HA Sustainable Infrastructure Capital, Inc. Q3 FY2025 earnings call

Business Model Aspects

• Demand for energy continues to increase, boosting HASI's total addressable market. Operating environment is conducive, with capital markets having low volatility and clients' pipelines active. HASI has achieved meaningful EPS growth in all interest rate environments and has attractive investment opportunities in various markets.

Q3 Performance

• Q3 was the most profitable quarter in history, with the largest investment closed. Adjusted EPS was $0.80, the highest quarterly EPS. Managed assets grew 15% year-over-year to $15 billion. Year-to-date adjusted ROE was 13.4%.

New Investments

• Closed over $650 million of new transactions in Q3, totaling $1.5 billion through the first 3 quarters of 2025. Closed a $1.2 billion investment early in Q4, on track to close over $3 billion for 2025, up over 30% year-over-year. New asset yield in Q3 was over 10.5% for the sixth quarter in a row. Pipeline remains above $6 billion.

Asset Optimization

• Executed targeted asset rotation strategy in 2024, monetizing lower-yielding assets and recycling cash into higher-yielding ones. In Q3, refinanced senior ABS debt in the SunStrong residential solar lease portfolio, resulting in paydown of mezzanine debt and cash distribution to equity owners.

Debt and Capital Platform

• Even after refinancing part of low-cost debt due in 2026, cost of debt only increased 10 basis points to 5.9% in Q3. Opportunistically added $250 million in hedges in September.

Major Investment

• Closed a $1.2 billion structured equity investment in a major clean energy infrastructure project in North America. The project is a 2.6 gigawatts wind power project, with expected return consistent with recent utility scale investments. Net impact on HASI's balance sheet is lower due to closing in CCH1.

Pipeline

• Pipeline remains above $6 billion, diversified with strong demand in key end markets. BTM asset classes benefit from higher retail electricity rates, residential solar leases expected to gain market share, grid-connected end market has larger project sizes, fuels, transport and nature end market demand remains strong, and Next Frontier asset classes are an exciting opportunity.

In Q3, HASI achieved a record quarterly adjusted EPS of $0.80. Year-to-date, adjusted recurring net investment income grew 27% to $269 million. Managed assets, including the portfolio, CCH1, and off-balance-sheet securitized assets, were up 15% year-over-year to $15 billion. Year-to-date adjusted ROE rose to 13.4%. The portfolio yield was 8.6%, up from 8.3% last quarter. Adjusted recurring net investment income, a new financial measure, showed a 27% year-to-date growth.

EPS Growth

• Reaffirmed guidance for 8% to 10% compound annual EPS growth through 2027 and expects roughly 10% adjusted EPS growth in 2025.

Future Guidance

• Working diligently on business plan with the Board and will have more to say about 2026 and 2027 in February.

Risks

• Comments made in the call are forward-looking statements subject to 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 stated.

Q: It sounds a lot like you're describing the SunZia project on Pattern Energy in New Mexico. Is there a reason you're not naming the project? And any color you can talk about what sort of equity stake and the economics of it would be interesting.

A: Thanks, Jon. I appreciate the question. It is the SunZia project and as you described. And -- in terms of returns, I think we talked about it being consistent with returns on recent other transactions we've had in our grid-connected portfolio. So, I think that's probably the best way we could describe the return. And it is a preferred equity investment. So, it has some structure to it. It's not a common equity investment.

Q: Echoing Jon's comments on the solid quarter. I wanted to ask about the pipeline. And I think you mentioned $6 billion, so flat quarter-on-quarter, but you've got -- I guess, if you adjust in the $1.2 billion transaction in October, it'd be up significantly. So can you just maybe talk about the pipeline here? It looks like it's strengthened quite a bit quarter-on-quarter. And just curious what you're kind of seeing from that perspective, if there's any sort of demand pull forward going on as a result of?

A: Sure, Chris. I would say, as we discussed in the prepared remarks, we did replace the grid-connected pipeline, in particular, with enough new volume such that it didn't go down after this $1.2 billion transaction that we described. Beyond that, our pipeline disclosure is, of course, not precise. We say greater than $6 billion. So I know it's hard from the outside looking in to tell if it actually went up or down in the quarter. But it's certainly at above $6 billion at a level that we're comfortable we'll have enough to invest in, in 2026 to achieve our goals. And we're not seeing too much in the way of pull forward. I would describe what we're seeing as ordinary course. And as we talked about last quarter, folks executing on their pipeline, meaning our clients, everything they're working on now is grandfathered or safe harbor, but I don't really think this is the result of any kind of pull-through.

Q: I want to ask sort of a broader question around investments resulting from this announcement today, the $1.2 billion. We've historically thought about the business as making smaller investments spread across a large number of projects. This is a pretty big one. But of course, as you said, energy projects are getting bigger. You've talked about data centers as the Next Frontier asset class and they're getting just on the energy infrastructure, this type of investment. So, I guess, how should we think about this investment and what it signals for your appetite to take on larger single projects going forward?

A: Well, it's a good question, Noah. We've built the business on some small and modest-sized transactions over time, but we've always, at least after -- since 2020, supplemented that with some larger transactions as well. I think this transaction is a reflection in many ways of our access to capital through both being investment grade and our CCH1 relationship. The amount of capital we can bring to the table is more significant. So, we've become a player in these larger transactions. And when it makes sense, we'll do that. We're, of course, going to manage our risk accordingly. I talked about half of this being in CCH1 and some other pathways to a lower long-term hold level. So, we're certainly managing our risk. But in terms of your broader question of how we think about the business, I think you should think about the business as we're being active in both smaller transactions where we've historically found great value and continue to find opportunities, but also supplemented by some periodic larger transactions where it makes sense for us. And so, I think this is in many ways -- I use the word milestone, but it's we graduating into access to some of these larger transactions, which are going to be more frequent, as you mentioned, because of data centers and the grid-connected development focusing on larger projects.

Q: A housekeeping item, just the ABS, the SunStrong ABS refinancing. Can you kind of quantify what the benefit was to the quarter in that because the ROE expansion this quarter was pretty noticeable?

A: Sure. And I'm going to ask Chuck to do that. But before I do that, Noah, I'm going to clarify a little bit a few items around SunStrong. I expected us to get a question on it, and I don't want there to be any confusion about what this distribution was. So let me just answer that a little more broadly and say we often refer to SunStrong and folks talking about us refer to SunStrong in a singular capacity, but we actually own 50% of 2 separate entities. One of them is SunStrong Capital Holdings, which is an AssetCo that primarily owns solar leases, most of which have been securitized. And the distribution we received this quarter was the result of refinancing the ABS debt, which due to de-levering and the very strong performance of the underlying leases resulted in essentially a cash out refi. So, there was meaningful cash distribution to the equity owners. And going forward, as an equity owner in SunStrong Capital Holdings, we'll just get the normal distributions from the waterfall of the securitized assets. The refi was a bit of a onetime. Now separate from that, we own 50% of SunStrong Management or SSM, as we call it, which is truly an operating business that provides servicing to consumer and commercial loans and leases, including the legacy SunPower and Sunnova portfolios. Now SSM is an operating business. It has its own executive team. It's performing very well. It has a business plan, which includes ongoing growth in the platform and expansion ideas. And our accounting for our SSM investment is as an equity method investment that we hold at fair value. So to the extent the underlying value of SSM increases, that would positively impact HASI's earnings. So I just wanted to create that clarification of when we say SunStrong, what we actually mean. This distribution that we're talking about in the third quarter was from SunStrong Capital Holdings. So sorry for the deviation to your actual question, I'm going to defer to Chuck. Charles Melko: Noah, so our investment in SunStrong consisted of both mezzanine level loans as well as a small amount of equity. The total proceeds from the ABS that we received was around $240 million. And the composition of that was roughly about $200 million of it went to pay off our mezzanine loans. of which we're redeploying back into additional accretive investments. But then we also -- the other remaining $40 million was related to our equity, of which we did have some small investment, like I said. And of that $40 million that we received, roughly about $24 million of it was a gain in excess of our investment. So the impact to the quarter was $24 million.

Q: I want to ask just how much the tax credit changes from Big Beautiful Bill have maybe impacted the types of investments you're seeing by asset class? And I guess the root of my question is just wondering if you've seen any opportunities in the last couple of months in discussions to step into a potential hole in the cap stack or any other ways that there have been puts or takes.

A: Sure. Thanks, Davis. I'm going to ask Susan to answer that one. Susan Nickey: I think at this point, with the extension of the tax credits for wind and solar, by and large, for 5 years with safe harbor and started construction and storage and some of the other credits that extend longer, I think we're still seeing the traditional combination of tax equity structures and transfer structures to dominate the market. So, we're still -- we still have this longer transition period before we expect to see a change in the capital stack to not include tax credits.

Q: A lot of third-party ownership have talked about prepaid leases. Is that a kind of product that would interest you guys? And would you see similar yields as traditional leases?

A: Sure. Thanks, Jack. I'm going to ask Marc to answer that one. Marc T. Pangburn: Jack, that's something that we could certainly take a look at but haven't been presented any opportunities yet. So we'll have to defer on that until the future.

Q: Just looking at the principal collections, it looks like it was a larger quarter with about $382 million returns. Could you just give some insight into what the maturity profile and roll-off schedule of the existing portfolio looks like? Should we expect the pace of that to potentially increase as you approach the new wind investment?

A: Yes. This is Chuck. So, the $300 million number that you're seeing there, the biggest driver of why that's a little bit higher has to do with the SunStrong refinancing that I just mentioned. When I said that roughly about $200 million of the proceeds went to pay down the mezz loans that came through that line. So that was a little bit of an acceleration of normal amort profile that you'll see from our portfolio. But the way I generally think of it is that the lives of our assets, weighted average life is around 10 years or so. So you could expect looking at our portfolio that our amort in any given period will mirror that.

Q: Just wondering if you could talk about how this large transaction and the $3 billion of volumes this year might impact the EPS growth algorithm in '26 and beyond. I know you reaffirmed the 8% to 10% range, but should we be thinking about a possible step-up in '26 from these volumes?

A: Thanks, Michael. Good question. Our cadence has consistently been to talk about guidance in February, and I think we're going to stick to that. So we're working diligently right now on our business plan with our Board. And I think we'll have more to say about '26 and '27 in February.

Q: It looks like SunZia was excluded from the greater than $6 billion pipeline, which makes sense. Just wondering if it was included in that number last quarter?

A: It was. It was in last quarter's pipeline. That's correct.

Q: I just wanted to follow up here. And I think you mentioned during your prepared remarks, the really low rate of bad debt. I think bp Lightsource or subsidiary had reported a default with one of their suppliers. And I'm curious, I think you all have worked with them in the past. Is there anything related to that, that would impact you all?

A: Thanks, Chris. No, there wouldn't be. We do work with bp Lightsource. But again, we're monetizing project cash flows. And the challenge that you discussed has no impact on the project in which we're invested.