Hannon Armstrong: Resilient And Evergreen Business (NYSE:HASI)


I’ve been very passionate about renewable energy for many years, particularly solar energy and its capacity to bring abundant clean, sustainable energy to millions around the globe. – Richard Branson

The buzz around nations allocating higher budgets for renewable energy is rising by the day, and that is great news for stocks such as Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI). Investing in renewable power is being regarded as a recovery strategy in the post-COVID-19 age because it does away with geopolitical tensions and oil price volatility, reduces pollution, increases employment, motivates entrepreneurs, and recovers its investment over the long run.

I have been and am bullish on HASI (since it was $33.66) as a long-term investment and here’s a confirmation of this: HASI has priced its 0% convertible senior notes due August 2023 at about $48.36, which is a healthy premium compared to its market price of $41.40 as of August 27, 2020. It is a sign of strength.

Image Source: Twitter

HASI has many things going for it. Here are the reasons for my bullish view:

The Business Model and Risks

HASI invests in the equity of renewable energy companies, government receivables, commercial receivables, and real estate which it leases long term to sustainable infrastructure projects. It has qualified for and elected to be taxed as a REIT. The company completed $186 million of transactions in Q2 2020 as compared to $319 million in Q2 2019. The pandemic caused the slowdown and it is understandable.

As of June 30, 2020, HASI’s managed assets worked up to about $6.2 billion on a consolidated basis. The company is also evaluating a host of new projects (in pipeline) worth $2.5 billion in equity, debt, and real estate.

COVID-19 is expected to disrupt the company’s operations in Q3 and Q4 2020 by interrupting its service and managerial operations. Delays or interruptions in financing, repayments, credit risks, etc. are other significant risks posed by the pandemic.

HASI, like other companies, has no option but to cope with the business interruptions. Recent events suggest that the company is coping admirably – in Q2 2020, it reported an EPS of 36 cents, beating estimates of 32 cents. This increase in EPS happened despite providing for a $2.5 million COVID-19-related loss on receivables. It just proves that the company’s management team is efficient in optimizing opportunities and managing financial headaches.

Debt

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Image Source: Q2 2020 SEC Filing

Though HASI’s debt is not a negative factor, I thought it would be appropriate to bring it to your attention. As of June 30, 2020, the company owed $911 million in unsecured debt and $626 million in secured debt. In Q3 2020, the unsecured debt will inflate by $375 million because of the company’s 3.75% senior unsecured notes due 2030. Stockholders’ equity as of June 30, 2020, is $1.06 billion, and, therefore, the Debt-Equity ratio is almost 2 without accounting for the convertible notes.

It is not a negative considering the company’s phenomenally bright prospects, but I figured I should bring it to your attention.

Dividend History

HASI distributed $1.848 as dividend in 2019 and has declared $1.02 as dividend for three quarters in 2020.

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Image Source: Seeking Alpha

I estimate that the company will end up paying $1.36 as dividend for the whole of 2020, which implies a dividend yield of 3.28%. HASI distributes approximately 91.7% of its income as dividend. It has beaten analysts’ estimates in the last four quarters, has received five earnings upgrades, and no downgrades after its Q2 2020 results. I believe that the company will pay out $1.36, at the minimum, as dividend in 2021 as well.

Other Bullish Factors Working in HASI’s Favor

1. After COVID-19 hit our economy, HASI’s business model has started gaining strength by the day. For starters, an investment in green energy recovers its costs in the long run and turns profitable. So, HASI’s debtor can be termed as long-term credit-positive.

2. Many of HASI’s clients are the world’s leading energy and renewable power infrastructure companies. These are the companies that will prosper during the pandemic and emerge as leaders thereafter, along with HASI, of course.

3. HASI’s project pipeline is buzzing with quality and committed clients who have the potential to emerge stronger after the virus is contained.

4. On July 2, 2020, HASI announced it had partnered with ENGIE S.A.’s (OTCPK:ENGIY) subsidiary to own and operate a 2.3 GW portfolio of wind and solar assets. The company will invest $540 million in this venture over the next few quarters. This deal will expand HASI’s consolidated balance sheet portfolio by 25% and increase the average life of its assets by four years.

5. In H1 2020, HASI’s portfolio yield worked up to 7.7%, which was flat as compared to H1 2019. The company has provided for COVID-19-related receivable losses, and, therefore, from here on, I estimate its portfolio yield will grow.

Summing Up

HASI has many solid factors working in its favor – it invests not only in equity but also in debt and real estate (all connected to renewable power). Therefore, it can earn a healthy portfolio yield and look forward to making capital gains in a sector that has great potential in the post-COVID-19 era.

To me, it is a resilient and evergreen business – a winner all the way.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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