HA Sustainable Infrastructure Capital, Inc. (HASI) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to Hannon Armstrong’s conference call on its Q4 and Full Year 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 call over to Ms. Amanda Cimaglia, Investor Relations Director for the company.

Thank you, Tom. Good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing its fourth quarter and full year 2016 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. Before the call begins, I would like to remind you that some of the comments made in the course of this 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. Please note that certain non-GAAP financial measures will be discussed on this conference call. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. A reconciliation of GAAP to non-GAAP financial measures is available on our posted earnings release and slide presentation. Joining me on today's call are Jeffrey Eckel, the company's President and CEO; and Brendan Herron, our CFO. With that, I’d like to turn the call over to Jeff, who will begin on Slide 3. Jeff?

Thanks, Amanda and good afternoon, everyone. Thank you all for dialing in. Today we're announcing core earnings of $13.1 million for the quarter or $0.29 per share and $15.5 million or $1.20 per share for the year, 15% growth year-over-year, consistent with our guidance range for 2016. For the quarter, we closed approximately 350 million of transactions, taking our full your volume to approximately $1.1 billion for 2016 up 14% from 2015. Leverage is presently at 1.71, fixed rate debt at 67% close to the top of our previously stated 50% to 70% target and we'll be providing an update on this target in a bit. And we expect low double-digit core EPS growth for 2017 consistent with prior guidance and our dividend increase in December. Turning to Slide 4, we address the three questions we're getting consistently from investors; interest rates, the election and REIT regulations. First interest rates. We fully expect and are prepared for rising interest rates. We've operated for over 35 years in various interest rate environments and our experience shows we will see spreads on new assets widen as rates rise, improving our asset yields. On the liability side, given our bias towards higher rates, we are increasing our fixed-rate debt target to 60% to 85% from 50% to 70%. This will of course reduce our floating rate exposure. Bottom line, we expect rising rates to be a positive for the business. The change in administration has created uncertainty in investor's minds as well. We believe federal ESPCs continue to enjoy widespread bipartisan support and our ESCO clients are continuing to book new business. As for the Trump infrastructure plan, we and our clients have engaged with the transition team working on this topic and believe there are significant opportunities for us in many of the infrastructure proposals. In addition, there are actionable paths to expand the use of performance contracting to increase federal efficiency beyond just federal buildings and why not. These transactions create jobs all around the country, save the U.S. treasury money and provide updated infrastructure. Finally, at PTC and ITC, we're eliminated and tax reform less than 10% of our $2.5 pipeline would be affected and most of the renewable energy industry does not think it is going away because 87% of all 2016-win installation were in red states and because solar generated one in 50 new jobs in 2016, we've very little exposure to this low probability event. There has been significant interest in our REIT status, which I would like to address head on and I'm showing [REIT] as always qualified as a REIT since our first REIT tax return and fully expects our REIT status to not be questioned by the IRS, but let me put some numbers to this issue. If Hannon Armstrong chose to not be a REIT, we forecast there would be no impact on the dividend or core earnings, we would not pay taxes for more than five years and we would still have approximately $70 million of NOL at that point. When potential tax reform is clear we'll look at the tax impact on our business and determine whether it is still in our investor's best interest to be organized as a REIT. Finally, if our REIT status was challenged today and we do not believe it will be we would hope $5 million of tax for the last four years. That's it. This is going to $5 million problem. I hope we have frame the REIT status and sufficiently clear in quantitative fashion for investors to fully evaluate the perceived risk. Turning to slide five, we continue to enjoy a robust diversified pipeline of more than $2.5 billion of investment opportunities. All consistent with our investment thesis. The better risk-adjusted returns will be achieved by investing on the right side of the carbon line. In addition to our investments in efficiency wind and solar we've increased our focus on opportunities on infrastructure assets. If you remember back 14 months ago or so very few in the renewable industry expected the PTC and ITC to be extended. And with that in mind we started then exploring opportunities and transmission, water system upgrades and storm water remediation, which we've now broken out into a new pipeline category. We also provide a bit more detail on the multiple submarkets in each category. It is important to understand that the growing part of our efficiency business is in state and local governments and commercial properties, all with little access to U.S. federal energy and tax policy. Similarly, wind enjoys diversity with the legacy operating projects for tax equity tail transactions and new-build preferred equity investments. In the solar asset classes, actually three separate market; land for utility scale solar commercial and residential markets, and taken together we are continuing to find strong, uncorrelated investment opportunities; many of which are beyond the influence of federal energy and tax policy. Turning to the right-hand side of the page, the portfolio increased 16% this quarter consistent with our plan and yields have remained fairly constant over the last several quarters. To clear up a common investor question let me clarify that these are forward-looking yields before leverage with our investment decision based largely on the levered return on equity. Turning to slide six, we want to highlight four Q4 transactions. The top right project is an $85 million micro grid system AmResco design to ensure the Marine Corps base of Parris Island South Carolina can still operate for extended periods with grid outages. The micro grid includes the 3.5 megawatt cogeneration plant, a 6.7 megawatt solar array and 8 megawatt hour battery energy storage system and control system capable of optimize dispatch and fast load shedding. This is an example of the military's need for investment in resiliency and this represents our second investment in a military base that combined solar and battery storage. This one uses the Tesla Powerwall and the other uses of Johnson Controls battery storage system. Top left we feature two California's school choosing to go solar and scale, using the SunPower helix system. Well, Parris Island and the schools on the REIT around the retail side of the meter, which insulates our investment from the pressure of low wholesale power prices to the inexpensive natural gas. The bottom two project land for 400 megawatt utility scale solar project in Minnesota and a preferred equity investment in 120 megawatt wind project in Texas by an energy highlight how we help the developer optimize the capital stack of a project and add value to their business. All four investments have attractive returns on equity are diversified by geography, technology, operator and obligor. Turning to the next page, we think it's useful to look back at how our business has developed over the last three years. Our business model which is building a balance sheet of the diversified set of relatively small and uncorrelated assets with long durations and attractive risk-adjusted returns is working. With each investment, we had we strengthen our ability to sustain our dividend given the 11-year weighted average life of the asset, the strong credit quality, and the diversification provided by an ever-increasing number of projects. On the liability side, reusing modest leverage approximately two to one and largely fixed rate debt. We'll continue to work on adding appropriate leverage to get to our target of 2.5 to 1 as we increase our fixed-rate debt. The net result is we are locking in strong returns on equity in a rising rate environment. Now I'll turn it over to Brendan to detail our financial performance.

Thanks Jeff. Turning to Q4 and full year results, for the year, we generated $51 million of core earnings or $1.20 per share as compared to $34 million last year $1.04 per share a 15% increase on a per share basis. For the year, we generated GAAP interest income, rental income and income from equity method investments, which we've labeled investment income of $68 million, an increase of approximately $48 million last year as a result of the continued growth in the portfolio. For the quarter, investment income grew to $19 million from $13 million in the same quarter last year. We also generated gain on sale on fee income, which we've labeled other investment revenue of $19 million up from $11 million last year, as a result of higher other investment revenue in the first half of the year. On a full year basis, interest expense grew to $45 million from $27 million last year. Currently 67% of our debt is fixed. However, as Jeff mentioned earlier, given potential Federal Reserve rate increases, we're increasing our fixed-rate debt target to 60% to 85% from 50% to 70% despite the higher associated interest rate cost. Comp and general administrative expenses remained consistent for the quarter as compared to this time last year. For the full year, comp G&A expenses grew by approximately $3 million due to higher staffing cost and higher professional fees. The staffing cost includes additional headcount. We're now up to approximately 40 people from approximately 32 people at this time last year. In total, we have $15 million or $0.32 per share of GAAP income, a 52% increase from the $0.21 per share last year. As many of you know, the GAAP earnings do not include the full effect of the cash we receive from our renewable energy equity investments, especially where we've invested alongside of the tax equity and receive a limited allocation of profits and losses although a much larger allocation of cash. For 2016 we collected $56 million in cash from our equity investments as compared to GAAP income on these investments of approximately $6 million. Since we've based our investment on future cash flows, discounted back to a present value, we believe the cash we receive reflects both a return of capital and a return on our investment. Thus, we make a core adjustment of approximately $24 million to recognize the return on investment, which year-to-date when added to our GAAP $6 million income gives a total core return of $30 million and that the other $26 million of cash received is treated as a return of capital. After adding in the equity method and the non-cash stock comp adjustment, we had $13 million of core earnings or $0.29 a share as compared to $9 million last year or $0.25 per share, a 16% increase on a per share basis and for the full year, we had $51 million of core earnings or $1.20 a share, up 15% from the $1.04 last year. All the earnings per share numbers reflect the impact of the dilution from our November offerings. Turning to Slide 9, our focus on high credit quality asset is reflected in our portfolio, which excluding the equity method investments, consist of 44% of our assets from government obligors and 54% commercial transactions with only two projects representing 2% of our asset or $22 million, not considered investment grade. Our portfolio is widely diversified with over 130 project and an average outstanding balance of approximately $12 million per project. As we've said, we invest in assets that are neutral to negative on greenhouse gas emissions. As such we analyze each investment for its greenhouse gas impact prior to taking to our investment committee and in Q4, the aggregate investments reduced greenhouse gases by approximately 155,000 metric tons or equivalent to 76,000 metric tons of coal. Turning to Slide 10, we want to focus on the balance sheet. Presently 67% of our assets are fixed rate debt investments with the remaining consisting of equity method investments and real estate, with largely preferred and predictable returns. As we've discussed new assets are originated at current rates, which is in effect similar to a bond ladder. On the debt side, we are at approximately 67% fixed rate and our leverage is 1.7 to 1 against our 2.5 to 1 leverage target. As you know, our equity raises like the one in November are based on our expectation of future business and we announced a large transaction earlier this quarter. As of December 31, 2016, before considering any improvement in asset yield, we estimated that a 25-basis point increase in LIBOR would increase quarterly interest expense by approximately $200,000 or less than $0.005 a share certainly a manageable number. I will now turn it back to Jeff who will wrap up the presentation.

Thanks Brendan. To close, we continue to execute on our business plan of investing our capital and assets that enable the growth of the best efficiency, renewable and infrastructure companies in the business by aggregating these assets like energy storage assets in Parris Island or the land for solar farm that are otherwise not accessible to public shareholders, we are building a business that allows our shareholders to participate in attractive yielding assets, generated by an increasingly diverse portfolio and managed by a team that owns 5% of the business and is dedicated to good governance. We thank our clients for the opportunity to support their businesses 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 a few questions.

[Operator instructions] We'll take our first question from Philip Shen with Roth Capital Partners.

Hey guys. Thanks for the questions. Seems like your NIM has experienced some compression in Q4, was this in part related to rates taking a meaningful step higher after Trump was elected and as we look to your guidance for '17 you guided 14% to 19% of core earnings growth in '16 which was 8% to 12% in '17? To what degree are the higher rates impacting this outlook?

There's two things, hi Phil, there's two things going on, we're forecasting higher fixed rates which are definitely higher but obviously, we're taking some risk off the table. We're certainly seeing the possibility of spreads going up as rates go up. I think growth slows in most businesses particularly when you're increasing your fixed rate portion. Brendan, do you have anything to add to that?

Yes, I think the forward-looking yield state of that were down 10 basis points, but I think that's mostly rounding the fact that we had more energy efficiency in the portfolio. We did have more fixed-rate debt now. Last year if you remember we put a lot of fixed-rate debt on in the quarter in December of last year. So, if we do want to comp this year to last -- this quarter of last quarter, we only had about a month of the fixed-rate debt in last year where this year we have all three months or all full year of the fixed-rate debt we put quite $250 million or so on fixed-rate debt in December of last year.

Okay. Great. Thanks. As it relates to Dodd Frank, let's say that hypothetically gets eliminated and I think you've highlighted in the past, that the banks are forced to sell down the preferred equity positions as a result of Dodd Frank, does this -- if this restriction is removed on the banks, how does that impact the outlook for your wind business?

I think if the banks don't have to sell it and they like the assets I believe they do like the assets and we'll obviously do less of that, there are other reasons for the banks to sell that other than Dodd Frank or sell off the assets and if we take a look -- step back and look at our business plan at the IPO, we never envision doing this business. It is good business. We like it, but I'm quite confident if it went away due to Dodd Frank going away, we can replace it.

And I think the other thing to add to that is we're increasingly doing deals on the sponsor side in the newer flavor of tax equity, it's the cash kind of close 50-50. So, there's an opportunity for preferred leverage on the sponsor side like the transaction we featured within the energy.

Correct, so it doesn’t go away totally, it may just shift the nature of the transactions that we do.

Okay, great. I've one more on a as it relates to C-PACE. It seems like in the past this has not been a big part of your business, but I was wondering if you could give us an update on how that relationship with CounterPointe is going, what the outlook might be for C-PACE in 2017 in your and your view on overall as we think longer term three to four years out how big of a mix of business could C-PACE be for you guys?

I think it's we consider it the market with a single biggest opportunity for us. The business with CounterPointe is developing nicely. These are inherently smaller transaction, so it's going to take a while to get to a lot of zeros, but it's effectively addressing 20% of the U.S. energy bill which we have heretofore not addressed at all. So, we'revery excited about the prospects for pace.

Great. Thanks, Jeff. Thank you, Brendan.

Thanks.

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

Thanks. Good afternoon. Even Jeff you made good points about the diversity in the investments that you look at in investing. But since you talked about some of the possibilities for expanding the federal business can you maybe expand a little bit on what some of those possibilities might be?

Well, I mean if you look at the Trump infrastructure plan there's I believe we have 50 high-profile infrastructure projects. Some of them like bridges and dams that's probably not our deal. Some of them are transmission lines for wind; you have to say that that's an interesting opportunity for us. They also talk about re-powering hydroelectric dams, Army Corps of Engineers dams, the average turbine of the Army Corps dam is over 50 years old I think. And clearly more power could be generated. And then we made a nice business on the ESPC market, but it is limited to buildings. If that were to change that unlocks another probably 70% of the governments energy bill that could be used for a performance contracting. And again, we are not forecasting that will happen, there's a lot of complexities with that, but it certainly is a something it would be consistent with the administration's views on what's a good public-private partnership and good for the war fighter and good for the taxpayer.

Interesting. Just turning to the 2017 guidance the 10% core EPS growth at midpoint, how should we be thinking about the level of originations and what new to stay on the balance sheet to kind of get to that point. I mean you just put on $1.1 billion, but what you need to do this year in the range to gets to that end point?

Well, what we you suggest as we'll keep the business model of $1 billion dollars a year of volume, $300 million securitized for gain on sale and fee income, and we show that in the pipeline chart and portfolio chart that there's a delta. And then $700 million gross goes on the balance sheet, of course there are some amortization, there may be some prepaid and things like that and net growth may be smaller. That's the basic model. Obviously more originations helped and the mix of securitizations versus additions to the balance sheet because it gives us lot of ways to get to the right answer.

Understood. And then you talked before to interest rates and we've seen BBBA spreads relatively flattish for a bit of time now. But since you're investing in certainly more niche markets, maybe if could talk what are you seeing in your markets thus far start the year with respect to pricing?

There are so many different markets it's hard to make a blanket statement. But let me reiterate you when I think investment-grade spread to come in but those are on liquid traded bonds and that's not the market we're in. We think as I said to a few investors as the price of money goes up those who are selling money generally will do better. I said that tenures coming back in pretty significantly from over the last month. So, to say we know which way interest rates are going it would be silly, we don't. But we certainly are protecting against asymmetric risk that we think rates have a lot more opportunity to go up and down. We'll make money on the assets and we'll hedge our bet on the liability side.

Okay. Thank you very much.

Thank you.

We'll take your next question from Joel Houck with Wells Fargo.

Good afternoon, guys and thanks for the color around the REIT, particularly the quantitative information. So, you talked about the infrastructure the Trump infrastructure plan, I'm wondering if you could maybe update that further as it pertains to clean energy and energy efficiency under the Trump administration?

Joel, I try to address that with the federal ESPC that really is the tool that the U.S. government uses to add efficiency assets, so Parris Island Marine Corps base Parris Island was done under an ESPC contract. It has as we've said before I think Hannon and myself that our first federal energy deal under the Reagan administration, the federal energy savings performance contract program is started on push one, supported by Clinton, Bush too and Obama. There's nothing that we're hearing from anybody that says that's changing. These are really good transactions for the treasury. Really good job creators and really good and necessary improvements to the infrastructure. That the reason the Marine Corps wants to do energy efficiency in micro-grid isn't really because the climate change it's for security at Parris Island. If they lose power, then and increasingly electrified military is really challenged to operate. So, having a cogeneration plant that replaces a very old and inefficient boiler and having the PV field and the battery energy storage gives them a terrific security. So, there's lots of reasons to like these energy-saving performance contracts whether you like the climate change thesis or not.

But I guess the key point Jeff is there's a lot more where this came from regardless of who's in the White House?

Absolutely.

Okay. Thanks. And then if I may another one. So, you didn't out $144 million land investment few weeks ago, Can you help us think about the economics and accounting specifically how should we think about the returns in that investment and weather will be any variance accounting between core and gap earnings for that investment?

So, I think it's relatively consistent with other land investments we don't specifically break out transactions. The only thing we are pursuing gap in core or in a land investment is that gap assigned values to land intangible that they amortized over the life of lease and we'd add back for that in core. So, you can see the lease amortization adjustment in core it's not typically a large adjustment. But so, there'll be some of that rough order of magnitude is roughly double what we're doing today. So, I think this year our real estate intangible add back for the full year with about $1 million. So, I think you could assume that we would probably go up and be almost double next year. We haven't finished the appraisals and for accounting that will be a rough guess.

Okay, got it. Then last one is help us think about the expense base in 2017 and whether 4Q comp and G&A expenses represent the run rate going forward or as you ramp up the base and how we should think about expenses in our model in 2017?

I think we've guided, if you look at the full year it moves around a little bit, 2017 on a core basis so I think if you put a little bit of growth on that you're probably in the right range. But it moves around quarter to quarter just depending on professional fees and some other things. But I think taking that the full year and adding 3% to 5% growth gets you a reasonable number.

Okay. And then any plans to add -- I know you added a 8 in '16, how about '17, what are the plans terms of additional people if any?

We continue to add people when it makes sense. So, I think as we continue to grow the business and build the business, we look to add appropriate people but clearly, we're unlikely to add eight on top of growth in addition should be slowing and on all of the staffing is going to grow much more slowly than assets on balance sheet.

Okay. Great. Thanks a lot guys.

We'll take our next question from Benjamin Kallo with Baird.

Thank you. I was -- that was the only company in my list that I work for, so hopefully my boss is with me. So, Brendan, the $5 million liability on the refi I thought there wasn’t a claw back and so how do we square that?

There is not a claw back Ben, all we're doing is we're taking the re-taxable income over the four-year period and multiply that by 40% and coming up to that number is what we would know and putting a lot of interest cost on it when we saw less than $5 million. So, we're just trying to quantify maximum exposure to people.

Sure. Thank you. And then the mix between renewables and energy efficiency I know there was an uncertainty in renewable right now or for uncertainty, do people worry about that and in the last call I think I asked the same question, if you could move the portfolio back energy efficiency, but it's a big difference now versus a couple years ago and the amount of investments you have in renewables, so is that still the case and so you guys, is that still the case I guess is the question.

Well the pipeline is 54% efficiency and then 11% sustainable infrastructure. So, I think it's always been dominated by efficiency and as I said in 2015, we're all shocked to see the ITC and the PTC extended for five years while we have our transactions we do in wind and solar, it is not the core focus relative to efficiency.

And on the land deal just to add on to the last question, how do I think about the opportunity going forward and those type of land deals and could you just talk about how those are sourced a little bit more?

Yes, if you look at the top 10 developers and that's where 90% of the businesses that would be interested in and we talk to them about the benefits to the developer's IRR like having us own the land and we don't make every sale but it's accretive for virtually every developer whether they choose to transact is another question, but we should be able make everybody money by owning the land and leasing it back to them.

And so, there's still opportunities there I guess was my question.

Yes, I think everybody is well aware that utility scale for solar and some power I've talked about the challenges in that market, but if you look at our pipeline, one of our three solar markets and solar is 13% of our pipeline. So, it's not like we've ever really had a big pipeline for utility scale solar land but we have a nice market share in it and yielding assets and good credit quality assets. So, we're doing what we can find them, but weaken the find them, but it's certainly not something that we're saying is going to grow through the roof like we expect pace to.

Yes, so just on that topic, could you talk about paid and any type of regulatory stuff that we should be aware of on the federal side or local side that could slow that down because it seems like that could be, that's far of the growth opportunity you have?

I think commercial pace has no nexus with the federal government on either energy policy or tax. These are local or state initiatives that don't need to ask Washington for permission to do this. It fundamentally goes to the entity that has the right to tax on property and then we attach a lean to the property tax bill that is a very local business. So, for us that's the perfect answer to the question of what might happen to us with the Trump administration, but at this point we also feel that federal business is going to do just fine.

And I have just a couple more on the assets backed security side, you just did a deal, what's that market look like and what are our expectations their number one and then two, if I just maybe ask for you Brendan, Jeff if I kind of back up three years ago, or maybe just through September or October before the enection, how does your visibility change or opportunities that change going forward? And then the third one as you try to get your returns to work, you want to be I guess if that's a proper way to say it, but are you reaching to a different asset class or different type of project to try to get returns where they need to be versus what you've done in the past and how do we think about that and adding people and risk and then I'll hop off. Thank you.

So, on the ABS Solar City does it for residential solar and good for them. We do ABS transactions and have since 2000 on a variety of asset classes. So, I'm actually not at all crisp on what Solar City did. We continue to find very good investor appetite for any of our long dated high credit quality, fixed rate ABS deals and really don't expect that to change. In terms of the pipeline, pre-and postelection, the good thing about our pipeline is it moves rather glacially. We don't see a lot of change. We've been building up leads and qualifying them in the sustainable infrastructure category and quite unrelated to the election result, but really related to expectation that tax driven renewables were going to be in a downward trend, that's actually not happening. But meanwhile we've developed another pipeline slice that we were quite attracted to. And then I think the last question you asked is are we chasing yield and other asset classes or do we need to? I don't you think you need to chase for yield and other asset classes. We'll continue to look for the best risk-adjusted returns and we're very, very consistent on our business model. We have to find programmatic assets that we can do over and over with the leading companies whether that's in water, wastewater -- stone water remediation or transmission distribution systems and we have an opportunity to add new clients and we are actively talking to them. Hopefully I got you covered there Ben.

So, I am going to add one to the debt for one second. Obviously, we've said we're going to increase our fixed rate debt. So, one of the ways we've done that is ABS. So, I think you could look for us to do more of those. An example of that is the land transaction we just did last time when we got a full run together, we were able to put that out in the securitization and in the long-term attract very attractive fixed-rate securitizations. So, we had success in that model one. So, I think that's something we'll look at to pursue again. So…

All right. Maybe I'll add one more if I can. Then I'll hop off. In competition, it's always some people ask once a while, so can I ask it again, is there anyone I see some of these private companies that China do something similar, maybe taking more risk and storage type projects that they pick that. How is that changed just over the past couple of years?

Ben, it really hasn’t. It's been pretty static. I know there are people looking at it. It's a tough business to get the scale and we think we have a very competitive cost of capital with respect to any of the private equity funds, the pension funds and insurance companies. They may look at it and say, hey that's a really attractive business and then I think they ultimately conclude shoot. We can aggregate these tiny deals to make money in our present situation why don’t we talk to Hannon. So, that's not to say we never stop worrying about competitors, but the best defense is for us to service our clients and we got a great team doing that.

All right. Thanks, guys.

Thanks, Ben.

And we'll go next to Julien Dumoulin-Smith with UBS.

Good afternoon, guys. This is actually [Jerimiah]. I just wanteddouble a little bit more under the sustainable infrastructure part here. Since it's kind of new that you're breaking out, I guess two things, one is this 8.6% yield that is in your portfolio, is that typical return profile or is they more so just because the right investment there and what are the future opportunities?

Sure. I mean that's a very specific transaction. It is actually couple of them in there, but the main one is a fiber-optic link that we own between Guam and Kwajalein serving the Reagan missile-defense command. That's a legacy pre-IPO asset originated in different interest rate environment. And in terms of what we see in sustainable infrastructure transmission distribution systems, some on federal properties, some not are completely under invested in this country and represent a good opportunity to decrease line losses, improve the overall system efficiencies actually have a great carbon story. Storm water remediation we're starting to see particularly around the Chesapeake Bay where EPA compliance and Supreme Court tested compliance requirements are creating need for 510 -- $15 million storm water remediation projects, which our government credit, but they're really public-private partnerships. And seismic retrofit is a California requirement that can be PACE financed.

Okay. That will make sense. I guess really what I'm getting at is there any change in the risk profile to these investments versus anything else or is it basically the same?

In some respect, maybe less risky. These are pretty well-trod, well-proven assets.

Okay, great. That was all for me. Thank you.

Thank you.

We'll take our next question from Carter Driscoll with FBR.

Hi, guys. Just going back to some of the early comment Jeff in terms of your direct engagement to transition team, I just want to clarify so this is maybe change trying to change the scope of the FTEC program beyond billings include other types of projects and/or maybe you can characterize any other types of discussions might have in terms of the nuance and helping the new administration support your core business?

Let me be clear, it's our clients that are really leading this. They're the ones that are most the gain and we certainly support them and have engaged where appropriate. But this performance contracting model that is limited to energy efficiency in buildings can be expanded to water, it can be expanded to as I said hydroelectric upgrades, hotel load on Navy ships, current law doesn't allow it. I have zero view on whether there will be any appetite to change it except I can say it is being discussed. And anything in this area is complicated and take some time, so like it's going to create a huge new mark force overnight. But it is a -- I think a nice fact that this isn't -- there isn't any perceived hostility to the performance contracting ESPC model like the opposite there's some interest and hey this really fits the public-private partnership philosophy of the administration.

And then given the administration's policy of really, I think increased transparency and this regulation do you think it was with a former cabinet member that put out in the journal two weeks ago, talking about our carbon tax would actually be a more streamlined way of driving more renewable investment. Do you think there is any appetite whatsoever in the current administration for that approach?

I have no idea. We haven't at that level.

Got you. And then your movement towards raising your fixed rate debt percentage, is this an anticipation of our gradual increase from the fed reserve or are you potentially anticipating a sudden shift or maybe additional couple rate hikes this year and trying to get ahead of that curve or is really just turning out on a more gradual basis?

I think it just as this has been consistent with what we have done last couple of years as with respect what the fed says they are going to do and I want to be conservative in that approach. So, I think that's a three rate hikes this year the market is probably too. So, that's certainly in that case there is going to be likely to be something and we're trying to adjust the portfolio and the debt side of the portfolio that to be ready for that.

Okay. I'll take the rest offline. Thanks, guys.

Thank you.

We'll take our next question from Stephen Byrd with Morgan Stanley.

Hi, good afternoon. Thank you very much. Most of my questions have been addressed. I just want to close the loop on your marks on the REIT status. In terms of the portion of the earnings that qualify for REIT status, what portion is that and can you just help us understand what would happen to the extent that you did a REIT qualification for that part of the earning string?

So, I think what we try to quantify with the $5 million Stephen is that number. So, the $5 million is -- it's less than 5 million. So, it's a relatively small portion of our overall earnings. So, the way we got the $5 million, we can reverse engineer as we got 40% of the REIT taxable income for each of the years and aggregated together. And so, they'll give you a sense of what it is. It's a relatively small portion of the overall earnings that I think we explained the people we do a lot of businesses TRS is and we also have lots of tax attributes both in the REIT and TRS is that give the rise to a difference between the book income and taxable income.

Okay, understood. So, that $5 million to the aggregation since you been able to qualify as a REIT status, so obviously on an annualized basis it’s a much smaller number than the five?

Correct. That's right the 5 is sum of the four years.

Okay. And is that -- is that the case because you do have a large tax position that helps shield you anyway, in other words do you burn through that at some point or is it that probably just it's not material for the foreseeable future?

That's what we're trying to say is if we ran a forecast of future income and assume that the REIT was combined with the rest of the business we wouldn't pay tax, we wouldn't affect the dividend. And at the end of five years we would actually be at the same NOL level or even higher. Right now, we have about $70 million of NOLs built up in the TRS. So, the REIT, if the whole business would taxable in the five-year forecast that we ran it wouldn't matter.

Understood. Okay. That's all I have. Thank you.

Thank you.

And we'll take our next question from Michael Morosi with Avondale Partners.

Hi there. Thanks for taking the questions. Many of mine have also been already answered, but looking at the commercial pace opportunity, or are you primarily viewing that as a securitization product or is that going to be an asset that you would like to hold on your balance sheet?

No, we definitely -- well there is two ways to answer that. We definitely want to hold it on our balance sheet. We like the risk. We like to return and we can securitize it and keep it on our balance sheet by bundling a lot of transactions and we actually can do that on the federal ESPC transactions as well. So, we have a fair bit on the balance sheet now and hopefully we'll be able to lever them up with some kind of ABS transaction, but keeping the piece that we want to own still on the balance sheet and keeping the debt on the balance sheet.

And then on the deals that you're involved in, have you seen any change in the behavior of the tax equity investors just given the prospect for tax reform. Have you seen any change, I know that's not exactly market that you plan, but you're certainly around?

I think there's been a growing anticipation of some form of tax reform for a number of years and what we understand about the tax equity market is leading suppliers of tax equity have pushed tax reform risk on developers over the last several years, probably not universal and not in every transaction. So, I wouldn't say that postelection there is a significant shift that's obvious to us.

Okay. Thanks.

And that is the final question we have in the queue at this time. So, Mr. Jeffrey Eckel, I'll turn the call back over to you for any closing remarks.

I just want to add, this is Brendan, I just want to go back to one point that we talked about with Joel earlier, in modeling G&A we've been in the low 4s on a core basis quarter to quarter. I think modeling think of it being closer to five and mid 4s. So, I just want to get that correction out there. Okay. Thanks, everybody. Good questions we look forward to speaking with you again soon.

And this does conclude today's conference. We appreciate your participation.