Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI) Q2 2022 Earnings Conference Call August 4, 2022 5:00 PM ET
Company Participants
Neha Gaddam – Investor Relations
Jeff Eckel – Chairman and Chief Executive Officer
Jeff Lipson – Chief Financial Offer and Chief Operating Officer
Conference Call Participants
Noah Kaye – Oppenheimer
Chris Souther – B. Riley
Mark Strouse – JPMorgan
Stephen Byrd – Morgan Stanley
Jeff Osborne – Cowen and Company
Julien Dumoulin-Smith – Bank of America
Operator
Greetings and welcome to the Hannon Armstrong Second Quarter 2022 Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Neha Gaddam. Please go ahead.
Neha Gaddam
Thank you, operator. Good afternoon, everyone and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing our second quarter 2022 results. A copy of which is available on our website. This conference call is being webcast live on the Investor Relations page of our website, where a replay will be available later today.
Before the call begins, I would like to remind you that some of the comments made in the course of this call are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. The company claims the protection of the Safe Harbor for the forward-looking statements contained in such sections. The forward-looking statements made in this call are subject to risks and uncertainties described in the Risk Factors section of company’s Form 10-K and other filings with the SEC. Actual results may differ materially from those described in the call.
In addition, all forward-looking statements are made as of today and company does not undertake any responsibility to update any forward-looking statements based on new circumstances or revised expectations. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core financial results and guidance. A presentation of this information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. 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 Eckel, the company’s Chairman and CEO and Jeff Lipson, our CFO and COO.
With that, I’d like to turn the call over to Jeff Eckel who will begin on Slide 3. Jeff?
Jeff Eckel
Thank you, Neha. Good afternoon, everyone. Today, we are pleased to report continued strong performance in the second quarter, with record distributable earnings of $0.60 per share, a 5% increase over last year, also continued growth in net investment income of 44% from last year and up 13% from last quarter, a dividend of $0.375 per share. The on balance sheet portfolio grew 30% year-over-year to $3.9 billion and demonstrates programmatic execution of investments with key clients as well as new ones.
Given our confidence in the business outlook, we once again are pleased to reaffirm our guidance for annual growth in distributable EPS of 10% to 13% through 2024 and 5% to 8% annual growth in our dividend for the period. Our investment in this quarter in an efficiency upgrade in our light industrial building in Baltimore, Maryland results in a carbon count score of 1.6. This relatively high carbon count means our investment has a much higher impact on carbon reduction per dollar spent.
Turning to Slide 4, I will touch briefly on the macro trends in the climate solutions industry. As many of you know, the climate provisions and the inflation reduction introduced last week would offer a powerful policy tailwind to our industry. If enacted, the bill would further accelerate renewable energy deployment by extending and simplifying the tax credits on these projects. Further, it would dramatically expand our investable universe of climate solutions, particularly by accelerating energy storage and hydrogen deployment in the U.S. While our business is not reliant on the IRA becoming law, there is no doubt that HASI and our clients would significantly benefit passage.
Next, the economics of renewable energy projects are improving as the industry is continuing to adapt to inflation by raising PPA prices, which on average have risen almost year-over-year. These price increases are generally less than the price increase customers have experienced due to rising natural gas prices reflected in the wholesale power market, leading to pricing power for our clients. We expect the growth for U.S. LNG in light of the Ukraine-Russia war will keep natural gas prices elevated. Increasing retail utility rates makes solar and efficiency investments even more compelling to the behind the meter and user aim to borne the impacts of inflation and higher utility rates.
Finally, the investments our clients are developing are increasing in sophistication beyond just producing or saving energy. Combining multiple technologies in a project creates more economic value to the end user and risk adjusted return for investors and climate solutions are rapidly expanding beyond electric power into fuels, agriculture and transport.
Moving to Slide 5, we provide an update on our 12-month pipeline, which we continue to report, is greater than $4 billion with a substantial volume weighted to the last half of 2022. I would like to highlight the growth in the sustainable structure pipeline, growth we have foreshadowed in prior calls. Sustainable infrastructure includes standalone storage, renewable natural gas, transportation, in addition to storm water remediation and climate resiliency investments as 17% of our pipeline further diversifies our client base and pipeline. Behind-the-meter pipeline remains strong in residential community and [indiscernible], along with consistent governmental and industrial efficiency opportunities. The grid connected pipeline remains predominantly solar with a smaller amount of onshore wind.
Turning to Slide 6, we detail our $3.9 billion balance sheet portfolio, which has grown 30% from $3 billion of this year and the yield has picked up slightly to 7.4% in the quarter. Our portfolio now includes over 350 investments across 8 asset classes, with a weighted average life of 18 years. The diversity in our portfolio in terms of clean energy asset classes, geography and clients remains an underappreciated strength of our business. The fact that these assets generate more money each month is an important fact with the prospect of a recession on the horizon.
Now, I will turn it over to Jeff to provide some detail on our financial results.
Jeff Lipson
Thank you, Jeff and good afternoon. Summarizing our second quarter results on Slide 7, we recorded distributable earnings per share of $0.60 and a strong quarter of distributable net investment income of $48 million and recorded gain on sale of approximately $23 million. On a year-over-year basis, we continue to demonstrate substantial growth, distributable net investment income and steady realization of gain-on-sale fees, as our dual revenue model continues to bolster our distributable EPS.
In the upper right, we note year-to-date distributable EPS growth was 12% year-over-year, resulting from higher revenue from a larger portfolio and a slightly higher portfolio yield offset by modestly lower gain-on-sale. In addition, as shown on the lower right, our gain-on-sale from securitized assets for the year-to-date was $45 million, modestly lower than prior year by interest rate movements, remaining at a level that reflects continued strong activity in investments that we typically securitize, coupled with ongoing robust demand from our securitization partners.
On the lower left, distributable net investment income was over $90 million year-to-date, reflecting year-over-year growth of 43% driven by a larger portfolio and ongoing strong margins. Our NII is expected to grow each quarter as we add assets to the balance sheet, provide ongoing stability and visibility into our future earnings growth. Therefore, as Jeff indicated, we are affirming our guidance of 10% to 13% compound annual growth and distributable earnings per share through 2024. Although we typically do not spend much time talking about GAAP earnings, I’ll note why we had a GAAP loss in the quarter.
At the project level for certain of our grid connected investments, swaps are put in place to hedge energy prices. As energy prices have been rising, the swaps although performing exactly as intended, incur mark-to-market loss on the project financials and those financials flow through to our GAAP results. These marks will reverse as towers delivered. Therefore although not a reflection of period economics nor our cash collected, we record a GAAP loss driven by the SWOT marks.
Turning to Slide 8, we detail our Q2 portfolio reconciliation. We funded $370 million of investments resulting in portfolio growth of 5% in the quarter. Funding expectations of previously closed transactions is shown on the right, with over $570 million expected to fund through the end of 2023. To be clear, the amounts in this table reflects close, but unfunded transactions and are entirely incremental to the portfolio growth we expect from our greater than $4 billion pipeline.
On Slide 9, we are pleased to highlight our inaugural credit rating by Moody’s of BAA3, which is investment grade and a major accomplishment in our long-term financing plan. The rating reflects our solid track record of investing in clean energy while sustaining profitability and appropriate leverage. It is also a reflection of the strong credit profile of our portfolio.
Shifting to interest rates, as we have noted several times in previous calls, we have a demonstrated track record of increasing our earnings at various levels of rates and fluctuating slips of the yield curve. Our margins remain strong and we expect increases on our cost of funds will remain manageable. In fact, when we establish our most recent guidance, the forward curve reflected future increases in rates model the corresponding increase in our future cost of funds at that time. Therefore, now that rates have increased, we are able to affirm our guidance.
I’d also note that the 10-year yield has decreased approximately 75 basis points from its recent peak and the forward curve is reflecting an expectation of generally flat rates over the next year. Notably, we have further prepared for higher rates by opportunistically pre-funding our future pipeline by using lower coupon debt in 2020 and 2021. The excess cash proceeds from those transactions, coupled with our $600 million unsecured revolver, have allowed us to continue to fund on investments without needing to access the public debt markets and have created a new transition to a higher rate environment. We have built a diverse funding platform and we are well prepared to shift to other sources of debt, including private debt so that we can continue to fund new investments. These prudent funding decisions have allowed us to operate business as usual despite the increase in rates. We also believe our investment grade rating will assist us in accessing public markets quickly and efficiently in the future.
In the second quarter, we issued $28 million of equity and $200 million of convertible debt. Cash proceeds from these transactions combined with availability in our credit facilities resulted in total available liquidity of greater than $740 million at quarter end. Our fixed rate debt has declined modestly to 93% due to higher utilization of our revolver and we have no material debt maturities until 2025 as we continue to manage our market risk by utilizing modest leverage, ladder debt maturities and diverse funding sources.
Turning to Page 10, we have received investor feedback requesting a more detailed description of our cash flows and non-GAAP measures. So in this quarter’s call, I will take the next few moments to provide a more detailed description of these items. We have provided a simplified example of the accounting and cash flow of an illustrative grid connected solar project in which HASI has an equity investment. The cash flow we expect to receive is depicted by the green line. In most projects, the tax equity investor receives a cash allocation in the early years of the project, which at some point becomes the decreasing percentage of project cash flows, resulting in a corresponding increase in cash flows to the other equity investors.
It depicts a typical GAAP earnings profile utilizing hypothetical liquidation of book value or HLBV accounting as prescribed by GAAP. Often as the tax equity investors receive the tax attributes, the remaining investors are allocated large gains. As we have said many times, these large gains are not indicative of our period economics, but are the property under GAAP. Therefore since we have been public, we have utilized non-GAAP measures that we believe better reflect our economic earnings. The dotted line in this graph reflects our typical distributable earnings methodology. We reported earnings consistent with our long-term expected IRR for the investment. We rigorously model these investments frequently and adjust this earnings accrual rate [indiscernible] that our existing rate is not consistent with our expected IRR. In fact, in the first quarter of this year, we had lowered the earnings accrual rate on two investments to the lower projected project revenue as a result of congestion in the Southwest Power Pool.
As depicted by Note 3 on the slide combining the cash flow with the distributable earnings methodology, results in a cash earnings relationship, such that we often record earnings greater than cash in early years due to the cash allocated to tax equity and in later years, we receive more cash than earnings. This non-cash earnings component is fully expected in earning and the result of the structure of the transaction, including the tax acquisitions, it is not the result of any distress in the project.
Over the full life of any individual project investment, earnings, distributable earnings and cash are expected to be equal. Our grid connected portfolio historically has been comprised of investments and more seasoned projects as depicted on the right side of the graph in which cash has exceeded earnings. In fact, since 2018, our cumulative cash collected on equity method investments has been roughly 2x our cumulative earnings, a definitive track record that our earnings have been realizable in subsequent cash collections. Currently, due our recent success in growing the grid connected business since 2012, most of our new grid connected investments are in an earlier stage during which tax equity investors are receiving cash distribution and our earnings exceed our cash.
Moving to Slide 11, we have also had several questions recently about our cash flow statement. In the appendix is our historical GAAP cash flow statement, on which we have highlighted items that represent adjusted operating cash and portfolio collections. On Page 11, we created a table that reflects portfolio collections, together with our adjusted operating cash flow, provides more than adequate funds to cover our dividend. As the cash flows in our portfolio are reasonably predictable, we have calibrated our dividends and expected dividend growth informed by these forecasted cash flows. The table also reflects that the excess portfolio cash flows are utilized to fund incremental investments supplemented by our capital raising activity.
In summary, we pay our operating expenses and dividend from portfolio collections using excess portfolio collections for reinvestment and raise capital to fund our growth. As our guidance indicates, we have adequate earnings and cash flow to continue to increase our dividend by a compound annual growth rate of 5% to 8% through 2024. And as displayed on the prior slide, as more of our investments reach later stages of their lifecycle, we expect to receive an increasing amount of cash flow to support continued dividend growth. Companies that invest in clean energy projects report cash flows from the projects and cash flow from operations, the consolidated projects, because if we do not consolidate, we report those same cash flows in cash flows from investing.
In summary, it was another quarter of strong earnings and NII growth. The portfolio is performing as expected and our liquidity profile remains excellent.
And with that, I will turn it back over to Jeff.
Jeff Eckel
Thanks, Jeff. Terrific. Turning to Slide 12, an update on our ESG activity includes establishing an internal price on carbon and continued engagement with the SEC on mandatory climate disclosures. Of course, we continue to measure the impact going to have on carbon and water savings and believe we have best in class reporting on this metric.
We will wrap up on Slide 13. Our robust pipeline of [indiscernible] drives our consistent execution quarter-over-quarter. We expect to convert a significant portion of the pipeline into closed transactions in addition to our book of committed fundings and the growth in sustainable infrastructure opportunities. The conversion of the pipeline to portfolio investments, in addition to stable margins, will continue our strong NII growth in future quarters. With our strong first half of 2022 and bright prospects for the second half, we reaffirm our guidance on distributable EPS growth of 10% to 13% and on dividend growth of 5% to 8% over the 2021-’24 time period.
With that, we will conclude our remarks and open up the line for questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question is from Noah Kaye from Oppenheimer. Please go ahead.
Noah Kaye
Good afternoon and thanks for taking the questions. First, I want to start with the Inflation Reduction Act. As it looks like we may get some fairly near-term action on that front. A lot of these provisions are something a repeat from what was contemplated bill back better. But wondering if you could give us as you look at what’s contained in the draft legislation, an overview of how this affects the business, obviously, it proves the opportunity set for customers, but how does it affect the business as a capital provider?
Jeff Eckel
Well, I think, this is Jeff Eckel. One thing simplifying the tax equity structure through transferability, it’s a huge gain for the industry. It allows the transactions to be much more aerodynamic than they are now. So, that’s just sort of the normal business gets easier. And then extending the tax credits for 10 years is a fantastic runway for the industry. As you remember, it used to be year to year, then we went 4 years for tax credit extensions, but to actually embark on the clean energy transition, it’s going to take a lot more than 10 years, but 10 years of tax credit visibility is fantastic. And then expanding the tax credits to include storage and hydrogen and various other above energy sources, most of which will reduce greenhouse gas emissions, as I said, just increases our opportunity set.
Noah Kaye
Okay, that’s very helpful. I guess picking up on that the big step up in the sustainable infrastructure pipeline you mentioned RNG and transportation and the standalone storage. It seems like that development took place really before we saw these provisions, certainly, the ROI in them goes way up if the IRA has passed, but have these assets gotten to the point, where not only are they passing your hurdle rate, but you feel like they are sufficiently dearest for you to consider carrying them on the balance sheet?
Jeff Eckel
Yes, these are meant to be balance sheet investments. Returns are slightly better. And for instance, renewable natural gas, it’s been around a lot longer than it’s been in our pipeline. And we have learned a lot from the industry and hope to use what we have learned to make our underwriting strong. These things are proving themselves out.
Noah Kaye
Okay, very helpful. I am sure others have a lot of questions. So I’ll go back in queue.
Jeff Eckel
Thanks, Noah.
Operator
Our next question is from Chris Souther of B. Riley. Please go ahead.
Chris Souther
Hey, thanks for taking my question. Maybe you could just talk a little bit about how the mix of assets that have been securitized is going to change over time as well as the energy efficiency pipeline, getting funding announcement of climate smart building initiative, how incremental do you think this could be? When are we going to start seeing an impact of this [indiscernible] December executive order around federal building? Thanks.
Jeff Eckel
You asked about securitization mix. And I will answer for Jeff. It’s hard for us to predict, but the opportunities that come to us cleave into something like I say which is low yielding great credit quality, which we have historically securitized to higher yielding assets we have put on the balance sheet. With respect to the executive order on energy efficiency, we are pleased with it. It will have an impact on government agencies to procure energy efficiency upgrades. It will not have an immediate impact however. It takes time for these projects to get proposed, developed and implemented.
Chris Souther
Got it. Okay. And then just on the Inflation Reduction Act, maybe you just talk a little bit about the impact we could see from tax equity. I think in the past we have talked about you guys would probably have benefited from the ITC expiring to some extent given you could potentially be financing a larger slice of project economics and maybe it’s too early to tell, but just the impacts that you guys would see from direct pay or some of these other options that might be available in some different kinds of projects?
Jeff Lipson
Chris, on direct pay, that’s for governmental projects, which there maybe some small positive for us, but conventional renewable projects transferability is applicable and that is not, still not a taxpayer doesn’t necessarily create a bigger opportunity for us, but as I said, to Noah’s question anything that can make tax equity closings more aerodynamic and increase the supply of property, it is a huge positive for everybody in the industry.
Chris Souther
Okay, that was helpful. Thanks.
Operator
Our next question is from Mark Strouse of JPMorgan. Please go ahead.
Mark Strouse
Yes. Thank you very much for taking our questions. And thank you very much for the increased disclosures in the slide deck, it’s very helpful. Jeff, I wanted to go to Slide 16. If we could and just within the EMI section, are you able to kind of break that out a little bit further as far as the return of capital versus return on capital, which is something we have been getting questions about from investors.
Jeff Eckel
So, the return on capital is going to primarily sit in the equity method investments line in the operating. And that’s going to be a sort of reconciliation of the difference between cash and the HLBV earnings. And the return of capital is going to be primarily in the equity method investment distributions received.
Mark Strouse
Okay. Got it. And then as far as the securitizations go, Jeff, I take your point earlier about kind of how to predict. But I believe you have been saying, at least earlier this year that you had expected the revenue contribution from that line item to grow in ‘22. Is that still your stance?
Jeff Eckel
I believe what we said was, it would be relatively similar to 2021. I think is what we have made in the previous statements. And I think we are still on track for that, the primary guidepost that I would use at this point.
Mark Strouse
Yes. Okay. My mistake there then. And then on the on the residential solar, going back to whatever slide that is, sorry, it took a pretty – it looks like it took a pretty good step up this quarter as far as the mix of your portfolio. Just wanted to go back to your comments from I believe, is the last quarter or maybe the 4Q call just talking about increased straight equity investments in some of those projects? Are you starting to see that already in 2Q? If not, when do we expect that to kick in? And can you kind of talk about the mix of preferred investments versus straight equity investments over time?
Jeff Eckel
In your questions, I am not sure that the resi, resi did tick up. We did do more business with our partners. But it’s not necessarily an equity. It’s not the kind of equity I refer to on two calls ago. And we will see, I did foreshadow a busy second half. And our pipeline is very skewed. A lot of second half closings. And I think that’s when we are likely to see some of those equity investments.
Mark Strouse
Got it. Okay. Thank you.
Operator
Our next question is from Stephen Byrd of Morgan Stanley. Please go ahead.
Stephen Byrd
Hi. Thanks for taking my questions and for the disclosure in the presentation. I wanted to just talk about the gain on sale and try to understand sort of the relationship going forward and the magnitude. I think there has been some concern that as in [indiscernible], gain on sale, income could go down. Are there any metrics that we could think about whether it’s the spread between the return is, as you look at it, versus the return that a buyer is targeting in general, not for any particular single transaction. But are there any other guideposts or other ways for us to try to forecast what this number is going to look like in the future?
Jeff Eckel
Yes. Once, you start Jeff and I will give the background.
Jeff Lipson
It’s always a challenge to forecast gain on sale. And I realize it’s been a challenge for the analysts. It’s a bit challenging for us at times, because it can be episodic. But I think the long track record we have had of maintaining a very small amount of gain on sales should provide some comfort as to what it may look like going forward. And we do try and add as I did a moment ago, some directional comments as to the level of gain on sale, we would project in a period – a year moving forward. On the first part of the question, and there was a bullet point related to this on Page 9, which I didn’t actually expand upon in my prepared remarks. But our securitization platform really does not have much if any interest rate risks. So, most of the transactions are done virtually simultaneous to the actual closing, the investment and the closing of the securitization. So and those that are usually a very short period and that short period will usually enter into a rate lock. So, there is virtually no interest rate risk in the securitization program. And we don’t expect interest rate movements up, down, sideways, flatness to impact our gain on sale number. It’s going to be volume driven, that nature.
Stephen Byrd
Understood. And then – thank you. And then just on the cash flow page, on Slide 11, you are showing a number there the first number being adjusted cash flow from operations plus other portfolio collections. If we are trying to think of a metric that’s essentially sort of the free cash flow before dividends and before investment, is that sort of what you are suggesting that measure as a sort of the free cash available to shareholders before, again, before you make those investments and before I guess a few other sources and uses, or how should we – could you just expand on that that sort of first line item, because it strikes me is very important in trying to think through the cash generation capacity of your business?
Jeff Eckel
Sure. I think obviously, we went out of our way to not necessarily create a new metric. I think what we tried to do here was create more of the sources and uses understanding of collections coming off the portfolio to cover operating expense and dividend. There is always some excess there as well to fund new investments. And then the difference becomes the capital raising. We weren’t intending to create a performance metric, weren’t intending to create free cash flow metric. We were simply trying to clarify the cash flow statement into more of a digestible sources and uses schedule and hopefully we were successful in that, but that’s all we were trying to do here.
Stephen Byrd
Understood. Thank you very much.
Operator
Our next question is from Jeff Osborne of Cowen and Company. Please go ahead.
Jeff Osborne
Yes. Just two questions on my end. Going back to securitization, sorry to keep going back to that one. But I understand your side of it and locking in as the deals close. I am just curious, I think you typically are selling those to a counterparty that’s a life insurance company, John Hancock, MassMutual, etcetera. And so I am curious as rates change, maybe quickly, like we saw in parts of Q2, what is their outlook around buying securitizations from you, are you using that as a vehicle?
Jeff Eckel
Jeff, going back to 2000, when we did our first Fannie Mae closing, the single biggest complaint from many of our insurance company partners is, enough volume can give us more. Even in ‘08 and ‘09, that was in the financial crisis that was still true. The fact that we have long dated grade quality, cash flows at a premium to the U.S. Treasury, that’s about as scarce a financial product that is out there. So, we are – that is 22 years tested through up and down cycles. It is a very strong buying side for that business.
Jeff Osborne
That’s helpful Jeff. One clarification, I had a question on the Page 10, which is helpful and illustrative example of a solar project. There is no change to the accounting treatment you would have if transferability of the ITC takes place and the IRA passes? Is that a safe assumption or no?
Jeff Eckel
That would not affect our accounting methodology. No, it will not.
Jeff Osborne
Got it. And the last question I had was just you made reference to private funding. Could you detail that on the debt side, what that would look like, now that your investment grade?
Jeff Eckel
There is a variety of forms and sources. I could say that could be a project level debt financing. It could be a bank, unsecured debt financing. I think the point was when markets are volatile, we look at other options and find that they are available to us. And that is certainly a comfort, and we keep those channels open. But it could look like those two examples or others as well.
Jeff Lipson
And Jeff, just remember, prior to, coming on board and creating our unsecured funding platform, that’s all we did was finance in the private markets. So, we have been a little bit supported with the corporate unsecured, but we have got more than 40 years or 39 years of financing ourselves in the private market.
Jeff Osborne
Got it. That’s helpful context. I appreciate it.
Operator
Thank you. The next question is from Julien Dumoulin-Smith of Bank of America. Please go ahead.
Julien Dumoulin-Smith
Hi. Good afternoon. Thanks for the time. Like to chat with you guys.
Jeff Eckel
Hi Julien.
Julien Dumoulin-Smith
Hi guys. So, just first on the securitization, just going back to that, I just want expectations here. What do you think about the growth outlook for that business? Again, I know you say it’s flattish, just as a percent of overall earnings going forward, obviously, you have got a cadence on your earnings. Should we assume that continues to grow off this 22 days at that trajectory, or do you think that kind of flattish is the new norm, and then we will kind of supplement to hit your earnings with some of these other sources?
Jeff Eckel
So, I think the flattish was ‘22 versus ‘21, which was a very, very large increase over the prior years. So, I think in that context, flattish, shouldn’t be seen as a negative. It’s a very robust gain on sale from securitization. I don’t think we have a ‘23 or ‘24 vision on that just yet. But I would say for context that that could remain relatively flat to ‘21 and ‘22. And we would still be able to achieve our guidance.
Julien Dumoulin-Smith
Right. Yes. I was just more curious about the composition. Oh, yes. Go for it.
Jeff Eckel
Yes. Sorry. As a percent of total earnings, as compared to NII, it should drift down over time, portfolio continues to grow, margins are strong. As you can see, it was 43% year-over-year. And that should create an expectation on gain on sale. On a percentage basis, should decrease over time as a percent of revenue.
Julien Dumoulin-Smith
Yes. That makes sense. Thank you, guys. Yes. And I appreciate the bump up last year as well there. Alright, excellent. And going back here in brief, with respect to maturities, financing strategy, private debt, as you just alluded to a second ago, how do you think about the evolution of interest expense from here? We were at 4.2 or 4.3, I mean you don’t really have sizable maturities for some time, should we expect to kind of stick in this ballpark here, especially if you tap into some of these private debt opportunities, or how do you think about that cadence of interest expense reflecting the interest rate environment where we are relative to the fact that you don’t have many maturities as you document for at least 3 years there?
Jeff Lipson
I think the context, as you said, of not having upcoming significant maturities and in addition, the sort of portfolio of debt is relatively large. So I think incremental debt issuances over the next year or so, are not going to move that 4.3 very much. They will very likely move it up, because whether it’s private debt or other forms of debt, they are likely to be a bit higher, obviously, than they were last year or the year before. But I think the level of increase of that bottom line on the graph, it’s on the bottom line of Page 9 should be relatively modest. And as I have said, in my prepared remarks, was also completely contemplated. So, we looked at the forward curve when we did our guidance. We expected that to happen, cost of funds will go up, they will pick up here a little bit. And it won’t be at a level that will impact our guidance.
Julien Dumoulin-Smith
Yes. Understood. Sorry. Just quick clarification here on the transferability, do you want to make sure on the same page, what you were saying a second ago, just to make it more explicit. Are you basically saying in transferability for IRA being an opportunity, you are saying that by freeing up tax equity and for others to absorb tax credits, that makes more of a traditional capital structure for renewable, but you all to participate from a credit perspective? Is that what you are saying? I just want to make sure I understood your IRA transferability comment.
Jeff Eckel
All I said was it makes it more than enough to close.
Julien Dumoulin-Smith
Yes. Okay, alright. Fair enough. I will leave it there. Thank you guys very much.
Jeff Eckel
Thank you, Julien.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. This concludes today’s conference. Thank you for joining us. You may now disconnect your lines.
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