Good afternoon and welcome to Hannon Armstrong's Conference Call on its Q3 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. [Operator Instructions] At this time, I'd like to turn the conference call over to Amanda Cimaglia, Investor Relations Director for the Company..

Thank you, Sophie. Good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing its third 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; Brendan Herron, our CFO; and Justin Cressall, our Deputy, CFO. With that, I'll turn the call over to Jeff, who will begin on Slide 3.

Jeff?.

Thanks Amanda, and good afternoon. Thank you all for dialing in. Today we're announcing quarterly GAAP earnings of $7.9 million or $0.14 per share and core earnings of $16.4 million or $0.31 per share.

Given rising interest rates and a flattening yield curve, we took the decision to proactively fix out a significant amount of our interest rate risk during the quarter.

We have committed the fixed rates on approximately 94% of our debt while extending maturities increasing leverage to 2:1:1 strengthening the balance sheet and significantly increasing liquidity.

While we believe this was a prudent decision to ensure strong and stable base for growth in the future, the higher cost of fixed rate debt lead us to project our annual core earnings per share will be at or bit below the low point of our guidance range. We're very proud of this quarter.

To get all of the fixed-rate transactions done at the coupons we achieved which - few facts here, almost 450 million of the debt has an average rate of approximately 3.86% including nearly 300 million of debt at approximately 25 years. This was no small feat.

We now sit with a solid investment grade balance sheet largely insulated from what many consider to be our largest risk rising rate environment. And we are now in a good position to preserve and grow the dividend.

We’ve closed approximately $750 million of transactions year-to-date and are well-positioned to achieve our $1 billion annual investment target. Turning to Slide 4, our balance sheet portfolio is $2 billion after profitably exiting one of our noninvestment grade transactions.

The portfolio consists of over 170 separate investments with an average investment of $12 million and is diversified across markets, technologies, obligors and geographic regions. Forward-looking portfolio yields remained consistent over the last several quarters with a blended yield of 6.2%.

It is timely to note the impact of the quarters extreme weather events on our portfolio. We have three solar projects affected by Hurricane Irma all with insurance coverage to the extent of the damage. We mapped our residential solar portfolio to the Napa Valley fires and concluded the impact as diminimus.

No wind assets in Texas were affected by Hurricane Harvey. Individually and corporately we've supported several charitable activities to minimize the human impact from these weather events. Overall, our portfolio remains comprised of high credit quality assets with less than 1% or only $10 million not considered investment grade.

Turning to Slide 5, we continue to enjoy a deep diversified pipeline of more than $2.5 billion of investment opportunities. The government efficiency business continues relatively unchanged in cadence and volumes while the commercial market shows increased activity. We found the recent JCI Energy efficiency indicator survey interesting.

In that for the first time noneconomic factors like greenhouse gas reduction goals and improved energy security were the top two buying influences for commercial property managers. This augurs well for our commercial efficiency prospects.

According to the [Avia] Q3 report, newbuilds for wind in Q2 and Q3 were lower compared to the prior three years, although conversations with CEOs were the largest win sponsors suggest 2018 looks strong. We also still find an active market for recycling capital and operating wind projects to optimize our clients capital stack.

The solar markets continued to be a washing capital with yields nearing surprising lows in the most competitive markets. While the solar pipeline fell from 8% to 6% quarter-over-quarter, we continue to increase the pipeline for other sustainable infrastructure.

This is an example of our willingness and ability to pursue more attractive yielding assets and trim pipeline where yields are not as attractive.

We also are seeing larger opportunities than we have in the past like our $200 million portfolio of utility privatization assets last quarter in part because our potential bite-size has increased as our portfolio has grown.

These transactions are interesting in that they can change our trajectory to the positive much faster than smaller transaction but of course they increase lumpiness in any given quarter. I’ll now turn it over to Brendan to detail our financial performance..

Thanks Jeff. Turning to Slide 6, for the quarter we generated GAAP interest income, rental income and income from equity method investments which we've labeled investment income of $28.9 million an increase from approximately $16.8 million last year.

As a result of approximately 45% growth in the portfolio from this time last year, as well as increases in the equity method investments and allocations under GAAP. We generated gain on sale in fee income which we labeled other investment revenue of approximately $4.4 million compared to $3.5 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 drove the higher other investment revenue.

Interest expense grew to $17.6 million from $10.6 million in Q3 last year primarily as a result of the approximately 45% increase in debt in 2017 used to fund our portfolio growth.

Comp and general administrative expenses increased by approximately $1.4 million for the quarter and approximately $2.8 million year-to-date primarily due to the additional cost associated with the growth of the company. Full time headcount was 43 at the end of the quarter as compared to 38 at the end of Q3 last year.

In total, we had $7.9 million or $0.14 per share of GAAP income compared to $3.3 million or $0.07 per share in Q3 last year.

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

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

Year-to-date we collected $66 million in cash from our equity method investments as compared to GAAP income on these investments of approximately $19 million.

Since we have based our investments in the future cash flows discounted back to the 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 $12 million to recognize the return on the investment which year-to-date when added to the $19 million GAAP income gives a total core return of $31 million and that's the other $35 million represents a return of capital. One comment on our debt.

As Jeff mentioned, we made the strategic decision to increase our fixed rate debt beyond our 60% to 85% range. With deals closed in Q3 and early Q4 as well as one additional Q4 transaction, we expect our fixed rate debt to have more than doubled since the start of the year. Obviously, this comes at a cost.

Using the Q3 ending average debt levels and rates, we estimate that the difference between the low end of our fixed-rate debt target of 60% and 94% we now expect could impact us by up to $0.10 per share on an annual basis. I've often discussed the concept of fixing out messages of access.

With these deals we have largely fixed out the first five years of assets.

We would expect that over time we will move back down into the target range and while there is a short-term impact on earnings that Jeff discussed, we and for various investor conversations over the years understand that many of you believe that it is small cost to reduce the risk further increases in rates as indicated by the Fed.

We expect longer-term as base rates rise that our yields will rise and the decision to fix out rates positions us well for future growth.

We're glad to have Justin Cressall who joined from [Maryland] approximately seven-months ago as our Deputy Chief Financial Officer along with Chuck Melko who joined us as our Chief Accounting Officer from PWC National Office around the same time.

Both have bought great capabilities and experiences they have and we expect will in the future help us drive the business forward. I will now turn it over to Justin who will provide an additional update on the execution of our financing strategy..

Thanks Brendan. Turning to Slide we wanted to highlight the progress we've made on our financing strategy this quarter. We closed or expect to close approximately $645 million of debt transaction involving our efficiency, wind and solar assets. And importantly our first transaction is Hannon as the general corporate debt issuer.

As we stated in the past we've been working with various rating agencies to rate each of our asset classes. And in August we were pleased to proceed our first investment grade corporate rating by DBRS which represents a culmination of our efforts on this front.

Additionally we issued 150 million investment grade 5 years senior unsecured convertible notes with a foreign bond and a 20% conversion premium. We were happy with the execution on this transaction and viewed as a good first step towards our goal of issuing straight unsecured corporate debt.

As a result of these and other transactions our percentage of fixed-rate debt is expected to increase to over 90%. Furthermore as you heard from Jeff earlier, we successfully added a significant amount of long dated debt to our balance sheet.

This further extended our maturity profile and notably as the chart on the bottom of the page illustrates, we have no maturities before 2019 and those anticipated maturity amounts represent no more than 11% of our current debt outstanding in any given year. Importantly, we have further diversified and expanded our investor and lender base.

Overall we believe these actions position Hannon well for the future. With that, I'll turn the call back to Jeff..

Thanks Justin. We’ll wrap this up on Page 8. We believe this quarter is another example of Hannon Armstrong continuing to execute this time on both sides of the balance sheet.

We produced an attractive yield that is now substantially protected from rising interest rates, generated by high credit quality, diversified portfolio, financed with a stronger balance sheet and managed by a team aligned with you the shareholders. We'll now open up the call for questions..

[Operator Instructions] And we'll take our first question from Philip Shen with ROTH Capital Partners..

Brendan you mentioned that next year as you guys originate more transactions, the fixed ratio to come down, would you - I think you mentioned it could come back down to the original target.

Can you just talk about how that might work and then in turn with the higher fixed-rate of debt or fixed out interest rates on your debt, can you talk about being able to support your dividend of $0.33 and the potential impact of core earnings for next year as well..

So on the first part about how we work we obviously did a lot of fixed rate debt this quarter given where the Fed was and what they were saying about rising interest rates and a number of rate hikes coming. We want to check ourselves against that.

As we've talked about - our assets work very much like a bond letter and will originate new asset at new rates. And as rates rise we will then use debt when those rates and some of that debt either in the form of our credit facility or floating rate debt.

So we would expect over a period of time that we’ll adjust back down from 94% back down into the target range, we thought this was the right strategic move at the time given where the market was and where rates were but we do believe long-term that this 60% to 85% makes sense for us.

I think Jeff mentioned that we think that this helps position us to continue to grow the dividend, we are not giving specific getting guidance at this point time we don't usually do that at this point time, so we would do that later in the year but we do think that this positions us well strategically.

The pipeline I think remains strong and we look forward to continuing to grow the business and to grow our dividend..

I think you also mentioned Brendan that you expect yields to rise, can you give us some additional color as to perhaps by segment or just some color on your end markets and you expect the yields arise at a similar rate yet that pricing power to be able to perhaps drive the yields looks faster or higher faster relative to your cost of funding some perspective on that would be helpful..

I'm not sure we have the power to drive yields higher. We're certainly - we've been flat on the gross forward-looking portfolio yield for three or four quarters now.

What we can do is continue to shift the portfolio and shift our focus to areas that are marginally more lucrative than frankly some of the overbanked markets with somewhat struck at Solar Power International I know you were there as well at the shockingly low yields people willing to except for equity investments in solar that’s probably not an area that we’re going be very active at those levels.

But there are other areas where we will and have been continually trying to grow the business..

One more here in terms of your corporate rating by DBRS, can you talk about when we might expect your first corporate grade debt issuance is it around the corner, is it - how do you thing about what the timing or size some of the details of that might be?.

So the convertible bond was corporate rated, it was rated BBB low by DBRS. I can’t give specifics on future debt offerings but this is part of a longer-term process where we undertook the convert and have a view that we want to be as an issuer in these sort of the unsecured market ideally at a rated level.

So it's all part of a longer-term plan we have in place but I can't give specific guidance as to when we might access the market in other forms..

And just add to that, we knew it as a first step. The process we gone through and we’ve talked about this in past calls as we first worked on getting most of our individual asset classes rated investment grade.

And then based on that we’re going to move to the corporate rating and we had a lot of questions about why a convert - we thought the convert was the good first step in introducing ourselves to the public debt markets, the people in the public equity market gotten to know us but the debt market is a whole different market and you have kind of reeducate and reintroduce yourself to those debt investors.

So the convert was a good first step in that process for us and we do think that corporate debt becomes an important part of our finance plan going forward..

Thanks for the color on that. Sorry, I missed that the rating was by DBRS. I'll pass it on and thanks..

[Operator Instructions] We will take our next question from Noah Kaye with Oppenheimer Funds..

And I hate to ask a speculative one, but it's a current topic. With tax reform ongoing some commentary that the investment tax credits for solar and the PTC for wind could be at stake here obviously that would not be great for the industry, but would be interested to hear your thoughts on how it might affect basically what you're doing here.

You know typically you’ve stayed away from debt finance for utility scale solar but with tax equity potentially not being or being lesser part of the capital stack, is there an upside to yields for Hannon potentially or how should we think about that?.

So I guess the first thing is we've always try to inoculate ourselves from federal tax policy and solar being the most dependent on in our opinion it is 6% of our pipeline its relatively small.

When we have really two sets of opportunities, the legacy projects that no longer need PTCs and that’s where we can recycle capital in really very limited impact on our business prospects.

The newbuilds I think would be affected I think in general the win business feels like with the five year ramp down of PTCs if they can get into an economic place in five years if that ramp down gets truncated because of tax policy I think that is negative for wind except that most of the wind developers have a tremendous amount of turbine supply already grandfathered for today's PTC.

So I think it's - we don't have a good enough forecasting tools say whether that’s two years or three years of capacity. But I think the Delta between no PTCs and what they've got grandfathered is a relatively minor number.

That said its tax credit all run way and these projects still penciled out then that's actually an economic opportunity for Hannon cash on cash investors become more of a desired source of capital than tax oriented investors.

So I don’t mean to say we will probably understand that, we don't care we worked as hard as any company I know of who inoculate ourselves from those things that we can't control..

I think a couple of quarters ago and by the way I'm picking up on - you mentioned that kind of the federal businesses pretty much unchanged in terms of activity.

I think that there's been some commentary that some of the agencies might even be interested in some of the sub agencies within DOD for example in looking at applying the ESPC program to say transportation.

Just curious to know whether you're seeing any traction on potential initiatives like that to expand the scope of the program?.

Well there has been some progress on the one thing that has frustrated the expansion of ESPC and basically CBO was given a direction by the chairs of the Senate and House budget committees to look at the savings as well as the cost and then ESPC and all things that does seem to open up the potential for going to more mobile assets.

That said, any transportation system at DOD is a very complex procurement cycle and I think the prospects of having meaningful volumes would be best thought and is years away not in a year or two. It takes a long time to upgrade technology at scale for particularly DOD.

But if they can do it long term it's a great positive step for the treasury will say the treasury money will certainly create jobs and improve conditions for the war fighter which hopefully everybody can get behind..

Our next question comes from Chris Souther with Cowen..

Just on the first subject was within a sustainable infrastructure, I was curious if you're seeing any potential opportunities within smart city financing in addition to the resiliency water any infrastructure you highlighted.

I just want to get an idea of how you view that market opportunity?.

I'm not particularly familiar with the smart city program that you mentioned in part because I think there are so many of those initiatives which is a very positive thing for the industry. It’s very much a local business I know the City of Annapolis and has a program and there is just a lot of activity worrying about resiliency.

The flipside of that is there is so many programs it’s really hard to get to scale. The one technology that we see being implemented and it’s not necessary for resiliency but LED street lighting upgrades is a good thing that's happening in a lot of various jurisdictions..

And then just on the transaction amount for the quarter volume, can you guys talk a little bit about I know there were some delays that you mentioned on kind of solar because you just kind of maybe quantify that or give kind of a little bit of commentary on what was going on there?.

Actually I don’t know there's specifically any mention of a delay in the solar transaction, I mean a business model and we talked about last quarter and really for the last couple years has been to do $1 billion of transactions for the year. We’re three quarters away through the year.

We've done three quarters of that amount and we’re on track to do the $1 billion.

We've always said the biggest risk after interest rate risk which hopefully was taken off the table so our business is our inability to predict when a transaction will land and whether it lands September 30 or October 1 as a closed deal doesn't matter to the enterprise value of Hannon Armstrong, it matters a lot to how you report a quarter.

So we had a really good Q2, we’re looking for a good Q4 that means Q3 is going to be where it was..

And then for the equity method adjustments it looks like you kind of broken that up between reverse GAAP income and core equity method investments or net earnings net out is that kind of netting out between those two?.

We were just trying to make it - we've worked very hard to try to make that a clear adjustment and so one understood and we had some suggestions and they would be clear if we show the reversal of GAAP and then show how much we’re adding back into core which is why we broke out those two lines definitely there is no change really in how we’re calculating either it was just an attempt to make it more - have a better way for people to feel to see exactly what we were doing..

And our next question comes from Carter Driscoll with B. Riley FBR..

So when we talk about the average transaction sides, it just couple of quarters, it was closer to 10, neither closer to 12, maybe characterization on mix and where it potentially had say, end of next year, we think in maybe '13 or '15, and does that at all, if you these larger deal sizes, putting a different bump up against in some of the larger players that wouldn't traditionally go down to some of the sizes of the transaction, you typically do, I guess, I'm just trying to get a better sense of where you might bump in this from greater competitors as you move upsize?.

I think when we talk about the larger transactions they’re really portfolios of relatively small projects. We still don't see ourselves doing a single transaction that dominates the balance sheet that would completely tilt our portfolio to the point and our credit profile to something that we really have to talk about it every time.

So I think you’re still going to see a lot of diversity in the portfolio. That said, we can acquire portfolio like we did with when land leases and some of the wind tax equity those can be relatively large transactions they were all in the hundred plus million range now may be we would seeing portfolios and then 200 or more plus range..

Can you update on your activities in commercial pace, I know it was pretty small, but one of the things you talked about kind of point was trying to get to more of a programmatic structure or what you guys have done so well and energy efficiency, and obviously now more in wind and solar, any update there? And then I just have a follow-up?.

Not a whole lot to update you on that’s new, it's definitely building on a platform to transact smaller transaction that takes some time. That said, we are doing it and putting the building blocks in place.

The reason I wanted to talk about the Johnson Controls energy efficiency survey is they been doing this for 11 years and economics has always been the number one criterion for the very first year economics still count and PACE is going to be economic.

But the problem with efficiency is the transactions are generally not a priority for commercial building owners if it’s just economics but now there's two other reasons to do it and its economic sustainability and energy security then that seems quite promising for the commercial office building sector that we’re pursuing with PACE..

And then maybe last one obviously we've had a number of natural disasters, it address your current portfolio.

Is this potentially offered up any new conversations on the infrastructure side?.

So I think when we talk about resiliency we've mentioned storm water in advance of Hurricane Harvey and we still think that is a critical issue in a number of places and sadly for the people of Houston it's still a critical issue they’re still suffering from the aftermath to that.

So I would be surprised if it's not a growing theme in infrastructure investing..

It's not a showy play on transmission, distribution of last mile in terms of resiliency or [indiscernible]..

I think that's what we see particularly DOD and when we talk about commercial office building, word about energy security having a more efficient building envelope, having some on-site generations, some a measure of microgrid and storage you may not be 30 days of energy security but sometimes 30 minutes can be very, very important to a business.

So, yes I think that’s definitely one of the big drivers. It's very hard for the central station utility model to provide a super secure solution behind the meter, it is physically impossible..

It appears there are no further phone questions at this time. Mr. Eckel, I would like to turn the conference back over to you for any additional or closing remarks..

No, thank you very much and thanks for good questions..

This concludes today's call. Thank you for your participation. And you now disconnect..