UPDATE: Roth Capital Starts Hannon Armstrong (HASI) at Buy

(Updated - February 2, 2015 9:45 AM EST)

Roth Capital initiated coverage on Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI) with a Buy rating and a price target of $19.

Analyst Philip Shen noted the following points with the initiation:

• We believe HASI is uniquely positioned as a “senior yieldco” with high quality CFs since the vast majority of its portfolio is either debt or real estate investments, which have senior CF priority. The company, in our view, has a sustainable competitive advantage enabled by industry and company specific structural features.
• HASI generates an attractive, risk-adjusted return...As of Q3’14, HASI has an average portfolio yield of 5.8% with an average duration of ~10 years. This compares with a ~3.7% yield for the BofA Merrill Lynch US Corporate 7-10 year bond index, ~2.5% yield for the 10 year Treasury, and ~2.2% yield for AA Municipal bonds (Source: Federal Reserve; Bloomberg). 97% of HASI’s portfolio is investment grade with nearly half represented by federal, state, or local governments.
• …as a result of industry & company-specific structural advantages HASI has operated in the ESCO market for 30 years and its attractive returns are enabled by a limited supply of ESCO funding due to meaningful barriers to entry. Additionally, the company has the benefit of scale, which enabled it to develop Hannie Mae securitizations that allow the company to efficiently recycle capital. HASI also has REIT status, which allows for tax efficient distributions to shareholders. All in, we believe HASI has an enduring competitive position and ability to drive outsized NIM.
• “Senior yieldco” attributes result in greater certainty of dividend distributions. When the performance/economics of a hypothetical project deteriorates, we see limited downside risk to HASI’s CFs as we expect the project to maintain a DSCR well above 1x. This compares with other yieldcos that may experience a wide range of equity IRRs, resulting in greater potential fluctuations of dividends.
• We believe HASI trades at an unwarranted discount given its dividend outlook. Compared with yieldcos, MLPs, and mortgage REITs, we see upside to HASI given its ~20% 2015 dividend growth outlook and establish a $19PT. We forecast the company to increase its 2015 dividend to $1.05, up ~20% YoY vs. a conservative Q4’14 forecast.

For an analyst ratings summary and ratings history on Hannon Armstrong click here. For more ratings news on Hannon Armstrong click here.

Hannon Armstrong closed at $13.70 yesterday.

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