Greetings. Welcome to the Hannon Armstrong fourth quarter and full year earnings conference call and webcast. At this time, all participants are in listen-only mode. A brief question -and -answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. 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, Hannon Armstrong distributed a press release detailing our fourth quarter and full year 2022 results, a copy of which is available on our website. This conference call is being webcast live on our investor relations page of our 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 the 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 include 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 Jeffrey Eckel, the company's Chairman and CEO; Jeffrey Lipson, CFO and COO; and Marc Pangburn, Executive Vice President and Co-Chief Investment Officer. Before turning the call over to Jeff, I'd like to announce that we are hosting an Investor Day on March 21st, during which we will discuss the company in more detail and allow investors and analysts to meet more members of our leadership team. More details on the event will be forthcoming. With that, I'd like to turn the call over to Jeff, who will begin on slide 3. Jeff?
Thank you, Neha. Good afternoon, everyone. I'm pleased to report the company continued to execute in 2022 with Distributable EPS of $2.08 per share, up 11% year-over-year. We reaffirm our guidance for annual growth and Distributable EPS of 10%-13% through 2024 and 5%-8% annual growth on our dividend for the same period. Our board has declared a quarterly dividend of $0.395 per share, an increase of 5.3%. Please note that growing earnings faster than the dividend is intentional in order to provide more retained capital for the growth in investments we are anticipating.
As signaled on prior calls, we executed on strong volume in the fourth quarter with over $880 million in transactions, bringing total volume for 2022 to $1.8 billion. The average yield for newly closed transactions on balance sheet was more than 8% last quarter, a notable increase in the yield of new investments compared to average portfolio yield of 7.5%. These new transactions will fund over the course of 2023. We announced our leadership transition, which will separate the role of Chairman and CEO, and thus Jeff Lipson will become President and CEO March first. Jeff arrived four years ago as a former bank CEO and has done simply a remarkable job building out our corporate and asset finance capabilities, as well as running operations for the last two years.
The board and I have the highest conviction in his leadership of the company. Marc Pangburn will be promoted to CFO from his current role as Co-Chief Investment Officer. Marc has been with the company since just after the IPO in 2013 and has been instrumental in building out the company's investment portfolio and client base. I congratulate Jeff and Marc on their promotions, and I'm highly confident we have the right people to lead the company. In the nearly 10 years since the IPO, I'm pleased to report that we have outperformed the S&P 500 by almost one and a half times on annualized total shareholder return, returning more than 18% per year. We did this while investing on the right side of the climate change line and setting the standard for measuring impact in climate solutions investing.
Most importantly, we've built a deep and highly skilled team of mission-driven professionals to continue to produce superior risk-adjusted returns while making a measurable impact on carbon emissions. I'm excited to focus on my role as chairman and confident of Jeff, Marc, and the rest of the leadership team's ability to execute our growth amidst the overwhelmingly supportive public policy backdrop. Let's talk about that policy backdrop on slide 4. The Inflation Reduction Act will positively affect our business, as evidenced by our clients increasing their pipelines due to the long-term ITC, PTC policy certainty and tax credits for renewable fuels. Tax credits for battery storage has made standalone projects conducive for investment, an example of policy accelerating new investable asset classes for us.
The transferability of tax credits will expand the tax capacity available for renewable projects as well as provide an opportunity for us to participate in those transactions. The Infrastructure Bill and CHIPS Act provide constructive policy backdrop for new transmission and onshoring manufacturing. In my 40-plus year career, I never imagined this level of and length policy support for the energy transition. This is unmitigated good news for HASI. With that, I will turn it over to Jeff Lipson.
Thanks, Jeff. Now that we have moved forward with our leadership transition, I would like to take a moment and recognize the enormous achievements that have occurred under Jeff's tenure. Jeff has overseen the growth of this company from a small enterprise into a significant industry trailblazer and leader in climate solutions. The investment thesis that he developed was well ahead of its time, but has proven to be a superior and durable strategic focus.
Jeff has built a talented team which will carry on his legacy. Personally, I am honored to be selected as the next CEO and look forward to continuing to work closely with Jeff as Executive Chairman. I will note we are not announcing a strategic change as part of this succession plan. Our current strategy is working, and we will continue to grow the business with a similar approach, adapting the strategy as necessary. Before discussing our results, I'd like to recognize our incoming CFO, Marc Pangburn. Marc has been an integral part of our investment team for many years, and I look forward to continuing to work with him in his new role. Marc will discuss our fourth quarter investment volume. Marc?
Thank you, Jeff. Thank you, Jeff. It is a privilege to support you both in our growth to date and on the capitalization of the opportunity ahead. I have spent the past nine years with the company, building deep relationships with the best clients in the business. I look forward to building similar relationships with our investors and analysts. On slide 5, we are pleased to report a great quarter, with approximately $883 million of closed transactions across our markets. A significant majority of these investments will remain on-balance sheet with an average yield above 8%, highlighting the upward trend in yields discussed on previous calls. The diversity of clients and asset classes is a noteworthy feature of our business.
In the fourth quarter, we closed 18 transactions with multiple clients, 8 programmatic clients, 2 with whom we've expanded existing relationships into new asset classes, and 1 new client. These clients will continue to drive our business forward in the years to come. I would also like to highlight the carbon count on 1 of our transactions we closed last quarter. It was an equity investment with AES and a 1.3 gigawatt portfolio of 18 projects across 6 states. We calculate a carbon count of 1.1, significantly higher than the portfolio average reported carbon count of 0.4, with the difference being driven by the specific location of the underlying assets. As a reminder, carbon count is heavily influenced by the energy mix of the applicable grid. These assets are displacing a larger amount of carbon emissions per dollar invested.
I will conclude by restating that fourth quarter volume represents a strong diversity of clients, markets, and asset classes. They provide long-term recurring income with an upward trend on yield and play a key role in the energy transition. With that, I will turn back to Jeff rey.
Thank you, Marc. Slide six displays our volume of $1.8 billion in 2022, consistent with recent history. One of the key reasons that we have successfully grown our portfolio is that our strategy incorporates multiple asset classes. If we were reliant on a single asset class, our growth would unlikely be as consistent. In 2020, grid-connected wind was a primary driver of volume. In 2021, grid-connected solar and public sector transactions led to volume growth. In 2022, volume was spread evenly across grid-connected solar, resi solar, and public sector. We also made strong progress in sustainable infrastructure. This diversity is a result of a significant number of clients that we work closely with, many of them involved in multiple asset classes, as well as our ability to pivot towards opportunities quickly.
Our business is becoming even more diverse as recent transactions in renewable natural gas and transportation indicate. Likewise, our 12-month pipeline of greater than $4.5 billion is also well-balanced, as our behind-the-meter pipeline is benefiting from increasing utility rates, our grid-connected pipeline is primarily solar opportunities, and our sustainable infrastructure pipeline is mostly clean fuels, transportation, and nature-based solutions. This balanced profile allows investors to participate across the entire clean energy transition market. Turning to slide seven, we show our $4.3 billion balance sheet portfolio as of year-end 2022, which represents growth of 19% over the prior year. The average yield of our investments is 7.5%, up slightly from the third quarter. The projects underlying these investments represent over 12 gigawatts of clean energy, in addition to the non-power-related investments in the sustainable infrastructure market.
Our investments are non-cyclical, resilient across economic cycles, and represent real assets with long-term income generation. On the right side of the page, we detail our portfolio reconciliation. The portfolio increased nearly 10% for the quarter as we funded $458 million of investments. Funding expectations of previously closed transactions is now over $750 million, including the recently announced AES grid-connected investment, which we expect to fund in the first quarter. Summarizing our 2022 results on slide 8, we report Distributable EPS of $2.08, an 11% growth rate versus 2021 and consistent with our guidance range. The growth is primarily driven by Distributable Net Investment Income, which grew by 34% to $180 million in 2022, reflecting a larger portfolio and strong margins.
We had another outstanding year of securitizing assets, resulting in gain on sale and fees of $79 million in 2022, very consistent with 2021. These fees are primarily driven by asset mix and unaffected by interest rate changes or the ABS market. We expect our gain on sale and fees to remain roughly in the same range for 2023, and over time to represent a lower percentage of revenue as we continue to grow our Net Investment Income. I will note our GAAP EPS was $0.47 for 2022, a lower result than 2021. This was substantially driven by mark-to-market losses on power price swaps at the project level. As energy prices rose, the project's value was increased, which does not show up in the GAAP numbers, but the swaps incur losses, which does result in non-cash unrealized losses.
As we remind investors consistently, this project-level HLBV accounting is not a good indicator of our period economics, which is better represented by our non-GAAP measures. Slide 9 summarizes the long-term consistent success of the business utilizing a variety of metrics. Our Distributable EPS has experienced consistent growth despite all the challenges of the last few years, including the pandemic, supply chain, and interest rates, achieving an 11% compound average growth rate for the 5 years ending 2022. Likewise, our Distributable NII has experienced an average growth rate of 28% over the last 5 years as we have continued to build the balance sheet with accretive investments. Our managed assets and portfolio, as well as our investment margins, have also experienced healthy growth over the last 5 years.
The multiyear demonstrated success of our business, as represented on this slide, represents a strong foundation on which to build. Which brings us to slide 10, reflecting that we continue to affirm our 10%-13% EPS guidance despite the macroeconomic challenges and market volatility. We expect to achieve our 2024 EPS guidance growing approximately ratably over the next two years. Turning to slide 11, we discuss our funding platform. Our liquidity as of year-end 2022 stands at over $870 million even after making all the aforementioned accretive investments in the fourth quarter. In the upper right, we note we have been successful raising capital from diverse sources over the last two years. In 2022, we raised approximately $1.5 billion from our Term Loan A, our unsecured revolver, commercial paper, convertible debt, and equity.
Whereas in 2021, we focused more prominently on unsecured bonds. In 2023, we expect to continue to raise capital to support our growth utilizing diverse funding sources, including securitization, incremental secured, convertible and unsecured debt, and revolver utilization, plus equity issuance to maintain our leverage. We have no material refinancing risk until 2026, and our leverage and fixed rate debt percentage remain consistent with historical ranges. I will also note we included our cash flow reconciliation in the appendix, consistent with the disclosure we began providing in the second quarter. In conclusion, our track record of earnings growth has been outstanding, and we are well-positioned for further growth while our diverse funding platform continues to provide ongoing sources of capital and liquidity. With that, I'll turn the call back over to Jeff.
Thanks, Jeff. Congratulations. Company is in great hands under your leadership. Turning to slide 12, we note a number of ESG accomplishments as well as our periodic carbon and water count disclosures. Last quarter, in collaboration with other leading corporates, we co-founded the Emissions First Partnership to improve corporate and investor emissions accounting by moving beyond megawatt-hour matching and focusing more on quantified emissions impact. We declared a social dividend to the Hannon Armstrong Foundation to support climate justice initiatives. Some of those projects in 2022 include energy efficiency projects for nonprofits, resilience hubs for disadvantaged communities, scholarships and fellowships for climate-focused young professionals. Finally, we have enhanced our governance protocol with the announced executive successor that would separate the roles of the Chairman and the CEO. We'll conclude on slide 13.
The business outlook is the brightest it has ever been in this company's history. The energy transition to a lower carbon world is accelerating with support of public policy in the IRA, the Bipartisan Infrastructure Bill on the CHIPS Act. Because of this, our clients' aspirations are expanding, and we believe our long participation in this industry positions us well for continued programmatic investment with our top-tier client base. We have a proven strategy executed by our mission-driven team. The announced leadership succession sets up the company to prosper in its next chapter.
I will close by thanking our clients who are doing the hard work engineering this energy transition, our investors and analysts who have appreciated the opportunity for this business, my fellow directors who have guided me through this succession process, and finally, the HASI team, which continues to inspire me and for whom working with them day-to-day has been an honor. With that, I'll ask the Operator to open the line for questions. Operator?
Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. Our first question is from the line of Noah Kaye with Oppenheimer. Please proceed with your questions.
Thanks very much for taking the questions. I guess let me be the first in the analyst community to congratulate you all for the leadership transitions, and wishing you all the best of success.
Thanks, Noah.
I guess, you know, not to take any attention away from Analyst Day, 'cause I'm sure you'll spend some time talking about this there. Maybe just at a high level, can you talk about why now is the right time for the leadership transition? You know, would love to hear each of your perspectives.
Great question. Noah, we've been doing this as a public company for 10 years. I'll be 65 in April, and there seems to be some symmetry around that. Really the growth in the opportunity is such that there's a real role for me as chairman, working on strategy, some client issues, public policy, and thinking more about carbon. This is going to be a much, much bigger business, and Jeff and Marc are the right two people to take this on. When I left Hannon Armstrong in 89, Mike Cannon sent me a note saying, "I should have created more space for you to stay with us." I feel that's true now.
There's so much opportunity that it's good for this organization to evolve and grow, and this is, I think, the best way to do that.
I would just add, Noah, I think on Investor Day, one of our themes will be how deep a team we have, and you'll get an opportunity to meet more members of the team, in addition to Marc and myself. So I think we're particularly able now to make this transition effectively, given all the talent we hired. This was entirely Jeff's unilateral decision of when he decided it was the right time for him. I think it's really worked out well for everybody.
Appriciate and looking forward to it. Now to switch over to a very in the weeds question, just around the equity method income. It looks like on a non-GAAP basis, you know, equity method income actually increased sequentially. It was, it grew sequentially, was pretty consistent with last quarter. Can you just give us a little bit more color on, you know, how the market price swaps impacted the GAAP losses and just, you know, remind us what, you know, the underlying economics represented by the non-GAAP actually reflect?
Sure. To reiterate, the non-GAAP accounting for equity method investments is fundamentally the IRR that we expect to achieve and earn over the life of the investments taken on a ratable basis. We do adjust that accruing IRR level for changes in the projects as we did in the first quarter of 2022. Other than for incremental changes in the project, that accruing rate tends to stay in place for a very long time, and we do believe reflects fundamentally the economics of our investment, which is why the non-GAAP measure is very helpful for investors and analysts. At the GAAP level, we're required to use HLBV, as you know. One of the items that occurs there is we have these power price swaps down at the project levels.
As I mentioned in the prepared remarks, as power prices increase, the project itself becomes more valuable, but there's no actual immediate accounting associated with that. The swaps themselves become less valuable, and they're more out of the money. They're doing the exact hedge that they're designed to do, but they on a mark-to-market basis are now worth less. That does have immediate accounting. You have losses at the project level that then become part of the HLBV calculation and part of the GAAP earnings on those projects. Likewise, if there were a second item to mention is when utility scale solar projects are put in service, there tends to be an immediate one-time increase through the ITC that also flows through our HLBV financials.
There were a lot more of those in 2021 than 2022, which also affects the GAAP income. Hopefully that's a helpful way to understand the difference between GAAP and non-GAAP for the equity method investments.
Yeah. Just to reflect back, fundamentally, these projects are more valuable now. They have higher revenue associated with them because energy prices are higher. You haven't changed your IRR assumptions regardless. Is that a fair statement?
That's a good statement.
Okay. All right. Thanks very much. I'll turn it over.
Thanks, Noah.
The next question is from the line of Christopher Souther with B. Riley. Please proceed with your question.
Hey, guys, thanks for taking my questions here, and congrats on the new roles all around here.
Thanks, Chris.
Maybe just yeah. Maybe on the gain on sale, you know, historically, that was pretty lumpy. Recently, it hasn't been. It's been, like, really steady until this quarter's down. I assume that's just a function of low public sector volumes in the quarter and not any change in spreads for that business. And in fact, it looks like there's a high receivables held for sale at the quarter end. I'm just kinda curious, you know, if you could talk about, you know, both the gain on sale and, you know, how the public sector market activity looks, you know, in the near term.
Obviously, it's a portion of the behind-the-meter stuff, but I wanted to get a sense of, you know, how that, you know, particular segment is looking these days.
Sure. There's no real trend to report there, Chris. I think, as you know, you know, it can get lumpy by quarter, and I think you picked up on there are some things that we didn't get a chance to securitize in the fourth quarter that'll spill into next year. I wouldn't read anything into that other than from 1 quarter to the next. In terms of the public sector pipeline, it remains very consistent. There are several transactions in the pipeline on the public sector side, and there are several transactions not in the public sector that include investments that we'll also securitize. That's where I was comfortable saying in my prepared remarks, we expect our gain on sale to be very similar again in 2023.
Okay. Got it. Makes sense. And then, you know, I was curious, you know, obviously you guys have had, you know, significant liquidity that you've, you know, been highlighting for, you know, several quarters. Looking at kind of the current liquidity and taking the AES deal closing in the first quarter, that probably, you know, cuts it in half or so. Do you guys have like a target around, you know, liquidity that you'd have at any given point going forward? Just, kinda curious. You know, it seemed to kind of hover, you know, around where it is now, or, you know, have been kind of trending up.
I'm curious if there's, you know, if you guys are looking at that as like a you know, metric we should continue to watch.
We do have a couple of liquidity targets internally that we've agreed upon with our board. We've not disclosed them formally, but they are a function of items that you might expect, including availability on our revolver and near term closings that we expect in our pipeline. I would say it's a very conservative measure, and we tend to maintain quite a bit of liquidity. Even going back all the way to 2020 when the pandemic hit, we started to hold more liquidity, much more than we had previously in 2019 and previous years. We've maintained that trend even as obviously markets have settled in a post-pandemic way.
You know, I suppose given your question, we may consider disclosing a liquidity metric, but I will confirm we do have very specific minimum liquidity targets here internally.
Okay. No, makes sense. Maybe just my last one. You called out that you had a new client. I'm curious what sector?
Excuse me. That was in the grid connected space.
Okay, great. That's all I had. Thanks, guys. I'll hop in the queue.
Thanks.
Our next question is from the line of Mark Strouse with JPMorgan. Please proceed with your questions.
Thank, yeah, congratulations to all of you. Well deserved. Good to see. Can I start with just the comments going back to the policy support, Jeffrey Eckel. Just can you talk about what you're seeing in the market as far as... I mean, the transaction volume you have is, in my opinion, pretty impressive. To the extent that you are able to tell, I mean, how much of that can you directly tie back to the IRA or some of these other bills that have been passed?
Maybe more specific to the IRA, kinda your expectations for timing, what you're hearing from some of your counterparts as far as, you know, getting some guidelines from Treasury, whatever it might be, if we can see a more material uplift as we progress throughout the year.
Thanks, Mark. I think we can attribute 0 in 2022 to the IRA since it only passed in 2022 and hasn't really had an impact on our clients' development pipeline. I think our optimism about that impact, it does come from our clients when they say, we've got, you know, a gigawatt in development, and now they're saying, "Well, now it's 2 gigawatts." Now we see projects penciling that weren't penciling before. We query our clients periodically and get updates on their view, and they're just really quite optimistic. Is it 2023 or 2024 or 2025? We don't know. I'm not sure our clients actually know. You asked about the Treasury guidelines. Some are coming out, but that's still a gating item.
Before you can actually implement the law, you have to have the guidance, and that should not done yet. I think it's important to take a big step back and say, with tax credit certainty for 10 years that this industry's never had, our clients are able to plan for much larger businesses in the U.S. It's, as I said, an unmitigated positive for the business. Always, timing is the key.
Yeah. Got it. Okay. Thank you. Just one quick follow-up. Just fully appreciating, you know, like you said, how diversified your end markets are, just curious for your take on the state of the U.S. residential solar market this year. Just there have been some mixed commentary, you know, from some of the industry participants so far. I'm just curious kind of how you're thinking about that as your outlook for this year?
I'm gonna have Marc Pangburn answer that.
Thanks, Jeff. Along the lines of Jeff's taking a step back, we believe the long-term fundamentals of the U.S. residential solar market remain very strong, driven both by the IRA and increasing utility rates. Obviously, there are some short-term headwinds which have all been identified, but as it relates to our business, we're seeing the increasing cost of capital have a much smaller impact on leases and PPAs, which have been a majority of our focus to date. We expect the industry will work through these and that our business will continue to benefit from this focus on leasing PPAs.
Versus loans.
Versus loans.
Yeah. Right. Makes sense. Okay. Thank you.
Thanks, Mark.
Thanks, Mark.
Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.