2023-05-30 07:00:00 ET
Summary
- HASI priced a public offering of 13.04M shares at a price of $23.00 per share for gross proceeds of ~ $300M.
- Shares dropped around 14% last week.
- Which creates a perfect time to pounce on more shares.
This article was published at iREIT on Alpha on Sunday May 28, 2023.
Hannon Armstrong Sustainable Infrastructure Capital ( HASI ) priced a public offering of 13.04M shares at a price of $23.00 per share for gross proceeds of ~ $300M, and as a result, HASI stock dropped by around 14% (for the week):
As you may know, I’ve been following HASI for years here on Seeking Alpha, and in my first article (published on February 2015) I explained “ forget beaten up utilities (for now), BUY this 7.1% clean energy REIT.”
As you can see, HASI shares topped $63.42 in December 2020 and have since dropped to $23.00.
On the pullback last week, I decided to increase exposure in HASI considerably, based upon the details I’ll describe below.
When I published that article in 2015, HASI’s payout ratio was 103% and as you can see below, the REIT has been able to lower the payout ratio to 71%.
Back in 2015 HASI’s market cap was just under $400 million and today it’s over $2.1 billion.
The dividend yield in 2015 was 7.1% and today it’s 6.9%, however, if HASI paid out all of its earnings out in dividends (like in 2015) the yield would be closer to 10%.
It’s important to recognize that HASI is a uniquely positioned REIT, having many features of a commercial mREIT in which P/E (not P/FFO) aligns with the business model.
We generally use mortgage REITs as the peer sector for HASI, as you can see below, the company screens attractive and is the only “strong buy” on this list:
I also like comparing HASI to the net lease REITs, given the durability of cash flows generated by these (net lease) REITs.
I consider HASI more of a specialty finance REIT model which could explain some of the mysteries behind the business model. Hence the reason I titled the article, “It’s a bird, it’s a plane, it’s HASI”.
The Basics…
During the first 10 years as a public company, HASI has built a managed asset balance of over $10 billion and achieved annual average growth of 11%, and earnings and a total shareholder return in excess of 15% per year, which was well above the S&P 500 over the same period.
HASI has simplified its story into the three pillars of climate, clients, and assets. The business model could be described as a “ climate positive investor, partnering with programmatic clients and investing at the asset level in energy transition projects”.
As shown below, HASI invests in multiple sectors including energy efficiency, renewable, grid-connected wind & solar land, behind-the-meter solar, fleet vehicles and renewable gas.
The diversity of HASI’s asset classes and diversity of its clients provide confidence that the REIT will be able to invest in a generally consistent pattern.
As seen below, HASI has a multi-decade growth opportunity to invest across its energy-oriented platform as it continues to build a wider moat as the “premier climate solutions investor”.
The Balance Sheet
HASI’s liquidity remains strong, with a total of ~$490 million of cash in undrawn revolver capacity. The company has raised over $14 billion of capital across different funding sources (15 banks and raised debt from >200 institutions).
HASI debt to equity ratio is 2.0x debt to equity and 87% of debt is fixed rate. The company has Investment Grade credit ratings from Moody’s (Baa3) and BB+ by S&P.
As you can see below, HASI has recently used swaps, which were entered into to mitigate interest rate risk and manage future cost of funds.
By entering into these swaps, the company has better aligned its assets and liabilities, converted the floating rate Term Loan A into a 10-year fixed rate obligation, and locked in the underlying base rates for expected ‘25 and ‘26 bond refinancing at approximately 3%.
HASI Investor Presentation
As seen below, HASI has no near-term debt maturities:
HASI Investor Presentation
Breaking down the Strong Buy
In Q1-23 HASI had a record level of first quarter transaction closings at an average yield greater than 8%, increased the pipeline to greater than $5 billion and increased the portfolio by 9%.
HASI also reported a larger 12-month pipeline of greater than $5 billion, up from greater than $4.5 billion in Q4-22. In Q1-23 HASI recorded distributable EPS of $0.53 and GAAP earnings per share of $0.26.
Over the last year HASI grew its portfolio by 25% to $4.7 billion and managed assets 15% to $10.4 billion and distributable net investment income of $47.1 million, up 11% year-over-year despite higher costs of capital. The company also recorded $19.5 million of gain on sale, fees and securitization income.
In Q1-23 HASI’s portfolio yield was 7.5%, with yield on closings above 8% and cost of debt of 4.8%. Nonetheless, HASI continues to maintain sufficient margins to achieve profitability metrics. On the latest earnings call, HASI management said,
“We're highlighting two important considerations (see below), 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 forecast refinancing costs, we continue to expect to maintain margins in our portfolio to achieve our ROE targets .”
As you can see below, HASI has very predictable EPS history:
Analysts forecast EPS growth of 8% in 2023 and 2024:
On Q1-23 HASI affirmed guidance for (2021 – 2024): Distributable EPS 10% – 13% ((CAGR)) and DPS: 5% – 8% ((CAGR)). As seen below, HASI has a solid dividend growth history:
Here’s another look at the dividends paid:
iREIT
Now remember what I said earlier, HASI has lowered its payout ratio to 71%...which means the dividend is arguably as safe as it has ever been.
Meanwhile the dividend yield is 6.9%:
FAST Graphs
Shares are trading at a 50% discount to normal valuation levels (based on P/E):
FAST Graphs
The iREIT™ “ most likely ” total return forecast is that HASI will return an average of 44% annually:
The iREIT™ “ conservative ” total return forecast is that HASI will return an average of 33% annually:
Catalysts, you ask?
A primary catalyst to HASI has been its grid-connected ('GC') segment, specifically transactions in which HASI's clients are recycling capital on operating projects. The grid-connected business continues to benefit from higher PPA prices, which have increased more than 25% over the past year.
Also, HASI's pipeline growth has been its focus on incremental asset classes (fuels, transport and nature business) that has added several investments to the pipeline, particularly in fuel-related transactions.
HASI is trading at a wide margin of safety - on all valuation metrics - and has been resilient in posting strong results despite the challenges of interest rate volatility, inflation, supply chain disruptions, shifting public policy and other headwinds.
It's a bird, it's a plane, it's HASI.
For further details see:
Hannon Armstrong: Time To Pounce On More Shares