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HASI - Hannon Armstrong Sustainable Infrastructure Capital


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Have anyone looked at this company (https://www.hannonarmstrong.com/about/)? I have never invested in a REIT, and would like to avoid any pitfall I can.


To me, this looks like a possibility to indirectly invest in companies that I otherwise could not (because they are not publicly traded) in the area of energy storage, smart-grid etc. An area that is crucial to the decarbonization of energy that is imho inevitable.


However, it is not cheap. Depending on how you calculate both the EV and the ebit(da), the EV/ebit(da) is around 30 or something now. And the ROA is in the low single digits. On the other side, the company has been making a profit for the last five-six years, and it has been increasing steadily. Perhaps this crisis is an opportunity to buy this at a relatively reasonable price, before everyone starts bid up the price of everything that looks green and responsible.


What should I look out for in this type of company (REIT), and what metrics make sense and not?

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While I haven't had the time to look at this thoroughly, a couple of things jump out to me on cursory review. First, the dilution - with REITs, you always have to watch out for large-scale share issuance. From their 8-K (https://www.sec.gov/ix?doc=/Archives/edgar/data/1561894/000119312520107712/d159410d8k.htm) today:

At-the-Market Equity Issuances– During the period from January 1, 2020 to April 10, 2020, the Company sold approximately 6,109,021 shares raising approximately $150 million at an average price per share, net of costs, of $24.50 including sales for the period from January 1, 2020 to March 31, 2020, of approximately 4,605,635 shares raising approximately $117 million at an average price per share, net of costs, of $25.50.


They listed 67,088,363 shares outstanding on their 10-K (https://www.sec.gov/ix?doc=/Archives/edgar/data/1561894/000156189420000016/hasi1231201910-k.htm) filed on February 18. The capital they raised from issuing shares is in addition to the $350mm that they announced from the note issuance relayed in today's 8-K.


Another thing that I noticed is a large gain on sale component in their accounting:

The Company has continued to complete gain on sale securitization transactions with large institutional investors such as life insurance companies, including a transaction that closed in late March. The market for the assets we finance has remained active throughout various market cycles due to investor demand for high credit quality, long-term investments.


According to their 10-K (pp. 87-88), they treat gain on sale transactions as follows:


Gain or loss on the sale of financial assets is calculated based on the excess of the proceeds received from the securitization (less any transaction costs) plus any retained interests obtained over the cost basis of the assets sold. For retained interests, we generally estimate fair value based on the present value of future expected cash flows using our best estimates of the key assumptions of anticipated losses, prepayment rates, and current market discount rates commensurate with the risks involved. Cash flows related to our securitizations at origination are classified as operating activities in our consolidated statements of cash flows.


So, the question becomes - how much do you trust their judgment of the NPV of the future cash flows for the retained interests? Also, do you believe that the cash flows from securitizations are correctly classified under operating activities? Their 2019 Statement of Cash Flows reflects 82mm net income, 29.5mm OCF with the subtraction of a 56.7mm non-cash gain on securitization.


Are you comfortable with management's use of variable interest entity SPVs?


We have established various special purpose entities or securitization trusts for the purpose of securitizing certain financial assets. We determined that the trusts used in securitizations are VIEs, as defined in ASC 810. When we conclude that we are not the primary beneficiary of certain trusts because we do not have power over those trusts’ significant activities, we do not consolidate the trust.


This was noted by EY as a Critical Audit Matter on pp. 76 of the 10-K:


The Company’s determination that it does not have the power to direct the significant activities impacting each of the investees’ economic performance (“power”) is critical to its determination that it is not the primary beneficiary of the investee . . . Auditing the Company’s determination of whether it has power was complex and required significant judgment to determine both the activities of the investee that most significantly impact the investee’s economics, and the distribution of the power among the members of the investee that ultimately determine the outcome of such activities.


For me, the items above would already put the company into my personal "too hard" pile right off the bat. I would also challenge you to look closely at your thesis: You seem to want to invest in this because you perceive a secular trend towards decarbonization. Is this really as inevitable as you think? Oil and natural gas prices are currently among the lowest they have ever been in the modern era, and cheap carbon-based energy is more likely to forestall the drive to renewables than to facilitate it.


Even if you're right on the trend, why this company? What's their moat? Why do the assets they own give them a durable competitive advantage?


You also note that you see the company as a proxy to invest in non-public assets. Here I would urge caution as well. One painful lesson that I have had to learn and re-learn in my investing lifetime is that you don't get any extra credit for obscurity. There are many good businesses that are public and easy to invest in, and many terrible businesses that are private. Most frontier markets, low-liquidity issues, dark companies, etc. are traps - just because it's hard to gain access to something does not mean that it will make you any money.


Just some things to think about - lots of shareholder value has been incinerated by "green" companies where the only thing sustainable seems to be executive compensation.

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Nomad, thanks for these very good comments and questions. I do think the trend towards decarbonization is real, but I should probably substitute "inevitable" for "likely". As for all your other points, I will go back to my room and study. (tone can sometimes be hard to convey online, so just to be clear: I mean no sarcasm or irony. Better to have my thinking challenged than my capital lost.)

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No problem - if you're interested in doing a deep dive, I would take a look at their 10-Ks going back a few years and try to come up with a normalized number for their funds from operation (FFO). Take a close look at "non-recurring" items in the financials - did they end up being true one-offs?


Also, looking at EDGAR, I see that they have amended their 10-Ks a couple of times - why? You'll want to find out to see what was omitted from the 10-Ks (or misstated) and the reasons behind those omissions or misstatements. For me, the biggest issue at first glance seems to be the financials. I immediately put my guard up when I see VIEs and gain on sale accounting. Those are not necessarily a sign of fraud, but they have been present in enough frauds in the past that you should look very carefully at the mechanics of the transactions to the extent that you can.

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