2023-10-26 02:57:13 ET
Summary
- Hannon Armstrong Sustainable Infrastructure Capital's stock has, like many REITs, suffered in 2023.
- Despite high short interest, analysts remain positive on the stock.
- In this article, we unpack the high and lowlights of the stock as it stands today.
A REIT Story
Consistent readers of our research are no strangers to the idea that rising interest rates have virtually hurt all REITs. Expanding cap rates at properties, tenant debt burdens, and suddenly unattractive yields have caused the sector to underperform the market on a broad scale.
Mr. Market is a fickle character, however, and he tends to overdo things when he panics just as he does when he's elated. It is in this vein that we discuss the curious case of Hannon Armstrong Sustainable Infrastructure Capital, Inc ( HASI ).
Like virtually all REITs, Hannon has had a tough go of things in 2023:
On a total return basis, the stock has returned negative 38% (negative 41% on a price return basis).
The stock has also seen a surge in short interest. 15% of the float held is currently held short, the highest level in 10 years.
Despite this, analysts remain quite positive on the stock. Of the 11 analysts who cover it, 3 rate it a strong buy, 6 a buy, and 2 a hold with no sell or strong sell ratings to speak of.
At current levels, the stock currently trades a staggering 95% below the average analyst target price. That's quite the discrepancy between the sell side and buy side.
So, what gives?
That, friends, is what we aim to uncover here. Let's dive in.
The Business
According to Hannon's latest 10K , the company's business operations can be summarized as follows:
We invest in climate solutions developed or sponsored by leading companies in the energy efficiency, renewable energy and other sustainable infrastructure markets. We believe that we were one of the first U.S. public companies solely dedicated to climate solutions. Our goal is to generate attractive returns from a diversified portfolio of project company investments with long-term, predictable cash flows from proven technologies that reduce carbon emissions or increase resilience to climate change. Our vision is that every investment improves our climate future.
Given that 2023 has been the hottest recorded year since 1880 (when records began) and the expected boost to the renewable sector from the spending in the 2021 infrastructure bill it would logically follow that the sector would have a tailwind behind it.
Getting a little further into the weeds, we see that Hannon's portfolio yielded 7.7% in the latest quarter. With a portfolio value of $4.8 billion, this works out to around $369 million in yield.
This 7.7% yield presents a decent spread over the company's interest expense of 4.8%, which is an obviously good thing.
The problem, as far as we can see it, comes into play when one considers the company's expense structure and its dividend.
In the six months ending June 30, 2023, the company recorded $143 million in total revenue against $130 million in expenses, $77 million of which were comprised of interest expense.
This, we think, is high.
Despite reductions in the provision for loss on receivables and compensation and benefits line, shelling out a bit more than 50% of total revenue on interest expense seems like a difficult hill to overcome no matter how you slice it.
Gains on equity method investments provided a nice boost in the first half of 2023, bringing total net income attributable to controlling stockholders to $37 million.
The point of contention becomes clear when we take a look at the company's cash flow statement. In the three months ending June 30, 2023 (where net income was $13.5 million), the company generated $65 million in operating cash flow and paid out $72 million in dividends in the quarter.
This was offset by the $357 million the company raised via equity issuance, but that's likely a cold comfort for shareholders.
To make it a bit more clear, the company generated a diluted earnings per share of $0.14 in the latest quarter, and paid a $0.395 dividend in the same quarter.
Diverging Lines
At this point, investors can be forgiven for not knowing what to make of Hannon. In a time where rising interest rates are pounding the REIT sector, this particular REIT seems to be in growth mode, leaving investors to decide which side of the coin is most attractive.
And Hannon's story of growth seems to be a real thing. Consider the trajectory of the company's stock price against its forward GAAP EPS estimates:
It isn't often that we see such a dramatic divergence in a company's stock price and forward earnings estimates, and we see it as evidence that Hannon's growth strategy is moving in the right direction even in the face of higher interest rates.
However, simple math dictates that even this forward estimate of $1.46 will be insufficient to fully cover the $0.40 quarterly dividend distribution (assuming no change) for the next twelve months.
The Bottom Line
Hannon presents an interesting opportunity for investors to gain exposure to the fast-growing renewable and green energy sector. However, the company is in growth mode and actively making investments, which is, to put things lightly, a difficult task in a rising rate environment. While we think that Hannon's business will likely be attractive in the future, the results generated today aren't enough to make us optimistic on the stock's near-term potential.
For further details see:
The Curious Case Of Hannon Armstrong