Hannon Armstrong listed the industry’s first mortgage real estate investment trust with sustainable and renewable energy characteristics on the New York Stock Exchange. Hannon Armstrong Sustainable Infrastructure Capital (HASI) went public the week that the Boston Marathon bombings cast a dark shadow across the country.
Eckel, president and ceo of Hannon Armstrong, spoke with Senior Reporter Holly Fletcher about why investors were attracted to the REIT and how much capital the company will be investing.
What prompted the initial public offering of Hannon Armstrong Sustainable Infrastructure Capital?
Two things drove us as a management team to the conclusion that we should explore a public offering. First off, is our continued belief that sustainability is a generationally defining issue. Hannon Armstrong has a small, but important role in making sure we mitigate the impacts of carbon on climate change. The second thing is really so much of what we do: financings which are substitutions for appropriations of governments, whether it’s federal state or local governments. The state of public finances is such that critical infrastructure is just not getting done—this is stuff that needs to get done. It’s economic to do but it is hard to replace economically outdated central energy plants when you're laying off teachers and police. We think it’s a terrific business opportunity and we think there is a terrific need.
There is public interest in sustainable initiatives so did you find that investors were excited to be a part of an investment opportunity that had sustainable characteristics?
No. We structured our deal such that we have been advertising that we have a superior risk adjusted yield to any other real estate investment trust that's out there. You get sustainability for free. We’re not asking investors to pay for sustainability.
This is what we do for a living. I think there are some investment attributes of sustainable investments that reduce credit losses, or things like that, that are financially tangible. These are important but are perhaps not visible to the historical investors in real estate investment trusts. Our business model can be described historically as to be on the right side of sustainable issues but we have always appealed to investors on the basis of financial merits alone.
If investors were primarily interested in the merits of Hannon Armstrong Sustainable Infrastructure Capital as a mortgage REIT was there anything you needed to do to get them comfortable with the so-called free sustainable characteristics?
I think the fact that we have a top law firm, a top auditing firm and a private letter ruling confirming our status, there was no pushback on why we are a REIT. The reason we're a REIT is that it's friendly to investors and our investment returns will look like virtually every class of REIT out there. We will return a reliable dividend. REITs are more income producing than share appreciation type investments yet we have a much advantaged credit profile from other REITs because of the benefits from the sustainable elements.
How did you select the bookrunners?
We talked to a number of investment banks and really there was quite a good reception from all of them. Bank of America Merrill Lynch, UBS Investment Bank and Wells Fargo Securities simply got the story quicker and were more enthusiastic than the others. We were very impressed with their institutional and retail placement capabilities. Within each of the bookrunners they have the REIT organizations, they have specialty finance organizations, they have clean tech organizations and we generally fit within the specialty finance organizations.
The target price was $14-16 and HASI listed at $12.50. How would you characterize the market the week of April 15?
It was a tough week with the sad events in Boston. The outcome was absolutely acceptable for Hannon Armstrong’s existing shareholders. So, it’s a very good outcome for us in what turned out to be a challenging market.
The private letter ruling from the IRS has generated a lot of hype from people who are curious about whether it will unlock a broader area of investment. Given that you’ve seen it, what’s the outlook for growth opportunity?
I’ve heard there's a lot of interest in reading the PLR and, frankly, having read it a number of times I can say that it is one of the most boring documents in the history of the English language.
Private letter rulings are exactly what the name implies. They apply only to the company that applied and only to the questions that the company asked. Our company--with a 30-year balance sheet built up--has a different set of assets than virtually any other company that we know but I think there are some things that people will get out of it. What the IRS answered were the questions that we asked and they confirmed our understanding of the reading of the rules.
What are some of the initial investments that will be made and could you elaborate on the clean energy project mentioned in the S-11?
It's a nice portfolio of initial assets that in their own, small way do the right things. In the initial portfolio there's some wind with Siemens turbines. There are a lot of energy efficiency assets.
The clean energy project is a set of very advanced refueling projects on a military base. Where this thing is a real winner for the government client is the loitering time for the vehicle will be nearly eliminated. The emissions from diesel engines as they loiter, well it's ugly. This will have a very big impact on the fuel consumption at the base just by cutting down the loitering time.
What about solar?
There are none in the initial portfolio. We’ve got a lot on our balance sheet and we certainly plan to do a lot. The REIT structure will permit us to do a significant volume of solar transactions in the next 12 months. We look forward to a lot of solar volume.
Do you have a target amount of capital to invest a year or a quota?
There is about $600 million of capital available right now, I wouldn’t say that it’s per year. As soon as we can put it to work we will go out and raise more capital. The first thing to do is get the first $600 million put to work.
What’s next for the REIT?
We all showed up and got back to work and started talking to clients about new projects. I’m delighted to be back at my desk and talking to people about doing really good things that will be profitable and sustainable. The REIT doesn't change what we do. It just allows us a different set of shareholders and, now, a lot more capital to go do more good projects.
