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Edited Transcript of HASI earnings conference call or presentation 20-Feb-20 10:00pm GMT

Q4 2019 Hannon Armstrong Sustainable Infrastructure Capital Inc Earnings Call

Annapolis Mar 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Hannon Armstrong Sustainable Infrastructure Capital Inc earnings conference call or presentation Thursday, February 20, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad Reed

Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Vice-President of Investor Relations

* 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 Ralph Van Horn

B. Riley FBR, Inc., Research Division - Analyst

* Jeffrey David Osborne

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* 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

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Presentation

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Operator [1]

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Good afternoon, and welcome to Hannon Armstrong's Conference Call on its Fourth Quarter and Full Year 2019 Financial Results. Leadership 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 question-and-answer session. (Operator Instructions)

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

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Chad Reed, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Vice-President of Investor Relations [2]

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Thank you, operator. Good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing our fourth quarter and full year 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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Thank you, Chad, and good afternoon, everyone. We're pleased to present our Q4 and 2019 results to date, which were strong for both the quarter and the year. That strength is driven by the growth in our markets and our client base. Our leadership in climate change investing in ESG is finally being recognized and valued by both our debt and equity investors.

Let's detail these themes, starting on Page 3. Today, we are announcing a 65% GAAP earnings growth year-over-year to $1.24 and core earnings per share of $1.40, which is above the midpoint of our 2019 guidance of $1.37. Our balance sheet portfolio grew by 10% quarter-over-quarter to $2.1 billion even as we still rotated a few more assets off. As such, we are raising our dividend to $0.34 per share for Q1 2020, which implies a $0.02 annual increase to $1.36 per share. This continues our practice of raising our dividend annually, but at a rate slower than we are growing earnings.

We are confirming our previous guidance for 2020, but expect annual core earnings per share in 2020 will exceed the midpoint guidance of $1.43. 2020 is the last year of our 3-year guidance, which we believe has worked well to allow both the company and investors to focus on the long-term growth potential of the business. We intend to issue new guidance this time next year that we expect will, at least, track growth consistent with current guidance.

I will wrap up this slide to highlight the large positive impact our business is having on reducing CO2 -- nearly 400,000 metric tons for carbon count of 0.3.

Turning to Slide 4, we highlight the success of our investment thesis over the last 5 years. The chart on the left shows total annual shareholder return for Hannon Armstrong at approximately 25% per year, 2x that of the S&P 500 and 25x better than the fossil-fuel-concentrated S&P Energy Index. Similarly, the yield on our corporate green bonds compressed over 150 basis points while the S&P Energy Index yield widened. These 2 charts seem to demonstrate that investors are pricing climate risk and opportunities into their investment decisions and achieving superior risk-adjusted returns from climate-positive investing with Hannon Armstrong.

Turning to Slide 5, as we did in last year's fourth quarter call, we would like to address some of the key macro themes that are top of mind for our investors and analysts. First, climate change is happening, perhaps even accelerating, and it is a driver of our business, whether it is a mitigation investment to lessen the impact of severe weather or resiliency investment in solar plus storage due to wildfire-related power outages, it is clear that investing in climate change solutions will continue to grow. Our client base is expanding and driving growth in our pipeline.

In 2019, we announced the emergence of several new clients and asset classes, including green real estate, community solar and commercial energy efficiency, all contributing to the growth in behind-the-meter market. We believe our excellent performance over the last few years in a persistently low interest rate environment shows the flexibility of our business model. Our ability to continue to find attractive risk-adjusted returns, while reducing our cost of debt in this environment has allowed us to grow core net investment income from our portfolio.

Our leadership, rigor and commitment to comprehensive and transparent ESG reporting since our launch as a public company is finally paying off as institutional investors seek credible, profitable ESG investments. As climate change investing expands, we believe that ESG leaders will be appropriately recognized and competitive advantages will widen.

Market forces continue to supersede federal policy headwinds as the increasing cost competitiveness of renewables, storage and energy efficiency have pushed the private sector and many state and local governments to accelerate their procurement and adoption. We believe these technologies are already standing on their own and that their costs will continue to drop.

Turning to Slide 6. We provide more details on our diverse client-driven pipeline. Of our more than $2.5 billion pipeline, nearly 80% is behind the meter. I mentioned on the prior slide our announcements in Q3 and Q4 of new client relationships and markets. But it's also important to note the strength of our historic client base and their capabilities, which are growing in sophistication and ambition. This combination of existing client growth and the addition of new clients is driving growth in our behind-the-meter pipeline.

While grid-connected investments continue to face headwinds from low natural gas prices, we intend to support our key clients in the grid-connected market when we can find a structure and economics that work for both parties.

Finally, the sustainable infrastructure market continues to present a number of attractive opportunities in the clean water, ecological restoration and resiliency markets.

Turning to Slide 7, we highlight the diversified and long-dated nature of the cash flows generated by the assets we manage on balance sheet. As of the end of 2019, we had over 180 investments with an average size of approximately $11 million and an average weighted life of approximately 15 years. 60% of the portfolio is behind-the-meter with a forward-looking yield of 8%. In the last half of 2019 we saw growth in C&I, green real estate and community solar relative to residential solar. 39% of our portfolio is grid connected, the majority of which is solar land, and is generating a forward-looking yield of 7%.

In sum, we believe our $2.1 billion balance sheet portfolio of diversified long-dated assets remains poised to support our projected growth in 2020 and beyond.

Now I'll 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 thank you to everyone for joining the call. I will focus my remarks on 3 topics: number one, our financial results; number two, a noteworthy accounting change; and number three, capital markets.

As we turn to Slide 8, I want to reiterate Jeff's comments and emphasize that we had an outstanding year and are -- had an outstanding fourth quarter and are very pleased with the full year results. We are equally pleased with how well the company is situated to take advantage of current trends, which we expect will result in further earnings growth.

Summarizing Page 8, we recorded GAAP earnings per share of $1.24 in 2019, an increase of 65% over 2018. Core earnings per share increased to $1.40 in 2019, up from $1.38 in 2018 and above the previously communicated 2019 midpoint guidance of $1.37. An increase in portfolio yield is a primary driver.

In addition, core net investment income was $82 million in 2019, a 22% increase over 2018, while gain on sale and fees were flat at approximately $39 million. As you can see on the slide, our fourth quarter GAAP earnings significantly exceeded our fourth quarter core earnings. The transaction that caused this difference is an excellent example that validates our core earnings methodology.

Specifically, in the fourth quarter, we sold a portfolio of wind projects that had flipped. So we had already collected the vast majority of our cash flows, and thus, the purchase price was roughly equal to our core book value. So we had no core gain or loss on the transaction. However, due to the GAAP methodology that frequently delays earnings on equity method investments, our GAAP book value was much lower and the sale resulted in a GAAP gain of approximately $28 million. Since the market price of this asset was equal to our core book value, this is a strong indication that our core earnings recognition for equity method investments is the appropriate methodology for investors to evaluate our results.

Before continuing the slide deck, I would like to address one item that will impact future reporting of our results. Beginning in 2020, all public companies are subject to a new accounting standard generally referred to as the Current Expected Credit Loss model, which is typically abbreviated as C-E-C-L, or CECL. Under this accounting standard, we will be implementing an expected loss methodology for certain of our assets at the time they are originated. For example, commercial receivables will require provisions, but equity method investments will not. For the relevant investments, we will create an allowance for losses on the balance sheet and record a provision on the income statement. This provision and allowance accounting is similar to the method that many financial companies have utilized for years, although CECL has resulted in a recalibration of required provisions across the industry.

Three additional brief thoughts regarding CECL: number one, utilizing provision and allowance does not change the cash flow or the lifetime profitability of our investments, but does reduce profitability in the first year of the investment. For example, a $10 million commercial receivables transaction with a 50 basis point allowance requirement results in a provision expense of $50,000 in the first year. However, the $50,000 will eventually become earnings in a future year if the investment performs as expected. Number two, CECL implementation does not reflect any change in our view of the actual credit quality of our investments and should not be interpreted as such. It is simply an accounting methodology change. And number three, the guidance we are clarifying today for 2020 is based on a pre-provision EPS estimate. For a transition period, we expect to report our core earnings on both a pre-provision and post-provision basis.

Turning to Slide 9, we highlight the 23% compound annual increase in core net investment income over the last 5 years. This growth has been driven by 2 factors: number one, rotating lower-yielding assets off the balance sheet and replacing them with higher-yielding assets, which has driven our portfolio yield up 150 basis points over the last 2 years; and two, lower leverage, which has fallen from above 2x debt-to-equity in 2017 to 1.5x in 2019, resulting in reduced interest expense.

We are extremely pleased with the significant increase in core net investment income as it enhances the predictability of our core EPS and further stabilizes the business given the long duration of our assets.

Turning to Slide 10, we highlight our flexible business model. By growing our managed asset base and the subset of assets we keep on balance sheet while also opportunistically executing on gain on sale transactions, we have been able to consistently achieve an attractive and stable return on equity despite global spread compression.

Turning to Slide 11, 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 include over 145,000 high credit quality consumers located across 22 states. 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 we turn to Slide 12, I want to emphasize our continued access to debt and equity capital markets at historically attractive levels. With our strong recent stock performance and our debt trading at a yield below 4%, we feel very confident about our ability to raise capital and continue to grow our business. In 2019, we raised $500 million of corporate unsecured debt, $138 million of equity and completed several private secured financings. Following the filing of our 10-K, we intend to refresh our at-the-market equity issuance shelf registration up to $250 million. As we continue to identify accretive investments, we expect to utilize the full arsenal of our funding alternatives, including the ATM, overnight or marketed equity offerings, unsecured debt, secured debt, syndications and off-balance sheet securitizations.

Note that we have no material recourse debt maturities until 2022 when our convertible bonds mature. And given our convertible notes may be settled in shares, this maturity does not necessarily reflect a cash need. This maturity profile, combined with the fact that the nonrecourse debt largely amortizes within the contracted terms of the underlying assets, demonstrates that we are largely inoculated against near-term refinance risks and interest rate movements.

We have also changed the target range of our ratio of fixed rate debt to total debt from a range of 60% to 85%, to a range of 75% to 100% to reflect our current and expected profile of limited floating rate debt. At 12/31, the fixed rate debt percentage was 98%.

I will now turn the call 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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Terrific, Jeff. Thanks. Turning to Slide 13 I will highlight notable developments on the ESG front that continue to demonstrate our leadership. With our proprietary carbon count methodology, the positive environmental impact of the firm is unquestionably embedded in our DNA. At Hannon Armstrong, an emphasis on a durable social fabric, including a diverse, engaged and fairly compensated staff is a material factor in our financial success. With the appointment of Teresa Brenner as our Lead Independent Director in 2019, we are now one of the few U.S. public companies with a woman as Lead Independent Director.

And lastly, as one of the first U.S. public companies to implement TCFD in our financial filings, we can assure our shareholders that our team will stay on track and deliver results. In sum, we are proud to remain a leader in ESG performance and reporting.

Turning to Slide 14, we close with a brief summary of the key strengths of Hannon Armstrong. With a programmatic origination platform, a diversified portfolio, a durable capital structure, industry-leading ESG and strong competitive positioning, we have demonstrated we can thrive in challenging interest rate and policy environments. For us, climate-positive investing is not a fad or a newly adopted strategy. It is the reason we exist. We welcome others who have recently announced they are focusing on climate change and believe that our competitive advantage will continue to serve all of our stakeholders well.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Julien Dumoulin-Smith of Bank of America.

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Anya A. Shelekhin, BofA Merrill Lynch, Research Division - Research Analyst [2]

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This is Anya filling in for Julien today. So first off, just want to ask, could you talk about your long-term strategy for exposure to distributed generation solar? What's a reasonable limit to assume as a percent of the overall portfolio? And then in line with that, can you talk about opportunities you are seeing for solar relative to wind over the next year or so?

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

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Well, let's take that in 2 parts. I'll do it in reverse order. So solar for wind, you have to split it between grid-connected and behind-the-meter. We generally have not found very attractive economics in the common equity of wind projects. And so that has led us to do more -- relatively more solar land, which is where we see the best value.

On behind-the-meter, we can continue to see solar expand in residential, as you asked, but also community and C&I. And it's really getting combined with storage plus energy efficiency projects, so the technology distinction is blurring a little bit. There is a limit on how much exposure we'll take to any one asset class. But actually, what we would hope you take away is as the portfolio grows, those limits tend to grow as well. We're, as we've demonstrated, very cautious on credit and the ability to sell down our risk is something we always have in the back of our minds. So I'm not going to give you a hard number. But Q4 demonstrates that we were able to add assets that weren't resi solar assets, and that just increases our capacity to grow all the asset classes.

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Anya A. Shelekhin, BofA Merrill Lynch, Research Division - Research Analyst [4]

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Okay. And then separately, can you talk about the growth trends you are seeing in federal, state and local government markets? Just lately, how are you expecting that to look going forward relative to other markets?

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

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Well, clearly, that's been the legacy business for Hannon Armstrong for more than 20 years. And I think the economics are doing nothing but getting better. When you have technology that is getting cheaper, is getting more capable and you have interest costs that are so low, we expect to see continued adoption with state and local and federal governments. I think there are lots of ways for that market to grow. What we've never actually seen it do though is double or triple. So I wouldn't expect that. It's a nice steady growth. These are complicated transactions to do, and that complication tends to limit the increase in their adoption. But it's a good steady market.

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Anya A. Shelekhin, BofA Merrill Lynch, Research Division - Research Analyst [6]

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Okay. And last question on the guidance -- I guess the guidance raise that you guys have put out. Could you add some color on what exactly is -- anything more specific on what's driving that increase above the midpoint? And that seems to be before the accounting change, right?

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [7]

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Yes, that's without regard to any provisions we might take this year.

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [8]

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And so what's driving it, the growth in NII is reassuring that we become less reliant on fees and able to hit higher end of the targets. The excellent progress we made on the corporate unsecured debt has given us a lot more flexibility to increase that NII. So that is really why we're focusing people's eye to the north side of the midpoint rather than a fairly wide range.

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Operator [9]

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Our next question comes from Chris Van Horn of B. Riley FBR.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [10]

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It seems like there's a big acceleration in transactions in the fourth quarter relative to your commentary from the third quarter. Was that just a matter of timing? And was it a similar mix in terms of your end markets that you have highlighted for the year?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [11]

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We haven't really disclosed the mix in Q4. But Q4 is typically a busy quarter. Obviously, people want to book business at the end of the year. We did have some safe harbor facilities, which are important to get closed at the end of the year. Those are drivers. I would not say there's any one overarching theme that would make you smarter about the timing of when business hits. As we've always said, we don't control that; our large client base controls that. But yes, Q4 should be a busier time for us just given the end of the year and the implications on -- particularly solar tax credit.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [12]

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Okay, got it. And then on the range of your EPS guidance, is there a timing component to the lower end versus the higher end? And is gain on sale still a big driving force there? Any additional color would be helpful.

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [13]

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So gain on sale is important. It just becomes less important to achieving our results when we're able to add accretive transactions to the balance sheet. So we're definitely signaling that that seems to be the way things are going for us now. With respect to timing, do you mean quarter-to-quarter timing?

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [14]

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Correct. Yes.

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [15]

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We gave annual guidance for a reason. Any one quarter is always difficult to predict. So -- but again, a shift to NII away from a greater reliance on gain on sale will mitigate quarter-to-quarter variations, but certainly doesn't eliminate them.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [16]

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Okay. Okay, got it. And then last for me. Obviously, 2019 had a number of international disasters that you highlighted in your kind of macro trends. When does that -- what's the typical -- I know it's probably hard to quantify, it depends on the region and the application. But is there a timing around an increase in kind of your pipeline and your activity around those? And have you seen anything kind of come down the pipe from what we saw in 2019 around those disasters?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [17]

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There's nothing we can specifically tie 1 disaster to a community's decision to go do something around resilience. What is fairly obvious to us is all around the country, people are feeling different impacts from climate change. It's different in Louisiana than it is in Florida versus Chesapeake Bay Area. And but every -- not everyone, but it just seems to be a much more topical conversation as we meet with our clients that they're seeing the need and the community is starting to come to the recognition that whether they want to call it climate change or just weird weather, something is different and they're going to have to make some investments. That all takes time for us. Sadly, the trend seems to be absolutely certain. So good for business, but not necessarily good for the communities where these impacts are being felt.

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Operator [18]

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Our next question comes from Mark Strouse of JPMorgan.

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Mark Wesley Strouse, JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst [19]

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Jeff E., I know you gave kind of long-term targets of annual transactions of around $1 billion or so. But for the last couple of years, you've been a bit north of that. I know it's hard to predict especially this time of year. But I mean, is there any obvious reason why it would slow back down to that $1 billion mark? Or should we be assuming kind of similar levels to what it's been the last couple of years?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [20]

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I think we've used the $1 billion target almost for ease of math for some of the business model questions. But I think this is our third year over $1 billion. It's not -- I don't think we're looking at a hockey stick necessarily. But hopefully, the tone of the thing we just did is pretty positive. There's growth in all of these markets.

Do they hit in 2020 or do they hit in 2021? That's really tough for us to say. But the general trend is very positive in terms of origination. So I don't see anything that's going to take it back down. Hopefully, we'll continue to see growth in accretive transactions with pricing and structures we like.

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Mark Wesley Strouse, JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst [21]

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Okay. And then, Jeff L., can you -- I know this is probably hard to predict as well, but how should we think about the potential impact of CECL to EPS this year? If you could qualify that a little.

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

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Well, one of the reasons we're doing the guidance on a pre-provision basis is we're still working through exactly what provisions will be on certain categories of assets. I would ground you in the notion that, for example, equity method investments will not have any CECL required provisions. So to the extent that ends up being a large part of our volume, CECL would be a nonevent. By the same token, commercial receivables will have required provisions. And so if the business migrates in that direction, it will be a little bit more of an impact.

So as Jeff said, the transaction volume itself is difficult enough to predict. The types of transactions and the timing of when they close become that much more difficult to predict, which, in turn, makes the CECL post-provision EPS challenging to predict. And that's why we don't want to get too specific about that just yet. We want to go through a couple of quarters and see where we come out before we provide too much guidance on a post-provision basis.

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Mark Wesley Strouse, JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst [23]

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Yes, fair enough. Okay. And then just one more quick one. So looking at your 2020 guidance, it would assume this will be the -- at least 2 years in a row now, where your dividend growth is a bit slower than your EPS growth. Can you just provide your latest thoughts around kind of long-term target payout ratios?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [24]

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What we have said, Mark, is we started out paying 100%. And as people got to know the story a little bit better, the need for growing that dividend at the same pace as earnings was less. So we're a pretty conservative bunch, and having some gap between earnings and dividend is, we think, helpful. We don't have a target payout ratio. This is not related to any REIT rules or anything like that for reasons I don't want to get into now. But for the next while, we'd like to see that gap grow.

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Operator [25]

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Our next question comes from Jeff Osborne of Cowen & Co.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [26]

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A lot of good questions were asked so far, but maybe for '19, just going back to the CECL, can you talk about what the equity method investments were as a percentage relative to commercial receivables? Is there a way to frame what the exposure would have been if 2020 were to be a mirror of '19 in terms of mix?

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [27]

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Good question.

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

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Yes, good question. I would say commercial receivables were significant. I don't have that in front of me, but were a significant percentage of the balance sheet growth in 2019.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [29]

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Can we talk about categories like community solar would have been?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [30]

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Community solar as a commercial receivable?

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

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Safe harbor.

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

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Yes, safe harbor. Land, resi, solar. So but what we don't have today for you guys is exactly the allowance factor, mainly percent of the asset that would be required to go through provision. So even if I tell you, ex $100 million of 2019 growth was commercial receivables, I'm not prepared to say yet exactly what that would have meant in terms of actual levels of provision. So keep that in mind. That's something we'll be disclosing as the quarters progress throughout 2020.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [33]

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Got it. Okay. And then maybe around the fourth quarter itself, can you give us a sense of what percentage of transactions were securitized? And how we should think about that same metric as it relates to the guidance for the year?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [34]

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Well, in the fourth quarter, it was roughly 50-50. I would sort of point to that metric being less helpful as we go forward, as it's been in the past. So for example, our C-PACE business was on balance sheet for quite a while, and then we securitized it in the fourth quarter. So this notion that what was originated in the quarter is exactly what was securitized in the quarter, is sometimes not the case. So I'd be a little -- I would give you some caution about using that number in your models.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [35]

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Okay. Any sense about securitization percentage for 2020? Or what the size of the balance sheet we should use for modeling purposes?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [36]

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I think we would say that we would expect most of the originations in 2020 to remain on balance sheet without putting out a specific number. It's mostly the energy efficiency transactions and C-PACE that we would look to securitize, and most everything else, we would expect to put on balance sheet.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [37]

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Okay. I think in the past, you had talked about 30% of $1 billion in transactions was sort of the rule of thumb. I don't know if that's changed meaningfully.

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [38]

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Actually, in 2019, we had said it's going to be closer to 50-50.

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

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And I think Jeff L. was saying probably maybe flip more to 30-70 and -- from the 50-50.

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

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And again...

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [41]

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Directionally.

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

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Yes. And not to be repetitive, but I would delink, in many ways, your analysis of our company in terms of originations and securitizations occurring simultaneously. We may look to syndicate, for example, assets that have been on the balance sheet for a while. And so that would create a difference in the way you are looking at it if you are always tying originations to securitizations in the same quarter.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [43]

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Got it. Just had 2 other quick ones. One, just given the topic with all the debates going on, can you remind us what you've seen over the past around elections and whatnot as that impacts the federal government business in particular? Is there any slowdown or speeding up into the election and any material impact post the election? That was question one. And then question 2 I had was just around rebalancing. You've had some in the past, was there any in the quarter itself in Q4? I just wasn't sure, as the yields have gone up and leverage has come down, how you're thinking about rebalancing in general? And if you can give us the amount for the fourth quarter, that would be helpful.

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [44]

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In terms of the election question, the good news is our civil service is largely apolitical and is not that sensitive to the election. So we don't expect that -- the presidential election to have any impact on which business gets generated at the federal government.

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [45]

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And on your other question, we have been talking for a few quarters about this rotation of lower-yielding assets off the balance sheet. I would say, directionally, we're coming to the end of that. Obviously, we only had a finite amount of lower-yielding assets on the balance sheet. And we did a fair amount of that in excess of $100 million, I think, in the fourth quarter. We'll get you the actual number. But I would guide you towards what we're sort of coming to the end of that rotation.

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Operator [46]

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Our next question comes from Noah Kaye of Oppenheimer.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [47]

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The growth in the portfolio, a large part of that sequentially was from the commercial non-investment-grade receivables. Fair to assume a significant component of that was the Freddie Mac BPs. Is that correct?

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [48]

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Some of it was, but that's equity method actually because we own those through a joint venture. So they come up as equity method.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [49]

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Okay. So what would have been the other kind of key drivers of the commercial non-investment grade? Not -- I shouldn't say other; what were the key drivers of commercial non-investment-grade growth? Was it the community solar and what were kind of the key assets?

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [50]

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Yes, the resi solar. As Jeff talked about, the safe harbor.

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [51]

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And there's some C&I solar in there as well.

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [52]

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Yes.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [53]

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Okay. Just kind of given the success of the KG series, any visibility to further deal potential with Freddie or with Fannie? How do you think about a pipeline of opportunity there?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [54]

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Well, I would say that's, in some ways, obviously, dependent on Freddie's program for these type of green transactions, number one. Number two, as we've disclosed, our partner there is a company called Morgan Properties, so their ability and willingness and availability to be selected to purchase on what's typically a rotating basis, these Freddie securities will also be a driver of our volumes there. So we feel good that Freddie will continue to issue and that Morgan will continue to be part of the rotation. But we're dependent on those 2 things in terms of we achieving our volumes.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [55]

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And can you talk about the pipeline for some of your other newer offerings like energy as a service and also, if I could sneak one more in, was this the first time you securitized C-PACE? If not, can you remind us when that started? And if so, can you talk to us a little bit about how that penciled out in terms of your expectations and loan to value?

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [56]

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I'll take C-PACE first.

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Jeffrey A. Lipson, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Executive VP & CFO [57]

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Yes, we can take the second one first, which is, yes, it's the first time we securitized C-PACE, and we were quite pleased with both where the rating agencies came out. The advanced rate on the transaction and the pricing on the transaction was all, I would say, at or above our expectations in terms of what we expected as we originate in the business.

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Jeffrey Walter Eckel, Hannon Armstrong Sustainable Infrastructure Capital, Inc. - Chairman, President & CEO [58]

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And Noah, on energy-as-a-service, I mean, we announced a number of transactions. They are relatively smaller companies. But I think -- and so I wouldn't -- to be clear, I wouldn't see -- I don't see a lot in the pipeline that we haven't already announced. These are programmatic relationships that -- still those programs need to be filled. So I think what we have announced is pretty close to what's in the pipeline. That said, Energy-as-a-service is a pretty neat offering. And as we've gained comfort with it, we're starting to see new potential clients and there is some in the pipeline. It's a very exciting market. But again, like all of our new markets, they're relatively slow to develop.

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Operator [59]

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This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.