanged from its prior distribution and $1.58 per share annualized for a 6.7% forward dividend yield. The quarterly distributions have also been hiked at a 4.81% compound annual growth rate over 3 years and have never experienced any cuts since the REIT went public in 2013. However, HASI is moving to discontinue its REIT tax election status. REITs are allowed to distribute 90% of their taxable income to shareholders which allows them not to pay any corporate income taxes. The move would see a hit to its capacity to sustain the dividend on the back of a 21% US corporate tax rate.
Portfolio, EPS, And Dividend Coverage
HASI is a renewable energy REIT with a broad $5.5 billion portfolio built around a range of climate solutions from grid-connected utility-scale solar and onshore wind to mezzanine loans made on a non-recourse basis to residential solar companies. The company has also been investing in renewable natural gas through senior debt investments in a portfolio of operating landfill gas-to-RNG and wastewater treatment biogas-to-RNG plants in partnership with Ameresco ( AMRC ). Hence, HASI is essentially one of the most diversified public companies to build exposure to the US transition to a low-carbon economy. I last covered the ticker earlier this year in February.
HASI reported revenue of $89.85 million for its third quarter, up 49.4% over its year-ago comp and a beat by $52.56 million on consensus estimates. This drove earnings of $21.45 million , down 38% from $34.5 million a year ago. The decline on a diluted per share basis from $0.38 a year ago to $0.20 in the recent third quarter was a larger 47% decline due to a not insignificant 20% increase in the weighted average common shares outstanding. Distributable EPS was at $0.62 per share, up from $0.49 per share a year ago for 157% dividend coverage.
Investment Activity, Yields, And Post-REIT Outlook
HASI's portfolio yield at 7.9% at the end of the third quarter was a 20 basis point expansion sequentially with its cost of debt at 4.9%. The continued growth of the portfolio is the core story here with 41% year-over-year growth from $688 million of new investment funded during the quarter and another $117 million in funding deployed to prior investments. It's hard to overstate the opportunity posed by the energy transition with the 2022 Inflation Reduction Act turbocharging growth through its provision of billions in investment and production tax credits for renewable energy production. The switch away from REIT status was explained further during HASI's third-quarter earnings call .
So the way to think about that is migrating away from REIT status, removes the constraint that would have occurred a few years down the line, since we remain primarily active non-REIT qualifying investments, the REIT test would have become a constraint.
Jeff Lipson, CEO
HASI is chasing growth by discontinuing its REIT status from the start of 2024. Whilst the company has stated it intends to maintain its dividend policy, the absence of the certainty of a REIT structure could still see what has historically been stable distributions become more volatile. The US economy remains in a state of disruption as higher rates are still yet to fully feed through to the broader economy. The sector is built on leverage and rates remaining higher for longer could see defaults begin to rise and utilities perhaps begin to face material financial difficulty. HASI has a BB+ balance sheet which is just below investment grade with year-to-date debt raises of $1 billion at a 6.5% cost of debt. This should see the cost of debt for its broader portfolio start to rise.
I intend to hold my shares through the change as the ticker is also held by relatively few REIT funds . Management doesn't see there being a significant turnover in their shareholder base and intends to use NOLs and tax credits to minimize HASI's tax obligations post-REIT. I'm rating the shares as a hold.
For further details see:
Hannon Armstrong: Should Shareholders Leave Before The Change From REIT Structure?