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Edited Transcript of HASI earnings conference call or presentation 30-Oct-19 9:00pm GMT

Q3 2019 Hannon Armstrong Sustainable Infrastructure Capital Inc Earnings Call

Annapolis Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Hannon Armstrong Sustainable Infrastructure Capital Inc earnings conference call or presentation Wednesday, October 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad Reed

* Jeffrey A. Lipson

Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO

* Jeffrey Walter Eckel

Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Anya A. Shelekhin

BofA Merrill Lynch, Research Division - Research Analyst

* Christopher Curran Souther

Cowen and Company, LLC, Research Division - Associate

* Mark Wesley Strouse

JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst

* Noah Duke Kaye

Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst

* Philip Shen

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Hannon Armstrong's Conference Call on its Q3 2019 financial results. Management will be utilizing a slide presentation for this call, which is available now for download on the company's Investor Relations page at investors.hannonarmstrong.com. Today's call is being recorded, and we have allocated 30 minutes for prepared remarks and a Q&A. (Operator Instructions)

At this time, I would like to turn the conference over to Chad Reed, Vice President, Investor Relations and ESG for the company. Please go ahead, sir.

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Chad Reed, [2]

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Thank you, operator. Good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing our third quarter 2019 results, a copy of which is available on our website. This conference call is being webcast live on the Investor Relations page of our website, where a replay will be available later today.

Before the call begins, I would like to remind you that some of the comments made in the course of this call 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 and Exchange Act of 1934, as amended.

The company claims the protections of the safe harbor for forward-looking statements contained in such sections. The forward-looking statements made in this call are subject to the risks and uncertainties described in the Risk Factors section of the company's Form 10-K and other filings with the SEC. Actual results may differ materially from those described during the call. In addition, all forward-looking statements are made as of today, and the company does not undertake any responsibility to update any forward-looking statements based on new circumstances or revised expectations.

Please note that certain non-GAAP financial measures will be discussed on this conference call. A presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. A reconciliation of GAAP to non-GAAP financial measures is available on our posted earnings release and slide presentation.

Joining me on today's call are Jeff Eckel, the company's Chairman and CEO; and Jeff Lipson, our CFO.

With that, I'd like to turn the call over to Jeff who will begin on Slide 3. Jeff?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [3]

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Thanks, Chad, and good afternoon, everyone. Today, we are announcing GAAP earnings of $0.13 per share and core earnings of $0.38 per share. GAAP earnings decreased due to a onetime provision that will be discussed later in the call.

In the third quarter, we realized year-over-year growth in core earnings per share of 6% and growth in core net investment income of 37%. This growth was driven by an improvement of 130 basis points in our portfolio yield, which now stands at 7.7% and a lower leverage position now 1.5x debt to equity.

We've closed $287 million of transactions in the third quarter, more than 90% of which we intend to fund on balance sheet. Year-to-date, we've closed $810 million of transactions and remain well on track to close over $1 billion of investments for the full year.

In addition, we continue to improve our access to capital and our liquidity position by following up with $150 million add-on to our previously discussed $350 million inaugural corporate unsecured green bond.

We also reiterate our 3-year guidance through 2020 of 2% to 6% growth in core earnings per share from the 2017 base. And as we do every quarter and for every investment we make, we calculate the carbon reductions from our investments. The carbon count for our third quarter investments is 0.35, offsetting over 96,000 metric tons of annual carbon emissions.

Turning to Slide 4. As a reminder, we source our pipeline from the premier engineering, development and operating companies driving the energy system of the future. We endeavor to do this on a programmatic basis in each of the behind-the-meter, sustainable infrastructure and grid-connected markets. Across these markets, we invest an approximately 10 asset classes that provide a highly diversified and uncorrelated flow of investment opportunities.

Given our investments year-to-date and our view on fourth quarter opportunities, we remain comfortable we will be able to meet or exceed our $1 billion annual target.

As of the end of the third quarter, our 12-month pipeline remains strong at more than $2.5 billion with behind-the-meter, or BTM, opportunities totaling 76% of this opportunity set. The weighting of our pipeline toward BTM opportunities is reflective of our belief that the future of energy will be decentralized, digitalized and decarbonized.

The majority of the BTM pipeline remains governmental energy efficiency and resiliency opportunities, the bulk of which are securitized. With regard to other BTM asset classes, the commercial and industrial portion of our pipeline continues to grow as several recent announcements have indicated, including those in community solar, C&I solar and C&I energy efficiency opportunities with new clients as well as a safe harbor facility for SunPower C&I business, all of which demonstrate the potential of the programmatic relationships.

The residential solar market continues to expand and makes up a growing but still modest portion of our pipeline. I'd also note how quickly resi solar, once storage is added, has gone from a nice-to-have home addition to a need-to-have home resiliency system due to the ongoing power outages associated with the catastrophic wildfires in California.

Approximately 13% of our pipeline consists of sustainable infrastructure assets. This diverse set of opportunities includes climate change adaptation and resiliency investments.

The grid-connected market remains competitive due to the amount of capital chasing deals driving down returns. As a result, our opportunities remain weighted towards utility-scale solar land investments with existing clients for whom we offer an accretive slice of capital to help them compete for new business. As landlord, with a senior position in the cash flows, we are also largely protected from short-term energy price fluctuations and counterparty credit risk like the PG&E bankruptcy.

To summarize this page with a long-term investment horizon and a broad platform focused on climate change solutions, we will continue to execute on the investment opportunities in a given quarter that provide the best risk-adjusted returns.

Turning to Slide 5. We provide a view into our managed assets and our portfolio. Since the end of Q2, our portfolio has grown from $1.8 billion to $1.9 billion as the rotation of lower-yielding assets off-balance sheet is more than offset by additions of higher-yielding assets to the balance sheet.

BTM assets comprised 50% -- 57% of our portfolio with grid-connected and sustainable infrastructure assets making up the remainder at 36% and 7%, respectively.

In total, we have 195 investments with a $9 million average investment size, which speaks to the diversity of our portfolio. As we've previously noted, we treat some portfolios of assets as a single investment. So the total number of physical assets and obligors is substantially larger and, thus, diversity is even more robust than these figures suggest.

While residential solar has become a larger portion of our portfolio because of the attractive risk-adjusted returns, we have several decades of experience in syndicating large positions and are focused on ensuring our portfolio retains the appropriate level of diversity and return to support our continued growth.

I'll now turn it over to Jeff L. to detail our financial performance.

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [4]

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Thanks, Jeff, and good afternoon. Turning to Slide 6, we've revised our presentation to emphasize that our earnings are broadly the result of 2 sources of revenue.

Net investment income from our balance sheet portfolio and gain on sale and fees primarily resulting from the securitization and servicing of assets that we originate. GAAP earnings of $9.1 million or $0.13 per diluted share this quarter were down from $16.6 million and $0.30 per diluted share in the same quarter last year. This decrease was primarily the result of an $8 million provision for losses related to lease royalty receivables, which we initially placed on nonaccrual status in 2017. This provision was recorded due to a recent court ruling in the litigation matter related to these projects.

The underlying assets are part of a previously disclosed land portfolio of acquisition from 2014, which, in aggregate, remains a very successful investment.

I'd also note that we now have 0 assets on nonaccrual status, and our cumulative losses since 2012 are approximately 30 basis points.

One further item related to GAAP results is that GAAP earnings do not include the full effect of the cash we receive from our equity method investments.

Year-to-date, we've collected $75 million in cash from our equity method investments, which include both the core earnings component of $29 million and a return of investment of $46 million.

Core earnings in the third quarter increased 29% to $25.2 million or $0.38 per share as compared to $19.6 million or $0.36 per share in the same quarter last year. This is primarily due to a 37% increase in core net investment income to $19.7 million as compared to $14.4 million in the same quarter last year. Gain on sale and fees were up 6% compared to the same quarter last year.

Turning to Slide 7. We demonstrate that growth in net investment income is driven by 2 factors: increasing portfolio yield and lower leverage. As we've discussed for the last few quarters, we've been rotating lower-yielding, highly-leveraged assets off of our balance sheet and replacing them with higher-yielding assets.

The lower leverage has reduced our interest expense. Therefore, in 2019, we are currently on track to continue the upward trend in core net investment income we've experienced since 2015. Given the 14-year average life of our assets, we are well positioned for this trend to continue.

Turning to Slide 8. We want to highlight continued recent success we've had in adding more flexibility and diversity to our funding platform. Following our inaugural issuance in July of $350 million of 5-year unsecured green bonds at 5.25%, in September, we issued a $150 million add-on to these notes with a yield to maturity of 4.13%. Note that both offerings were oversubscribed, enabling an aggregate $100 million upsize to the original transaction launch sizes.

These transactions demonstrate our access to the deep, stable and liquid corporate bond market, which when coupled with our established access to the secured debt and equity markets, positions us well to consistently and flexibly fund our growth going forward.

Note that we have no material recourse debt maturities until 2023 when our convertible bonds mature. This maturity profile, combined with the fact that the nonrecourse debt on our underlying assets largely amortizes within the contracted terms of the assets and that approximately 97% of all of our debt is at fixed rates, demonstrate that we are largely inoculated against near-term refinance risk and interest rate movements. The 97% fixed rate debt ratio is above our previously disclosed target range of 60% to 85%. This is primarily the result of utilizing the proceeds of unsecured debt offerings to temporarily reduce our credit facility balance as the credit facilities are the primary source of our floating rate debt.

Turning to Slide 9. The credit quality of our portfolio remains strong as depicted in the pie chart on the upper right. All of our government and the vast majority of our commercial obligors enjoy investment-grade ratings.

In addition, the obligors of our residential solar assets are high credit quality consumers. And in our equity method investments, which, by their nature, do not lend themselves to simple obligor credit analysis, we are typically senior or preferred in the investment structure.

As I turn the call back over to Jeff, I just want to give a quick shout out to the Washington Nationals and wish them success in Game 7 of the World Series tonight. And as many of us are Nats fans and we're very excited about the game.

And with that, I'll turn it back over to Jeff.

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [5]

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Thanks, Jeff. Turning to Slide 10. We believe that investors broadly are seeking opportunities that offer a few common characteristics. First, they're looking to capture yield in an environment with historically low interest rates. Second, they're looking for recession-resilient companies that can demonstrate sustainable growth in a late-stage economy. And finally, they're looking for companies strongly committed to ESG and environmental leadership. With the demonstrated history of providing a total return comprised of a dividend yield plus growth, Hannon Armstrong presents an attractive opportunity for yield-hungry investors. Further, through our flexible and diversified funding platform, our decades-long history of sourcing accretive investment opportunities and our many recession-resilient government utility and other counterparties, we have demonstrated sustainable growth across all terms in the business cycle. And with the mission of funding climate change solutions and industry-leading ESG practices and disclosures, we offer a very compelling opportunity for the ESG-focused investor.

Thank you for joining us today. Operator, please open the line for a few questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question today from Noah Kaye with Oppenheimer.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [2]

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Maybe we can start with a question on the investments by the SunStrong JV for 200 megawatts in safe harbor panels under the ITC. It seems like that there could be more runway here just looking at forecast for distributed solar installations over the next couple of years. So can you comment on how you view this growth opportunity over the short and medium term as the ITC ramps down?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [3]

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I think we've commented in prior calls that as the ITC ramps down, the investment opportunity for Hannon Armstrong goes up as tax equity is replaced with cash equity. So that's the big picture. What we're talking about with the safe harbor facility is an increased opportunity for Hannon in this transition period, which we certainly see as an opportunity. And we certainly see the overall growth in distributed solar as being very constructive for our business as well as SunPower's and our other solar clients. So not sure what more to add other than, I think, it's a good opportunity for Hannon, and our clients are the ones that we think are going to be the winners in this business.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [4]

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Okay. Maybe on the investment in GridPoint. Can you talk about what attracted you to that platform? Why you believe the energy management as a service approach makes sense for the target market of mid-sized buildings? Maybe what kind of pipeline or deal opportunities this partnership brings you?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [5]

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First of all, it's not an investment in GridPoint. It's an investment in the assets, which is consistent with our general business practice of not about thinking company of, but investing in the assets. Energy-as-a-service has grown, and that's an example of the digitalization of the energy systems of the future. We've known GridPoint for 20 years. We tried to sell them something in -- probably 20 years ago, and it took a while, but we look -- really like what they're doing now. They're very granular transactions, very, very small investments, and they've been able to aggregate through corporate clients a series of very profitable, very carbon impactful transactions. When I say very profitable, very cost-effective for the end user in terms of the limited amount of capital that needs to be invested to gain a significant amount of savings. It's -- we look at it as an evolution of the industry. We certainly think PACE is an opportunity to get at some of this market. But frankly, the GridPoint actual investments are so much smaller than you would want to do for a PACE transaction. This is really another way to access the energy savings opportunities in the commercial sector.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [6]

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Okay. And maybe as a follow-up here. You mentioned the partnership -- the PACE opportunity and you partnered with companies, therefore, now the energy management as a service approach. It still seems like the C&I market is very underpenetrated that there's not been an area of opportunity and higher yield potential for you.

So I guess, can you talk about reasons to think that commercial building efficiency can start to become more material for the company? Do you have any targets you can share with respect to growth or any timetables for growth for this segment?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [7]

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Good question. The C&I is the market is, what, 20% of U.S. greenhouse gas emissions. So it's clearly an interesting market, and we think it's one of the more profitable markets. That said, it has historically been quite resistant to these kinds of services. We still think PACE is a terrific solution. And when we have talked about PACE or some other new markets, we generally talk about them on calls when we think they can be about $100 million or more of annual investment. So we still think that's the case. I would say, Energy-as-a-service is early days, but it seems quite promising.

The problem with small transactions, it takes a lot of them to make a meaningful difference in anybody's financials, but you got to start somewhere, and we like where we are with GridPoint.

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Operator [8]

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Our next question today comes from Philip Shen with Roth Capital Partners.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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For the first one, we'd love to explore the Empower Energies partnership. When do you expect assets to be added to the balance sheet? Can you talk through the pipeline and perhaps give some examples of the types of projects? I know it's C&I, municipal university book. What's kind of near term in the docket in terms of what you guys might be able to add to the balance sheet?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [10]

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And similar to the concept on GridPoint, we really are focused on financing the assets that Empower is developing and engineering and operating. They've done a good job of developing assets. They do them on a contract basis as well as a finance basis. And we just have a great deal of comfort with the management team. It's one of the -- we were excited to have a new origination platform with them. This is a market that is exploding, I think, nationally. And we've struggled in the past to figure out how to participate. And I think we now have a model with Empower that will allow us to get to scale. As again, a consistent theme in all of our assets, no one transaction, no one client is all that big. So while we're excited about Empower and GridPoint, I don't think either of these bend the curve materially, but it certainly gets us into a market that we're attracted to, and we think has good risk-adjusted returns.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11]

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As a follow-up there. What do you expect the average deal size to be? And you mentioned just now that you've struggled in the past to get into this market, what's differentiated about this model? What did you guys do to crack the code?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [12]

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It's actually more what the Empowers of the world are doing. And there are a lot of companies they compete with, but they've started to focus on it. And like every business, it takes a while. And I think there are a number of companies that have figured out how to work with corporate clients and do things on a programmatic basis with their clients. And then naturally, our programmatic finance is a pretty good fit. So I don't think we did anything particularly innovative other than just stay very persistent on the market. We knew we wanted to be there. And you talk to a lot of companies, and you try to find the ones that match up with your -- one, with our capital. But also culturally, we think the Empower team is a great fit for us.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

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Okay. Shifting over to the resi solar, you're at 29% of your portfolio being resi. Last quarter, it was 22%. This -- it's growing fast as a percentage of your overall mix. At this rate, at some point, you're going to get to a majority of your asset base being in resi solar. What does this look like by year-end '20? And how much is too much? Or do you just keep on adding?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [14]

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Well, I think part of the reasons we've added some comments on the pipeline in that resi solar is, while it's growing, is relatively small pieces of pipeline is to address that. We love where we are. Could we do more? Sure. Will it become a majority of our balance sheet? I think that is highly unlikely.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [15]

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Okay. Great. And then staying with the solar theme, the real estate line item has been pretty flat for the past couple of years. What's the outlook for solar real estate for utility-scale solar? And do you expect any opportunities near term to add real estate to the balance sheet?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [16]

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It's a good question, Phil. I think a couple of years ago, I was thinking that run of utility-scale solar was pretty much over. That's just not the case. Yes, I think we see a pretty consistent flow of business. Again, it's kind of lumpy. If that's all we did, it'd be a lousy business. But as a -- one of our asset classes, we think it's good value for us, good -- very much like the risk, and the utility-scale guys are doing a terrific job of developing great projects. So do expect to see more land in the portfolio.

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Operator [17]

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Our next question today comes from Julien Dumoulin-Smith with Bank of America.

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Anya A. Shelekhin, BofA Merrill Lynch, Research Division - Research Analyst [18]

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This is Anya filling in for Julien. So I guess in terms of the pipeline overall, maybe first, could you discuss your thoughts around asset level growth past the roughly $2 billion that you've had historically? And then is there any potential for acceleration from the 2% to 6% EPS growth target you've had?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [19]

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So Anya, we've had a history of talking about our pipeline. I think we started out with $1.5 billion at the IPO, and then $2 billion and then more than $2 billion and now more than $2.5 billion. And the reason is if we're doing $1 billion or $1.2 billion a year, that's 2x coverage -- more than 2x coverage of what it is we're proposing to invest.

We certainly believe carrying a pipeline that is at least that size is sufficient for us to continue to hit our investment targets and to continue to grow earnings. Can the pipeline be bigger? Sure, but it's enough. And what we're particularly focused on, we don't want to be judged on the pipeline. To us, that's a second of order metric. And you can -- there's a lot less discipline in talking about pipelines, a lot less discipline required to talk about your pipeline than there is to talk about actual earnings and investment. So we certainly think the future of energy will be our kind of assets behind the meter, and we certainly expect that to grow.

With respect to earnings, we'll address earnings in the future, but we're comfortable reiterating guidance at 2% to 6% growth.

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [20]

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And Anya, the portion of your question that addressed balance sheet growth, keep in mind, in the prepared remarks, I think we said at least 2 or 3 times, we made reference to the balance sheet rotation we've been going through. So although we've been closing a large volume of balance sheet transactions, we've also been selling a decent amount to optimize. So that's where you've not seen as robust balance sheet growth as we go through this rotation.

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [21]

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The balance itself -- growing the balance itself isn't the goal. Growing net interest income is the goal.

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [22]

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Correct.

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Anya A. Shelekhin, BofA Merrill Lynch, Research Division - Research Analyst [23]

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Excellent. And on portfolio credit quality, how do you think of the non-IG portion? What would be a reasonable range going forward? Because it looks like the IG portion, if I'm reading this correctly, has declined to slightly under 50% as of 3Q, and it was maybe around 60% a couple of quarters ago?

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [24]

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So I think we've, in the prepared remarks, tried to migrate away from that being the primary metric in terms of IG and non-IG as it relates to the entire portfolio because as we show on the top of Page 9, we have 2 large components of the portfolio that really don't even lend themselves to this notion of being investment grade or noninvestment grade. A big portion in consumer obligors are essentially the off-takers, and they're not certainly going to be investment grade, either individually or collectively. And likewise, in the equity method investments, we're not going to have investment-grade ratings. So we are trying to steer away from that being the primary metric. We're very, very comfortable with the level of credit quality in the portfolio, and we'll continue to describe the portfolio in detail, but this notion of investment grade, noninvestment grade, I think, has become a little less meaningful over time in describing credit risk in the portfolio.

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Anya A. Shelekhin, BofA Merrill Lynch, Research Division - Research Analyst [25]

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All right. And last question from my end. What -- could you talk more about the prospects for a community solar? How big of a market can it be or what kind of the trends could you see?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [26]

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I think I just heard a statistic that rooftop resi solar at max potential something like 10% or 15% just because of roof orientation and shading and things like that, which implies a much bigger opportunity for community solar than perhaps we were thinking about a couple of years ago.

So we have announced a transaction in community solar and continue to think that's a pretty interesting model to expand the solar market with some of the benefits of -- the residential market with some of the scale benefits of utility-scale solar. It's up to the -- to our clients to go commercialize those and develop those projects and make them investable. And I think when we talk to them, they're pretty enthusiastic about the possibilities.

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Anya A. Shelekhin, BofA Merrill Lynch, Research Division - Research Analyst [27]

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Okay. And could you talk more about how meaningful it could be for your own portfolio in terms of returns and size of the portfolio?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [28]

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Not really. I mean we don't really talk about any one asset class. Because actually, it would be factual, not any one asset class is driving the results. But we like -- we've used the metaphor of the 10-cylinder engine with our 10 asset classes. This is potentially an interesting new asset class that could be $100 million of investment a year. It's starting to be more meaningful than I, particularly, had anticipated it to be.

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Operator [29]

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Our next question comes from Mark Strouse with JPMorgan.

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Mark Wesley Strouse, JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst [30]

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So most of them have been answered by now, but just at a high level, given the change in rates since the last time we spoke, just hoping for an update on how we should think about the mix of securitizations going forward. And then kind of on a similar tone, I mean just global search for yield. Just wondering if there's been any material change that you've noticed in your competitive landscape?

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [31]

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Sure, Mark. So on the first question, it's not necessarily the absolute level of rates or even the slope of the yield curve that drives the level of securitization. It tends much more to be the type of asset that we originate. So certain of our assets like energy efficiency, we tend to securitize, and many of the other asset classes like a resi solar or solar land, we tend to keep on balance sheet. So that decision tends not to be driven by the absolute level of interest rates. And most of the -- or let's put it this way, the energy efficiency business, as we've noted many times, tends to be lumpy. So when that -- when we have quarters where we closed a large volume of those transactions, you'll see securitization percentage go up. And in a quarter like both second and third quarter of this year, where we didn't do too many of those deals, you'll see securitization percentage go down. So that's the more appropriate way to think about it. And then the second question, I'll let Jeff answer.

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [32]

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I was still absorbed with your answer, I've forgotten the second question. Global search for yield again. It persists. And our ability to continue to adapt our business model to access investors who are looking for that -- or participants in that global search for yield. That just means several asset classes can be securitized rather than -- and profitably securitized rather than put on the balance sheet, which from our client standpoint, they don't really care how we do it just as long as we have the capital. And so we're seeing better opportunities to take things off the balance sheet. But fundamentally, with an average investment size of $9 million, it's really hard for some of these global players to actually compete on a $9 million transaction. That's where I think many of them look at us as an opportunity to aggregate those assets using our balance sheet or otherwise and partner with those players rather than necessarily compete with them. That's how we talked about the grid connected, particularly, the wind projects and the utility-scale solar. Now those are not the areas we're choosing to play in for precisely that reason. There is an abundance of capital willing to take parts transaction sizes, and they're good bids for the developers of those projects. That's just not our business.

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Operator [33]

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Our next question comes from Chris Souther with Cowen.

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Christopher Curran Souther, Cowen and Company, LLC, Research Division - Associate [34]

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I wanted to go back to the new JV with SunPower for safe harboring. Could you talk a little bit about how that structure to be similar or different to the SunStrong JV, just given it seems like it would be kind of a shorter time frame, kind of just during that transition period versus kind of the longer term? Is it going to be similar where you guys have mezz debt along with that, and there's kind of a senior lender and all that kind of stuff? Or how does that going to work?

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [35]

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Well, I think it's a little bit of apples and oranges as SunStrong transaction is a true JV that's invested in a series of underlying transactions to finance many of these portfolios of lease receivables, whereas the safe harboring facility is more of a transaction than a joint venture to capture these ITCs. And to your point, will run off quickly. So there's not -- they're really 2 quite different transactions despite of being the same client.

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Christopher Curran Souther, Cowen and Company, LLC, Research Division - Associate [36]

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Okay. Got it. And then did that transaction occur in the third quarter or is that fourth quarter that's kind of ramping up here?

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [37]

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It closed in the third quarter.

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Christopher Curran Souther, Cowen and Company, LLC, Research Division - Associate [38]

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Okay. And then just kind of talking about the 10 or so, 10-plus kind of end markets, could you talk a little bit about where else you're seeing strength beyond kind of a solar? And kind of where the other markets are sitting at this point?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [39]

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Well, we continue to see good flow in the governmental efficiency business, particularly, for resiliency and to climate change. Those transactions are getting larger and lumpier. Didn't do any this quarter, but the resiliency problem in the United States government didn't get fixed either. So the transaction still persist. We've talked about the Energy-as-a-service in the C&I market. That's maybe small dollars now, but it's certainly an area that we think can be interesting. I've mentioned PACE. We continue to grow the PACE business. In the sustainable infrastructure markets, again are episodic. They're pretty small in the pipeline, but they're developing as communities cope with and try to adapt to 100-year storms that happen more frequently than perhaps they have in the past. And again, that takes time to develop, but it's not like the problem is getting fixed or the severity of the issue is going away. And again, it's really good to have 10 cylinders on its engine because they don't all hit in the same quarter.

The area that we haven't seen much activity in that we've talked about for a number of quarters is wind. There's a lot of capital in the wind business, and we're not seeing necessarily the risk-adjusted returns we want there. So I think that's a -- sorry, Jeff, would you add anything? The color?

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [40]

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No, I think you covered that, yes.

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Christopher Curran Souther, Cowen and Company, LLC, Research Division - Associate [41]

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Excellent. And then just the last one. I wanted to get an idea of where we are within the active management we've seen over the last couple of quarters. Obviously, second quarter was kind of big moves, but there are still some moves here. Looking at the end of the second quarter, there were about $400 million of receivables and investments that were below 5%. Is that going to kind of continue to come down here? Or is it really opportunistically that you guys are looking at that? Could you provide a little color there?

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [42]

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Sure. So to your point, what we've been calling the rotation was larger in second quarter than third quarter. I would characterize our point in the process there of -- as not being complete yet. So I think there do remain some assets on our balance sheet that we may rotate out of. And so don't be surprised to see that. But to your point...

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [43]

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Probably it would have been logical for us to do the more attractive ones first. So there are probably some diminishing marginal returns to future rotations. Sorry to interrupt you but...

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [44]

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No, no, I totally agree with that. And Chris, yes, I was just going to say to your point about being opportunistic, it certainly is. We're not aggressively marketing assets. I would characterize it more as opportunistically taking advantage of opportunities to, at times, rotate out of some of these low-yielding assets is the way to think about it. But that is likely not complete yet.

Goodbye [zone.]

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [45]

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Thank you all.

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Operator [46]

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And it appears there are no further questions in the queue at this time. So this will conclude today's call. We'd like to thank you so much for your participation, and you may now disconnect.