Greetings and welcome to HASI's First Quarter 2024 Earnings Conference Call and Webcast. It is now my pleasure to introduce your host, Neha Gaddam, Senior Director, Investor Relations and Corporate Finance.

Thank you, operator. Good afternoon, everyone, and welcome. Earlier this afternoon, HASI distributed a press release detailing our first quarter 2024 results, a copy of which is available on our website. This conference call is being webcast live on our Investor Relations page of the website, where a replay will be available later today. Some of the comments made in this call are forward-looking statements, which are subject to 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 stated. And today's discussions also include some non-GAAP financial measures. 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 Jeff Lipson, the company's President and CEO; Marc Pangburn, CFO; and Susan Nickey, our Chief Client Officer. Susan will be available for the Q&A portion of our presentation. Now I'd like to turn the call over to Jeff, who will begin on slide 3. Jeff?

Thank you, Neha, and good afternoon, everyone. I appreciate you joining the call. Today marks a significant moment in the evolution of HASI. Since our Investor Day in 2023, we have consistently emphasized the importance of developing a more efficient and scalable capital structure. Today, we announced a $2 billion strategic partnership with KKR, which is a significant step toward achieving this goal. This partnership combines HASI's expertise in sourcing, underwriting, and managing a diverse portfolio of climate-positive investments with KKR's leadership in raising and managing sustainable core infrastructure funds. This arrangement establishes an efficient platform for managing most of our balance sheet investments moving forward. We are excited about this partnership and the opportunities it will create. We have named the partnership CarbonCount Holdings 1, or CCH1 for short. I will discuss CCH1 in more detail shortly, but first, I would like to highlight some key points from the first quarter, including $0.68 in adjusted earnings, over $500 million in closed transactions, and a 24% year-over-year growth rate in our managed assets. We are announcing a $0.415 dividend and affirming our guidance, which had already accounted for a co-investment transaction, so there are no changes there. We also had a successful quarter, increasing and extending our debt, which Marc will detail in his remarks. To provide context for today's announcement, prior to 2013, HASI primarily relied on securitization, mainly with life insurance companies. After our IPO, we used public equity to build a balance sheet focused on higher-return investments. In 2019, we received corporate debt ratings and gradually tapped into the unsecured bond market. Today's announcement gives us additional access to private infrastructure capital, complementing our existing funding sources. In a business like ours, a diverse array of capital resources is critical for long-term success. This slide illustrates a capital strategy that has positioned us for profitable growth, even amid volatility and macroeconomic challenges. Our securitization program, balance sheet, and the CCH1 partnership will work together to create a powerful and resilient business. As for CCH1, it has numerous advantages, three of which are highlighted on this slide. Firstly, it will lessen our dependence on capital markets, which have been highly volatile over the past four years. In the future, 50% of the funding for CCH1 investments will come from sources outside the capital markets, significantly lowering our exposure to market disruptions. Secondly, CCH1 will enhance our investment capacity, allowing us to accelerate growth in managed assets. This additional capacity is timely as energy demand forecasts continue to rise, particularly for renewable and sustainable sources. Our enhanced access to capital will enable us to cater to our clients' growing needs as they progress with projects to meet this demand. Lastly, CCH1 will diversify our income, providing stable fee revenue to complement our net investment income and gain on sale income. All of these benefits contribute to making HASI a more dynamic and resilient organization, well-prepared for long-term success. Moving on to CCH1, it is structured with equal ownership by HASI and one of KKR's core infrastructure funds. HASI will continue to source investments for CCH1, in line with our existing strategy. In fact, we are not altering our investment strategy as a result of this partnership. This transaction serves as an endorsement of our current strategy and the appeal of the diverse portfolio we can originate. We will maintain interactions with our clients throughout the investment process, consistent with our current practices. Both parties have committed $1 billion each to CCH1, and we anticipate deploying the $2 billion over roughly 18 months. Two HASI investments totaling just under $200 million in commitments are being used to seed the partnership at its inception. In exchange for sourcing and managing these investments, HASI will receive fees from CCH1. This straightforward structure allows both HASI and KKR to focus on their respective strengths, benefiting the partnership as a whole. Further detailed information regarding CCH1 can be found in an FAQ section in the appendix of the earnings materials. Now, I will hand the call over to Marc Pangburn.

Thank you, Jeff. I'll start on slide 7. We have increased our 12-month pipeline to greater than $5.5 billion. Demand growth continues to drive investment opportunity in all of our markets. While AI is the latest trend, electrification and resiliency are long-term themes driven by a multitude of factors, including decarbonization goals, increasing extreme weather events, and the increasing reliance on electricity. We see these themes materialize in our pipeline, our clients' pipeline, and the underlying demand for energy transition assets. As identified on the right, there has been notable growth in our pipeline for community solar, grid connected solar, and renewable fuels, while other asset classes, including residential solar, have remained consistent with prior quarters. In Q1, we closed $562 million of transactions across six different asset classes with an average yield for on-balance sheet investments of approximately 10.5%. Moving on to slide 8, before I jump into the slide, I'd like to highlight one change in naming convention. Our non-GAAP metric was previously referred to as distributable, which was a term adopted by REIT. Given our move away from the REIT structure, we will be using adjusted on a go-forward basis. The definition is unchanged. Our adjusted EPS increased by 20% year over year to $0.68. Adjusted NII grew by 37% to $64 million. A significant contributor to earnings growth in Q1 is higher gain on sale, fees, and securitization income, which totaled $35 million, an 81% increase year over year. As a reminder, gain on sale is variable quarter to quarter, and we expect gain on sale during the guidance window to be consistent compared to 2022 and 2023. On the right, given the update Jeff provided on CCH1, we are reorganizing our top-line metrics into three different categories: the presentation of NII is unchanged. In future periods, income relating to our 50% ownership in CCH1 will be reflected here. We have split our income streams relating to our capital-light activities into recurring and upfront. Recurring will be comprised of securitization income and ongoing CCH1 management fees. Upfront will be comprised of gain on sale, fees, and upfront CCH1 fees. Turning to slide 9. We show impressive growth in both portfolio and managed assets. Our portfolio grew by 36% year over year, reaching $6.4 billion, while managed assets grew 24% to $12.9 billion. In future periods, our 50% ownership in CCH1 will be included in our portfolio, while the full balance will be included in managed assets. The growth of our investments is a testament to the strength of our programmatic origination platform. On page 10, we've added ROE to our margin chart given the expansion of our capital light activities. ROE has increased this quarter primarily due to the gain on sale discussed on slide 8. As it relates to portfolio yield and debt costs, we are showing a temporary compression due to the newly issued debt and the time delay to fully deploy these funds. This dynamic was expected and has been factored into guidance. I'll add that we continue to see elevated returns for new transactions with Q1 transactions coming in approximately at 10.5%. Turning to slide 11, we highlight our robust funding platform that underpins business growth with over $800 million in liquidity, minimal near-term debt maturities, and a leverage ratio of 1.9 times, so liquidity and liability management is evident. Our interest rate risk management has ensured 97% of our debt is fixed or hedged, while also managing future refinancing rate exposure. Alongside the strong execution with our first quarter, we further strengthened the debt platform with an upsize and extension of three bank facilities: our revolver; term loan A; and CP facility. This aggregates to a borrowing capacity of greater than $1.6 billion and the maturity extensions are detailed in the box on the lower right. With our activities this year, we have provided ourselves the flexibility to opportunistically approach the debt markets for further 2025 refinancing extensions. With that, I'll turn the call back to Jeff.

Thanks, Marc. On page 12, we share a few sustainability and impact highlights from the first quarter. We published our best-in-class 2023 Sustainability Impact Report, donated $2.5 million to the HASI Foundation to support Climate Justice initiatives, and achieved independent verification of Scope 3 Category 15 emissions. Let's wrap up on slide 13. Our strategy continues to produce strong results, despite the higher interest rate environment and other real or perceived headwinds. The elevated demand for energy will continue to facilitate an emphasis on supply, particularly from renewable and sustainable sources, which will create increasing opportunities for the business to invest. The CCH1 transaction is the optimal structure with an ideal partner and is occurring at the perfect time, allowing us to scale our business. On our Investor Day, we discussed reducing our reliance on equity raises. And last quarter, we discussed the trajectory of our payout ratio and our intention to retain more capital as one step in this direction. Today's announcement is another significant step in that direction as we continue down the path of executing on our stated goals. Today, HASI is a powerful enterprise and better positioned for long-term success with an even more diversified access to capital. I thank our outstanding team for closing the CCH1 transaction and several other important initiatives this quarter. And I welcome our new partners from KKR as we jointly provide capital to the energy transition. That concludes our prepared remarks. Operator, please open the line for questions.

Our first question is from Noah Kaye with Oppenheimer & Co.

All right. Well, thanks for taking the questions and congratulations on closing the investment structure with KKR. And I think the FAQ that you provided in the appendix is really helpful. So that avoids me having to ask those questions. But I will ask one question related to the structure, which is, is there any color we can get on the yield or return profile threshold for investments that would go into the structure? Are there any stipulations or parameters that we should think about for the types of investments that will go in?

Thanks, Noah, for the question. I think the best way to think about the structure is that it will be very consistent with the HASI underwriting across the board, including risk and yield. And so I don't think you should think about CCH1 as having a different yield than our balance sheet otherwise would have. So we're really not changing our outlook on the business or the way we source investments.

Okay. A question around the balance sheet and specifically the real estate investments. The balance sheet real estate investments have gone from $350 million in Q2 down to almost nothing. And just can you give us a little bit more color on the rationale for unwinding the exposure there and whether or not real estate as an asset class is one that you will continue to add to? Certainly, it seems like a lot of the on-balance sheet going forward will be equity method, but just trying to get some color.

Thanks, Noah. Yes, we continue to seek new investments within the solar real estate asset class and like that asset class a great deal. New assets that are originated today in that asset class are generally securitized. They are relative to what goes onto our balance sheet today, somewhat low yielding and somewhat highly levered. And so that is a much better asset to go through our securitization program. And what you're seeing on the reduction in real estate on the balance sheet is us rotating out of those on-balance sheet programs into the securitization platform.

Yeah. And at the same time, just to sneak one more in. I mean, you did grow your financing receivables balance, right? So that suggests that that asset class, you're still finding opportunities to get the kind of yields that you spoke to, that you referenced in your prepared remarks. Just trying to understand the types of receivables that would carry these types of rates.

For receivables, it really just goes into our loan bucket, which is applicable really to all of our assets.

Yeah. I would say just to even take us further, most of what we do in residential solar, for instance, and most of what we do in renewable natural gas, are loans in form and therefore will show up in the receivables line in the balance sheet.

Our next question is from Chris Souther with B. Riley.

Hey, guys. Thanks for taking my questions here. Just on the elevated gain on sale in the quarter, is that related to KKR, or the real estate sales is the driver there? Just wanted to see what had caused the elevated numbers there in the quarter?

Chris, it was more the latter. The KKR transaction just closed and had no impact on the first quarter.

Okay.

And will have no impact going forward on the gain on sale line. A significant part of that was what Marc mentioned earlier, which involved rotating some of these real estate investments from on-balance sheet to off balance sheet.

Got it. Okay. That makes sense. And then, yeah, I was looking at the economics of the KKR partnership, the FAQs, obviously, very helpful. But should we think about the origination and management fees with that partnership as similar to the securitization business has been historically? Or is it materially different? And then just kind of a follow-up around that is you mentioned on the last call and then again on this call, not needing incremental gain on sale. So I guess KKR's upfront origination doesn't count as gain on sale, but I kind of took that to mean, episodic upfront revenue was not going to be the main driver around the guidance going out to 2026. So I'm just kind of curious is the episodic upfront stuff, it's just between now and the end of 2025. So that's the reason doesn't change 2026 is because it would all be set up by the end of 2025. Or am I thinking about that incorrectly with like the timing?

All right. Because there are a few things in there to unpack. I'll maybe answer the first part of the question and Marc can answer the second part. So for the first part of the question, there's no relationship between the gain on sale, fees, and the orientation and size of those fees and the fees related to CCH1. One is very market driven around the yield on the underlying investment versus the cost of funds from the life that we work with. And it is variable depending on those factors. The fees in this vehicle are generally fixed in nature where we'll get an upfront fee for each investment and we will get a management fee based on the balance, which presumably will go up over time. So I won't in any way equate those to the second part of your question, I'll let Marc answer that.

Sure. So, Chris, I think you're referring to my commentary where I identified the gain on sale remains variable and also some tied our forecast to the guidance window. And the main message we're trying to communicate there is we continue to forecast a consistent level of gain on sale as it relates to guidance. And while we have an elevated amount of gain on sale this quarter, just by nature of the income stream, it is lumpy by nature and will move up and down quarter by quarter.

Our next question is from Maheep Mandloi with Mizuho.

Hi. Jack Hurley here online for Maheep. Slide 15 of the deck provides all the detail on the CCH1 partnership and answers a lot of the initial questions, so thanks for that. The key question remaining is if the three-year guidance includes any of the other similar transactions with other private infrastructure capital providers? And also does the KKR transaction impact any of your equity or debt needs?

For the first part of the question, we wouldn't need to finalize any additional co-investment partnerships to meet our guidance. The transaction we discussed was already anticipated, so it doesn’t alter our current guidance. Regarding the second part of the question, I’m sorry, I seem to have forgotten.

Does it impact any of your equity or debt needs?

Oh, the equity needs. Yeah. Okay. So I think, a simple framework for that is that it's a 50-50 partnership. Without this partnership, all those investments would have gone on their balance sheet. So a strong amount of that is it reduces our equity needs by 50% is I think the best way to think about it.

Thank you. I have one more follow-up. How should we view the economics surrounding the transaction compared to other structures for your company? Additionally, we've heard that many renewable projects and constructions are being delayed by a few quarters for various reasons, such as interconnection challenges. Are you noticing any effects on your pipeline because of this? Does it mean you'll need to shift your focus more towards behind-the-meter projects, for instance?

But maybe I'll take the second part of the question first and Marc can take the first part. So we are seeing periodic and episodic delays in certain projects, but it's not been material. We tend to work with the largest developers who've had less challenges than some others. And some of the transactions we do are also capital recycling. So the project is already built and they're simply recycling capital into next projects so you wouldn't have any delays there. So any delays we're seeing aren't material to our revenue, and aren't causing us to reconsider our guidance. So they've been relatively minor. And I'll let Marc answer the other part of the question.

Sure. The question was generally about the economics of CCH1. To reiterate what Jeff mentioned, it's a straightforward 50-50 structure. Any investment that would have been on our balance sheet but is instead placed into the CCH1 partnership allows us to earn 50% of that through our ownership interest. Additionally, we will receive payments from upfront and ongoing contributions.

Our next question is from Mark Strouse with JPMorgan.

Hi, this is Michael Fairbanks on for Mark. Thanks for taking our questions. On CCH1, is there any color you can provide on how the exclusivity piece works also, I know it doesn't change the overall investment strategy here, but is there a certain asset class within the portfolio that the structure is best suited for? Is that more kind of all encompassing?

I would say it's more all-encompassing. The exclusivity we would describe as limited exclusivity. I think you should think of it as we're showing them most of what we are sourcing for the balance sheet. And they are, in some cases committed based on some pre-agreed upon criteria. And in other cases, they have the ability to decline transactions and in those cases, we can do them on our own. So I think that's the framework.

Our next question is from David Sutherland with Baird.

Hey, Marc. Hey, Jeff. Thanks for taking the time to answer my question. I have another inquiry regarding KKR. I wanted to ask if you mentioned in the guidance that a joint investment was already anticipated. Were you expecting this to happen as soon as it did, or could you provide any details about how this situation developed? I also have a quick follow-up.

Sure, David. Thanks for the question. I think the main point there is that by the time we were issuing our guidance in the February call, we were engaged in early conversation with KKR and we're able to model what we thought the partnership would become and included in that guidance number. So now that it closed, we don't need to change it. I think that's the key point.

Okay, good. That makes sense. And then lastly, I think Noah may have already asked this, so apologies for the repeat, but just wanted to clarify. Is there any different risk threshold or any other, I guess, restrictions or outlines for the assets in that CCH1 that we should contemplate? Thank you.

Thanks for the question and definitely not. So I'll go back to what I said in the prepared remarks that our business and the way we source, underwrite investments, the way we price risk, it is all unchanged and this in many ways is an endorsement of that strategy. And that the objective here is to have HASI do what it's always done and allow KKR to participate in that business, not change the business. So that's the way to think about it.

Ladies and gentlemen, we have reached the end of the question-and-answer session and are out of time for today's call. Thank you for your participation. You may disconnect your lines at this time.