As evidence continues to mount that the world is heating up at an alarming pace, the shift from fossil fuels to clean, renewable energy sources has taken on increasing urgency. One of our latest investments is a company that is making a significant contribution in advancing renewable energy across the country. Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI) is a specialty finance company that finances infrastructure projects that enhance energy sustainability. Hannon provides financing for three types of projects: clean energy, energy efficiency, and other sustainable infrastructure.
Hannon Armstrong’s senior management thinks that climate change is the defining issue of our generation and that finance has much to contribute to the adoption of low-carbon technologies. Hannon focuses on the large opportunity to provide financing for distributed energy assets, which include assets that either reduce energy consumption (like LED lighting) or reduce carbon in energy production (like solar on buildings). Most of these distributed energy assets need the financing that Hannon provides. Founded in 1983, this Annapolis, Maryland-based company went public in 2013 and is structured as a real estate investment trust (REIT). With more than thirty years of experience in financing sustainable infrastructure projects, Hannon fills a void that often is left by traditional lenders and Wall Street.
Many lower-carbon projects mean higher upfront capital costs but lower ongoing operating and fuel costs. Just as a home mortgage allows people to spread the cost of a home purchase over time, Hannon provides financing so that the costs of distributed energy assets are spread over the useful lives of the assets.
Over most of its history, the company primarily worked with firms such as Johnson Controls or Trane — as well as the federal government, one of its largest customers — to finance energy-saving equipment. The company recently has placed greater emphasis on financing solar and wind energy projects. Just last month, it lent $144 million for ten wind farms across five states, with a capacity of 1,200 megawatts (enough to power approximately 200,000 homes).
The company defines sustainability as positively impacting the environment while being neutral or reducing greenhouse gas (GHG) emissions. In addition to GHG emissions, projects are evaluated for other environmental benefits, such as water use reduction. The company’s 2013 annual report estimated that assets financed will annually reduce emissions by 331,000 metric tons of GHG (equivalent to 178,000 tons of coal) and save 628 million gallons of water.
Though Hannon Armstrong has grown significantly since it went public last year, management sees huge unmet needs remaining. We agree that large financing opportunities remain and are likely to result in higher dividends paid to shareholders over time. Hannon Armstrong does not own the underlying real assets of solar or wind farms or energy-saving equipment; it is primarily a finance company. So unlike an equity real estate investment trust (REIT) that owns real property that has the potential to appreciate (along with higher rents), HASI is essentially a mortgage REIT whose value is largely dependent on interest rate spreads, financial leverage, and credit risk.
Since the company is structured as a REIT and not as a corporation, its dividend is taxed largely as ordinary income, not as a qualifying dividend that has a lower tax rate. But with an exceptionally high current dividend yield of 6.4% and excellent growth prospects, we think the stock offers attractive total return potential from current income and growth of income and capital — while helping to find solutions for the crisis of climate change. Our initial price target for the stock is $15.20.
Hannon Armstrong Sustainable Infrastructure Capital
Revenues: $14 million
Earnings Per Share (EPS):
2014 est. $.92
2015 est. $1.12
Projected 3–5 Year Annual Earnings Growth: 7%
Dividend Yield: 6.4%
Stock 52-week Low–High: $11.70–15.11
Risk: Above average