/Solar%20Panels%20in%20Nature%20Sunny.jpg)
On Sept. 1, after the markets closed, S&P Dow Jones Indices announced many changes to its various broad-market indices. One of these changes saw Hannon Armstrong Sustainable Infrastructure Capital (HASI) added to the S&P SmallCap 600.
Whenever stocks are added to broad-market indices, they usually rise in value in anticipation of index-based portfolio managers having to add the stocks to their holdings. In this instance, the real estate investment trust will be added to the small-cap index before the markets open on Sept. 18.
The news had HASI stock up 8% in Tuesday trading and 22% over the past five days.
While there is no question that the clean energy real estate investment trust’s (REIT) stock is on a roll, that doesn’t necessarily make it a buy.
Here are the pros and cons of owning HASI for the long haul.
Why You Want to Own HASI Stock
Most of the clean energy debt and equity investments it makes are in assets backed by long-term power purchase agreements. That makes the interest payments its clients owe generally a safe and sure thing.
As a result, if you’re interested in income, the 6.7% dividend yield -- about 210 basis points higher than the Vanguard Real Estate ETF (VNQ) -- is desirable.
“Our investments take many forms, including equity, joint ventures, land ownership, lending, or other financing transactions. We also generate ongoing fees through off-balance sheet securitization transactions, advisory services, and asset management,” states pg. 45 of its 2022 10-K.
“We use borrowings as part of our strategy to increase potential returns to our stockholders and we have available a broad range of financing sources including non-recourse or recourse debt, equity and off-balance sheet securitization structures.”
As of June 30, 2023, its portfolio totaled $4.9 billion, with $2.1 billion in grid-connected assets. Meanwhile, $2.5 billion was in behind-the-meter assets such as residential and community solar, with the remainder in fuels, transport, and nature.
In the first six months of 2023, it generated $143.44 million in total revenue, 18.3% higher than $121.28 million a year earlier. Its net income through Q2 2023 was $37.63 million, 39.9% higher than $26.90 million.
On Aug. 3, it announced that it would stop electing to be treated as a REIT for tax purposes starting in 2024. The management and board believe they can better capture future investment opportunities while maintaining its policy to grow dividends between 5% and 8% annually over the long haul.
Due to the transactions it has entered into in the second quarter, it will have reduced carbon emissions by 147,000 metric tons annually.
“The combination of record investment volumes and higher yields provides us with a strong foundation for continued growth and success in the second half of 2023 and beyond,” said Jeffrey A. Lipson, HASI President and Chief Executive Officer.
“As the demand for climate solutions continues to grow in the U.S. and across the world, HASI’s differentiated business model remains ideally positioned to address the accelerating energy transition markets.”
Its emphasis on clean energy assets will undoubtedly lead to continued growth in its investment portfolio.
Why You Might Pass
The biggest reason one should consider passing on this stock is the level of debt. As of June 30, its total debt was $3.27 billion, or 1.6x its shareholder equity and 1.2x its market capitalization of $2.68 billion.
For example, its interest expense through the first six months of 2023 was $77.1 billion, 38.9% higher than a year ago, accounting for 53.8% of its total revenue, 800 basis points higher than in the first six months of 2022.
Approximately 54% of its $3.27 billion in debt is in senior unsecured notes.
Most of these notes don’t mature until 2026 and beyond, with fixed interest rates of 3.38% to 3.75%. By the time these notes mature, interest rates could have moved to some middle ground between where they are today and where they were 36 months ago before the Federal Reserve started hiking rates to curb inflation.
However, that’s a big if.
Is It the Time to Buy?
With more than $5 billion in future investments in its pipeline, the risk/reward proposition looks attractive for investors comfortable with above-average risk. However, there is no question that its debt levels are high.
In the end, infrastructure assets don’t come cheap. You have to pay to play in the clean energy transition. There is the risk that interest rates remain elevated for longer than expected, hiking the cost of financing its investments.
That said, the conversion from a REIT should help deliver some capital appreciation on top of its attractive dividends. Over the past five years, HASI stock is up just 16.8%, a performance more than three-fold less than the S&P 500 over the same period.
HASI is a buy despite the 22% gain over the past week.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
