Jeffrey Eckel
Analyst · Wells Fargo Securities
Thanks, Brendan. As this is our first public call and some of you may not have had the opportunity to hear our story during the roadshow, I want to take some time to provide an introduction to our company. And if you have access to the slides on the website, I'll refer to them occasionally. First, some background.
Hannon Armstrong is a 32-year-old specialty finance company that provides capital, mostly debt, for sustainable infrastructure projects. We have financed our business historically through securitizations and syndications which generate fees. After the IPO, we'll hold more assets on our balance sheet, but we will continue to securitize and syndicate transactions. We think it's a very scalable business that leverages our existing client base of Global 1000 companies. Since 2000, we've done about $4 billion of transactions in approximately 450 individual transactions. We truly believe in the financial merits of sustainable infrastructure, and our management team has dedicated our careers to the sustainable infrastructure industry.
We are delighted to have completed the IPO, which provided our company with capital and, in turn, introduced a new asset class to institutional and retail investors. We expect to generate an attractive risk-adjusted yield with a roadmap to getting above 7% by year end. That yield will be earned through the cash flows that stem from projects that use proven technologies and our financed using proven financial structures. The cash flows are generated from high credit quality obligors to fully-contracted, life-of-investment revenue streams, and all of this is in the U.S. market for sustainable infrastructure, which we believe is large and growing.
This is, importantly, an internally-managed business, which means our management team is fully aligned with shareholders, with management owning over 8% of the business.
Looking at our assets, we finance proven technologies like HVAC, lighting, power generation and fiber optic systems. To be clear, we finance projects. We are not taking new technology risks or manufacturing risk, no salinders [ph] or A123 type [ph] risks in our portfolio. The stuff that we are financing is the backbone of a modern, sustainable economy.
And a few words on sustainability. The projects we finance are negative to neutral on carbon emissions. That's a very important piece for us, particularly now that the average daily level of CO2 has crossed the 400 part per million threshold as reported last week from Hawaii. It is increasingly clear how important this investment principle is.
I'd like to provide 2 examples of the types of projects we work on. First off, on the energy efficiency side, we previously financed a project at the U.S. Army base at Fort Bliss, a very important base for the U.S. government, covering nearly 1 million acres in El Paso, Texas. Our client on this project is Johnson Controls. They go into the space and engineer a solution for the Army with HVAC controls and a few other pieces of equipment that save the Army money on their utility bill without dipping into congressional appropriations. The Army pays us back for the money we've given to Johnson Controls through the savings generated from the project.
Historically, we've financed this type of project through our Hannie Mae securitization that we completed in 2000. And that structure sells notes to institutional investors, basically, household name insurance companies, and they give us their highest insurance company rating of NAIC 1. And that's reflective of a very tightly structured transaction.
Turning to the other side of the page of Slide 7. A good example on the clean energy side is the geothermal project we closed in 2012. This project is in California and is basically using decades-old technology to drill deep into the earth, bring the heat that's latent at the 10,000-foot depth, turn that into steam, use the steam to rotate a turbine and generate electricity. Our role in the transaction was to syndicate the senior debt for the transaction. We syndicated a $313 million deal with 4 institutional investors. It's a 30-year debt obligation, 6 1/4% coupon rated BBB- by S&P. Now the ability to finance this type of project and get a strong credit rating on the project is due to offtake agreements with a AA+ rated ministry utility that's buying their power on a take-or-pay basis. These 2 projects are really good examples of what we've done in the past. They're also exactly what we're going to do going forward. We have a follow-on project at Fort Bliss, and we will bring a sister geothermal project to market in the fall.
Let's discuss the credit story on these projects. In my experience, one gets paid back as a lender when you deal with good credits and when the projects are essential in nature. And both of those features, we think, are very important in the kinds of projects we do. Our obligors are the traditional providers of infrastructure services, federal, state and local governments, universities, utilities, et cetera. The projects are economically viable. They have an inherent economic value, often generating their own source of repayment, such as savings from an upgraded HVAC equipment. The fully-contracted revenue stream is really something that we haven't seen in other REITs and certainly not combined with the credit quality we have. It's as if you are an investor in a commercial office building with 100% of your tenant leases signed up for the life of your investment with an investment grade-rated tenant. We're not talking about a 1-year lease or a 5-year but a life-of-the-investment horizon, 10 years, 20 years, 30 years. Certainly, a very helpful feature in getting paid back.
Finally and importantly, this is essential infrastructure. This is stuff people need in their day-to-day lives. It's not necessarily stuff that is fashionable or stylish, it's simply essential. Reinforcing the good credit story are the drivers of why participants do the transactions. From the obligor's standpoint, we're a substitute for scarce appropriations. State and local governments don't have to defer maintenance of physical plant to avoid laying off teachers or police, not when they use financing from Hannon Armstrong.
For our Global 1000 clients, very much like these transactions so that they can get revenue recognition. Basically, with these structured transactions, they're able to book the margin once they've completed construction, and there's no balance sheet impact. From our historical investor base, they have always appreciated the tight focus on structure and the quality counter-parties we deal with.
I mentioned that the market is large and growing. There are 2 real trends here: Infrastructure needs in the U.S. are great, and I think everybody has an intuitive sense of that; and the traditional funders are quite limited, and I think you get a sense of that from federal government sequester and state and local government budget woes. So the good news is the market is growing and we have a tremendous opportunity to scale our business.
Hannon Armstrong's clients are the Global 1000, such as Johnson Controls and Honeywell and Chevron. These are companies that we have generally had relationships with for over a decade. They're in the federal market, they're in the state and local market and, increasingly, they are in the utilities market. We have a long-standing history with them, and we generate transactions through this origination platform. The Global 1000 companies want 3 things from Hannon Armstrong. First, they want really good execution. Their job is, frankly, a lot tougher than ours, in that they have to go out and build these projects. And when they spend the time and the money to sell the projects, they want assurance that the transactions will close as scheduled. Second, they want competitive pricing. Clearly, these are all investment-grade entities with their own financial resources, and we have to compete against those resources. And finally, they want to achieve revenue recognition. That's -- they'd rather not do a deal than have it go on their balance sheet, in our experience. The IPO allows us to grow with our clients and provides the opportunity to finance a broader range of transactions that they are selling.
One of the things that we have -- very important to our asset management group is $1.6 billion of assets under management, and it gives us 2 things. By having an asset management group, it generates servicing fees, basically monthly revenues, as well as provides the opportunity to finance modifications and expansions of the original projects. So for example, in the Fort Bliss project that we talked about, we financed the original project a few years ago and are now in the position to get the follow-on project. That's just one example of how these long-term relationships provide a competitive advantage.
Turning to the numbers, the business model is relatively simple. We've raised approximately $165 million through the IPO. And we're going to lever that 2:1. We're putting that money to work over 3 to 5 quarters. And on the leverage, we have a credit facility that is being finalized and it will provide the majority of our leverage in the near term.
We'll continue to do securitizations that generate cash and gain on sale income that enhance our yield. And longer term, we plan to use asset-backed debt and, eventually public debt, which will allow us to drive down our cost of funds and increase our interest spreads.
The assets that we expect to originate going forward are very similar to what we've historically originated. We put them in 3 classes: energy efficiency, clean energy and sustainable infrastructure. These are the asset classes that we've been transacting in for at least a decade. The only major difference between our historical portfolio and future transactions is we expect growth in the other sustainable infrastructure category -- in large part because of the tremendous needs in areas like water and waste water, where we think there's some really great opportunities.
As I mentioned, we closed $109 million of transactions and expect additional closings by the end of the quarter. We also have syndication mandates for $2.4 billion, $1.7 billion of which we expect to close by 2015. Those syndication mandates each generate about a 1% fee to Hannon Armstrong, and that's a sizable fee income stream that we should have over the next couple of years.
To build up our yield on an unlevered basis, our assets generate about 5.5%, and that was specific -- statistic, excuse me, that I mentioned at the outset that the initial portfolio exceeds. The fee generation largely offsets our SG&A expenses. Because we're internally managed, as we grow our portfolio, our SG&A cost should fall as a percentage of assets. If you back out the interest expense on our leverage, you achieve about a 3% unlevered return. And on a levered basis, you get to about 9% return on assets. If you then put that on top of a market cap to get what an investor would earn, you get to the approximately 7% dividend yield that we talked about.
We think our expected yield compares favorably to other alternative investments. If you look at the unlevered return -- excuse me, the pages are out of order here, one moment. Unfortunately, they're not numbered. Anyways, if you look at the expected unlevered return on assets, our 5% return compares favorably across most public bond alternatives up to even a B-rated bond yield. But the thing to remember is that our lost history is much more like AA-rated bonds, so a tremendous spread over comparable public bond yields. We're able to generate these attractive spreads given our access to unique projects, a premium for structuring of small deals and, finally, the experience and expertise of our management team.
If you look at the expected yield of our stock by the end of the year, we compare favorably against alternatives for investors, such as infrastructure funds, MLPs, triple net leases and specialty REITs. We only see comparable yields in other specialty finance investments such as BDCs. But with BDCs, one has a much lower credit quality and much higher economic sensitivity. Plus most of those other companies are externally managed, whereas we are internally managed, meaning the real franchise is owned by our stockholders.
Our assets have low economic correlation due to the long-term contracted revenues and the fact that we don't take volume risks on our projects. Inflation will, in many cases, actually increase the attractiveness for these types of products that we provide. The large pension funds and the sovereign wealth funds have realized this and have allocated the -- increased their allocation to about 7% of their portfolios.
Before we open up the -- to summarize our business, we expect to earn over 7% yield with high credit quality projects, growth potential and low economic correlation. We believe we are well-positioned as the first mover in this asset class and expect to build a very large business. Before we open up the call for questions, we'd like to provide some thoughts on how we manage and evaluate our performance, so that may help you in some of the questions you ask. We focus on a blended portfolio of assets. That means while we have targeted asset classes, we focus on the best opportunities that drive our target unlevered yield of 5.5%. We've been in this business a long time and know that if you have your heart or quarter set on any one deal closing, you're likely to have your heart broken. Thus, we focus on having a large number of transactions in our pipeline that provide 2 to 3 or even more times coverage on our origination target for any given quarter.
Originations will move around as we saw in the March quarter, and thus, anyone's quarter's originations may not be reflective of the year. But most of these infrastructure projects move out in time. They don't get canceled. They don't -- they do get delayed occasionally. This will be especially true as we continue to grow the assets. We also focus on managing our debt levels and interest rate exposure. And finally, we work to largely offset SG&A with fee income. When these factors are in place, along with a plan to pay a dividend of close to 100% of free cash flow, the attractiveness of our risk-adjusted yield will be transparent. For competitive reasons, we do not intend to provide quarterly updates that include specific project examples, just not good for our business. But the portfolio will be built from many transactions, and with the deep markets for each of the target asset classes, it is our job to manage the portfolio. Remember, we own a large portion of this internally-managed company, so we're fully aligned with shareholders.
With that, we'll now open the call up for a few questions. Thank you.
