Good afternoon, and welcome to Hannon Armstrong's Conference Call on its Q4 and Full Year 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, Assistant Vice President, Investor Relations for the Company.

Thanks, Jessica. Good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing its fourth quarter and full year 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 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. 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 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'll turn the call over to Jeff, who will begin on slide three. Jeff?

Thanks, Amanda, and good afternoon. Today, we are announcing that we grew GAAP earnings 32% year-over-year to $0.75. Core earnings are up 9% year-over-year to $1.38, above the high end of our 2018 guidance. Given our accretive additions to the balance sheet and the strong pipeline, we reiterate our guidance for 2019 and 2020 of 2% to 6% growth in core earnings from the 2017 base. We also announced a 2% increase in the quarterly dividend to an annualized $1.34 per share. As previously discussed, we intend to grow the dividend, but slower than the core earnings growth rate. We closed a record $1.2 billion of transactions for the year with balance sheet transactions around the same level as 2017 and securitizations up, compared to 2017. The combination of higher portfolio yields from the balance sheet investments and higher securitizations in 2018 allowed us to increase our core return on equity above 11%. Our pipeline remained strong at more than $2.5 billion, especially in behind-the-meter assets. In Q4, we renegotiated our primary credit facility at lower rates than at the maturity, both good things. 0.5 million metric tons of CO2 will be reduced annually from our 2018 investments, a CarbonCount score of 0.42. The business is in great shape. And as our business has grown, our need for talent has grown. This is the perfect time to be making a transition. Brendan has done an outstanding job as our Chief Financial Officer, including coming up with the idea and strategy for taking the Company public in 2013. Effective March 1, Brendan will assume a new leadership role, focusing on strategy and our growth initiatives. This is not an exit for Brendan but a new role to use his considerable business skill and acumen to help us capture the very-large climate…

Thanks, Jeff. Turning to slide eight. For the year, total revenue grew by approximately $32 million or 31% as compared to 2017. The increase was the result of higher gain on sale and fee income of $15 million due to the increased securitization volume and higher yields on our portfolio. In the fourth quarter, approximately $300 million of residential solar assets and our related $250 million of debt was prepaid. Both revenues and interest expense were impacted by this transaction. We recorded approximately $13 million of interest income related to this prepayment. This was offset by approximately $9 million of expense recorded in interest expense related to the debt repayment. Total revenue grew by approximately $12 million in the fourth quarter as compared to the same period last year, as a result of the -- sorry, total revenue for the year grew by approximately $12 million as compared to same period last year as a result of the $15 million increase in investments due to higher yields and the prepayment described above. Excuse me. Total revenue by the -- grew by approximately $12 million for the fourth quarter as compared to the same period last year as a result of the $15 million increase in investment revenue due to higher yields and the prepayment described above. Increased investment revenue was offset by $3 million lower gain on sale and fee income for the quarter. Interest expense grew to $77 million from $65 million last year, as a result of the higher fixed rate debt and the prepayment described earlier. We completed a series of transactions in the second half of the year, which lowered our interest cost, such as refinancing our primary credit facility, reducing the level of our interest rate swaps and the $250 million debt repayment, which reduced…

Thank you, Brendan. Allow me to begin by expressing my enthusiasm for joining Hannon Armstrong. And I look forward to working with all of our analysts and investors. I joined the Company at a perfect time. Jeff Eckel's leadership has resulted in a strong financial performance and pipeline, and Brendan's leadership has optimized the capital and liquidity structure of the Company. My focus will be on expanding upon these successes and working with my colleagues to build a scalable platform to facilitate further growth in earning assets and EPS. Moving to slide 10 of the presentation, we maintain a debt structure that is limited refinance risk as most of our managed assets are either securitized or funded with amortizing non-recourse debt. The 2019 non-recourse maturities are being addressed as we are currently negotiating extensions and term takeout financing. As previously disclosed, we are also currently evaluating corporate unsecured debt as part of our liquidity platform. We also anticipate continuing to utilize regular way and the at-the-market equity offering programs to address liquidity needs, and we will be refreshing our shelf and the current ATM up to $250 million around the filing of our 10-K. The graph at the bottom of Page 10 further reinforces the limited maturities over the next few years. Now, I'll turn the call back over to Jeff Eckel.

Welcome aboard, Jeff Lipson.

Thank you.

Turning to slide 11, we want to highlight some of our environmental, social and governance metrics, and the progress we've made in the year. As we've discussed our investment thesis is that in a world increasingly defined by carbon, we will earn superior risk-adjusted returns investing on the right side of the climate change line. We have long operationalized the thesis by using carbon count which calculates the carbon reduce per $1,000 of investment. This is under the theory that if carbon counts and capital is scarce, we should seek to make the most impactful investments. As part of our commitment to transparently reporting the E in ESG, we published an Annual Sustainability Report Card disclosing the CarbonCount of every investment we made in the year and which will show a 0.42 CarbonCount in 2018, representing avoided carbon emissions. We have continued our industry leadership in TCFD disclosures by integrating much of the disclosure into the 10-K we will be filing in the next few days. Our corporate culture is reflective of our commitment to ESG, which will be detailed in our forthcoming ESG report coming out in Q2. One example of this culture was the initiative of one of our young people to organize a team to install solar panels on low-income housing in D.C. Our employees commitment to advancing these types of initiatives is inspiring, and I am honored to work alongside them. Turning to slide 12, in closing, we couldn't be more optimistic about our business. We're investing in a large and growing market. Over the long term, estimates indicate our addressable market is a multi-trillion dollar one. That's true. However, we estimate the current addressable opportunity for the next five years with assets we like, possessing attractive risk-adjusted returns and sponsored by a top tier client in a programmatic effort to be closer to $100 billion, still substantial. This lower addressable market estimate indicates that we are carefully navigating the large opportunity set to ensure we are getting the best risk-adjusted returns in these complex markets. Our client base is dominated by top tier firms growing to capture the decentralized, digitalized and decarbonized future of energy. These firms are the key to any of our success in combating climate change and we are grateful for the opportunity to support them. By sticking with our programmatic focus, we will also benefit from additional operating leverage. Our assets are well diversified, relatively granular yet similar in structure giving us an excellent portfolio to manage. We continued to have one of the most experienced teams in the industry, and with our staff additions in 2018 and 2019, including Jeff Lipson, of course, we have deepened and broadened our skill. Thank you for joining us today. We'll now open the call up for a few questions.

Thank you. [Operator Instructions] We'll go first to Julien Dumoulin-Smith of Bank of America.

Hi, this is Anya [ph] actually filling in for Julien. So, I guess my first question is just wanted to get a sense of your strategy for the business model looking forward. How much in on-balance sheet assets are you looking to hold onto versus securitizations? Specifically, what's a good estimate for the targeted split for 2019, and then going forward after that, more long-term?

So, this year, we did about 60% of securitizations and about 40% on balance sheet. We would expect that that would continue at that level or probably depending on the assets we see, we may increase putting on balance sheet. As we've talked about in the past, our model longer term and in normal rate environment would be to -- be at 70-30 on balance sheet. But, given the flat yield curve, a lot of the assets we originate our best -- we best realize the value in those by securitizing them. So given the environment, we would expect to continue to have a fairly high level of securitization comparable to this year or maybe slightly inside of that.

Great, thanks. And second, what's your growth strategy in terms of resi solar market and specifically on that? How much of that 75% of behind-the-meter pipeline over the next year would you expect to include resi solar? Maybe any information on what market you're looking to get into there and then what kind of return profiles are you aiming for resi solar?

Well, you've got quite a few questions into your second question. The 75% behind-the-meter is dominated by energy efficiency, our legacy market. Resi solar is relatively new. It's growing. You -- Julien covers most of the companies that are out there and some of whom are our clients now. We expect it to be an interesting pipeline. We would say that we're not going to become a residential solar finance company, we're going to continue to build a diversified portfolio on balance sheet. We like the assets we've got, we like the pipeline we've got, but really the efficiency market is growing just as fast as the resi solar market. I'm not trying to answer all of your questions, but we haven't -- we have disclosed some of the returns on the resi solar portfolio, so I won't repeat those. And we haven't disclosed it, we can't talk about them.

We'll go next to Mark Strouse with J.P. Morgan.

So just starting off, Brendan, thank you very much for your help getting us up to speed and congrats on the new role, and Jeff we look forward to working with you. So, our first question…

Thanks, Mark.

I mean, it sounds like the pipeline is still very well diversified, but just in particular looking at the 4Q strength and the beat versus your guidance on the EPS level, is there any particular in markets that led to that outperformance that you can call out?

Well, I think it was last quarter we used the phrase that we're hitting on all cylinders, and it's like a 10-cylinder engine. We've got 10 niche markets. It really does continue. Whether it's Q3, Q4, or Q1, we don't have that -- we have no control over which some of them fires, but in general, one half of them are hitting, things go well. When it's closer to all 10, it's pretty good business. Beyond that, it's a good time to have the position we have in behind-the-meter assets with the behind-the-meter clients that we have. I think this is where the market is going and, frankly, it's coming right toward us.

And then just a quick follow-up. So your originations in 2018 were a bit above your long-term targets of about $1 billion or so. But just how should we think about that in 2019. I know it's kind of hard to predict. But, at this point, are you expecting kind of similar levels to '18 or should we be modeling closer to your longer-term targets.

Well, yes, as you've hinted at, the business model still stands at $1 billion. I think it's reasonable to think that if we're hitting on all 10 cylinders, there's a good chance it's more than that. At the same, this is not a point in the business cycle where we want to reach for marginal assets, and we're going to continue to be careful about which ones we go forward. So the market is good. We would prefer to optimize on picking the best risk-adjusted returns rather than going for growth sake.

We'll now take a question from Noah Kaye with Oppenheimer & Company.

I'll echo the congratulations to Brendan on the evolution of your role. Welcome aboard Jeff. I guess, we're going to have to start disambiguating by specifying which Jeff we're talking to. Eckel, I guess given the focus on behind-the-meter, actually I wanted to ask you about activity around microgrids. You talked about some of the signature projects like Parris Island microgrid. We've seen Hawaii begin the preceding to actually create a microgrids tariff. It looks like California could follow. We understand these are typically long cycle development projects, but just wondering if you're seeing uptick in activity there. Yes, just comment -- if you could comment on the market.

Well, the White House was in the news this morning for their new task force that's looking at resiliency issues with DoD. And, certainly, we continue to see DoD continue to invest through ESPCs and effectively micro grids for resiliency and cost reductions. I think all large campuses whether they are DoD or not are probably thinking that way. The best thing about these emerging trends is with our client base. Our clients are out there talking to the folks in Hawaii and the US government, and any of the other campuses. And we may not hear about them, but we have complete confidence that when those jobs go to execution time, we're going to be in the mix for financing that. So, I think the kind of the conclusion on micro grids is, if you have increasing -- increasingly violent storms, having onsite generation is the only way you can ensure reliability. So I guess the bad news is, we're going to have worst storms. The good news for Hannon Armstrong is that probably is positive for our future business.

Understood. And then I guess just a question around your comments on capping your leverage really kind of seeing that 2.5 to 1.0 as a cap. Can you just elaborate on that a little bit in the context of how the portfolio is evolving. You called out the increase in non-investment grade exposure and how we kind of square this with the efforts that the Company is making to look at the possibility of corporate debt?

Sure. So, couple of comments on that, Noah. So first of all, we've never really hit the 2.5 to 1.0. We got the 2.4 to 1.0. But we never really hit the 2.5 to 1.0. So that was one comment. The other comment, and especially as you start to think about things like corporate debt and I'll take the transaction that was paid off this quarter, we had $300 million of assets, we had $250 million of debt. So net equity was only $50 million. So that -- when you look at that on a leverage basis, that's pretty highly levered. And if you just -- we're reporting the net equity number, you'd have a much lower leverage and enjoy the same if not a higher return. So, especially when you start to think about rating agencies and things, it makes sense to kind of look at where you're levered and are you levered in the appropriate way, and do the assets be kind of put on the balance sheet at a gross versus the net level.

We'll now take a question from Philip Shen with Roth Capital Partners.

Brendan, congratulations as well. And Jeff, looking forward to working with you. Back to resi solar…

Thanks, likewise.

For a bit. A follow-up to Anya’s [ph] question earlier. Jeff Eckel, I know you had mentioned you guys do not want to become a resi solar finance company, but when you look at these originators SunPower, Vivint, Sunrun, et cetera. They are installing meaningful megawatts every year. Can you maybe give us a little bit more color on what that line might be? I think SunPower might be 300 megawatts this year, Vivint close to 200 megawatts. And I think you mentioned that you are doing business with three resi solar companies, but I believe you may have only announced two, Vivint and SunPower. Is it possible to talk about who that third one might be? Thanks.

Thanks, Phil. On your last point, we always let our clients lead. So whenever that third company chooses to disclose that, that's when it will be public. Let me clarify one of your question, when you said line, what do you mean? Can you give us a view on the line. You talked about SunPower and Vivint, but I'm not sure what you're looking for.

Yes. So, there is a line between being -- not being a resi solar finance company and being one. So how -- what -- is there a metric that you guys -- like at what point do you guys become too resi solar heavy. And so how do you think about where that line might be on whatever metric you guys might use internally?

That's a good question. We clearly do not have a line that is quantitative. I think, we're very comfortable with where we are now. We would probably be hesitant to add significantly more. At the same time, a lot of these transactions ended up in the last third of the year. We don't expect similar volumes in the first third of 2019, instead we'll see volumes in other markets. We talked about wetlands and mitigation, stream restoration. Those are coming on balance sheet we believe in the first-third of the year, C&I solar. So, kind of had a lump of resi solar at the end of the year. And now, it's time for us to add some other asset classes as we always expect to, including PACE assets.

One quick follow-up on resi solar. And forgive me, but I'm just travelling two different earnings calls, and I may have missed this in your prepared remarks. But, I recall the SunStrong initial deal was a 100-plus-million for mezzanine debt and then $10 million for equity. And then, now, you guys are $270 million plus an additional 20 -- $30 million of equity, $270 million mezz debt. So, incrementally, is there $170 million more of the mezz debt and $20 million more of equity? And can you just talk about who this might be with? And apologies if you guys have already addressed this.

Yes. So, Phil, in the call we talked about $300 million. We talked about with three of the top sponsors, and $270 million of it is classified as debt and $30 million is classified as equity. We didn't give more detail, but the fact that the transaction you're referring to is one of the three sponsors, you can imagine that we did two other transactions that gave us the additional volume.

And then lastly, Jeff, you just mentioned C-PACE, can you give us an update on how things stand there? Historically, it's been -- it's still on the horizon. Is there some development to think that maybe in 2019 we could see some degree of acceleration in that end market?

I would say it is still on the horizon, but we are obviously talking about it. We do think 2019 should be a pretty good year for C-PACE and we're very much -- we've been investing in this platform. Those investments we think are starting to turn the corner and pay off. So, again, we'll announce things when they're closed not before, but we continue to think that's a sound market for us to invest in.

We'll now take a question from Christopher Souther from Cowen and Company.

Hey. Welcome Jeff. And congrats on the new role, Brendan. First question, you just said that 60-40 split between securitization and balance sheet transactions, given the industry environment might be something to kind of think of going forward as well. But you also said you expected to hit the midpoint of guidance without kind of an elevated gain on sale. Are those gain on sale return thing pretty consistent? Just kind of curious that if you are keeping the 2020 range for EPS despite kind of the strong 2018 when we get a sense of this is conservatism, potential lumpiness or some other factor.

So, I think to clarify that question a little bit, Chris. We said -- the comment I made was we're going -- thought interest rate expense would decrease by about $8 million, which would allow us to bring down gain on sale somewhat. So I don't think we're talking that gain on sale as disappearing or anything, but it's was $30-some-million last year. So it's going to go down from that number as we put more assets on the balance sheet and recognize more net interest income, or net investment income off of those assets. So I think it's a shifting or a sliding of the gain on sale versus a wholesale change. The other point that you made is, yes, certain transactions are -- like anything else, certain transactions -- the margins move around a little bit. In total, they are relative -- they've been relatively consistent, but they do move around a little bit depending on the transaction that we're securitizing.

But we don't see any particular trend in securitization margins. It's more of the mix in a quarter or in a year. But if you take a much longer view, it's pretty -- pretty much the same.

Okay, that's helpful. And then just kind of a -- to put the $300 million residential solar in context. Do you guys know how much of that was kind of new leases type thing as opposed to ones that were on the balance sheet of kind of these residential partners? Just to kind of get an idea of what the run rate is here, I think, might be helpful.

So I think the SunPower assets were disclosed -- they were the third of assets that we have had for -- roughly a third of the assets we've had for five years that were refinanced and we just entered at a difference point in the capital stack. I don't know that we're prepared to talk about it for the other two providers.

But it’s fair to say two-thirds are relatively new assets.

We'll now take questions from Carter Driscoll with B Riley FBR.

Mr. Herron, who is going to explain HLBV to me anymore? I'm going to have…

I'm still around, Carter. I can still do that service for you.

Thank you. Terrified me there for a moment. No, seriously. So, maybe could you explain maybe with little more color your role. Are you looking at exploring new types of financing alternatives as kind of the composition of your portfolio slightly ships? And would that be with some newer partners? Just trying to get a little bit of additional detail on how your role -- what your role really is moving into.

So, Carter, a couple of things. I mentioned that we've got SunStrong and Hannon Armstrong Sustainable Real Estate. These are platforms that are an evolution of our origination strategy. We've always talked about Johnson Controls having a master purchase agreement that's 20 years old and we just add new pages to it each year. What we're doing with SunStrong, HASIRE, and a few other efforts are significantly more complex. They are effectively joint ventures that are not as simple as adding another addendum to a master purchase agreement. So, in looking at how the business is evolving, it's fantastic to have a great business person on staff who can really step into these ventures as a business person, not just a transactor, not that we don't cherish our transactors, but there is an experience that we need to bring to bear in these joint ventures. Because our clients are big companies and they have a load of staff, we don't. So it's good to have Brendan now able to be our load of staff to match up with our clients. And, as you know, his intellective is more than one persons. So we'll -- just delighted to have him available now with Lipson coming on board. With that, Brendan, do you want to expand on that?

Go ahead Carter.

I was going to say, so -- I mean is it -- it's a deepening of relationships in a different form. Is that the right characterization or --

I think it's part of that. And I think the other two things that we've talked about is -- as kind of goals is how do we capture more of this emerging market opportunity, what is it and how do you capture it and then how do you do it in a more profitable way. So I think those are kind of the three things I'm going to be primarily focused on. How can we continue to grow and capture -- and develop new niches, either through partnerships or otherwise. And how do we do it more profitably and enhance the business further.

If you're successful, is it reasonable to assume a higher level of ROE over time?

Yes, I think so.

I hope so.

Just a quick follow-up. So, in terms of like rate normalization, do you have like a monitor that we could ourselves whether it's a 2 and 10 [ph] or commercial paper and some other long-yielding instruments where you get some level of spread for some duration that would kind of tip the balance more toward on balance sheet versus securitization? I mean, are there effect of number of different metrics you utilize?

Yes. The first thing we do on every management meeting on Monday is look at interest rates, spreads, trends, so on and so forth. And so, one of the things we look at is the 2 and 10 [ph]. We look at the also the three months and the 10. So, if you look at the curve now and we compare it against last week and against last year, and you obviously see, it's very flat and in some places, it's actually inverted. So, we look at that. We obviously would like to see steepening. We pay attention to what the Fed says because they're the ones that determine things but also look at other sources. So, we look at a variety of things, but from a curve flattened standpoint, it's basically a 2, 10 or as I said, a three-month LIBOR to 10.

Perfect. Thank you. Welcome aboard, Jeff. And I appreciate taking all my questions. Thanks guys.

We'll now take a question from David Katter with Baird.

Hi, guys. Thank you for taking the question. Quickly looking on guidance for next year and I don't want to get too ahead of ourselves after a strong quarter. But can you talk about what happens to get you to the low end of guidance and the high end? Is that all volatility in gain on sale income? And then maybe speaking more long term, what can jump-start EPS growth rates in your view? Does it require a steepening in the yield curve or do you have -- what other levers do you have to kind of accelerate growth?

Do you want to…?

Yes. So, I think, this is our last question, Brendan. This is your last. [Multiple speakers]. So, good question, David. I didn't give you a blank look. So, I think, yes, gain on sale obviously has a big impact because that's variable. And I think as we've always talked, we don't control closing. So, it's something slips to the right, especially in a gain on sale has a much bigger impact on EPS than if on-balance sheet transaction slips. I think, we can think we're continuing to do the right things in the business to set the business up for the future and to grow more. We think that we're in this for the long haul. As Jeff said, it's late cycle. So, we don't necessarily -- don't want to be in a situation where feel like we're reaching for things. So, it's a matter of being disciplined and how we approach it. But, we do think that there's lots of exciting opportunities. So we're going to continue that discipline, but also look for places where we can either grow origination or add more assets to the balance sheet or lower our cost of debt. So, I think those three things. We've always talked about how we grow earnings, and growing earnings is new additional assets; it's increasing the net interest income; it's continuing to work on our operating leverage. And we still have I think a lot of ability to increase our finance leverage also. So, we continue to think and focus about those things. And that's how we'll be able to continue to grow earnings above kind of what we said.

And it appears there are no further questions at this time. I'd like to turn the conference back to Mr. Jeff Eckel for any additional or closing remarks.

Thank you. Once again, you asked good questions. We look forward to speaking with you all soon. Over and out.

This concludes today's call. Thank you for your participation. You may now disconnect.