Is Hannon Armstrong Sustainable Infrastructure Capital a Buy?

With the brand new administration in Washington, the US is predicted to shift extra aggressively towards renewable energy. That is nice information for corporations like Hannon Armstrong Sustainable Infrastructure (NYSE: HASI), which put money into the house. However is that sufficient to make this actual property funding belief (REIT) price shopping for? This is what it is advisable to know.

A world shift

There is no doubt that the world is essentially seeking to cut back the quantity of carbon it produces. That has large implications for the way in which energy is produced, saved, and consumed. REIT Hannon Armstrong is seeking to journey alongside this big, long-term pattern by proudly owning clear power property.

At this level, the portfolio is damaged down roughly 60%/40% between what administration calls behind-the-meter (distributed solar, storage, and power effectivity) and grid-connected property. Hannon Armstrong has round 200 or so investments inside its $2.2 billion portfolio. The typical contract life on these investments is roughly 16 years, that means it has greater than a decade of regular, rising money flows forward.

In the meantime, the REIT has a sturdy pipeline of latest initiatives because it seems to continue to grow. On the finish of the third quarter of 2020, administration pegged its future progress spending at $2.5 billion. The breakdown of that spending was throughout the behind-the-meter (62% of the full), grid-connected (27%), and sustainable infrastructure (11%, comprised of issues like stormwater remediation and ecological restoration investments) segments of its enterprise. That final class solely makes up 1% of Hannon Armstrong’s portfolio at present, little greater than a rounding error, nevertheless it may turn out to be extra materials over time. And all of that spending is predicted to fall throughout the subsequent 12 months or so.

Making issues much more enticing is that the REIT seems to have ample entry to low-cost capital. That features bonds, the place Hannon Armstrong was not too long ago in a position to difficulty debt with a modest 3.75% rate of interest and convertible bonds with a 0% coupon. And it consists of inventory, with shares up roughly 230% since mid-March 2020. This could maintain financing prices low and assist assist all the expansion investments within the pipeline. However it additionally exposes the massive downside right here.

Getting wealthy

You might want to put Hannon Armstrong’s share worth positive aspects since mid-March into perspective. The S&P 500 Index was up about 55% over the identical span. The truth is, Hannon Armstrong’s achieve was roughly according to that of Zoom Video Communication (NASDAQ: ZM), which superior 257%. The typical REIT, utilizing Vanguard Actual Property ETF (NYSE: VNQ) as a proxy, was up simply 30% or so. To sum it up, Hannon Armstrong is being handled like a high-growth expertise firm by investors. However, ultimately, it is only a actual property firm.

The dividend is the true tell-all right here, provided that Hannon Armstrong is providing a scant 2% dividend yield. The typical REIT yields 3.9%. Hannon Armstrong’s yield is close to the bottom ranges in its historical past and effectively beneath its current vary, which had been trending between 5% and seven% for a number of years.

Buyers have taken to those shares in a really huge method. Taking a look at valuation one other method, the REIT’s P/E ratio is over 40 (Hannon Armstrong offers earnings, not funds from operations like most REITs). That is a quantity you’d anticipate from a expertise firm, not a REIT — that are by design meant to cross earnings on to shareholders in a tax-efficient method.

The truth is, REITs are usually thought of to be boring dividend shares. However Hannon Armstrong is something however boring, and the earnings it presents at present is paltry. Which brings up an fascinating comparability. A few years in the past utility The Southern Co. (NYSE: SO) pulled away from investing in renewable energy as a result of it thought the challenge yields had been too low and counterparty dangers more and more too excessive. In different phrases, competitors for funding within the house had tilted the chance/reward profile in a damaging method. The logic at Southern was that it is a conservative, income-oriented funding and that the renewable energy house now not matched up with that. It looks like a REIT may be seen in an identical method.

Take a deep breath

Buyers taking a look at Hannon Armstrong ought to maintain Southern’s name at the back of their minds. The REIT is an fascinating technique to put money into renewable energy, however buyers are pricing in a variety of excellent news. This does not appear to be a sensible choice for conservative sorts at present, notably these with an income focus.

And even growth-oriented buyers needs to be cautious after the huge inventory positive aspects right here. To purchase Hannon Armstrong at current worth ranges, it is advisable to imagine its progress will proceed to be sturdy for a really very long time into the long run. If buyers start to doubt that story, in the meantime, the inventory is prone to fall. All in, this seems like a REIT for the want checklist however not the purchase checklist proper now.