Good afternoon, and welcome to Hannon Armstrong's Conference Call on its Q3 2018 Financial Results. Management will be utilizing a slide presentation for this call, which is available now for download on their 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'd 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 third quarter 2018 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 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. A 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 will be 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'll turn it over to Jeff, who will begin on Slide 3. Jeff?

Thanks Amanda, and good afternoon, everyone. Today, we are announcing GAAP earnings of $0.30 per share and core earnings of $0.36 per share. Originations for the quarter were a record $553 million bringing the year-to-date total to over $850 million. Of the $553 million, 42% or $233 million represent balance sheet transactions and 58% or $320 million were securitized. We are pleased with this quarter's progress in building the balance sheet with the accretive assets as well as our business model flexibility to securitized transactions. Like last quarter because securitizations produced earnings with little to no capital, our core return on equity is relatively higher, this quarter north of 12%. We also increased leverage to 2.4 to 1, which also improves ROE. To summarize our quarter’s financial results, given strong investment activity, higher securitizations, and considering the depth of our pipeline, we remain optimistic for the rest of 2018 and continue to track to our guidance. As an ESG update, consistent with our investment thesis, we are enjoying strong financial results by investing only in assets that are neutral to negative in carbon emissions. This quarter investments expected to offset over 286,000 metric tonnes of carbon annually, a 0.52 CarbonCount. Our Board of Directors has also recently formalized various environmental and social policies to implement TCFC and the UN Global Compact. While the spirit of these policies has long been embedded in our corporate DNA, formalizing them further illustrates our commitment to enhancing our ESG disclosures. Turning to Page 4, we will provide a business and market update for the quarter. As we have discussed, we invest in a number of systematically consistent niche markets, approximately [10] none of which alone makes a business, when a majority are added together, forms the basis of our $1 billion annual origination target.…

Thanks, Jeff. Turning to Slide 7. For the quarter, total GAAP revenue grew to approximately $35 million, a 32% increase from the same quarter last year, and securitization volumes were up over 100% from the prior year. Interest expense grew to $20 million from $18 million in this quarter last year, primarily because of an increase in total debt as well as a result of increasing our leverage as well as a higher percentage of fixed rate debt compared to the same time last year. Comp and general and administrative expenses increased by approximately $2 million for both GAAP and core over the same quarter last year. The increase is a result of our continued investment for the growth of the business. Income from equity investments increased by approximately $5 million, due to a project companies negotiated settlement of a power purchase agreement. On a year-to-date basis, income from equity method investments was relatively consistent with 2017. For the three months ended September 30, 2018, we recorded a GAAP profit of $16.5 million, an increase of $8.6 million from the same quarter last year. As a reminder, the GAAP earnings do not include the full effect of the cash we receive from our equity method investments. For core, we adjusted our GAAP earnings to reflect an estimated return on our investment, which we include in core earnings. Year-to-date in 2018, we have collected approximately $100 million in cash from these investments, representing $31 million of return on investment, which is included in our core earnings and $69 million return of capital. It is important to note that the interest expense associated with the leverage on these investments is shown in the interest expense line above as required under GAAP. After adjusting for our equity method investments and stock-based comp, in…

Thanks, Brendan. Great job. On the last slide, let's summarize what we are doing. Hannon Armstrong is investing in the future of energy, which we believe is decentralized, digitalized, and decarbonized. These three trends represent a part of $100 trillion global market opportunity to mitigate and adapt to climate change. While the investable market is quite large in anyone period the relative value in the market may ebb and flow. As we are demonstrating our business model allows us to selectively build our portfolio from a large set of assets while still serving our clients with a broad range of capital solutions. The portfolio represents a high quality investments individually and when considered together represent a diversified portfolio with little correlation to the economic cycle. As a 37-year old Company, we also have a great deal of management experience over political and economic cycles, including several of the big downturns in the clean energy industry and the broader markets. We've continued to prosper and are well positioned to grow earnings over time. Finally, we believe we are doing something important, addressing climate change, while we are earning superior risk adjusted returns consistent with our investment thesis. Thanks to the Hannon Armstrong team for continually evolving our investment platform, creatively and intelligently seeking returns across various – business model flexibility to adapt to various market conditions all the while serving our clients. This is an outstanding team, organized to capitalize on the great opportunity to invest in assets, reducing the impact of climate change. Thank you to our investors for joining us today. And now, we will open up the call for few questions. Amanda?

Operator, go ahead and open the call for questions.

Thank you. [Operator Instructions] And our first question today will come from Chris Souther with Cowen & Company.

Hey, thanks for taking my question. First on the leverage and also the fixed rate percentage. Can you guys discuss a bit where do you guys feel comfortable as far as that going up a little bit on the leverage side and then down a bit on the fixed percentage?

Sure. So we've always talked about a target of [2.5 to 1, 2.4] is pushing us up to that. We've most recently been in the kind of the 2 to 2.5 range. So we think we're right in the right level where we want to be. And as far as fixed rate debt, our target is 65% to 85% fixed rate debt given the Feds continue to bios. So we've come down a little bit from where we were in the high-90s, but still well within our range and again we're comfortable with that.

That makes sense. And then just would you be able to provide a little bit more color on the Behind-the-Meter solar financings with SunPower and Vivant? Maybe just on what is making the mezzanines less attractive compared to traditional debt? And what you guys are kind of bringing to the table as far as some of the models you've used in the past with Johnson Controls in other words energy efficiency, if this is kind of a repeat customer kind of thing that you guys are looking to continue?

A couple things in that question. Let's address the larger one of why Johnson Controls or SunPower finds it attractive to do programmatic transactions with us. There's no question we dig in deep on these. We figured out exactly what the problem is that our clients are trying to solve in order to sell their gear and improve their balance sheet, and our entire investment team is built to solve those problems. With respect to the SunPower assets, we don't want to talk about more than it was disclosed in the SunPower 8-K, Brendan. Yes, but basically these are assets that we know, many of them we’re already invested in the portfolios from transactions two to three years ago. And it made sense to take assets that we knew increase our position in those and get paid for the incremental risk.

Appreciate that. I’ll hop back in the queue. Thanks.

Next we'll hear from Carter Driscoll with B. Riley FBR.

Hi. This is Carson Sippel on for Carter. I just had a quick question. Can you update us on how C-PACE is coming and any other general commentary you have there? It would be helpful. Thank you.

Sure. C-PACE is developing. I would offer a couple perspectives on it. You have the real estate finance market that is one of the oldest and most mature and most established structures. C-PACE comes along in the commercial real estate market and forces a lot of the incumbents to change what is they're trying to do. That's challenging. People have been doing these transactions for decades the same way. And C-PACE comes in with a different position in the capital stack. So that's the challenge. Our Group Hannon Armstrong Sustainable Real Estate comes out of that commercial real estate business. They're able to speak the language and we're making progress. We announced the transaction few weeks ago, maybe a month ago, $10 million transaction for a higher property and there are others coming. We continue to believe it is a very large market, but like every very large market we've ever been in, they take time to develop. These are different kinds of financial service offerings and the whole ecosystem has to accept them, not just one or two players. So we remain very positive on PACE and measured in our near-term estimates for it.

Got it. Thank you.

We'll now hear from Philip Shen with ROTH Capital Partners.

Hey guys, thanks for the questions. First one is on originations. You guys had the record $553 million in Q3? Can you talk about – we know you're talking in $1 billion as your standard targets. But as you look beyond this year, is there a chance that you might drive that a little bit higher? Do you continue to see kind of the lumpiness that we were getting with the originations as we get into 2019 or do you expect any degree of smoothing out?

Nice to hear your voice Philip, I think we don't have any more ability to predict anyone quarters, originations than we have ever had, which is why we have so many niche markets. I will say we are feeling better that these niches are more – more niches are hitting than not, which in – on average that means we should have relatively more stable originations. But it's still we don't control the closing timing. So it's still somewhat uncomfortable for us to be highly confident of predictability. We will always have variability. But I think we're showing though from Q2 and Q3 is – may be an originations in any one quarter or not exactly, the first order drive of earnings. It's also as much what we do with those transactions that we securitize and maybe turbocharged earnings or do we put it on the balance sheet. And of course, this quarter we were fortunate to do both. But yes, I think the market looks good. It's you have very bullish, CEO's among all of our clients. I think particularly in the Behind-the-Meter business, Brendan, you said the CEO of AEP was even talking about it, which is fairly notable a statement. I think that's where the growth is and we're very well positioned for that.

Great. Thanks Jeff. From a competitive standpoint, historically you guys targeted niche opportunities that traditional lenders may not be as active in. But wanted to see if you could give us an update on the landscape and if you're seeing any of the larger banks possibly enter your segment. We've heard a little bit of chatter that that might be the case, but want to get a feel for if you are seeing any of that competitive pressure at all, and if so, provide some color on that.

I am sure we will always have competitors and I'm sure the large banks will always, endeavor to compete. Frankly, they've been doing it for decades, but it's hard for them, when your average deal sizes, what is it this quarter, Brendan, 10, 11, 12. What we are seeing is a lot of banks actually wanting to finances, and that's a lot better strategy for them than it is to compete. So I know we will always have competitors and one thing I've known is incumbents give up market share very unwillingly and we perceive ourselves to be that stubborn incumbent.

Fair enough. As a follow-up on that in your response there, you just mentioned that a lot of the banks are wanting to finance you, that's interesting. And I was wondering if that's a little bit different from now relative to kind of the recent past for – in years past. And then specifically I think in the past you've talked about, the possibility of unsecured corporate data as part of your financing plan. Can you just give us an update on how that's going, if that's on the table at all and any sense of milestones you may need to reach before doing that?

I'll let Brendan answer the corporate debt. One thing, Bank of America has been our lead bank since the IPO. They have our credit facility and they're one of our competitors. The markets are large and confusing and nobody is completely consistent in terms of their approach to the market, particularly when you have large institutions like Bank of America. I think over time as they realize what it takes to be successful in these smaller transactions, they tend to realize they can make more money banking us, then they can competing with us. That doesn't mean people don't try and some might be successful, but so far, I think the history's been pretty much in our favor. On corporate debt, I’ll turn it to Brendan.

So thanks, Phil. We continue to look at corporate debt. Our main credit facility expires next July. So I think we also will look to roll that over and extend that and are very positive and what's going to happen there. So we follow our financing plan, where we continue to build out, the plan has been that we would rate individual asset classes, which was largely accomplished now that will make sure that we have appropriately stacks maturity ladder, which we think we have good visibility into it right now. And then the next step is corporate debt. So we continue to look at all the tools in the tool kit. The good news is Jeff mentioned is, there's a lot of interest in financing our assets and financing us. I think we benefit from having built a fair amount of credibility up over the last six years, so certainly a different situation from pre-IPO, when we're arranging financing. So I think we've seen great improvement in that area and we think we will continue to.

Great. Good to hear. Thank you, Jeff and Brendan. I'll pass it on.

Thanks Phil.

[Operator Instructions] We will hear from Noah Kaye with Oppenheimer & Co.

Hey, good afternoon, and thanks for taking the questions. Maybe follow-up about the competitive question because I think this is important. It seems like the trend, and let's just take one market, the ESPC market, it seems like the trend has been towards larger projects and projects notably requiring a lot of different technologies to be integrated, distributed solar, storage, CHP, et cetera. So, the first question is, are you seeing that in your deal flow kind of increasing number of measures and complexity? And the follow-up to that is what do you think that does for your competitive differentiation?

Good question, Noah. We've talked about Marine Corps Base at Parris Island as one of the examples of a larger ESPC that got – that incrementally larger by adding more measures, photovoltaic, power generation, cogeneration, battery storage. I think that is the future of any campus, whether it's federal, ESPC or a college campus or a state government campus or even a corporate campus. These technologies are all when put together, I think in the money. So sit makes them a more, I would say satisfying and more complete solution Behind-the-Meter business. And that's one of the reasons we've characterized it as Behind-the-Meter, not energy efficiency or solar or storage. It's all of the above. I think these are all things we've financed separately. Seeing them together is certainly not a challenging for us. And I think our offering is everybody's competitive today as it was a year-ago, five years ago or 20 years ago.

And then maybe a follow-up on that specific end market, the ESPC market. I believe the latest defense authorization bill was pretty notable in first defining energy and climate resiliency, basically requiring, master planning to consider energy and climate resiliency and to require DoD to establish performance contracting goal. I'm curious, have you seen any more momentum either with DoD or kind of any of the parties you work with on the back of that, because it would seem to speak to kind of one of your core value propositions?

Sure. I mean, it's certainly a supportive piece of legislation. I think what it reflects is the reality that's been going on. I don't want to say for five years in ESPC market where DoD particularly has focused on being that energy zero, net water zero and that way zero. And while those are all there for good mission oriented reasons for DoD. They have the effect of also being really good for the climate. The fact that there's federal legislation that actually acknowledges climate risk and the need to harden these assets good, but I think the basis have already been doing it ESCOs are already meeting that need with a much more sophisticated offering. So we were glad to see the legislation and it's good to have that reinforced that that the market we're seeing is going to persist.

Okay, thanks. And maybe I could sneak a couple of quick more in, it looks like, the long-term yields and spreads have picked up a bit really over the last couple of months. And you talked about the market looking good. Should we anticipate if kind of marketing conditions stay this way, kind of a continued relative shift and an increased willingness to put more assets on the balance sheet? So that's something we can look at it in 4Q beyond?

Yes. That's always been the plan, and to the extent the origination stay strong and keep hitting on all cylinders and some of those investments are going to be on the balance sheet and some are going to be securitized.

Great. And then last quick one, congratulations on getting the IT system in place to manage all those investments. Can you remind us how much spending was associated with that and that come out of the P&L?

There is about $5 or $6 spent on the systems and it gets amortized into the P&L and we started advertising late last year on parts of and we're seeing more of it come through the P&L now. So it gets amortized over a five-year period or so.

Okay. So we're kind of at this run rate on the amortization for awhile.

Yes.

Okay. That's very helpful. Thank you.

Thank you, Noah. End of Q&A

That will conclude today's question-and-answer session. I will now turn the conference over to Jeff Eckel for any additional closing remarks.

Thank you, investors. Thank you, operator. And again, thanks for Hannon Armstrong team. I guess have some analyst calls and get back to work on November 2. Thanks all.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.