Good afternoon and welcome to Hannon Armstrong’s Conference Call on its Q1 2017 Financial Results. Management will be utilizing a slide presentation for this call, which is available now for download on their Investor Relations page at investors.HannonArmstrong.com.

Today's call is being recorded and we have allocated 30 minutes for prepared remarks and Q&A. All participants will be in a listen-only mode. [Operator Instructions] At this time, I’d like to turn the conference call over to Amanda Cimaglia, Investor Relations Director for the company. Please go ahead, ma’am..

Thanks, Tom. Good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing its first quarter 2017 results, a copy of which is available on our website. This conference call is being webcast live on the 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 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.

Please note that certain non-GAAP financial measures will be discussed on this conference call. 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 Jeffrey Eckel, the company's President and CEO; and Brendan Herron, our CFO. With that, I’d like to turn the call over to Jeff, who will begin on Slide 3.

Jeff?.

Thank you, Amanda, and good afternoon. Thank you all for dialing in. Today we're announcing core earnings of $15.5 million for the quarter or $0.32 per share. We closed approximately $288 million of transactions, which is consistent with our business model and earnings guidance.

These investments reduce over 197,000 tons of greenhouse gas equivalent emissions, which is equivalent to 96,000 tons of coal. Our leverage increased to 1.9 to 1 versus 1.7 last quarter with fixed rate debt at 64%. We also in the quarter issued an $84 million fixed rate sustainable yield bond.

This bond carried both Moody's highest green bond assessment, a first for our firm, and a carbon count rating. These are both metrics, which improve visibility for green bond investors. Brendan will speak more about this issuance.

Turning to Slide 4 on pipeline, we continue to enjoy a robust diversified pipeline of more than $2.5 billion of investment opportunities, all neutral to negative on incremental green house gas emissions. In addition to our investments in efficiency wind and solar, we’ve increased infrastructure asset as a percent of total pipeline to 12%.

You will note that the solar assets as a percent of pipeline has fallen from 13% last quarter to 5% in part due to the conversion of that solar pipeline to portfolio assets, which we will talk about in a bit.

While we are reloading the solar pipeline, one could expect more originations in efficiency, wind and infrastructure in the coming quarters simply based on the fact that 95% of the pipeline is in those categories. Forward-looking portfolio yields have remained fairly constant over the last quarter in total and by category.

On a net portfolio basis, the portfolio increased approximately 15% by $240 million and now stands at approximately $1.9 billion. The single largest additional was in approximately $144 million portfolio of solar land investments, which we will turn to next on Slide 5.

On Slide 5, we highlight four Q1 transactions starting at the bottom left is the aforementioned solar land portfolio representing 4,000 acres with over 20 utility scale solar projects in four states.

sPower is a new client for Hannon and we believe their subsequent acquisition by AES will allow sPower to prosper and our opportunities with them to continue. On the bottom right, we highlight wind preferred equity transaction with JPMorgan and a top tier sponsor.

This approximately $65 million investment is associated with almost 600 megawatts of wind capacity in five projects spread across three states and enjoys a preferred equity position in cash flows with no debt ahead of us, a structure similar to the prior three transactions with JPMorgan.

Moving counterclockwise around the page, we were proud to finance Schneider Electric’s 22 million investment in three VA hospitals this quarter. These investments improve conditions in hospitals while saving the government money.

As an aside, Secretary of Energy, Rick Perry, has quoted in a press release last week praising the energy savings performance contract transactions, not just the Schneider Electric one at the VAs for us.

The top left project is another SunPower Helix system we financed for California school district similar to the two school districts we featured in the prior quarter. All four of these investments have attractive returns on equity, are diversified by geography, technology, operator, obligor and they continue diversify our portfolio.

Now, I will turn it over to Brendan to detail our financial performance..

Thanks, Jeff. Turning to the Q1 results, we generated $15 million of core earnings as compared to $12 million last year. While earnings grew by approximately 27% on a dollar basis, the impact of reduced other investment revenue and lower leverage in part due to the timing of equity raises resulted in a flat core EPS of $0.32 per share.

For the quarter, we generated GAAP interest income, rental income and income from equity method investments, which we have labeled investment income of $23 million, an increase from approximately $15 million last year as a result of a nearly 40% growth in the portfolio from this time last year.

We generated gain on sale on fee income, which we've labeled other investment revenue of approximately $4.6 million, down from $5.8 million in the prior year or about $0.02 on a core basis. If you remember in the first half of last year, we had higher than normal other investment revenue.

Interest expense grew to $14 million from $11 million last year as a result of approximately $230 million of higher debt in 2017 used to fund our portfolio growth. Approximately, $100 million of this debt was floating rate to finance the land portfolio transactions and also our fixed rate debt feel slightly to 64% from 67% at the end of last year.

We expect to complete more fixed rate debt transactions in the next several quarters as we work towards our increased fixed rate debt target. Comp and general administrative expense remain fairly consistent on both the GAAP and a core basis for the quarter as compared to this time last year with variance primarily due to one-time items.

Headcount was 41 at the end of the quarter. In total, we have $7 million or $0.14 a share of GAAP income, a 100% increase from the $0.07 per share last year in part due to higher GAAP income from equity method transactions of approximately $4 million.

This increase was the result of new transactions where we see a preferred distribution of both cash and profits.

The GAAP earnings do not include the full effect of the cash we received from our equity method investments especially where we have invested alongside a tax equity and receive a limited allocation of profits and losses, although a much larger allocation of cash.

For the first quarter, we collected $17 million in cash from our equity method investments as compared to GAAP income on these investments of approximately $4 million.

Since we have based our investments on future cash flows, discounted back to a present value, we believe the cash we receive reflects both a return of capital and a return on our investment.

Thus, we make a core adjustment of approximately $5 million to recognize the return on investment, which year-to-date when added to our GAAP $4 million income gives a total core return of $9 million and thus the other $8 million is treated as a return of capital.

Turning to Slide 7, our focus on high credit quality assets is reflected in our portfolio, which excluding equity method investments, consist of 42% of our assets from government obligors and 57% commercial transactions with only two projects representing about 1% of our assets or $21 million, not considered investment grade.

Our portfolio is widely diversified with over 155 projects at an average outstanding balance of approximately $11 million per project. On Slide 8, we want to focus on our balance sheet. Essentially our assets have largely fixed rate return characteristic as opposed to floating rate investments and generally have little prepayment risk.

61% of our assets are financing receivables in debt investments with fixed rates. The balance of the portfolio consists of equity method investments in real estate with largely preferred and predictable returns. As we've discussed, new assets are originated at current rates, which is in effect similar to a bond letter.

On the debt side, we are at approximately 64% fixed rate debt. As of March 31, 2017, before considering any improvement in asset yield, we estimate that a 25-basis point increase in LIBOR would increase quarterly interest expense by approximately $300,000 or $0.005 a share certainly a manageable number.

We completed our eight asset-backed nonrecourse debt deal this quarter with the $84 million announced transaction Jeff mentioned earlier bringing our total leverage to 1.9 to 1 compared to 1.7 to 1 at year-end. These transactions have allowed us to add fixed rate debt, extend maturities and diversify lenders and investors.

We’ve also been successful in diversify our equity investor base with many high quality investors and increasing the liquidity of our stock. As we grow, we will continue to use these and other financing tools as we execute on our capital plan. I will now turn it back to Jeff, who will wrap up the presentation..

Thanks, Brendan. To close, we continue to execute on our business plan of investing our capital and assets that enable the growth of the best efficiency, renewable and infrastructure companies in the business.

y aggregating assets like efficiency assets at a VA hospital, or land for solar farm assets that are otherwise not accessible to our public shareholders, we are building a business that allows our shareholders to participate in attractive yielding assets generated by an increasingly diverse portfolio and managed by a team that own 6% of your business and is dedicated to good governance.

We thank our shareholders for their continued support and interest and I thank my colleagues at Hannon Armstrong for keeping our clients top of mind as we continue to invest in the future of energy. We appreciate you listening to our update and we'll now open the call for a few questions..

Thank you, sir. [Operator Instructions] We will take our first question from Noah Kaye with Oppenheimer..

Thank you. Good afternoon, Jeff, Brendan and Amanda. Thank you so much for taking the questions..

Hi, Noah..

If we can just start with the federal business, call last week that the DoD indefinite-delivery and definite-quantity, $55 billion authorization for federal efficiency projects was successfully put into place, so that runs now for quite a long time and I think it overlaps with the existing program authorization, so there should be good continuity there, but from where you sit, wondering more about kind of the ongoing activity inflow of projects that have already kind of been in develop, from your perspective are things pretty much – business as usual, have you seen any change in kind of activity inflow on a contracting basis?.

Let me answer that a little bit differently. There is always a change at administration. Contracting officers and agencies look for new direction. I frankly see less change in this transition of administrations than any of the prior four that we’ve been through. And remember we go back to Bush I in this business.

And part of it is because the last two years in 2015 and 2016 where such high volume ESPC transaction years that the industry really developed the muscle and the anecdotal evidence we hear is this is really well institutionalized.

You’ve probably noticed that when President Trump undid President Obama’s executive orders on energy, he did not unwind any of the executive orders ESPCs and with Secretary Perry’s saying – calling out explicitly, these are good public-private partnership, they are, this makes great sense for republic administrations, for democratic administrations.

So, it’s early days of course, but we don’t see the typical slowdown in a change of administration that frankly I feared regardless of anybody politics, just changes is never good for contracting. So we are quite optimistic..

Okay. Thanks very much for that color.

Second question, just sneaking around incentives at the company as the business continues to grown, having ahead of chance to read the proxy, it seems like in the past incentives have something based off of a combination of origination volume and then core EPS and – please correct me if I’m wrong, but also some provision around quite a losses [indiscernible] preparedness, but as you take the on balance sheet portfolio, now over $2 billion, and some of the one-time gain on sale from securitization that you had last year, it’s a little bit lower this year, those do boost short-term EPS, but don’t necessarily lead to higher recurring revenue and EPS growth.

How are you thinking about those incentives? Is there any thought to kind of putting more emphasis on the recurring earnings portion of the business particularly if that becomes a bigger part of the overall earnings?.

Well, I think, that’s has been sort of the premise of why we went public. For 32 years, all we did was had effectively gain on sale income and no recurring revenues.

The whole point of going public was to build the balance sheet and, as we’ve – each of the – now, 16 quarters we’ve been public, we are less and less reliant on recurring fees and more and more generating our core earnings from net interest margin, which is obviously a more robust and longer dated earnings stream.

So I think you should expect that – I don’t think it’s a change in the way we are compensating ourselves, I think it’s the same – or incentivizing ourselves with the same basic driver of be less reliant on fees, have fees be noise to the upside on earnings, not some that causes to hit earnings, and that’s why the fact that fees are down a little bit, but earnings or up.

That’s to us is we are going in the right direction.

Anything to add to that, Brendan?.

Thank you..

I think the other end to add to that is it still we really try to align ourselves with shareholders, so the words that – in the way the grants are structured, the short-term rewards are focused mostly on – a large percentage of it is our core earnings targets and that largely attracts guidance and then the longer term incentives are more on total return, which again is what shareholders, I think, care about.

So we are really trying to, as Jeff has always talked about, had governance and align, how we are compensated with our stockholders expect to – to benefit from owning our stock. So, hopefully, we’ve done a good job in wanting those too..

Okay. Well, thank you very much. I will jump back in queue..

Thanks..

We will take our next question Carter Driscoll with FBR..

Hi, guys.

How are you?.

Good..

Good, Carter, how are you?.

Fine, thank you. Just following up on Noah’s question, do you see the scope of the FEC program changing at all in terms of adding storage or micro-grids really expanding the opportunity, obviously, you highlighted the program with AmResco, Parris Island last quarter is a big [ph] project.

I’m just trying to get at – could you get some incremental margin as you drive some new technologies into these types of deployments? And I have a follow-up..

Well, I think, the incremental margin would accrue to the ESCO, if they are able to make a larger project by adding storage or some kind of distributed generation solution, they’ve got a markup on the total package, that goes to them. We certainly like larger deals rather than smaller deals, so effectively it probably gives us a little margin.

But the real juice is for the ESCO, as to where the industry is going, I think it started out as how do you save money and really that was sort of when we started doing ESPCs, the average deal size was $2 million, it’s now substantially larger than that and you are seeing transactions like Parris Island and some other ones that are in the $100 million.

And now we are looking at rebuilding bases, rebuilding for resiliency, net energy zero, net water zero, net waste zero, so the scope and the ambition of the ESPC program I think has expanded significantly along with the capabilities and competitions of the ESCO community.

And that’s where, I think, to revisit Noah’s questions, it’s become a expected source of investment in particularly DoD facilities, there isn’t appropriations for this kind of stuff and with the performance guarantees, the government enjoys and I think they are getting a very, very good deal. So, hopefully, that addresses the question.

I think the – adding storage, we think that’s a terrific idea in the context of efficiency upgrades and distributed generation as well..

That’s very helpful. Thank you.

Do you see any change in – you talked obviously ESPC and through this administration really total change unlike maybe some of the prior administrations, at the state level, you’ve hit a couple of hiccups to maybe Oklahoma, realized for a smaller state, really pulling back from renewables or subsidization, any other pocket of [indiscernible] where you should keep an eye potential changing their commitment to reducing GHG?.

I know Ohio just introduced in the state legislature bill that reverses what Governor Kasich vetoed, no prognostication on Ohio politics. The simple answer no, we probably don’t see that level of visibility. Fortunately, the developers are the ones who have to bare that risk.

If they’ve made an investment in Oklahoma in the transaction or in Ohio and that political landscape becomes less favorable, that’s frankly their risk. We are likely to not even know of a change in their development pipeline. We see the transactions when they become much more mature and much closer to being developed in fact in construction.

And I would suggest some other states like California that are maybe softening on some aspects like residential solar, but there is still significant public policy support for renewables in general..

And then if I could just sneak in a quick last one. I think you are pretty confident in your getting closer to your high-end of your fixed rate target by year-end.

You can contrast that with the variable issue you did for the land deal, was that for speed to market, just trying to get a sense of your confidence in still reaching at least close to the high-end of that target by year-end?.

Yeah, we had – if you remember back in 2015, we had a similar land transaction, we are able to take it out and rate it ABS debt transaction, so this was much more of a bridge facility to get us through that process, so we could close the land transaction in the timeframe that our customer needed for us to do it and then we will replace it with longer term financing..

Perfect. I will get back in the queue. Thank you..

We will take our next question from Philip Shen with Roth Capital Partners..

Hi, everyone. Thanks for the questions..

Hi, Philip..

Hi, guys.

So, recently, I believe there is a bill called PACE Act of 2017 was proposed in the Senate, can you talk about how this bill might impact you C-PACE opportunity? Do you see a meaningful probability for the bill to pass? And then you’ve been expecting the segment to be a nice source of growth in 2017 versus 2016, do you continue to expect the same level of opportunity as you did on the Q4 call?.

So, that bill is largely focused on residential, an area that we haven’t really participated in. My understanding, it does some things to make sure that the residential PACE programs are compliant with Truth in Lending and some of the other lending requirements that are applicable to residential loans.

As far as commercial PACE, where we focus ourselves, we continue to invest in the area, we continue to see progress in transactions. As we’ve explained all along, it’s a education process, it’s slightly different sales channels.

And I use to describe it as the toddler standing against the table, he is now taking a few steps, but certainly not running a marathon yet. And so, we continue to work at it and we continue to be optimistic that it will be well accepted and be a good source of the long-term revenue..

Okay, great. Thanks, Brendan..

And Phil just to, I think, supplement that, I’ve no comment on the toddler waking and running, but we didn’t mention PACE in this quarterly call and that’s – I mean it’s developing normally, there is nothing really to highlight. We are pleased with the development and its absence in our comments is of no significance..

Great..

The toddler did not fall down..

Previously you guys indicated that if rates fall or the yield curve inverts, you could look to increase securitizations for gaining on sale, with the recent modest flattening of the yield curve, can you talk us through the conditions in which you can or may start to pursue more securitization versus holding assets on balance sheet?.

I think if you look at the yield curve kind of over the timeframe, it’s very much been in a range and a couple of months ago, we are probably at the high-end of the range of where we’ve been in the last four years and I was trying to back down a little bit more towards maybe the midpoint of the range of where we’ve been.

So I don’t think that any – the changes that we’ve seen either up or down were sufficient to make us change the business model in anyways. We’ve tried very hard to protect ourselves on the upside and, as Jeff mentioned, we are continuing to try to grow portfolio.

So, I don’t think that any – the most recent changes ether the upswing post election and then kind of return downward, which causes to change our strategies..

Okay, great.

And then, finally, here given your change in assets from Q4 to Q1, you guys originated $288 million, which implies, I think, $135 million of assets rolled of in Q1, does that make sense? And then for the assets that you added during the quarter, can you compare in contrast perhaps the yield profiles between what rolled off and kind of what came on in the period?.

Well, I think, we continue to add assets in the period and I don’t know that there’s been a mix. Jeff did point to the land transactions and land has historically been at the higher end of the rates that we bring on or – so, I think, we were happy with where land ended up. I don’t know that – $135 million seems high to me..

Yeah, yeah.

How are you getting to that one Phil?.

We are just taking the gross assets, adding the originations and looking at the change in the net assets and getting to an implied number of assets, more amount of assets rolled off, so $288 million less $153 million getting to the $135 million..

You are talking in number assets? Because in portfolio….

No, we are talking more – this is the dollar math, it’s dollar math..

At the end of quarter, it was – just under 1.9 and it was 1.6 last quarter, the portfolio balance, I’m just focused on portfolio, not other assets. So, of the portfolio, we added about $240 million net. So, I think, the $288 million, we put about high-90s of that $288 million percentage on to the balance sheet.

So, there wasn’t that roll off in the quarter Phil..

Okay, great. Well, thanks, Jeff, thank you, Brendan. I will pass it on..

Thanks, Phil..

[Operator Instructions] We will go next to Ben Kallo with Baird..

Hi, guys, can you just comment on your expected growth rate on the – now that we are couple of months into the year and you haven’t seen things slowdown, so can you talk about that a little bit? And as it concerns larger transactions, can you just talk about competition and larger transaction sizes and maybe origination? And just following on another as a storage question, how about with water….

Okay..

…where we expect it?.

Ben, what was the first question? Sorry, I was taking notes..

Growth rate..

So, we are reaffirming the $1.32 for 2017 earnings, we haven’t really talked much more about growth beyond that other than as we continue to add assets to the balance sheet. With the impacts of operating leverage and financial leverage, we are able to continue to grow earnings. So that’s a 10% midrange growth in earnings.

In terms of competition, for large deals, you have to remember, even our large are a lot of little deals. $144 million deal was made up of 20 deals, all of which need to be due diligence and frankly a lot of shops look at that and say, forget it, we can’t. We can’t get our heads our $12 million average deals sizes.

So that’s not to say we don’t have competition. But I think the one thing that we are starting to appreciate is the fact that we have permanent capital is perceived as valuable by financial and sponsor partners. They want to know that they have a more permanent partner rather than a fund, which is time limited. That doesn’t make us win all deals.

Maybe we get to win tides with that advantage. But I think we are finding that to make money in this you have to specialize in the various niches.

We expect to see more solar land transactions precisely because the market for utility scale solar is tight and people have to get the capital stack to be even more efficient and for bidding on the land and provide an accretive solution to the sponsor, now is the time they are going to seek that out. It’s worth it.

They need every help they can get so. And then with respect to storage, I think we’ve always had the view that storage is another measure to be included behind the meter with efficiency upgrades and other supply side solutions whether it’s cogeneration or solar.

We don’t have – haven’t talked about utility scale or wholesale side of the meter type storage projects, we know they are out there. It’s – I suspect we will see them, but it’s not something we are –.

I was asking about water. Sorry, I made that confusing, about water projects. Thank you..

That reminds me of a bad presentation I made at [indiscernible] one time, where I completely misunderstood the question. Water storage or water, we always report on water in our annual report in terms of millions of gallons saved. There are a lot of water upgrade projects along side efficiency upgrades.

We have started to look at storm water – water remediation particularly in the Chesapeake Bay region. We don’t have any of those assets yet, but it’s – seem to us like the kind of assets that our financing could help accelerate. We are looking at water privatizations on military basis. Again, nothing on that, but there could be something on that.

So, we love to have a water project to talk about and get it at scale, but we really want to make sure that the transactions that we are talking about are programmatic and repeatable and scalable. And then that’s the kind of transaction that we get enthusiastic about talking about and get enthusiastic about investing in. Not yet..

Great. Thank you..

And we will go next to Jeff Osborne with Cowen & Company..

Hi, good afternoon. Most of the questions have been answered already. I appreciate that.

But maybe just your expectations on pricing of deals that you are getting, how are you seeing the market evolve in particular on some of the solar and wind projects just given solar in particular has less volume this year than last year?.

Really hard to generalize, Jeff, and I’m not trying to be evasive, but some transactions were really good fit and have some maybe softer benefits like a permanent capital, it’s not as quite – execution is more valued than the last basis point.

Other deals that are addressable by many other players, of course, they get super bid out, but those aren’t we’ve ever really pursued. So, we continue to like the niches.

That said, in any one of our markets, if somebody wants to beat us and buy a deal, they are going to have some opportunities, but none of these niches are that big that that many competitors come in and can make a good business out it. And the cost of capital advantage doesn’t seem to be much of an issue. So, it’s hard to say.

I don’t want to be a utility scale developer that’s why we own land underneath them. And we think that’s a better business for us. We are thankful others are out there developing those projects, but it’s pretty thin business right now for sure..

Got it. The last question I had was just on the efficiency side. Historically, I always associated you with a large presence within Johnson Controls, a lot of the examples that you’ve given in the past were with that partners, it’s just been a key ally for quite some time.

And in today’s presentation, you had nice win with Schneider Electric, which I think has also been partner.

But just if you were – I know you don’t report results this way and you probably won’t continue to do that, but just qualitatively, can you just discuss are you gaining share within non- Johnson Controls partners or how do you look at the business that way with the types of folks that you are doing deals with?.

Well, we’ve talked about the six industrial giants of energy efficiency, Johnson Controls, Siemens, Schneider, Honeywell, Trane and UTC. We’ve done business with all of them for as long as 17 years. Schneider, I think, started four years ago, we did their first U.S. federal deal.

So, we’ve had multiyear, in some cases multi-decade relationships with these companies. We continue to do business with all of them. And the only thing we’ve ever said about any one client is we generally win more than we lose in the industry.

So, you’d almost have to go back to the FEMP, Federal Energy Management Program, kind of add up market share of the various ESCOs and that would probably be a pretty interesting or pretty useful indicator of where we are, I’m not sure there is a bias from anyone ESCO to another in terms of our win rate..

Okay. Good to hear. Thanks so much..

Thank you..

And ladies and gentlemen, that’s our final question today. I’d like to turn the call back over to Mr. Eckel for any closing remarks..

Thanks for everybody listening in and good questions. Hopefully our answers were up to the questions. Thank you so much..

Ladies and gentlemen, this does conclude today’s conference. We appreciate your participation..