Business Description
HASI is a climate pure-play investment firm. It is currently structured as a REIT, but it will not elect as a REIT starting from 2024. The company says it is a pure tax consideration, so its dividend policy does not change. The company's target payout ratio is 50-60%, although historical payout ratio was 70-80%.
HASI was always a REIT in name only. It doesn't really own any real estate or any real estate debt like other "real" REITs. It invests in debt, structured or preferred equity of climate positive projects. From my superficial understanding, the investments are all secured by the assets which generate electricity powered by renewable resources. When the investment is in the form of structured or preferred equity, the return is often determined by the timing of the total volume of power generated over time, so the cash flow may be shifted by the timing of the power generation a bit, but that should not matter much in the big picture.
The three important pillars of the business are:
Climate: climate positive, invest capital to facilitate the energy transition
Clients: become strategic partners of our client, never compete with clients
Assets: income generating real assets (not platforms or companies), proven technologies, noncyclical lower-risk predictable business, that results in a very predictable cash flow
Six attributes in all investments:
First three are climate, clients, assets: climate-positive investments with top-tier clients and they are invested in real assets
Contracted cash flow: contracted cash flow between some provider of energy and some end user,
Proven technologies: wind, solar, storage, renewable natural gas
High-quality incentive off-taker: The off-taker is typically saving money through the project in which they're invested with us and our partner. And therefore, they're highly motivated to continue to make the payment and then they're high-quality off-takers to begin with, whether they be individual pools of high-quality individuals or creditworthy companies.
The investments are in three categories:
Behind-the-meter: behind-the-meter (BTM) building or facility-specific distributed energy projects which reduce energy usage or cost. These include projects that employ solar power generation, electric storage, or energy efficiency improvements such as heating, ventilation, and air conditioning systems (HVAC), lighting, energy controls, roofs, windows, building shells, and/or combined heat and power systems.
Grid-connected: renewable energy projects that deploy cleaner energy sources, such as solar, solar-plus-storage, and onshore wind, to generate power production where the off-taker or counterparty may be part of the wholesale electric power markets.
Fuels, Transport & Nature: renewable natural gas (RNG) plants, transportation fleet enhancements, and ecological restoration projects, among others. Our natural climate solutions investments in ecological restoration increase carbon storage or avoid greenhouse gas emissions, while also offering additional environmental and resiliency benefits
Below is the ~$10 billion managed portfolio ($4.3b portfolio, $5.5b off-balance sheet) in Feb, 2023:
For financing, HASI securitizes the lower-yielding investments and takes a gain because they can't finance them efficiently on their balance sheet. Higher-yielding investments are funded themselves and left on their balance sheet.
With a targeted debt /equity ratio of 1.7x, the return on equity is about 10-12% as illustrated below:
The business is proven by the track record of steady increase of distributable earnings per share (11% CAGR from 2014 to 2022):
From 2021 to 2024, the company is expected to have 10-13% CAGR in distributable earnings per share (DEPS), and 5-8% CAGR in dividend per share (DPS). That is 2.27-2.53 in DEPS, and 1.65-1.85 in DPS by 2024. The payout target is 50-60% by 2030.
With this business model, HASI believes it has a lower risk portfolio than other energy transition participants with similar exposure to energy transition.
After Donald Trump being elected to be the president of the United States in Nov, 2024, the company shows two slides that support the company's business model that is driven by economic not politics, and it can navigate across all interest rate environments:
SWOT analysis
Strengths
Simple business model but complex investments which create barriers to entry. The expertise is hard to replicate to some degree.
Predictable cash flow
Weaknesses
Only narrow economic moats due to the nature of fungible capital
Opportunities
The Inflation Reduction Act in 2022 lowers economy-wide CO2 emissions, which includes electricity generation and use, by 35 to 43% below 2005 levels in 2030. Originally it was 24-35%. This increased the total addressable market of the company.
Threats
Irrational competing capital
Macro environment affecting the credit quality of the investments
References
2024-11-07 2024 Q3 earnings presentation
2023-03-21 Investor Day Presentation 2023
Updates
2024/11/15 Add slides related to business model resilience in terms of politics and interest rate, also update valuation
The company expects to grow its earnings 10% annually. As my update on 2023/10/13 says, based on payout ratio (~65%) and ROE of 10-12% on investment, the expected growth is only about 4%. The rest will have to be explained by one-time transactions which have uncertainty in repeatability like securitization income or accretive investments with equity offering.
That being said, given the track record of the company, I decide to assume it can grow 7% per-share earnings long-term. On the other hand, the dividend payout ratio has to decrease from 65% to 50%, so I assume the dividend can only grow about 6% in the intermediate term.
I also add 100 basis points on my usual 11% discount rate given the uncertainty in growth. Below is my valuation:
2023/10/23 Correction on the Return On Capital of HASI
It should be regarded as average return on capital (or return on equity for HASI) at ~10% instead of low (< 10%). My investment thesis for this kind of company is described in Investing in Companies with Average Return on Capital.
2023/10/13 Valuation
With a return on equity of 10-12%, it belongs to the low ROIC category, so the valuation has to be low enough to get a good investment return on the stock.
2023 dividend per share is $1.58, DEPS is expected to be around $2.2. I would take a 15% discount from DEPS to take out the equity expenses, so the real EPS of the company is about $1.87.
The current price per share is $16.5. That is 1.58/16.5 ~ 9.5% dividend yield, P/EPS = 16.5/1.87 = 8.75x. Payout ratio = 1.58/1.87 = 84%, so a sustainable organic annual growth is about 2% given the 10-12% ROE. This is a very conservative estimate. HASI's DEPS has a CAGR of 11% for the past 8 years, and is expected to be 10+% for this year and next year. Its dividend grew at a high single digit as well. The difference can be explained by securitization income and issuing shares to fund investment in an accretive way. The former is quite unstable, and the later, while being a high contributor factor, is limited by the premium price that the stock traded at some time before, and thus not sustainable and probably not repeatable in the near future.
I would use 11% as the discount rate, so a buy below price is at 9% dividend yield, or 1.58/0.09 = $17.55 per share.
It also had a good number of insider purchases back in August.
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