Disclosure: I am long PW and HASI.
In a rational world, the sunniest places would have the warmest
reception for solar technology and investment. While solar is having
its day in the sun in Hawaii, state incentives make the economics of
photovolatics equally attractive in Vermont, a state not known for its
sunny skies. And while California is famous for its rapid deployment of
solar, the economics are at least as good in Washington state, New
York, New Hampshire, and chilly Maine.
It’s not only the economics of solar which can counter-intuitively
get better to the North. There are also some unique opportunities for
small investors to finance of solar projects. Last year, I wrote about
attempts to allow
US retail investors to invest in solar projects through Real Estate
Investment Trusts (REITs) and Master Limited Partnerships (MLPs).
Solar REITs would require a ruling from the IRS, which now looks
unlikely, while Solar MLPs would require an act of Congress… a Congress
that can’t even keep the government open for business, let alone enact
useful legislation.
Innovations in Solar Infrastructure Investment
While Congress fails to act, financial innovators are moving forward. I’ve previously written about Solar Mosaic, Power REIT (NYSE:PW), and Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
Solar Mosaic offers small investors the opportunity to participate in
loans directly, but the number of opportunities has so far been
limited. The interest on offer (4.5%) is attractive compared to many
fixed income investments. Unfortunately, Mosaic investments don’t allow
the freedom to sell which investors can get with ordinary bonds or CDs,
and are not available in tax-advantaged retirement accounts.
Power REIT is investing in the land under solar projects, but is in
the middle of a civil case with Norfolk Southern (NYSE:NSC) and Wheeling
& Lake Erie. Resolution of this civil action has the potential to
easily more than double the value of PW stock with (in my opinion) very little downside risk,
but the associated expenses have forced Power REIT to temporarily
suspend its dividend. When the case is resolved and the dividend
resumed, I expect Power REIT to become an attractive solar income
investment. Until then, I still consider it an attractive investment on
the basis of the huge potential upside from the civil case, but it is
not an income investment.
In contrast, I am very enthusiastic about Hannon Armstrong as a green
income investment. I’m confident that the company will be able to
increase its dividend to $0.93 or more per year over the next two to
three quarters, which will translate into an 8.2% yield at the current
price of $11.32. But HASI is an investment in sustainable
infrastructure (mostly energy efficiency), as opposed to solar.
Two other clean energy income investments have gone public in the US
are Pattern Energy Group (NASD:PEGI) and NRG Yield (NYSE:NYLD). Both
invest in clean energy infrastructure but only have minor investments in
solar. Pattern Energy plans to pay an initial $1.25 annual dividend,
or 5.5% at the current price of $22.63 per share. NRG Yield is expected
to pay an annual dividend of $1.20 per share initially and hopes to
ramp that up to $1.44 per share by the end of 2014, corresponding to
dividend yields of 3.9% and 4.7% at the current price of $30.58. I have
not evaluated either of these companies in depth, but plan to do so
soon.
CleanREIT
In many ways, our Canadian friends to the North are as far ahead of
us in creating a sunny climate for solar income investment as Vermont is
ahead of Florida in creating a sunny climate for solar installations.
CleanREIT Partners, LLC is a specialty finance/management company
investing in solar installations and based in California, but planning
an initial public offering on a Canadian exchange to allow investors to
take advantage of a structure called a foreign asset income trust. I
recently spoke to Bill Hillard, co-founder of CleanREIT, and asked him
what made him consider Canada.
I expected him to cite the tax advantages of Canadian foreign asset
income trusts. Like US REITs, such trusts are not subject to income tax
at the corporate level, but instead Hillard cited the large number of
comparable renewable energy income investments already trading in
Canada. (I wrote about six of these, and selected the one I consider
most attractive here.
Not only are there more than on US exchanges, but the yields on offer
are typically higher.) According to Hillard, solar’s existing tax
advantages should be sufficient to shelter the income from solar
investments to the extent that legislation such as the MLP Parity Act would not be necessary to create a US-listed solar investment vehicle which would not be subject to tax at the corporate level.
For investment bankers who would be underwriting the offering, having
comparable companies already trading on the same exchange makes it much
easier to price the offering. In the end, if a company can’t find an
investment banker willing to take it public, there will be no IPO.
Canadian Foreign Asset Income Trusts
In addition to the advantage of having numerous comparable stocks in
Canada, the Canadian foreign asset income trust seems likely to prove a
compelling structure for companies investing in US-based energy assets.
Several companies investing in conventional energy have already gone
public using this structure, including The Eagle Energy Trust
(TSX:EGL.UN), The Parallel Energy Trust (TSX:PLT.UN), and the Argent
Energy Trust (TSX:AET.UN), which have investments in oil and gas wells
mostly in Texas to avoid state level taxes.
The foreign asset income trust arose out of an exception in Canada’s
2007 “SIFT” rules which required Canadian income trusts to begin paying
corporate tax on Canadian assets. The purpose of these rules was to
reverse the hollowing out of Canada’s tax base. This hollowing out was
the result of Canadian corporations converting to trust structures,
which had only been subject to tax at the investor level, and not the
corporate level at the time. Because the SIFT rules were narrowly
designed to prevent the loss of tax on Canadian corporate assets, they
left in place the ability of a trust to avoid Canadian corporate income
tax on foreign corporate assets. This income would only be taxable to
investors, not the corporation.
According to Hillard, income distributed to US investors in a
carefully managed Canadian solar foreign asset income trust should also
be tax-free because of the income tax shelter afforded by accelerated
depreciation. To his (and my) surprise, many large investors he has
been speaking with seem more interested in this ability to avoid tax at
all levels than the actual income on offer.
That said, the yield should also be attractive. The
distributed-scale, operating solar projects the CleanREIT team has
identified produce a 9% to 10% unlevered cash yield, according to
company documents Hillard shared with me. They expect to be able to
grow income over time as rising interest rates and higher electricity
prices increase the income on solar projects. They also expect that
solar technology efficiency gains will create investment opportunities
to generate more revenue per square foot by upgrading existing solar
plants as they age. At the retail investor level, they expect this
strategy to result in a 7% dividend yield plus growth in equity over
time.
Bottom Line
Although a handful of clean energy income investments are now
available in the US, American investors would do well by considering
Canadian stocks. The existence of numerous comparable companies,
favorable tax structures, and higher yields look likely to keep the
Toronto Stock Exchange an attractive venue for both clean energy
investors and financiers for years to come. If CleanREIT successfully
executes on its plan to IPO as a high-yield, tax-free, distributed solar
investment, Canada will be virtually irresistible to American
sun-seeking investors.
http://www.forbes.com/sites/tomkonrad/2013/10/18/go-north-solar-income-investor/2/?ss=businessenergy
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