Shares of Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI) are currently trading just above their four-year lows, offering a substantial 5.6% yield. This renewable energy company is one of the most distinctive of its kind, as it has classified itself as a REIT, intending to pay out the majority of its distributable earnings back to shareholders.
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While rising interest rates have applied pressure to its stock price in recent years, Hannon Armstrong has continued to post resilient results, while management is targeting compelling growth rates in the coming years. Therefore, I believe that Hannon Armstrong stock has a chance to rebound notably from its current levels, which, combined with its rather hefty yield, forms a compelling investment case. Accordingly, I am bullish on the stock.
Is Hannon Armstrong Actually a REIT?
Upon closer examination, Hannon Armstrong defies initial expectations of being a conventional REIT. While it may resemble a typical utility company focusing on renewable energy projects, its operations extend far beyond what meets the eye. Instead of actively managing these ventures, Hannon Armstrong adopts an investment approach, effectively positioning itself as an investment company.
However, the intriguing aspect lies in its classification as a Real Estate Investment Trust (REIT) due to the renewable energy assets qualifying as real estate. This strategic move allows Hannon Armstrong to optimize its tax benefits and leverage the unique requirements of REITs. One such advantage is the mandatory payout of a major portion of its earnings as dividends, making it an attractive choice for income-seeking investors.
Hannon Armstrong Renewables Portfolio
Hannon Armstrong boasts a remarkable “real estate” portfolio of renewables valued at an impressive $4.7 billion. Through a meticulous selection of top-tier projects, the company’s projects featured a lengthy weighted average contract life of 17 years at the end of Fiscal 2022 (which must have since adjusted slightly to approximately 16.5 years), coupled with an attractive investment yield of 7.5%.
It is important to highlight again that Hannon Armstrong does not directly own these assets. Instead, the company holds economic interests in the form of preferred equity, debt, and other financial instruments. These investments are typically tied to long-term Power Purchase Agreements (PPAs) with energy off-takers, ensuring the generation of stable cash flows that are subsequently distributed to Hannon Armstrong. This strategic arrangement enables the company to enjoy high predictability in its cash flows.
The company has strategically allocated its investments across three distinct categories, each encompassing a unique facet of the sustainable energy landscape:
Behind-the-Meter Assets
Leading the pack is the Behind-the-Meter segment, which accounts for a substantial 53% of the company’s assets. Within this domain, Hannon Armstrong focuses on harnessing the power of solar energy, electric storage solutions, and various cutting-edge heat and power systems.
Grid-Connected Assets
Comprising 42% of the portfolio, the Grid-Connected category revolves around the development of renewable energy projects that seamlessly integrate with the existing power grid. Think vast solar arrays and sprawling wind farms that efficiently channel nature’s forces.
Sustainable Infrastructure Assets
Last but certainly not least, the Sustainable Infrastructure segment claims the remaining 5% of the portfolio, embracing a forward-thinking approach to resource utilization.
Cash Flow Predictability Drives Robust Multi-Year Targets
As noted, Hannon Armstrong’s portfolio benefits from being able to produce relatively predictable cash flows due to the very long nature of its underlying PPAs attached to the projects. After delivering record financials for Fiscal 2022, Hannon Armstrong kicked off Fiscal 2023 on a high note, with total revenues rising roughly 18% to $69.1 million and distributable earnings per share (DEPS) up by one cent to $0.53.
The outstanding predictability of Hannon Armstrong’s assets was once again emphasized in Q1, reinforcing management’s multi-year guidance that outlines compelling growth prospects. Specifically, Hannon Armstrong projects a robust Compound Annual Growth Rate (CAGR) for DEPS, ranging between 10% and 13% through 2024, building upon the baseline of $1.55 per share established in fiscal 2020.
Moreover, the company anticipates consistent growth in annual dividends, with a CAGR between 5% and 8% during this period. These projections offer a clear and promising glimpse into Hannon Armstrong’s future capital returns. It is probable that the management will release a new multi-year outlook for the upcoming years, considering the current one is nearing completion, moving toward 2024.
The 5.6%-Yielding Dividend is Attractive
The convergence of Hannon Armstrong’s share price decline over the past few years and the company’s commitment to growing its dividend has resulted in a rather attractive yield of about 5.6%.
Considering the prevailing landscape of elevated interest rates, one could argue that investors should anticipate an even more favorable dividend yield from a YieldCo. However, it is worth noting that Hannon Armstrong’s stock decline has already propelled its yield to rather hefty levels, particularly when assessing the prospect of further dividend growth.
Given that management’s guidance intends to have Hannon Armstrong’s dividend grow annually in mid-to-high single digits, I view the stock as an appealing option for individuals seeking to generate a solid and steadily increasing income. Notably, the recent dividend increase of 5.3% in February aligns with management’s guidance. It represented the fifth consecutive annual dividend hike by the REIT.
Is HASI Stock a Buy, According to Analysts?
Regarding Wall Street’s sentiment, Hannon Armstrong features a Moderate Buy consensus rating based on three Buys and two Holds assigned in the past three months. At $38.80, the average Hannon Armstrong stock forecast implies 37.6% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell HASI stock, the most accurate analyst covering the stock (on a one-year timeframe) is Noah Kaye from Oppenheimer. He boasts an average return of 30.36% per rating and a 71% success rate.
The Takeaway
In my view, Hannon Armstrong presents a unique investment opportunity within the renewables space. Despite recent stock price pressure caused by rising interest rates, the company has demonstrated resilience and continues to deliver strong results.
With a robust portfolio of assets and a predictable cash-flow stream, Hannon Armstrong is poised for compelling earnings and dividend growth in the coming years. In fact, the company’s growth targets, coupled with the stock’s substantial 5.6% yield, comprise a unique potential for capital appreciation and income prospects.
