Steven Chuslo - General Counsel Hannon Armstrong Jeff Eckel - President and CEO Brendan Herron - CFO.

Joe Houck - Wells Fargo Taylor Frank - Robert W. Baird.

Good afternoon and welcome to Hannon Armstrong 2014 Third Quarter Earnings Conference Call.

Management will be utilizing a slide presentation for this call which will be available for download on Hannon Armstrong's Investor Relations Page at investor.hannonarmstrong.com Today's call is being recorded and we've allocated one hour for prepared remarks and Q&A. all participants will be a listen-only mode.

(Operator Instructions) At this time, I would like to turn the conference over to Mr. Steven Chuslo, General Counsel at Hannon Armstrong. Please go ahead sir..

Thank you, Operator. Good afternoon everyone. By now you should have received a copy of the earnings release for the company’s third quarter 2014 results. If not, the copy is available on our Web site www.hannonarmstrong.com.

On the call today we will start out with the operating business review from Jeff Eckel our President and CEO followed by Brendan Herron our CFO who will review our third quarter 2014 financial results. As a reminder a replay of this call will be available later today on the Investor Relations Page of our Web site.

Before we begin, I would like to remind you that some of the comments made on today’s 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.

With that I would like to turn the call over to Jeff Eckel, President and CEO of Hannon Armstrong. Jeff..

Thanks Steve. Good afternoon everyone and thank you for listening to our Q3 earnings call. Today we are announcing core earnings of $4.9 million or $0.22 per share in line with the $0.22 dividend we announced in September. We remain on track to grow core earnings by the previously indicated 13% to 15% by Q4 of 2014.

We have singled our intent to grow the dividend as well with the Q4 target of $0.26 per share. You may note that we paid more in dividends year-to-date in core earnings which is a function of rounding the whole cents rather than a plan to payout more than we earn and we expect to make up any difference in future quarters.

Execution highlights from the quarter include a 175 million of transactions closed, three quarters of which were energy efficiency transactions. Being mandated on the $144 million ten wind project portfolio from JP Morgan, this was closed subsequent to the quarter end and was partially funded with a 115 million of non-recourse fixed rate debt.

We ended the quarter with 31% of fixed rate debt increasing it to 50% fixed with a wind transaction in October. This is right in the middle of our fixed rate target of 40% to 60% and increased our overall leverage to 1.9:1. We also successfully completed a capital raise in October, raising approximately $59 million.

Turning to our Page 4 and consistent with last quarter we provide more detail on the mix of closed transactions the yield of our on balance sheet portfolio and our pipeline mix. Starting with the chart on the top left, we've closed $1.1 billion of transactions since the IPO.

The majority 56% were energy efficiency transactions which are generally with Federal State and local governments and institutions. These are more likely to be the longest tenure highest credit quality and lowest yielding transactions we do and thus are good candidates for fee generating securitizations and ABS transactions.

41% of the transactions were renewable energy such as solar and wind. As we've noted in the past we increasingly find these renewable energy transactions to be distributed energy assets those that are closer to the customer meter relatively higher yielding and having shorter tenures than the energy efficiency transactions.

Moving to the chart on the top right, you'll notice that our on balance sheet portfolio is 57% renewable energy assets with an average asset yield of 6.2%. 30% of the portfolio are energy efficiency assets which yield approximately 4.8%. Blending the portfolio together as of September 30, we have an average yield of approximately 5.8%.

As we've discussed in prior calls we continue to see a wide variety of investment opportunities which allow us to pursue the best risk adjusted yields. Our ability to invest in multiple asset classes is a real strength in our business model.

We think the recent wind transaction is a great example of Hannon Armstrong's nimbleness and adjusting to changing market conditions and our ability to capitalize on opportunities. Our pipeline charted at the bottom of Page 4 remains greater than 2 billion and provides good visibility on future transaction volumes.

Turning to Page 5, we again profiled two Q3 investments in order to increase investor understanding of our investments and the growth potential in the various markets in which we transact.

On the left there is a picture of a VA Hospital in California where we financed a $7.7 million chiller and lighting upgrade for Energy Systems Group or ESG as they're known in the market. ESG is owned by Vectron an A minus rated Midwestern utility. We are delighted to call ESG a client and look forward to doing more business with them.

On the right is a land acquisition for 60 megawatt solar farm owned by First Solar this is the first follow on transaction from our Q2 acquisition of the portfolio of land underlying solar and wind projects. Again we expect more of this business in future quarters as well.

Turning to page six, we summarize our $144 million portfolio of 10 operating wind projects in five states. These are all seasoned wind projects with no debt.

We are invested in the senior swipes of capital meaning we along with some other large institution investors received the lion share of the cash flow after operating expenses until we reach our target yield. We acquired the interest from J.P. Morgan but J.P.

Morgan is still in the investment allowing us to partner with one of the largest equity investors in the wind asset class. Most of the power contracted with investment grade rated obligors over 75% in the next three years.

The way these projects work the owner operators do not significantly participate in the cash flows until the institutional investors including ourselves achieve our preferred yield, this mechanism serves to largely mitigate operating risk and merchant power risk.

Another positive feature of this investment is the quality of the owner operators, EDP renewable, [Envergy], E.on and EDF Energy among the top wind operators in the world.

Finally, we were able to lever this investment 4:1 at a fixed rate of interest both features which contribute to our goals of increasing leverage up to approximately 2:1 and fixing out 40% to 60% of our debt. Since this transaction we’ve identified several additional follow on opportunities.

Now I will turn it over to Brendan to detail our financial performance and credit quality..

Thanks Jeff. Turning to the Q3 results. We generated $8.2 million in investment revenue in Q3, an increase of approximately 1.4 million from Q2 in large part due to a full quarter of the land investment acquisition.

The increase in investment revenue was offset by higher interest expense as we increased our credit facility volumes by $46 million in Q3 and thus net investment revenue grew by 1.2 million in the quarter. We ended the quarter with 1.4:1 leverage and 31% fixed rate debt.

As Jeff mentioned, following quarter end, we entered into a $115 million non-recourse fixed rate debt transaction which increased leverage to approximately 1.9:1 and 50% fixed rate. We also realized 3.5 million of other investment revenue in the quarter.

As we discussed last quarter we’ve expected our other investment revenue to revert back towards the normal target of offsetting our other expenses core as they did this quarter. Our total revenue net of investment interest expense was 7.8 million in Q3, an increase from 7.6 million in Q2.

Other expenses core were flat at 2.9 million versus our target of approximately $3 million a quarter. Core earnings rose to 4.9 million compared to 4.7 million last quarter. EPS was flat at $0.22 per share as a result of the decline in other investment revenue.

In regard to the wind investment Jeff discussed earlier we will count to that investment in GAAP as an equity method investment using hypothetical liquidation at book value or HLBV accounting.

Under the structure of the transaction we are allocated a large percentage of the cash flow but only a small amount of the book earnings and thus our GAAP accounts will reflect only a small amount of earnings which will be reported at the bottom of the income statement as an investment and equity method affiliate.

We evaluated and negotiated this transaction on a discounted cash flow basis and thus we will adjust core earnings to reflect the effective yield being realized on the transaction similar to how we account for our financing receivables.

While we don’t provide details on individual projects this transaction was priced with a yield that is several 100 basis points above our present renewable energy yields. In both GAAP and core the debt will be reflected as interest expense with no adjustments.

Turning to Page 8, one of the things that makes our business unique is our focus on the diversified portfolio of high credit quality assets. Our portfolio continues to be 97% investment grade rated at September 30th.

This consist of 46% of our assets from government obligors and 51% commercial transactions with only 3% of our assets of $15 million not considered investment grade with the largest of these assets being a $14 million senior debt investment went in operating wind project owned by NRG.

Turning to page nine, we’ve had a number of questions about how do we think about our capitalization structure. Given continued low short-term rates we’re looking to balance the impact on short-term earnings with the risk mitigation associated with locking in longer term rates.

As discussed our plan has been to use asset back transactions like the one we did in December 2013 to lock in fixed rates on the portion of the portfolio. We completed another one of these transactions in October as part of the wind deal. This enabled us to achieve 50-50 fixed to floating debt ratio versus our target of 40% to 60%.

We will continue to look to complete additional fixed rate debt transactions and continue to work on those being publicly rated. It is likely that we use a ladder approach to this debt and have multiple maturities. We continue to focus on increasing our leverage up to the target of 2:1 and had achieved 1.9:1 with the wind transaction.

Given the timing with year-end we believe it was important to have capital to use on our pipeline and thus we completed the approximate of $59 million capital raise in October. This was approximately six months from our last raise and near the midpoint of our five month to eight month guidance.

With the shelf now in place we'll likely look at having a small ATM early next year to balance out any short term needs. We continue to look at how to best optimize our leverage and capital raises with the next raise expected to be sometime in the first half of next year.

We're presently yielding approximately 6.2%, we target to raise our dividend once per year. Based on the completion of the wind transaction in our outlook for next year, we announced we expected to grow the dividend to $0.26 per share beginning in December. This equates to an 18% increase or a 7.4% yield on our current stock price.

Our target for EPS growth remains 13% to 15% Q4 2013 to Q4 2014 and we would expect to give 2015 guidance on the next earnings call. Turning to Slide 10, there are a number of macroeconomic issues that investors are looking to address. And we wanted to try to place Hannon Armstrong in context of these issues.

First there is a lot of discussion about interest rates which is a matter we continually focus on. We've worked hard to reduce our interest rate risk with our 50% fixed rate debt and our proprietary origination model allows us to originate new assets at current market rates in a rising environment.

And we continue to be able to originate high quality risk adjusted yields in the low interest rate environment. Another point of discussion is international exposure or exposure to slowing economy.

Our portfolio is a 100% North American and we are not exposed to private equity backed leverage loans like BEC or commercial real-estate risk like a mortgage REIT. Instead we focus on high credit quality obligors as seen by our 97% investment grade portfolio.

We believe that investors will become increasingly concerned about the concentrated asset base of the yield [cost] and have worked to have a broadly diversified portfolio of over 60 projects with an average investment of approximately $12 million after factoring in the ten wind projects.

Similarly, we focus on being fully contracted with fixed priced power purchase agreements or in having investment structures that mitigate merchant power risk. Finally, we enjoy a widely diversified group of investors which we believe helps to lower our correlation. Investors get all of this with the yield in excess of 7%.

I will now turn it back to Jeff, who'll wrap up the presentation..

Thanks Brendan. Once again thanks to the Hannon Armstrong team for executing on our plan in Q3. Our priorities for 2014 includes capitalizing on the high growth distributed energy asset market and thus further optimizing our pipeline.

Continuing to increase leverage and fixed out interest rates, growing earnings per share in the 13% to 15% range which with that growth when combined with our dividend should provide investors with a 20% total return and growing our assets to approximately $1 billion.

We appreciate you listening to our Q3 update and we'll now open the call up for a few questions..

Thank you. At this time we will conduct a question and answer session. (Operator Instructions) Our first question comes from Joe Houck with Wells Fargo. Please proceed with your question..

Good morning and congratulation on good quarter guys.

The question is related to the new wind project investment which is in equity state, can you talk about both the accounting treatment I think you guys are using the equity method and then also the tax treatment of that investment I think it's in the TRS if you could confirm that?.

Sure, so yes, we put most of our renewable energy investments in our taxable REIT subsidiary and given the leverage that it has on it, it was the $144 million investment a $115 million debt on it so the net impact on the TRS is relatively small.

As far as how we'll account for, and try to explain a little bit on the call the transaction is structured so that it throws off a lot of cash to us, but we don't get throwing off a lot of the book earnings that come from the projects.

And so what that does it means it will have very little impact on our GAAP earnings, but the way we structured the deal and priced it, we looked at it in a net present value of cash flow basis using a discount rate on effective yield and that's what we'll be recording as we report in course so we'll adjust for that between the GAAP and the core numbers.

As I mentioned on the call, the rate is at the high end of what we see in our clean energy portfolio couple of hundred basis points higher than the numbers Jeff talked about as our average portfolio..

And will that create over time a deferred tax asset/liability depending on adjustments?.

One of the other things that comes with the transaction is there is some tax attributes that we’ll get allocated to as far as the transaction but yes there will be a deferred tax adjustment that comes through as part of the transaction.

Basically, as I think we’ve talked in the past we structure the TRS to basically be a mini yield co and in doing so we always seek to have enough tax attributes so the TRS is not a tax payer. And so we’d expect that this transaction actually helps further that goal. So we don’t expect to actually pay any tax out of the adjustment..

Okay, thanks Brendan appreciate it..

Thank you. Our next question comes from Ben Kallo with Robert W. Baird. Please proceed with your question..

This is Taylor Frank on for Ben. I was wondering if you could just touch on the overarching strategy. It looks like you guys are shifting more into investing both into land and then distributed generation projects.

How do you guys see that in terms of your pipeline going forward and what should we expect as you look out over the next year or so?.

Thanks Taylor. I think the overall message on the pipeline is that it is largely energy efficiency and of the renewable energy it’s largely distributed generation. And I think we’ve been pretty consistent on that over the last few quarters.

The addition of the land business really just allows us to participate in grid connected renewable, a market that frankly is no longer that interesting from a yield standpoint. But we get to participate in that with very attractive yields that are senior to the senior debt in that market.

So I think we’re being opportunistic in grid connected renewable but meanwhile we continue to see the business coming towards us in the sense of growing energy efficiency business and growing distributed generation business..

I think the one thing to add to that is the energy efficiency projects tends to be longer lived and they’re typically federal government projects, so very high credit quality and lower rates. They’re good candidates for the securitization so you will tend to see us put more of those into a securitization transaction than hold on to our balance sheet.

So thus you will see a little bit more of a renewable energy on the balance sheet. But we’ll continue to originate the blend as Jeff talked about and as we’ve consistently originated over the time period. But given the interest rate environment we think a lot of it is transactions make more sense for securitizations..

Great.

And then just a follow up on securitizations, is the plan still to try and bring a rated ABS to market in the immediate term and can you just provide a little more color on that?.

The plan is to do it intermediate terms probably a good ambiguities phrase. We’re not sure when that’s actually going to happen. We’ve been able to achieve our goal of getting to 40%-60% fixed rate with wind deal. So the benefit of fixing out more rates with ABS has not something we need right now.

But it certainly a transaction we intent to do and announce it just as soon as we get it done..

Great, thank you guys..

Thank you (Operator Instructions). There are no questions in queue at this time. I would like to turn the call back over to management for closing comments..

Thanks everybody. We’re going to go back to work and start -- keep working on Q4. Thanks so much..

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. And have a great day..