Investment thesis

Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI) is a great company for investors looking to gain exposure to renewable energy in many varieties. The company is classified as a REIT, so continued dividends can be expected compared to many other renewable energy companies. HASI is heading into a great year 2022 with growth in revenues and revenues with a diversified investment portfolio and land and real estate leases. I also expect a 2-3% dividend increase for the first quarter of 2022, which may make Hannon Armstrong a potential buying opportunity for income investors who are also looking for long-term organic growth.

Business model

Hannon Armstrong provides capital and services to the energy efficiency, renewable energy and other sustainable infrastructure markets in the United States. The company’s projects include energy efficiency projects that reduce the energy consumption or cost of buildings or facilities through the use of solar generation, heating, etc. It also focuses on the areas of grid-connected projects that deploy cleaner energy sources, such as solar power and wind to generate electricity; and other sustainable infrastructure projects. The company is considered a real estate investment trust for US federal income tax purposes. Officially, HASI is classified as a mortgage REIT, but the company is more like a hybrid business between a business development company and a mortgage REIT. With over $ 8 billion in assets under management, Hannon Armstrong’s primary goal is to make climate-positive investments with superior risk-adjusted returns. The company recognizes income from 4 different sources. Interest income from loans they have made, rental income from property and land, gains on the sale of debt and investments, and fee income from providing brokerage services by managing and maintaining assets belonging to third parties.

Source: The graphic is created by the author. All figures are taken from the company’s third quarter 2021 financial statements.

Finances and income

Q3 results

HASI generated distributable EPS of $ 0.41 on a fully diluted basis for the third quarter of 2021, compared to $ 0.36 distributable EPS for the same period in 2020, a 14% year-over-year increase. The company reported GAAP-based net investment income of $ 5.3 million for the third quarter of 2021, up from $ 3.9 million for the same period in 2020. HASI closed $ 1.1 billion of investments in the first three quarters of 2021, including more than $ 200 million in the third quarter in a seasoned portfolio of residential solar assets. The total portfolio grew 45% year-over-year to $ 3.2 billion and assets under management also increased 28% to $ 8.2 billion from the current fiscal year in the third quarter of 2020. “We continue to deliver exceptional results with the flexibility to invest in multiple asset classes. and a fall in the cost of capital. Additionally, we continue our ESG leadership with CarbonCount and our focused philanthropic efforts at the intersection of social justice and climate action, ”said Jeffrey W. Eckel, chairman and CEO of Hannon Armstrong.

Source: Presentation of results

The return on the Company’s portfolio has been consistently at 7.6% over the past 3 years while interest charges are down from 5.1% to 4.7% as of September 30, 2021. The Loan Industry behind the meter has the highest return in the portfolio. with 8.1%. Management tries to build uncorrelated asset classes to deal with macroeconomic and other challenges. This is why the company did not make investments related to wind power but more than doubled the public and residential asset classes to balance the portfolio. In addition, HASI will not be affected by the rise in interest rates in 2022 because 99% of their debt is a fixed rate loan.

Source: Presentation of results

Evaluation

Fossil fuel prices are stable or have fallen slightly over the past 10 years, but renewables have experienced a massive price drop, making them an excellent substitute for energy sources at fair price points. The cost per MWH has changed dramatically over the past 11 years in favor of renewables. While electricity prices linked to natural gas ($ / MWH) only fell by 29% (i.e. before the price hike at the end of 2021) and electricity prices linked to coal remained the same as in 2009. At the same time, solar energy prices fell by 90% and onshore wind prices by 70%.

Source: visualcapitalist.com

Looking at the numbers, it is quite difficult to assess HASI based on traditional metrics due to the combined nature of the business. We could measure on the basis of tangible book value, but there is a huge portion that could instead be measured on the basis of NII. Based on traditional REIT metrics, the company appears overvalued with a price per TBV of 3.07. Despite these problems and figures, the company appears to be heading for a bright future. Total revenue forecast is 30% above 2021 levels (2022 estimate of $ 128 million). EPS forecasts also look good with EPS 5% higher for 2022 than 2021, estimates of operating cash flow growth are above 50%. The current price is not overvalued based on the current dividend yield, but rather between a fair price and an overvaluation. With intensive growth for 2022 and the potential dividend increase in the first quarter, I see HASI as a long position.

Risks specific to the company

The projects in which the Company invests generally depend in part on various US federal, state, or local government policies and incentives that support or enhance the economic feasibility of the project. These policies may include government initiatives designed to reduce energy consumption and impact the use of renewable energy or the investment and use of sustainable infrastructure. Government regulations also affect the terms of funding from third parties provided to support these projects. If any of these government policies, incentives or regulations are changed adversely, or if recent changes in federal law have a negative impact, the operating results of the projects they finance and the returns available, the investments that they do could decrease.

Many traditional energy sources such as coal, petroleum-based fuels, and natural gas can be influenced by the price of underlying or substitute raw materials. However, oil prices surged in the second half of 2021 and the forecast for 2022 is more to stay at this current price level or decline to an average of $ 60 per barrel. In addition, low natural gas prices can negatively affect both the price available for renewable energy projects under future electricity sales agreements and the price of the electricity that projects. sell on a futures or spot market basis. The price forecasts for natural gas are relatively similar to those for oil; it is expected to gradually decline to “normal” levels as the winter season passes. Additionally, volatile commodity prices, including energy prices, can make building owners and other parties reluctant to engage in projects where payback is based on value. fixed monetary policy for energy savings that would not decrease if the price of energy fell. Any resulting decline in demand for HASI’s investments or in the price that industry participants receive for the sale of fossil fuels could have a negative impact on the company’s operating results.

The volume and timing of the Company’s originations are subject to seasonal fluctuations and the Company has a risk factor typical of BDC and FPI which is that their investments are not listed on a stock exchange. The fair value of assets that are not listed on a stock exchange may not be readily determinable. The business also faces seasonal fluctuations and timing due to construction cycles, especially in colder climates during the winter months, such as the northern United States, or in educational institutions. , where large projects are usually carried out during the summer months when their facilities are unoccupied.

My opinion on the HASI dividend

Current dividend

The company has a great history of dividends. At first glance, it may not seem so great, but a closer look at it will erase the image. The company has paid dividends since the IPO (not surprisingly as HASI is classified as a mREIT) but has not suffered any dividend cuts and 7 increases in the past 8 years. Additionally, HASI has a history of consecutive 3-year dividend growth at the start of 2022. Although they only yield 2.81% and the dividend growth over the past 5 years was only 2.62 %. But management is committed to paying dividends and the most important thing is to increase them over time.

Future sustainability

Based on all external and internal factors, the company’s dividend looks stable and secure over the long term. External factors are in their favor such as government and local incentives to move towards green energy, rising fossil fuel prices. Internal factors such as portfolio diversification and liquidity available for distribution are good factors. The company has a sustainable payout ratio of between 70% and 80%, indicating that there is still room for improvement. The company also expects annual dividends per share to increase at a compound annual rate of 3% to 5% from 2021 to 2023, compared to the 2020 benchmark of $ 1.36 per share. This is why I am expecting a dividend increase in the first quarter of 2022 and calculated with a dividend increase of 2.8%.

Source: The table is created by the author. All figures are taken from the company’s financial statements and the SA’s earnings estimates.

Summary

Hannon Armstrong is now trading the best dividend yield since May 2021 with a potential dividend increase in this quarter. Additionally, the company has excellent forecasts and numbers for this year with an estimated revenue growth of 30%. The valuation may seem overvalued, but it is instead somewhere between fair and overvalued, making HASI a potential buy. External trends of declining renewable energy prices and other government initiatives are working in the company’s favor in the long run. For income investors looking for an ESG with a fair return, continuous dividend increases, and the potential for long-term organic growth, HASI may be a great choice.