Good day, ladies and gentlemen. Good afternoon and welcome to Hannon Armstrong’s conference call on its Q3 2016 Financial Results. Management will be utilizing a slide presentation for this call which is available now for download on their Investor Relations webpage 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’d like to turn the conference over to Amanda Cimaglia, Investor Relations Director for the company. Please go ahead, ma’am.

Thank you, operator, and 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, President and CEO; and Brendan Herron, our CFO. We will discuss non-GAAP financial measures in 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. Good afternoon and thank you all for dialing in. Today, we are announcing core earnings for the quarter of $0.29 per share, a 12% increase from Q3 of last year. This is lower than both Q1 and Q2 this year, because, as we indicated last quarter, we expected to securitize less in Q3, and thus, add more to the balance sheet, which increases earnings for future quarters. For the quarter we closed $242 million of transactions, this brings our year-to-date closings to $712 million, which is nearly 20% ahead of last year at this time. We increased leverage from 1.7 to 1.9 to 1, compared to Q2, and our fixed-rate debt at 67% is close to the top of our 50% to 70% fixed rate target. We remain on track for 2016 earnings, consistent with prior guidance. Turning to Slide 4, we’ve now been public for almost four years and have produced a total shareholder return of over 125% in that period. This result continues to reinforce our investment thesis. Better risk-adjusted returns will be achieved by investing on the right side of the climate change line. As we’ve said since the IPO, we only invest in assets that are neutral to negative on incremental greenhouse gas emissions. We analyze each investment for its GHG impact prior to taking it to our investment committee. And in Q3 the aggregate investments reduced greenhouse gases by 70,000 metric tons or equivalent to 34,000 metric tons of coal. We believe that in a world increasingly defined by climate change, we don’t sacrifice returns to have a positive environmental impact, but rather we expect to have better returns, investing on the right side of climate change line. Turning to Slide 5, our diversified origination [Technical Difficulty] highlight this quarter. Not only are…

Thanks, Jeff. For the quarter, we generated GAAP interest income, rental income and income from equity method investments, which we have labeled investment income on the slide, of $16 million, an increase from approximately $12 million this quarter last year as a result of the growth in the portfolio from $1.1 billion to $1.4 billion. We also generate gain on sale and fee income, which we have labeled other investment revenue of $4 million, up from $3 million in this quarter last year. For the nine months, we have generated $15 million of this other investment revenue versus $8 million in the same period last year. Since we have been public we’ve averaged approximately $3.4 million of other investment revenue a quarter, so the first half was clearly larger, as Jeff said, due to the capital market volatility. One of the strength, we think we have in the business is the ability to securitizations to reduce our exposure to rising capital in volatile or difficult markets. As discussed last quarter, given the more normal capital markets, we have moved to a more historic level of other investment revenue in the quarter, a trend we expect to continue for Q4. Interest expense grew to $11 million from $7 million this time last year. As you can see from the press release, our overall debt balance grew by approximately $200 million, and we are at 67% fixed rate debt at the end of the quarter as compared to 51% this time last year. Comp and G&A expenses remained fairly consistent for the quarter as compared to this time last year. Year-to-date comp and G&A expenses grew by approximately $3 million due to higher staffing cost and professional fees. The staffing cost includes additional headcount, we’re now up to 38 people from approximately…

Thanks, Brendan. Turning to Slide 10 to close, we continue to execute on our business plan of investing capital in assets that enable the growth of the best efficiency, wind and solar companies in the business. By aggregating these assets that are otherwise not accessible to public shareholders, we are building a business that allows our shareholders to participate in attractive and growing yields generated by an increasingly diverse portfolio of sustainable assets and managed by a team dedicated to good governance. We thank our clients for the opportunity to support their business, and I thank my colleagues at Hannon Armstrong for keeping our clients top of mind as we continue to invest in the future of energy. We appreciate you listening to our update, and we’ll now open the call for some questions.

[Operator Instructions] And first from Oppenheimer, we have Noah Kaye.

Good afternoon, Jeff, Brendan, Amanda. So you mentioned in your comments and in the earnings release back in October the White House did extent that federal performance contract challenged by the additional $2 billion over the next three years, so comparing that to $4 billion goal over the last seven to eight years. I guess, the question is, as it relates to your business, how do you think about the cadence of that growth? Is that really a sort of four to five year tailwind given the time for these projects to get completed and get on your balance sheet?

That’s a good question. I for one was skeptical of the very first $2 billion challenge, that it would really provoke the federal bureaucracy to do these projects at scale. I have been completely and happily wrong on that. The federal business is going at a very high cadence. The purchasing apparatus that transacts ESPCs takes these targets seriously, and it’s hitting the numbers. So we have to be, based on the recent experience last year and this year, have to be very excited with yet another challenge that will cross the administrations.

Okay. So next question, on the distributed solar side, particularly in residential, we have seen a shift in financing towards cash sales and loans and more solar companies looking to get cash flow positive. As a strategic financing player in the industry, how does that mix shift impact your opportunity set?

Well, we certainly follow our clients lead. We will evolve our financial offering to where the market is leading them to go. So we don’t really care what the form of the finance transaction is. We will invest in it, if it’s good risk adjusted return for us. That’s kind of the neat thing about our structure as a REIT, we don’t have limitations like that on what kind of slice of capital we can do. That said, resi continues to be a great business for the solar companies, and we have been able to do good business with it. I have to be much more optimistic about the commercial and industrial being slightly more analogous to our historical kind of business. So we’ve got quite a bit of effort going into other commercial industrial solar market.

Okay. Just last one for me. You ended the quarter with, it looks like $73 million cash balance, I believe that’s the highest quarterly balance since you went public, so a good amount of dry powder there. With the market suggesting a good probability of a rate hike, wondering if we are in some ways in a similar dynamic for you guys to 4Q of last year, where you were able to negotiate some project term sheets. Now you have the potential catalyst of rates going higher. Can you just talk about that dynamic and how it’s affecting the timing of your originations?

We generally try not to take interest rate risk prior to having our own economics locked in, sometimes we do. But we look at a 25 basis point raise in the fed funds rate in December as, I won’t say meaningless, but a really, really small number compared to forward-looking yields of 6.3%. So I don’t think this is like Q4 last year. Q4 last year you had enormous disruptions around the old-coal [ph] model, oil and gas sector, banking sector. I think now we have the market saying we might have some inflation for the first time in a decade, and we might have interest rates go up by 25 bps to 50 bps. As I said, that’s typically good news for Hannon Armstrong when rates are higher and there’s a little bit of volatility.

Okay, great. Thank you.

Thanks, Noah.

And moving on from FBR, we have Carter Driscoll.

Good evening, Jeff, Brendan, Amanda. Can you talk, Jeff, about the some of the risk adjusted returns? You’re talking about the difference between C&I and resi made a high level. And then any surprising territories geographically where you are seeing better growth in C&I or - and/or weakness in resi?

No. In terms of the geography, I don’t know that we see any changes in the geographic penetration of any of the resi or C&I solar markets. I think some clients are much better on the West Coast, some are better on the East Coast, and some are better in the middle part of America. I don’t think it’s one solution nationally and one trend. There are a lot of players out there mining this field, and I think we’re going to see lots of different solutions out there. Maybe had another part of your question I missed, but…

Just in terms of like at a high level, maybe the risk adjusted difference between what you’re seeing in resi originations versus C&I.

Well, I think this is true for any asset class, newer ones are going to have better yields than more mature ones. That’s not to say that resi solar is mature, but it certainly is more mature than commercial industrial, which had struggled for years to find common contractual bases to do these relatively small transactions at scale. I think the way that the analogy would be federal ESPC that’s been going on for better part of 20 years is far more mature than property assessed clean energy, which is just getting started.

And then maybe…

Sorry, guys, this is Brendan. I was going to add two things to that. One is back to the geographic area, we’re typically following our clients, and we typically are structuring our transaction so the clients have skin in the game behind us. So they are going to focus on the areas they think are the best for them, depending on whatever geographic region they operate in because they are more at risk to that than we are. So I just wanted to add that.

Yes, now I’m just trying to get a sense of C&I, because it’s such an earlier stage than resi as many surprising region just to get a little bit additional flavor. Maybe just the PACE as a follow-up to that on the commercial side is the project is the length of the project duration noticeably shorter than what you’ve experienced in the federal side?

Yes. I mean, federal transactions go out 25 years. That’s not our target for commercial PACE, we’d probably want it to be shorter. That said, if the collateral is good and there is a large building on top of a small energy efficiency improvement, you might be able to justify longer tenors. We certainly think the credit story is good. But it’s not the U.S. government.

Yes, yes, understood. Okay, I’ll get back in the queue. I will take everything else offline. Thank you.

And moving on our next question comes from Benjamin Kallo with Baird.

Hey, all.

Hi.

Thanks for taking my questions. First of all, on the - I guess, tenor - and maybe just to Brendan, how do you guys looking at the tenor of investment versus the interest environment rate right now or has it changed at all? I got this question from someone more sophisticated the me, which doesn’t take much, but does it - if your interest rates are raising you want shorter term deals. And so how are you guys operating under that environment? I guess, number two is what we hear from NextEra and Southern companies are going to invest less than solar, more in wind. What kind of opportunities does that open up for us, and on the back of that, I guess if I look at the traditional 66% versus 33% energy efficiency versus renewables, how do I get a juiced up return without renewables if things get pushed out in this market? Or is that something I worry about? And sorry for the backup noise, I’ll jump out.

I will address the tenor first, Ben. So we always report our average life, and that’s been as a proxy for kind of tenor of the deals, and that’s been about 11 years, and that is been relatively consistent. I think the main thing we look at is, can we fix out debt against that, and in order to mitigate the interest rate risk? And I sometimes talk about vintage as a transaction. So if we matched off our interest rate risk in the 2014 vintage or the 2015 vintage, because the new stuff we are originating, if we’re going to place debt against it in the same market environment, it doesn’t really matter how long it is because we will match off the debt to the appropriate level. We don’t necessarily ever match fund, we would typically be a little shorter, because these are very long dated assets and we would expect over the life of these assets that we will go through one or two interest rate cycles, up and then down or whichever direction. So we’re more focused on, did we fix out the rates at the time we did a series of transactions. And then - it’s what we’re managing to and we are managing to being largely fixed out in general, with the fact that what usually remains is the credit facility and that tends to be newer stuff, because it gets put in the credit facility then moved out somewhere else.

I think the other thing you asked about Ben was, we’ve got different yields in different asset classes. And just a reminder, these are the forward-looking yields and the gross asset yields. What we really focus on is return on equity. So while wind and solar might yield 7%, our ability to lever that or interest in levering that is less than efficiency transactions yielding 4.3%. In general, we end up very - the ROEs on all three asset classes end up very close to one another once you take into account different leverage levels.

I guess, maybe a follow up, just two questions. One follow up is, the potential pipeline you have of over $2.5 billion, how do I think about that? Is it similar mix as you look forward in kind of a similar type of returns on equity? And then second is, the REIT status comes up every once in a while and people scratch their heads at why you are at REIT, and if you go back and you expect to be approved as a REIT or whatever process that is. What type of risk is there if it isn’t? And then I will jump off, thanks guys.

Well, I’ll take the non-REIT question, save that for Brandon. I said the pipeline is as strong as it’s ever been, and really tried to highlight that there are a series of submarkets and efficiency wind and solar asset classes. I won’t say everything is hitting on all cylinders, but it’s getting pretty close to that. I think the wind and solar business took the first half of 2016 off as it was digesting the good news on tax credit extensions. I think NextEra and Southern Company are clearly signaling that the wind business is back. That creates incremental business for everybody supplying capital to those projects. And the efficiency business in each of the markets is quite strong right now.

And to the REIT designation, Ben, when we went public, we thought the REIT rules gave us the best tax structuring of various alternatives. The YieldCo model didn’t really exist at the time. I’ve often talked about, we operate at a REIT side of the business, good REIT qualifying side, and then we operate that’s called a taxable REIT subsidiary, which is a taxpayer and operates very much like the YieldCos. And then we have various tax attributes that we can utilize if we get in some of these projects. And thus, we don’t pay any current tax in the YieldCo. If for some reason we didn’t qualify, we’d look at whether we would just take the whole thing to be the YieldCo model. There’s a lot of different alternatives that we could go through. But right now we continue to believe this is a good structure for us, but if things change, then we will adapt. I don’t think it would have a long-term impact on the type of business that we are doing. And think we have the flexibility there to adjust to various alternatives.

Thank you, guys.

Thanks, Ben.

[Operator Instructions] Moving on, we’ll hear from Jeff Osborne with Cowen and Company.

Good evening, most of the questions have already been asked, but just a couple. I was wondering if there’s any impact during the quarter over the summer months around the JCI/Tyco merger. I understand it’s been a historically large partner for you on the energy efficiency side.

No impact. I think it’s a terrific deal for JCI. I think it broadens their service offering. What I think you see, all of the - our six industrial giants of energy efficiency, Johnson Controls, Honeywell, Trane, et cetera, is they are really seeing the ability to wire buildings and effectively own the information in buildings. JCI acquiring Tyco’s security business just enhances their portfolio of offerings and really is quite consistent with that theme. So things are good in Milwaukee.

Okay. Good to hear. And to that kind of theme, the follow-up question I had is just, can you characterize the breadth of energy efficiency in terms of scope? Obviously HVAC was I think the bulk of what you have done in the past. Can you talk about whether the government vertical’s embracing lighting, and you’re financing those types of initiatives and your average deal size might pick up for building?

Yes, I mean, lighting has been at the forefront of the efficiency market since its beginning in the late 1970s, early 1980s, shifting to fluorescents from incandescents and now from fluorescents to LEDs. I would say virtually every project has a lighting project. It has a control project that relates to HVAC. We see a lot of vintage fossil fuel boilers that are either oil or gas or coal being replaced with more distributed steam supply systems, those make for a larger projects. We are seeing a smattering of cogeneration projects that are benefiting from low electricity prices and the desire to have a little more grid independence. Basically, energy use in a building hasn’t changed a whole lot. The technologies are just getting more sophisticated, and that means they are more expensive, but the sophistication means they are saving more money. That’s increasing our average project size in general. And I think all of the ESCOs are starting to be more ambitious about the kinds of projects they are doing. So we are seeing some relatively larger opportunities than in the past.

Excellent, and the last question I had for you Jeff is just a bit of a softball here, but just as you think about planning for 2017, what you think the biggest challenge is? And certainly the past couple of quarters you’ve been on cruise control, so to speak.

I am thinking more about baseball tonight than softball, but I think the challenges are - this a while ago we’ve got some internal plumbing to work on. The market is good. We are growing. And as you know, we went public with 22 people, which was pretty skinny, now we’re up to 38. So the challenges are more internal. We haven’t changed our business plan. We haven’t changed the kinds of investments we are making. We’re really just discounting cash flows, but we are planning for growth. It’s a good market. At the same time, to a person we are all very conservative people, and we worry about bad things happening to markets, and that’s why we were securitizing so much in Q1 and Q2. We think that’s a real strength of our model, but otherwise, I think we are seeing good opportunities in 2017.

Excellent, thanks so much for the answers.

Thank you.

All right. And moving on, we will go to Charles Nabhan with Wells Fargo.

Hi, there. Looking across your businesses, I was wondering if you could comment on the competitive landscape, what you’re seeing in terms of activity from banks and any impact that might be having on yields on incremental investments?

Chuck, I think we have used the statement, I think even with you on one NDR that I look at this as a confluence of the decarbonization of the power sector and the reregulation of financial institutions. Most of the decarbonization assets are relatively long-lived assets, and they deserve long tenor financing. As you know, being with Wells, that is not exactly what banks want to do right now with the cost of capital and [BOWSEN III] [ph]. That said, these are good assets, and everybody is starved for yield. So I continue to just be delighted that we’ve got multiple assets, and if yield isn’t there because one market gets very competitive, we’ve got a lot of other asset classes to continue to invest in. We don’t defy gravity on competition. But if asset yields were to fall due to higher competition, you would also expect our cost of capital to fall a little bit. So I think we are - as a 35 year old business have shown we can find margin in good markets, lousy markets and hypercompetitive markets.

Thanks - go ahead, I’m sorry.

Sorry Chuck, this is Brendan. I was going to add, the fact that we have an $11 million average deal size does help limit competition, because there aren’t a lot of people who can be effective at originating and then aggregating those transactions. And that does help us in the competitive landscape, especially on a long-dated asset.

Great, thanks. And as a follow up, I know it’s difficult to comment on, on ongoing conversations with regulators and/or government bodies like the IRS, but it sounds like there is some sort of historical precedent for driving your expectations for the REIT ruling. So I guess with that in mind, do you have any expectations in terms of a timeframe when you expect to hear back from the IRS?

Let me be clear, the IRS issued new rules. We have an existing private letter ruling. We don’t think that the new regulations that they issued impact our existing private letter ruling. We think that that was - that we qualified under that and continue to qualify under that. And so, there’s no plan right now to go and enter into a dialogue with the IRS. So the IRS is putting out the regulations so that people would - some people have said they’ve put them out so that people would stop asking for new rulings and just kind of use the regulations. It’s all very new so people are still trying to understand what’s happening there. But we have an existing prior letter ruling, we think the spirit of that complies with the spirit of the new regulations, we think we can continue to comply with the private letter ruling.

Okay. Thank you.

And at this time we have no remaining questions. I like to turn the floor back to management for any additional or closing remarks.

Perfect. Thanks once again for dialing in. We will be hitting the road soon here to go to some bank conferences and perhaps some NDRs, and look forward to meeting as many of you as we can. Thanks for your interest.

And ladies and gentlemen, that does conclude today’s conference. We appreciate your participation and you may now disconnect.