Dear Mr. Berko:
What do you think of SolarCity bonds, which pay 4 percent and are guaranteed by individual leases on solar installations? I would like to invest $10,000 in the solar bonds, which would give me an income of $600 a year, if you approve.
-SA, Springfield, Ill.
Dear SA:
SolarCity (SCTY-$55), with 170,000 customers, is among the nation's largest installers of residential solar systems. Elon Musk-the spacey, flaky, high-profile, high-hype investor-was an SCTY founder and is the chairman. Something about this fellow feels wrong, and I'm leery of his quixotic pursuits. This surfacely pleasant fellow has started many ventures in the past few years, but he's finished few-and only one with a profit. Since SCTY came public at $8 in 2012, revenues have tripled, from $128 million to an expected $380 million this year, and Elon's projections are off the charts. While Elon's glowing was going on, SCTY's price zoomed to $89 last year, and some analysts actually think SolarCity will run to $110 by 2016.
Today's cost to convert a home (an average of 5 kilowatts of power) to solar is about $27,000. It has fallen 65 percent in the past four years. The homeowner doesn't put a dime down, because 100 percent of the costs are financed by SCTY. Homeowners sign 20-year leases and send their utility checks to SCTY each month rather than to the power company. And thanks to a generous investment tax credit, their power bills are less than the ones they would be getting from a utility. Every few months, SCTY packages thousands of accumulated customer leases into bundles, selling pieces of those bundles to selected private investors as an asset-backed security. Then SCTY promises to maintain the system and pay interest to bondholders for 20 years. And bond buyers will be happy as pigs in a mud pond, as long as the interest arrives on time. However, with lower energy prices and declining material prices, system installation costs are falling faster than a speeding turtle. And as competition pushes SolarCity's margins lower, smart bond buyers are less willing to risk capital on this junk-quality debt, which lacks a liquid market. So now SCTY retails this junk debt to dummies like us, using a Web-based investment platform called Common Assets. From its California offices, SCTY sells these bonds, importuning guaranteed leases and steady cash flows.
I think these bonds, which depend on a homeowner's discipline to make payments for 20 years, are a dumb, dumb, dumb investment. But income investors or retirees getting 2 percent on certificates of deposit can buy a $10,000 SCTY bond and earn 4 percent. Many things bother me about this process, not the least of which is that I don't trust SolarCity's future management to act in the best interest of the investor, especially for 20 years. As competition becomes increasingly daunting and if financing becomes more expensive, events and things may become shaky at SCTY. There's just too much room and opportunity for management to quietly meddle, manipulate and tamper. Though the process appears simple and straightforward, the crux of the matter is that future management's greed and need to improve revenues and earnings every year could lead to big trouble. Because SCTY's revenue and earnings growth depends importantly on its ability to finance 100 percent of each installation, there's too much temptation for shenanigans. Most investors recall the crisis in the Federal Housing Administration and Freddie Mac when the nation's banking system nearly collapsed during the mortgage bond crisis. These solar bonds are not insured and could easily turn to tinder, and I suspect that SCTY's management is no more trustable than the bankers on Wall Street. And I also doubt a 20-year lease from Mr. and Mrs. Homeowner is considered a secure asset.
Because the investment tax credit will be cut significantly in 2017, SCTY must continually reduce costs to remain competitive. I'd also stay away from SolarCity's shares, which, like those of Elon's Tesla Motors (TSLA-$207.10), are grossly overpriced. SCTY won't earn a centime this year or next and trades at a silly 50 times expected 2017-18 earnings. If you must own a solar security, consider SunPower (SPWR-$31.55). It's a far better company, with four times SCTY's revenues, and handsomely profitable.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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Published: Tue, Mar 03, 2015
