Infrastructure, Sustainable, And Renewable Energy – Are They Still Investments For The Future? – Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI)

The answer my friend is blowin’ in the wind – Bob Dylan (1962)

The Premise for my Article:

There is no doubt there is a degree of luck in making successful investment decisions. However, you will find your odds for achieving favorable results enhanced by devoting ample time for doing due diligence before opting to purchase a specific stock. Even before doing specific due diligence, one should understand economic and political trends and how they will impact the segment of the market involved in your consideration.

A few years ago, I identified the sustainable and renewable energy as being an area for more in-depth due diligence. In addition, I considered the need for addressing our declining infrastructure could be a major area of attention with a new administration coming into power in Washington. Based on this premise, I undertook and devoted numerous hours, over several months, seeking out what I considered viable stocks meeting my criteria. In my opinion, haste in making investment decisions is not a good attribute for saving and growing one’s capital.

With this article, I would like to update the status of the stocks I identified and purchased for this investment segment of the market. Plus, I will give investors my current thinking for the future of this segment of investing.

Willdan (WLDN):

Willdan is a direct play in the infrastructure market. On October 28th, 2016, I shared my opinion in an article published for my Seeking Alpha readers. Since writing this article, the stock has appreciated over 120% – from $16.62 to the recent $36.87. Not a shabby return for an eight-month investment!

For those holding a stock that has doubled in price, taking a portion of you gain off the table could be a wish decision. However, within the last few days, we have seen the stock trade down to the $30.00 level, for a near 18% retracement. Part of this retracement could be related to the planned comments by the President on August 15th about his goal of addressing our nation’s infrastructure needs. It appears there was another issue broached during this news conference where the latter has dominated the news cycles, completely overshadowing the issue of infrastructure needs.

It is my opinion that the chances for a bipartisan decision between infrastructure and a tax overhaul, the decision should go in favor of infrastructure. My view for stocks like Willdan – they should provide investors with a long-term horizon a viable and beneficial source for capital appreciation. The current 18% retracement could be an excellent entry level for establishing a limited position in the stock.

Salient Data Points from Recent 2Q Report:

* Second quarter revenue increased by 21.9% to $71.8 million from $58.9 million in 2016. This was all organic growth for the company.

* Energy Efficiency Services segment increased by 26.6%.

* Engineering Services segment increased by 11.1%.

* Public Finance Services component increased by 14.7%.

* Homeland Security Services decreased by 15.1%.

* Full year 2017, revenue projections were increased from $250 million to $260 million.

Assuming with proper funding, Willdan should maintain its current trend with its highly positive financial results. I never invest with the top criteria being a take-over by a larger player in the market segment. However, with that said, Willdan’s spectacular results should be on competitor’s radar screens.

Hannon Armstrong Sustainable Infrastructure (HASI):

Hannon is an Annapolis, MD, company with a 30-year history of operation. A few years ago, it opted to redirect its REIT into focusing on debt and equity investments in sustainable infrastructure, including energy efficiency and renewable energy. This emphasis gives them an enviable position for what I consider the investing opportunity for funding the growth areas we need as a nation with job opportunities for our workers. With the growth of these sources of energy, we can finally become independent from relying on foreign supplies. We have seen constant upheavals and wide swings in our economy with the dominant use and reliance on fossil fuels as our major source of energy.

Hannon focuses on providing preferred or senior capital and obligors for assets that generate long-term, recurring and predictable cash flows. The company directs it investments activities primarily in energy efficient projects, which include projects normally found in energy service companies. Such projects reduce a building’s energy usage or cost by installing various components, including heating, ventilation and air conditioning systems. They are also involved with lighting, energy controls, roofs, windows, and combined heating and power systems. Their Renewable Energy Projects employ cleaner energy sources – including solar and wind to generate power. In addition, their business model allows them to invest in related projects, like water and communication infrastructure needs.

In October 2014, I shared an article with my Seeking Alpha readers where I highlighted the merits of owning this stock. In the near three-year interim, this stock has given me an 80% appreciation for my investment capital, plus providing me with a sizeable and growing dividend rate. From the date of my original article, the stock has gone from $14.00 to the recent high of $25.21.

Based on the stock’s appreciation, the dividend rate is still yielding a superb 5.7% for investors. As a matter of fact, I added shares last week when they announced plans for a public offering of $135 million aggregate principal amount of its 4.125% convertible senior notes due 2022. Hannon has granted the underwriters a 30-day over-allotment option to purchase up to an additional $15 million amount of the notes. They plan to use the net proceeds from this offering to repay outstanding borrowings under one or both of its senior secured revolving credit facility and its recourse credit facility, or for general corporate purposes. The notes will bear interest at a rate equal to 4.125% per year, payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2018. The conversion rate will initially equal 36.7107 shares of common stock per $1,000 principal per note, which is equivalent to a conversion price of $27.24 per share of common stock, representing a 20% conversion premium on the closing price of the stock at $22.70 per share on August 16, 2017.

Second Quarter – 2017 Highlights:

On August 2nd, Hannon announced its results for the latest quarter. The following are some of the more salient achievements they experienced during the quarter:

* Their investments are spread over 165 accounts.

* The average investment is for about $12 million.

* Their balance sheet now reflects assets at more than $2.2 billion.

* The first half of 2017, they increased transaction values by 47% when compared to the first half of 2016 – from $470 million to $690 million.

* GAAP EPS for the quarter was $0.23 vs. $0.09 for the 2016 comp.

* Core EPS for the quarter was $0.34 vs. $0.32 for last year’s same period. These results fully covered the increased dividend for the quarter.

* Hannon’s portfolio totals $2.2 billion – includes $0.5 billion on energy efficiency, $1.4 billion for renewable energy (wind and solar) and approximately $0.2 billion for other infrastructure investments.

The following represents a few of the more interesting projects signed on with in the 2nd Q. Note the diversity of these projects and how they are spread over the available markets:

* A contract with Wright-Patterson Air Force base in Ohio, related to controls, chillers, lighting and water conservation technologies. This contract will offer savings to the US Treasury, plus create jobs, help military operations conduct their mission with modern infrastructures in place.

* In Colorado, North Dakota, and Minnesota, they added to their wind portfolio with five projects over the three states.

* Their wind portfolio at the end of the quarter was comprised in more than 2,500 megawatts of power.

* Also, during the quarter they added 1,400 acres of land, supporting 20 megawatts of solar energy. This latest addition gives them a land portfolio covering more than 20,000 acres.

* Personally, based on the fact I once lived in the San Francisco Bay area, I found their contract to fund Seismic Retrofits of great interest. The $200,000 PACE contract is small, but it should be noted these retrofits are being mandated in California, so there should be additional projects for them to negotiate in the future. This first project is for the city of San Francisco to provide resiliency should their area suffer another earthquake, like the one in 1989.

For 2017, they raised the quarterly dividend to $0.33, creating a nifty full-year dividend of $1.32. The following chart reflects that since converting to the current business model, the yearly dividend has increased from $0.42 in 2013, to the current run-rate of $1.32. Analysts that follow the company currently are projecting the minimum revenue growth rate in 2018 being 10%. Achieving this continued rate of growth, investors should see a commensurate growth in the dividend being paid.

Final Thoughts:

The shared information is merely a starting point for investors to consider. Before making any investment decisions, one should do in-depth due diligence based on specific criteria related to how one invests their funds. My shared data is information limited as to the full scope of data available and should be considered as such.

My emphasis on infrastructure being a potential favorable segment is based on my assumption that we are moving into an inflection point where as a nation, we must address our energy needs. In addition, we have failed to demonstrate a willingness to maintain and upgrade our vital infrastructure components. Whether it is roads, water and sewer projects, bridges and even sustainable energy projects to heat and cool our homes, factories and workers are needed to create the materials needed for the projects. Therefore, if one does not agree with this surmising on my part, investing in this segment might not be place for investing. And that is fine with me!

Also, investors should consider the current market cycle over the last eight years, we have seen the DJIA increase from 8,000 to over 22,000 – a historical high for this index. However, as of late we have seen the DJIA correct from the 22,000 level with the 8/17/2017 results showing the largest YTD downturn in the average 274 points. Over recent years the average pull-back in the market has been around 10%, so we are still a few points from reaching this level of market corrections. So, prudent investors should take this into consideration if we are in such a cycle.

I firmly believe we are at the point where we as a nation must address our use of fossil fuels and vital infrastructure needs. So, in closing please allow me the opportunity to share the decision that Ben van Buerlin recently made. Mr. Beurlin recently stated he was giving up his diesel-powered Mercedes. He is opting to replace his current vehicle with a plug in Mercedes. In my opinion, Mr. Beurlin is speaking from a position of knowing what the future holds for the world relying on fossil fuels. Mr. Beurlin is the CEO of Europe’s largest fossil fuel company – Royal Dutch Shell.

Good luck with your future investing decisions! I would welcome any discussion on the merits, or lack thereof merits, for my position on infrastructure and sustainable energy.

Disclosure: I am/we are long HASI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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