Hannon Armstrong Sustainable Infrastructure Capital, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI) is a real estate investment trust (REIT) that provides capital and financing for climate solutions, primarily in renewable energy and sustainable infrastructure projects, acting as a bridge between investors and clean energy initiatives.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

HASI operates primarily within the clean energy and sustainable infrastructure sectors. They don’t directly operate energy projects or infrastructure but rather act as a specialty finance company, providing the necessary funds to develop or acquire such projects. Their investments allow clients to implement projects that reduce carbon emissions, improve energy efficiency, and enhance resource sustainability.

Revenue Distribution:

  • Real Estate Transactions: Revenue generated from the leasing or sale of assets with an environmental or climate impact, including land, equipment, or infrastructure.
  • Interest Income: Revenue from extending loans to project owners and other credit facilities.

Industry Trends: The renewable energy industry has experienced explosive growth. Climate change mitigation and adaptation initiatives have been the major drivers for the growth in the market. Governments across the world have become committed to environmental targets which are creating increased investment in the renewable and sustainable energy space.

Competitive Landscape: The competitive landscape in the renewable energy sector is varied. Numerous investment firms, private equity groups, and development banks all compete in the same space as HASI to acquire projects. It’s a relatively commoditized market where many players can offer financing, meaning HASI does not have significant market power or exclusivity. However, HASI stands out due to its extensive expertise and experience specifically tailored to the climate solutions domain, as well as its unique financing approach.

What Makes HASI Different:

  • Focus on Sustainability: A dedicated focus on financing climate solutions, unlike many diversified finance companies. Their focus is very important to their targeted clientele.
  • Proven Track Record: Established operations and long-standing track record within the renewable energy sector, meaning they have experience with deals and regulations.
  • Hybrid Financing Approach: HASI employs a combination of different financial instruments including debt, equity, and off-balance-sheet structures.

Financial Analysis

Let’s dive deeper into a more detailed analysis of their financials:

Income Statement:

  • Revenues have generally grown year over year, though there are considerable fluctuations on a quarterly basis.
  • Net income, when compared with revenues, tends to have large swings, highlighting that the amount earned by the company is vulnerable to external conditions, such as interest rates and project profitability.
  • For example, they reported significant increases in revenue for 2022, but profitability dropped significantly year-over-year, which resulted in a net loss.

Balance Sheet:

  • Assets include a combination of real estate, loans, and equity investments which are often very complex instruments.
  • Liabilities are mostly comprised of debts from loans, mortgages, and notes payable, highlighting they are not a cash-rich entity and thus depend on credit markets.

Cash Flow:

  • Cash flow from operations is volatile and can often be negative or barely positive. They tend to borrow cash at short term to then finance long-term projects and hence their cash from operations is usually not sufficient to fund their operations.
  • They do have significant borrowings that often involve large debt repayments. The ability to repay their debt depends on factors including project completion, rates of return on investments, and the broader macroeconomic environment.
  • They rely quite a bit on issuing equity and taking on debt to finance operations.

  • Recent performance: As of the quarter ended March 2023, their EPS came in at -0.03 versus the consensus estimate of 0.43. However, their revenue of $61.8 million missed expectations by $23.99 million. That indicates that they are having problems translating revenue to profits.

  • Also, their financial statements in their 10-Q filing have a going concern warning. While they may be operating, the company has an uncertain future ahead.
  • They are working with lenders to modify existing agreements.
  • In the recent earnings call, they stated that their main focus for 2023 is on capital preservation, which means they are slowing down new acquisitions to focus on stability.

Risks to the Moat and Business Resilience

Legitimate Risks that can harm the moat:

  • Interest rate risk: HASI’s earnings are tied very closely to interest rates. Increase in interest rates will directly hurt their profitability and their financing costs.
  • Economic downturn: A significant downturn may lower the value of the underlying projects they have investments in and reduce clients abilities to repay their debts.
  • Competition: Numerous players with financial resources are competing in the same industry space. This makes it very difficult for HASI to find cheap opportunities with high returns.
  • Government Regulations: Changes in tax laws or renewable energy regulations and incentives by any government will drastically affect their earnings as that’s the industry they operate in.
  • Project Failure: The projects they finance might fail to come to fruition or may prove to have significantly less returns than originally projected, resulting in losses.

Business Resilience:

  • Diversified portfolio across sectors and geographical areas provides some degree of stability. Their focus on sustainability projects creates a demand for their services even in downturns, although there will still be an impact on profits.
  • Their focus on sustainability may be more resilient due to increased government efforts to support green initiatives.

Understandability Rating: 3 / 5

  • The core concept of providing capital for sustainable infrastructure is easy to understand, but a deeper understanding of the specific details of their accounting, the financial instruments they use, the contracts they sign, and the legal frameworks of operating in different geographies is complex, which is why I have given a 3 out of 5.

Balance Sheet Health Rating: 3 / 5

  • HASI is not a cash-rich company, they rely on debt and equity issuance for funding operations. Their short-term liabilities are quite significant and they have a high debt-to-equity ratio which can expose them to significant problems. While they do have assets, they do not necessarily have much control over the assets’ value and these are not as tangible as those held by a regular industrial or manufacturing company. They have received a lot of bad news in their recent earnings report, including a going concern warning, indicating an unstable balance sheet. Thus, I have given them a 3 out of 5.