Good afternoon and welcome to Hannon Armstrong's Conference Call on its Q2 2017 Financial Results. Management will be utilizing a slide presentation for today's 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. Amanda, please go ahead..

Thank you and good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing its second 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'll turn it over to Jeff, who will begin on Slide 3.

Jeff?.

Thanks, Amanda. Good afternoon. Today we're announcing quarterly GAAP earnings of $12.3 million or $0.23 per share and core earnings of $17.9 million or $0.34 per share. Consistent with prior calls we expect to remain on track for 2017 annual core earnings guidance.

Leverage increased to 2.0 to 1 versus 1.9 last quarter with our fixed rate debt level at 54% at the end of the quarter. Later Brendan will discuss our leverage and financing strategy in more detail. We closed over $400 million of transactions in the quarter putting us at approximately $690 million for the first half of the year.

This puts us on the right path to achieve our $1 billion annual investment target that we've discussed in the past. In aggregate the investments in Q2 reduce approximately 200,000 tons of greenhouse gas equivalent annually. Equivalent to approximately 100,000 tons of coal consistent with our sustainability objectives.

Turning to Slide 4, we continue to enjoy a deep diversified pipeline of more than $2.5 billion of investment opportunities, all neutral to negative on incremental greenhouse gas emissions. Consistent with prior quarter's efficiency in the governmental and commercial market is a largest opportunity followed by wind then solar.

We are working to refill the pipeline for sustainable infrastructure after closing over $200 million of transactions in this category in the quarter. Forward-looking portfolio yields have remained fairly constant over the last several quarters at 6.2% in total.

The net portfolio increased 13% or approximately $240 million from the last quarter and now stands at approximately $2.1 billion. Turning to Slide 5, we wanted to profile five transactions we closed in the quarter to demonstrate the breadth and diversity of our investments.

The first transaction we want to highlight our investment controls, chillers, lighting and water conservation technologies at Wright-Patterson Air Force Base in Ohio. This energy savings performance contract saves the U.S. Treasury money creates jobs and helps the servicemen and women at right pat conduct their mission with more modern infrastructure.

Consistent with its decades long bipartisan support, we are pleased to report that the federal energy efficiency business continues to look quite strong in 2017. We added to our wind portfolio by increasing our investment in five projects spread across Colorado, North Dakota, and Minnesota.

At the end of the quarter, we have a wind portfolio comprised of interest in more than 2,500 megawatts. The third transaction on the Slide is the addition of approximately 1,400 acres of land, supporting 280 megawatts of utility scale solar. This brings our land portfolio to over 20,000 acres.

We've been discussing the pace of the market potential for many quarters and this quarter we feature a $200,000 PACE transaction used to finance Seismic Retrofits in California, a market we like very much. These retrofits are mandated by the city of San Francisco to provide resiliency should San Francisco suffer another earthquake.

The secondary benefit of those retrofit is they preserve the carbon embedded in the built environment. We completed this transaction through our partnership with Counterpoint which provides us the same platform to do small PACE transactions. Shifting to the final transaction. We were delighted to provide the capital for the U.S.

Army to start much needed improvements to the electrical distribution system at Aberdeen Proving Ground here in Maryland.

This $200 million investment is actually for separate projects and will improve the electrical reliability and efficiency at this mission critical facility, while large and lumpy these kinds of sustainable infrastructure investments are increasingly structured as public private partnerships that we can participate in, and we look forward to doing more of them.

Given its size relative to our balance sheet, we were able to finance much of the investment with three institutional investors on a fixed rate non-recourse basis with leverage above our target of 2.5 to 1.

To summarize, all five investments have attractive returns on equity, positive environmental profiles, and help increase our portfolio of diversity with respect to asset class, geography, technology, operator and obligor. I will now turn it over to Brendan once again to detail our financial performance..

Thanks Jeff. For the quarter, we generated GAAP interest income, rental income and income from equity method investments, which we have labeled investment income of $28 million, an increase from approximately $17 million last year as a result of an approximately 50% growth in the portfolio from the same time last year.

We generated gain on sale in fee income, which we've labeled other investment revenue of approximately $8 million, compared to $6 million in the prior year. Given the nature of the assets sold and general market conditions, we achieved higher margins in the quarter and year-to-date, which droves the higher other investment revenue.

Interest expense grew to $15 million from $11 million in Q2 last year primarily as a result of approximately 50% increase in debt in 2017 used to fund our portfolio growth.

Comp and G&A expense increased by approximately $1 billion for the quarter and year-to-date primarily due to additional cost associated with the growth and the size of the company. Full time headcount was 43 at the end of the quarter as compared to 35 at the end of Q2 last year.

In total, we have $12 million or $0.23 a share of GAAP income, compared to $4 million or $0.09 per share in Q2 last year. The increase is primarily due to both additional investments and allocations the income from certain of our equity method investments in renewable energy projects.

As a reminder, the GAAP earnings do not include the full effect of the cash we received from our renewable energy equity investments. This is especially true where we have invested alongside of the tax equity and received a limited allocation of profits and losses, although a much larger allocation of cash.

In addition, under GAAP, HLBV can be heavily influenced by the allocation of tax attributes like an investment tax credit or production tax credit. As we are not investing for the tax attributes, we will periodically like in this quarter end up with a large profit allocation where other investors have received tax attributes.

Year-to-date, we collected $39 million in cash from our equity method investment as compared to GAAP income when these investments were approximately $13 million.

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

Thus we make the core adjustment of approximately $7 million to recognize the return on the investment, which year-to-date when added to the GAAP $13 million gives a total core return of $20 million and not the other $19 million of the cash received represents 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 a 47% of our assets from government obligors, and 51% commercial transactions with only three projects representing 2% of our assets were $26 million, not consider investment grade.

Our portfolio is widely diversified with over 165 projects and then average outstanding balance of approximately $12 million per project. Turning to Slide 8, we want to focus on our balance sheet. Essentially, our assets have largely fixed rate return characteristics as opposed to floating rate investments and generally have little prepayment risk.

60% of our assets refining into receivables and debt investments with fixed rates. The balance of the portfolio consisting of equity method investments in real estate would largely preferred a predictable returns. As we have discussed, new assets are originated at a current rate, which is in effect similar to a bond letter.

On the debt side, we ended the quarter approximately 54% fixed rate debt. In Q2 we took an opportunity to refinance one of our 2015 transactions at a lower cost by combining it with several other wind investments.

[indiscernible] portfolio, we able to lower the spread on the debt, presently loan is floating rate without hedges, which is why the fixed in rate debt percentage fell. We expect to convert it to a fixed rate debt within the next several months.

In addition, we continue to focus on closing several other debt transactions in the near-term and expect to reach the high-end of our 60% to 85% fixed rate debt target by year-end.

Even with a lower fixed rate debt percentage as of June 30, before considering any improvement in asset yield, we estimated that 25 basis point increase in LIBOR would increase quarterly interest expense by approximately 400,000 or less than the Senate share certainly a manageable number.

A quick update with various capital items, as we continue to grow we've been adding various tools for capital raising, along with filing the Q, we'll be filing updated shelf which at public debt capabilities and update it at the market or ATM prospectus supplement in Q2 we raised approximately $31 million through our ATM program and an average price of [22 71], which we believe is an efficient means of raising capital.

We've used about $45 million of the existing $75 million program who wanted updated to the new shelf and will be increasing the size of the program to $150 million. Like before we expect the ATM to be a portion of our equity capital raising process.

As we've discussed our financing planets with focused on adding fixed rate that extending maturity and diversifying lenders and investors while reducing cost all of which we have achieved. We have also been exceptional in diversifying 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 another financing tools as we continue to execute on our capital plan. With that, I'll 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 capital in assets that enable growth of the best efficiency renewable and infrastructure companies in the business.

By aggregating assets is diverse of a small seismic retrofit in California to a large electrical infrastructure upgrade in Maryland, we're building a business that allows our shareholders to participate an attractive yielding assets, generated by an increasingly diverse portfolio and managed by a team that own 6% of the business.

Our staff and board of directors pride themselves on demonstrating good corporate governance and leadership in an environmental disclosure. Being internally managed and aligning our long-term incentives with shareholders, does nothing but reinforce that good governance.

We thank our shareholders for their continued support and interest and truly bank my colleagues at Hannon Armstrong for another steady quarter of investing in the future of energy. Also we hope our new website rolling out later this week will better explain the business Hannon Armstrong. With that, we will open the call up for a few questions..

[Operator Instructions] Our first question comes from Noah Kaye with Oppenheimer & Company. Your line is open..

Thanks very much. Good afternoon, Jeff, Brendan, Amanda. Congratulate on the quarter..

Thanks, Noah..

Thanks, Noah..

Okay. Can we start with the large investment obviously and you talked about potential to rebuild the sustainable infrastructure portfolio. But just curious kind of how an opportunity like that manifest this [couple main] partners, and how we think about from those type of opportunity and how do we think about this type - of this type opportunity.

And I'm really here just not only thinking about for standalone infrastructure, but sustainable critical infrastructure which does clearly as?.

Yes, great question. The utility privatization program, the federal government has been trying to do for a couple of decades has been successful in a few areas where the regulated utility can rate base the on base infrastructure upgrades.

Some asset classes and Aberdeen is one of them, but you'd also see it in water and wastewater are really going to be good opportunities for the regulated utility that's the serving utility to capitalize on. So that opens it up for alternative capital providers like ourselves.

And the way we find these deals is the same way we find all of our deals which is to find the best vendors or clients who are out developing these projects and this isn't a new project, this probably been around for a decade in terms of what the army needed to do, want to do maybe even longer than that.

So they have a long gestation cycle and you just have to be patience in the federal market, but it is clearly an area that we've been focusing on for it two decades and have done precious few, but there will be more coming when and where is to be determined.

It's really kind of normal business very similar to our energy savings performance contract business just the scale is perhaps a little bit larger..

Yes, that's helpful. Thank you. And then maybe a quick question on pricing, we have seen [indiscernible] yields are generally [indiscernible] earnings call. Obviously, you're in something of a specialty finance market, but just wondering how pricing environment at the moment particularly are in context of the second quarter..

I mean it depends on the asset class. Really were in efficiency wind and solar and there are submarkets in each of those some more competitive than others. We certainly think solar is the most price competitive market and as a result that is probably why there is lots of it in our pipeline.

The efficiency market in the federal market can be very, very competitive for the very best credit on the ESCO side. Lesser credit becomes a little bit more interesting. But I think overall our view is we don't divide interest rates, we don't divide the five compression in spread.

The way we address tight spread as we continue to look for newer niches where we can do the same kind of business we do, and I would say the army privatization project as an example of that..

That's helpful. Thanks so much..

Thanks Noah..

Our next question comes from Ben Kallo with Robert W. Baird. Your line is open..

Hey, great quarter. Thanks guys for taking my question..

Hi, Ben..

Hey, so you talked about the financing, I think I've asked this before about public debt, but could you just maybe explain what has changed to allow you to do this now, and how you look at your public debt as a potential capital source?.

Hey Ben, it's Brendan. So we had a multi-year financed plan and we basically have been working through various asset classes and doing ABSs, getting those weighted, and educating the rating agencies and investors on the various assets that we do.

And as part of that you eventually get to a critical mass where enough of your assets are rated that you can start to look at doing more of a general corporate type situation. That combined with the fact that the market caps gotten over $1 billion with good liquidity in the stock these days. It creates lots of new opportunities in the financing area.

And a couple years ago, we had laid out this plan where we would basically follow that path and we've just been executing on it.

So it's really just couple years of hard work by a lot of people in organization to get us to this stage and we think we can know continue to take some opportunities to lower the cost of some of our debt, while extending majorities and fixing out the rates..

Actually, it sounds good.

And then I guess as I think about the number of deals that you talked about the $1 billion target and what the different financing options now opening up, how do we think about that changing over time or do I not look at it like that?.

Well, I guess the good news is, I guess one investors - when we would do start talking about doing more and I said how about after we do it. So we get to be a big business for the - big enough business to grow the earnings just with $1 billion business model.

So we don't want to at this stage and the economic cycle start reaching for marginal deals just growth for growth sakes. We think we'd rather optimize on return on equity then topline growth or market share and those kinds of second order metrics..

Okay. And lastly, just a few months ago, I think every question was around the policy, the regulatory world, maybe just we've had new administration in the office for a few months now. What can you see as far as visibility related to the solar trade case out there? So the only thing that you guys are seeing this either got better or worse? Thank you..

I'm quite confident you know more about the solar trade case than we do. So I don't think there's much we could add.

In terms of federal policy just to remind everybody that the energy savings performance contracts were started under the regular administration and supported by Bush I, Bush II, Clinton, Obama and by all measures that we see by the Trump administration, and really we'd ask why wouldn't they.

As I said about the transaction at right path, it saves treasury money, lowers costs, creates jobs and really improves conditions on military bases and civilian agencies for people. So really not much too in these federal privatization transactions..

Great, thank you..

Thank you, Ben..

Our next question comes from Carter Driscoll with FBR Capital Markets. Your line is open..

Good afternoon, guys.

How are you?.

Hey Carter..

So Jeff or Brendan, it seems like that your wind investments are diversifying by state into kind of some non-traditional or at least what typically wouldn't necessarily think of the strong wind states.

You talk about maybe the characteristics of equipment of the landscape that's changing or allow you to kind of diversify and maybe the expectations of what this might do to the addressable market at least domestically?.

Well, remember most of that in the wind transactions we talked about our, so-called tax equity transactions which are effectively on average 10-year old projects. So you'd really have to go back to look 10 years ago where wind developers developing.

I don't think much was happening in - certainly not as much in West Texas, 10 years ago as might have happen in the last couple years. So these - I think outstanding when regime areas and I think we've had two people observe that the very first wind projects were cited at some of the best sites in the country.

Not the only good sites, but some of the best. So what we were able to acquire through these tax equity details are really the slices of a lot of different projects, which creates a nice diversity, which is really what supported the refinancing of the transaction that that Brendan mentioned..

Okay. And just next question, you talk about the relationship with counterpoint and/or expectations in the commercial PACE market.

Is that accelerating faster than you thought, I mean you talked last couple of quarters about it in a very sizable market opportunity really infancies maybe just some color and what you see developed in the last 60, 90 days?.

Yes, I mean I think that's still a good characterization, counterpoint ourselves are figuring out how to scale this thing economically. You clearly have to do the business differently than we handle our traditional business that have to be lighter touch and from a documentation and transaction processing standpoint.

And as - ever everything we've ever done that's been successful has been programmatic. So we're spending a fair moment time with counterpoint setting up that programmatic capacity to handle the volume and there's no assurance that volume comes, but it should. These are economic transactions for the building owner.

They're supportive for the first mortgage and kind of it's like them. So we should have a good market there, but again we'll start talking about what a fantastic market it is when it becomes a fantastic market. Right, now we're just planning for success..

Just last question, in terms of the sustainable infrastructure seems to be very sizable projects and is that characterization fair in terms of the types of projects that betting on and in terms of replenishing the pipeline that take a little bit longer than some of the other end markets you're in just because of the size and engagement process.

Where is it - if it as is it comparable in terms of how quickly can get into the pipeline versus the other end market?.

Well, actually we have a little deal that takes such as long as the big deal, since like all the deals take too long. But in terms of sustainable infrastructure and we intentionally juxtaposed the $200,000 transaction against a $200 million transaction - in sustainable infrastructure resiliency is going to come in a lot of different sizes.

We certainly like the large projects, but we don't want to add large projects that on balance or balance sheet. So having the smaller ones that can be done on a more programmatic basis like seismic retrofits, we like that. But obviously we got to do a lot of $200,000 deals to - yes exactly..

Perfect. I get back in queue. Thanks guys..

Thank you..

Our next question comes from Philip Shen with ROTH Capital Partners. Your line is open..

Hey, guys. Thanks for the questions. Just as a quick follow-up on the sustainable infrastructure.

Can you quantify in any way, how many of these large deals maybe in the existing pipeline perhaps characterize it as a handful, more than a handful, and then are there any potentially near-term?.

We always think there are near-term and then I never are being a little facetious here. But again they do take a long time. These are really large undertakings for the U.S. government to contract. So I would be - I would not want to set expectations that the capacity for the U.S.

government to increase the lot of these deals is there too hard to do, it's a lot of engineering. But we're delighted to be in the market and we think we'll do our fair share of this business. And obviously Aberdeen is a nice start to this..

Great. Thanks. And in terms of - in the past your dividend has been classified as more than 90% return of capital.

Can you talk about how do you expect that trend for the dividends later this year as well as into next year?.

We don't actually give guidance on that Phil, I think if you look at the average over the last three or four years, it's been less than 20% has been tax and the rest has been return of capital.

I think the earnings mix of the business is relatively consistent from what it's been in the past, so I think those ratios on the average are in reasonable direction, but things do move around a little bit when the way earnings come through. So that's why we don't forecast it.

We have been able to produce a fairly high return of capital which we think is very good to shareholders..

And Phil, thanks for bringing that up, it's feature we don't get a lot of investor comments on, but certainly my dad is very aware of the after tax return that he's getting. So for individual shareholders that's an awesome feature of the stock..

Yes, it certainly is. Great. One last question for me here, in terms of the solar business. On First Solar's recent earnings call, they highlighted valuations for large scale utility projects are going higher.

Can you talk about whether or not this impacts your existing solar land business? So for example is the valuation under the land having impact as well? And can you address in terms of the land that you have on your balance sheet as it appreciated in a meaningful way that perhaps may not be reflected on the balance sheet?.

Let Brendan answer the value of the land. I think the land transaction is accretive to developers, so to the extent developers are realizing that the land transaction is supportive of their goals of increasing the sales price. Our transactions probably do have the impact of increasing the value of projects to owners.

And we've only been in the solar land business for about three years. So it's still there, I think substantial number of clients who could still transact that scale in this, but that said land is never their biggest priority.

They're much more focused on getting the primary project financed or sold and the land transaction can be lot accretive is not the largest number in the capital stack. But we think it's very value-added services that we're getting very good at and look to do a lot more.

As for solar or other solar companies saying prices are going up, again that's not in the transaction area where we have a lot of visibility or try to play in..

Add-on to that, I think as Jeff said it's accretive to developer, but that also means that no one is looking to sell a project. We have examples what people have added to the total of what they realized out of the sale by selling the land separately to us.

So we think that really - it's accretive from the developing, but also when the developer would sell. As to valuations, I think when you have a long-term asset like we have and rates go down or the people are searching for yield it makes really the assets more valuable. So I don't know the land is really different than anything else.

But we think that we continue to add good asset, good yields and they're all long dated and we think that's one of the values in our Company that we've been able to do and we've tried to take a very conservative approach to leverage on that. So in combining those things that help adds the value to the shareholders..

Okay. Great Jeff, Brendan, thanks. I will pass it on..

Thanks, Phil..

Our next question comes from Chris Souther with Cowen. Your line is open..

Hey, thanks for taking my call. Most of my question have been answered. But I just want to kind of touch upon the equity method investments. It looks like more those have been kind of coming in through the GAAP results as opposed to kind of the core investments.

Are you guys kind of thinking about that over the next couple quarters?.

As I try to explain in the prepared remarks Chris, that's going to be variable depending on the project. So this quarter, for example we had some solar projects where we're on the sponsors side and there was an investment tax credit return. So unlike the PTC, the investment tax credit is more lumpy, it's one-time credit.

So the way the accounting works, when the tax credit is allocated to the tax equity investor, they recognize a loss under GAAP even though they've gotten the benefit of tax credit and we recognized a gain. So those are lumpy type one-time transaction that really don't have anything to do with cash or the profitability of project or anything else.

That's the way the accounting allocations work. So that's why we use core. That's why we kind of - it's very hard for us to even forecast the HLBV because of the timing on some of these types of transactions that come through. And I think what we've talked about in the past is I know you can use the past as kind of a guide.

But it is a hard thing to actually forecast because it really depends on the mix of private investment we have where we sit in the project and the nature of the asset itself..

And Chris, that's the same answer it gives me when I ask him can you forecast GAAP earnings..

Yes, appreciate that. Thanks. And then just kind of a last question would be as far as SunPower mentioned yesterday they have 400 megawatts in residential leases, they are looking to monetize it.

Just want to get an idea, if you guys had kind of enough capital to participate in that kind of transaction and how do you kind of think about that?.

I think we would have to look at that. We've been pretty focused on getting ready for our own earnings call. So I haven't dug into what SunPower said. So I'll be evasive because I simply don't know. We certainly think we have capital, that the kind of asset that we want to use on, and I guess we've to steady it..

Perfect. Thanks a lot..

Thanks, Chris..

That concludes the Q&A portion of today's call. I'd now turn the call over to Jeffrey Eckel for closing remarks..

Thanks. Good questions. Appreciate all the interest and everybody here in Hannon Armstrong is busy working on Q3. Thanks so much. Talk to you next quarter..

That concludes today's conference. Thank you for your participation. You may now disconnect..