Investor Presentation | May 2016 - Hannon Armstrong
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Investor Presentation | May 2016
Forward Looking Statements
2
Some of the information contained herein are forward-looking statements and within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used herein, words such as
"believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may," "target," or similar expressions, are intended
to identify such forward-looking statements. Forward-looking statements are subject to significant risks and uncertainties. Investors are
cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in the forward-
looking statements. Factors that could cause actual results to differ materially from those described in the forward-looking statements
include those discussed under the caption "Risk Factors" included in our Annual Report on Form 10-K for our fiscal year ended Dec.
31, 2015, which was filed with the U.S. Securities and Exchange Commission (SEC), as well as in other reports that we file with the
SEC.
Forward-looking statements are based on beliefs, assumptions and expectations as of May 4, 2016. We project annualized Core
Earnings growth in the range of 14% to 19% per share for 2016 and continued double-digit Core Earnings per share growth for
2017. This guidance reflects the Company's estimates of (i) yield on its existing Portfolio; (ii) yield on incremental Portfolio
investments, inclusive of the Company's existing pipeline; (iii) amount, timing, and costs of debt and equity capital to fund new
investments; and (iv) changes in costs and expenses reflective of the Company's forecasted operations. All guidance is based on
current expectations of future economic conditions, the dynamics of the markets in which it operates and the judgment of the
Company's management team. We disclaim any obligation to publicly release the results of any revisions to these forward-looking
statements reflecting new estimates, events or circumstances after the date of this presentation.
2
Hannon Armstrong: Financing the Future of Energy
3
Q1 2016 Results
• $0.32 Core EPS for Q1 ‘16
• $213 million closed in Q1 ‘16
• 2.3:1 leverage
• 66% fixed rate debt
• $0.30 Quarterly Dividend; 6.1% Annualized Yield1
Target Asset Classes Core Earnings Per Share | 2016 Guidance
Efficiency $1.40 $1.18 to $1.24
$1.20 $1.04
$1.00 $0.93 14-19%
Growth
$0.80 Target
Wind $0.60
$0.43
$0.40
$0.20
Solar $-
2013A 2014A 2015A 2016E
1Source: Bloomberg – Based on HASI closing share price of $19.65 on 5/3/16
3
~100% TSR Since IPO Supports Our Investment Thesis1
Investment Thesis
We will earn better risk adjusted returns by investing on the right side of the
climate change line and making those investments in the senior or preferred
equity position of the capital stack.
Analysis of Q1 2016 on GHG Emissions2 + Examples of Q1 2016 Investments:
Removing • Senior Debt For Commercial Efficiency
176,919
Metric Tons
• Senior Investment for Wind
of GHGs • Land Transaction for Solar farms
reduced
annually
from Q1 ‘16
investments
86 thousand …With the Leading Companies in our Markets
Metric Tons
of Coal
1 Totalshareholder return is calculated from the closing price on April 18, 2013 (our first day of trading) and assumes that all dividends were reinvested without the payment of any commissions.
2 Estimatedcarbon savings are calculated using the estimated kilowatt hours (“kWh”), gallons of fuel oil, million British thermal units (“MMBtus”) of natural gas and gallons of water
saved as appropriate, for each project. The energy savings are converted into an estimate of metric tons of CO2 equivalent emissions based upon the project’s location and the
corresponding emissions factor data from the U.S. Government and International Energy Administration. Portfolios of projects are represented on an aggregate basis. 4
Clean Energy Financing Opportunity Continues to Grow
Growth Estimates Through 2018 for Our Three Target Markets1
With PTC extension
+~100%
Wholesale Power
With ITC extension
z
+ ~50%
Wind
Solar
DG Solar
With C-PACE and
other Innovations
Retail Power Efficiency +22%
1 Illustrative; not to scale; Estimates based on the period from 2015 to 2018. 2015 uses installed capacity from American Wind Energy Association & Business Council for Sustainable Energy and
the Bloomberg New Energy Finance 2016 Sustainable Energy in America Factbook. 2018 wind growth from NREL, Impact of Federal Tax Credit Extension on Renewable Deployment and
Power Sector Emissions, February 2016; 2018 Solar growth from the GTM Research and Solar Energy Industries Association 2015 U.S. Solar Market Insight™. 2018 Efficiency growth from
management estimates of Navigant’s Energy Service Company Market Overview 2Q 2015
5
Pipeline Remains Robust & Yields Tick Up in Q1 2016
Drives Growth of
12-Month Pipeline on Balance Sheet Portfolio and
>$2.5 Billion Fee Generating Securitizations
≈7.0%*
Solar Yield
8%
Wind Solar
32% 38%
Wind
27% >$2.5b ≈6.3%
Yield*
Efficiency Other
Efficiency
65% 2%
≈8.5%* 28% ≈4.5%*
Yield Yield
Efficiency is Either Kept on Balance Sheet
or Securitized for Fees
*Represents forward looking unlevered return on assets yield as of March 31, 2016 6
Summary Financial Data
Results, Unaudited Q1 Q1
Notes
($ in millions, except per share data) 2016 2015
Investment income, core $21.9 $13.7 Grew Portfolio from ~$885m to $1.4b
Other Investment Revenue 5.8 3.1 Increased securitizations due to market conditions
Core Total Revenue 27.7 16.8 65% Increase Q1‘15 to Q1’16
Investment interest expense (11.3) (6.1) 66% Fixed-rate debt
Core Total Revenue, net 16.4 10.7
Higher SG&A due to growth
Core Other Expenses, net (4.2) (3.3) in the business
Core Earnings $12.2 $7.4
Core Earnings/Share $0.32 $0.27 19% Core EPS Growth Q1’15 to Q1’16
Quarterly Transaction Volume Fluctuates
Due to the Nature of the Assets
($ in millions)
Q4 ’14 Q1 ’15 Q2 ‘15 Q3 ’15 Q4 ’15 Q1 ‘16
Volume $375 $104 $350 $140 $340 $213
7
Portfolio / Credit Quality1
Commercial
Commercial Non- Subtotal,
Investment Investment Debt and Real Equity Method
Government Grade Grade Estate Investments Total
($ in millions)
Financing receivables $ 374 $ 428 $ 17 $ 819 $ — $ 819
Financing receivables held-for-sale 42 — — 42 — 42
Investments 21 16 — 37 — 37
Real estate — 163 — 163 — 163
Equity method investments — — — — 304 304
Total $ 437 $ 607 $ 17 $ 1,061 $ 304 $ 1,365
% of Debt & Real Estate portfolio 41% 57% 2% 100% N/A N/A
Average remaining balance/transaction $ 12 $ 10 $ 17 $ 11 $ 25 $ 12
Diversified Portfolio,
High Credit Quality
With Over 110 Transactions
1 See Supplemental Financial Data on Slide 11 for footnotes 8
Positioned for Higher Interest Rates
Assets ($ in millions)
Financing receivables & investments $ 898 • 61% of portfolio is fixed-rate debt
investments
Real estate 163 • Remaining 39% consists of equity method
Strong investments, real estate, and floating rate
Equity method investments 304 Portfolio debt
• New assets originated at current rates
Cash 26 • Asset side of B/S similar to a bond ladder
Other 86
Total Assets $ 1,477
Liabilities and Equity
• 66% Fixed debt; target is 50 – 70%
Credit facility $ 322 • 2.3 to 1 Leverage; target is 2.5 to 1
Conservative • 25 bps increase in LIBOR would increase
Nonrecourse debt 552 Leverage quarterly interest expense by $0.2
million, or less than $0.01 per share
Other nonrecourse debt 94
Other 85
Total Liabilities 1,053
Total Equity 424 • Hannon Employees: ≈7%
High Quality • Institutional Ownership: >70%
Total Liabilities and Equity $ 1,477 Shareholders1 • Public Float: ≈93%
On average over the last three years, approximately 80% of dividends treated as return of capital
due to available tax attributes
1 Bloomberg data as of 5/3/16; Management calculations 9
Hannon Armstrong: Continuing to Execute
Attractive • Long-term cash flows provide stable dividend
Yield • Preferred returns minimize commodity, resource variability
Diversified • Over 110 Investments
Portfolio • Multiple customer segments and technologies
Good • Industry leader in environmental disclosure
Governance • Internally managed, LTIP aligned with shareholders
10Supplemental Financial Data
EXPLANATORY NOTES
Non-GAAP Financial Measures
Core Earnings
Core Total Revenue, Core Total Investment Revenue, net of investment interest expense and provision, Core Other Expenses, net and Core Earnings (collectively "Core Financial Metrics") are non-GAAP financial measures. The Core Total Revenue amounts reflects the
wind equity investments adjusted to an effective interest method and the add-back of non-cash real estate intangible amortization and the provision for credit losses, if any.
Our equity method investments in the wind projects are structured using typical wind partnership "flip" structures where we, along with other institutional investors, if any, receive a pre-negotiated preferred return consisting of priority distributions from the project cash
flows along with tax attributes. Once this preferred return is achieved, the partnership flips and the wind energy company, which operates the project, receives the majority of the cash flows through its equity interests with the institutional investors retaining an ongoing
residual interest. Given this structure, we negotiated our purchase price of our wind investments based on our assessment of the expected cash flows from each investment discounted back to net present value based on a discount rate that represented an expected yield
on the investment. This is similar to how we value the expected cash flows in financing receivables. Under U.S. GAAP, we are required to account for these investments utilizing the hypothetical liquidation at book value method ("HLBV"), in which we recognize income or
loss based on the change in the amount each partner would receive if the assets were liquidated at book value, in this case, at the end of the immediately preceding quarter after adjusting for any distributions or contributions made during such quarter. As HLBV
incorporates non-cash items, such as depreciation, and because we are entitled to receive a preferred return of cash flows on our investments independent of how profits and losses are allocated, the HLBV allocation does not, in our opinion, reflect the economics of our
investments. As a result, and in an attempt to treat these investments in a manner similar to our other investments and our initial valuation, in calculating Core Total Revenue for the above periods, we adjusted the income we receive from these investments as if we were
recognizing income or loss based on an effective interest methodology. Generally, under this methodology, income is recognized over the life of the asset using a constant effective yield. The initial constant effective yield we selected is equal to the discount rates we
determined when making our investment decisions. On at least a quarterly basis, we will review and, if appropriate, adjust the discount rates and the income or loss we receive from these investments for purposes of calculating Core Total Revenue in future periods, as
necessary, to reflect changes in both actual cash flows received and our estimates of the future cash flows from the projects. Our allocation of profits and losses is projected to change in 2019 in our transactions with JPMorgan Chase & Co. ("JPMorgan"), which is
expected to result in an increase of the amount of HLBV profits or losses allocated to us.
We have borrowed approximately $225 million on a nonrecourse basis as of March 31, 2016, using our equity method investments as collateral. Included in our U.S. GAAP investment interest expense for the three months ended March 31, 2016, was approximately
$4 million of interest expense related to these nonrecourse loans. For the three months ended March 31, 2016, we collected cash distributions from our wind investments of approximately $16 million, of which $7 million represents our Core Earnings adjustment for these
investments based upon the effective yield methodology discussed above.
Core Other Expenses, net reflects the add back of non-cash equity-based compensation, amortization of intangible assets, GAAP HLBV income or loss on our equity method investments, and business acquisition costs, if any. Core Earnings represent earnings utilizing the
adjustments for Core Total Revenue and Core Other Expenses, net and adjusting for any non-cash taxes and the minority interest. Our Core Financial Metrics are also adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges,
if any, as approved by a majority of our independent directors.
We believe that the Core Financial Metrics provide additional measures of our core operating performance by eliminating the impact of certain non-cash income and expenses and facilitating a comparison of our financial results to those of other comparable REITs with
fewer or no non-cash charges and a comparison of our operating results from period to period. Our management uses Core Financial Metrics in this way. We believe that our investors also use our Core Financial Metrics or a comparable supplemental performance
measure to evaluate and compare our performance to our peers, and as such, we believe that the disclosure of our Core Financial Metrics is useful to our investors.
Core Earnings does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), or an indication of our cash flows from operating activities
(determined in accordance with GAAP), a measure of our liquidity or an indication of funds available to fund our cash needs, including our ability to make cash distributions. In addition, our methodology for calculating our Core Financial Metrics may differ from the
methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and accordingly, our reported Core Earnings may not be comparable to the Core Earnings reported by other REITs.
Portfolio/Credit Quality Footnotes
“Government” Transactions where the ultimate obligor is the U.S. federal government or state or local governments where the obligors are rated investment grade (either by an independent rating agency or based upon our internal
credit analysis). This amount includes $260 million of U.S. federal government transactions and $177 million of transactions where the ultimate obligors are state or local governments. Transactions may have guaranties
of energy savings from third party service providers, the majority of which are entities rated investment grade by an independent rating agency.
“Commercial Investment Grade” Transactions where the projects or the ultimate obligors are commercial entities, including institutions such as hospitals or universities, that have been rated investment grade (either by an independent rating agency or
based on our internal credit analysis). Of this total, $11 million of the transactions have been rated investment grade by an independent rating agency. Commercial investment grade financing receivables include $174
million of internally rated residential solar loans where the cash flows which support our financing receivables are subordinated to the tax equity investors (whose return is largely derived from the renewable energy tax
incentives) and for which we rely on certain tax related indemnities of the publicly traded residential solar provider.
“Commercial Non-Investment Grade” Transactions where the projects or the ultimate obligors are commercial entities, including institutions such as hospitals or universities, that have ratings below investment grade (either by an independent rating agency or
using our internal credit analysis).
“Equity Method Investment” Consists of ownership interests in operating wind projects.
“Real Estate” Includes the real estate and the lease intangible assets through which we receive scheduled lease payments, typically under long-term triple net lease agreements.
”Average Remaining Balance” Excludes 79 transactions each with outstanding balances that are less than $1 million and that in the aggregate total $28 million.
May 2013 11 11Core Earnings
We calculated our Core Earnings and provided a reconciliation of our GAAP Net Income to Core Earnings for the three
months ended March 31, 2016 and 2015, respectively, in the table below:
12Core Adjustments
The table below provides a reconciliation of the GAAP Total Revenue, to Core Total Revenue:
The table below provides a reconciliation of the GAAP Other Expenses, net to Core Other Expenses, net:
13Income Statement
14Balance Sheet
15Appendix
Why We Invest Where We Do
Distributed Solar Efficiency
Residential Commercial Industrial
Regulated Utility
Utility Scale Solar Utility Scale Wind
• Land Leases • Tax Equity
Power Purchase Agreement
Regulated Utility Investors
• Senior Debt • Senior Debt • Sponsor Equity
• Tax Equity • Preferred Stock
• Sponsor Equity • Common Equity
We seek the best risk-adjusted returns in target asset classes, which is most often in the senior or preferred
position; In effect, we are senior to the regulated utility investor.
17Our Strategy Stays The Same, While Our Client List Expands
Originate
Programmatic
Assets with Positive
GHG Profile
Internally managed • Sustainability Report
•
• Average Experienced Team Competitive Cost of Card
management tenure Capital • Sustainable Yield℠
is 13 years Bonds with
CarbonCount™
• Deep industry
experience since
late 1980s
Core Purpose: Generate superior risk-adjusted returns using finance to enable
GHG reducing assets to be adopted at scale.
18Market Positioning
Hannon’s Financing Complements Industry Incumbents1
Transaction
Size
Commercial Life Insurance
Banks Companies
Private
Equity
Tenor
• Flexibility in deal size and tenor
Hannon Competitive Advantages: • Low cost of capital
• Clear-eyed view of risk and return
Hannon Competitive Advantages: 1
19
Illustrative; not to scaleEnergy Efficiency Project Examples
Federal Facilities in the Mid-West $16.7 8,978 Metric Tons
Million Annual Reduction in
14 different energy efficiency CO2 Emissions
improvements implemented in 44
buildings across two federal facilities in
the mid-western U.S.
Mid-Atlantic Public School System $25.0 7,410 Metric Tons
Million Annual Reduction in
17 energy efficiency improvements, CO2 Emissions
including lighting, energy management
systems and HVAC upgrades implemented
in 29 mid-atlantic public schools
V.A. Medical Center $7.7 1,500 Metric Tons
Million Annual Reduction in
6 energy efficiency improvements CO2 Emissions
including, chiller plant upgrades, lighting
upgrades, window film installation, and
steam distribution upgrades at a V.A.
Medical Center in California
20Renewable Energy Project Examples
Residential Solar Leases $86.5 19,459 Metric Tons
Million Annual Reduction in
Hannon Armstrong provided non-recourse CO2 Emissions
debt to SunPower to help finance its
residential solar lease program
Wind Equity Investment $144 87,831 Metric Tons
Million Annual Reduction in
Wind investment covers 10 projects, in CO2 Emissions
five states, representing over 1,200
megawatts (MW) of gross generating
capacity
Solar Land Investment $12.0 1,343 Metric Tons
Million Annual Reduction in
Hannon Armstrong acquires land under CO2 Emissions
60 megawatt solar farm owned by First
Solar in Fresno County, CA. Electrical
output to be sold to Pacific Gas & Electric
under a 20-year Power Purchase
Agreement
21For more information, please visit our website at
www.hannonarmstrong.com
Or contact Investor Relations directly at
410-571-6189
investors@hannonarmstrong.com
Securities are offered by Hannon Armstrong Securities, LLC, a registered broker dealer, member FINRA and SIPC and subsidiary of Hannon Armstrong Sustainable Infrastructure Capital, Inc. 22You can also read
