Good afternoon, and welcome to Hannon Armstrong's conference call on its first quarter 2021 financial results. Leadership will be utilizing a slide presentation for this call, which is available now for download on the company's 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. . At this time, I would like to turn the conference call over to Chad Reed, Vice President, Investor Relations and ESG for the company. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and welcome. Earlier this afternoon Hannon Armstrong distributed a press release detailing our first quarter 2021 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 Jeff Eckel, the company's Chairman and CEO; and Jeff Lipson, our CFO and COO. With that, I'd like to turn the call over to Jeff, who will begin on Slide 3. Jeff?

Thank you, Chad, and good afternoon, everyone. Today we are reporting GAAP earnings of $0.61 per share and distributable earnings of $0.43 per share. 38% portfolio growth year-over-year to $2.9 billion and 19% growth in our managed assets to $7.4 billion. The establishment of a $400 million unsecured revolving credit facility, a 10 basis point increase in our portfolio yield to 7.7% from the Q4 levels. And the declaration of a dividend of $0.35 per share. We continue our leadership on ESG reporting with our carbon count disclosures and our 2020 impact reports. Turning to Slide 4. We remain confident in our ability to achieve the 3-year guidance target we established last quarter due to expected portfolio growth, stable or improving margins and improvements in our operating leverage. These 3 factors will be the drivers for growth in distributable earnings per share of 7% to 10% through 2023 and the dividend growth at a rate of 3% to 5% annually, also through 2023. With distributable earnings growing faster than our dividend, we can continue to retain capital for accretive investments and believe the combination of earnings growth and dividend yield remained attractive on a total return basis.

Thanks, Jeff. Turning to Slide 7. We note our high-quality assets continue to perform within our expectations in the first quarter. This performance is driven in part by the structural seniority of our investments and the credit quality of our obligors. In nearly all of our investments we are in a preferred senior or super senior position. In addition, our obligors are typically investment-grade government or corporate entities or creditworthy consumers. The structure of our investments, most notably our structural seniority, has a very meaningful impact in reducing our exposure to both operating and commodity price risk. As we discussed last quarter, this structural seniority was a significant factor in limiting the impact of the Texas weather events on our results. Moving to Slide 8. We detail our balance sheet as of the end of the quarter. In the first quarter, we funded $168 million of investments many of which are ongoing fundings of previously closed transactions. We also executed several securitization transactions, including a low yielding, highly leveraged government transaction, consistent with our past practice of taking transactions with this profile off balance sheet. The net result was a portfolio balance of $2.9 billion, similar to year-end 2020. Our funding expectation of previously announced transactions is shown on the lower left. We expect these incremental fundings, along with the strong pipeline that Jeff referenced earlier, will generate further growth in net investment income. As of the end of the quarter, we have over $200 million of cash on our balance sheet. And subsequent to the quarter, we added substantial incremental liquidity with our revolver, which I will discuss in a moment. Summarizing our results on Slide 9. We recorded distributable earnings per share of $0.43 in the first quarter, roughly flat with the same period last year. Higher revenue…

Thanks. Turning to Slide 13. We highlight publication of our 2020 impact report, which we're proud of, and I really urge you to read it. It's a terrific piece of work. The report features enhanced disclosures and advocates for a common ESG reporting framework that includes standardized reporting on avoided emissions, particularly for financial institutions. We would certainly love for them to embrace the carbon count metric. In addition, yesterday, we announced the Hannon Armstrong Foundation's first grant to establish the Climate Solutions scholarship Program. The program provides financial assistance for high achieving, sustainability focused undergraduate students from underrepresented communities. At launch, the participating schools include Morgan State University, Maryland's largest historically black college and university and Miami University in Oxford, Ohio. The needs-based scholarships will cover the cost for up to 5 students interested in pursuing careers related to climate change and sustainability. We believe this grant serves as an important step forward in our journey to drive meaningful and sustainable impact as well as a potential pipeline of new professionals in the industry. We'll conclude on Slide 14. Our 4 key strengths are the strong programmatic investment platform with the firms who are driving the energy transition to a low-carbon future. We are grateful for the opportunity to support these companies in this effort. Second, our well-diversified funding platform allows us to satisfy our clients' capital requirements, whether the assets are a good fit for our balance sheet or not. This flexibility allows us to solve our customers' financing problem with a full range of behind-the-meter and grid-connected assets these programmatic clients generate. Third, it is terrific to have a policy tailwind for the first time in 4 years. We expect recent and anticipated executive orders on proposed federal legislation to contribute to continued growth in our existing markets and asset classes. As we've shown over the last 4 years, we don't need the tailwind, but if the country is going to meaningfully address climate change, public policy will be a key piece of the solution. As Jeff L showed, we have a proven track record in a variety of interest rate environments over our 8 years as a public company, with consistent growth in distributable earnings, independent of the level of interest rate or the shape of the yield curve. This track record should give investors comfort in how we will manage the business into the future. To sum up, the opportunity for growth has never looked more promising, and we are confident in our ability to execute in the months and years ahead.

. And the first question comes from Noah Kaye with Oppenheimer.

A lot of positive commentary and actual reported results from some of the leading performance contracting companies. It seems like just a having moved past some of the logistics difficulties during the pandemic of doing contracting, we're starting to see improved contracting flow. I just wanted to get your color on whether you're seeing that as well and how you look at the flow in the energy efficiency business over the balance of the year? I know you addressed that, it's a large part of the 12-month pipeline. But just curious for any incremental color you can provide.

Yes. I think -- Noah, I think the comment that our behind-the-meter pipeline, it is dominated by energy efficiency, speaks to that robustness that you're commenting on about the ESCO market. It's a good business, and they're doing a good job. And I think things are starting to move at the federal level, but also state and local level as some -- maybe they've experienced some delays in COVID last year, but things are starting to happen again.

And you've always said that the timing of originations is lumpy. But -- and I think this dovetails off of my previous question, confidence in kind of an increasing pace of originations over the balance of the year?

I think we're quite confident, Noah. What we did in Q1 was about what we did in Q1 last year. And if you look at last year, it ended rather well with high volumes. I don't think anybody should be surprised if the same thing happens this year.

And just one last question. You may have seen that -- and it was actually on Earth Day, we had a lot of announcements on Earth Day, but the European Commission announced that as part of the new climate law package in June, they're going to add buildings to the emissions trading system for carbon. In other words, building decarbonization is going to be properly incentivized. There's always been a U.S.-focused business. Just curious for perspective on that, whether there's potential for similar legislation in the U.S. to benefit, whether or not your ambition might start to stretch overseas as you look at the potential for building carbon pricing to actually impact the bottom line?

Great question, Noah. As you know, we've been big fans of carbon pricing in whatever form it might take and applaud the EU for adding buildings, which is I think 40 -- the build environment is 40% of greenhouse gas emissions or something like that. So if we're actually going to get at it, you should be incentivizing it. I'm not familiar with any comparable legislation in the U.S., but it certainly is a good idea and would provide yet another revenue stream and benefit to the energy services industry.

The next question comes from Ben Kallo with Baird.

Congrats. Maybe, Jeff Lipson, can you just talk a little bit more about interest rates because all of our sector stocks have gotten crushed partly because of interest rates, I think. And maybe just refine or remind, I guess remind us how they impact you and how we think about the yield curve. I know you have this slide here. I know you guys talked about it. But any color you can give there.

Sure, Ben. I think the primary item to consider is, as I said, we have fixed rate assets that are funded by long-term fixed rate liabilities, and we have been extending our liability duration, particularly with a 10-year debt offering we did in 2020. And so we have locked in margins on a large segment of the portfolio. And then, as we go forward and add new investments, our funding costs are available to us at the time of close. So we can look at those and invest -- to maintain our margin. So it's not as if rates moving up, down, steeper, flatter, have this sudden impact on the portfolio. The existing portfolio, margins are pretty much locked in. And the new investments we can lock them in at -- lock in our margins at the time we close. And then I'd add to that, we have our off-balance sheet distribution network as well. And we can lean on that a little heavier, if need be, to take more things off balance sheet if we really had some kind of disconnect between funding costs in our investment markets, but we don't -- we certainly don't expect that.

And Ben, I would add to that, that the -- what we fundamentally look at is the economic rate of return on these assets. And I'm perplexed why a 50 or 100 basis point move in interest rates threatens the viability of those assets. These assets are not so fragile that 50, 100 or 200 basis points is going to kill them. So I think the interest rate --

Well, that was going to be my question. So sorry to interrupt. But what is that kind of threshold that you think about across the different asset classes? I have a bigger picture question for you guys too after that.

Well, I would say, the entire industry, renewable energy industry and energy efficiency industry has operated successfully in higher interest rate environments than now. And they have done it by continually taking costs out of their systems. It's not easy. It's hard work. But I have no doubt they're going to continue to do that. To me, it's perplexing that a couple of hundred basis points rise in market rates, which we haven't seen, but let's say it happens, that the viability of the entire industry goes away. I don't have a precise number to your specific question. I just -- obviously we're not betting against this industry. We think this industry has good ability to prosper in a higher and choppier interest rate environment.

Yes. No, it's good context to remember just the history of that. So thank you. A question that you've gotten forever, maybe on competition, but you're not small anymore. And you raised a lot of capital and you're doing bigger deals. And used to be that you were a player and people didn't want to do small deals like this. But now where do you stand with that competition front? Because every headline is if you want to pour money into the sector here. And so how do you guys stay that same nimble as well as have the growth?

Good question. I mean, we have competition in every market in every asset class. But I still haven't seen anybody who's put their financial services offering together the way we have that can nimbly go with the same team from a grid-connected transaction to a behind-the-meter transaction. And our clients are doing both. You have some companies that are just doing wind and solar, and I'm sure we'll have more competition over time. We need a lot more capital in this industry to make a meaningful difference on climate change. That said, I'm hard-pressed to see where somebody is coming in with a better offering than we have right now. Our cost of capital has come down, our price of capital has come down. I think we're extremely competitive. And then at the end of the day, service does matter, knowledge of the industry matters and our portfolio management business continues to be a very sticky aspect of client management.

Let me ask this way. Who would buy you if they were going to buy you?

No, Ben, I'm not going to answer that.

All right. I had to try, I mean. All right.

The next question comes from Philip Shen with ROTH Capital Partners.

In your prepared remarks, you talked about how the shortages that people are seeing out there, whether they be chip shortages, or what have you, are not impacting your business yet. I was wondering if you might be able to elaborate on that more. As you mentioned, you're getting a lot of inbounds on this. So there is the interest to hear and get more color on this. Specifically, when I've been in touch with EPCs recently, they're saying capacity through the whole kind of system is very tight, whether it be EPC capacity or even truckers in the U.S. that drive blades and get materials from one point to another. So are you getting any sense that some of your investments and the timing that you might have expected earlier might be getting pushed out a little bit into 2022? Any color on this would be very helpful.

Phil, I recently checked with a number of our clients on this very question. And I think one of the themes is prices are going up a little bit, and it's some of the risk of development that they've got, and we don't wear. But they're basically getting the material they need. I won't say it's absolute, and everybody's got everything just in time. But generally that's not the thing that our clients seem to be worrying about. And maybe what they're worrying about are next year's projects, looking at the supply chain for next year's transaction. That may be. But we're not seeing it in the business we think we're going to do in 2021.

Okay. And that was my follow-up on that topic. What are they worrying about? Anything else you have in mind on that topic?

No. I think those are normal things for developers of these assets to worry about. What's the price, and is there a margin in it. And they're generally doing a good job with it. But definitely prices are going up in a variety of -- whether it's labor or steel or copper or chips, obviously.

Yes, Aluminum, et cetera.

Yes.

Okay. Great. Last quarter, you guys talked about it was too early to get a full understanding of the impact of the Texas events on your portfolio. So I was wondering if you could give us an update on the situation, what's the risk, you may have a write-down at some point or pay any kind of settlement for power that wasn't supplied from your facilities. You highlight that 99% of your assets are performing, but wanted to see if you could share some more there.

So there's not too much update from what we said last quarter, Phil, in terms of the overall impact on the portfolio is going to be minor. There's no sort of contingent items still hanging out there. There's various force majeure resolutions going on and payments in cash for power when the power couldn't be provided. But as we said last quarter, the punchline of all that for us is some very minor reductions in the expected lifetime IRR of some of our investments, very, very minor. So that's the impact for us. It really hasn't changed from last quarter.

Okay. So as we look across Texas and ERCOT, how many megawatts of projects are actually behind on payments to you guys? How much is actually late? And if there were late payments, are they already caught up? Or is there any continuation of that potential threat?

There's no late payments to us. Again, we're supplying power. And as we talked about last quarter and some of the developers have talked about, we did have to make certain payments for the days we could not provide power, but nobody is late in a payment to us.

Great. Okay. That's really helpful. And then one last housekeeping question on compensation and benefits. I think it looks like it increased $5 million quarter-over-quarter. What drove this is a onetime thing? Should we be modeling this level going forward?

It was driven by higher headcount. It was driven by a higher percentage of our compensation being paid in cash, which runs through distributable, whereas equity does not. And then there's also a bit of onetime in there as well, which will not recur in the subsequent quarters.

So we should increase -- have an increased net line item, but maybe not as much as $5 million. Is that a fair way of putting it?

That's exactly right.

The next question comes from Stephen Byrd with Morgan Stanley.

Congrats on the scholarship announcement as well. That's fantastic. So a lot's been addressed. I wanted to maybe just focus on energy efficiency a little bit further. Obviously you're bullish on the outlook. I was just curious, given the bid administration's focus on a variety of things, but certainly energy efficiency is on the list. Is that bullishness reflective of sort of what you expect there? Or is it possible we could see a further step change upward in terms of sort of government demand beyond what you're seeing already in your sort of bullish overview of where you see energy efficiency going?

Good question, Stephen. I think we reflect on our pipeline that we're reporting as of 3/31. We didn't factor in a lot of new stuff. The way we build our pipeline, there's got to be a lot of granularity. So it's very doubtful that with a inauguration in January, we would have seen deals happen and go to our pipeline. So I think what we're talking about is just sort of normal course business. We're certainly very encouraged by the type of appointments the administration has made in the appropriate agencies and the experience these people have. They actually know how to turn the dials and push the levers of energy efficiency. So you haven't seen anything go up. But I would also caution again, people always talk about energy efficiency as that low-hanging fruit, and that just means they've never picked grapes on a vine because low-hanging fruit is it takes a long time to engineer these solutions. I think the one thing I would point to is, in our comments, was the industrial sector, which has always been a real challenge for the energy services business to be effective in. But we're starting to see signs that the service providers are offering a really interesting value-add service to industrial customers and corporate customers that hit a lot of their sustainability goals inclusive of on-premise energy efficiency.

That's helpful. Yes, it does seem like -- I mean, it's -- as you say, it's not easy to get these projects done, but the trend does seem to be pretty clear, pretty favorable. That's helpful. We -- I seem to ask you about legislation every quarter. I wanted to kind of focus in a different way. I think we're constructive around the prospects for support for clean energy. One thing I haven't really focused on very much would be just tax rate impacts for you all if we did see a higher corporate tax rate. I wonder if you could just remind us sort of how to think about the impacts to Hannon Armstrong if we did see a higher corporate tax rate.

Well, I guess there's two answers to that. The impact on Hannon Armstrong as an entity and the impact on our outlook for additional projects and investments. So for us, of course, we're a REIT, so we're not a taxpayer. It doesn't affect us. We do have taxable REIT subsidiaries. But we have enough in the way of tax planning strategies. We don't expect our tax rate subsidiaries to be taxpayers for the foreseeable future. So virtually no impact on us. On our investment outlook, it would potentially create more tax equity capacity, which would be certainly positive for the volume of transactions that could get done.

Yes. So that could help. And that's been a limit to some extent, right, is tax equity capacity?

Right. Yes.

The next question comes from Julien Dumoulin-Smith with Bank of America.

So let's -- if I can just go back to -- real quickly, just to understand that. So it sounds like you're fairly immaterial in the quarter itself here. And really, as best I understand your response earlier, obviously, you guys have more of a credit exposure here than necessarily in equity exposure. But how do you think about that as an ongoing exposure? It sounds like whether it is counterparties on projects, otherwise, that seems relatively material as well to the extent to which that not everything is necessarily resolved thus far. Is it fair? I'm trying to rehash a little bit what you said a moment ago here, but I want to make sure I heard that right.

Talking about taxes?

Yes. You're -- Julien, you are breaking up a little bit, but I think we got most of that. So on Texas, again, to reiterate, the ongoing exposure is very limited. Most of these situations have now been settled up. And for us, with very limited impact on our portfolio. There's still, as I mentioned, a few loose ends being tied up on various, to the hedges and arrangements, but it's mostly behind us at this point.

Excellent. I just wanted to make sure I heard that right. And the real question I had for you guys is, how do you think about the scaling and the cadence of the balance sheet through the course of this year? Specifically, obviously quarter-on-quarter here, not too much of a change in the balance sheet. How do you think about what this balance sheet looks like in size and composition by the end of this year, if you can speak to that a little bit more? Obviously, I'm seeing community solar to be a little bit of a step-up here. What is that pie going to look like, if you will?

Well, Julian, of the -- based on the remarks, you would expect to see more grid-connected solar, which is a small slice of the pie. But that's, as I said, one of the largest element in our grid-connected pipeline. Solar land is next, and wind. So I would expect to see more grid-connected solar and perhaps less wind added to the portfolio. The behind-the-meter assets, a lot of those are securitized, probably not added to the portfolio. Some will of course, in the government sector and in the federal and state and local government as well as the solar. In terms of the level, I did say on the last call, just by our growth in the portfolio, over the full year, not the quarter. And I would reiterate that. I think we will have a significantly larger portfolio, and that will be one of the key drivers of our earnings to hit our guidance.

Yes, hence the question just on quarter-over-quarter here. Any sense on securitization percentages since that's one of those transpositions -- how you transpose your growth into the portfolio?

Yes. It remains as unpredictable to you as it is to us. It is when the transactions happen.

Okay. Fair enough. I got you. Best of luck, and congrats again.

The next question comes from Greg Lewis with BTIG.

I wanted to touch a little bit on how the trend is of the ability to recycle cash. And so as we think about the ability for you guys to kind of monetize some of the -- some of your portfolio, is that at all interest rate-sensitive from your customer side?

That all is sort of a tough threshold. I would say it's not particularly sensitive to interest rates. Most of the folks who are the buyers of our off-balance sheet transactions, I wouldn't say they're completely immune from interest rates, but less sensitive than, for instance, capital markets.

And so as we think about where we are today, would you say the appetite is as strong as it was, I don't know, pre-COVID, in terms of those opportunities to lay off existing assets to buyers?

It's extremely strong, as strong as pre-COVID, if not stronger.

Yes, it's been proven.

Yes.

So sure.

And we could even take -- we're off balance sheet, and we would like to maintain, as we spoke about a moment ago, a nice size and growing balance sheet, but we could even -- if we so chose to do so, to take even more off balance sheet. The appetite is quite large.

. The next question comes from Christopher Souther with B. Riley.

Just one quick one. As the grid-connected piece of the pipeline continued to go up, maybe you could just talk a little bit about the timeframe for the projects you're looking at originating there would be for funding. So some of the deals that you closed last year was funding through kind of 2022. Should we expect -- if you're able to close some grid-connected deals this year? Would it be similar over the next year, two years type timeframe we'd be looking at before those would be kind of added to the balance sheet? Just wanted to get a sense of how those opportunities are looking at this point?

It's a good question, Chris, and we may not have all the information yet. But clearly, there's a forward flow element to a lot of the grid-connected transactions we do. There's always going to -- generally going to be an upfront funding of some projects that have commercially matured and then a pipeline of future. How those lay out over the next few quarters, kind of hard for us to say at this point. What we do like is the number of programmatic platforms that we're developing started to create good diversity among the quarters. Not every company is going to hit the same set of projects in any one quarter. So I think we'll start to see perhaps a bit smoother quarter-to-quarter additions to the portfolio.

Got it. No, that's very helpful. And then looking at the various kind of solar pieces within your portfolio and pipeline, just wanted to get a sense of where kind of storage is starting to fit in there as far as -- I imagine, an okay portion of the residential solar is starting to include it, but maybe just kind of walk through where storage is starting to fit within the portfolio, if you could break out a number kind of taking apart the different solar areas that you're kind of looking at between resi, utility and community there.

I think they all have storage. I think community solar is much more site-specific as to whether solar or storage is valued. I know Massachusetts is one market for community solar that puts a price on capacity. And so there's value to add storage. Other markets are less interesting for community solar storage. Resi and C&I generally, we can echo what the sun powers of the world say, but it's -- the uptake is pretty strong.

This concludes our question-and-answer session, which also concludes today's conference call. Thank you for attending today's presentation. You may now disconnect.