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Hannon Armstrong: A Sunny Play For Clean Energy Lovers

This article updates one that I wrote last February which drew favorable conclusions about Hannon Armstrong, a renewable energy REIT.

HASI has reported improving earnings in 2015, and it has been raising its 6.1% dividend while growing at a fast pace.

HASI still has work to do on the earnings front, but it shows great promise as a profitable play on a greener future.

Background

This article updates an article I wrote on 6 February 2015 about Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE: HASI). The stock closed at $14.16 on that day, and recently closed at $17.04, for a gain of $2.88 or 20.3%. In between, it peaked at $21.52, which represented a gain of 52%. Obviously, it has been a volatile year for this small cap ($660 million market cap) company.

HASI, as my previous article explained, is a specialty finance REIT that focuses on renewable energy loans. That focus is both a blessing and a curse, as the stock price tends to reflect prevailing sentiment about other renewable energy industries, such as solar. Recently, solar stocks have fallen out of favor, and HASI also has experienced some weakness. However, HASI has a business model that is distinct from such companies, and weakness now could present an opportunity for the longer term.

I concluded my previous article by stating the following:

If you believe in the promise of renewable energy sources and related investments, Hannon Armstrong is one of the more promising companies in the field -- and it pays a healthy dividend to reward you.

Let's see if that still applies.

HASI Financials

I always start with an overview of a company's financials. This provides a basic introduction and sets the stage for a review of recent developments.

Hannon Armstrong Annual Financials

Source: HASI Form 10-K. All amounts in $000s. Debt is nonrecourse debt.

A glance at the annual data shows that HASI is growing at a rapid pace. It also turned profitable in 2014. Its Total Liabilities are relatively high as compared to Total Equity, but the ratio of liabilities/equity declined slightly, from 2.8 in 2013 to 2.69 in 2014. A high debt/equity ratio is not unusual for a smaller, fast-growing company.

Next, let's look at annual cash flows, which are always of prime importance for a REIT. Since HASI is not an equity REIT, it does not report Funds From Operations. Instead, it reports Core Earnings, which as I explained in my previous article adjusts for non-recurring items and is roughly comparable to AFFO.

Hannon Armstrong Annual Cash Flows

Source: HASI Form 10-K. Ratio is the amount of Dividends per share divided by Core earnings per share.

While one would prefer that regular earnings cover the dividend, the company has been able to cover it with its Core Earnings. The figures suggest that as goes the Core Earnings, so will go the dividend.

Next, let's turn to the 2015 cash flow data that is available, which we have for the nine months through 30 September.

Hannon Armstrong Nine Month Cash Flows

YearRevenueNet Income /shareCore earnings/ shareDiv/ shareRatio
201421,084$0.40$0.64$0.661.03
201523,544$0.16$0.79$0.780.99

Source: HASI Form 10-K. Ratio is the amount of Dividend per share divided by Core earnings per share.

The same trends seen in the annual data are evident in the nine-month data (which is one reason I like to go over the annual data, to see such trends). Revenue is up, and the company now is keeping its dividend covered under the Core Earnings standard.

In its earnings press release for the third quarter, the company stated:

Core Earnings, a non-GAAP financial measure, for the quarter ended September 30, 2015, of $8.5 million or $0.26 per share, an increase of 18% over the $0.22 per share in the same quarter last year. For the nine months ended September 30, 2015, Core Earnings were $24.0 million or $0.79 per share, as compared to $13.2 million or $0.64 per share in the same period last year.

While the report slightly missed analyst expectations and sent the stock price lower, the increase in Core Earnings for both the quarter and the first nine months of 2015 is encouraging.

The basic financial data shown above always leads to other company issues without having to do a lot of digging elsewhere, sort of like a puzzle. With Revenues up year over year, but Net Income per share down, that usually points to increased expenses and/or increased share count. HASI had both, with...


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