Hannon Armstrong Stays Enticing Regardless of Issuing Fairness At Low Costs (NYSE:HASI)

Pricey readers/followers,

Hannon Armstrong Sustainable Infrastructure Fund (NYSE:HASI) is a singular REIT centered on investing in renewable power initiatives. Its initiatives are roughly break up in half between behind-the-meter initiatives, the place power is each created and consumed on-site (assume photo voltaic panels on a roof of a warehouse), and grid-connected initiatives (assume giant photo voltaic and wind energy vegetation).

The corporate’s enterprise mannequin is sort of just like that of a standard mortgage REIT (mREIT) in that it generates roughly two thirds of its distributable earnings from curiosity on excellent loans. The remaining earnings come from charges for managing third get together renewable belongings and from earnings on fairness stakes price about $2 Billion that the corporate holds in varied renewable initiatives.

I began protecting the inventory again in February with a HOLD ranking at practically 2x ebook worth. Then, in Could and following Q1 earnings, I upgraded the inventory to a BUY at $26 per share (1.5x BV). Since then, the inventory has underperformed, declining by about 8% because of (largely unfounded) fraud allegations and vital fairness issuance at arguably low costs. At this time, the inventory trades at 1.3x ebook worth and stays engaging publish Q2 2023 earnings.

Current Outcomes

HASI has had a reasonably good first half of the 12 months on the subject of progress, rising their portfolio by a document $815 Million to $4.9 Billion, up 14% YoY.

Should you recall my earlier articles, HASI primarily makes cash by incomes the unfold between the curiosity they cost on their loans and their price of capital. And over the primary half of the 12 months, they’ve achieved a document common yield of 8.5% on their newly funded investments, which has contributed to an total portfolio yield improve from 7.5% to 7.7%.

Portfolio progress and a steady price of capital of 4.8% has elevated the unfold that the corporate earns from 2.7% to 2.9% and has pushed robust 12% YoY progress in web curiosity earnings. In flip, Q2 distributable EPS got here in at $0.53 or $2.12 annualized.

HASI has traditionally grown their portfolio and distributable earnings by a double-digit CAGR and administration expects this stage of progress to proceed as steerage requires a 10-13% annual progress till at the very least 2024. On a portfolio stage, a big a part of this progress is very seen due to a big numerous $5 Billion pipeline with anticipated yields above 8%.

Whereas the corporate will possible haven’t any scarcity of initiatives so as to add to their portfolio, it is vital to appreciate the place the cash that will likely be used to fund these acquisitions is coming from. HASI has two methods of sourcing capital. It will possibly both situation inventory or take-on debt, every has its distinctive implications.

Throughout the first half of the 12 months, it has centered on the previous by issuing $300 Million price of shares at $23 per share. The market did not appear to love this very a lot (possible as a result of the share value has fallen rather a lot, and issuing shares at low costs is rarely an excellent look). However because the inventory continues to commerce above ebook worth and HASI is ready to make investments the proceeds in 8%+ yielding proceeds, I haven’t got a problem with affordable fairness issuance at this stage and truly desire it to taking up extra debt at present excessive rates of interest. Administration has additionally elevated their revolver restrict by $240 Million to $840 Million to offer further liquidity if wanted.

Throughout the second half of the 12 months, it is anticipated that administration will focus extra on debt raises, fairly than additional fairness choices. This may possible improve the price of capital over time, however the improve ought to be offset by increased yield that the corporate is ready to obtain on its new investments. Going ahead, I’ll proceed to carefully monitor the unfold that they earn.

The corporate maintains a BB+ rated stability sheet, which though not the strongest within the REIT sector, does present vital safety from the upper for longer situation as there aren’t any materials near-term maturities and over 85% of debt is fixed-rate.

HASI is a progress play, however one which additionally pays a strong dividend. Presently, the quarterly dividend stands at $0.395 per share and yields about 6.5% with a payout ratio of 74%.

Administration has guided in the direction of a 5-8% dividend progress going ahead, which is considerably beneath their goal EPS progress. The reason being easy, administration needs to progressively lower the payout ratio to 70% by 2024 and to 50-60% by 2030 to retain extra cash-flow to allow the corporate to develop with out the necessity for fairness/debt raises.

Earlier than diving into valuation, I wish to contact on a latest announcement that the corporate will now not be labeled as a REIT, beginning in 2024. Whereas nonetheless topic to board approval, the proposal is a results of administration’s detailed analysis of their tax and company construction and crucially shouldn’t influence the corporate’s dividend coverage nor technique. I do not see it as a serious change to my thesis.

Valuation

Following the identical methodology as in my unique article, one of the best ways to worth HASI is on an adjusted ebook worth foundation. My pondering is that one of the best ways to worth a mortgage REIT is to check its enterprise worth (market cap + debt) to its ebook worth (loans excellent). Ideally, if we expect that every one loans will carry out, we wish to purchase an mREIT at <1x BV.

Within the case of HASI, nonetheless, there are components that justify an adjustment upwards. Specifically, the corporate makes cash from managing third get together off-balance sheet belongings and holds fairness stakes in initiatives which might be reported at price, even-though they’ve possible elevated in worth since acquired. Because of this, final time I estimated that the ebook worth is discreet by about $400 Million. Following latest earnings, I see no motive to vary this estimate.

That is why I see the present 1.33x BV valuation as honest and reiterate my BUY ranking for HASI at $24 per share with an expectation of returning as much as 16% per 12 months (6% dividend + 10% EPS progress). I see HASI as a worthy different to conventional mortgage REITs, resembling Blackstone Mortgage Belief (BXMT), as a result of it has no industrial actual property publicity and gives manner superior EPS progress prospects.