Good afternoon and welcome to Hannon Armstrong’s Conference Call on its Q2 2016 Financial Results. Management will be utilizing a slide presentation for this call, which is available now for download on the Investor Relations page at investors.hannonarmstrong.com. Today’s call is being recorded and we have allocated 30 minutes for prepared remarks and Q&A. All participants will be in a listen-only mode. [Operator Instructions] At this time, I would like to turn the conference call over to Amanda Cimaglia, Investor Relations Director for the Company.

Thank you, operator. Good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing its quarterly results, a copy of which is available on our website. This conference call is being webcast live on the Investor Relations page of our website where a replay will be available later today. On today’s call, we have Jeffrey Eckel, our President and CEO; and Brendan Herron, our CFO. We will discuss non-GAAP financial measures on this call. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release and slide deck. I would like to remind you that some of the comments made on today’s call are forward-looking statements and within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. The company claims the protections of the Safe Harbor for forward-looking statements contained in such sections. The forward-looking statements made in this call are subject to the 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 described during the call. In addition, all forward-looking statements are made as of today, and the company does not undertake any responsibility to update any forward-looking statements based on new circumstances or revised expectations. With that, I’d like to turn the call over to Jeff, who will begin on Slide 3. Jeff?

Thanks, Amanda, and good afternoon to the investors and analysts dialing in. We know many of you will be anxious to jump from our call, which we hope will be boring to get on the Tesla call at 5:30, so we will endeavor to keep it short and simple today. Today, we are announcing core earnings for the quarter of $0.32 per share, a 23% increase from Q2 of last year. For the quarter, we closed $257 million of transactions, down from $350 million in the second quarter of last year. however, we remain ahead of last year’s pace for the first-half of this year. Our balance sheet remains strong with a completion of our $91 million follow-on equity offering in June, our leverage at 1.7 to 1, and our fixed rate debt at 70%. We expect to remain on track for 2016 annual earnings consistent with prior guidance, but the second-half of the year should benefit less from fee income, as Brendan will address more completely, while we work to build the balance sheet according to our business model. As you know, we generate our dividend currently 5.4% annually by investing in a diversified portfolio of efficiency wind and solar assets, assets that we believe constitute the future of energy investing. Turning to page 4, we’ve now been public for three years and have produced a total shareholder return of over 125% in that period, which is supportive of our investment thesis. We believe we will earn better risk adjusted returns by investing on the right side of the climate change line and by making those investments in the senior or preferred equity positions of the capital stack. Let me detail that thesis a bit more. By investing on the right side of the climate change line, we mean…

Thanks, Jeff. You will note in the press release and in the Q when it’s filed that we have modified our presentation of the income statement to calculate a total return number for the quarter. We did this, because various third-party reports looking information on total revenue, and we wanted a consistent calculation that all sources could use. We’ve also eliminated the net interest margin calculation. As you maybe aware, the interest expense includes the interest on our nonrecourse loans for our equity method investments, but does not include the earnings on those investments. Year-to-date, interest expense for those loans is approximately $7 million, or 32% of interest expense. Thus any interest margin that was being calculated using this data was not a meaningful presentation and we have discontinued the calculation. Turning to the presentation, you will see that we are now showing core – are now showing GAAP earnings and a reconciliation to our core earnings in response to the new SEC guidance on non-GAAP measures. For the quarter, we generated GAAP interest income, rental income, and income from equity method investments, which we’ve labeled investments income of $17 million for the quarter, an increase from approximately $11 million this quarter last year, as a result of growth in the portfolio from $1.1 billion to $1.4 billion. Included in this increase is approximately $1.4 million of equity method income, resulting from some of our preferred return projects, where we’re investing in a sponsor side, which reduces some of the HLBV allocation issues we see when we invest alongside the tax equity investors. When combined with the core equity adjustments, we have recognized a total return of $13.6 million on our equity method investments year-to-date, up from $6 million this time last year. This increase over last year is a…

Thanks, Brendan. Turning to Slide 10, to close, we continue to execute on our business plan and continue to produce for our shareholders. Our long-term cash flows from the seniors slice of capital provides a stable dividend, delivering an attractive and growing dividend yield. Our portfolio is continuing to diversify, I think, Brendan mentioned 115 individual assets with respect to the number of transactions, customer segments, and technologies. And again we pride ourselves on good governance and alignment of managers of the business, with the owners of the business, you the shareholders. Again, it is an honor to work with my colleagues at Hannon Armstrong, and I thank them publicly for another outstanding quarter, as we continue to invest in the future of energy. We appreciate you listening to our update. We’ll now open the call for a few questions.

Thank you. [Operator Instruction] And we’ll take our first question from Carter Driscoll with FBR.

Hey, guys, how are you?

Hi, Carter.

Just quick question. So, you talked about being a lot more securitizations in first-half of the year, kind of at what point or maybe you could kind of characterize the transition, where you think it’s kind of stabilized, obviously it tapped the equity markets in late June, and how you see that maybe being more stable in the second-half of the year, and how that maybe does or doesn’t play into your forward yield potential in the second-half of the year, maybe potentially creeping up after flat lining Q-over-Q?

Carter, this is Jeff. I think when – as we’ve done in the past, when we raised equity, it’s, because we needed, and we’re going to be able to put it to work. So, the first-half of the year, it was little dicey in the equity markets. It certainly has been more stable. And we expect to get back to plan and start building the balance sheet up to the targets.

Is it possible – obviously your leverage ratio just as a point investment fell sequentially, is it reasonable to assume you are trying to get back to where you were last quarter by year end, would that be a reasonable target?

Yes, I think so.

Okay. All right. I know, you guys want to keep it short. I’ll get back in the queue and take them offline.

And we’ll take our next question from Charles Norton with Wells Fargo.

Hi, guys. Wanted to get some commentary around the pipeline. It looks like it shifted towards solar and wind projects away from energy efficiency. So I was hoping you could just give some color on what you are seeing across those markets, and talk about what prompted the shift in the pipeline?

Thanks, Chuck. The pipeline last quarter was dominated by efficiency, which was probably more related to our surprise at the year-end extension of the tax credits than any real pure measure of the market. We’ve adjusted now to the fortunate reality of having five-year visibility on tax credits. And it’s not that efficiency is falling it’s just that now we’re seeing solar and wind transactions that we hadn’t seen. Now the one point we made is, some of the utility scale solar and wind transactions we expect to be back-end loaded in 2016 and 2017. It’s been pretty light for the solar guys, particularly utility scale. Residential, commercial and industrial still seems to have good prospects.

Okay. And as a follow-up, it looks like the balance – the equity method, the equity balance increased by about 10%, or $30 million this quarter. Is that attributable to adjustments in the current investments going into the quarter, or where there any new equity method investments this quarter?

Yes, there was a new equity method investment of about $40 million this quarter, Chuck.

Okay.

And you will see it in the Q, it was an equity method investment in a distributed set of commercial, industrial and a little bit of residential solar.

Okay, great. And if I could sneak one more quick modeling question in, given the increase in the headcount and the ongoing SOX compliant, is it fair to assume that the G&A expense line we’re seeing this quarter is a fair run rate going forward?

I think I would use an average of the last two quarters.

Okay, great. Thanks for the color, guys. I appreciate it.

Thanks, Chuck.

We’ll take our next question from David Carter with Robert W. Baird.

Hey, guys, this is Ben Kallo. How are you?

Hi, Ben.

Nice quarter. Could you guys talk a little bit about, I guess, you get close to $1billion dollar market cap – along thus the way of the past couple of years. How was – competition changed or origination and how you find your opportunities? I guess, lastly, on the last question as you ship forward into some of the renewable, which I guess would carry higher returns. How are you managing that, the headcount question, this is interesting, because I think you probably added two people. But just as you get bigger, what’s change or is the competition change you at all?

Good question. I think our market cap is largely irrelevant to the competitive landscape. We continue to focus on efficiency wind and solar and trying to do as many programmatic transactions with the leading players as possible. And if we get to be $2 billion or $3 billion, I don’t really expect to see that that strategy change much. I think there’s two countervailing competitive trends in the market that you’ve got that, we certainly see better hard to sort out what the net impact is, you’ve got the exit of yieldcos as buyers and lot of these transactions. But you also have a lot of institutional investors going down market a bit. I mentioned I think in the last call and John Hancock doing a residential solar transaction that was a great deal for them and SolarCity, but was surprised about to see that. So, I think, there’s always competition, I don’t think it has anything to do with our market cap. And in terms of managing the assets, we have added more on the asset management and technical side. We brought in an old colleague of mine George Emsurak, who is really on point for our wind and solar investment. He has built wind farms and solar farms and expert in engineering, really good person to help us manage these assets. And I think it gives us a capability to talk to the clients at a technical level and an engineering level that we probably hadn’t had until George came on Board.

I guess just two quick follow-ups. We kind of say regards Brendan, what kind of financing opportunities are open to you with your line of credit, where it is? Is there something that you want to change about that or are you comfortable with that and then I guess a follow-up for you, Jeff? There’s been a little bit of headlines up on the PACE side, any movement there kind of still early phase? Thanks guys.

I think on the finance plan, we’ve been working to kind of continue to reduce cost and increase the number of lenders and we continue to do that – have ongoing discussions with a wide variety of lenders. We bought new lenders in. Over the last 12 – assuming number of new lenders in over last 12 months and continue to talk to new people and find – continue to find people are interested and playing in various parts of our capital stack on the debt side. So I think – we think that markets robust right now and we continue to have those discussions and look for new opportunities both with the existing lenders and new lenders. And you of course will get me googling PACE headlines with your question. But we continue to develop our PACE business. We think it is a very interesting market. It’s still early days in PACE, but we’re starting to see some uptake of the product and find the delivery mechanism that allows us to scale it. So we’re still quite optimistic about the PACE business.

And we’ll take our next question from Noah Kaye with Oppenheimer.

Thanks very much. So just a question for you, first of all, about the state of capital flows in the market. We’ve actually seen the triple of A yield, continue to kind of come down over the course of the year. But you guys continue to do great job in maintaining and growing your yield. How much of that is kind of shift in the portfolio? And how much of that is kind of continue to occupy this niche, and I guess, the implied question, are any of kind of the asset classes that you’re investing in, under any kind of yield pressure right now with more folks looking for yield, given extremely low base interest rate?

Yes, the good question. I think you mentioned niche, we really look at it as four or five niches that we’re investing in. And that is a good defense against competitive pressures. That said, we don’t defy gravity on interest rates or spreads. It’s our job to continue to find the places where we can add value and is not too crowded. So I mean the numbers are what they are, but I think were doing a good job of keeping the margins where we want them today.

And you mentioned, the higher in the asset management side, certainly I mean, the mix of assets continues as the previous caller said, shift a little bit towards renewable, as you put more capital into solar and wind, and let’s take wind specifically, how comfortable are you in terms of your visibility on kind of the cadence of returns of these assets on a quarterly basis, given some fluctuations or does your positioning in the capital stack kind of make you slightly immune to the kind of how fluctuation of that consideration?

I think the latter question. We are senior, there was generally some kind of preferred flip and then the accounting is also very supportive of a more levelized earning string. Brenda mentioned $30 million of cash and $13 million of earnings, you can be a lot of variation in the 30 million of cash and it doesn’t really affect our $13 million of revenue recognition. And just a question on the asset management, we’ve always done asset management, we just outsourced it to George and his business and now we brought him on – not only asset management, but the technical aspects of the solar or wind project that we just brought him on Board. Like we are building an engineering company and his name is George.

And he’s been on – it’s not a new hire. He’s been with the – since the beginning of the year. The other comment Jeff’s point is, we do structure these projects so. We have preference in cash flows all and thus we avoid – we don’t absorb that variability that you may see if you were a sponsor.

Okay, thank you so much.

We’ll take our next question from Michael Morosi with Avondale Partners.

Hi guys, thanks for taking the question. Just building on your preference position within these projects and to the extent that the market cap is raising and the stock is performing and there might be new investors interested in the name. Could you just take a step back and just talk conceptually about where you think Hannon’s dividend yield and kind of risk profile should slot longer-term relative to other assets in the market, relative to YieldCos, relative to utilities, and just the broader investment universe?

Sure and we took out the slide and spared everybody. The slight of why we invest where we do, but it’s one of my favorites. We’re generally senior in the waterfall to sponsor equity in solar and wind. I think we are senior. So we think – we should price beneath the yieldco types, IPP type, investors’ just on that PACEs. And we think all of those are generally senior to the utility equity investors. And that the source of our revenue are operating costs for regular utility that come from before the debt and the preferred and the common get itself. So it gets paid. So we like being senior and in the cash flows, we wouldn’t mind being in the equity, if we thought the returns were there, but returns kind of thin and in most equity projects as people chase yield. So I think seniors, a nice place for is to be.

Great, thanks a lot.

Thank you.

We’ll take our next question from Jeff Osborne with Cowen and Company.

Hey, good afternoon guys. Congratulations on the strong results, couple questions on my end. I think Brendan, if I heard you right, you said you made an equity method investment in residential solar, just given the challenges that that sector has had in terms of net metering roles. Can you just discuss what exposure you would have to what you bought and potential role changes in the state or jurisdiction that you have the asset?

Yes, so it was at distributed portfolio, they had some residential, mostly C&I.

Okay. And then, how do we think about, Jeff or Brendan on the pipeline for wind and solar. I think a lot of the third-party forecasters have pushed out some of the utility projects that they thought would happen in 2016 into 2017. If I heard you right, you mentioned that both years will be back-end loaded. And certainly this year, for the industry, for solar is back-end loaded as is win based on the installation data. But I guess, just how do we think about 2017 and then if you have land ownership in a project that maybe was pushed out from this year to next? Are you still being paid on that? Whether the project moved forward or not? Just trying to understand some of the dynamics for the couple of gigawatts of utility scale that has pushed to the right

So if it’ a land deal and we own the land and the project is closed in this generating profit. So we’re not speculating on pure development land deals or is at least in construction.

Yes, we’re in construction, correct. So any push out wouldn’t effect our land. The utility scale is just one market that wherever the new build utility scale, solar and wind market are just one market. We continue to look at tax equity tails and see how we can participate in those, and those are legacy projects that may have been built seven, eight, nine years ago and really not affected by that. And that’s – why I made the comment, I’m glad we have multiple markets, because some of these markets will not be as productive in one period as you might like them to be. So it’s good to have some other options like PACE and efficiency and distributed solar.

Got it. And then the last I had, Jeff, on the energy efficiency side just as your conversations with your partners like Johnson Controls and others, how are they feeling or what are they relaying to you in terms of the pipeline of projects for the rest of this year as we head into 2017 post-election things like that. Are you still feeling comfortable with the pace of growth, in particular, with your exposure to the government vertical?

Well, first, I never feel comfortable, Jeff, so I’m a constant worrier. So I won’t say I feel comfortable about anything, but never have. But yes, I think, the federal and the state local market is continuing to be a good source of business for us. State and local is going to be completely unaffected by an election. I don’t see really the federal market being affected by an election either way. The infrastructure continues to depreciate, the needs continue to change, and the economics continue to be very sound. If those elements were there, a fair share business will be generated.

Perfect. I appreciate it. Thanks so much.

Thank you, Jeff.

And we’ll take our final question today from Philip Shen with ROTH Capital Partners.

Hey, guys, thanks for taking my questions.

Hi, Phil.

I’ve been bouncing around between calls, so apologies if this has been asked. With the expected growth in energy efficiency, solar, wind over the next few years, what are your expectations for maybe pushing transaction volumes meaningfully beyond $1 billion perhaps in 2017? How real is that possibility, and what would it take to get there?

I think, we’ve talked before about the hazard of accelerated growth. If we just do our business model of $1 billion, $700 million a year going on the balance sheet and two, three, four, five years, it becomes a sizable company. I think if we see opportunities, I think, the first order of business for us is to optimize the risk-adjusted returns, not necessarily grow. That said, we’re not going to be sticks in the mud, if there really are significant increases in the market opportunity. But those are good problems to manage to. I think, we’re going to stick to the netting and stick to the model.

Great, thanks, Jeff. As for my follow-up, can you talk about OpEx and the trends that you see there? I mean, do you see any reason to take operating expenses up meaningfully in the near-term, if not, how do you see them trending in Q3 and Q4?

Not that I’ve mentioned, George, so much, I think he is going to ask for raise, but what do you think generally Brendan?

So, I think, generally, I’d say if you take the first two quarters as an average and run that out for the rest of the year, I think you’re in the right ballpark on a core basis. For operating expenses, we are going to have some – we’re seeing some higher cost because of SOX and some other things. But I think, we’re at $9.3 million through the first two quarters. So I think if you take after the second-half, you’d be in the right relative range, Phil.

Great, thanks Brendan. Thank you, Jeff.

Thank you.

And this will conclude today’s question-and-answer session. I would now like to turn the call back over to Jeff Eckel for any additional or closing remarks.

Thanks so much, everybody, and good questions. And we’ll go get back to work and try to produce a good Q3.Thanks so much.

And that does conclude today’s conference. Thank you for your participation. And you may now disconnect.