Why This Mortgage REIT Could Skyrocket

In this video clip from "The Rank," recorded on Feb. 14, Motley Fool contributors Tyler Crowe and Jason Hall discuss Hannon Armstrong Sustainable Infrastructure's (HASI 2.51%) unique portfolio of assets and and explain why it could continue to grow even in an uncertain market. 

Tyler Crowe: Hannon Armstrong Sustainable Infrastructure. The simplest way to explain it is it is a mortgage REIT, but the things that it buys are assets and debt related to sustainable infrastructure, either being renewable energy, grid resilience, water rights management, sort of things. The very basic mechanics of it, is it borrows money and then invests that money. An example, one of its most recent deals is it did a mezzanine loan to the company Sunrun, and it was a mezzanine loan secured by 30,000 residential solar systems, Novel Solar Systems with their contracted backlogs and things like that.

They can get a little creative with the way they invest. You're going to see them invest in debt, they're going to invest in the land underneath a solar farm, for example. They're going to take equity investments, either mezzanine debt, or common equity. But it's basically like a portfolio that is managed by them. The idea being is that they can invest better than they can borrow, very much like a mortgage REIT. So far the proof has been in the pudding. The best way to explain their earnings or their operating margin, is their interest rate spreads or their yield spread, which in 2018, they had a 1.4 percentage point spread between how much it costs for them to borrow and how much the yield on their portfolio was. As of the most recent quarter, they report on Thursday, but I'll give you the third quarter. As of most recently that spread between the yield on their portfolio and their debt has widened to 2.9%.

You've got that, you're seeing a widening spread there, which is a great thing. One of the things that they have access to green bonds. It's basically access to cheap capital. HASI Investing has created this massive demand for climate-conscious borrowing and loans and portfolio products, so institutional investors are working to buy green bonds as fast as they can be printed. It gives someone like Hannon Armstrong a real advantage when they're going to borrow money. Nice cheap capital, you can invest it in things and get a good spread. Here's the one thing that, like I said, gives me pause to actually adding new money to it right now. Why they're being No. 5? Is that, it's price right now, it's only a $3 billion company. It's not huge. But the market value of its equity is two times its book value of its equity, which for anything in the borrowing, lending business that's huge. Just to give a counter, Annaly Capital Management, which is a mortgage REIT, they trade at a discount. Their market cap trades in discount to their book equity. Just gives you an idea, it's an interesting business, it's growing well and you're seeing improvement across the portfolio. But you tie that sustainable infrastructure work to it and it gets really expensive.

Jason Hall: I feel like there's a good chance they could, even with interest rates are going up. I think that's actually going to be a net positive for this company. That's not always the case for essentially mortgage REITs. But I think that's going to prove the case for this company because of their expertise on the renewable side. That's why I rated it as high as I did.

Crowe: The benefit being, of course, is that mortgages most part, they're fixed nowadays. They're variable-rate mortgage thing is not as much anymore, so rising interest rates crush them pretty fast. A lot of what Hannon Armstrong has is some variable rates as well as things like mezzanine debt, preferred equity, things that aren't necessarily the bedrock staple. It's 3.7% for 30 years investment.