Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI) is a unique mortgage real estate investment trust (REIT). Instead of focusing on the commercial or residential mortgage markets like most of its peers, it provides capital to companies developing solutions to solve climate change.
The company recently took a major step toward enhancing its sustainable infrastructure portfolio by partnering with global energy producer ENGIE (OTC: ENGIY). The deal will add cash-flowing renewable energy assets to its portfolio, which will improve the long-term sustainability of its 3.2%-yielding dividend.
Partnering on the future of energy
Hannon Armstrong's partnership with ENGIE will own 2.3 gigawatts (GW) of onshore wind and utility-scale solar assets in the U.S. To put that size into perspective, 1 GW of solar energy is enough to power about 190,000 homes. The portfolio consists of 13 projects spread across five states. Currently, 663 megawatts (MW) of wind projects are operating, with the remaining 1.6 GW (five more wind farms and four utility-scale solar facilities) of projects under construction.
Hannon Armstrong will be making a $540 million preferred equity investment into this portfolio, giving it a 49% interest. Meanwhile, ENGIE will remain the controlling shareholder of the portfolio and manage the assets. That arrangement will enable Hannon Armstrong to benefit from the steady cash flows the assets produce. The portfolio sells the power its renewable energy assets generate to several high-quality customers like utilities and large corporations under long-term, fixed-rate power purchase agreements. Overall, those contracts have a weighted average remaining life of 13 years, implying that the company will benefit from more than a decade of stable cash flow.
Improving its long-term sustainability
Once all the projects are operating, this investment will significantly increase and diversify Hannon Armstrong's balance sheet portfolio. That will support continued growth in recurring net investment income, increasing the long-term sustainability of its dividend.
The transaction will grow its balance sheet from $2.1 billion to $2.6 billion. Meanwhile, the contribution from grid-connected assets (like wind farms and utility-scale solar facilities) will rise from 27% to about 50%, which will reduce its exposure to behind-the-meter assets (such as energy efficiency investments, distributed solar assets, and storage investments) from 62% to 49%.
Meanwhile, another notable aspect of this investment is its type as it's equity instead of debt, which is the focus of most mortgage REITs. Equity investments tend to be permanent in the sense that the owner usually has control over when they sell whereas debt investments are subject to borrower repayments. When interest rates decline, borrowers race to refinance loans to reduce their costs. That has an impact on the cash flows and dividend-paying ability of mortgage REITs since they'll lose the income streams of refinanced loans, which will most likely get replaced with lower-yielding ones. That's not an issue for most equity investments. Because of that, Hannon Armstrong should keep benefitting from this investment's cash flows even if interest rates keep falling. Thus, it will help enhance the long-term sustainability of its dividend.
An interesting REIT for sustainable income
Hannon Armstrong Sustainable Infrastructure stands out in the REIT sector in many ways. It primarily focuses on providing capital to companies that focus on sustainable infrastructure, like developing renewable energy projects. These investments, which tend to be long-term in nature, should generate a steadier stream of cash flow to support its growing dividend. That makes it an intriguing option for REIT investors who want to make some green by helping the world go green.