Hannon Armstrong Sustainable Infrastructure Capital Inc

NYSE:HASI

Earnings Call Analysis

HASI Achieves Multiple Milestones and Affirms Strong Growth Guidance

Hannon Armstrong Sustainable Infrastructure Capital (HASI) had a strong second quarter in 2024, achieving two major milestones: closing on a co-investment vehicle and acquiring a second investment-grade rating. The company reported an impressive 19% year-over-year increase in adjusted earnings per share (EPS) to $0.63. HASI affirmed its guidance for 8-10% adjusted EPS growth from 2024 to 2026 and aims for a 50% payout ratio by 2030. With significant advancements in renewable investments, the company is poised for continued growth, benefiting from stronger capital positions and favorable market conditions, especially in the renewable energy sector.

Solid Performance in Q2 2024

HASI reported a strong second quarter in 2024, achieving a 19% increase in adjusted earnings per share (EPS), reaching $0.63 compared to the previous year. The company also successfully closed a $2 billion co-investment vehicle and secured a second investment-grade rating, which enhances its financial stability and growth potential.

Optimistic Guidance

Looking ahead, HASI has reaffirmed its guidance for adjusted EPS to grow by 8% to 10% annually from 2024 to 2026, along with a dividend payout ratio forecast of 60% to 70% during the same period. In the long term, the company aims for a 10% annual growth in EPS and a 50% payout ratio by 2030.

Impactful Energy Investments

HASI's portfolio investments, specifically in renewable energy, reflect significant scale, with 10 gigawatts of solar and wind capacity capable of powering 7 million homes. The projects are generating around 20 terawatt-hours of renewable energy annually and are projected to avoid approximately 8 million metric tons of CO2 emissions each year.

Financial Resilience and Cost Structures

The recent upgrade to investment-grade ratings has enabled HASI to access longer-term bonds more reliably, allowing for better alignment of its asset and liability durations. This change is expected to reduce capital costs significantly, evidenced by a spread of 225 basis points on its inaugural investment-grade issuance compared to 339 basis points previously in the high-yield market.

Expanding Managed Assets

Since 2020, HASI's managed assets have surged over 80% to $13 billion. The company is focused on selling lower-yielding investments while reinvesting the proceeds at higher yields, with current investments yielding over 10.5%. This dynamic is critical to the company's strategy to maintain profitability and growth.

Market Trends and Growth Drivers

The demand for energy in the U.S. is expected to grow rapidly, driven by AI-driven data centers anticipated to consume 8% of U.S. electricity by 2030. Electric vehicle adoption and increased domestic manufacturing, particularly in semiconductors, will further contribute to this demand surge.

Strategic Partnerships and Future Prospects

HASI's recent partnership with KKR enhances access to committed capital, giving the company an edge in scaling its operations. As the clean energy market evolves, HASI remains well-positioned to capitalize on opportunities presented by rapidly increasing power demand.

Cautious Yet Positive Outlook

While optimistic about the future, HASI remains cautious, particularly regarding potential fluctuations in gain on sale, which may be flat when compared to previous years. The management emphasized their confidence in maintaining the current guidance and assessing opportunities continuously.

Earnings Call Transcript 2024-Q2

[Operator]

Greetings, and welcome to HASI's Second Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Aaron Chew, Senior Vice President of Investor Relations.

[Aaron Chew, executive]

Thank you, operator, and good afternoon to everyone joining us today for HASI's second quarter conference call. Earlier this afternoon, HASI distributed a press release reporting our second quarter 2024 results, a copy of which is available on our website, along with the slide presentation we will be referring to today. 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 on 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.

And today's discussions also include some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is available in our earnings release and presentation.

Joining me on today's call are Jeff Lipson, the company's President and CEO, Mark Pangburn, the CFO; and Susan Nickey, our Chief Client Officer. Susan will be available for the Q&A portion of our presentation.

Now I'd like to turn the call over to our President and CEO, Jeff Lipson. Jeff?

[Jeffrey Lipson, executive]

Thanks, Aaron, and welcome to the team. Thanks, everyone, for joining us today for our second quarter 2024 conference call. I'm going to begin on Page 3. The second quarter of 2024 was a terrific quarter for HASI as we achieved 2 long-standing goals of closing on a co-investment vehicle and procuring a second investment-grade rating. We also were able to continue to invest at higher returns and increase our adjusted earnings 19% year-over-year to $0.63.

Considering these results and other positive catalysts that I will discuss shortly, we are affirming our guidance for adjusted EPS growth of 8% to 10% from 2024 to 2026 and for a dividend payout ratio of between 60% and 70% in the same period. And a reminder that our long-term goals are 10% annual growth in EPS and a 50% payout ratio by 2030.

Turning to Page 4. We have now reached a level of scale in our business such that we think it is worthwhile to highlight not only the impact on our financials, but the impact we are having on the energy markets as a whole. Excluding our managed assets, our portfolio investments in the first half of 2024 alone comprised 10 gigawatts of solar and wind capacity. To put that in perspective, that is enough electricity capacity to power more than 7 million homes, that solar and wind capacity is generating approximately 20 terawatt hours of renewable energy annually, which is about 2x the annual electricity consumption of the entire city of Washington, D.C.

And our portfolio has also invested in renewable natural gas projects with almost 6 million MM BTUs of capacity. That is about the equivalent annual energy required to heat more than 100,000 homes. Altogether, including the projects in our managed assets, we have invested in projects that, in aggregate, are avoiding approximately 8 million metric tons of CO2 annually based on the year 1 calculation of our carbon count methodology.

In summary, our business already has significant scale and impact, but it's poised to take both the scale and impact a step change higher.

Turning to Page 5. In the second quarter, several industry dynamics and has specific milestones emerged that position the company particularly well over the next several years. First, there continues to be increasing consensus that U.S. energy demand will increase more rapidly than previously forecasted. And this elevated demand for energy will result in corresponding supply increases, much of it from clean energy sources. In fact, we have fundamentally entered a new era of power demand growth with one of the largest drivers coming from AI-driven data centers, which are expected to become 8% of U.S. electricity consumption by 2030. And the majority of these data centers prefer clean power.

In partnership with some of the largest corporate buyers in the world, HASI remains determined to drive transparency and the climate impact of new load by ensuring that emissions rather than simply megawatt hours generated are credibly measured. In addition, there is expected to be continued adoption of electric vehicles, which have an 8% and growing market share and will result in a significant shift from the oil markets to the electricity markets.

Furthermore, another trend is the heightened prioritization of domestic manufacturing, particularly when it comes to semiconductors. Together, these sources of growth are expected to account for an increase in U.S. electricity demand of more than 800 terawatt hours from a base of approximately 4,000 terawatt hours per year. This uptick in growth is expected to occur after approximately 20 years of relatively modest demand growth. In this period of lower growth over the last 20 years, Clean Energy became the overwhelming source of new generation. Therefore, as we enter this period of higher growth, renewables and other low-carbon solutions will experience even more rapid growth.

Solar energy represents the lowest levelized cost of electricity of any source. And solar and wind energy continue to represent the vast majority of new electricity capacity being added to the grid. Likewise, increased adoption of renewable natural gas is forecasted to occur as natural gas will continue to be utilized to meet energy demand. And technology will continue to allow this gas to be more efficiently produced from municipal and animal waste.

It is important to note that all of these trends are unlikely to be impacted by the 2024 election results. There continues to be active discussion and speculation regarding public policy changes and the corresponding impact on the outlook for Clean Energy development. However, it is our view shared by many others that the megatrends of the energy transition itself and the aforementioned increase in power demand, will result in continued considerable clean energy deployment without meaningful disruption resulting from public policy changes. This forecasted supply of clean energy to meet surging demand, will require hundreds of billions of dollars of capital investment. As the only public pure-play investment company exclusively focused on the energy transition, HASI is well positioned to capitalize on this trend, particularly in light of 2 transformative developments in the second quarter.

First was the launch of our CCH1 $2 billion strategic partnership with the global investment firm, KKR, this partnership provides enhanced access to committed capital, diversifies our revenue with incremental fee income and generally positions us to scale our business. The partnership is also an affirmation of the differentiation of our strategy and a reflection that our underlying portfolio of sustainable investments is difficult to replicate.

The CCH1 vehicle has been ceded with 2 investments and is functioning as designed, and we expect CCH1 to be the primary financing vehicle for our balance sheet investments over the next 18 months.

The second positive development in the quarter was our retainment of fully investment-grade stats. We were upgraded by Fitch and placed on positive watch by S&P to go along with our existing investment grade rating by Moody's. These ratings have provided us access to the investment-grade bond market, which provides more stability, lower costs and longer tenure among other attributes that Marc will articulate.

Summarizing CCH1 and the investment-grade ratings into a single sentence. We have reduced our capital needs by 50% and significantly reduced the cost for the 15% we raise ourselves. Therefore, as we holistically assess industry trends and HASI's capital access, we are at a pivotal moment as to just the position of several positive catalysts. As I said on Investor Day last year, we have a simple business model, but a complex business. Our business model can be encapsulated as climate clients' assets, but our business requires a deep understanding of energy markets structured finance and the ability to establish and maintain long-term relationships.

Our talented and experienced team is uniquely qualified to meet the capital needs of the energy transition. This combination of a differentiated investment strategy and enhanced access to diversified and stable sources of capital positions HASI perfectly to capitalize on these industry trends and continue to operate with increasing scale strong margins and profitable growth.

And with that, I'll pass along the call to Marc to discuss the quarterly financials in greater detail.

[Marc T. Pangburn, executive]

Thank you, Jeff. I'll start on Slide 6. Before I cover the quarterly results, I'd like to take some time to emphasize 1 point Jeff just highlighted, our second investment-grade rating and how impactful this will be for our business. We see the change benefiting our business in 3 primary ways: First, on cost. The chart on the left shows the spread differential between BB and BBB bonds over the last 10 years, which has averaged 120 basis points.

To be more specific to HASI, within our previous high-yield platform, we raised approximately $3 billion of corporate debt at a weighted average spread of 339 basis points. Compare this 339 to the credit spread of our inaugural investment-grade issuance of 225 basis points a greater than 100 basis point compression in cost.

Second, we can now more reliably access longer maturity bonds better aligning our asset and liability duration and minimizing our need for hedging activities.

Third, when market dislocations occur, the IG market is meaningfully more resilient as evidenced by the graph on the left. For example, during the initial COVID dislocation, the high-yield market costs increased by 250 basis points more than investment-grade market costs. Generally, the best times to invest during these dislocations and now our largest funding source will be substantially more cost-effective during these times.

Finally, there are intangible benefits such as the general affirmation of the credit profile of our investments. We believe that the combination of these factors will continue to drive attractive margins over the long term.

Turning to Slide 7 to cover the quarterly results. Adjusted EPS grew 19% year-over-year to $0.63 and adjusted net investment income rose 16% year-over-year, to $63 million. Also of note, gain on sale fees and securitization income was $32 million, up about $12 million year-over-year. As a reminder, we expect gain on sale during the guidance window to be fairly consistent with '22 and '23.

Stepping back a bit and moving to Slide 8. This highlights the expansion of our managed assets since 2020. As a reminder, our managed assets include our portfolio, the investments we have securitized and CCH1. Since 2020, our managed assets have grown by more than 80% to $13 billion through the end of Q2. This includes new closings of approximately $260 million during Q2 or $823 million during the first half, which is consistent with our first half 2023. Perhaps more important, the new asset yield for portfolio investments during the first half of '23 was greater than 8.5%, whereas today, we're investing in yields greater than 10.5% with a consistent risk profile.

Moving on to Slide 9. Our portfolio stood at $6.2 billion at the end of Q2, up 27% year-over-year. And we continue our focus on maintaining diversification across our asset classes. Two items of note. Given the size of CCH1, we have not yet broken it out separately, but note that it is currently comprised of one resi solar transaction and one C&I solar transaction. The portfolio also decreased approximately $200 million driven by the ceding of CCH1 and our focus on asset rotations where we have been selling or syndicating our lower-yielding investments to reinvest at higher yields.

Next, on Slide 10. The narrative around our ROE and margins remain consistent with the prior quarter. Our elevated first half '24 ROE is driven primarily by gain on sale. Our portfolio yield continues to increase as new transactions are funded. Our cost of debt has increased relative to 23%, but is actually down to 5.6% from 5.7% in Q1 of '24.

I'd also like to touch on our recent '25 bond refinancing. The 2025 was a $400 million bond with a coupon of 6%. The managed interest rate risk, we entered into a forward starting swap to lock the base rate for the expected refinancing -- we actually refinanced the bond. We also unwound the swap. After factoring in the impact of the swap, the effective cost of refinancing was 6%, identical to the 6% coupon on the '25 itself with an additional 9 years of tenure.

Finally, on Slide 11. In terms of the balance sheet, a few important updates. Our leverage ratio declined to 1.8x and after paying down our revolver, we are entering the second half of 2024 with $1.4 billion of liquidity. Additionally, on the right, we have minimal near-term maturities. We continue to manage our liability platform to a ladder maturity profile. Our liquidity position and minimal near-term maturities provide us the opportunity to capitalize on our pipeline and attractive investment environment we see today.

With that, I'll pass it back to Jeff for closing remarks.

[Jeffrey Lipson, executive]

Thank you, Marc. Turning to Page 12. We detail various sustainability and impact items, including receiving the highest rating from S&P's green bond framework and a notable award from Reuters regarding our sustainability culture.

Let's conclude on Page 13. HASI remains uniquely positioned with a differentiated business model, enabling us to remain the preeminent pure play capital provider to the energy transition. Our existing liquidity and capital, paired with our improved access to growth capital and an attractive margin to our investment return, ideally positions us for success over the next several years. I would like to thank our talented team for another outstanding quarter as we look forward to a successful second half of 2024.

Operator, please open the line for questions.

[Operator]

[Operator Instructions] The first question we have is from Noah Kaye of Oppenheimer & Company.

[Noah Kaye, analyst]

A lot of positive developments noted in your remarks. Maybe just a first quick housekeeping one. Looking through the cash flow statement, it looked like there was a really big number in principal collections from financing receivables. Can you just give us a little bit more color on that what drove that? And I assume we should treat that as not typical, but any information would be helpful.

[Marc T. Pangburn, executive]

So there were 2 components to it. One was I would just say, ordinary course amortization of some of our loans that we do have a regular run rate on but it is larger this quarter, primarily due to us identifying some loans that were at a lower yield and being able to bring in other parties to take a large piece of that. And that fits into our -- the general asset rotation program. We've been talking about looking to reinvest that cash at the higher yields we're seeing today.

[Noah Kaye, analyst]

Okay. And then a follow-up. You have an update on the pipeline in the appendix. It looks like it primarily skews behind the meter and FTN. So for confirmation, should we think about the likely yields on those is also 10.5% or north of that? Which would imply continuing, in fact, increasing spreads, given the favorable trends on cost of debt.

[Jeffrey Lipson, executive]

So thanks for the questionNoah. I think you should think of the pipeline yield as being consistent with the recent closings. So I think most of what's in the pipeline is at that same levels at which we've been closing transactions in 2024.

[Noah Kaye, analyst]

Great. And maybe just one last one. I appreciate not breaking CCH out early in the life of the vehicle, but you did disclose the actual assets, I believe, in the vehicle in the release. roughly what kind of size would it have to get to before you would think about breaking it out? And just to clarify for us what that would mean in terms of a separate revenue line or or equity income contribution, rather, I should say.

[Marc T. Pangburn, executive]

Sure. So in terms of how we would break it out, I think the 2 components to that. One is in the deck itself in our various high charts and it'd likely either become a slice of a pie or we just create a new pie chart as pros. In terms of how it will show up in the financial statements, the revenue streams from CCH1, for example, the recurring asset management fee and the upfront fees, we're just too small to break out of the line items on the financial statement. But we will certainly continue to consider the right time to break those down in the future.

[Operator]

The next question we have is from Brian Lee of Goldman Sachs.

[Unknown Analyst]

This is [ Tyler Bisset ] on for Brian. First, are there any implications from SunPower no longer providing leases and PPAs on existing fund strong funding Additionally, you were involved in a portion of the $300 million of project financing commitments SunPower announced earlier this year. So is there any underutilized capacity on these existing funds that may be able to get returned or redistributed?

[Jeffrey Lipson, executive]

So thanks, Tyler, for the question. I may answer that a little broader than you even asked it, just to assume there'll be other questions related to SunStrong. And I would ask folks to turn to Page 18 in the appendix. And I think the sort of 5 things to understand about SunStrong and HASI is, number one, it's a very small portion of the existing portfolio. Number 2, it's been a very small portion, less than 3% of originations since 2021. So it's not likely to impact us from an incremental business point of view. Third, all of our [ mezz ] loans that are part of SunStrong are fully collateralized by underlying cash flows from leases and a little bit from loans as well. Number 4, all the leases continue to perform as the homeowners themselves are obviously unimpacted by any disruption of SunPower. And number 5, the servicer can be changed based on the underlying documents. And so there is some chance there'll be a successor servicer. So when you take those 5 things together, we don't feel like the investments in SunStrong are at risk or at elevated risk given the challenges with the servicer. And hopefully, embedded in their answers to your questions related to the specific facility that we have. We're not funding at this point under that facility.

[Unknown Analyst]

Super helpful. And then there's been a lot of investment happening in the data center world as it relates to power demand, which you discussed in your opening remarks. So where can we expect to see this trend show up most for you? Have you seen any specific opportunities you can call out? Additionally, can you discuss a bit more specifically on how your agreement with KKR can allow you to better capture this growth. Any thoughts there would be appreciated.

[Jeffrey Lipson, executive]

Let me answer that last part, and then I'll let Susan Nickey answer some of the first part of the question. The KKR benefit is really more around access to committed capital, which allows us to scale the business and rely less on capital markets. So that vehicle will just allow us to generally scale the business in all asset classes. As it specifically relates to where we might see elevated business from data center development. I'm going to ask Susan to answer that.

[Susan Nickey, executive]

Yes. Thanks, Jeff. Yes, the data center demand growth, we're really seeing driving the increased forecast for energy. And it seems like every week, we'll get another forecast, which is continuing to escalate. So how that translates to us, again, as we finance the largest developer sponsors who are building projects to satisfy that energy demand. We're seeing that translate into our pipeline. And a lot of the data centers are certainly the big companies, the Googles, the Amazons and other names too are the corporate offtakers that Jeff referred to in the beginning, who are looking for not only that energy, but they want clean energy. So that's overall driving our pipeline growth and also continuing to impact things in a different way in other parts of the sectors also positively.

[Operator]

The next question we have is from [ Julien Demilanmith ] of Jefferies.

[Unknown Analyst]

This is Hannah on for Julien. So just a quick question around managed assets. How should we think about the pace of growth given that they've been growing over 20% year-over-year for a few quarters now? And how should we also think about the distributions and transfers from the KKR partnership impacting that pace of growth?

[Marc T. Pangburn, executive]

Sure, happy to take that. I'll actually take the second one first. In terms of the transfers to the CCH1 entity, I would expect that as a onetime dynamic where we had some assets on our balance sheet and use those assets to seed the partnership. On a go-forward basis, new investments would just be closed directly into CCH1. So there would be -- there would not be a transfer dynamic. But in terms of how to think about the growth of managed assets, I would tie that to our annual closed transactions in that whether they end up in our portfolio in CCH1 or being securitized, you can think about all 3 of those prongs showing up in managed assets and also on the closed transaction side.

[Unknown Analyst]

Got it. And then just as a follow-up, generally, how are you thinking about new partnerships going forward, especially given that your shares have recovered a bit in the past few months. is the strategy still to go out and search for new partnerships?

[Jeffrey Lipson, executive]

Well, it's unimpacted by the share price. Our business on the investment side of our business has been very client-centric. So that often involves joint ventures and other partnerships with our clients, and that's an unchanged element of our strategy. On the liability side, we've obviously done this recent transaction with KKR. That is -- think of that as more or less exclusive for the next $2 billion in 18 months. And so we won't be just yet seeking any partnerships on the liability side. We're just going to focus on operationalizing what we have with KKR.

[Operator]

Next question we have is from Ben Kallo of Baird.

[Ben Kallo, analyst]

Could you just talk -- I know Jeff, you said that the KKR providing capital. But have you seen any change in maybe deal flow or the size of deals or terms around deals? I know it's new. So that's my first question.

[Jeffrey Lipson, executive]

Well, we've not seen any changes in deal sizes or terms of deals as specifically related to having the CCH1 program in place. So that's really invisible to our investment side of the business to our client relationships, it really just is a capital element to our business. And so no, it's not impacted how we've operated on the investment side of the business.

[Ben Kallo, analyst]

And then I know you guys have operated under a different White houses, but maybe could you just expand upon what you guys are hearing in D.C. I know it changes day by day, but anything you could kind of color you can give us on IRA and potentially the change?

[Jeffrey Lipson, executive]

Sure. And thanks, Ben, for the question. I'm not sure we're hearing anything different than others are hearing, but it's our general view, as I said in my prepared remarks shared by others that substantial changes in public policy related to clean energy are somewhat unlikely, just given the economics, given the job creation, given how difficult it is to change the tax code. So it's our view that if there were, for instance, a Republican sweep, there may be some changes to things like EV tax credits and things like that, but nothing that would significantly impact our business.

We really deem that very unlikely and the energy transition, as I said, the demand growth, the economics are just too overwhelming such that public policy is not going to impair the deployment of clean energy, and therefore, the addressable market for HASI.

[Operator]

The next question we have is from Maheep Mandloi of Mizuho.

[Maheep Mandloi, analyst]

Apologies for background noise here. Just first one on the SunPower joint venture. Thanks for the details we gave on that. But just curious if it impacts your pipeline -- or just trying to understand how much of that $5.5 billion pipeline is from residential solar exposed to this? And part of that question is also how does -- the refinancing of the SunStrong ABS is do you think is impacted by their to stop the leases and [ PPS?]

[Jeffrey Lipson, executive]

Maybe I'll take the first part and Marc can take the second part. As it relates to pipeline, very, very minimal impact, again, as we showed on Page 18. SunStrong related originations have been less than 3% of total originations since 2021. The portion of your question, that was how much resi solar is in the pipeline when you see our pie slice of behind the meter being relatively large, a decent percentage of that is resi solar. It's still an asset class that we will continue to invest in and so our partners there have portfolios that they continue to show us. And the asset class continues to perform well. So our overall strategy there remains intact.

As it relates specifically to the SunStrong ABS portion of the question, I'll ask Marc to answer that.

[Marc T. Pangburn, executive]

Sure. So ultimately, the ABS investors are focused on asset level performance. and the support that the various service providers perform to ensure that asset level performance. And I would note that -- the ABS is, at this point, 6 years since issuance and that asset portfolio has continued to perform extremely well. And as we've all -- as we've identified previously, the services that SunPower is providing are done through service contracts, and they can be replaced with other service providers as necessary. So I'd expect the ABS investors to continue to focus on the performance of the assets.

[Maheep Mandloi, analyst]

Got it. Appreciate that. And maybe just building on Ben's question on the elections -- any way to kind of think about the impact of the $5.5 billion pipeline if EV or the other taxes, which you think are [indiscernible] for these elections?

[Jeffrey Lipson, executive]

So again, I think something like the EV tax credit would not affect our pipeline at all. And again, it's to repeat a bit. I think any changes that we feel are likely would not be ones that would impact our clients' development or correspondingly impact our pipeline.

[Operator]

The next question we have is from Jeff Osborne of Cowen.

[Jeffrey Osborne, analyst]

Just a couple of quick ones on my side. If I was following the comments right, I think you mentioned the gain on sale guidance would step down in the second half, if I heard you right. Could you just discuss what's driving that?

[Marc T. Pangburn, executive]

Sure. So what we've identified is that both in '24 and just generally within the forecast that we performed, we are forecasting relatively flat gain on sale relative to '22 and '23. And I think you're identifying that our first half of '24 has been a pretty strong half in terms of gain on sale, which would imply the back half comes down a bit. And there's, of course, plenty of time in the second half of the year to continue to originate and securitize transactions. But at the end of the day, these are -- these can be somewhat lumpy to use the term we've used before. And so we've been pretty successful in the first half of the year. And hopefully, we'll continue that success, but we're not -- we have not been forecasting it.

[Jeffrey Osborne, analyst]

Just a quick follow-up on that was the change in the REIT status a driver of the success in the first half at all or no, not related.

[Marc T. Pangburn, executive]

No, that has had no impact.

[Jeffrey Osborne, analyst]

Got it. And then I think the portfolio yields have been flattish here sequentially. How should we think about that for the second half just with the pipeline that you have?

[Jeffrey Lipson, executive]

So Jeff, I think the trend will be as we continue to fund these more recent vintage closings that will have a positive effect on portfolio yield. So the dynamic so far as we have reported in the first half closing transactions at that higher yield, but many of those haven't funded yet. So you haven't really seen it show up in portfolio yield yet. So you'll see it gradually show up. Again, it's a $6 billion portfolio now. So new closings only impact portfolio yield so much. But as these new ones fund, it will start to push up here in the second half.

[Jeffrey Osborne, analyst]

Got it. And the last one I had is just on the investment grade rating. The obvious longer-duration capability, which will be great and lower rates. But does it change your approach to debt as a whole at the Board level, would you consider using more debt now that you can get it at a lower cost and for a longer duration in terms of just total maximum leverage ratio or just your broader approach to debt?

[Jeffrey Lipson, executive]

No, no change there. In fact, the rating agencies are very focused on leverage. And so to maintain the investment-grade rating, we have to keep leverage where it is. So there's no view towards increasing leverage. The only real change, as Marc said, is the lower cost and longer duration.

[Operator]

The next question we have is from [ Ryan Tink ] of B. Riley Securities.

[Unknown Analyst]

Just to follow up on Jeff's first one. If we're looking at full year guidance after 2 strong quarters in the first half, understanding gain on sale was pretty high. Could you just help us think about the next 2 quarters and if the strong performance in the first half could imply upside to the guide?

[Jeffrey Lipson, executive]

I think that's premature, Ryan. And the guidance obviously speaks to 2026. So the first 2 quarters of a 12-quarter guidance period, we're off to a good start. But I don't think that causes us to bump up the guidance just yet. And I think our cadence has been to address guidance and changes in guidance in our February call. So that's likely what we'll do more to say -- we may or may not have more to say, but if we do have something to say, we'll say it then, it's not something in the July and the November call, we usually adjust.

[Unknown Analyst]

Yes. Fair enough. And then just one more on the election understanding. We've talked about what might happen if there's a change in administration. And the little impact you expect there. But maybe can you talk about your customers' cadences ahead of the election if that coming up in November has affected them at all?

[Susan Nickey, executive]

Again, with the demand growth and really also sometimes an insatiable demand by corporates and a number of our clients are the global leaders in corporate PPAs and procurement. They are continuing to develop and follow those clients and being able to provide the power, not only in the grid connected side, but also in behind the meter and other markets opening up in community solar. So we see that again, the macro trends are pervasive and states also, we have always been an important driver in opening up markets. We see that in community solar and some of the other policies they're adopting to meet the demand and capture this great economic growth opportunity for their states.

[Operator]

The next question we have is from Mark Strouse of JPMorgan.

[Mark W. Strouse, analyst]

Yes. I joined late, so I apologize if this was already addressed. But just kind of going back, I think, on that previous question, looking at the medium-term targets here, and just thinking about kind of the impact to your cost of debt with the investment-grade credit rating. Is it -- is it really just kind of your cadence of not updating guidance until the 4Q calls. Or are you kind of signaling that there's something out there potentially that could still kind of get you towards the lower end of that existing rain?

[Jeffrey Lipson, executive]

I don't know that it's really either. We're comfortable with the guidance that we've put out there. Again, we'll look at it again in February. Mark already identified an answer to a question that we had a particularly strong first half in gain on sale, and that may dip down a little bit in the second half. There's nothing thematic there. It's just more coincidental of how many securitized transactions we closed in first half versus second half of the year is more coincidental than anything.

And -- so I don't think there's any real hidden agenda or anything. It's just the 8% to 10% through 2026, we feel good about. And as always, there's upside, there's downside out there, and we're constantly assessing them and reforecasting our business, but we're comfortable with the guidance we have out there right now.

[Mark W. Strouse, analyst]

Is it fair to say though you feel better about that range since the investment-grade credit rating?

[Jeffrey Lipson, executive]

Yes. I will affirm that. We do feel better about the business, about the financial performance about margins having achieved investment grade. So the answer to that is yes.

[Operator]

Ladies and gentlemen, we have reached the end of the Q&A session. And with that, it concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.