Greetings and welcome to HASI’s Second Quarter Earnings Conference Call and Webcast. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neha Gaddam, Senior Director of Investor Relations and Corporate Finance.

Thank you, operator. Good afternoon, everyone and welcome. Earlier this afternoon HASI distributed a press release detailing our second quarter 2023 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. Today's discussions also included some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP 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. Now I’d like to turn the call over to Jeff, who will began on Slide 3. Jeff?

Thank you, Neha and good afternoon, everyone. July 2023 is likely to be recognized as the hottest month in history today and 2023 is turning to be the hottest year on record. Unfortunately, climate risk continue to escalate, but these trends also highlight the enormous amount of projects and capital that will be required to mitigate these risks. In this context, HASI continues to actively engage with our clients, providing capital, industry expertise and efficacy to address these growing challenges. Our business remains uniquely positioned to invest in the increasing number of projects being developed with a climate-positive focus. As evidence of these trends and our growing opportunity set, I am pleased to announce that our investment volume for the first half of the year is the highest ever at $815 million, including $426 million for the second quarter. This is compared with our highest investment yields ever over the same period with a weighted average yield at 8.5% for balance sheet investments. This combination of larger volumes and higher yields provides significant momentum for the business and for future earnings growth. In addition, our portfolio yield has increased from 7.5% to 7.7%. We also closed on our successful capital raise sustaining long-term equity growth capital that provides the foundation for another $1 billion of accretive balance sheet investments or roughly $2 billion of total investments if we include securitized investments. And we upsized our bank revolver providing enhanced financial flexibility. For the second quarter, we announced distributable EPS of $0.53 and GAAP EPS of $0.14. We've declared a quarterly dividend of $39.5 per share and are affirming our earnings and dividend guidance. On our Investor Day in March, we disclosed we were performing a thorough analysis of our tax and corporate structure. As a result of this process, we…

Thank you, Jeff. I'll begin by summarizing our financial performance on Slide six. In the second quarter, we recorded distributable earnings per share of $0.53 and GAAP earnings per share of $0.14. Over the last year, we grew our portfolio by 26% to $4.9 billion and managed assets 15% to $10.7. Our portfolio is driving a 12% increase in distributable net investment income compared to the same period last year. We also recorded $39 million gain on sale, fees and securitization income for the first half of this year and anticipate full year to be in line with prior year. Our execution has remained consistent in any number of different macroeconomic environments. To provide some context for this consistent execution, between 2019 and 2021, we approximately doubled our gain on sale fees and have maintained these levels. We have also more than doubled our portfolios in 2019 and continue to see a shift where a larger portion of our earnings are anticipated to be derived from NII. This shift is particularly important as we see a higher level of visibility into profitable growth. Let's turn to Slide seven. Our portfolio yield increased from 7.5% to $7.7% in the second quarter. We funded $290 million of investments during the quarter, and recent closings at higher yields are beginning to show their impact. As we continue to convert our pipeline and fund newer transactions at higher yields, we expect portfolio yield to continue its upward trend. On Slide 8, I'm pleased to update that our disciplined focus on margins is working. While our investment yields are increasing, our cost of debt has remained constant. Year-to-date, we've managed our debt costs primarily through our hedging program and more efficiently managing our revolver and cash position. During the second half of 2023, we anticipate…

Thanks, Marc. Turning to Slide 10, I'll give an update on our environmental, social and governance efforts, which are embedded into our differentiated business model. We made good progress in quantifying our Scope 3 category 15 portfolio emissions for 2022, which certain investors have asked about, with the goal of setting a Scope 3 science-based target later this year. I'm also pleased to report that the HASI Foundation continues to make an impact at the intersection of climate change and social justice. And related to governance, a majority of our independent directors are now women or from underrepresented communities. Turning to Page 11, a few more thoughts on our corporate structure transition, reiterating that as a C-Corp, we will be better positioned to capitalize on new opportunities, particularly in our FTN business segment. And I will again clarify that our change in corporate structure will have no impact on our investment strategy or dividend policy. Quite simply, the company will continue to operate in an identical fashion in virtually all aspects of our business. We also expect the shareholder rotation will be minimal as our shares are held by very few REIT funds. As it relates to tax efficiency, we will utilize existing NOLs, as well as newly generated NOLs, depreciation, and tax credits, all from our traditional equity investments in order to minimize our tax obligations going forward. We expect to pay de minimis cash taxes for at least the next five years and expect to deploy an effective tax planning strategy in the subsequent years to maintain efficiency. In summary, the business will have a higher growth trajectory, an unchanged dividend profile, and continued tax efficiency. Please note we have included an FAQ regarding the tax election on Page 14 in the appendix. Let's wrap up on Slide 12. Over the last several months, we've been responsive to investor and analyst advice to simplify our story. On Investor Day in March, we clarified we have a simple business model focused on climate, clients and assets. Today we are further simplifying by communicating a simpler corporate structure in 2024. We pair this simplified model with demonstrated success as we continue to execute quarter after quarter, achieving our profitability goals and establishing a path for continued success despite higher interest rates and other real or perceived headwinds. Our unique business offers investors access to the energy transition with both growth and income. We are very proud of our success in the first half of 2023 and have positioned the business for additional prosperity. These achievements are the result of a dedicated and talented team at HASI that I have the privilege of working with every day. I thank all of my teammates as well as our shareholders for their support of our business. That concludes our prepared remarks. Operator, please open the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Your first question comes from Noah Kaye with Oppenheimer. Please go ahead.

Good afternoon. Thanks for taking the questions. Let's start with the REIT announcement. Clearly you put a lot of effort and thought into this and announcing to us today, but just indicating this is preliminary or, I guess, subject to board approval, maybe just walk us through expected process and timing for making this formal, getting it formally approved by the board.

Thanks, Noah. I appreciate you calling in. There are a few compliance and governance items involved and when companies are dereading, it's best to seek the board approval and the finalization in the fourth quarter for those governance and compliance reasons and so that will be our plan. We're targeting a fourth quarter board approval and so for now, we're calling this a preliminary decision, but I think investors should certainly expect us to start to move in this direction for 2024.

Okay. And as a formal approval, one would presume you consulted already with the board on this.

Yes. We have informed the board. We just haven't asked for their approval. That is correct.

Okay. The second part of this, have you had any discussions with the agencies that provide classification systems about moving out of the REIT category, or do you plan to? And I guess, what industry peer group would you ultimately expect to be placed in if you're not classified as a REIT?

So we have looked at that issue. I believe the way to think about it is the SIC code. You select when you file your financial statements, and the GIC code is primarily determined by MSCI and S&P and so you don't have control over your GIC code. Those organizations generally select it for you, but we are going to advocate for a certain code to the extent you can do so.

Okay. And the SIC code that you would elect would be?

That's to be determined.

We'll find out. Okay. All right. Understood. I had to ask. I guess, just the last question for me, appreciate, Marc, the comments around the timing of cash collections on those wind investments, and it seems like, in general, credit loss provisions tend to continue to be de minimis. But the overarching question we have is, in your cash sources and uses, you've shown healthy coverage of the dividends, fiscal '22 and then trailing 12 months. Any concern that, as we move throughout the year, we may be getting tighter on that? Do you expect to have continued healthy coverage in terms of cash collections?

Thanks, Noah. Yes. There's no concern. We have obviously identified a quarter dynamic that I think everyone has seen show up throughout the industry. But at this time, I would not point to any long-term trends.

Okay. I'll turn it over.

Next question, Chris Souther with B. Riley Securities. Please go ahead.

Hey. Thanks for taking my questions, guys. Maybe just to follow up on the wind impact there, could you kind of break that out versus kind of the just general lumpiness of the cash collection, and kind of cash flows from operation? I just wanted to get a sense what the magnitude there was specifically on the wind side. And then if you had any sense of the timing of that catch up, would be helpful.

The best place to look, which I'll point you to, I think will show up actually in the queue, which will detail the cash collected from our EMI investments, which, as I think you know, are primarily the grid connected and grid connected wind investments. So that, I think, can help start to quantify it for you. In terms of the catch-up, I think that that will largely depend on what next quarter's performance is. But assuming that wind bounces back and starts to perform per expectations, we would not anticipate that this is a long wait period for us.

Got it. Okay. I guess that's for you to predict the wind. So maybe just on the pipeline mix dynamic, there's an uptick in behind the meter. I'm curious if that reflects additional partners, customers, any specific subsectors that are getting more exciting that you could call out that would be great.

We have some new clients in there, Chris? The behind the meter side is mostly community solar, energy efficiency and resi solar. And there's a lot in the pipeline from longstanding clients in those asset classes, but there are several transactions also from some new clients as well as we expand our business.

Got it. Okay. That's helpful. I'll hop in the queue. Thanks, guys.

Next question, Ben Kallo with Baird. Please go ahead.

Hi. Good evening. Thanks for taking my question. Just on the restructure, does it change anything, Jeff, on the way you think about either the distribution rate for your dividend or the capital structure? I know you guys for a long time, I think, had like a 2.5 leverage ratio.

No, Ben, it really doesn't. I think the leverage profile of less than 2.5, it will be unchanged as a result of the tax selection. And I think the trajectory of dividends will be unchanged as well. On Investor Day, Marc, for instance, alluded to by 2030, the payout ratio being in that 50% to 60% range. I think that's a reasonable way to think about the business with more retained capital over time that the dividend will continue to grow, but will grow at a slower pace than earnings. And so the roughly 70% payout ratio we had this year will gradually decline accordingly. So I think that's the way to think about the business.

Thank you. As we see your portfolio yield pick-up, often we think that you might be taking on more risk. Could you just talk to that a little bit? If anything has changed, I know you gave the examples there, but maybe just how you guys continue to look at different investment opportunities. Thank you.

Good question, Ben. And the answer is no, we're not taking on a different risk profile in order to obtain the higher yield. The higher yield is a function of higher base rates. So in many of the investments we've made for many years at the same risk profile, we're now achieving a higher yield naturally with the base rates higher and with more revenue to the projects because of some of the dynamics there. And then in some of the new asset classes, particularly in FTN, we're also achieving a higher yield because they're a bit less mature than some of our traditional asset classes. But from a risk profile perspective, they're really very, very similar. On Investor Day, we talked about the six attributes that virtually all of our investments have and as we have expanded into FTN, we've maintained those six attributes as our risk profile and the way we think about the business. So we have not taken on more risk in order to achieve this higher yield.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.