Greetings, and welcome to HASI's Fourth Quarter and Full Year 2023 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neha Gaddam, Senior Director, Investor Relations and Corporate Finance.

Thank you, operator. Good afternoon, everyone, and welcome. Earlier this afternoon HASI distributed a press release detailing our fourth quarter and full year 2023 results, a copy of which is available on our website. This conference call is being webcast live on Investor Relations' page of the website, where a replay will be available later today. Some of the comments made in this call are forward-looking statements, which are subject to 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 stated. Today's discussions also include some non-GAAP financial measures. 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 Lipson, the company's President and CEO; Marc Pangburn, CFO; and Susan Nickey, our Chief Client Officer. Susan will be available for the Q&A portion of our presentation. Now, I'd like to turn the call over to Jeff, who will begin on Slide 3. Jeff?

Thank you, Neha and good afternoon, everyone. Thank you for joining the call. 2023 was a record year for HASI, producing outstanding results as our non-cyclical and adaptable business model overcame the challenges presented by disruptive capital markets. We increased our distributable earnings by 7% to $2.23 and increased our net investment income by 21%. We were able to close a record volume of $2.3 billion of new investments at a yield greater than 9%. This volume facilitated a 44% increase in our portfolio, which creates a foundation for continued revenue growth. We also declared a dividend of $0.415 for the quarter, an increase of $0.08 on annualized basis from the prior quarter. Our ability to achieve these results in spite of the 2023 operating backdrop, including volatile interest rates, provides us ongoing confidence that our long term business model driven by our climate, clients, asset strategy is exceedingly resilient and the path forward to achieving our financial and climate goals. Turning to Slide 4. As a reminder, our long term business model is to continue to produce 10% EPS growth, consistent with our first 10 years as a public company. And we have also previously indicated that over the long term, we are targeting a payout ratio of 50%, retaining the remaining 50% of our earnings to re-invest, while shifting to less reliance on equity issuance. Today, we are pleased to announce earnings and dividend guidance over the next three years consistent with our long term business model. Our earnings guidance reflects reacceleration to 8% to 10% compound annual growth through 2026 using a 2023 base year. The midpoint is above our 2023 growth rate, but very slightly below our long term business model due to this period, including significant refinancing activity. However, this difference between the guidance and…

Thank you, Jeff. I'll start on Slide 7. Underpinning the guidance, Jeff discussed is our pipeline of over $5 billion, which is highly diversified across three markets, eight asset classes, over 30 programmatic clients and over 150 unique transactions, a portion of which represent greater than $25 billion of project CapEx from our 10 largest clients. We continue to be excited about growth in all three markets and the growing number of new clients that we can serve. Our pipeline has grown significantly from $3 billion in 2020 to greater than $5 billion in 2024, a reflection of our success and organizational structure that supports programmatic transactions. A unique element of our business is our ability to pivot between asset classes, seeking the most attractive risk adjusted returns and adapting to market conditions. Our annual closings since 2020 confirm the power of a diverse asset strategy as our volumes are consistent while our growth in the underlying end markets are not. We continue to see a vastly expanded opportunity set in front of us, driven by the underlying demand in all of our markets for energy transition assets and services. Moving on to Slide 8. For a full year 2023, we are reporting distributable EPS of $2.23. We closed a record volume of new transactions at $2.3 billion. Year-over-year, our volumes increased 28%, distributable NII increased 21% and gain on sale increased 15%. Notably, our portfolio grew 44% providing a much larger base for long term recurring income. And looking to the top right, this portfolio growth is at higher yields with incremental on balance sheet investments yielding greater than 9%, a material shift up relative to prior years. Continuing to the next slide, we have a track record of stable growth along all notable metrics. Since 2019, we have…

Thanks, Mark. Turning to Slide 13. We summarized a few of our sustainability and impact highlights from 2023, including our alignment with the EU taxonomy and other items related to advocacy, disclosure and philanthropic priorities, as well as summarizing the impact of our investments as measured by our carbon count metric. We'll conclude on Slide 14. As I reflect on my first year as CEO of HASI, I am extremely proud of our many accomplishments in 2023 and I remain confident that our three year business planning process has concluded that all of the components of long term success are in place. As I said on Investor Day back in March, HASI is the preeminent climate pure play with a differentiated strategy that allows investors to access the growth trajectory of the energy transition in a low risk business model. This strategy of focusing on climate positive asset level investing with the leading sponsors and developers continues to be successful and provide ongoing shareholder value. Our business model has proven resilient despite many headwinds, and our new guidance reflects a path forward to consistent profitability and less reliance on capital markets. I thank our dedicated team for their outstanding achievements in 2023 and their enthusiasm and commitment to our future success. Thank you for joining the call. And I'll ask the operator to open the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question is from Brian Lee with Goldman Sachs. Please proceed with your question.

Hey. Good afternoon, everyone. Thanks for taking the questions. Maybe just starting off with the longer term, three year earnings growth outlook. Can you kind of give us a sense, I don't know, if you think about it in that context, but you mentioned how your portfolio yields have moved higher. You gave us an indication of kind of what cost capital is today. Sort of, what are you baking into your sort of medium to longer term, maybe tail end of that forecast in terms of where you think yields kind of settle out? And then, where also you think cost of capital and then, obviously spreads could ultimately sort of settle in that forecast horizon?

So, thanks for the question, Brian. I would say in our base case, we primarily use the forward curve rather than making any of our own predictions related to rates. And from a credit spread perspective, we're using credit spreads on both the investment side and the debt side, fairly similar to where they are today, and projecting that forward. With obviously some range on that as we build out the guidance. And that's in part why guidance has some range to it. But I would say as our general baseline, those are the numbers we're using for rates and credit spreads.

Okay. Fair enough. I guess, my question was more around, it sounds like there's some opportunistic assets, and I know there's been some segment make shifts, namely more FTN versus historical. Is there opportunity in that three year horizon to kind of drive portfolio yields higher and hence earn kind of a higher return spread from that vantage point? I guess, that was sort of the angle I was taking with that question, just giving mix shift and potential for, I guess, refinancing at the same time?

Sure. And I think I did. And I'll just reiterate what I said in my prepared remarks. I think, I did say, there's upside to guidance and it's mostly around debt costs could be lower than we forecasted, especially, if we get that second investment grade rating. Volumes could be higher, particularly, if we go into some new markets that are not necessarily into our base plan, but that we're thinking about. And then, the third one I identified was that the return on the individual investment level could be higher than we forecasted, which I think is the one that's responsive to your question. So, yes, there is an opportunity for yields over the next three years to be a bit wider than we forecasted, and that would be an upside to our guidance.

Okay. Fair enough. And then maybe one more question for me, and I'll pass it along. There's been a lot made in the press about some of the challenges in the residential solar segment in the U.S. and I know you have some unexpected exposure there. Can you remind us kind of -- as you head into '24 where that mix lies in your portfolio? What you're embedding in kind of the near term view as to additional growth there? And then, with some of these publicized bankruptcies and developers having some challenges in the marketplace, how are you sort of navigating that credit risk? What's embedded in kind of your portfolio exposure if you will? Thank you.

Sure. And maybe what I'll do, Brian is, I'll start out and Marc and Susan may add to my answer as well. But I would say as a baseline, first of all, that our resi solar portfolio itself is performing very well and we are at the asset level and the homeowners continue to make payments on their leases. And we are very comfortable with our exposure and it is performing. I will say, obviously, some of the sponsors are going through some challenges, mostly related to cost structure and other business challenges at the corporate level and we've been very supportive working with them. We were very involved with SunPower over the past several weeks, getting various waivers in place, as they reported this morning. And we remain a supportive partner. We do think it will be an ongoing portion of our business, but a relatively modest portion of the business going forward, given some of those challenges. So, I do think we will close certain transactions in 2024 related to resi solar, very similar in risk profile to what we've done in the past. But if there's a bit of a slowdown there, as those companies do some restructuring and different things and maybe see lower demand, that won't have a meaningful impact on our business, and it really won't affect what we've put out there in terms of guidance.

I think, Jeff, you covered that well. Just two additional details. All of our investments, whether it is within resi solar or other asset classes are structured to have some level of replaceability of the operator. And so, that is how -- that is the primary means by which our risk is really isolated at the asset level. The other -- and I think Jeff covered the portfolio exposure already. In terms of the pipeline, it's really just not a material part of our pipeline. As Jeff mentioned, we do anticipate it will continue to be a part of our go-forward business on a new closings basis. But as you look at the expansion and diversification of our business across multiple different asset classes, it has shrunk in terms of its pipeline exposure for us.

Okay. Great. Appreciate all the color. I'll pass it on. Thank you.

Thanks, Brian.

Our next question is from Chris Souther with B. Riley Securities. Please proceed with your question.

Hi, guys. Thanks for taking my questions. Maybe you could just break down some of the assumptions around the growth components here, going from '24 to '26 within the guidance between distributable NII and some of the episodic pieces? I know in the past you've kind of given a little bit more granularity there, but just curious, how we should be thinking about from those two components standpoint.

Sure. Thanks, Chris. So, I think the primary area to focus on when trying to think about our business as either NII or gain on sale as it relates to guidance is that we do not need to see any incremental growth in gain on sale to achieve guidance. But we'll, of course, continue to work to maximize that to the best we can. But it is not baked into guidance.

Got it. That's great to hear. And then maybe just housekeeping. Can you talk about the gap income from equity method of investments there? That was a lot higher than it's ever been. So I'm just kind of curious, if you could walk us through that piece.

Sure. So, the primary driver for that is the HLBV pass through from some of our solar projects, that generally happens at initiation of an investment, primarily related to the tax credits coming through.

Okay. That makes sense. I'll hop in the queue. Thanks, guys.

Thanks, Chris.

Thank you.

Our next question is from Noah Kaye with Oppenheimer & Company. Please proceed with your question.

Thanks for taking the questions. I think, if we had looked back to the start of 2023 and looked to where 2023 ended, we would have been surprised that fuels transport in nature was 30% of the origination mix. Clearly, you're giving some information on the pipeline mix as always, but talk to us about the incremental growers this year. Where are you bullish by asset class? And what if I think back to your Investor Day presentation are some watch items in terms of either new asset classes or maturing asset classes where you expect more participation?

Hey. Thanks, Noah. This is Susan Nickey. As we talked about in our Investor Day presentation, we're very client centric focused, and not only with our existing clients, but as we add new clients and sectors, we look for the leading strategic and industrial companies that will do not only the first transaction, but programmatic repeats of transactions in existing asset classes, but also as they themselves expand into new sectors. I see that's what you see represented as we look going forward, as we look at in the pipeline that follows from a top down approach of looking at where our clients are forecasting their growth and then how we fit into that capital stack in their projects. So, we have a diversified base and are seeing strong demand in energy and as well as fuel as companies and states want to continue to see growth in demand but also in decarbonization.

And I'd add one thing to Susan's answer, and looking at Page 7, you hopefully have the deck with you there. Our cadence is such that we have different leading asset classes in subsequent years, and I actually don't think we ourselves would have necessarily, in your hypothetical -- if we dialed back to the beginning of '23 predicted that FTN would have been 30% community solar 18%, the pace of closings, we obviously know our pipeline very well, but the pace of closings is outside of our control and therefore that short term prediction of what's going to hit in '24 can be a little difficult. But think of our pipeline as more than 2 times what we need to be successful, and therefore it gives us the confidence that enough will hit that we will meet our guidance.

Thanks, Jeff and Susan. This is slightly around clarifying the cadence of distributable EPS. If I look at the dividend guidance for this year of $166 million, if we just took the midpoint of the payout ratio guidance, it would imply distributable EPS for 2024, a fair bit north of the prior midpoint. And so, without putting too much of a fine point on it and understanding EPS could be lumpy. Do we think about a potentially higher growth rate in '24 versus the 8% to 10% based off of your pipeline and funding visibility?

No, I don't think so. It certainly could turn out that way, but that's not the way I would propose you think about it. I do think if we stick somewhere near the midpoint of the guidance over the next three years and have dividend increases that I can't quite, articulate right now publicly, of course, but something in terms of future dividend increases, you would -- the math would be that you would end up in that 60% to 70%, through '24, '25 and '26. So, I think that's the math on how that was built.

Yeah.

You mentioned…

Go ahead, Marc. Sorry.

Sure, no worries. You mentioned midpoint of payout. I would think of it more as a midpoint of EPS with payout fluctuating to achieve the guidelines that Jeff already laid out.

Yeah. That would argue for a little bit higher payout in '24. Last sort of housekeeping questions. It looked like portfolio cash inflows all in were down slightly year-over-year. Primary delta, or one of them, seemed to be collections from the equity method affiliates. So, just trying to understand the timing on that. Is there a catch up in 2024? Any color there would be helpful.

So just as a, for some context, the total portfolio collections was higher and around $500 million. And that is relative to an average portfolio of $5.3 billion, which is roughly a 10% cash yield and that has been somewhat consistent over time. The two primary drivers that you mentioned is we've discussed before new transaction -- for new transactions, the cash by expectation during the tax equity window is a little bit lower and then it flips to be higher thereafter and given the substantial growth in the portfolio that dynamics on display here. The other dynamic which we've actually talked about a few times throughout the course of the year and you might have seen in some other asset owners is wind performance. So, in 2023 wind we've seen poor wind performance. It was a P99 year which means we would not expect it to continue and additionally given our preference, we expect it's as you already identified a delay of distributions and not a loss. So, yes we do see line of sight into those -- into those starting to catch up and we've already reflected any updates into our guidance and portfolio yield.

Very helpful. I'm sorry. Go ahead, Jeff.

Sorry. I just want to make sure we're not talking past each other on guidance and there's good understanding. So, to get more specific on your math question a moment ago, if we hit the midpoint of our guidance in 2024, that would be 9% growth, which would be $2.43. If I divide the $1.66 dividend by $2.43, I get 68%, which is right in that 60% to 70% range. So, hopefully that holds together. I just want to make sure we're not talking past each other.

Yeah. Absolutely. It's at the higher end of the payout, but that makes perfect sense. Thanks, Jeff.

Okay.

Our next question is from Davis Sunderland with Baird. Please proceed with your question.

Hey, guys. Thanks for taking my question. Brian, I know, kind of already asked in a different roundabout way. So, I don't mean to beat a dead horse here, but I guess maybe asking from the perspective of willingness to assume risk or risk appetite, Has the higher rate environment had any impact on appetite for risk in any particular asset class? And I guess just asking a bit more about maybe have yields become too attractive to ignore for anyone in particular or any details that would be helpful?

I think as a general matter, we've not changed our risk appetite. I think our underwriting has been very consistent. I think the higher yields, as I think we said in the prepared remarks, are mostly the market adapting to higher rates, some economics at the project level, some credit spread dynamics in the market. But I think we've fundamentally kept a very stable risk profile that we're very comfortable with and results in an enormous amount of opportunity. So we haven't really felt the need to change the risk profile. We found these higher yielding investments and this ongoing margin expansion available to us without changing our risk parameters.

Perfect. That's all from me. Thanks, guys.

Thank you.

Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference call. You may disconnect your lines and have a wonderful day

Thank you.