I found Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI) by looking into an ETF for mortgage REITs. I’m looking for interesting mortgage REITs, and the ETF seemed a good starting point. Reviewing its holdings, one jumped out at me. You guessed it; that’s HASI. It jumped out at me because it trades at a massive premium to book value.

Data by YCharts

And it also generated stellar returns in a market that has been very hostile to the (mortgage) REITs:

ChartData by YCharts

So, what’s special about HASI? It turns out, as you probably know, this REIT is focused on providing capital to energy efficiency, renewable energy, and other sustainable infrastructure markets in the United States. Infrastructure is a buzzword for institutional allocators, and renewable is a buzzword to all allocators. I quickly got an idea of why this is a popular vehicle.

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It is displaying impressive growth with GAAP EPS up 44% year over year. Revenue is down 44% year-over-year, so I had some worries about that. The yield is very unimpressive at 2.16% per year, but with this kind of growth and the company clearly expanding, that can be overlooked for now. Few REITs offer a compelling path to much higher distributions through a growth path.

The company is funding a mix of different energy and renewable projects, from energy efficiency measures and solar initiatives to sustainable infrastructure projects. There are more than enough projects to finance. A pipeline of $2 billion+ suggests attractive growth rates for some time in the future.

What worries me slightly is the number of investments and the small average investment of $11 million. Neither do I like the weighted average life of 16 years. REITs’ most important metrics are AFFO or NII. HASI shares a NII metric, which is down quite a bit from a ’19-high but assets under management have increased:

I’m enthusiastic about the company supervising, initiating, and securitizing these projects, and this results in a fee stream, not unlike investment banking/asset management. An attractive capital-light business, especially if some of the smaller projects can become automated. These activities are generally of higher value to the market and justify some of the price-to-NAV multiple here.

ChartData by YCharts

A REIT trading above book value can be a beautiful growth vehicle to ride. The company can issue shares to finance projects. This increases the company’s income streams from these assets and the “investment banking” side. As long as the assets are valued somewhat above net asset value, this powers a virtuous cycle where initial investors are richly rewarded. HASI has been playing that game.

Issuing shares below net asset value has the opposite effect and is a highly dilutive death spiral from which it is hard to recover as a REIT investor.

But this REIT is also exploiting the demand for ESG products with a yield and aggressively pursuing its options in the green bond market and elsewhere. At the same time, I see advertisements for a green bond fund all-the-time online (obviously, because I’ve been profiled as an interested party) but likely also because money is flowing there. In the asset management business, it is much less costly to market the investment products people already desire instead of educating or convincing prospects of what’s good for them.

That’s a topic for another day, but the bottom line is that capital flows towards green bonds and ESG yield products. These fund managers, generally at marketing-driven organizations, need to plow the money into something. The business community is now answering this call en masse. Recently, I’ve even written up a company on the special situations report that’s as far removed from ESG as can be but completely transforming itself. I think management perceives a giant opportunity in green bond financing coupled with an attractive growth market for an end product.

HASI is also very smart about its capital sourcing, as evidenced by these paragraphs from the recent earnings call:

…In addition, our corporate debt is trading below 4% about half the level of the S&P U.S. High-Yield Energy Index. With this attractive capital markets backdrop, we highlight our very successful recent debt issuances on Slide 9. In August, we issued $375 million of 10-year unsecured corporate green bonds at a 3.75% coupon and $144 million of three-year convertible green bonds at a zero percent coupon…

Let’s now turn to Slide 12 where I will highlight notable recent developments on the ESG front. In addition to our recent PCAF membership in green bond issuances, our renewed commitment to racial justice, diversity and inclusion continues. We made meaningful contributions in the third quarter to the NAACP Legal Defense & Education Fund, Campaign Zero and the Baltimore Action Legal Team.

Our diversity equity and inclusion consultant continues to help us develop a multi-year plan for impact on these persistent challenges. In addition, we’re pleased to report that our ESG score was recently upgraded by MSCI by two notches to A. We’ll conclude on Slide 13. The ongoing pandemic and recession has tested the business models of companies across the spectrum and the resilience of our business model has once again proven strong.

We remain poised for growth, with a robust pipeline from leading energy and infrastructure clients and recent strategic investments in people and systems to support our increasing scale. Finally, our ESG leadership is being increasingly recognized by others and we expect that to continue as we ramp up our social initiatives while also leading the industry to report on the carbon intensity and investments. Our investment thesis, earning better risk adjusted returns investing on the right side of the climate change line continues to be proved out.

Furthermore, it doesn’t just pay low-coupons, but the capital structure is quite attractive. Most of the bonds are securitizations that are managed off-balance sheet. The corporate green bonds are converts and senior unsecured. The converts are a relatively recent issuance. These aren’t too attractive to issue if the share price continues to accelerate. They aren’t publicly traded but were issued to a private party. Then there are the sustainable yield bonds, and these are non-recourse, asset-backed, but managed on the balance sheet. These obscure the attractiveness of the company somewhat. It’s amazing to have non-recourse leverage. I don’t like (a part) of the assets of the company anyway.

To me, looking at this company for the first time, this looks like a powerful well-positioned growth engine that’s taking advantage of the playing field as it is.

What worries me is what I suspect is the profile of the assets. Income partially depends on 158k consumers with FICO scores of very good. But a FICO score of very good means consumers are above the lowest 50% of credit scores and below the 25% highest score. You can imagine a recession could still hurt this group. Coincidentally, we are in the middle of a pandemic. The federal government has been taking care of many people, but with the sitting President on the way out, support is too. It may take a while (if it happens) for support to get restored.

Government obligors are generally strong, but that isn’t always the case if these include municipalities. Many are close to bankruptcy. Having corporate counterparties that are IG is preferable to non-IG. However, investment-grade is a term that’s lost some of its luster in recent years. Rating agencies have been very lenient, and corporate debt loads (including at the IG level) have rarely been this elevated. The company also provides under the equity method of investment but generally with a preferred. That caps the upside while it is only slightly better protected to the equity. If there’s a lot of debt on these projects, it isn’t necessarily a great trade-off.

The arguably weak nature of the company’s exposures combined with the fast deteriorating assets (this isn’t real-estate) and the asset base’s dispersed nature has me worried. I’m not too fond of an $11 million average project value (most are likely much smaller as the distribution will be heavily skewed) because if things go wrong, costs to fix will be relatively high and eat into the returns.

I wouldn’t say I like the insider buying/selling profile either. The company insiders are taking a large part of compensation in equity. That’s a positive and a sign they are bullish on prospects. But the agreement is a bit dated, of course.

Data: company proxy filing

This has resulted in quite a bit of equity ownership among execs. The CEO owns ~$60 million worth of shares, for example. The wellbeing of the company will trump his annual takeout; I’m quite sure.

Data: company proxy filing

What I don’t like is the change in insider/buying selling. Over the years, insiders have been aggressive buyers. That changed for the first time in Q3 of 2019 at around $30 per unit:

ChartData by YCharts

At the time, book value per share also stalled briefly. In March’s sell-off, insiders became aggressive buyers. The stock must have fallen over 60%, and in retrospect, it was the opportunity of a lifetime.

ChartData by YCharts

But recently, insiders are heavy sellers. There are suddenly many 10b5-1 plans that are getting triggered, and the CEO sold $7 million worth of shares at $48.63 after being a buyer in March at $20 and in 2019 at $29.

Source: BAMSEC

I think I missed the boat here. It would have been fun to recognize the opportunity earlier and ride the compelling story combined with a premium-to-NAV REIT. I’m confident the company has a great business on the capital raising side (including the attractive fee business), but I’m worried about how the capital is getting deployed. Odds are this company powers onwards and continues to develop a stellar track record. However, given my reservations about said development and the recent insider 180, it’s too risky for my blood. I’ll continue my hunt for an attractive mREIT and hope I come across more interesting and non-standard companies along the way.

I write the Special Situation Report. I look at special situations like spin-offs, share repurchases, rights offerings and a lot of M&A events. The point is to make money with risks under control. Check it out here. Follow me on Twitter here or reach out through email at dehaas.bram@gmail.com.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.