Greetings, and welcome to Hannon Armstrong First Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Neha Gaddam, Senior Director, Investor Relations & Capital Market. Thank you, and over to you. Thank you.

-- on our website. This conference call is being webcast live on 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 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 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 company does not undertake any responsibility to update any forward-looking statements based on new circumstances or revised expectations. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core financial results and guidance. 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 Eckel, who will begin on slide three. Jeff?

Thank you, Neha, and welcome to the Investor Relations role, and good afternoon, everyone. Today, we're pleased to report continued strong performance in the first quarter, with distributable earnings of $0.52 per share, a 21% increase over last year, continued growth in net investment income, up 41% from last year and up 10% from Q4 2021, also a dividend of $0.375 per share. Strong NII growth contributed to this strong quarter and sets us up for a strong year. With our gain on sale revenue added to NII, we demonstrate again that the HASI dual revenue business model, built on a diverse set of clients, technologies and assets, continues to work well, despite macroeconomic and industry challenges. As such, we're pleased to reaffirm our prior guidance for annual growth in distributable EPS of 10% to 13% through 2024 and 5% to 8% annual growth in our dividend for the same period. As we do every quarter, this quarter, we highlight a carbon count of some projects, in this case, two California-based solar investments, one grid connected at a 0.8 carbon count and one behind-the-meter at 0.2. With the same grid emissions profile, the difference in the carbon count is the relative cost per KW, with the grid-connected solar cost three to four times lower than the behind-the-meter transaction. Now of course, there are other advantages to behind-the-meter solar plus storage assets such as reliability, but we believe measuring and reporting with this level of rigor on carbon count is where the market needs to go. Turning to Slide 4. We'd like to discuss some of the headline challenges that are top of mind of our investors. First, as we mentioned last quarter, the clean energy industry is continuing to adapt to inflation by raising PPA prices. Our clients in both…

Thanks, Jeff. Summarizing our first quarter results on slide 6. We recorded distributable earnings per share of $0.52 and had a strong quarter of distributable net investment income of over $42 million and recorded gain on sale of approximately $22 million. On a year-over-year basis, we continue to demonstrate substantial growth in our distributable net investment income and steady realization of gain on sale fees as our dual revenue model continues to bolster our distributable EPS. In the upper right, we note distributable EPS year-over-year growth was 21%, resulting from growth in both equity method investment income and interest revenue. In addition, as shown on the lower right, our gain on sale from securitized assets for the first quarter was $22 million, representing an 8% increase year-over-year. Lastly, distributable net investment income was over $42 million in the first quarter, reflecting year-over-year growth of 41%, driven by a larger portfolio and ongoing strong margins. Our net investment income is expected to grow each quarter as we add assets to the balance sheet, providing ongoing stability and visibility into our future earnings growth. Therefore, we are affirming our guidance of 10% to 13% and compound annual growth in distributable EPS through 2024. Turning to slide 7. We detail our $3.7 billion balance sheet portfolio as of the first quarter of 2022, which has grown 28% from $2.9 billion over the last year. Our portfolio now includes over 320 investments across eight asset classes with a weighted average life of 18 years. With no asset class comprising more than 30% of the portfolio, the diversity of our business remains a strength, particularly in a period in which certain asset classes are more impacted by the aforementioned macroeconomic trends. Our forward-looking portfolio yield at quarter end was 7.3%, down from 7.5% at year-end.…

Thanks, Jeff. Great job. Turning to slide 11. We continued efforts to improve the carbon count methodology, and we're pleased to be recognized by Fast Company for our innovations in Climate Solutions investing. On the social front, our foundation advanced several Climate Justice Initiatives, including efficiency upgrades for nonprofits, advancing our Climate Corps fellow program, funding of resilient hubs in Baltimore and supporting an online climate education library. Finally, we encourage you to take a deep dive into our 2021 impact report, which includes many new disclosures and details on the progress of our various ESG initiatives, is now posted on our website along with our new and improved proxy. We'll conclude on slide 12. There are three reasons we think this is a fantastic business. First, over our nine years as a public company, we've demonstrated that our dual revenue business model continues to grow earnings in a variety of macro environments, and we're well positioned to continue that growth in the future. Second, our commitment and credibility in ESG attracts and retains the best talent committed to making a positive impact, leading to high employee retention, which in turn, improves our operating leverage and our ability to solve client problems, a direct benefit to shareholders. Finally, our pipeline of Climate Solutions investment opportunities is large and growing. The growth is driven by the twin priorities of addressing climate change while improving our national energy security, an enormous addressable market for years to come. With that, I'll ask the operator to open the line for questions

Thank you. At this time, we will be conducting a question-and-answer session. The first question comes from the line of Mark Strouse with JPMorgan.

Yes, good afternoon. Thank you very much for taking our questions. Just wanted to go back to your comments about the yield coming down a little bit. Kind of what drives that? How do we reconcile that with just kind of generally increasing PPA rates across the space? And then how should we think about that over the near future?

Take it, Jeff.

Sure. So thanks for the question, Mark. We tried to highlight it was a little bit different dynamic this quarter. It wasn't a function of new assets coming on the balance sheet. It was strictly a function of the congestion in SPP causing us to lower the IRRs on a couple of investments, and that served to reduce the overall portfolio yield. But I think the trend long-term should be that these higher PPA prices and higher interest rate environments should gradually result in a higher yield over time. It was a unique dynamic this quarter that we wanted to highlight.

Okay. And then the comments about participating in the common equity investments -- can you go into more detail there? Is that kind of across your portfolio? Is that in one particular sub-segments? And does that require any kind of change to your – your existing partnership models that have been existing for many years now?

So Mark, over the years, we – when we went public, we explicitly said that we would invest in the common equity in these assets. Over the years, we've not exactly found those returns to be all that compelling. Thus, we structured things more as a preferred. If you can't get the return, don't take the risk. And that's been our philosophy. But now we see the potential with $5 and $6 gas persistent in our view for quite a while as presenting some opportunities. But the fundamental principle is we don't want to make any investment, where we don't get paid for the risk, but we're not unwilling to take risk if we feel we're going to get paid for it.

Okay.

And we don't have to make any other changes in our business model or anything. We actually have equity and pure equity and some things relatively small, but it's not any kind of a change to the business.

Yes, okay. Very helpful. Thank you.

Thank you.

Thank you. The next question comes from the line of Chris Souther with B. Riley. Please go ahead.

Hi guys. Thanks for taking my question here. I just wanted to talk a little bit about transactions in the quarter and then movements within the pipeline. Could you talk about the end markets for this quarter based on the balance sheet growth and capital issues mostly behind the meter stuff that you'd be securitizing, I wanted to see if there were any other segments that weren't captured there. And then it's kind of a shift in the pipeline, reflecting any challenges you're seeing on the utility grid side at all?

So we highlighted in the carbon count section two solar projects, one behind the meter, and one grid-connected. So there clearly were solar projects. We didn't call out any other projects this quarter. And you said the shift in the pipeline, I don't really see where our pipeline shifted that much. We did talk about the impact on solar as being something we might see in six to nine months, but that it would be manageable, some deals happen --- has happened every quarter, move out in time, there's nothing -- no real big change in the pipeline. Jeff, anything you'd add to that?

No, I think you’ve covered it.

Okay. And then looking at, I guess, the elevated receivables held-for-sale that kind of indication that securitization is something that we should be expecting a larger number in the next quarter. I don't think I've seen you guys break out a number that since you started breaking that out. So I'm just kind of curious if you could talk about that at all?

Sure. So Chris, I wouldn't read anything in particular into that. It just means we had some assets on the balance sheet at quarter end that we intend to securitize; sometimes the timing is such where we close in one quarter and securitize in the next. And in those instances, we do have the held-for-sale bucket a little higher. And in other quarters, we essentially securitize everything we intend to and held-for-sale is virtually zero. So as sort of a business model or a trend issue, I would not read anything into that.

Okay. Appreciate. Thanks guys.

Thank you.

Thank you. The next question comes from the line of Ben Kallo with Baird. Please go ahead.

Hi, good evening guys. Could you talk about electricity prices and PPAs? And just how quickly it flows through on both the utility side and then on the residential side? And then also, does it open up other -- what other opportunities does it open up because of higher electricity prices being other asset classes out there that you typically haven't played in? And I'll leave it there. Thank you.

Thanks, Ben. I think there are two kinds of developments. Those that have revenue contracts that can't be changed and that lead to a small or even negative development fee for the sponsors. Those are tough, but those are tremendous wake-up calls to the sponsors that the next deal needs to be priced better. So I think it's been a rather instantaneous well, as soon as you figure out you have a negative development fee, you figure out that's not very fun and your next deal will better be better. And I think that -- we're seeing that with distributed solar. We're seeing it with grid-connected solar and some contracts are getting renegotiated and modified. So I don't see this as a particularly long lead time item kind of the industry doesn't have a whole lot of choice but to do it. With respect to higher utility prices, it's a great question. We're certainly seeing an uptick in efficiency interest. And it's -- the economics were in the money before, now they're even more in the money. But you always have a kind of a hedge in energy efficiency where you've smoothed out the cost of your electricity and now people are realizing that the natural gas portion of that price is going up and even the demand charges are going up, way better to conserve. So I don't know that's going to take us into new and exotic technologies, but more of what we've been doing would be terrific.

Thank you.

It won't take us to exotic technologies, guarantee that.

Thank you. The next question comes from the line of Julien Smith with Bank of America. Please go ahead.

Hi, guys. This is Anya stepping in for Julien. So first off, I just wanted to ask on the portfolio, just following up on that. Portfolio increased from $3.6 billion to $3.7 billion this quarter. And I know you mentioned that the yield declined largely due to that transmission congestion and basis risk. But are there any other moving pieces there? Just curious on those new additions to the portfolio, what kind of impact did those have on the yield? And are you seeing yields relatively flat as you just discussed based on PPA prices going up? Maybe could you just talk a little bit about that? Thanks.

Sure, Anya. So -- as we noted, we added $160 million to the portfolio in the quarter, and the portfolio is $3.7 billion. So I think the new additions themselves had virtually no impact on the overall portfolio yield, just given the math there. I think as a general trend, as we mentioned earlier, as part of PPAs rising inflation, interest rates, we're certainly looking to achieve a higher yield on the portfolio as a trend than we had previously, and we're optimistic about that trend.

Okay. Great. And as a follow-up, could you maybe discuss the progress on the Clearway co investments. What are the risks of development delays – on development delays on that investment at this point? Any color you could provide on procurement efforts on their side will be helpful. And what do you kind of look like on the high…

I'm not sure we can provide any color. They're working hard at it, and it's a great group that will get those projects developed. I'm sure they've got 1 million headaches that we frankly don't know about and that they're managing. But every bit is incentivized as anybody in the transaction to get it done. So no real color Anya.

Okay. Thanks. Could you also actually provide more information on the energy efficiency opportunity, you just mentioned right now. Have you seen a pickup in interest already at this point? And just how are you looking at that right now, just given the dynamics in the market today?

Maybe this is me being optimistic. But I can't believe this increase in utility rates and gas prices doesn't lead to an increase in efficiency. I may have spoken a little more optimistically. It absolutely should on you, as it -- we’ll see.

Great. Thank you. I'll jump back in the queue.

Thank you

Thank you. The next question comes from the line of Noah Kaye with Oppenheimer. Please, go ahead.

Good afternoon. Thanks for taking the questions. First one, around transmission bottlenecks and potential opportunity. When we look at the report that Lawrence Berkeley put out at the end of 2021, I think it showed over a terawatt of solar storage, et cetera, in the interconnection queue. And even if we assume only 15%, 20% of those products get built, it seems like the transmission issues will get worse, and that may be a solvable problem and something that you can participate in. So, can you talk a little bit about opportunities that you may have on the transmission side or in supporting sustainable infrastructure, or generally, how you think about these congestion issues affecting your opportunity set?

I would say, Noah, that our clients are working very hard to produce transmission solutions, but that's never been a short-term business, never a short-term fix. We are seeing them add storage or add solar to wind to try to offset some of the impacts. I don't -- it's not a quick fix. Some of the utilities are working on it. Their incentives may be a little out of alignment with ours, but it's absolutely got to get fixed.

Okay. And I think --

I don’t know if you’re asking the real fix for it, though.

All right. Well, to be continued. But I think a couple of folks have been asking this question in a couple of different ways, but I just want to see if we can take a shot at it, where in the markets do you see the higher energy prices, most clearly accelerating the sales cycle. And I wonder if you could touch specifically on the types of projects that historically have had long development cycles like the P3 investments.

I'm not sure that we would be able to speak to sales cycles by asset class. But anybody who's opened up to electric bill has said, "Dang, this is higher than I thought it was". And particularly with the additions of the rate base that have been added by most utilities and it's not an easy number to take in a monthly bill. So what we see primarily Noah, are the economics are even better for residential solar, for C&I solar with storage for energy efficiency. And that, typically, we're all economic animals, and that should provoke more business. But we really couldn't say which asset class might be moving the fastest.

Appreciate it. Thank you.

Thank you.

Thanks.

Thank you. The next question comes from the line of Nate Crossett with Berenberg. Please, go ahead.

Hey. Good evening. Couple of questions. First one, just on competition, just with rates rising, have you seen any change in the players that you normally compete against in terms of just their ability to compete for deals with higher funding costs? And then maybe you can just, kind of, go through your funding needs for the rest of the year? It sounds like the pipeline continues to be pretty strong. So how should we think about funding that? And it looks like you just recently did that green exchange senior note deals, should we expect to see similar things like that?

So on competition, I don't think we've seen too much change, most of the new entrants really are not investing in the asset level, they're actually investing in at the sponsor level and new sponsors, particularly to create development platforms. That's not an area where we want to be. We like to fund our clients and not create competitors to our clients. But there's always a new entrant every quarter we've not seen before, and then somebody exits, but it's not a significant change in the competitive profile.

And on the funding platform, we'll continue to use the diverse sources of capital in our arsenal that we've developed. As we've noted, we have substantial dry powder on the credit facility. We'll probably lean on that a little bit. If we're successful converting on a significant amount of the pipeline. You should expect us to do a term debt deal at some point this year and will be a relatively consistent issuer on our ATM as well, and we'll also continue to actively securitize certain assets. So the core diverse funding strategy that we've used historically, probably all those sources will get tapped this year.

Okay. And just maybe one on the portfolio yield of 7.3, like are you guys articulating that, that's the lowest we would see this year, or I guess, how do you see that trending? I know you had some longer term comments, but is this like a bottom tick quarter in that sense?

We're not saying that specifically. I think what we really wanted to highlight was it was not new investments that cost portfolio yield to tick down in the quarter and we just wanted to make that point. It's not necessarily a low point for the year. There's a lot of dynamics there, for instance, securitization activity and taking things off balance sheet. Clearly, itself impacts portfolio yield, which transactions -- which investments pay off a little bit faster than others affect portfolio yield. So there's a lot of dynamics in that number. So we're not prepared to say specifically, this is the low point of the year.

Okay. I’ll leave it there. Thank you.

Thank you. As there are no further questions, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.