INVESTING IN CLIMATE CHANGE SOLUTIONS
S M
2018 ANNUAL REPORT
INVESTING IN CLIMATE CHANGE SOLUTIONS
ABOUT HANNON ARMSTRONG
Hannon Armstrong is proud to be the first U.S. public company focused exclusively on making investments in climate change
solutions. We do this by providing capital to the leading companies in the energy efficiency, renewable energy and other sustainable
infrastructure markets. Our goal is to generate attractive returns for our stockholders by owning a diversified portfolio of investments
that generate long-term, recurring and predictable cash flows from proven commercial technologies.
2018
$ 0. 75
GAAP Earnings
per Share;
32% Annual GAAP
EPS Growth
$1.38
Core Earnings
per Share1;
9% Annual Core
EPS Growth
$1. 2 Billion
Transactions closed
11 . 1%
Core Return on
Equity2
>85% 5 -YEAR TOTAL STOCKHOLDER RETURN, OUTPERFORMING THE S&P 500 INDEX BY 35%*
HASI
S&P 500
$100
$109
$153
$163
$219
$186
$100
$114
$115
$129
$157
$150
SNL Finance REIT
$100
$115
$105
$129
$151
$145
Dow Jones Utility Average
$100
$131
$127
$150
$170
$173
* Assumes $100 invested at closing on December 31 2013, and that all dividends were reinvested without the payment of any commissions. SNL Finance REIT index is an index created by S&P Global Market
Intelligence. See Annual Report on Form 10-K for additional information.
1 Core Earnings in a non-GAAP financial measure. See our Annual Report on Form 10-K for an explanation of Core Earnings and a reconciliation to our GAAP earnings.
2 Represents Core Earnings divided by the average of the stockholders’ equity as of the last day of each quarter.
2
12/31/201312/31/201412/31/201512/31/201612/31/201712/31/2018HASI$109HASI$153HASI$163HASI$21912/31/201312/31/201412/31/201512/31/201612/31/201712/31/2018$100$110$120$130$140$150$160$170$180$190$200$210$220HASI$186 RECORD INVESTMENT ACTIVITY IN 2018 –
ALLOWED US TO GENERATE FEES ALONG WITH STRONG GROWTH IN MANAGED ASSETS
Closed Transactions
($ in billions)
$1.5
$1.0
$0.9
$0.9
$1.1
$1.0
$1.2
Managed Assets
($ in billions, as of 12/31)
$5.0
$4.0
$3.0
$2.0
$1.0
$3.9
$3.1
105+
130+
$2.6
80+
$5.3
$4.7
175+
185+
$0.5
2014
2015
2016
2017
2018
2014
2014
2015
2015
2016
2016
2017
2017
2018
2018
Balance Sheet Portfolio
Assets Held In Securitization Trust
#+ Represents Number Of On Balance Sheet Investments
CONTRIBUTING TO HIGHER CORE ROE IN 2018 –
WHILE PORTFOLIO ADDITIONS IMPROVED YIELDS TO BENEFIT 2019
Core Return On Equity
Forward Looking Yield
11.1%
Forward Looking Yield1
Weighted Average Life in Years2
11.0%
10.0%
9.3%
9.6%
10.1%
10.2%
8.0%
6.0%
4.0%
2.0%
0%
7.0%
6.0%
5.0%
4.0%
6.0%
13
6.2%
6.2%
6.1%
10
11
12
6.8%
14
24
20
16
12
8
4
0
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
1 Represents forward looking unlevered estimated return on assets (core) yield as of 12/31.
2 As of 12/31, excluding match-funded transactions.
3
LETTER FROM THE CEO
L E T T E R F R O M T H E C E O
Dear Stockholders
2018 carbon emissions were up 3.4 percent in the United States.1
Make no mistake – we are losing the battle against climate
change. While our investment thesis continues to work well, it is
disheartening that the U.S. is not making meaningful progress on
reducing carbon emissions. Simply put, carbon emissions need
to go down by 3% per year, not up, over the next few decades to
limit the impacts of climate change.
Something needs to change. We need to unleash the power of
markets to solve climate change. It’s no secret that the most
credible, scalable and efficient solution is eliminating all energy
subsidies, including the mother of all subsidies, unpriced carbon.
The fossil fuel industry has enjoyed a century of socializing the
costs of its business while privatizing all the profits. No credible
economist has ever thought this was an example of a properly
functioning free market. Fredrick Hayek wrote, “the price system
becomes similarly ineffective when the damage caused to others
” …like “the smoke and noise of factories” … “cannot be effectively
charged to the owner of that property.”2 Similarly, Milton Friedman
discusses a “furnace pouring sooty smoke that dirties a third
party’s collar,”3 as a market failure. Carbon is the ‘sooty smoke’
of climate change.
I have been a student of energy
policy for 40 years, and it is
time to do the one thing that
we have failed to do: put a price
on carbon. And then, dividend
the resulting tax receipts to
U.S. citizens. Friedman’s only
concern about taxing things
like carbon was the unintended
c o n s e q u e n c e s a n d c o s t s o f
government getting the proceeds. With a Carbon Tax and
Dividend, the economists get the program they want, U.S.
citizens get cash rebates, and we all benefit from reduced
risk of climate change.
Carbon is the “sooty smoke”
of climate change
Mind you, Hannon Armstrong doesn’t need a price on carbon
to prosper. Perversely, the larger the impact of climate change,
the better we should perform as we expand beyond investing
in carbon mitigation solutions, into assets for adaptation and
resiliency. Our Portfolio should become more valuable as the
costs of climate change become more obvious to investors – but
what an empty financial victory that would be.
By our estimates, our addressable and investable market is $100
4
billion in the U.S. over the next five years. If we invest at the
current annual rate, Hannon Armstrong investments represent
approximately 5 to 10 percent of the overall market, a meaningful
contribution to the climate change investing business.
However, a $100 billion market segment in the U.S. is several
orders of magnitude below the amount of capital needed to
keep us below the 1.5 degrees Celsius (2.7 degrees Fahrenheit)
warming threshold scientists estimate is necessary to avoid the
most catastrophic damages from climate change.
2018 Review
W e i n v e s t e d a r e c o r d $ 1 . 2
billion in 2018, delivering a 32%
increase in GAAP earnings per
share and 9% increase in core
earnings per share for the year
ended December 31, 2018,
compared to December 31,
2017. This was driven, in part,
by the strength we saw in virtually all of our investment niches
in which we operate – including governmental and commercial
building energy efficiency, residential, C&I and utility solar,
wind and sustainable infrastructure. We continued to focus on
our diversified balance sheet Portfolio with over 185 different
investments and, as expected, securitized a larger percentage of
assets originated in the year for gain on sale income.
$100 Billion addressable and
investable market by 2025
At year-end 2018, our forward-looking yield increased to 6.8%.
This increase was driven by the higher returns of various assets
added to the Portfolio in the year, as well as the disposition of
some lower yielding assets. Notably, the higher Portfolio yields
from balance sheet investments and higher securitizations in
2018 allowed us to increase our core return on equity to 11.1%
in 2018.
Contributing to our strong 2018 performance was the
successful execution of various equity and debt issuances, as
well as the refinancing of our primary credit facility, extending its
maturity to 2023. We lowered our fixed-rate debt percentage to
approximately 75%, within our target range of 60% to 85% and
ended the year with leverage at 1.5 to 1.
Outlook for 2019
I could not be more optimistic about how Hannon Armstrong
can, and will, transact in the large and growing market to address
climate change. We added several new clients to our client base,
L E T T E R F R O M T H E C E O
dominated by top-tier firms growing to capture the future of
energy. These firms are the key to any of our success in combating
climate change and we are grateful for the opportunity to support
them.
We continue to see better risk-adjusted returns in assets that
are behind-the-meter, as opposed to grid-connected assets. This
reinforces our focus on the three D’s of the future electric power
system: decentralization, digitalization and decarbonization.4
Fortunately, this evolution is happening faster than we expected.
improved forward-looking yield positions us well for
The
recurring revenues in 2019 and should allow us to achieve our
earnings growth. As such, we reaffirmed our previously stated
2018 to 2020 annual core earnings per share growth (using
2017 as the baseline) to be between 2% to 6%.
Setting the bar for Environmental, Social and
Governance (ESG) measurement and reporting
A rigorous approach to ESG
– b o t h i n i t s m e a s u r e m e n t
and reporting – has long been
embedded in our corporate
values. While we believe strong
Social and Governance policies
will improve stockholder returns,
it is the Environmental actions,
particularly related to carbon
and climate change, that are most
meaningful to our business, our stockholders and our employees.
$1.2 billion transactions closed
with a 0.42 CarbonCount®
Accordingly, we believe CarbonCount® remains the quintessential
standard for ESG reporting. Our 2018 investments will reduce
carbon emissions by 496,000 metric tons (MT) in the first year
the projects are operational, translating into a 0.42 CarbonCount,
or 0.42 MT of carbon emissions avoided per each $1,000 of
investment. Our annual Sustainability Report Card included
herein details the CarbonCount for each asset.
We formalized various ESG
initiatives under the direction of
our Board of Directors, highlights
of which you can view in the
ESG section of this report. We
are extremely proud to be one
of the first public companies to
incorporate recommendations
from the Task Force on Climate-
Related Financial Disclosures
(TCFD) in our Form 10-K. We
believe it is important for all companies to present information
on the opportunities and risks associated with climate change.
We hope that our presentation of both CarbonCount and TCFD
recommendations will serve as a model for others to follow when
considering how best to report the “E” in ESG.
One of the first companies to
include elements of TCFD in
the Form 10-K
Conclusion
Again, I want to thank the Hannon Armstrong team for an
outstanding 2018. This is a smart, astute and committed team
working for you, our stockholders, while they make a difference
in the defining issue of our generation. Thank you for investing in
Hannon Armstrong.
Respectfully,
Jeffrey W. Eckel
Chairman, President and CEO
April 18, 2019
1 Rhodium Group, 2019, US Electric Sector-only
2 Frederick Hayek, “The Road to Serfdom,” 1944
3 Milton and Rose Friedman, “Free to Choose,” 1980
4 Credit, Isabelle Kocher, CEO of Engie
5
INVESTMENT EXAMPLES
U.S. MILITARY TURNS TO BUNDLED ENERGY SOLUTIONS TO INCREASE RESILIENCY AND RELIABILITY
$ 85 Million
Invested
0.39 CarbonCount®
With the installation of new energy management control systems,
chiller upgrades, lighting improvements, water conservation
technology and solar plus battery storage, our investment in the U.S.
Marine Corps Recruit Depot Parris Island advances the U.S. Marine
Corps mission to ensure reliable and secure energy supply while
reducing lifecycle operating costs.
Photo Credit: Aero Photo. aerophoto.com
CORPORATE RENEWABLE ENERGY COMMITMENTS REACHING NEW HEIGHTS
$ 50 Million
Invested
0.47 CarbonCount®
An increasing number of companies have committed to 100%
renewable electricity, working to increase demand for, and delivery
of, clean energy. Our investment in a distributed energy portfolio of
approximately 200 commercial & industrial solar projects includes
high credit quality corporate off-takers such as Target, FedEx and
investment-grade rated co-ops.
STORMWATER REMEDIATION BECOMING A KEY CLIMATE ADAPTATION MEASURE
$ 7 Million
Invested
0.0 CarbonCount®
increasing
Climate change-related extreme weather events are
in number and strength. As more land is paved and rain has fewer
places to soak in, water runs off faster. Our investment in stormwater
infrastructure installed at four separate project locations will help
to decrease the flow of stormwater, while also filtering out many
contaminants before entering downstream waterways.
6
CORPORATE RESPONSIBILITY
CORPORATE RESPONSIBILITY AND OUR COMMITMENT TO ESG INTEGRATION
We believe we will make better risk-adjusted returns for our stockholders by investing in accordance with sound ESG policies,
while benefiting our clients, employees and communities in which we invest. Recognizing the importance of formalizing our Board
of Directors’ oversight of ESG matters, in 2018, the Nominating, Governance and Corporate Responsibility Committee amended
its charter to expand its scope of responsibilities to include the integration of ESG matters into our strategies, activities, policies,
and communications.
ENVIRONMENTAL
• Financed $1.2 billion of climate change solutions
•
•
Implemented the recommendations of the Task Force on Climate-Related Financial Disclosures (“TCFD”) in our financial filings
– among the first companies to do so
Issued $400 million of Green Bonds through one of our joint ventures, which received Moody’s highest Green Bond Assessment
of GB-1
• Enhanced and further defined our Sustainability Investment Policy and our Environmental Policies
• Became a signatory to the UN Global Compact, with a particular focus on the following UN Sustainable Development Goals:
“Demonstrating a commitment to strong ESG practices is a fundamental element of
the Board’s stewardship. In 2018, Hannon Armstrong’s Board of Directors formalized
and enhanced multiple ESG policies and communications related to our business
operations and strategic objectives. We believe the ongoing commitment to ESG
reporting, including the implementation of the TCFD recommendations, will help to
drive corporate competitiveness and sustainability, as well as serve as a model for
others to follow.”
Teresa Brenner, Chairwoman
Nominating, Governance and Corporate Responsibility Committee
7
ESG HIGHLIGHTS
2018 SUSTAINABILITY REPORT CARD
ASSET TYPE
REGION
CARBONCOUNT ®
ASSET TYPE
BTM
BTM
GC
GC
GC
BTM
GC
GC
GC
BTM
GC
GC
GC
GC
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
West
South
Midwest
South
West
West
West
West
West
West
West
West
West
West
West
Midwest
South
South
South
Midwest
West
South
Midwest
International
Northeast
South
1.78
1.74
1.68
0.98
0.72
0.70
0.65
0.65
0.64
0.61
0.58
0.57
0.55
0.52
0.49
0.47
0.45
0.43
0.42
0.42
0.38
0.34
0.31
0.30
0.29
0.28
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
BTM
REGION
National
West
National
National
West
South
West
West
West
West
West
West
West
National
West
West
South
West
West
West
West
South
West
CARBONCOUNT ®
0.26
0.26
0.26
0.26
0.24
0.23
0.22
0.21
0.21
0.20
0.20
0.19
0.17
0.15
0.15
0.15
0.14
0.12
0.11
0.06
0.04
0.03
0
0
0
*
Other
Other
Seismic
Mid -West
West, South
West
2018 Totals
Metric Tons of CO2 Avoided
496,000
CarbonCount ®
0.42
Gallons of Water Saved
116 Million
BTM (Behind-The-Meter) – Includes Energy Efficiency, Distributed Solar + Storage
GC (Grid Connected) – Includes Utility Scale Wind and Solar
Other – Includes environmental restoration
* Investments in seismic retrofits provide resiliency in the event of an earthquake. A secondary benefit of such retrofits includes the preservation of carbon embedded in the built environment.
Estimated carbon savings are calculated using the estimated kilowatt hours (“kWh”), gallons of fuel oil, million British thermal units (“MMBtus”) of natural gas and gallons of water saved as appropriate,
for each project. The energy savings are converted into an estimate of metric tons of CO2 equivalent emissions based upon the project’s location and the corresponding emissions factor data from the
U.S. Government and International Energy Administration. Portfolios of projects are represented on an aggregate basis.
CarbonCount® is a scoring tool that evaluates investments in U.S.-based, energy efficiency and renewable energy projects to determine estimated CO2 emissions avoided annually per $1,000
of investment.
8
ENVIRONMENTAL IMPACT CONTINUES TO GROW
Cumulative Metric Tons Of CO2
Avoided Annually
Cumulative Gallons of Water
Saved Annually
(In Million Gallons)
2013
2014
2015
2016
2017
2018
2013
2014
2015
2016
2017
2018
(0)
331,000
(1 Million)
672,000
(2 Million)
(3 Million)
1,323,000
1,809,000
2,339,000
(0)
(500)
(1,000)
(1,500)
628
773
913
1,114
2,835,000
(2,000)
1,496
1,612
CarbonCount® Total Metric Tons of CO2
Avoided Annually per $1,000 Invested
Hannon Armstrong Emissions Data
The table illustrates our goals and performance for 2018 in metric tons (MT).
0.75
0.60
0.45
0.30
0.15
0
0.72
0.39
0.56
0.46
0.42
2014
2015
2016
2017
2018
Category
Goal
Performance
Verification1
Scope 1
GHG emissions
0 MT
0 MT
Bureau Veritas
Scope 2
GHG emissions
0 MT
0 MT2
Bureau Veritas
Scope 3
GHG emissions
0 MT3
365 MT3
Bureau Veritas
1 In addition to our internal review, Bureau Veritas North America, Inc. was commissioned
as an independent organization to verify our GHG emissions reporting as estimated in
accordance with GHG measurement and reporting protocols of the World Resources
(WBCSD)
Institute
Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting Standard (Scope 1, 2
and 3).
(WRI)/World Business Council
for Sustainable Development
2 Performance stated is market-based which includes the impact of purchasing carbon offsets.
3 Our stated actual performance for Scope 3 GHG emissions does not include the carbon
emissions reductions as a result of our investments. The first year carbon emissions
9
ESG HIGHLIGHTS
SOCIAL
• Formalized and documented our Human Capital Management and Human Rights Policies
• Engaged a nationally recognized expert in workplace diversity, inclusion and equity to provide employee training
•
Sponsored several non-profit events aligned with our core values, such as Carbon Neutral corporate sponsorship for the
Chesapeake Bay Foundation’s annual event and an employee volunteer day to install a rooftop solar system in an underserved
community
• Became a corporate member of the Women of Renewable Industries and Sustainable Energy (WRISE) organization, supporting
the professional development and advancement of women in the renewable energy economy
• Our workforce is ~40% female and ~20% minority
Hannon Armstrong employees installing a rooftop solar system for an underserved household in Washington, D.C.
Jobs
Our investments create over
95,000 highly skilled and high-
wage jobs in over 40 states.
Education
Our investments provided energy
efficiency upgrades to educational
facilities that support over 170,000
school children annually.
Veterans
Our investments provided energy
efficiency upgrades to hospitals and
other facilities that serve over 1 million
U.S. military veterans annually.
Estimated benefit based on project size and investment, length of construction, and industry and government data sources.
• Formalized Board oversight of our ESG strategies, activities, policies, and communications
• Two of our six independent directors are women
GOVERNANCE
• Established an internal cross-functional ESG Committee comprised of company staff representing the accounting, investment,
investor relations, legal and portfolio management functions of the company dedicated to implementing ESG strategies and
policies
• Established a confidential Whistleblower Hotline
FOR YOUR REFERENCE
Hannon Armstrong has published the materials relevant to our ESG initiatives on our website, which serve as additional background
on our ESG-related policies, strategies and communications. Please visit www.hannonarmstrong.com for more details.
10
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35877
HANNON ARMSTRONG SUSTAINABLE
INFRASTRUCTURE CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
1906 Towne Centre Blvd
Suite 370
Annapolis, MD
(Address of principal executive offices)
46-1347456
(I.R.S. Employer
Identification No.)
21401
(Zip Code)
(410) 571-9860
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 par value
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of June 30, 2018, the aggregate market value of the registrant’s common stock (includes unvested restricted stock) held by non-
affiliates of the registrant was $1.0 billion based on the closing sales price of the registrant’s common stock on June 30, 2018 as reported on
the New York Stock Exchange.
On February 19, 2019, the registrant had a total of 63,436,907 shares of common stock, $0.01 par value, outstanding (which includes
1,465,951 shares of unvested restricted common stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the 2019 annual meeting of stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Page
5
5
12
45
45
45
45
46
46
49
49
68
71
106
106
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107
107
107
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110
- 2 -
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Annual Report on Form 10-K (“Form 10-K”) within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”) that are subject to risks and uncertainties. For these statements, we claim the
protections of the safe harbor for forward-looking statements contained in such Sections. These forward-looking statements
include information about possible or assumed future results of our business, financial condition, liquidity, results of
operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,”
“intend,” “should,” “may” or similar expressions, we intend to identify forward-looking statements.
Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing
undue reliance on such statements. Actual results may differ materially from those set forth in the forward-looking statements.
Statements regarding the following subjects, among others, may be forward-looking:
•
•
our expected returns and performance of our investments;
the state of government legislation, regulation and policies that support or enhance the economic feasibility of
sustainable infrastructure projects, including energy efficiency and renewable energy projects and the general market
demands for such projects;
• market trends in our industry, energy markets, commodity prices, interest rates, the debt and lending markets or the
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
general economy;
our business and investment strategy;
availability of opportunities to invest in projects that reduce greenhouse gas emissions or mitigate the impact of
climate change including energy efficiency and renewable energy projects and our ability to complete potential new
opportunities in our pipeline;
our relationships with originators, investors, market intermediaries and professional advisers;
competition from other providers of capital;
our or any other companies’ projected operating results;
actions and initiatives of the federal, state and local governments and changes to federal, state and local government
policies, regulations, tax laws and rates and the execution and impact of these actions, initiatives and policies;
the state of the U.S. economy generally or in specific geographic regions, states or municipalities, economic trends and
economic recoveries;
our ability to obtain and maintain financing arrangements on favorable terms, including securitizations;
general volatility of the securities markets in which we participate;
changes in the value of our assets, our portfolio of assets and our investment and underwriting process;
the impact of weather conditions, natural disasters, accidents or equipment failures or other events that disrupt the
operation of our investments or negatively impact the value our assets;
rates of default or decreased recovery rates on our assets;
interest rate and maturity mismatches between our assets and any borrowings used to fund such assets;
changes in interest rates, including the flattening of the yield curve, and the market value of our assets and target
assets;
changes in commodity prices, including continued low natural gas prices;
effects of hedging instruments on our assets or liabilities;
the degree to which our hedging strategies may or may not protect us from risks, such as interest rate volatility;
impact of and changes in accounting guidance and similar matters;
our ability to maintain our qualification as a real estate investment trust for U.S. federal income tax purposes (a
“REIT”);
our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the
“1940 Act”);
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•
•
•
availability of and our ability to attract and retain qualified personnel;
estimates relating to our ability to generate sufficient cash in the future to operate our business and to make
distributions to our stockholders; and
our understanding of our competition.
Forward-looking statements are based on beliefs, assumptions and expectations as of the date of this Form 10-K. Any
forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is
not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do
not intend to, update or revise any forward-looking statements after the date of this Form 10-K, whether as a result of new
information, future events or otherwise.
The risks included here are not exhaustive. Other sections of this Form 10-K may include additional factors that could
adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
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PART I
In this Form 10-K, unless specifically stated otherwise or the context otherwise indicates, references to “we,” “our,”
“us” and “our company” refer to Hannon Armstrong Sustainable Infrastructure Capital, Inc., a Maryland corporation,
Hannon Armstrong Sustainable Infrastructure, L.P. and any of our other subsidiaries. Hannon Armstrong Sustainable
Infrastructure, L.P. is a Delaware limited partnership of which we are the sole general partner and to which we refer in this
Form 10-K as our “Operating Partnership.” Our business is focused on reducing greenhouse gases that have been
scientifically linked to climate change. We refer to these gases, which are often for consistency expressed as carbon dioxide
equivalents, as carbon emissions.
Item 1.
Business
GENERAL
We focus on solutions that reduce carbon emissions and increase resilience to climate change by providing capital and
specialized expertise to the leading companies in the energy efficiency, renewable energy and other sustainable infrastructure
markets. Our goal is to generate attractive returns for our shareholders by investing in a diversified portfolio of assets and
projects that generate long-term, recurring and predictable cash flows or cost savings from proven commercial technologies.
We believe we were one of the first U.S. public companies exclusively focused on financing solutions to climate change.
Our investments, which typically benefit from contractually committed high credit quality obligors, have taken a number of
forms including equity, joint ventures, land ownership, lending or other financing transactions. We also generate ongoing fees
through gain-on-sale securitization transactions, services and asset management.
We are internally managed, and our management team has extensive relevant industry knowledge and experience, dating
back more than 30 years. We have long-standing relationships with the leading energy service companies (“ESCOs”),
manufacturers, project developers, utilities, owners and operators. Our origination strategy is to use these relationships to
generate recurring, programmatic investment and fee generating opportunities. Additionally, we have relationships with leading
banks, investment banks, and institutional investors from which we are referred additional investment and fee generating
opportunities.
We completed approximately $1.2 billion of transactions during 2018, compared to approximately $1.0 billion during
2017. As of December 31, 2018, we held approximately $2.0 billion of transactions on our balance sheet, which we refer to as
our “Portfolio.” For those transactions that we choose not to hold on our balance sheet, we transfer all or a portion of the
economics of the transaction, typically using securitization trusts, to institutional investors in exchange for a gain on the
transfer and in some cases, ongoing fees. As of December 31, 2018, we managed approximately $3.3 billion in these trusts or
vehicles that are not consolidated on our balance sheet. When combined with our Portfolio, as of December 31, 2018, we
manage approximately $5.3 billion of assets, which we refer to as our "Managed Assets".
We use borrowings as part of our strategy to increase potential returns to our stockholders and have available to us a
broad range of financing sources including non-recourse or recourse debt, equity, and off-balance sheet securitization
structures. A further description of our financing activities can be found below.
We have a large and active pipeline of potential new opportunities that are in various stages of our underwriting process.
We refer to potential opportunities as being part of our pipeline if we have determined that the project fits within our
investment strategy and exhibits the appropriate risk and reward characteristics through an initial credit analysis, including a
quantitative and qualitative assessment of the opportunity, as well as research on the market and sponsor. Our pipeline of
transactions that could potentially close in the next 12 months consists of opportunities in which we will be the lead originator
as well as opportunities in which we may participate with other institutional investors. As of December 31, 2018, our pipeline
consisted of more than $2.5 billion in new equity, debt and real estate opportunities. There can, however, be no assurance with
regard to any specific terms of such pipeline transactions or that any or all of the transactions in our pipeline will be completed.
We elected to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ended
December 31, 2013 and operate our business in a manner that will permit us to maintain our exemption from registration as an
investment company under the 1940 Act.
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INVESTMENT STRATEGY
With scientific consensus that climate warming trends are linked to human activities and resulting in various extreme
weather events, we believe our firm is well positioned to generate attractive risk-adjusted returns by investing in, and managing
a portfolio of, assets that reduce climate changing carbon emissions. Further, with increasing weather related events affecting
certain of our markets, we see similar investment opportunities in infrastructure assets that mitigate the impact of, and increase
the resiliency to, these weather events and climate change.
Our investment thesis is based on the following theories:
• More efficient technologies are more productive and thus should lead to higher economic returns;
• Lower portfolio risk is inherent in a portfolio of smaller investments, generated by trends of increasing
decentralization and digitalization of energy assets, compared to larger, centralized utility-scale investments;
•
Investing in assets aligned with scientific consensus and society’s general beliefs will reduce potential regulatory
and social costs through better internalization of externalities; and
• Assets that reduce carbon emissions represent an embedded option that may increase in value if carbon regulations
were to set a price on carbon emissions.
We believe combining this investment thesis with our multi-decade experience in investing in our markets through
multiple interest rate and business cycles, intermittent governmental support for reducing carbon emissions and several ‘boom
and bust’ cycles of business expansions in renewable and other sustainable infrastructure markets, will allow us to earn
attractive risk adjusted returns on the assets we invest in. We also believe there is potentially a very large market opportunity as
the legacy technology for generating and using energy with systems that produce carbon emissions are converted to low-to-no
carbon emission systems and mitigation and resiliency investments continue to increase in an effort to address weather events
and climate change.
Our investments are focused on three areas:
• Behind-The-Meter ("BTM"): distributed building or facility projects, which reduce energy usage or cost through the
use of solar generation and energy storage or energy efficient improvements including heating, ventilation and air
conditioning systems (“HVAC”), lighting, energy controls, roofs, windows, building shells, and/or combined heat
and power systems;
• Grid Connected ("GC"): projects that deploy cleaner energy sources, such as solar and wind to generate power
where the off-taker or counterparty is part of the wholesale electric power grid; and
• Other Sustainable Infrastructure: upgraded transmission or distribution systems, water and storm water
infrastructure, seismic retrofits and other projects, that improve water or energy efficiency, increase resiliency,
positively impact the environment or more efficiently use natural resources.
We prefer investments where the assets have a long-term, investment grade rated off-taker or counterparties. In the case
of BTM, the off-taker or counterparty may be the building owner or occupant, and we may be secured by the installed
improvements or other real estate rights. In the case of GC, the off-taker or counterparty may be a utility or electric user who
has entered into a contractually committed agreement, such as a power purchase agreement (“PPA”), to purchase some, or all
of, the power produced by a renewable energy project at a minimum price with potential price escalators for a portion of the
project’s estimated life.
We make our investments utilizing a variety of structures including:
• Equity investments in either preferred or common structures in unconsolidated entities;
• Government and commercial receivables or securities, such as loans for renewable energy and energy efficiency
projects; and
• Real estate, such as land or other assets leased for use by sustainable infrastructure projects typically under long
term leases.
Our equity investments in renewable energy projects are operated by various renewable energy companies or by joint
ventures in which we participate. These transactions allow us to participate in the cash flows associated with these projects,
typically on a priority basis. Our energy efficiency debt investments are usually assigned the payment stream from the project
savings and other contractual rights, often using our pre-existing master purchase agreements with the ESCOs. Our debt
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investments in various renewable energy or other sustainable infrastructure projects or portfolios of projects are generally
secured by the installed improvements or other real estate rights. We also own, directly or through equity investments, over
24,000 acres of land that are leased under long-term agreements to over 50 renewable energy projects, where our rental income
is typically senior to most project costs, debt, and equity.
We focus on projects that use proven technology and that often have contractually committed agreements with an
investment grade rated off-taker or counterparties. While we prefer investments in which we hold a senior or preferred position
in a project, as our markets evolve and grow, we are seeing increasing opportunities to invest, and have invested, in mezzanine
debt or common equity in projects where we are subordinated to project debt and/or preferred forms of equity. Investing greater
than 15% of our assets in any individual project requires the approval of a majority of our independent directors. We may adjust
the mix and duration of our assets over time in order to allow us to manage various aspects of our portfolio, including expected
risk-adjusted returns, macroeconomic conditions, liquidity, availability of adequate financing for our assets, and to maintain our
REIT qualification and our exemption from registration as an investment company under the 1940 Act.
As of December 31, 2018, our Portfolio consisted of over 185 investments and we seek to manage the diversity of our
Portfolio by, among other factors, project type, project operator, type of investment, type of technology, transaction size,
geography, obligor and maturity. The mix of our Portfolio is expected to vary over time and approximately 49% of our
Portfolio was invested in BTM assets; approximately 45% was invested in GC assets, which includes our land holdings, and
approximately 6% was invested in Other Sustainable Infrastructure.
As part of our investment process, we calculate the ratio of the estimated first year of metric tons of carbon emissions
avoided by our investments divided by the capital invested to understand the impact our investments are having on climate
change. In this calculation, which we refer to as CarbonCount®, we use emissions factor data, expressed on a CO2 equivalent
basis, from the U.S. Government or the International Energy Administration to an estimate of a project’s energy production or
savings to compute an estimate of metric tons of carbon emissions avoided. We estimate that our investments originated in
2018 will reduce annual carbon emissions by approximately 496 thousand metric tons. In addition to carbon, we also consider
other environmental attributes, such as water use reduction, stormwater remediation benefits or stream restoration benefits.
We believe that our long history of energy efficiency and renewable energy investing, the experience, expertise and
relationships of our management team, the anticipated credit strength of the obligors or investees of our investments and the
size and growth potential of our market, position us well to capitalize on our strategy.
Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of
Operations, for additional discussion on the performance of our investment portfolio.
FINANCING STRATEGY
We believe we have available to us a broad range of financing sources as part of our strategy to increase potential returns
to our stockholders. We may finance our investments through the use of non-recourse debt, recourse debt, or equity and may
also decide to finance such transactions through the use of off-balance sheet securitization structures.
We have worked to expand our liquidity and access to the debt and bank loan markets and have entered into transactions
with a number of new lenders and insurance companies in the last year. For example, in December 2018, we replaced our
existing credit facility with two new primary credit facilities with a group of lenders, including several new lenders, that
provide for a combined $450 million in borrowing capacity and a maturity in 2023. We often provide, and our sources of
financing are increasingly interested in, the estimated carbon emission savings or environmental ratings associated with our
financings.
We plan to raise additional equity capital and continue to use other fixed and floating rate borrowings which may be in
the form of additional bank credit facilities, including term loans and revolving facilities, warehouse facilities, repurchase
agreements and public and private equity and debt issuances, including convertible debt and match funded arrangements, as a
means of financing our business. We also expect to use both on-balance sheet and non-consolidated securitizations and believe
we will be able to customize securitized tranches to meet investment preferences of different investors. In the future, we may
use corporate unsecured debt to finance our investments. We may also consider the use of separately funded special purpose
entities or funds to allow us to expand the investments that we make.
The decision on how we finance specific assets or groups of assets is largely driven by capital allocations, risk, and
portfolio management considerations, as well as the overall interest rate environment, prevailing credit spreads and the terms of
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available financing and market conditions. Over time, as market conditions change, we may use other forms of leverage in
addition to these financing arrangements. Although we are not restricted by any regulatory requirements as to the type or
amount of leverage we may utilize, we do have certain targets we seek to, but are not required to, operate within; including
maintaining a leverage ratio at or below 2.5 to 1 and the percentage of fixed rate debt to total debt between 60% to 85%. See
additional discussion at Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations—
Liquidity and Capital Resources regarding our ongoing evaluation of our leverage and fixed-rate debt targets.
For those transactions that we choose not to hold on our balance sheet, we transfer all or a portion of the economics of the
transaction, typically using securitization trusts, to institutional investors in exchange for a gain on the transfer and in some
cases, ongoing fees. As a result of increases in short-term interest rates without a corresponding increase in long-term rates
which has resulted in a reduction in the difference in yield between short-term interest rates and long-term interest rates known
as a flattening of the yield curve, we have increased our use of securitization transactions and expect to continue to use a higher
level of these transactions in the short to intermediate-term. The market for the assets we finance has remained active
throughout various market cycles due to investor demand for high credit quality, long-term investments. We may arrange such
securitizations of loans or other assets prior to originating the transaction and thus avoid exposure to credit spread, interest rate
and funding risks that are normally associated with traditional capital markets conduit transactions. We also typically manage
and service these assets in exchange for fees. We may also use other funds or structures where institutional investors purchase
all or a portion of the economics of the transaction and where we may receive upfront or ongoing fees for managing the assets.
We periodically provide other services, including arranging financings that are held on the balance sheet of other investors and
advising various companies with respect to structuring investments.
Refer to Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity
and Capital Resources, for additional discussion on our financings and our ratios and Item 8. Financial Statements and
Supplementary Data, Notes 5, 7 and 8 to our financial statements for further information on the types and amounts of our
financing activities.
ENVIRONMENTAL AND SOCIAL RESPONSIBILITY AND CORPORATE GOVERNANCE
We own and invest in a diversified group of sustainable infrastructure projects focused on reducing or mitigating the
impacts of climate change through the allocation of our capital across the energy efficiency, renewable energy and other
sustainability focused markets. Under the direction of our Chief Executive Officer and the board of directors, we are focused on
achieving a high level of environmental and social responsibility and strong corporate governance. The Nominating,
Governance and Corporate Responsibility Committee of our board of directors is responsible for our environmental, social and
governance (“ESG”) oversight, including for our policies and communications. Additionally, we have a committee, comprised
of employees from across the organization, that is focused on implementing various ESG strategies, policies and
communications that reports to our Chief Executive Officer.
Our business and business strategy are focused on addressing climate change, including through the reduction of carbon
emissions. As described in the Investment Strategy section above, we estimate the carbon impact of each of our investments. In
addition, we operate our business in a manner intended to reduce the environmental impact, including by purchasing carbon
free electricity for our office and by encouraging recycling. In 2018, we adopted our Environmental Policies focused on our
operations. We also participate in a number of climate focused initiatives including Climate Action 100+, We Are Still In and
the Climate Disclosure Standards Board (“CDSB”). In 2017, we joined the CDSB’s initiative to pledge to implement the
recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”). Additionally, in 2018, we became a
signatory to the United Nations Global Compact, an initiative focused on responsible business practices related to human
rights, labor, the environment and anti-corruption.
We are also focused on our social responsibility within our workforce and our community. In 2018, we adopted our
Human Rights and Human Capital Management Policies to further our commitment to social responsibility. Our culture is
focused on hiring and retaining diverse and highly talented employees and empowering them to create value for our
stockholders. In our employee selection process and operation of our business we adhere to equal employment opportunity
policies and encourage the participation of our employees in training programs that will enhance their effectiveness in the
performance of their duties. Our Chief Executive Officer leads employee meetings intended to encourage employees to
understand why sustainability matters and regularly meets with small groups of employees to receive their feedback on the
business.
We provide competitive benefits that help our employees and their families be healthy and design compelling job
opportunities, aligned with our mission, in an energizing work environment. We also encourage our employees to continue to
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develop in their careers, including by obtaining advanced degrees or professional certifications. We compensate our employees
according to our fair remuneration policies and believe deeply in paying for performance. Therefore, employees generally
receive a portion of their compensation in the form of stock grants tied to performance. We encourage our employees to
contribute their time to support various community and charitable activities and sponsor several local community organizations
with a primary focus on environmental organizations.
We have structured our corporate governance in a manner we believe closely aligns our interests with those of our
stockholders. Notable features of our corporate governance structure include the following:
•
•
•
•
•
our board of directors is not staggered, with each of our directors subject to re-election annually;
our board of directors has determined that six of our seven directors are independent for purposes of the New York
Stock Exchange (“NYSE”) corporate governance listing standards and Rule 10A-3 under the Exchange Act;
two of our directors qualify as an “audit committee financial expert” as defined by the Securities and Exchange
Commission (the “SEC”);
two of our directors are women, constituting 29% of the board, in furtherance of our board diversity policy;
our Corporate Governance Guidelines provide for a majority vote policy for the election of directors pursuant to
which any nominee who receives a greater number of votes “withheld” from his or her election than votes “for”
such election shall promptly tender his or her resignation to our board of directors, which shall consider whether or
not to accept such resignation;
• we have established a target retirement age of 75 for our directors;
• we have an active stockholder outreach program, including providing stockholders the right to vote on the fairness
of the remuneration of executives;
•
our Statement of Corporate Policy Regarding Equity Transaction prohibits our directors and officers from hedging
our equity securities, holding such securities in a margin account or pledging such securities as collateral for a loan;
• we adopted a Clawback Policy which provides for the possible recoupment of performance or incentive-based
compensation in the event of an accounting restatement due to material noncompliance by us with any financial
reporting requirements under the securities laws (other than due to a change in applicable accounting methods, rules
or interpretations);
• we have opted out of the control share acquisition statute in the Maryland General Corporations Law (the “MGCL”)
and have exempted, from the business combinations statute in the MGCL, transactions that are approved by our
board of directors;
• we do not have a stockholder rights plan; and
• we have expanded the role of our Nominating, Governance and Corporate Responsibility Committee to also focus
on directing the strategy and oversight of our ESG strategies, activities, policies and communications.
In order to foster the highest standards of ethics and conduct in all business relationships, we have adopted a Code of
Business Conduct and Ethics policy (the “Code of Conduct”). This policy, which covers a wide range of business practices and
procedures, applies to our officers, directors and employees. In addition, we have implemented Whistleblowing Procedures
related to accounting and auditing matters as well as Code of Conduct matters (the “Whistleblower Policy”) that sets forth
procedures by which any Covered Persons (as defined in the Whistleblower Policy) may raise, on a confidential basis, concerns
regarding, among other things, any questionable or unethical accounting, internal accounting controls or auditing matters with
our Audit Committee as well as any potential code of conduct or ethics violations with our Nominating, Governance and
Corporate Responsibility Committee or our General Counsel.
We have adopted a Statement of Corporate Policy Regarding Equity Transactions that governs the process to be followed
in the purchase or sale of our securities by any of our directors, officers, employees and consultants and prohibits any such
persons from buying or selling our securities on the basis of material nonpublic information, and also prohibits our directors
and officers from hedging equity securities of the Company, holding such securities in a margin account or pledging such
securities as collateral for a loan. We review all of these policies on a periodic basis with our employees.
Our business is managed by our senior management team, subject to the supervision and oversight of our board of
directors. Our directors stay informed about our business by attending meetings of our board of directors and its committees
and through supplemental reports and communications. Our independent directors, led by the lead independent director, meet
regularly in executive sessions without the presence of our officers.
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COMPETITION
We compete against a number of parties, including banks, private equity, hedge or infrastructure investment funds,
insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, specialty finance
companies, utilities, independent power producers, project developers, pension funds, governmental bodies, public entities
established to own infrastructure assets and other entities.
We compete primarily on the basis of service, price, structure and flexibility as well as the breadth and depth of our
expertise. We may at times compete, and at other times partner or work as a participant, with alternative financing sources. The
continued low interest rate environment and increasing investor acceptance of the sustainable infrastructure market has
increased the level of competition we experience. The increase in the number and/or the size of our competitors in this market
has resulted, and could continue to result, in less attractive terms on our investments or the need to accept a higher level of risks
associated with our investments.
We also encounter competition in the form of potential customers or our origination partners electing to use their own
capital rather than engaging an outside capital provider. In addition, we may also face competition based on technological
developments that reduce demand for electricity, increase power supplies through existing infrastructure or that otherwise
compete with our sustainable infrastructure projects.
Some of our competitors are significantly larger, have greater access to capital and other resources or enjoy other
advantages in comparison to us. In addition, some of our competitors may have higher risk tolerances or different risk
assessments, which could allow them to consider a wider variety of opportunities and establish more relationships than we can.
These competitors may not be subject to the same regulatory constraints (such as REIT compliance or the need to maintain an
exemption from registration as an investment company under the 1940 Act) that we face.
We believe that a significant part of our competitive advantage is our management team’s experience and industry
expertise. However, we may not be able to achieve our business goals or expectations due to the competitive risks that we face,
including increasing competition as a result of the increasing interest by various investors in our assets classes, including
renewable energy, to enhance their investment returns. This, or other increases, in competition among competing providers of
capital could adversely affect the returns we generate on our investments, and thereby adversely affect the market price of our
common stock. For additional information concerning these competitive risks, see Item 1A. Risk Factors—We operate in a
competitive market and future competition may impact the terms of our investments.
EMPLOYEES; STAFFING
As of December 31, 2018, we employed 49 people. We intend to hire additional business professionals as needed to assist
in the implementation of our business strategy.
OUR EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES
Our executive officers and other significant employees and their ages are as follows:
Jeffrey W. Eckel, 60, has served as our president, chief executive officer, and chairman of our board of directors since
2013 and was with the predecessor of our company as president and chief executive officer since 2000 and prior to that from
1985 to 1989 as a senior vice president. Mr. Eckel is a member of the board of directors of the Alliance To Save Energy and is a
member of the President’s Council of Ceres, Inc., the Board of Trustees of The Nature Conservancy of Maryland and DC, and
is a Director of the New York City-based Urban Green Council. He was appointed by the governor of Maryland to the board of
the Maryland Clean Energy Center in 2011 where he served until 2016 while also serving as its chairman from 2012 to 2014.
Mr. Eckel has over 35 years of experience in financing, owning and operating infrastructure and energy assets. Mr. Eckel
received a Bachelor of Arts degree from Miami University in 1980 and a Master of Public Administration degree from
Syracuse University, Maxwell School of Citizenship and Public Affairs, in 1981. He holds Series 24, 63 and 79 securities
licenses. We believe Mr. Eckel’s extensive experience in managing companies operating in the energy sector and expertise in
energy investments make him qualified to serve as our president and chief executive officer and as chairman of our board of
directors.
J. Brendan Herron, 58, has served as an executive vice president and our chief financial officer since 2013 and served in
a variety of roles at the predecessor of our company and its affiliates from 1994 to 2005, and from 2011 to 2013. Effective
March 1, 2019, Mr. Herron will take on a leadership role as an executive vice president focused on the company’s strategy and
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growth initiatives. Mr. Herron has over 25 years of experience in structuring, executing and operating infrastructure and
technology investments. He formerly served on the U.S. Commerce Secretary’s Renewable Energy and Energy Efficiency
Advisory Committee and is presently a member of the Board of Trustees of Calvert Hall College High School (Baltimore,
MD). Mr. Herron received a Bachelor of Science degree in accounting and computer science from Loyola University Maryland
in 1982 and a Master of Business Administration degree from Loyola University Maryland in 1987 and has passed the CPA and
CMA examinations.
Steven L. Chuslo, 61, has served as an executive vice president and our general counsel since 2013 and with the
predecessor of our company as general counsel since 2008. Mr. Chuslo is responsible for internal governance matters and is
actively involved in structuring, developing, negotiating and closing transactions. He has more than 25 years of experience in
the fields of securities, commercial finance and energy development, U.S. federal regulation and project finance. Mr. Chuslo
received a Bachelor of Arts degree in History from the University of Massachusetts/Amherst in 1982 and a Juris Doctorate
from the Georgetown University Law Center in 1990.
Jeffrey A. Lipson, 51, joined the Company as our deputy chief financial officer in 2019. Effective March 1, 2019, Mr.
Lipson will become an executive vice president and our chief financial officer. From 2013 until 2018, Mr. Lipson was President
and Chief Executive Officer and Director of Congressional Bancshares and its subsidiary Congressional Bank; where he began
as President and Chief Operating Officer in 2012. He continues to serve on the Board of Directors of Congressional Bank.
Prior to that, Mr. Lipson was the Senior Vice President and Treasurer of CapitalSource and its subsidiary CapitalSource Bank
and Senior Vice President, Corporate Treasury, at Bank of America and its predecessor FleetBoston Financial. He holds an
MBA in Finance from New York University’s Leonard N. Stern School of Business and a Bachelor of Science in Economics
from Pennsylvania State University. Mr. Lipson serves on the Board of Directors of the Jewish Council for the Aging of
Greater Washington.
Daniel K. McMahon, CFA, 47, has served us as an executive vice president since 2015 and is the head of our portfolio
management group. He has been with the Company and its predecessor since 2000 in a variety of roles, including as a senior
vice president from 2007 to 2015. He has played a role in analyzing, negotiating, structuring, and managing several billion
dollars of transactions. Mr. McMahon received his Bachelor of Arts degree from the University of California, San Diego in
1993, and is a CFA charter holder. He holds Series 24, 63 and 79 securities licenses.
Charles W. Melko, CPA, 38, has served as our senior vice president and chief accounting officer of the Company since
2017. He joined the Company in 2016 as a senior vice president and controller. Prior to this role, he served in a number of roles
at PricewaterhouseCoopers LLP since 2005, including as a Senior Manager in the National Professional Services Group where
he focused on complex financial instruments accounting issues for energy clients. Mr. Melko received a Bachelor of Science
degree in Accountancy in 2002, a Master of Business Administration degree in 2005 and a Master of Science degree in
Accountancy from Wheeling Jesuit University in 2005. He holds a CPA license in West Virginia and Maryland.
Susan D. Nickey, 58, has served as a managing director of the Company since 2014. Prior to that, she founded and
served as CEO of Threshold Power. Ms. Nickey currently serves on the Board of Directors of the American Wind Energy
Association and its Finance Committee and the Board of Directors of the American Council of Renewable Energy and its
Executive Committee. Ms. Nickey received a Bachelor in Business Administration from the University of Notre Dame in 1983
and a Master’s of Science in Foreign Service from Georgetown University in 1986.
Nathaniel J. Rose, CFA, 41, has been an executive vice president since 2015 and our chief investment officer since
2017. He served as our chief operating officer from 2015 to 2017, our chief investment officer from 2013 to 2015 and has been
with the Company and its predecessor since 2000. He has been involved with a vast majority of our transactions since 2000. He
earned a joint Bachelor of Science and Bachelor of Arts degree from the University of Richmond in 2000, a Master of Business
Administration degree from the Darden School of Business Administration at the University of Virginia in 2009, is a CFA
charter holder and has passed the CPA examination. He holds a Series 63 and 79 securities licenses.
Dana M. Smith, SPHR, SHRM-SCP, 47, has served as our Chief Human Resources Officer since 2017. Prior to that, she
was Chief Human Resources Officer for American Capital, Ltd. and its publicly-traded affiliates as well as Senior Vice
President of Human Resources and Corporate Marketing for CapitalSource Inc. She received a Bachelor of Science in
Economics from The Wharton School of the University of Pennsylvania in 1993 and a Master of Science in Organizational
Counseling from The Johns Hopkins University in 2006.
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AVAILABLE INFORMATION
We maintain a website at www.hannonarmstrong.com. Information on our website is not incorporated by reference in this
Form 10-K. We will make available, free of charge, on our website (a) our Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K (including any amendments thereto), proxy statements and other information (collectively,
“Company Documents”) filed with, or furnished to, the Securities and Exchange Commission (the “SEC”), as soon as
reasonably practicable after such documents are so filed or furnished, (b) Corporate Governance Guidelines, (c) Director
Independence Standards, (d) Code of Business Conduct and Ethics policy and (e) written charters of the Audit Committee,
Compensation Committee, Nominating, Governance and Corporate Responsibility Committee and Finance and Risk
Committee of our board of directors. Company Documents filed with, or furnished to, the SEC are also available for review by
the public at the SEC’s website at www.sec.gov. We provide copies of our Corporate Governance Guidelines and Code of
Business Conduct and Ethics policy, free of charge, to stockholders who request such documents. Requests should be directed
to Investor Relations, 1906 Towne Centre Blvd, Suite 370, Annapolis, Maryland 21401, (410) 571-9860.
Item 1A. Risk Factors
Our business and operations are subject to a number of risks and uncertainties, the occurrence of which could adversely
affect our business, financial condition, consolidated results of operations and ability to make distributions to stockholders and
could cause the value of our capital stock to decline. We may refer to the energy efficiency, renewable energy and the other
sustainable infrastructure projects or market collectively as sustainable infrastructure projects or the industry. Please also refer
to the section entitled “Forward-Looking Statements.”
Risks Related to Our Business and Our Industry
Our business depends in part on U.S. federal, state and local government policies and a decline in the level of
government support could harm our business.
The projects in which we invest typically depend in part on various U.S. federal, state or local governmental policies and
incentives that support or enhance project economic feasibility. Such policies may include governmental initiatives, laws and
regulations designed to reduce energy usage and impact the use of renewable energy or the investment in and the use of
sustainable infrastructure.
Policies and incentives provided by the U.S. federal government may include tax credits (with some of these tax credits
that are related to renewable energy scheduled to be reduced in the future), tax deductions, bonus depreciation, federal grants
and loan guarantees and energy market regulations. The value of tax credits, deductions and incentives may be impacted by
changes in tax laws, rates or regulations.
Incentives provided by state and local governments may include renewable portfolio standards (“RPS”), which specify
the portion of the power utilized by local utilities that must be derived from renewable energy sources such as renewable
energy as well as the state or local government sponsored programs where the financing of energy efficiency or renewable
energy projects is repaid through an assessment in the property tax bill in a program commonly referred to as property assessed
clean energy (“PACE”). Additionally, certain states have implemented feed-in tariffs, pursuant to which electricity generated
from renewable energy sources is purchased at a higher rate than prevailing wholesale rates. Other incentives include tariffs,
tax incentives and other cash and non-cash payments.
Governmental agencies, commercial entities and developers of sustainable infrastructure projects frequently depend on
these policies and incentives to help defray the costs associated with, and to finance, various projects. Government regulations
also impact the terms of third party financing provided to support these projects. If any of these government policies, incentives
or regulations are adversely amended, delayed, eliminated, reduced, retroactively changed or not extended beyond their current
expiration dates, or there is a negative impact from the recent federal law changes or proposals, the operating results of the
projects we finance and the demand for, and the returns available from, the investments we make may decline, which could
harm our business.
U.S. federal, state and local government entities are major participants in the sustainable infrastructure industry and
their actions could be adverse to our projects or our company.
The projects where we invest are, and will continue to be, subject to substantial regulation by U.S. federal, state and local
governmental agencies. For example, many projects require government permits, licenses, concessions, leases or contracts.
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Government entities, due to the wide-ranging scope of their authority, have significant leverage in setting their contractual and
regulatory relationships with third parties. In addition, government permits, licenses, concessions, leases and contracts are
generally very complex, which may result in periods of non-compliance, or disputes over interpretation or enforceability. If the
projects where we invest fail to obtain or comply with applicable regulations, permits or contractual obligations, they could be
prevented from being constructed or subjected to monetary penalties or loss of operational rights, which could negatively
impact project operating results and the returns on our assets.
Contracts with government counterparties that support the projects where we invest may be more favorable to the
government counterparties compared to commercial contracts with private parties. For example, a lease, concession or general
service contract may enable the government to modify or terminate the contract without requiring the payment of adequate
compensation. Typically, our contracts with government counterparties contain termination provisions including prepayment
amounts. In most cases, the prepayment amounts provide us with amounts sufficient to repay the financing we have provided
but may be less than amounts that would be payable under “make whole” provisions customarily found in commercial lending
arrangements.
In addition, government counterparties also may have the discretion to change or increase regulation of project
operations, or implement laws or regulations affecting project operations, separate from any contractual rights they may have.
These actions could adversely impact the efficient and profitable operation of the projects in which we invest.
Government entities may also suspend or debar contractors from doing business with the government or pursue various
criminal or civil remedies under various government contract regulations. They may also issue new government contracts or
fail to extend existing government contracts. Our ability to originate new assets could be adversely affected if one or more of
the ESCOs or other origination sources with whom we have relationships with are so suspended or debarred or fail to win new,
or renew existing, contracts.
Changes in the terms of energy savings performance contracts could have a material and adverse impact on our
business.
We derive a portion of our income from the assignment to us of payment streams under energy savings performance
contracts with property owners, including government customers, in which the scope and cost of improvements and services
are specified. While U.S. federal, state and local government rules governing such contracts vary, such rules may, for example,
permit the funding of such contracts through long-term financing arrangements, permit long-term payback periods from the
savings realized through such contracts, allow units of government to exclude debt related to such contracts from the
calculation of their statutory debt limitation, allow for award of contracts on a “best value” instead of “lowest cost” basis and
allow for the use of sole source providers. To the extent these rules become more restrictive in the future, our ability to provide
financing to support these projects could be adversely impacted, which could harm our business. Changes in these rules,
including retroactive changes, could also negatively impact the operating results of the projects we finance and the returns on
our assets.
A change in the fiscal health, level of appropriations or budgets of U.S. federal, state and local governments could
reduce demand for our investments.
Although our energy efficiency assets do not normally require direct governmental appropriations and instead the
resulting cash flow is generally paid for out of operations and maintenance appropriations based on the energy and operating
savings derived from the improved facility, a significant decline in the fiscal health, level of appropriations or budgets of
government customers may make it difficult or undesirable for them to make existing payments or to enter into new energy
efficiency improvement projects. Alternatively, the government may choose to provide financing or other credit support for
sustainable infrastructure projects, which would negatively impact the use of private capital such as ours. This could have a
material and adverse effect on the return of and return on our investments for existing projects and on our ability to originate
new assets. Moreover, other changes in resources available to governments may also impact their willingness to undertake
energy efficiency projects. For example, an increase in money set aside for government expenditures for energy efficiency
projects may reduce demand for our investments.
In addition, to the extent we make investments that involve direct appropriations funding, we will depend on approval of
the necessary spending for the projects. The repayment of the investment, or the return on our asset, could be adversely affected
if appropriations for any such projects are delayed or terminated.
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Because our business depends to a significant extent upon relationships with key industry players, our inability to
maintain or develop these relationships, or the failure of these relationships to generate business opportunities, could
adversely affect our business.
We rely to a significant extent on our relationships with key industry players in the markets we target. We originate
transactions through programmatic finance relationships with various parties, including global ESCOs. We also originate
transactions with renewable energy manufacturers, developers and operators who own and operate renewable energy projects,
including a number of U.S. utility companies. In addition to the net proceeds from past and future offerings, we have
traditionally financed our business by accessing the securitization, syndication or other debt markets, primarily utilizing our
relationships with insurance companies and commercial banks. We also rely on relationships with a variety of key financial
participants, including institutional investors, senior lenders, and investment and commercial banks, as well as leading
intermediaries, to complement our origination and financing activities. Our inability to maintain or develop these relationships,
or the failure of these relationships to generate business opportunities, could adversely affect our business. In addition,
individuals and entities with whom we have relationships are not obligated to provide us with business opportunities, and,
therefore, there is no assurance that such relationships will generate business opportunities for us.
If the cost of energy generated by traditional sources of energy continues to stay at present levels or declines, demand
for the projects in which we invest may decline.
Many traditional sources of energy such as coal, petroleum based fuels and natural gas can be influenced by the price of
underlying or substitute commodities. While we believe the potential for rising or increasingly volatile commodity prices and
inflation will spur investment in our industry, there have been, and may continue to be, decreases in such prices, which may
reduce the demand for energy efficiency projects or other projects, including renewable energy facilities, that do not rely on
traditional energy sources. For example, we believe low natural gas prices may reduce the demand for projects like renewable
energy that can substitute for natural gas. Additionally, low natural gas prices can adversely affect both the price available to
renewable energy projects under future power sale agreements and the price of the electricity the projects sell on either a
forward or a spot-market basis. Technological progress in electricity generation, storage or in the production of traditional fuels
or the discovery of large new deposits of traditional fuels could reduce the cost of energy generated from those sources and
consequently reduce the demand for the types of projects in which we invest, which could harm our new business origination
prospects as well as the value of our existing portfolio. In addition, volatility in commodity prices, including energy prices, may
cause building owners and other parties to be reluctant to commit to projects for which repayment is based upon a fixed
monetary value for energy savings that would not decline if the price of energy declines. Any resulting decline in demand for
our investments or the price that industry participants receive for the sale of their products could adversely impact our operating
results.
If the market for various types of sustainable infrastructure projects or the investment techniques related to such
projects do not develop as we anticipate, new business generation in this target area would be adversely impacted.
The market for various types of sustainable infrastructure projects such as renewable energy projects, commercial office
building energy efficiency projects, electricity storage, and storm water and various other sustainable infrastructure projects are
emerging and rapidly evolving, leaving their future success uncertain. Similarly, various investing techniques, such as leasing
land for renewable energy projects, purchasing interests in existing renewable energy projects, the use of PACE financing and
the use of taxable debt for state and local energy efficiency or sustainable infrastructure financings are emerging and the future
success of these investing techniques is also uncertain. If some or all of these market segments or investing techniques prove
unsuitable for widespread commercial deployment or if demand for such projects or techniques fail to grow sufficiently, the
demand for our capital may decline or develop more slowly than we anticipate. Many factors will influence the widespread
adoption and demand for such projects and investing techniques, including general and local economic conditions, commodity
prices of traditional energy sources, the cost and availability of energy storage, the cost-effectiveness of various projects and
techniques, performance and reliability of such technologies compared to conventional power sources and technologies, and the
extent of government subsidies and regulatory developments. Any changes in the markets, products, technologies, financing
techniques, or the regulatory environment could adversely impact the demand or financial performance for such projects and
our investments.
In addition, renewable energy projects rely on electric and other types of transmission lines, pipelines and facilities
owned and operated by third parties to obtain their inputs or distribute their output. Any substantial access barriers to these lines
and facilities could make projects that depend on them more expensive, which could adversely impact the demand or financial
performance for such projects and our investments.
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Existing electric utility industry regulations, and changes to regulations, may present technical, regulatory and
economic barriers to the purchase and use of renewable energy and energy efficiency systems that may significantly
reduce demand for systems in which we can invest.
Federal, state and local government regulations and policies concerning the electric utility industry, and internal policies
and regulations promulgated by electric utilities, heavily influence the market for electricity products and services. These
regulations and policies often relate to electricity pricing and the interconnection of customer-owned electricity generation. In
the United States, governments and utilities continuously modify these regulations and policies. These regulations and policies
could deter customers from purchasing energy efficiency and renewable energy systems. For example, the Department of
Energy (“DOE”) has requested the Federal Energy Regulatory Commission (“FERC”) to change various policies and
regulations related to the functioning of the electric markets which, if enacted, may negatively impact the use of renewable
energy or encourage the use of fossil fuel energy over renewable energy. This could result in a significant reduction in the
potential demand for such systems. Utilities commonly charge fees to larger, industrial customers for disconnecting from the
electric grid or for having the capacity to use power from the electric grid for back-up purposes. In addition, there is an
increasing trend towards initiating or increasing fixed fees for users to have electricity service from a utility. These fees could
increase our customers’ cost to use energy efficiency and renewable energy systems not supplied by the utility and make them
less desirable, thereby harming our business, prospects, financial condition and results of operations. In addition, any changes
to government or internal utility regulations and policies that favor electric utilities could reduce competitiveness and cause a
significant reduction in demand for systems in which we invest.
Some projects in which we invest rely on net metering and related policies to improve project economics which if
reduced could impact repayment of our investments or the return on our assets.
Many states have a regulatory policy known as net energy metering, or net metering. Net metering typically allows some
project customers to interconnect their on-site solar or other renewable energy systems to the utility grid and offset their utility
electricity purchases by receiving a bill credit at the utility’s retail rate for the amount of energy in excess of their electric usage
that is generated by their renewable energy system and is exported to the grid. At the end of the billing period, the customer
simply pays for the net energy used or receives a credit at the retail rate if more energy is produced than consumed. Net
metering policies are under review or have been limited or amended in a number of states. The ability and willingness of
customers to pay for renewable energy systems which benefit from net metering rules may be reduced if net metering rules are
eliminated or their benefits reduced, which may also impact our returns on such systems.
Sustainable infrastructure projects that involve the generation, transmission or sale of electricity such as renewable
energy projects may be subject to regulation by the Federal Energy Regulatory Commission under the Federal Power
Act or other regulations that regulate the sale of electricity, which may adversely affect the profitability of such projects.
Sustainable infrastructure projects that involve the generation, transmission or sale of electricity such as renewable
energy projects may be “qualifying facilities” that are exempt from regulation as public utilities by the “FERC under the
Federal Power Act, (the “FPA”) while certain other such projects may be subject to rate regulation by the FERC under the FPA.
FERC regulations under the FPA confer upon these qualifying facilities key rights to interconnection with local utilities, and
can entitle such facilities to enter into PPAs with local utilities, from which the qualifying facilities benefit. Changes to these
U.S. federal laws and regulations could increase the regulatory burdens and costs, and could reduce the revenue of the project.
In addition, modifications to the pricing policies of utilities could require sustainable infrastructure projects to achieve lower
prices in order to compete with the price of electricity from the electric grid and may reduce the economic attractiveness of
certain energy efficiency measures. To the extent that the projects in which we invest are subject to rate regulation, the project
owners will be required to obtain FERC acceptance of their rate schedules for wholesale sales of energy, capacity and ancillary
services. Any changes in the rates project owners are permitted to charge could impact the repayment of our investments, or the
return on our assets.
In addition, the operation of, and electrical interconnection for, our sustainable infrastructure projects may be subject to
U.S. federal, state or local interconnection and federal reliability standards, some of which are set forth in utility tariffs. These
standards and tariffs specify rules, business practices and economic terms to which the projects where we invest are subject and
which may impact a project’s ability to deliver the electricity it produces or transports to its end customer. The tariffs are
drafted by the utilities and approved by the utilities’ state and U.S. federal regulatory commissions. These standards and tariffs
change frequently and it is possible that future changes will increase our administrative burden or adversely affect the terms
and conditions under which the projects render services to their customers.
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In addition, under certain circumstances, we may also be subject to the reliability standards of the North American
Electric Reliability Corporation. If project owners fail to comply with the mandatory reliability standards, they could be subject
to sanctions, including substantial monetary penalties, which could also raise credit risks for, or lower the returns available
from, the projects in which we invest.
These various regulations may also limit the transferability or sale of renewable energy projects and any such limits could
negatively impact our returns from such projects.
Unfavorable publicity or public perception of the industries in which we operate could adversely impact our operating
results and our reputation.
The sustainable infrastructure industry, including various forms of renewable energy and PACE financings receives
significant media coverage that, whether or not directly related to our business or our projects, can adversely impact our
reputation and the demand for our investments. Similarly, negative publicity or public perception of the broader energy-related
industries in which we operate or of climate change in general could reduce demand for our investments and our projects’
services. Any reduction in demand for sustainable infrastructure projects or for our investments could damage our reputation or
could have a material adverse effect on our results of operations and business prospects.
Future litigation or administrative proceedings could have a material and adverse effect on our business, financial
condition and results of operations.
We may become involved in legal proceedings, administrative proceedings, claims and other litigation that arise in the
ordinary course of business. In addition, we may be subject to legal proceedings or claims arising out of the projects in which
we invest. Adverse outcomes or developments relating to these proceedings, such as judgments for monetary damages,
injunctions or denial or revocation of permits, could have a material adverse effect on the projects in which we invest, which
could adversely impact the repayment of or the returns available for our assets.
We operate in a competitive market and future competition may impact the terms of our investments.
We compete against a number of parties who may provide alternatives to our investments including specialty finance
companies, savings and loan associations, banks, private equity, hedge or infrastructure investment funds, insurance companies,
mutual funds, institutional investors, investment banking firms, financial institutions, utilities, independent power producers,
project developers, pension funds, governmental bodies, public entities established to own infrastructure assets and other
entities. The continued low interest rate environment and increasing investor acceptance of the sustainable infrastructure market
have increased the level of competition we experience. We also encounter competition in the form of potential customers or our
origination partners electing to use their own capital rather than engaging an outside provider such as us. In addition, we may
also face competition based on technological developments that reduce demand for electricity, increase power supplies through
existing infrastructure or that otherwise compete with our sustainable infrastructure projects. Some of our competitors are
significantly larger than we are, have access to greater capital and other resources than we do and may have other advantages
over us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow
them to consider a wider variety of investments and establish more relationships than we can. In addition, many of our
competitors are not subject to the operating constraints associated with REIT tax compliance or maintenance of an exemption
from the 1940 Act. These characteristics could allow our competitors to consider a wider variety of opportunities, establish
more relationships and offer better pricing and more flexible structuring than we can offer. We may lose business opportunities
if we do not match our competitors’ pricing, terms and structure. If we match our competitors’ pricing, terms and structure, we
may not be able to achieve acceptable risk-adjusted returns on our assets or we may be forced to bear greater risks of loss. The
increase in the number and/or the size of our competitors in this market has resulted, and could continue to result, in less
attractive terms on our investments or the need to accept a higher level of risks associated with our investments. As a result,
competitive pressures we face could have a material adverse effect on our business, financial condition and results of
operations.
Our business is affected by seasonal trends and construction cycles, and these trends and cycles could have an adverse
effect on our operating results.
The volume and timing of our originations are subject to seasonal fluctuations and construction cycles, particularly in
climates that experience colder weather during the winter months, such as the northern United States, or at educational
institutions, where large projects are typically carried out during summer months when their facilities are unoccupied. In
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addition, government customers, many of which have fiscal years that do not coincide with ours, typically follow annual
procurement cycles. Further, government contracting cycles can be affected by the timing of, and delays in, the legislative
process related to government programs, funding, or incentives that help drive demand for sustainable infrastructure projects.
As a result of such fluctuations, we may occasionally experience fluctuations in the timing of new asset opportunities or
declines in revenue or earnings as compared to the immediately preceding quarter, and comparisons of our operating results on
a period-to-period basis may not be meaningful.
Risks Related to Our Assets and Projects in Which We Invest
Interest rate fluctuations and increases in interest rates could adversely affect the value of our assets, which could result
in reduced earnings or losses and negatively affect our profitability.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors beyond our control. Many of our assets pay a fixed rate of
interest or provide a fixed preferential return.
With respect to our business operations, increases in interest rates, in general, may over time cause: (1) project owners to
be less interested in borrowing or raising equity and thus reduce the demand for our investments; (2) the interest expense
associated with our borrowings to increase; (3) the market value of our fixed rate or fixed return assets to decline; and (4) the
market value of our interest rate swap agreements to increase. Conversely, decreases in interest rates, in general, may over time
cause: (1) project owners to be more interested in borrowing or raising equity and thus increase the demand for our assets;
(2) prepayments on our assets, to the extent allowed, to increase; (3) the interest expense associated with our borrowings to
decrease; (4) the market value of our fixed rate or fixed return assets to increase; and (5) the market value of our interest rate
swap agreements to decrease. Adverse developments resulting from changes in interest rates could have a material adverse
effect on our business, financial condition and results of operations.
The lack of liquidity of our assets may adversely affect our business, including our ability to value and sell our assets.
Volatile market conditions could significantly and negatively impact the liquidity of our assets. Illiquid assets typically
experience greater price volatility, as a ready market does not exist, and can be more difficult to value. In addition, validating
third-party pricing for illiquid assets may be more subjective than more liquid assets. The illiquidity of our assets may make it
difficult for us to sell such assets if the need or desire arises. In addition, if we are required to liquidate all or a portion of our
Portfolio quickly, we may realize significantly less than the value at which we have previously recorded our assets. To the
extent that we utilize leverage to finance our investments that are or become illiquid, the negative impact on us related to trying
to sell assets in a short period of time for cash could be greatly exacerbated. As a result, our ability to vary our portfolio in
response to changes in economic and other conditions may be relatively limited, which could adversely affect our results of
operations and financial condition.
We may experience a decline in the fair value of our assets.
A decline in the fair market value of available for sale securities, our receivables held-for-sale, our interest rate hedges, if
any, or any other assets which we may carry at fair value in the future, may require us to reduce the value of such assets under
generally accepted accounting principles in the United States (“GAAP”). In addition, all of our other financial assets are subject
to an impairment assessment that could result in adjustments to their carrying values. Upon the subsequent disposition or sale
of such assets, we could incur future losses or gains based on the difference between the sale price received and adjusted value
of such assets as reflected on our balance sheet at the time of sale.
Some of the assets in our portfolio may be recorded at fair value and, as a result, there could be uncertainty as to the
value of these assets.
Our investments are not publicly traded. The fair value of assets that are not publicly traded may not be readily
determinable. In accordance with GAAP, we record certain of our assets at fair value, which may include unobservable inputs.
Because such valuations are subjective, the fair value of these assets may fluctuate over short periods of time and our
determinations of fair value may differ materially from the values that would have been used if a ready market for these assets
existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these
assets were materially higher than the values that we ultimately realize upon their disposal. Additionally, our results of
operations for a given period could be adversely affected if our determinations regarding the fair value of these assets were
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materially higher than the values that we ultimately realize upon their disposal. The valuation process can be particularly
challenging during periods when market events make valuations of certain assets more difficult, unpredictable and volatile.
We may not realize income or gains from our assets, which could cause the value of our common stock to decline.
We seek to provide attractive risk-adjusted returns to our stockholders. However, our assets may not appreciate in value
and, in fact, may decline in value, and the assets we originate or acquire may default or not perform in accordance with our
expectations. Accordingly, we may not be able to realize gains or income from our assets. Any gains that we do realize may not
be sufficient to offset any other losses we experience. Any income that we realize may not be sufficient to offset our expenses.
Many of our investments are not rated by a rating agency, which may result in an amount of risk, volatility or potential
loss of principal that is greater than that of alternative asset opportunities.
Many of our investments are not rated by any rating agency and we expect that some of the assets we originate and
acquire in the future will not be rated by any rating agency. Although we focus on sustainable infrastructure projects with high
credit quality obligors, we believe that some of the projects or obligors in which we invest, if rated, would be rated below
investment grade, due to speculative characteristics of the project or the obligor’s capacity to pay interest and repay principal or
pay dividends. Some of our assets may result in an amount of risk, volatility or potential loss of principal that is greater than
that of alternative asset opportunities.
Any credit ratings assigned to our assets, debt or obligors are subject to ongoing evaluations and revisions and we
cannot assure you that those ratings will not be downgraded.
To the extent our assets, their underlying obligors, or our debt are rated by credit rating agencies or by our internal rating
process, such assets or our debt will be subject to ongoing evaluation by credit rating agencies and our internal rating process,
and we cannot assure you that any ratings will not be changed or withdrawn in the future. For example, PG&E Corporation
declared bankruptcy in January 2019, and credit rating agencies have downgraded, and are reviewing, a number of other the
California utilities’ credit ratings as a result of potential wild fire liability and such downgrades have reduced the amount we
can borrow on certain assets that have California utilities as obligors and caused a rating agency to place on review the rating of
two of our non-recourse debt facilities. If rating agencies assign a lower-than-expected rating or if a rating is further reduced or
withdrawn by a rating agency or us, or if there are indications of a potential reduction or withdrawal of the ratings of our assets,
the underlying obligors or our debt in the future, the value of these assets could significantly decline, the level of borrowings
based on such asset could be reduced or we could incur higher borrowing costs to finance these assets or incur losses upon
disposition or the failure of obligors to satisfy their obligations to us.
Our investments are subject to delinquency, foreclosure and loss, any or all of which could result in losses to us.
Our investments are subject to risks of delinquency, foreclosure and loss. In many cases, the ability of a borrower to
return our invested capital and our expected return is dependent primarily upon the successful development, construction and
operation of the underlying project. If the cash flow of the project is reduced, the borrower’s ability to return our capital and our
expected return may be impaired. We make certain estimates regarding project cash flows or savings during the underwriting of
our investment. These estimates may not prove accurate, as actual results may vary from estimates. The cash flows or cost
savings of a project can be affected by, among other things: the terms of the power purchase or other use agreements used in
such project; the creditworthiness of the power off-taker or project user; power prices now and in the future; the technology
deployed; unanticipated expenses in the development or operation of the project and changes in national, regional, state or local
economic conditions, laws and regulations; and acts of God, terrorism, social unrest and civil disturbances.
In the event of any default or shortfall of an investment, we will bear a risk of loss of principal or equity to the extent of
any deficiency between the value of the collateral, if any, and the amount of our investment, which could have a material
adverse effect on our cash flow from operations and may impact the cash available for distribution to our stockholders. Many
of the projects are structured as special purpose limited liability companies which limits our ability to realize any recovery to
the collateral or value of the project itself. In the event of the bankruptcy of a project owner, obligor, or other borrower, our
investment or the project will be deemed to be subject to the avoidance powers of the bankruptcy trustee or debtor-in-
possession and our or the project's contractual rights may be unenforceable under federal bankruptcy or state law. Foreclosure
proceedings against a project can be an expensive and lengthy process, which could have a substantial negative effect on our
anticipated return on the foreclosed investment.
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Our sustainable infrastructure projects may incur liabilities that rank equally with, or senior to, our investments in such
projects.
We provide a range of investment structures, including various types of debt and equity securities, senior and
subordinated loans, real property leases, mezzanine debt, preferred equity and common equity. Our projects may have, or may
be permitted to incur, other liabilities or equity preferences that rank equally with, or senior to, our positions or investments in
such projects or businesses, as the case may be, including with respect to grants of collateral. By their terms, such instruments
may entitle the holders to receive payment of interest, principal payments or other distributions on or before the dates on which
we are entitled to receive payments with respect to the instruments in which we invest. Also, in the event of insolvency,
liquidation, dissolution, reorganization or bankruptcy of an entity in which we have invested, holders of instruments ranking
senior to our investment in that project or business would typically be entitled to receive payment in full before we receive any
distribution. After repaying such senior stakeholders, such project may not have any remaining assets to use for repaying its
obligation to us. In the case of securities ranking equally with instruments we hold, we would have to share on an equal basis
any distributions with other stakeholders holding such instruments in the event of an insolvency, liquidation, dissolution,
reorganization or bankruptcy of the relevant project.
Our mezzanine or subordinated loans are less protected against losses than senior debt.
We make or acquire mezzanine or subordinated loans, which are loans made to project owners for sustainable
infrastructure projects that are subordinate to other more senior interest or are secured by pledges of the borrower’s ownership
interests in the project and/or the project owner. These mezzanine or subordinated loans may be subordinate to senior secured
loans on the project or to the returns required by the investors focused on the tax attributes in a project, known as tax equity
investors, but senior to the project owner’s equity. In the event a borrower defaults on a loan and lacks sufficient assets to
satisfy our mezzanine or subordinated financing, we may suffer a loss of principal or interest. In the event a borrower declares
bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to
satisfy our mezzanine or subordinated loan. In addition, mezzanine or subordinated loans are by their nature structurally
subordinated to more senior project level investments, and in some cases, to tax equity investors. If a borrower defaults on our
mezzanine or subordinated loan, on its obligations to the tax equity investor or on debt or other obligations senior to our loan,
or if a borrower declares bankruptcy, our mezzanine or subordinated loan will be satisfied only after the project level debt or
other obligations or tax equity and other senior debt is paid in full. Significant losses related to our mezzanine or subordinated
loans would result in operating losses for us and may limit our ability to make distributions to our stockholders.
Our subordinated and mezzanine debt and equity investments, many of which are illiquid with no readily available
market, involve a substantial degree of risk.
We make subordinated and mezzanine debt and equity investments which may fail to be repaid or appreciate and may
decline in value or become worthless and our ability to recover our investment will depend on the success of the project in
which we make such investments. Subordinated and mezzanine debt and equity investments involve a number of significant
risks, including:
•
•
•
subordinated and mezzanine debt and any equity investment we make in a project could be subject to further
dilution as a result of the issuance of additional debt or equity interests and to serious risks because subordinated
and mezzanine debt are subordinate to other indebtedness and in some cases, project tax equity, and equity interests
are subordinate to all indebtedness (including trade creditors) and any senior securities in the event that the issuer is
unable to meet its obligations or becomes subject to a bankruptcy process;
to the extent that a project in which we invest requires additional capital and is unable to obtain it, we may not
recover our investment; and
in some cases, subordinated and mezzanine debt will not pay current interest or principal or equity investments will
not pay current dividends, and our ability to realize a return on our investment, as well as to recover our investment,
will be dependent on the success of the project in which we invest. The project may face unanticipated costs or
delays or may not generate projected cash flows which could lead to the project generating lower rates of return than
we expected when we decided to fund the project. Further, many projects in which we make subordinated and
mezzanine debt or equity investments will be subject to competitive risks and to volatility in commodity prices
including the price of energy. Even if the project is successful, our ability to realize the value of our investment may
be dependent on our ability to renew commercial contracts for a project or on the occurrence of a liquidity or other
event.
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We generally do not control the projects in which we invest.
Although the covenants in our financing or investment documentation generally restrict certain actions that may be taken
by project owners, we generally do not control the projects in which we invest. As a result, we are subject to the risk that the
project owner may make business decisions with which we disagree or take risks or otherwise act in ways that do not serve our
interests.
We invest in joint ventures or other similar arrangements that subject us to additional risks.
Some of our projects are structured as joint ventures, partnerships and securitization, syndication and consortium
arrangements. Part of our strategy is to participate with other institutional investors or the project’s management in consortiums
and in partnerships on various sustainable infrastructure transactions. These arrangements are driven by the magnitude of
capital required to complete acquisitions and the development of sustainable infrastructure projects and other industry-wide
trends that we believe will continue. Such arrangements involve risks not present where a third party is not involved, including
the possibility that partners or co-venturers might become bankrupt or otherwise fail to fund their share of required capital
contributions. Additionally, partners or co-venturers might at any time have economic or other business interests or goals
different from us. Joint ventures, partnerships and securitization, syndication and consortium investments generally provide for
a reduced level of control over an acquired project because governance rights are shared with others. Accordingly, decisions
relating to the underlying operations, including decisions relating to the management, operation and the timing and nature of
any exit, are often made by a majority vote of the investors or by separate agreements that are reached with respect to
individual decisions. In addition, such operations may be subject to the risk that the project owners may make business,
financial or management decisions with which we do not agree or the management of the project may take risks or otherwise
act in a manner that does not serve our interests. Because we may not have the ability to exercise control over such operations,
we may not be able to realize some or all of the benefits that we believe will be created from our involvement. If any of the
foregoing were to occur, our business, financial condition and results of operations could suffer as a result.
In addition, some of our joint ventures, partnerships, securitization or syndication or consortium arrangements, including
some of our equity investments, subject the sale or transfer of our interests in these projects to rights of first refusal or first
offer, tag along rights or drag along rights and buy-sell, call-put or other restrictions. Such rights may be triggered at a time
when we may not want them to be exercised and such rights may inhibit our ability to sell our interest in an entity within our
desired time frame or on any other desired terms.
Energy efficiency, renewable energy and other sustainable infrastructure projects are subject to performance risks that
could impact the repayment of and the return on our assets.
Energy efficiency, renewable energy and other sustainable infrastructure projects are subject to various construction
and operating delays and risks that may cause them to incur higher than expected costs or generate less than expected amounts
of output such as electricity in the case of a renewable energy project. These risks include construction delays, a failure or
degradation of our, our customers’ or the utilities’ equipment; obsolescence of, or an inability to find suitable, equipment or
parts; labor shortages; less than expected supply of a project’s source of renewable energy, such as solar insolation and wind; or
a faster than expected diminishment of such supply. Further, many projects in which we invest will be subject to competitive
risks and to volatility in commodity prices including the price of energy. Any extended interruption in the project’s construction
or operation, any cost overrun or failure of the project for any reason to generate the expected amount of output or cash flow,
could have a material adverse effect on the repayment of and the return on our assets.
Many of our assets depend on revenues from third-party contractual arrangements.
Many of the projects in which we invest rely on revenue or repayment from contractual commitments of end-customers,
including federal, state or local governments for energy efficiency projects or utilities or other customers under PPAs. There is a
risk that these customers will default under their contracts. In addition, many of these end-customers are large entities with
wide ranging activities. An event in a non-related part of the business could have a material adverse impact on the financial
strength of such end-customer such as the recent wildfires in California on the California utilities. Furthermore, the bankruptcy,
insolvency or other liquidity constraints of one or more customers may result in a renegotiation or rejection of the third-party
contract, delay the receipt of any obligations or reduce the likelihood of collecting defaulted obligations. Some projects rely on
one customer for their revenue and thus the project could be materially and adversely affected by any material change in the
financial condition of that customer. While there may be alternative customers for such a project, there can be no assurance that
a new contract on the same terms will be able to be negotiated for the project.
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Certain of our projects with contractually committed revenues or other sources of repayment under long term contracts
will be subject to re-contracting risk in the future. We cannot provide assurance that these contracts can be re-negotiated once
their terms expire on equally favorable terms or at all. If it is not possible to renegotiate these contracts on favorable terms, our
business, financial condition, results of operations and prospects could be materially and adversely affected.
Revenues at some of the projects in which we invest depend on reliable and efficient metering, or other revenue
collection systems, which are often specified in the contract. There is a risk that, if one or more of such projects are not able to
operate and maintain the metering or other revenue collection systems in the manner expected, if the operation and
maintenance costs, are greater than expected, or if the customer disputes the output of the revenue collection system, the ability
of the project to repay our investments or provide a return to us on our asset could be materially and adversely affected.
We are exposed to the credit risk of ESCOs and others.
While we do not anticipate facing significant credit risk in our assets related to government energy efficiency projects, we
are subject to varying degrees of credit risk in these projects in relation to guarantees provided by ESCOs where payments
under energy savings performance contracts are contingent upon energy savings. We are also exposed to credit risk in projects
in which we invest that do not depend on funding from governments. We seek to mitigate this credit risk by employing a
comprehensive review and asset selection process and careful ongoing monitoring of acquired assets. Nevertheless,
unanticipated credit losses could occur which could adversely impact our operating results. During periods of economic
downturn in the global economy, our exposure to credit risks from obligors increases, and our efforts to monitor and mitigate
the associated risks may not be effective in reducing our credit risks. Certain participants in the sustainable energy industry
have experienced significant declines in the value of their equity and difficulty in raising or refinancing debt, which increases
the credit risk to these companies and there can be no assurance they will be able to fulfill their obligations which could
adversely impact our operating results.
Some of the projects in which we invest have sold their output under PPAs which expose the projects to various risks.
Some of our projects enter into PPAs when they contract to sell all or a fixed proportion of the electricity generated by the
project, sometimes bundled with renewable energy credits and capacity or other environmental attributes, to a power purchaser,
often a utility. PPAs are used to stabilize our revenues from that project. We are exposed to the risk that the power purchaser,
who we consider an obligor, will fail to perform under a PPA or the PPA will be terminated or expire, which will lead to that
project needing to sell its electricity at the then market price, which could be substantially lower than the price provided in the
applicable PPA. In most instances, the project also commits to sell minimum levels of generation. If the project generates less
than the committed volumes, it may be required to buy the shortfall of electricity on the open market or make payments of
liquidated damages or be in default under a PPA, which could result in its termination. In the event that any of these events
were to occur, our business, financial condition and results of operations could suffer as a result.
Portions of the electricity our assets generate is sold on the open market at spot-market prices. A prolonged
environment of low prices for natural gas, or other conventional fuel sources, could have a material adverse effect on
our long-term business prospects, financial condition and results of operations.
Historically low prices for traditional fossil fuels, particularly natural gas, could cause demand for renewable energy to
decrease or adversely affect both the price available to our projects under PPAs that the projects may enter into in the future and
the price of the electricity the projects generate for sale on a spot-market basis. Low spot market power prices, if combined
with other factors, could have a material adverse effect on the projects and its value and our expected returns, results of
operations and cash available for distribution. Additionally, cheaper conventional fuel sources could also have a negative
impact on the power prices the projects are able to negotiate upon the termination of current PPAs. As a result, the price our
projects realize in the open market could be materially and adversely affected, which could, in turn, have a material adverse
effect on the project’s current and expected results of operations and cash available for distribution. In the event that any of
these events were to occur, our business, financial condition and results of operations could suffer as a result.
The ability of our assets to generate revenue from certain projects depends on having interconnection arrangements and
services.
The future success of our assets will depend, in part, on their ability to maintain satisfactory interconnection agreements.
If the interconnection or transmission agreement of a project is terminated for any reason, they may not be able to replace it
with an interconnection and transmission arrangement on terms as favorable as the existing arrangement, or at all, or they may
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experience significant delays or costs in connection with securing a replacement. If a network to which one or more of the
projects is connected experiences equipment or operational problems or other forms of “down time,” the affected project may
lose revenue and be exposed to non-performance penalties and claims from its customers. These may include claims for
damages incurred by customers, such as the additional cost of acquiring alternative electricity supply at then-current spot
market rates. The owners of the network will not usually compensate electricity generators for lost income due to down time. In
addition, our projects may be exposed to a locational basis risk resulting from a difference between where the power is
generated and the contracted delivery point. These factors could materially affect the ability to forecast operations on these
projects, which could negatively affect our business, results of operations, financial condition and cash flow.
Our projects and their obligors are exposed to an increase in climate change or other change in meteorological
conditions which could have an impact on electric generation, revenue or the ability of the projects or their obligors to
honor their contract obligations, all of which could adversely affect our business, financial condition and results of
operations and cash flows.
The electricity produced and revenues generated by a renewable electric generation facility are highly dependent on
suitable weather conditions, which are beyond our control. Components of renewable energy systems, such as turbines, solar
panels and inverters, could be damaged by natural disasters or severe weather, including wildfires, hurricanes, hailstorms or
tornadoes. Furthermore, the potential physical impacts of climate change may impact our projects, including the result of
changes in weather patterns (including floods, tsunamis, drought, and rainfall levels), wind speeds, water availability, storm
patterns and intensities, and temperature levels. The projects in which we invest will be obligated to bear the expense of
repairing the damaged renewable energy systems and replacing spare parts for key components and insurance may not cover
the costs or the lost revenue. Natural disasters or unfavorable weather and atmospheric conditions could impair the
effectiveness of the renewable energy assets, reduce their output beneath their rated capacity, require shutdown of key
equipment or impede operation of the renewable energy assets, which could adversely affect our business, financial condition
and results of operations and cash flows. Sustained unfavorable weather could also unexpectedly delay the installation of
renewable energy systems, which could result in a delay in our investing in new projects or increase the cost of such projects.
We typically base our investment decisions with respect to each renewable energy facility on the findings of studies
conducted on-site prior to construction or based on historical conditions at existing facilities. However, actual climatic
conditions at a facility site may not conform to the findings of these studies. Even if an operating project’s historical renewable
energy resources are consistent with the long-term estimates, the unpredictable nature of weather conditions often results in
daily, monthly and yearly material deviations from the average renewable resources anticipated during a particular period.
Therefore, renewable energy facilities in which we invest may not meet anticipated production levels or the rated capacity of
the generation assets, which could adversely affect our business, financial condition and results of operations and cash flows.
The amount of electricity renewable energy generation assets produce is also dependent in part on the time of year. For
example, because shorter daylight hours in winter months results in less solar irradiation, the generation of particular assets will
vary depending on the season. Further, time-of-day pricing factors vary seasonally which contributes to variability of revenues.
As a result, we expect the revenue and cash flow from certain of our assets to vary based on the time of year.
In addition, many of the project’s end-customers are large entities with wide ranging activities. A climate related event in
a non-related part of the business could have a material adverse impact on the financial strength of such end-customer and their
ability to honor their contractual obligations which could negatively impact on revenue and the cash flow of the project and our
business.
Operation of the projects in which we invest involves significant risks and hazards customary to our investees that could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
The ongoing operation of the projects in which we invest involves risks that include the breakdown or failure of
equipment or processes or performance below expected levels of output or efficiency due to wear and tear, latent defect, design
error or operator error or force majeure events, among other things. In addition to natural risks such as earthquake, flood,
drought, lightning, wildfire, hurricane and wind, other hazards, such as fire, explosion, structural collapse and machinery
failure, acts of terrorism or related acts of war, hostile cyber intrusions or other catastrophic events are inherent risks in the
operation of a project. These and other hazards can cause significant personal injury or loss of life, severe damage to and
destruction of property, plant and equipment and contamination of, or damage to, the environment and suspension of
operations. Operation of a project also involves risks that the operator will be unable to transport its product to its customers in
an efficient manner due to a lack of transmission capacity. Unplanned outages of projects, including extensions of scheduled
outages due to mechanical failures or other problems, occur from time to time and are an inherent risk of the business.
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Unplanned outages typically increase operation and maintenance expenses and may reduce revenues as a result of selling fewer
megawatt hours or require the project to incur significant costs as a result of obtaining replacement power from third parties in
the open market to satisfy forward power sales obligations. The project’s inability to operate its assets efficiently, manage
capital expenditures and costs and generate earnings and cash flow could have a material adverse effect on our investment and
our business, financial condition, results of operations and cash flows. While the projects maintain insurance, obtain warranties
from vendors and obligate contractors to meet certain performance levels, the proceeds of such insurance, warranties or
performance guarantees may not cover the lost revenues, increased expenses or liquidated damages payments should the
project experience any equipment breakdowns, insurance claims or non-performance by contractors or vendors.
Some of the projects in which we invest may require substantial operating or capital expenditures in the future.
Many of the projects in which we invest are capital intensive and require substantial ongoing expenditures for, among
other things, additions and improvements, and maintenance and repair of plant and equipment related to project operations.
While we do not typically bear the responsibility for these expenditures, any failure by the equity owner to make necessary
operating or capital expenditures could adversely impact project performance. In addition, some of these expenditures may not
be recoverable from current or future contractual arrangements.
The use of real property rights that we acquire or are used for our sustainable infrastructure projects may be adversely
affected by the rights of lienholders and leaseholders that are superior to those of the grantors of those real property
rights to us.
The projects in which we invest often require large areas of land for construction and operation or other easements or
access to the underlying land. In addition, we may acquire rights to land or other real property. The rights to use the land can be
obtained through freehold title, leases and other rights of use. Although we believe that the real property rights we acquire, or
our projects in which we invest, have valid rights to all material easements, licenses and rights of way, not all of such
easements, licenses and rights of way are registered against the lands to which they relate and may not bind subsequent owners.
Some of our real property rights and projects generally are, and are likely to continue to be, located on land occupied pursuant
to long-term easements and leases. The ownership interests in the land subject to these easements and leases may be subject to
mortgages securing loans or other liens (such as tax liens) and other easement and lease rights of third parties (such as leases of
water, oil or mineral rights) that were created prior to, or are superior to, our or our projects’ easements and leases. As a result,
our rights may be subject, and subordinate, to the rights of those third parties. We typically obtain representations or perform
title searches or obtain title insurance to protect our real property interest or our investments in our projects against these risks.
Such measures may, however, be inadequate to protect against all risk of loss of rights to use the land rights we have acquired
or the land on which these projects are located, which could have a material and adverse effect on our land rights, our projects
and their financial condition and operating results.
We own land or leasehold interests that are used by renewable energy projects. Negative market conditions or adverse
events affecting tenants, or the industries in which they operate, could have an adverse impact on our underwritten
returns. Moreover, many of our assets are concentrated in similar geographic locations, which subjects us to an
increased risk of significant loss if any property declines in value or if we are unable to lease a property.
We own land or leasehold interests used by renewable energy projects that are concentrated in a limited number of
geographic locations. One consequence of this is that the aggregate returns we realize may be substantially adversely affected
by the unfavorable performance of a small number of leases or a significant decline in the market value of any single property.
Our cash flow depends in part on the ability to lease the real estate to projects or other tenants on economically favorable terms.
We could be adversely affected by various facts and events over which we have limited or no control, such as:
•
•
•
•
•
•
lack of demand in areas where our properties are located;
inability to retain existing tenants and attract new tenants;
oversupply of space and changes in market rental rates;
our tenants’ creditworthiness and ability to pay rent, which may be affected by their operations, the current
economic situation and competition within their industries from other operators;
defaults by and bankruptcies of tenants, failure of tenants to pay rent on a timely basis, or failure of tenants to
comply with their contractual obligations;
economic or physical decline of the areas where the properties are located; and
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•
destruction from natural disasters.
At any time, any tenant may experience a downturn in its business, including increased operating costs, termination of a
PPA or low spot-market prices of products, that may weaken its operating results or overall financial condition, a tenant may
delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become
insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when
due could result in the termination of the tenant’s lease and material losses to us.
If a tenant elects to terminate its lease prior to or upon its expiration or does not renew its lease as it expires, we may not
be able to rent or sell the properties or realize our expected value. Furthermore, leases that are renewed and some new leases
for properties that are re-leased, may have terms that are less economically favorable than expiring lease terms, or may require
us to incur significant costs, such as lease transaction costs. In addition, negative market conditions or adverse events affecting
tenants, or the industries in which they operate, may force us to sell vacant properties for less than their carrying value, which
could result in impairments. Any of these events could adversely affect the value of our asset, the cash flow from operations
and our ability to make distributions to stockholders and service indebtedness. A significant portion of the costs of owning
property, such as real estate taxes, insurance and maintenance, are not necessarily reduced when circumstances cause a decrease
in rental revenue from the properties. In a weakened financial condition, tenants may not be able to pay these costs of
ownership and we may be unable to recover these operating expenses from them.
Further, the occurrence of a tenant bankruptcy or insolvency could diminish the income we receive from the tenant’s
lease or leases. For instance, a bankruptcy court might authorize the tenant to terminate its leases with us. If that happens, our
claim against the bankrupt tenant for unpaid future rent would be subject to statutory limitations that most likely would be
substantially less than the remaining rent we are owed under the leases. In addition, any claim we have for unpaid past rent, if
any, may not be paid in full. As a result, tenant bankruptcies may have a material adverse effect on our results of operations.
In addition, since renewable energy projects are often concentrated in certain states, we would also be subject to any
adverse change in the political or regulatory climate in those states or specific counties where such properties are located that
could adversely affect our properties and our ability to lease such properties.
Performance of projects where we invest may be harmed by future labor disruptions and economically unfavorable
collective bargaining agreements.
A number of the projects where we invest could have workforces that are unionized or that in the future may become
unionized and, as a result, are required to negotiate the wages, benefits and other terms with many of their employees
collectively. If these projects were unable to negotiate acceptable contracts with any of their unions as existing agreements
expire, they could experience a significant disruption of their operations, higher ongoing labor costs and restrictions on their
ability to maximize the efficiency of their operations, which could have a material and adverse effect on our business, financial
condition and results of operations. In addition, in some jurisdictions where our projects have operations, labor forces have a
legal right to strike which may have a negative impact on our business, financial condition and results of operations, either
directly or indirectly, for example if a critical upstream or downstream counterparty was itself subject to a labor disruption
which impacted the ability of our projects to operate.
We invest in projects that rely on third parties to manufacture quality products or provide reliable services in a timely
manner and the failure of these third parties could cause project performance to be adversely affected.
We invest in projects that typically rely on third parties to select, manage or provide equipment or services. Third parties
may be responsible for choosing vendors, including equipment suppliers and subcontractors. Project success often depends on
third parties who are capable of installing and managing projects and structuring contracts that provide appropriate protection
against construction and operational risks. In many cases, in addition to contractual protections and remedies, project owners
may seek guaranties, warranties and construction bonding to provide additional protection.
The warranties provided by the third parties and, in some cases, their subcontractors, typically limit any direct harm that
results from relying on their products and services. However, there can be no assurance that a supplier or subcontractor will be
willing or able to fulfill its contractual obligations and make necessary repairs or replace equipment. In addition, these
warranties generally expire within one to five years or may be of limited scope or provide limited remedies. If projects are
unable to avail themselves of warranty protection or receive the expected protection under the terms of the guaranties or
bonding, we may need to incur additional costs, including replacement and installation costs, which could adversely impact our
investment.
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Liability relating to environmental matters may impact the value of properties that we may acquire or the properties
underlying our assets.
Under various U.S. federal, state and local laws, an owner or operator of real estate or a project may become liable for the
costs of removal of certain hazardous substances released from the project or any underlying real property. These laws often
impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous
substances.
The presence of hazardous substances may adversely affect our, or another owner’s, ability to sell a contaminated project
or borrow using the project as collateral. To the extent that we, or another project owner, become liable for removal costs, our
investment, or the ability of the owner to make payments to us, may be negatively impacted.
We acquire real property rights, make investments in projects that own real property, have collateral consisting of real
property and in the course of our business, we may take title to a project or its underlying real estate assets relating to one of
our debt financings. In these cases, we could be subject to environmental liabilities with respect to these assets. To the extent
that we become liable for the removal costs, our results of operation and financial condition may be adversely affected. The
presence of hazardous substances, if any, may adversely affect our ability to sell the affected real property or the project and we
may incur substantial remediation costs, thus harming our financial condition.
Our insurance and contractual protections may not always cover lost revenue, increased expenses or liquidated
damages payments.
Although our assets or projects generally have insurance, supplier warranties, subcontractors performance assurances
such as bonding and other risk mitigation measures, the proceeds of such insurance, warranties, bonding or other measures may
not be adequate to cover lost revenue, increased expenses or liquidated damages payments that may be required in the future.
Risks Related to Our Company
We may change our operational policies (including our investment guidelines, strategies and policies) with the approval
of our board of directors but without stockholder consent at any time, which may adversely affect the market value of
our common stock and our ability to make distributions to our stockholders.
Our board of directors determines our operational policies and may amend or revise our policies, including our policies
with respect to acquisitions, dispositions, growth, operations, compensation, indebtedness, capitalization and dividends, or
approve transactions that deviate from these policies, without a vote of, or notice to, our stockholders at any time. We may
change our investment guidelines, underwriting process and our strategy at any time with the approval of our board of
directors, but without the consent of our stockholders, which could result in originating assets that are different in type from,
and possibly riskier than, the assets initially contemplated. In addition, our charter provides that our board of directors may
authorize us to revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that
it is no longer in our best interests to qualify as a REIT. These changes could adversely affect our business, financial condition,
results of operations and our ability to make distributions to our stockholders.
Our management and employees depend on information systems and system failures could significantly disrupt our
business, which may, in turn, negatively affect the market price of our common stock and our ability to make
distributions to our stockholders.
Our underwriting process and our asset and financial management and reporting are dependent on our present and future
communications and information systems. Any failure or interruption of these systems could cause delays or other problems in
our originating, financing, investing, asset and financial management and reporting activities, which could have a material
adverse effect on our operating results.
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We contract with information technology service providers where, in part, we rely upon their systems and controls for
the quality of the data provided. The inappropriate establishment and maintenance of these systems and controls could
cause information that we use to operate our business to be unavailable or inaccurate and could negatively impact our
financial results.
Our information technology architecture is partially outsourced. These systems and processes may be either internet
based or through traditional outsourced functions and certain of these arrangements are new or emerging. When we contract
with these service providers we attempt to evaluate the quality of their systems and controls before we execute the arrangement
and may rely on third party reviews and audits of these service providers and attempt to implement certain processes to ensure
the quality of the data received from these service providers. Because of the nature and maturity of the technology such efforts
may be unsuccessful or incomplete and the unavailability of these systems or the inaccurate data provided from these service
providers could negatively impact our financial results.
Cybersecurity risk and cyber incidents may adversely affect our business by causing a disruption to our operations, a
compromise or corruption of our confidential information and/or damage to our business relationships, all of which
could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our
information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining
unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information,
corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or
unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance cost,
litigation and damage to our relationships. As our reliance on technology has increased, so have the risks posed to both our
information systems and those provided by third-party service providers. We have implemented processes, procedures and
internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased
awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations or
confidential information will not be negatively impacted by such an incident.
We may seek to expand our business internationally, which will expose us to additional risks that we do not face in the
United States, which could have an adverse effect on our business, financial condition and operating results.
We generate substantially all of our revenue from operations in the United States, and currently derive only a small
amount of revenue from outside of the United States. We may seek to expand our revenue and projects outside of the United
States in the future. These operations will be subject to a variety of risks that we do not face in the United States, including risk
from changes in foreign country regulations, infrastructure, legal systems and markets. Other risks include possible difficulty in
repatriating overseas earnings and fluctuations in foreign currencies.
Our overall success in international markets will depend, in part, on our ability to succeed in different legal, regulatory,
economic, social and political conditions. We may not be successful in developing and implementing policies and strategies
that will be effective in managing these risks in each country where we decide to do business. Our failure to manage these risks
successfully could harm our international projects, reduce our international income or increase our costs, thus adversely
affecting our business, financial condition and operating results.
We will continue to seek to expand our business in part through future acquisitions or other similar investments.
As we grow our business, we have used, and will continue to use, acquisitions of, or other types of transactions such as
equity or convertible debt investments in, companies or assets to invest in new or different projects, expand our project skill-
sets and capabilities, expand our geographic markets, add experienced management and increase our product and service
offerings. There are a number of risks associated with these transactions and we may not achieve our goals in the transaction.
Such transaction could disrupt our business, cause dilution to our stockholders and harm our business, financial condition or
operating results. In addition, the time and effort involved to identify candidates and consummate such transactions may divert
members of our management from the operations of our company.
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Risks Relating to Regulation
We cannot predict the unintended consequences and market distortions that may stem from far-ranging governmental
intervention in the economic and financial system or from regulatory reform of the oversight of financial markets.
The U.S. federal government, the Federal Reserve Board of Governors, the U.S. Treasury, the SEC, U.S. Congress and
other governmental and regulatory bodies have taken, are taking or may in the future take, various actions to address the
financial crisis or other areas of regulatory concern, such as the Dodd—Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”). Such actions could have a dramatic impact on our business, results of operations and financial
condition, and the cost of complying with any additional laws and regulations or the elimination or reduction in scope of
various existing laws and regulations could have a material adverse effect on our financial condition and results of operations.
The far-ranging government intervention in the economic and financial system may carry unintended consequences and cause
market distortions. We are unable to predict at this time the extent and nature of such unintended consequences and market
distortions, if any. The inability to evaluate the potential impacts could have a material adverse effect on the operations of our
business.
Loss of our 1940 Act exemption would adversely affect us, the market price of shares of our common stock and our
ability to distribute dividends.
We conduct our operations so that we are not required to register as an investment company under the 1940 Act.
Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is or holds itself out as being engaged
primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an
investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning,
holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the
value of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on a non-consolidated basis, which
we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are U.S. Government
securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not
relying on the exemption from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940
Act.
We conduct our businesses primarily through our subsidiaries and our operations so that we comply with the 40% test.
The securities issued by any wholly-owned or majority-owned subsidiaries that we hold or may form in the future that are
excepted from the definition of “investment company” based on Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any
other investment securities we may own, may not have a value in excess of 40% of the value of our total assets on a non-
consolidated basis. Certain of our subsidiaries rely on or will rely on an exemption from registration as an investment company
under the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for entities which are not primarily
engaged in issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates
and which are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate. This exemption generally requires that at least 55% of such subsidiaries’ portfolios must be comprised of
qualifying assets and at least 80% of each of their portfolios must be comprised of qualifying assets and real estate-related
assets under the 1940 Act. Consistent with guidance published by the SEC staff, we intend to treat as qualifying assets for this
purpose loans secured by projects for which the original principal amount of the loan did not exceed 100% of the value of the
underlying real property portion of the collateral when the loan was made. We intend to treat as real estate-related assets non-
controlling equity interests in joint ventures that own projects whose assets are primarily real property. In general, with regard
to our subsidiaries relying on Section 3(c)(5)(C), we rely on other guidance published by the SEC or its staff or on our analyses
of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real
estate-related assets.
In addition, one or more of our subsidiaries qualifies for an exemption from registration as an investment company under
the 1940 Act pursuant to either Section 3(c)(5)(A) of the 1940 Act, which is available for entities which are not engaged in the
business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates,
and which are primarily engaged in the business of purchasing or otherwise acquiring notes, drafts, acceptances, open accounts
receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services, or
Section 3(c)(5)(B) of the 1940 Act, which is available for entities primarily engaged in the business of making loans to
manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance, and services.
These exemptions generally require that at least 55% of such subsidiaries’ portfolios must be comprised of qualifying assets
that meet the requirements of the exemption. We intend to treat energy efficiency loans where the loan proceeds are specifically
provided to finance equipment, services and structural improvements to properties and other facilities and renewable energy
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and other sustainable infrastructure projects or improvements as qualifying assets for purposes of these exemptions. In general,
we also expect, with regard to our subsidiaries relying on Section 3(c)(5)(A) or (B), to rely on guidance published by the SEC
or its staff, including reliance on a no-action letter obtained in connection with Sections 3(c)(5)(A) and 3(c)(5)(B) of the 1940
Act, or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying
assets under the exemptions.
Although we monitor the portfolios of our subsidiaries relying on the Section 3(c)(5)(A), (B) or (C) exemptions
periodically and prior to each acquisition, there can be no assurance that such subsidiaries will be able to maintain their
exemptions. Qualification for exemptions from registration under the 1940 Act will limit our ability to make certain
investments. For example, these restrictions will limit the ability of these subsidiaries to make loans that are not secured by real
property or that do not represent part or all of the sales price of merchandise, insurance, and services.
There can be no assurance that the laws and regulations governing the 1940 Act, including the Division of Investment
Management of the SEC providing more specific or different guidance regarding these exemptions, will not change in a manner
that adversely affects our operations. For example, on August 31, 2011, the SEC issued a concept release (No. IC-29778; File
No. SW7-34-11, Companies Engaged in the Business of Acquiring Mortgages and Mortgage-Related Instruments) pursuant to
which it is reviewing the scope of the exemption from registration under Section 3(c)(5)(C) of the 1940 Act. Any additional
guidance from the SEC or its staff from this process or in other circumstances could provide additional flexibility to us, or it
could further inhibit our ability to pursue the strategies we have chosen. If we or our subsidiaries fail to maintain an exemption
from the 1940 Act, we could, among other things, be required either to (1) change the manner in which we conduct our
operations to avoid being required to register as an investment company, (2) effect sales of our assets in a manner that, or at a
time when, we would not otherwise choose to do so or (3) register as an investment company, any of which could negatively
affect our business, our ability to make distributions, our financing strategy and the market price for our shares of common
stock.
We have not requested the SEC or its staff to approve our treatment of any company as a majority-owned subsidiary and
neither the SEC nor its staff has done so. If the SEC or its staff were to disagree with our treatment of one or more companies
as majority-owned subsidiaries, we would need to adjust our strategy and our assets in order to continue to pass the 40% test.
Any such adjustment in our strategy could have a material adverse effect on us.
Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or
our exemption from the 1940 Act.
If the market value or income potential of our assets changes as a result of changes in interest rates, general market
conditions, government actions or other factors, we may need to adjust the portfolio mix of our real estate assets and income or
liquidate our non-qualifying assets to maintain our REIT qualification or our exemption from the 1940 Act. If changes in asset
values or income occur quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the
illiquid nature of the assets we may own. We may have to make decisions that we otherwise would not make absent the REIT
and 1940 Act considerations.
Because we expect to distribute substantially all of our REIT taxable income to our stockholders, we will need
additional capital to finance our growth and such capital may not be available on favorable terms or at all.
We may need additional capital to fund our growth. U.S. federal income tax law generally requires that a REIT distribute
annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital
gains, and that it pay tax at regular corporate rates to the extent that it annually distributes greater than 90% but less than 100%
of such REIT taxable income. Because we intend to grow our business, this limitation may require us to incur additional debt or
raise additional equity at a time when it may be disadvantageous to do so. We cannot make any assurance that debt and equity
financing will be available to us on favorable terms, or at all, and debt financings may be restricted by the terms of any of our
outstanding borrowings. If additional funds are not available to us, we could be forced to curtail or cease new asset originations
and acquisitions, which could have a material adverse effect on our business and financial condition.
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The preparation of our financial statements involves use of estimates, judgments and assumptions, and our financial
statements may be materially affected if our estimates prove to be inaccurate.
Financial statements prepared in accordance with GAAP require the use of estimates, judgments and assumptions that
affect the reported amounts. Different estimates, judgments and assumptions reasonably could be used that would have a
material effect on the financial statements, and changes in these estimates, judgments and assumptions are likely to occur from
period to period in the future. Significant areas of accounting requiring the application of management’s judgment include, but
are not limited to determining the fair value of our assets.
These estimates, judgments and assumptions are inherently uncertain, and, if they prove to be wrong, then we face the
risk that charges to income will be required. Any charges could significantly harm our business, financial condition, results of
operations and the price of our securities. See Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies and Use of Estimates for a discussion of the accounting estimates, judgments and
assumptions that we believe are the most critical to an understanding of our business, financial condition and results of
operations.
Risks Related to Borrowings
We use leverage in executing our business strategy, which may adversely affect the return on our assets and may reduce
cash available for distribution to our stockholders, as well as increase losses when economic conditions are unfavorable.
We use leverage to finance our assets, including a credit facility or facilities, recourse and non-recourse debt as well as
securitizations. In the future, our financing sources may also include other fixed and floating rate borrowings in the form of
new bank credit facilities (including term loans and revolving facilities), warehouse facilities, repurchase agreements,
securitizations and public and private debt issuances.
Changes in the financial markets and the economy generally could adversely affect one or more of our lenders or
potential lenders and could cause one or more of our lenders, potential lenders or institutional investors to be unwilling or
unable to provide us with financing or participate in securitizations or could increase the costs of that financing or
securitization. The return on our assets and cash available for distribution to our stockholders may be reduced to the extent that
market conditions prevent us from leveraging our assets or increase the cost of our financing relative to the income that can be
derived from the assets acquired. Increases in our financing costs will reduce cash available for distributions to stockholders.
We may not be able to meet our financing obligations and, to the extent that we cannot, we risk the loss of some or all of our
assets to liquidation or sale to satisfy the obligations.
An increase in our borrowing costs relative to the interest we receive on our leveraged assets may adversely affect our
profitability and our cash available for distribution to our stockholders. Our borrowings may have a shorter duration
than our assets.
As any borrowing agreements we enter into mature, we may be required either to enter into new borrowings at higher
rates or to sell certain of our assets. In addition, any increases in the federal funds rate announced by the Federal Reserve Board
of Governors is likely to increase shorter-term interest rates and may lower the difference between shorter-term interest rates
and longer-term interest rates which would result in a continued flattening or inversion of the yield curve. Our credit facilities
have rates that adjust on a frequent basis based on prevailing short-term interest rates. An increase in interest rates, or a
continued flattening or inversion of the yield curve, would reduce the spread between the returns on our assets which are
typically priced using longer-term interest rates and the cost of any new borrowings or borrowings where the interest rate
adjusts to market rates or is based on shorter-term rates. This change in interest rates would adversely affect the returns on our
assets, which might reduce our earnings and, in turn, cash available for distribution to our stockholders. In addition, as we may
use short-term borrowings including repurchase agreements and warehouse facilities that are generally short-term commitments
of capital, lenders may respond to market conditions making it more difficult for us to secure continued financing. If we are not
able to renew our then existing facilities or arrange for new financing on terms acceptable to us, or if we default on our
covenants or are otherwise unable to access funds under any of these facilities, we may have to curtail entering into new
transactions and/or dispose of assets. We will face these risks given that a number of our borrowings have a shorter duration
than the assets they finance.
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We do not have a formal policy limiting the amount of debt we may incur. Our board of directors may change our
leverage policy without stockholder approval.
Although we are not restricted by any regulatory requirements to maintain our leverage ratio at or below any particular
level, the amount of leverage we may deploy for particular assets will depend upon the availability of particular types of
financing and our assessment of the credit, liquidity, price volatility and other risks of those assets and the credit quality of our
financing counterparties. We have established leverage targets which are discussed in Item 7, Management’s Discussion and
Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources. However, our charter and
bylaws do not limit the amount or type of indebtedness we can incur, and our board of directors has changed, and has the
discretion to deviate from or change at any time in the future, our leverage policy, which could result in an investment portfolio
with a different risk profile. We utilize non-recourse facilities on certain types of assets that have significantly higher leverage.
On these facilities, the lenders’ primary recourse is to the pledged assets and if the value of the pledged assets is below the
value of the debt or if we default on a facility, the lender would be able to foreclose on all the pledged assets, which would
result in losses and reduce our assets and the cash available for distributions to stockholders. Moreover, we have more limited
experience dealing with certain types of debt financings for our assets and we may apply too much leverage to our assets or
may employ an inefficient financing strategy to our assets.
We will require additional borrowings and equity raises in the future to achieve our targets.
To achieve our leverage target and to grow our business, we will require new sources of debt and equity which may be
difficult to arrange or which may have significantly higher costs. There may be declines in the value of our equity and we may
experience difficulties in raising new equity or in raising or refinancing debt. If we were to experience such declines or
difficulties, we may be forced to limit our growth, liquidate assets or incur higher costs which may significantly harm our
business, financial condition, results of operations, and our ability to make or grow our distributions, which could cause the
value of our common stock to decline.
The use of securitizations and special purpose entities would expose us to additional risks.
We presently hold, and to the extent that we securitize loans in the future, we anticipate that we will often hold the most
junior certificates or the residual value associated with a securitization. We may also establish other funds or special purpose
entities, where we would hold only a partial or subordinate interest or a residual value after taking into account our non-
recourse debt facilities or a right to participate in the profits of such entity once it achieves a predefined threshold. As a holder
of the residual value or other such interests, we are more exposed to losses on the underlying collateral because the interest we
retain in the securitization vehicle or other entity would be subordinate to the more senior notes or interests issued to investors
and we would, therefore, absorb all of the losses, up to the value of our interests, sustained with respect to the underlying assets
before the owners of the notes or other interests experience any losses. In addition, the inability to securitize our portfolio or
assets within our portfolio could hurt our performance and our ability to grow our business.
We also use various special purpose entities to own and finance our assets. These subsidiaries incur various types of debt,
which can be used to finance one or more of our assets. This debt is typically structured as non-recourse debt, which means it is
repayable solely from the revenue from the investment financed by the debt and is secured by the related physical assets, major
contracts, cash accounts and in some cases, a pledge of our ownership interests in the subsidiaries involved in the projects.
Although this subsidiary debt is typically non-recourse to us, we make certain representations and warranties or enter into
certain guaranties of our subsidiary’s obligations or covenants to the non-recourse debt holder, the breach of which may require
us to make payments to the lender. We may also from time to time determine to provide financial support to the subsidiary in
order to maintain rights to the project or otherwise avoid the adverse consequences of a default. In the event a subsidiary
defaults on its indebtedness, its creditors may foreclose on the collateral securing the indebtedness, which may result in us
losing our ownership interest in some or all of the subsidiary’s assets. The loss of our ownership interest in a subsidiary or some
or all of a subsidiary’s assets could have a material adverse effect on our business, financial condition and operating results.
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Our existing credit facilities and debt contain, and any future financing facilities may contain, covenants that restrict
our operations and may inhibit our ability to grow our business and increase revenues.
Our existing credit facilities and debt contain, and any future financing facilities may contain, various affirmative and
negative covenants, including maintenance of an interest coverage ratio and limitations on the incurrence of liens and
indebtedness, investments, fundamental organizational changes, dispositions, changes in the nature of business, transactions
with affiliates, use of proceeds and stock repurchases. In addition, the terms of our non-recourse debt include restrictions and
covenants, including limitations on our ability to transfer or incur liens on the assets that secure the debt. For further
information see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity
and Capital Resources.
The covenants and restrictions included in our existing financings do, and the covenants and restrictions to be included in
any future financings may, restrict our ability to, among other things:
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incur or guarantee additional debt;
• make certain investments, originations or acquisitions;
• make distributions on or repurchase or redeem capital stock;
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engage in mergers or consolidations;
reduce liquidity below certain levels;
grant liens;
have a tangible net worth below a defined threshold;
incur operating losses for more than a specified period; and
enter into transactions with affiliates.
Our non-recourse debt limits our ability to take action with regard to the assets pledged as security for the debt. These
restrictions, as well as any other covenants contained in any future financings, may interfere with our ability to obtain
financing, or to engage in other business activities, which may significantly limit or harm our business, financial condition,
liquidity and results of operations. Our financing agreements may contain cross-default provisions, so that if a default occurs
under any one agreement, the lenders under our other agreements could also declare a default. A default and resulting
repayment acceleration could significantly reduce our liquidity, which could require us to sell our assets to repay amounts due
and outstanding. This could also significantly harm our business, financial condition, results of operations, and our ability to
make distributions, which could cause the value of our common stock to decline and adversely affect our ability to qualify, or
remain qualified, as a REIT. A default will also significantly limit our financing alternatives such that we will be unable to
pursue our leverage strategy, which could curtail the returns on our assets.
In addition, certain of our financing arrangements contain provisions that provide for a preference in cash flow
allocations to the lender from our assets or an acceleration of principal payments owed when certain conditions are present
related to the underlying assets that serve as collateral for the financing. These provisions may limit our ability to obtain
distributions from the underlying assets and could impact our cash flow and expected returns.
We will have to pay off the remaining balance or refinance our borrowings when they become due. The failure to be
able to pay off the remaining balance or refinance such borrowings or an increase in interest rates of such refinancing
could have a material impact on our business.
Some of our borrowings will have a remaining balance when they become due. If our subsidiary is unable to repay or
refinance the remaining balance of this debt, or if the terms of any available refinancing are not favorable, we may be forced to
liquidate assets or incur higher costs which may significantly harm our business, financial condition, results of operations, and
our ability to make distributions, which could cause the value of our common stock to decline.
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If a counterparty to repurchase transactions defaults on its obligation to resell the underlying security back to us at the
end of the transaction term, or if the value of the underlying security has declined as of the end of that term, or if we
default on obligations under the repurchase agreement, we will lose money on repurchase transactions.
In repurchase transactions, we will generally sell certain of our assets to lenders (i.e., repurchase agreement
counterparties) and receive cash from the lenders. The lenders will be obligated to resell the same assets back to us at the end of
the term of the transaction. Because the cash we will receive from the lender when we initially sell the assets to the lender is
less than its value, if the lender defaults on its obligation to resell the same asset back to us we would incur a loss on the
transaction equal to the differential in value at which the lender purchased the asset (assuming there was no other change in
value). We would also lose money on a repurchase transaction if the value of the underlying asset has declined as of the end of
the transaction term, as we would have to repurchase the assets for their initial value but would receive loans worth less than
that amount. We may also be forced to sell assets at significantly depressed prices to meet margin calls, post additional
collateral and maintain adequate liquidity, which could cause us to incur losses. Moreover, to the extent we are forced to sell
assets at such time, given market conditions, we may be selling at the same time as others facing similar pressures, which could
exacerbate a difficult market environment and which could result in our incurring significantly greater losses on our sale of
such assets. In an extreme case of market duress, a market may not even be present for certain of our assets at any price. Such a
situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for protection
under the United States Bankruptcy Code (the “Bankruptcy Code”). Further, if we default on one of our obligations under a
repurchase transaction, the lender will be able to terminate the transaction and cease entering into any other repurchase
transactions with us. Our repurchase agreements may contain cross-default provisions, so that if a default occurs under any one
agreement, the lenders under any other of our agreements could also declare a default. If a default occurs under any of our
repurchase agreements and the lenders terminate one or more of our repurchase agreements, we may need to enter into
replacement repurchase agreements with different lenders. There can be no assurance that we will be successful in entering into
such replacement repurchase agreements on the same terms as the repurchase agreements that were terminated or at all. Any
losses we incur on our repurchase transactions could adversely affect our earnings and thus our cash available for distribution
to our stockholders. In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special
treatment under the Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the
applicable repurchase agreement to avoid the automatic stay provisions of the Bankruptcy Code and to foreclose on the
collateral agreement without delay, which could ultimately reduce the amounts we could otherwise recover.
Uncertainty regarding the London interbank offered rate ("LIBOR") may adversely impact our borrowings and
interest rate hedging.
In July 2017, the United Kingdom Financial Conduct Authority announced that it would phase out LIBOR as a
benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established or other changes
made such that LIBOR continues to exist after 2021. Many of our debt and interest rate hedge agreements are linked to this
benchmark rate. When LIBOR ceases to exist or is otherwise modified, we may need to amend the debt and/or interest rate
hedge agreements that utilize LIBOR as a factor in determining the interest rate to reflect any new standard or modification that
is established. There is no guarantee that a transition from LIBOR to an alternative will not result in financial market
disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could have an adverse
effect on our business, results of operations, financial condition, and stock price.
Risks Related to Hedging
We, or the projects in which we invest, enter into hedging transactions that could expose us to contingent liabilities in
the future and adversely impact our financial condition.
Subject to maintaining our qualification as a REIT, part of our strategy, or the strategy of the projects in which we invest,
involves entering into hedging transactions that could require us to fund cash payments in certain circumstances (e.g., the early
termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a
counterparty to request margin it is contractually owed under the terms of the hedging instrument). The amount due would be
equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and
charges. These economic losses will be reflected in our, or the project’s, financial statements, and our, or the project’s, ability to
fund these obligations will depend on the liquidity of our, or the project’s, assets and access to capital at the time, and the need
to fund these obligations could adversely impact our financial condition.
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We have limited experience hedging the interest rate, credit or commodity risk of our assets and liabilities and such
hedging, if any, may adversely affect our results of operations.
We have limited experience hedging the interest rate, credit or commodity risk of our assets and liabilities. However, we
have entered into interest rate hedges for certain of our liabilities and as part of our strategy, we may pursue various hedging
strategies to seek to reduce our exposure to adverse changes in interest rates, credit or commodity prices. Our hedging activity
will vary in scope based on the level and volatility of interest rates, credit risk of our counterparties or the underlying
commodity, our types of assets and liabilities and other changing market conditions. Interest rate, credit, or commodity hedging
may fail to protect or could adversely affect us because, among other things:
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our hedging strategies may be poorly designed or improperly executed as a result of from our limited experience
hedging the interest rate, credit or commodity risk;
interest rate, credit or commodity hedging can be expensive, particularly during periods of rising and volatile
interest rates, market conditions or commodity prices;
available interest rate, credit or commodity hedges may not correspond directly with the interest rate, credit or
commodity risk for which protection is sought;
the duration of the hedge may not match the duration of the related liability or exposure;
the amount of income that a REIT may earn from certain hedging transactions (other than through taxable REIT
subsidiaries, or “TRSs”), to offset interest rate losses is limited by U.S. federal income tax provisions governing
REITs;
the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that
it impairs our ability to sell or assign our side of the hedging transaction;
the hedging counterparty owing money in the hedging transaction may default on its obligation to pay; and
our hedging transactions, which are intended to limit losses, may actually adversely affect our earnings, which could
reduce our cash available for distribution to our stockholders.
In addition, over-the-counter hedges entered into to hedge interest rates, credit risk or commodity prices involve risk
since they often are not traded on regulated exchanges or cleared through a central counterparty. We would remain exposed to
our counterparty’s ability to perform on its obligations under each hedge and cannot look to the creditworthiness of a central
counterparty for performance. As a result, if a hedging counterparty cannot perform under the terms of the hedge, we would not
receive payments due under that hedge, we may lose any unrealized gain associated with the hedge and the hedged liability
would cease to be hedged. While we would seek to terminate the relevant hedge transaction and may have a claim against the
defaulting counterparty for any losses, including unrealized gains, there is no assurance that we would be able to recover such
amounts or to replace the relevant hedge on economically viable terms or at all. In such case, we could be forced to cover our
unhedged liabilities at the then current market price. We may also be at risk for any collateral we have pledged to secure our
obligations under the hedge if the counterparty becomes insolvent or files for bankruptcy.
Furthermore, our interest rate swaps and other hedge transactions are subject to increasing statutory and other regulatory
requirements and, depending on the identity of the counterparty, applicable international requirements. Recently, new
regulations have been promulgated by U.S. and foreign regulators to strengthen the oversight of swaps, and any further actions
taken by such regulators could constrain our strategy or increase our costs, either of which could materially and adversely
impact our results of operations.
In addition, the Dodd-Frank Act requires certain derivatives, including certain interest rate swaps, to be executed on a
regulated market and cleared through a central counterparty. Unlike over-the-counter swaps, the counterparty for the cleared
swaps is the clearing house, which reduces counterparty risk. However, cleared swaps require us to appoint clearing brokers
and to post margin in accordance with the clearing house’s rules, which has resulted in increased costs for cleared swaps
compared to over-the-counter swaps. Our over-the-counter hedges with swap dealers became subject to margin regulations
promulgated by U.S. regulators on March 1, 2017, which regulations increased the required margin, and the cost to us of over-
the-counter swaps. The margin requirements for both cleared and uncleared swaps also limit eligible margin to cash and
specified types of securities, which may further increase the costs of hedging and induce us to change or reduce the use of
hedging transactions. The margin regulations generally do not apply to any over-the-counter swaps that were entered into prior
to the effective date of such regulations.
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In addition, the projects in which we invest, may enter into various forms of hedging including interest rate and power
price hedging. To the extent they enter into such hedges, the financial results of the project will be exposed to similar risks as
described above which could adversely impact our results of operations.
If we, or our projects, choose not to pursue, or fail to qualify for, hedge accounting treatment, our operating results may
be impacted because losses on the derivatives that we enter into may not be offset by a change in the fair value of the
related hedged transaction.
We, or our projects, may choose not to pursue, or fail to qualify for, hedge accounting treatment relating to derivative and
hedging transactions. We, or our projects, may fail to qualify for hedge accounting treatment for a number of reasons, including
if we, or our projects, use instruments that do not meet the Accounting Standards Codification (“ASC”) Topic 815 definition of
a derivative (such as short sales), we, or our projects, fail to satisfy ASC Topic 815 hedge documentation and hedge
effectiveness assessment requirements or the hedge relationship is not highly effective. If we, or our projects, fail to qualify for,
or choose not to pursue, hedge accounting treatment, our, or our projects, operating results may be impacted because losses on
the derivatives that we, or our projects, enter into may not be offset by a change in the fair value of the related hedged
transaction.
Risks Related to Our Common Stock
There can be no assurance that an active trading market for our common stock will continue, which could cause our
common stock to trade at a discount and make it difficult for holders of our common stock to sell their shares.
Our common stock is listed on the New York Stock Exchange (“NYSE”). However, there can be no assurance that an
active trading market for our common stock will continue, which could cause our common stock to trade at a discount.
Accordingly, no assurance can be given as to the ability of our stockholders to sell their common stock or the price that our
stockholders may obtain for their common stock. Some of the factors that could negatively affect the market price of our
common stock include:
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our actual or projected operating results, financial condition, cash flows and liquidity or changes in business strategy
or prospects;
changes in the mix of our investment products and services, including the level of securitizations or fee income in
any quarter;
actual or perceived conflicts of interest with individuals, including our executives;
our ability to arrange financing for projects;
equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may
occur;
seasonality in construction and demand for our investments;
actual or anticipated accounting problems;
publication of research reports about us or the sustainable infrastructure industry;
changes in market valuations of similar companies;
adverse market reaction to any increased indebtedness we may incur in the future;
commodity price changes;
interest rate changes;
additions to or departures of our key personnel;
speculation or negative publicity in the press or investment community;
our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts;
increases in market interest rates, which may lead investors to demand a higher distribution yield for our common
stock, and would result in increased interest expenses on our debt;
•
changes in governmental policies, regulations or laws;
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•
•
•
failure to qualify, or maintain our qualification, as a REIT or failure to maintain our exemption from registration as
an investment company under the 1940 Act;
price and volume fluctuations in the stock market generally; and
general market and economic conditions, including the current state of the credit and capital markets.
Market factors unrelated to our performance could also negatively impact the market price of our common stock. One of
the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution rate as a
percentage of our stock price relative to market interest rates. If market interest rates increase, prospective investors may
demand a higher distribution rate or seek alternative investments paying higher dividends or interest. As a result, interest rate
fluctuations and conditions in capital markets can affect the market value of our common stock.
Common stock and preferred stock eligible for future sale may have adverse effects on our share price.
Subject to applicable law, our board of directors, without stockholder approval, may authorize us to issue additional
authorized and unissued shares of common stock and preferred stock on the terms and for the consideration it deems
appropriate.
We cannot predict the effect, if any, of future sales of our common stock or the availability of shares for future sales, on
the market price of our common stock. Sales of substantial amounts of common stock or the perception that such sales could
occur may adversely affect the prevailing market price for our common stock.
We cannot assure you of our ability to make distributions in the future. If our portfolio of assets fails to generate
sufficient income and cash flow, we could be required to sell assets, borrow funds, raise additional equity or make a
portion of our distributions in the form of a taxable stock distribution or distribution of debt securities.
We are generally required to distribute to our stockholders at least 90% of our REIT taxable income (without regard to
the deduction for dividends paid and excluding net capital gains) each year for us to qualify, and maintain our qualification, as a
REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). Our current policy is to pay
quarterly distributions, which on an annual basis will equal or exceed substantially all of our REIT taxable income. In the event
that our board of directors authorizes distributions in excess of the income or cash flow generated from our assets, we may
make such distributions from the proceeds of future offerings of equity or debt securities or other forms of debt financing or the
sale of assets.
Our ability to make distributions may be adversely affected by a number of factors. Therefore, although we anticipate
making quarterly distributions to our stockholders, our board of directors has the sole discretion to determine the timing, form
and amount of any distributions to our stockholders. If our portfolio of assets fails to generate sufficient income and cash flow,
we could be required to sell assets, borrow funds, raise additional equity or make a portion of our distributions in the form of a
taxable stock distribution or distribution of debt securities. To the extent that we are required to sell assets in adverse market
conditions or borrow funds at unfavorable rates, our results of operations could be materially and adversely affected. If we raise
additional equity, our stock price could be materially and adversely affected. Our board of directors will make determinations
regarding distributions based upon various factors, including our earnings, our financial condition, our liquidity, our debt
covenants, maintenance of our REIT qualification, applicable provisions of the MGCL and other factors as our board of
directors may deem relevant from time to time. We believe that a change in any one of the following factors could adversely
affect our results of operations and impair our ability to make distributions to our stockholders:
•
our ability to make profitable investments;
• margin calls or other expenses that reduce our cash flow;
•
•
•
defaults in our asset portfolio or decreases in the value of our portfolio;
the cash flow we receive from our assets, including those subject to non-recourse debt; and
the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.
As a result, no assurance can be given that we will be able to make distributions to our stockholders at any time in the
future or that the level of any distributions we do make to our stockholders will achieve a market yield or increase or even be
maintained over time, any of which could materially and adversely affect us.
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In addition, distributions that we make to our stockholders will generally be taxable to our stockholders as ordinary
income, subject to a deduction equal to 20% of the amount of such dividends for taxable years beginning in 2018 and ending in
2025, which generally reduces the effective U.S. federal income tax rate applicable to such dividends. However, a portion of
our distributions may be designated by us as long-term capital gains to the extent that they are attributable to capital gain
income recognized by us or may constitute a return of capital to the extent that they exceed our earnings and profits as
determined for tax purposes. A return of capital is not taxable income, but has the effect of reducing the basis of a stockholder’s
investment in shares of our common stock.
Future offerings of debt or equity securities, which may rank senior to our common stock, may adversely affect the
market price of our common stock.
Our present debt ranks, and any future debt would rank, senior to our common stock. Such debt is, and likely will be,
governed by a loan agreement, an indenture or other instrument containing covenants restricting our operating flexibility.
Additionally, our convertible securities, and any equity securities or convertible or exchangeable securities that we issue in the
future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to
owners of our common stock. We and, indirectly, our stockholders will bear the cost of issuing and servicing such debt or
securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and
other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus,
holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and
diluting the value of their stock holdings in us.
Risks Related to Our Organization and Structure
Our business could be harmed if key personnel terminate their employment with us.
Our success depends, to a significant extent, on the continued services of our senior management team. We have entered
into employment agreements with certain members of our senior management team. Notwithstanding these agreements, there
can be no assurance that any or all of these members of our senior management team will remain employed by us. We do not
maintain key person life insurance on any of our officers other than two policies we maintain for Mr. Eckel under which we are
a beneficiary in the amount of approximately $500 thousand. The loss of services of one or more members of our senior
management team could harm our business and our prospects.
Conflicts of interest could arise as a result of our structure.
Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand,
and our Operating Partnership or any partner thereof, on the other. Our directors and officers have duties to our company under
applicable Maryland law in connection with our management. Our duties, as the general partner, to our Operating Partnership
and our partners may come into conflict with the duties of our directors and officers to us.
Under Delaware law, a general partner of a Delaware limited partnership owes its limited partners the duties of good faith
and fair dealing. Other duties, including fiduciary duties, may be modified or eliminated in the partnership’s partnership
agreement, except that conflict of interest transactions may still run afoul of implied contractual standards under Delaware law.
The partnership agreement of our Operating Partnership provides that, for so long as we own a controlling interest in our
Operating Partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited
partners will be resolved in favor of our stockholders. We have not obtained an opinion of counsel covering the provisions set
forth in the partnership agreement of our Operating Partnership that purport to waive or restrict our fiduciary duties that would
be in effect under common law were it not for the partnership agreement of our Operating Partnership.
Additionally, the partnership agreement of our Operating Partnership expressly limits our liability by providing that
neither we, as the general partner of the Operating Partnership, nor any of our directors or officers, will be liable or accountable
in damages to our Operating Partnership, its limited partners or their assignees for errors in judgment, mistakes of fact or law or
for any act or omission if the general partner, director or officer, acted in good faith. In addition, our Operating Partnership is
required to indemnify us, our affiliates and each of our and their respective officers, directors, employees and agents to the
fullest extent permitted by applicable law against any and all losses, claims, damages, liabilities (whether joint or several),
expenses (including, without limitation, attorneys’ fees and other legal fees and expenses), judgments, fines, settlements and
other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or
investigative, that relate to the operations of the Operating Partnership, provided that our Operating Partnership will not
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indemnify any such person for (1) willful misconduct or a knowing violation of the law, (2) any transaction for which such
person received an improper personal benefit in violation or breach of any provision of the partnership agreement of our
Operating Partnership, or (3) in the case of a criminal proceeding, the person had reasonable cause to believe the act or
omission was unlawful.
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the MGCL may have the effect of deterring a third party from making a proposal to acquire us or of
impeding a change in control under circumstances that otherwise could provide the holders of our common stock with the
opportunity to realize a premium over the then-prevailing market price of our common stock. We are subject to the “business
combination” provisions of the MGCL that, subject to limitations, prohibit certain business combinations (including a merger,
consolidation, statutory share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or
reclassification of equity securities) between us and an “interested stockholder” (defined generally as any person who
beneficially owns 10% or more of our then outstanding voting stock or an affiliate or associate of ours who, at any time within
the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting stock)
or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder.
After the five-year prohibition, any business combination between us and an interested stockholder generally must be
recommended by our board of directors and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast
by holders of outstanding shares of our voting stock and (2) two thirds of the votes entitled to be cast by holders of our voting
stock other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be
effected or held by an affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply
if, among other conditions, our common stockholders receive a minimum price, as defined under the MGCL, for their shares in
the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. These
provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a board of directors
prior to the time that the interested stockholder becomes an interested stockholder. Our board of directors has by resolution
exempted business combinations between us and (1) any other person, provided, that such business combination is first
approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person),
(2) the Predecessor and its affiliates and associates as part of our formation transactions and (3) persons acting in concert with
any of the foregoing. As a result, any person described in the preceding sentence may be able to enter into business
combinations with us that may not be in the best interests of our stockholders, without compliance by our company with the
supermajority vote requirements and other provisions of the statute. There can be no assurance that our board of directors will
not amend or revoke the exemption at any time.
The “control share” provisions of the MGCL provide that, subject to certain exemptions, a holder of “control shares” of a
Maryland corporation (defined as shares which, when aggregated with all other shares controlled by the stockholder (except
solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in
electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control
of issued and outstanding “control shares”) has no voting rights with respect to such shares except to the extent approved by
our stockholders by the affirmative vote of at least two thirds of all the votes entitled to be cast on the matter, excluding votes
entitled to be cast by the acquirer of control shares, our officers and our directors who are also our employees. Our bylaws
contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our
stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
The “unsolicited takeover” provisions of Title 3, Subtitle 8 of the MGCL permit our board of directors, without
stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover
defenses, some of which (for example, a classified board) we do not yet have. Our charter contains a provision whereby we
have elected to be subject to the provisions of Title 3, Subtitle 8 of the MGCL, pursuant to which our board of directors has the
exclusive power to fill vacancies on our board of directors. These provisions may have the effect of inhibiting a third party
from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the
circumstances that otherwise could provide the holders of shares of common stock with the opportunity to realize a premium
over the then current market price.
Our authorized but unissued shares of common and preferred stock may prevent a change in our control.
Our charter permits our board of directors to authorize us to issue additional shares of our authorized but unissued
common or preferred stock. In addition, our board of directors may, without common stockholder approval, amend our charter
to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have the
authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the terms of the classified
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or reclassified shares. As a result, our board of directors may establish a series of common or preferred stock that could delay or
prevent a transaction or a change in control that might involve a premium price for shares of our common stock or otherwise be
in the best interest of our stockholders.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could
limit stockholder recourse in the event of actions not in our stockholders’ best interests.
Our charter eliminates the liability of our present and former directors and officers to us and our stockholders for money
damages to the maximum extent permitted under Maryland law. Under Maryland law, our present and former directors and
officers will not have any liability to us or our stockholders for money damages other than liability resulting from:
•
•
actual receipt of an improper benefit or profit in money, property or services; or
active and deliberate dishonesty by the director or officer that was established by a final judgment and was material
to the cause of action adjudicated.
Our charter authorizes us to indemnify our directors and officers for actions taken by them in those and other capacities to
the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present and former director or
officer, and each person who served any predecessor of our company in a similar capacity, to the maximum extent permitted by
Maryland law, in connection with the defense of any proceeding to which he or she is made, or threatened to be made, a party
or a witness by reason of his or her service to us or any predecessor. In addition, we may be obligated to pay or reimburse the
expenses incurred by such persons in connection with any such proceedings without requiring a preliminary determination of
their ultimate entitlement to indemnification.
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our
stockholders to effect changes to our management.
Our charter provides that, subject to the rights of holders of any series of preferred stock, a director may be removed with
or without cause upon the affirmative vote of holders of at least two thirds of the votes entitled to be cast generally in the
election of directors. Vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum.
These requirements make it more difficult to change our management by removing and replacing directors and may prevent a
change in control of our company that is in the best interests of our stockholders.
Ownership limitations may restrict change of control or business combination opportunities in which our stockholders
might receive a premium for their shares.
In order for us to qualify as a REIT for each taxable year after 2013, no more than 50% in value of our outstanding
capital stock may be owned, directly or constructively, by five or fewer individuals during the last half of any calendar year,
and at least 100 persons must beneficially own our stock during at least 335 days of a taxable year of 12 months, or during a
proportionate portion of a shorter taxable year. “Individuals” for this purpose include natural persons, private foundations, some
employee benefit plans and trusts, and some charitable trusts. To assist us in preserving our REIT qualification, among other
purposes, our charter generally prohibits any person from directly or indirectly owning more than 9.8% in value or in number
of shares, whichever is more restrictive, of the aggregate outstanding shares of our capital stock, the outstanding shares of any
class or series of our preferred stock or the outstanding shares of our common stock. These ownership limits could have the
effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their
shares over the then prevailing market price or which holders might believe to be otherwise in their best interests. Our board of
directors has established exemptions from these ownership limits that permit certain institutional investors and their clients to
hold shares of our common stock in excess of these ownership limits.
We are subject to financial reporting and other requirements for our accounting, internal audit and other management
systems and resources and the failure to comply with such requirements may adversely effect our business, operating
results and stock price.
We are subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). Section 404 requires annual management assessments of the
effectiveness of our internal controls over financial reporting and, our independent registered public accounting firm to express
an opinion on the effectiveness of our internal controls over financial reporting. These reporting and other obligations place
significant demands on our management, administrative, operational, internal audit and accounting resources and may cause us
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to incur significant expenses. We have upgraded, and may need to continue to upgrade, our systems or create new systems;
implement additional financial and management controls, reporting systems and procedures; expand or outsource our internal
audit function; and hire additional accounting, internal audit and finance staff. If we are unable to accomplish these objectives
in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to
reporting companies could be impaired. We believe that we currently have in place accounting, internal audit and other
management systems and resources that will allow us to maintain compliance with the requirements of the Sarbanes-Oxley Act.
Any failure to maintain effective internal controls could have a material adverse effect on our business, operating results and
stock price.
Risks Related to Our Taxation as a REIT
Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code, and our failure to
qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local tax,
which would negatively impact the results of our operations and reduce the amount of cash available for distribution to
our stockholders.
We elected and qualified as a REIT for U.S. federal income tax purposes commencing with our taxable year ended
December 31, 2013. The U.S. federal income tax laws governing REITs are complex, and judicial and administrative
interpretations of the U.S. federal income tax laws governing REIT qualification are limited. To qualify as a REIT and remain
so qualified, we must meet, on an ongoing basis through actual operating results, various tests regarding the nature and
diversification of our assets and our income, the ownership of our outstanding shares, and the amount of our distributions. Even
a technical or inadvertent violation could jeopardize our REIT qualification. Our ability to satisfy the asset tests depends upon
our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise
determination, and for which we will not obtain independent appraisals.
We received a private letter ruling from the Internal Revenue Service (“IRS”), which we refer to as the Ruling, relating to
our ability to treat certain of our assets as qualifying REIT assets. We are entitled to rely on this Ruling for those assets which
fit within the scope of the Ruling only to the extent that we have the legal and contractual rights described therein, we continue
to operate in accordance with the relevant facts described in the ruling request we submitted, that such facts were accurately
presented and to the extent such ruling is not inconsistent with the Real Property Regulations (as discussed in more detail
below). As a result, no assurance can be given that we will always be able to rely on this Ruling.
In August of 2016, the Treasury Department and the IRS published regulations which we refer to as the Real Property
Regulations relating to the definition of “real property” for purposes of the REIT income and asset tests which apply to us with
respect to our taxable years beginning after December 31, 2016. Among other things, the Real Property Regulations provide
that an obligation secured by a structural component of a building or other inherently permanent structure qualifies as a real
estate asset for REIT qualification purposes only if such obligation is also secured by a real property interest in the inherently
permanent structure served by such structural component. This aspect of the Real Property Regulations has important
implications for our qualification as a REIT since a significant portion of our REIT qualifying assets consists of receivables that
are secured by liens on installed structural improvements designed to improve the energy efficiency of buildings and a
significant portion of our REIT qualifying gross income is interest income earned with respect to such receivables.
The structural improvements securing our receivables generally qualify as “fixtures” under local real property law, as
well as under the Uniform Commercial Code, or the UCC, which governs rights and obligations of parties in secured
transactions. Although not controlling for REIT purposes, the general rule in the United States is that once improvements are
permanently installed in real properties, such improvements become fixtures and thus take on the character of and are
considered to be real property for certain state and local law purposes. In general, in the United States, laws governing fixtures,
including the UCC and real property law, afford lenders who have secured their financings with security interests in fixtures
with rights that extend not just to the fixtures that secure their financings, but also to the real properties in which such fixtures
have been installed. By way of example only, Section 9-604(b) of the UCC, which has been adopted in all but two states in the
United States, permits a lender secured by fixtures, upon a default, to enforce its rights under the UCC or under applicable real
property laws. Although there is limited authority directly on point, given the nature of, and the extent to which, the structural
improvements securing our receivables are integrated into and serve the related buildings, we believe that the better view is that
the nature and scope of our rights in such buildings that inure to us as a result of our receivables are sufficient to satisfy the
requirements of the Real Property Regulations described above. In addition to the limited authority directly on point, two other
important caveats apply in this regard. First, the Real Property Regulations do not define what is required for an obligation
secured by a lien on a structural component to also be secured by a real property interest in the building served by such
structural component. However, the initial proposed version of the Real Property Regulations, which never became effective,
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included a requirement that the interest in the real property held by a REIT be “equivalent” to the interest in a structural
component held by the REIT in order for the structural component to be treated as a real estate asset. This requirement was
ultimately not included in the final Real Property Regulations, in part in response to comments that such requirement may
negatively affect investment in energy efficient and renewable energy assets. We believe the deletion of this requirement
implies that under the final Real Property Regulations, our rights in the building need not be equivalent to our rights in the
structural components serving the building. Second, real property law is typically relegated to the states and the specific rights
available to any lien or mortgage holder, including our rights as a fixture lien holder described above, may vary between
jurisdictions as a result of a range of factors, including the specific local real property law requirements and judicial and
regulatory interpretations of such laws, and the competing rights of mortgage and other lenders. While a number of cases have
addressed the rights of fixture lien holders generally, there are limited judicial interpretations in only a few jurisdictions that
directly address the rights and remedies available to a fixture lien holder in the real property in which the fixtures have been
installed. Such rights have been addressed in some cases which support our position and, in factual circumstances
distinguishable from our own, in some cases where the courts have found these rights to be more limited. The resolution of
these issues in many jurisdictions therefore remains uncertain. As a result of the foregoing, no assurance can be given that the
IRS will not challenge our position that our receivables meet the requirements of the Real Property Regulations or that, if
challenged, such position would be sustained.
The preamble to the Real Property Regulations provides that, to the extent a private letter ruling issued prior to the
issuance of the Real Property Regulations is inconsistent with the Real Property Regulations, the private letter ruling is revoked
prospectively from the applicability date of the Real Property Regulations. We do not believe that the Ruling is inconsistent
with the Real Property Regulations because we believe the analysis in the Ruling was based on similar principles as the
relevant portions of the Real Property Regulations, and accordingly we do not believe that the Real Property Regulations
impact our ability to rely on the Ruling. However, no assurance can be given that the IRS would not successfully assert that we
are not permitted to rely on the Ruling because the Ruling has been revoked by the Real Property Regulations.
If the IRS were to assert that a significant portion of our receivables do not qualify as real estate assets and do not
generate income treated as interest income from mortgages on real property, we would fail to satisfy both the gross income
requirements and asset requirements applicable to REITs. If this were to occur, we would be required to restructure the manner
in which we receive such income and we may realize significant income that does not qualify for the REIT 75% gross income
test, which could cause us to fail to qualify as a REIT.
In addition, our compliance with the REIT income and quarterly asset requirements also depends upon our ability to
successfully manage the composition of our income and assets on an ongoing basis in accordance with existing REIT
regulations and rules and interpretations thereof. Moreover, the IRS, new legislation, court decisions or other administrative
guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT.
Our ability to satisfy the requirements to qualify as a REIT also depends in part on the actions of third parties over which we
have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a
partnership for U.S. federal income tax purposes. Thus, given the highly complex nature of the rules governing REITs, the
ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be
given that we will so qualify for any particular year.
If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would
be required to pay U.S. federal income tax on our net taxable income, and distributions to our stockholders would not be
deductible by us in determining our taxable income. In such a case, we might need to borrow money or sell assets in order to
pay our taxes. Our payment of income tax would negatively impact the results of our operations and decrease the amount of our
income available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT, we no
longer would be required to distribute substantially all of our taxable income to our stockholders, which would leave our board
of directors with more discretion over our future distribution levels. In addition, unless we were eligible for certain statutory
relief provisions, we could not re-elect to qualify as a REIT for the subsequent four taxable years following the year in which
we failed to qualify.
Complying with REIT requirements may force us to liquidate or forego otherwise attractive investments.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that, at the end of each
calendar quarter, at least 75% of the value of our total assets consists of cash, cash items, government securities, shares in
REITs and other qualifying real estate assets. The remainder of our investment in securities (other than government securities
and REIT qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one
issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than
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5% of the value of our total assets (other than government securities, securities of a TRS and securities that are qualifying real
estate assets) can consist of the securities of any one issuer, no more than 20% of the value of our total assets can be
represented by securities of one or more TRSs, and no more than 25% of the value of our assets can consist of debt instruments
issued by publicly offered REITs that are not otherwise secured by real property. If we fail to comply with these requirements at
the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for
certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result,
we may be required to liquidate from our portfolio, or contribute to a TRS, otherwise attractive investments, and may be unable
to pursue investments that would be otherwise advantageous to us in order to satisfy the source of income or asset
diversification requirements for qualifying as a REIT. These actions could have the effect of reducing our income and amounts
available for distribution to our stockholders.
REIT distribution requirements could adversely affect our ability to execute our business plan and may require us to
incur debt or sell assets to make such distributions.
In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, at least 90% of our REIT
taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid
and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of
our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed income. In addition, we
will incur a 4% non-deductible excise tax on the amount, if any, by which our distributions in any calendar year are less than a
minimum amount specified under U.S. federal income tax laws. We intend to distribute our taxable income to our stockholders
in a manner intended to satisfy the REIT 90% distribution requirement and to avoid the 4% non-deductible excise tax.
In addition, differences in timing between the recognition of taxable income, our GAAP income and the actual receipt of
cash may occur. For example, we may be required to accrue interest and discount income on debt securities or interests in debt
securities before we receive any payments of interest or principal on such assets, and there may be timing differences in the
accrual of such interest and discount income for tax purposes and for GAAP purposes.
As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and find it difficult
or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required
to: (i) sell assets in adverse market conditions, (ii) raise debt or equity on unfavorable terms, (iii) distribute amounts that would
otherwise be invested in future acquisitions, capital expenditures or repayment of debt, (iv) make a taxable distribution of our
shares as part of a distribution in which stockholders may elect to receive shares or (subject to a limit measured as a percentage
of the total distribution) cash or (v) use cash reserves, in order to comply with the REIT distribution requirements and to avoid
U.S. federal corporate income tax and the 4% non-deductible excise tax. Thus, compliance with the REIT distribution
requirements may hinder our ability to grow, which could adversely affect the value of our common stock.
Even though we qualify as a REIT, we may face tax liabilities that reduce our cash flow.
Even though we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our
income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a
foreclosure, and state or local income, franchise, property and transfer taxes, including mortgage recording taxes. In addition,
any TRSs we own will be subject to U.S. federal, state and local corporate income or franchise taxes. In order to meet the REIT
qualification requirements, or to avoid the imposition of a 100% tax that applies to certain gains derived by a REIT from sales
of inventory or property held primarily for sale to customers in the ordinary course of business, we may hold some of our assets
through TRSs. Any taxes paid by such TRSs would decrease the cash available for distribution to our stockholders.
The failure of assets subject to a repurchase agreement to be considered owned by us or a mezzanine loan to qualify as a
real estate asset may adversely affect our ability to qualify as a REIT.
We may enter into repurchase agreements under which we will nominally sell certain of our assets to a counterparty and
simultaneously enter into an agreement to repurchase the sold assets. We believe that we will be treated for U.S. federal income
tax purposes as the owner of the assets that are the subject of any such agreements and that the repurchase agreements will be
treated as secured lending transactions notwithstanding that such agreements may transfer record ownership of the assets to the
counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets
during the term of the repurchase agreement, in which case we could fail to qualify as a REIT.
- 41 -
In addition, we may acquire mezzanine loans, which are loans secured by equity interests in a partnership or limited
liability company that directly or indirectly owns real property. In IRS Revenue Procedure 2003-65, the IRS provided a safe
harbor pursuant to which a mezzanine loan, if it meets each of the requirements contained in the Revenue Procedure, will be
treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will
be treated as qualifying mortgage interest for purposes of the REIT 75% gross income test. Although IRS Revenue Procedure
2003-65 provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. We may acquire
mezzanine loans that may not meet all of the requirements for reliance on this safe harbor. In the event we own a mezzanine
loan that does not meet the safe harbor, the IRS could challenge such loan’s treatment as a real estate asset for purposes of the
REIT asset and income tests, and if such a challenge were sustained, we could fail to qualify as a REIT.
We may be required to report taxable income for certain investments in excess of the economic income we ultimately
realize from them.
To the extent we acquire debt investments in the secondary market for less than their face amount, the amount of such
discount will generally be treated as “market discount” for U.S. federal income tax purposes. Market discount is generally
accrued on the basis of a constant yield to maturity of a debt investment. Accrued market discount is reported as income when,
and to the extent that, any payment of principal of the debt instrument is made, unless we elect to include accrued market
discount in income as it accrues. Principal payments on certain loans are made monthly, and consequently accrued market
discount may have to be included in income each month as if the debt investment was assured of ultimately being collected in
full. If we collect less on the debt investment than our purchase price plus the market discount we had previously reported as
income, we may not be able to benefit from any offsetting loss deductions.
Similarly, some of the debt investments that we acquire may have been issued with an original issue discount. We will
generally be required to report such original issue discount based on a constant yield method and will be taxed based on the
assumption that all future projected payments due on such debt investments will be made. If such debt investments turn out not
to be fully collectible, an offsetting loss deduction will become available only in the later year that uncollectability is provable.
In addition, in the event that any debt investments acquired by us are delinquent as to mandatory principal and interest
payments, or in the event payments with respect to a particular debt investment are not made when due, we may nonetheless be
required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate
collectability. While we would in general ultimately have an offsetting loss deduction available to us when such interest was
determined to be uncollectible, the utility of that deduction could depend on our having taxable income in that later year or
thereafter. Although we do not presently intend to, we may, in the future, acquire debt investments that are subsequently
modified by agreement with the borrower. If such amendments are “significant modifications” under the applicable Treasury
Regulations, we may be required to recognize taxable income as a result of such amendments. Finally, we may be required
under the terms of indebtedness that we incur with private lenders to use cash received from interest payments to make
principal payments on that indebtedness, with the effect of recognizing income but not having a corresponding amount of cash
available for distribution to our stockholders.
The recently effective Public law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act of 2017 (“TCJA”)
implements various changes to the U.S. federal income tax laws that impacts the taxation of us and our shareholders. Among
these changes, the TCJA generally accelerates our accrual for U.S. federal income tax purposes of certain items of income to
the extent that we would otherwise recognize such items of income for U.S. federal income tax purposes later than we would
report such items on our financial statements. This provision of the TCJA could increase our taxable income in certain taxable
years, which could impact our ability to satisfy the REIT distribution requirements. In addition, this provision of the TCJA may
override many of the U.S. federal income tax rules relating to the timing of income inclusions, including such rules that are
discussed elsewhere herein.
The interest apportionment rules under Treasury Regulation Section 1.856-5(c) provide that, if a loan is secured by both
real property and other property, a REIT is required to apportion its annual interest income to the real property securing the loan
based on a fraction, the numerator of which is the value of such real property, determined when the REIT commits to acquire
the loan, and the denominator of which is the highest “principal amount” of the loan during the year. If a mortgage loan is
secured by both real property and personal property and the value of the personal property does not exceed 15% of the
aggregate value of the property securing the mortgage loan, the mortgage loan is treated as secured solely by real property for
this purpose. IRS Revenue Procedure 2014-51 interprets the “principal amount” of the loan to be the face amount of the loan,
despite the Internal Revenue Code requiring taxpayers to treat any market discount, that is the difference between the purchase
price of the loan and its face amount, for all purposes (other than certain withholding and information reporting purposes) as
interest rather than principal. The interest apportionment regulations apply only if the loan in question is secured by both real
- 42 -
property and other property and the value of personal property securing the mortgage exceeds 15% of the aggregate value of
the property securing the mortgage.
If the IRS were to assert successfully that our loans were secured by property other than real estate, the interest
apportionment rules applied for purposes of our REIT testing, and that the position taken in IRS Revenue Procedure 2014-51
should be applied to certain loans in our portfolio, then depending upon the value of the real property securing our loans and
their face amount, and the sources of our gross income generally, we may fail to meet the 75% REIT gross income test. If we
do not meet this test, we could potentially lose our REIT qualification or be required to pay a penalty to the IRS.
The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the
manner in which we effect future securitizations.
Securitizations by us or our subsidiaries could result in the creation of taxable mortgage pools for U.S. federal income tax
purposes. As a result, we could have “excess inclusion income.” Certain categories of stockholders, such as non-U.S.
stockholders eligible for treaty or other benefits, U.S. stockholders with net operating losses, and certain U.S. tax-exempt
stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend
income from us that is attributable to any such excess inclusion income. In the case of a stockholder that is a REIT, a regulated
investment company (a “RIC”), common trust fund or other pass-through entity, our allocable share of our excess inclusion
income could be considered excess inclusion income of such entity. In addition, to the extent that our common stock is owned
by U.S. tax-exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts
that are not subject to tax on unrelated business income, we may incur a corporate level tax on a portion of any excess inclusion
income. Because this tax generally would be imposed on us, all of our stockholders, including stockholders that are not
disqualified organizations, generally will bear a portion of the tax cost associated with the classification of us or a portion of
our assets as a taxable mortgage pool. A RIC, or other pass-through entity owning our common stock in record name will be
subject to tax at the highest U.S. federal corporate income tax rate on any excess inclusion income allocated to their owners that
are disqualified organizations. Moreover, we could face limitations in selling equity interests in these securitizations to outside
investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity
interests for tax purposes. Finally, if we were to fail to qualify as a REIT, any taxable mortgage pool securitizations would be
treated as separate taxable corporations for U.S. federal income tax purposes that could not be included in any consolidated
U.S. federal corporate income tax return. These limitations may prevent us from using certain techniques to maximize our
returns from securitization transactions.
Although our use of TRSs may be able to partially mitigate the impact of meeting the requirements necessary to
maintain our qualification as a REIT, our ownership of and relationship with our TRSs is limited and a failure to
comply with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. Subject to certain exemptions, a TRS may hold assets
and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the
REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than
35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value
of a REIT’s total assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the
deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of
corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are
not conducted on an arm’s-length basis. Our TRSs will pay U.S. federal, state and local income or franchise tax on their taxable
income, and their after-tax net income will be available for distribution to us but will not be required to be distributed to us,
unless necessary to maintain our REIT qualification. While we will be monitoring the aggregate value of the securities of our
TRSs and intend to conduct our affairs so that such securities will represent less than 20% of the value of our total assets, there
can be no assurance that we will be able to comply with the TRS limitation in all market conditions.
Dividends payable by REITs generally do not qualify for the reduced tax rates on dividend income from regular
corporations, which could adversely affect the value of our shares.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are
individuals, trusts and estates is 20%. Dividends payable by REITs are generally not eligible for the reduced rates and therefore
may be subject to a 37% maximum U.S. federal income tax rate (for taxable years beginning in 2018 through taxable years
ending in 2025) on ordinary income. Beginning in 2018 (and through taxable years ending in 2025), the TCJA permits a
deduction for certain pass-through business income, including “qualified REIT dividends” (generally, dividends received by a
- 43 -
REIT shareholder that are not designated as capital gain dividends or qualified dividend income), which allows U.S.
individuals, trusts, and estates to deduct up to 20% of such amounts, subject to certain limitations, resulting in an effective
maximum U.S. federal income tax rate of 29.6% on such qualified REIT dividends. Although the reduced U.S. federal income
tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or
dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are
individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of
non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including shares of
our common stock.
The tax on prohibited transactions limits our ability to engage in certain types of transactions, including certain
methods of securitizing loans, which would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or
other dispositions of property, other than foreclosure property, but including loans, held as inventory or primarily for sale to
customers in the ordinary course of business. We might be subject to this tax if we were to sell or securitize loans in a manner
that was treated as a sale of the loans as inventory for U.S. federal income tax purposes. Therefore, in order to avoid the
prohibited transactions tax, we may choose not to engage in certain sales of loans, other than through a TRS, and we may be
required to limit the structures we use for our securitization transactions, even though such sales or structures might otherwise
be beneficial for us.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations. Under these
provisions, any income that we generate from transactions intended to hedge our interest rate exposure will be excluded from
gross income for purposes of the REIT 75% and 95% gross income tests if (i) the instrument (A) hedges interest rate risk on
liabilities used to carry or acquire real estate assets or certain other specified types of risk, or (B) hedges an instrument
described in clause (A) for a period following the extinguishment of the liability or the disposition of the asset that was
previously hedged by the hedged instrument, and (ii) such instrument is properly identified under applicable Treasury
Regulations. Income from hedging transactions that do not meet these requirements will generally constitute non-qualifying
income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use
of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the
cost of our hedging activities because our TRS would be subject to tax on gains or the limits on our use of hedging techniques
could expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition,
losses in our TRS will generally not provide any tax benefit to us, although subject to limitation, such losses may be carried
forward to offset future taxable income of the TRS.
Legislative, regulatory or administrative changes could adversely affect us.
The U.S. federal income tax laws and regulations governing REITs and their stockholders, as well as the administrative
interpretations of those laws and regulations, are constantly under review and may be changed at any time, possibly with
retroactive effect. No assurance can be given as to whether, when, or in what form, the U.S. federal income tax laws applicable
to us and our stockholders may be enacted. Changes to the U.S. federal income tax laws and interpretations of U.S. federal tax
laws could adversely affect an investment in our common stock.
The TCJA, which was signed into law on December 22, 2017, significantly changes U.S. federal income tax laws
applicable to businesses and their owners, including REITs and their stockholders, and may lessen the relative competitive
advantage of operating as a REIT rather than as a C corporation. For additional discussion, see Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations, “U.S. Federal Income Tax Legislation.”
Liquidation of our assets may jeopardize our REIT qualification.
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are
compelled to liquidate our assets to repay obligations to our lenders, we may be unable to comply with these requirements,
thereby jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that
are treated as inventory or property held primarily for sale to customers in the ordinary course of business.
- 44 -
Your investment has various U.S. federal income tax risks.
We urge you to consult your tax advisor concerning the effects of U.S. federal, state, local and foreign tax laws to you
with regard to an investment in shares of our common stock.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our principal executive offices are located at 1906 Towne Centre Blvd, Suite 370, Annapolis, Maryland 21401. Our
telephone number is (410) 571-9860.
Item 3.
Legal Proceedings
From time to time, we may be involved in various claims and legal actions in the ordinary course of business. As of
December 31, 2018, we are not currently subject to any legal proceedings that are likely to have a material adverse effect on
our financial position, results of operations or cash flows.
Item 4.
Mine Safety Disclosures
Not applicable.
- 45 -
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
PART II
Market Information
Our common stock is traded on the NYSE under the symbol “HASI.”
Holders
As of February 19, 2019, we had 146 registered holders of our common stock. The 146 holders of record do not include
the beneficial owners of our common stock whose shares are held by a broker or bank. Such information was obtained from
The Depository Trust Company.
Dividends
We intend to make regular quarterly distributions to holders of our common stock. Any distributions we make will be at
the discretion of our board of directors and will depend upon, among other things, our actual results of operations. These results
and our ability to pay distributions will be affected by various factors, including the net interest and other income from our
portfolio, our operating expenses and any other expenditures. See Item 1A. Risk Factors, and Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations, of this Form 10-K, for information regarding the sources of
funds used for dividends and for a discussion of factors, if any, which may adversely affect our ability to pay dividends. See
Note 11 of the audited financial statements in this Form 10-K for details of our dividends declared in 2018 and 2017.
Stockholder Return Performance
The stock performance graph and table below shall not be deemed, under the Securities Act or the Exchange Act, to be
(i) “soliciting material” or “filed” or (ii) incorporated by reference by any general statement into any filing made by us with the
SEC, except to the extent that we specifically incorporate such stock performance graph and table by reference.
The following graph is a comparison of the cumulative total stockholder return on our shares of common stock, the
Standard & Poor’s 500 Index (the “S&P 500 Index”), the SNL Finance REIT Index, and the Dow Jones Utility Average which
are peer group indexes from December 31, 2013 to December 31, 2018. The graph assumes that $100 was invested at closing
on December 31, 2013, in our shares of common stock, the S&P 500 Index, and the peer group indexes and that all dividends
were reinvested without the payment of any commissions. There can be no assurance that the performance of our common
stock will continue in line with the same or similar trends depicted in the graph below.
- 46 -
Company or Index
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
Hannon Armstrong Sustainable Infrastructure
Capital, Inc.
S&P 500 Index
SNL Finance REIT Index (1)
Dow Jones Utility Average
$
100.00
$
108.76
$
153.14
$
163.32
$
219.37
$
185.64
100.00
100.00
100.00
113.69
114.52
130.65
115.26
105.02
126.65
129.05
129.36
149.67
157.22
150.94
169.65
150.33
145.09
173.02
Source: S&P Global Market Intelligence, a division of S&P Global
(1) As of December 31, 2018, the SNL Finance REIT Index comprised of the following companies: AG Mortgage Investment Trust, Inc.; AGNC Corp.;
American Church Mortgage Company; Annaly Capital Management, Inc.; Anworth Mortgage Asset Corporation; Apollo Commercial Real Estate
Finance, Inc.; Arbor Realty Trust, Inc.; Ares Commercial Real Estate Corporation; ARMOUR Residential REIT, Inc.; Blackstone Mortgage Trust, Inc.;
Capstead Mortgage Corporation; Cherry Hill Mortgage Investment Corporation; Chimera Investment Corporation; Colony Credit Real Estate, Inc.; CV
Holdings, Inc.; Dynex Capital, Inc.; Ellington Residential Mortgage REIT; Exantas Capital Corp.; Granite Point Mortgage Trust, Inc.; Great Ajax Corp.;
Hannon Armstrong Sustainable Infrastructure Capital, Inc.; Hunt Companies Finance Trust; Invesco Mortgage Capital Inc.; JER Investors Trust Inc.;
Jernigan Capital Inc.; KKR Real Estate Finance Trust, Inc.; Ladder Capital Corp.; MFA Financial, Inc.; New Residential Investment Corp.; New York
Mortgage Trust, Inc.; Orchid Island Capital, Inc.; Owens Realty Mortgage, Inc.; PennyMac Mortgage Investment Trust; RAIT Financial Trust; Ready
Capital Corp.; Redwood Trust, Inc.; Sachem Capital Corp.; Starwood Property Trust, Inc.; TPG RE Finance Trust, Inc.; Two Harbors Investment Corp.;
United Development Funding IV; and Western Asset Mortgage Capital Corporation.
Securities Authorized For Issuance Under Equity Compensation Plans
In 2013, we adopted the 2013 Hannon Armstrong Sustainable Infrastructure Capital, Inc. Equity Incentive Plan (the
“2013 Plan”) to provide equity based incentive compensation to members of our senior management team, our independent
directors, advisers, consultants and other personnel. The 2013 Plan authorizes our compensation committee to grant stock
options, shares of restricted common stock, restricted stock units, phantom shares, dividend equivalent rights, long-term
incentive plan (“LTIP”) units and other restricted limited partnership units issued by our Operating Partnership and other
equity-based awards up to an aggregate of 7.5% of the shares of common stock issued and outstanding from time to time on a
fully diluted basis (assuming, if applicable, the exercise of all outstanding options and the conversion of all warrants and
convertible securities, including OP units and long-term incentive-plan units (“LTIP units”), into shares of common stock).
As of December 31, 2018, we have approximately 2.2 million shares of our restricted common stock and restricted
common stock units outstanding (assuming that the restricted stock units vest at 200%), which are subject to vesting and, in
some cases, performance requirements, to our directors, officers and other employees.
- 47 -
The following table presents certain information about our equity compensation plan as of December 31, 2018:
Award
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total
Number of securities
remaining available for
future issuance under
equity compensation plans
1,829,609
—
1,829,609
(1) The 2013 Plan provides for grants of equity awards up to, in the aggregate, the equivalent of 7.5% of the issued and outstanding shares
of our common stock from time to time (on a fully diluted basis (assuming, if applicable, the exercise of all outstanding options and the
conversion of all warrants and convertible securities into shares of common stock and assuming restricted stock units vest at 200%)) at
the time of the award. As of December 31, 2018, we did not have outstanding under our equity compensation plan, any options, warrants
or rights to purchase shares of our common stock.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the year ended December 31, 2018, certain of our employees surrendered common stock owned by them to
satisfy their tax and other compensation related withholdings associated with the vesting of restricted stock and restricted stock
units. 7,406 OP units were exchanged for shares of common stock during the year ended December 31, 2018. The price paid
per share is based on the price of our common stock as of the date of the exchange and withholding. The table below
summarizes all of our repurchases of common stock during 2018.
Period
February 2018
March 2018
May 2018
August 2018
November 2018
Total number
of shares
purchased
Average price
per share
2,879
$
97,206
63,822
453
196
20.54
18.13
19.08
20.52
23.40
Total number of
shares purchased
as part of publicly
announced plans
or programs
Maximum number
of shares that may
yet be purchased
under the plans or
programs
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
- 48 -
2014
45
35
—
—
10
10
144
284
269
62
114
27
316
319
—
735
274
0.43
0.92
Item 6.
Selected Financial Data
The following table sets forth selected financial and operating data on a historical basis for the Company for the last five
calendar years. The following financial information should be read in conjunction with Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations and the financial statements and related notes thereto. Certain
amounts in the prior years have been reclassified to conform to the current year presentation.
Year Ended
December 31,
2018
2017
2016
(dollars in millions, except share and per share data)
2015
Total revenue
Total expenses
Income (loss) from equity method investments
Income tax (expense) benefit
Net income (loss)
Net income (loss) attributable to controlling
stockholders
Balance sheet data (at period end):
Equity method investments
$
$
$
$
Government receivables
Commercial receivables
Receivables held-for-sale
Real estate (1)
Investments
Total assets
Credit facilities
Non-recourse debt
Convertible notes
Total liabilities
Total equity
Per share data:
$
$
$
$
138
116
22
(2)
42
42
471
497
447
—
365
170
2,155
259
835
148
1,350
805
106
$
$
$
$
96
22
(1)
31
31
523
519
473
19
341
151
2,250
70
1,211
148
1,607
643
$
$
$
$
81
72
6
—
15
15
363
526
516
—
172
58
$
$
$
$
59
51
—
—
8
8
319
401
383
60
156
29
283
692
—
1,172
574
247
664
—
1,038
432
1,746
1,470
1,009
Basic and diluted earnings per share
Dividends declared
$
$
0.75
1.32
$
$
0.57
1.32
$
$
0.32
1.23
$
$
0.21
1.08
$
$
Weighted average shares outstanding—basic and
diluted
Managed assets (2)
52,780,449
50,361,672
40,290,717
30,761,151
20,656,826
$
5,284
$
4,736
$
3,933
$
3,188
$
2,609
(1)
(2)
Includes real estate intangible assets.
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures—Managed
Assets for information on managed assets.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements and accompanying notes included
in Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
Overview
We focus on solutions that reduce carbon emissions and increase resilience to climate change by providing capital and
specialized expertise to the leading companies in the energy efficiency, renewable energy and other sustainable infrastructure
markets. Our goal is to generate attractive returns for our shareholders by investing in a diversified portfolio of assets and
projects that generate long-term, recurring and predictable cash flows or cost savings from proven commercial technologies.
- 49 -
We believe we were one of the first U.S. public companies exclusively focused on financing solutions to climate change.
Our investments, which typically benefit from contractually committed high credit quality obligors, have taken a number of
forms including equity, joint ventures, land ownership, lending or other financing transactions. We also generate ongoing fees
through gain-on-sale securitization transactions, services and asset management.
We are internally managed, and our management team has extensive relevant industry knowledge and experience, dating
back more than 30 years. We have long-standing relationships with the leading energy service companies ("ESCOs"),
manufacturers, project developers, utilities, owners and operators. Our origination strategy is to use these relationships to
generate recurring, programmatic investment and fee generating opportunities. Additionally, we have relationships with leading
banks, investment banks, and institutional investors from which we are referred additional investment and fee generating
opportunities.
We completed approximately $1.2 billion of transactions during 2018, compared to approximately $1.0 billion during
2017. As of December 31, 2018, we held approximately $2.0 billion of transactions on our balance sheet, which we refer to as
our “Portfolio.” For those transactions that we choose not to hold on our balance sheet, we transfer all or a portion of the
economics of the transaction, typically using securitization trusts, to institutional investors in exchange for a gain on the
transfer and in some cases, ongoing fees. As of December 31, 2018, we managed approximately $3.3 billion in these trusts or
vehicles that are not consolidated on our balance sheet. When combined with our Portfolio, as of December 31, 2018, we
manage approximately $5.3 billion of assets, which we refer to as our managed assets.
We use borrowings as part of our strategy to increase potential returns to our stockholders and have available to us a
broad range of financing sources including non-recourse or recourse debt, equity and off-balance sheet securitization structures.
See Item 1. Business for a further discussion of our business, investing strategy, and financing strategy.
Market Conditions
We believe that the sustainable infrastructure markets in which we invest, and overall investment in climate change
solutions, will continue to develop given the increasing awareness of the impact of climate change. According to the 2018 U.S
Fourth National Climate Assessment Report, a report from the U.S. Global Change Research Program, the earth's climate is
now changing faster than at any point in the history of modern civilization, primarily the result of human activities. The report
concludes that the impacts of climate change are intensifying across the country but that the severity of future impacts will
depend on efforts to reduce carbon emissions and how fast adaptations occur. Without changes to reduce the historic level of
carbon emissions growth, the report estimates that annual losses in some economic sectors are projected to reach hundreds of
billions of dollars by the end of the century-more than the current gross domestic product (“GDP”) of many U.S. states.
Similarly, on a global basis, the World Economic Forum’s 2019 Global Risk Report identified extreme weather and failure to
mitigate climate change as the two largest risks facing the global economy according to a survey of business, government, civil
society and thought leaders.
At the present time, it is estimated that overall energy efficiency and renewable energy spending is over $500 billion a
year globally and over $100 billion a year in the United States. For example, BloombergNEF (“BNEF”) in a January 2019
report estimated that worldwide renewable energy investment was approximately $300 billion with U.S. investing
approximately $64 billion. A study by the International Energy Agency (“IEA”) titled Energy Efficiency 2018 estimated global
spending on energy efficiency was approximately $235 million with U.S. investing approximately $42 billion. As we focus on
certain submarkets, our presently addressable market is less than these overall industry estimates as especially in energy
efficiency, projects are often self-financed. However, we believe these estimates provide an indication of market trends.
Positive industry trends and the need to reduce carbon are expected to further increase the investment opportunity. The
IEA in the same report estimates that energy efficiency spending pays back on average by a factor of 3 over the life of the
improvement as a result of lower energy expenditure. The U.S. Energy Information Administration (“EIA”) in its January 2019
report titled Annual Energy Outlook 2019 estimated that energy efficiency will keep U.S. energy consumption largely flat even
as the U.S. economy grows. BNEF in its New Energy Outlook 2018 projects the cost from building and operating a new solar
photo-voltaic plant is forecast to decline 71% by 2050, with project costs for onshore wind declining 58%.
The need to reduce carbon emissions is expected to drive further growth. IEA estimated that in order to achieve necessary
carbon reductions, global energy efficiency annual spending would need to more than double by 2025 with a further doubling
between by 2040. The EIA also estimates that the use of renewables will increase from 18% of U.S. generation to 31% by
- 50 -
2050. To quantify the future opportunity, a joint study was prepared by the International Renewable Energy Agency
(“IRENA”) and the International Energy Agency (“IEA”) titled Perspectives for the Energy Transition: Investment Needs for a
Low-Carbon Energy Transition, estimated that 76% of total worldwide estimated carbon emission reduction by 2050 would be
achieved from energy efficiency and renewable energy investments. The study estimated that over $100 trillion dollars could be
spent globally on energy efficiency and renewable energy over the next 35 years while increasing overall GDP growth.
In addition to a focus on reducing the amount of carbon emissions, we are seeing an increasing need to focus on
adaptation to weather events or resiliency, including those as a result of climate change. According to the U.S. National
Oceanic and Atmospheric Administration, there were 14 disaster events in the United States in 2018 with an estimated
individual cost of greater than $1 billion, the 4th highest year ever, with an aggregate cost of approximately $90 billion dollars.
The average annual number of such events over the last five years has doubled as compared to the average annual number of
events since 1980. Over the last five years, the estimated cost of these events is approximately $500 billion.
Despite these trends, there have been certain federal governmental actions that could have downward pressure on the
renewable energy market, such as the potential repeal of the clean power plan (“CPP”), a proposed rule introduced by the EPA
under the prior presidential administration and intended to establish carbon emissions guidelines for existing U.S. power plants,
the tariff on solar imports in the Section 201 solar trade case (“201”), the withdrawal of the U.S. from the Paris Climate
Accords (the “ Paris Accords”) and the 2017 Tax Cut and Jobs Act (“TCJA”). The results of CPP, 201, withdrawal from the
Paris Accords, and the TCJA may have caused a short-term reduction in growth in the U.S. renewable energy markets,
however, we believe that the growth will continue given the strength in the other factors that are increasing demand.
There were also changes to certain provisions of the tax code in the 2017 TCJA that impacted the renewable energy
market included the reduction in the corporate tax rate as well as a minimum tax on organizations with foreign operations
referred to as the base erosion anti-abuse tax (“BEAT”) which potentially limits the value of renewable energy tax credits. It
does not appear that there was a material impact to the market resulting from the BEAT other than a temporary slowdown in
investment taken to understand the totality of the impacts of the provision. On a more positive note, there have been various
legislative proposals to increase investment in renewable energy or to place a tax on carbon emissions.
The federal government actions have been largely offset by the continued interest by state and local governments to
invest in, and implement policies to encourage, private sector funded investment in, sustainable infrastructure focused on
climate change. For example, in the renewable energy markets, much of the U.S. energy policy is implemented at the state level
where we continue to see support for the use of renewable energy in many states to address concerns on the long-term
environmental impact to our society, to develop a sustainable environment and, in many cases, to encourage jobs creation and
economic growth. Along with these policies, there has been an increase in corporate commitments to utilizing renewable
energy and other forms of sustainable infrastructure. We believe that the development of projects in our markets help to achieve
these goals and thus may benefit from these policies.
Both state and local governmental agencies and other organizations are responding to the ability of renewable energy and
energy efficiency to address climate change. State governmental agencies are responding to the potential risks of climate
change through the implementation of renewable portfolio standards (“RPS”) as well as energy reduction targets such as energy
efficiency resource standards (“EERS”). According to the National Conference of State Legislatures, as of July 2018, there
were twenty-nine states, Washington D.C. and three territories that have adopted RPS policies while eight states and one
territory have set renewable energy goals with California with the highest goal of 100% renewable energy by 2050. Also,
according to the EIA, as of July 2017, 24 states have EERS policies with many states recently increasing their targets in both of
these programs. Corporate organizations are also addressing the concern of climate change through their own corporate
policies, including increased commitments to the use of energy from renewable sources.
The Federal Energy Savings Performance Contracts ("ESPCs") are an example of a public private partnership that
eliminate the need for a federal agency to find appropriated funds to replace, operate, and maintain energy-using equipment
while providing multiple benefits, including saving taxpayer dollars from energy savings, improving conditions for federal
workers and service men and women and creating private sector jobs. In total, according to the DOE, the federal government
has identified, as of February 2019, approximately $8.5 billion of energy conservation measures that could be implemented at
existing U.S. federal buildings. In addition, federal agencies, including the U.S. Department of Defense are focused on
increased adoption of energy efficiency improvements and on-site renewable energy generation to improve energy resiliency.
The recent John S. McCain National Defense Authorization Act for 2019 requires the military to address climate and energy
resiliency in their planning with Congress encouraging the use of ESPCs to address these issues.
While we believe that the long-term growth prospects for our business remain positive, there is the potential for financial
market and commodity price volatility and interest rate movements that may impact the markets we serve. The current interest
- 51 -
rate environment and increasing investor acceptance of our markets has increased the level of competition we experience. In
addition, in 2018, the Federal Reserve Board of Governors continued to raise the rate at which banks lend to each other known
as the federal funds rate and have implemented four rate increases equal to 1.0% during 2018 and has indicated for 2019, it will
be patient in determining future rate increases. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk-
Interest Rate and Borrowing Risks” for an analysis of the impact of rates on our business.
According to DOE data, the average annual Henry Hub natural gas prices decreased by approximately 30% from 2014 to
2018 with its 2019 outlook forecasting that prices will stabilize or begin to increase. Wholesale electricity prices are closely
tied to wholesale natural gas prices in many parts of the country and thus lower natural gas prices have negatively impacted,
and are expected to continue to negatively impact, renewable energy projects that sell wholesale power on a “merchant” basis
at spot prices. As described in more detail in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk-
Commodity Price Risk” for further information on the impact of commodity prices, we attempt to mitigate our exposure to
commodity price volatility by focusing on projects with contracted revenues and by negotiating certain structural protections
such as a preferred return as well as our on-going active asset management and portfolio monitoring. We also seek to manage
credit risk that might arise from commodity price declines thorough due diligence and underwriting processes, strong structural
protections in our transaction agreements with customers and on-going active asset management and portfolio monitoring. In
addition, we do not generally lend to individual companies but instead focus on projects or portfolios of assets which are
typically held in special purpose entities.
Notwithstanding the near-term concerns that current market conditions have raised for our business, we believe
significant opportunities exist for us to grow our business in the face of these conditions. Historically, attractive risk-adjusted
returns were available in a higher interest rate environment rather than lower. As a long-term participant committed to
providing capital for sustainable infrastructure, we plan to continue to fund projects that meet our underwriting standards and
look for opportunities to expand our business.
Factors Impacting our Operating Results
We expect that our results of operations will be affected by a number of factors and will primarily depend on the size of
our Portfolio, including the mix of transactions which we hold in our Portfolio, the income we receive from securitizations,
syndications and other services, our Portfolio’s credit risk profile, changes in market interest rates, commodity prices, federal,
state and/or municipal governmental policies, general market conditions in local, regional and national economies and our
ability to qualify as a REIT and maintain our exemption from registration as an investment company under the 1940 Act.
Portfolio Size
The size of our Portfolio will be a key revenue driver. Generally, as the size of our Portfolio on our balance sheet grows
the amount of our investment revenue will increase. Our Portfolio may grow at an uneven pace as opportunities to originate
new assets may be irregularly timed, and the timing and extent of our success in such originations cannot be predicted. To the
extent the size of our Portfolio changes due to equity method investment activity, the income or loss from such investments will
not be included in revenue but are reflected on a separate line in our income statement and will vary over time. In addition, we
may decide for any particular asset that we should securitize or otherwise sell a portion, or all, of the asset, which would result
in gain on sale of receivables and investments or fee income as described below. The level of portfolio activity will fluctuate
from period to period based upon the market demand for the capital we provide, our view of economic fundamentals including
interest rates, the present mix of our Portfolio, our ability to identify new opportunities that meet our investment criteria, the
volume of projects that have advanced to stages where we believe a transaction is appropriate, seasonality in our activities and
in the various projects where we may provide debt or equity and our ability to consummate the identified opportunities,
including as a result of our available capital. The level of our new origination activity, the percentage of the originations that we
choose to retain on our balance sheet and the related income, will directly impact our investment revenue.
Income from Securitization, Syndication and Other Services
We will also earn gain on sale of receivables and investments or fee income by securitizing or selling all or a portion of
our transactions and by servicing the securitization financings we arrange. For transactions that we securitize to a non-
consolidated trust, we recognize a gain on securitization of the receivables. The gain may be comprised of both cash received
and a retained interest in securitization assets. We may also recognize additional income such as servicing fees from these
securitization assets over the life of the asset.
- 52 -
In many cases, we arrange the securitization of the loan or other asset prior to originating the transaction and thus have
avoided exposure to credit spread and interest rate risks that are typically associated with traditional capital markets conduit
transactions. In these cases, we avoid funding risks for these financings or other assets given that our securitization partners
contractually agree to fund such assets before the origination transaction is completed.
We also generate fee income for syndications where we arrange financings that are held directly on the balance sheet of
other investors or if we sell existing transactions to other investors. In these transactions, unless we decide to hold a portion of
the economic interest of the transaction on our balance sheet, we have no exposure to risks related to ownership of those
financings. We may charge advisory, retainer or other fees, including through our broker dealer subsidiary.
The gain on sale income and our other sources of fee income will also vary depending on the level of our new origination
activity and the portion of our originated assets we decide to transfer to other investors. We view this revenue from such
activities as a valuable component of our earnings and an important source of franchise value. The total amount of income from
securitizations, syndications, and other services will vary on a quarter to quarter basis depending on various factors, including
the level of our originations, the duration, credit quality and types of assets we originate, current and anticipated future interest
rates, the impact on our leverage, the potential income from a securitization or syndication, the mix of our Portfolio and our
need to tailor our mix of assets in order to allow us to qualify as a REIT for U.S. federal income tax purposes and maintain our
exemption from registration under the 1940 Act.
Credit Risks
We source and identify quality opportunities within our broad areas of expertise and apply our rigorous underwriting
processes to our transactions, which, we believe, will generally enable us to minimize our credit losses and keep financing costs
low. While we do not anticipate facing significant credit risk in our assets related to government energy efficiency projects, we
are subject to varying degrees of credit risk in these projects in relation to guarantees provided by ESCOs where payments
under energy savings performance contracts are contingent upon achieving pre-determined levels of energy savings. We are
also exposed to credit risk in our other projects that do not benefit from governments as the obligor such as on balance sheet
financing of projects undertaken by universities, schools and hospitals, as well as privately owned commercial projects. In the
case of various renewable energy and other sustainable infrastructure projects, we will also be exposed to the credit risk of the
obligor of the project’s PPA or other long-term contractual revenue commitments, as well as to the credit risk of certain
suppliers and project operators. Our level of credit risk has increased, and is expected to continue to increase, as our strategy
increasingly includes mezzanine debt, real estate and equity investments. We seek to manage credit risk thorough due diligence
and underwriting processes, strong structural protections in our transaction agreements with customers and continual, active
asset management and portfolio monitoring. Nevertheless, unanticipated credit losses could occur and during periods of
economic downturn in the global economy, our exposure to credit risks from obligors increases, and our efforts to monitor and
mitigate the associated risks may not be effective in reducing our credit risks. See Item 7A. Quantitative and Qualitative
Disclosures about Credit Risks for further information on our credit risks and see Note 6 of our audited financial statements
included in this Form 10-K for additional detail of the credit risks surrounding our Portfolio.
Changes in Market Interest Rates and Liquidity
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors beyond our control. We are subject to interest rate risk in
connection with new asset originations and our borrowings, including our credit facilities, and in the future, any new floating
rate assets, credit facilities or other borrowings. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk for
further information on interest rates risks and liquidity.
Commodity Prices
When we make investments in a project that act as a substitute for an underlying commodity, we may be exposed to
volatility in prices for that commodity. For example, the performance of renewable energy projects that produce electricity can
be impacted by volatility in the market prices of various forms of energy, including electricity, coal and natural gas. This is
especially true for utility scale projects that sell power on a wholesale basis such as many of our wind projects as opposed to
distributed renewable projects or energy efficiency projects which compete against the retail or delivered costs of electricity
which includes the cost of transmitting and distributing the electricity to the end user. See Item 7A. Quantitative and Qualitative
Disclosures about Market Risk for further information on the impact of commodity prices.
- 53 -
Government Policies
We make investments in renewable energy projects that typically depend in part on various federal, state or local
governmental policies that support or enhance the project’s economic feasibility. Such policies may include governmental
initiatives, laws and regulations designed to reduce energy usage and impact the use of renewable energy or the investment in,
and the use of, sustainable infrastructure. Policies and incentives provided by the U.S. federal government may include tax
credits (with some of these tax credits that are related to renewable energy scheduled to be reduced in the future), tax
deductions, bonus depreciation, federal grants and loan guarantees, and energy market regulations. The value of tax credits,
deductions and incentives may be impacted by changes in tax laws rates or regulations, including as a result of the TCJA.
Incentives provided by state and local governments may include a RPS, which specify the portion of the power utilized
by local utilities that must be derived from renewable energy sources as well as the state or local government sponsored
programs where the financing of energy efficiency or renewable energy projects is repaid through an assessment in the property
tax bill in a program commonly referred to as PACE. Additionally, certain states have implemented feed-in or net metering
tariffs, pursuant to which electricity generated from renewable energy sources is purchased at a higher rate than prevailing
wholesale rates. Other incentives include tariffs, tax incentives and other cash and non-cash payments.
Governmental agencies, commercial entities and developers of sustainable infrastructure projects frequently depend on
these policies and incentives to help defray the costs associated with, and to finance, various projects. Government regulations
also impact the terms of third party financing provided to support these projects. If any of these government policies, incentives
or regulations are adversely amended, delayed, eliminated, reduced, retroactively changed or not extended beyond their current
expiration dates or there is a negative impact from the recent federal law changes or proposals, the operating results of the
projects we finance and the demand for, and the returns available from our investments may decline, which could harm our
business.
U.S. Federal Income Tax Legislation
The TCJA, which was signed into law on December 22, 2017, made significant changes to the U.S. federal income tax
laws applicable to businesses and their owners, including REITs and their stockholders. Certain key provisions of the TCJA
could impact us and our stockholders. See Note 10 of our audited financial statements in this Form 10-K for further information
on the TCJA. Prospective investors are urged to consult with their tax advisors regarding the effects of the TCJA or other
legislative, regulatory or administrative developments on an investment in our common stock.
Impacts of climate change on our future operations
As our business is focused on reducing carbon emissions and increasing resiliency to climate change, we are impacted by
the effects of climate change and various related regulatory responses. To stem the effects of climate change within the 21st
Century, nearly 200 countries agreed in December 2015 to the Accords, which aims to limit the increase in world-wide
temperatures to 2 degrees Celsius above pre-industrial levels. Although the United States announced in 2017 its intention to
withdraw from the Paris Agreement, numerous governmental, NGO, university, social media and private sector initiatives
continue to support the goals outlined in the Accords, push initiatives beyond the Accords and encourage the transition from
fossil fuel energy and related physical assets to increased deployment of clean energy and energy efficiency solutions. We
understand that the transition to a lower-carbon economy will require sustained creative problem solving and substantial
investment of capital over the next several decades across the entirety of the climate change front. We have built our business
around providing capital to assets or projects and services aimed at making concrete progress in both mitigating the physical
effects of climate change and in supporting the transition to a lower carbon economy.
Because our business focuses on supporting climate change solutions, our results of operations and the growth of our
business will be impacted by the risks and opportunities associated with climate change. For example, our business will be
impacted by the degree to which governmental initiatives encourage or fail to encourage climate change solutions. In
particular, the value of and the revenue we generate from our assets will be positively impacted by governmental action that (1)
increases taxes or fees on carbon emitting assets, or (2) increases the value or scope of renewable energy credits. In addition,
governmental action that supports additional investment in infrastructure related to renewable energy, storage and energy
efficiency assets, is likely to increase the volume of the assets available for us to invest.
If world-wide temperatures continue to rise, it would be reasonable to expect that flooding, storm surges and challenges
with electric grid stability would occur more frequently. In this circumstance, we believe that we are likely to continue to see
attractive investment opportunities in renewable energy, resiliency, and energy efficiency assets. Renewable energy assets are
- 54 -
becoming increasingly cost competitive when compared to fossil fueled energy assets, for example, and are also an integral
component of a distributed generation platform that may be in more demand as the effects of climate change increase. In the
case of energy efficiency assets, we expect there will be continued demand for the reduction in operating costs offered by such
assets.
Further, all of our assets remain vulnerable to the potential impact of climate-related events, including flooding, increased
wildfires, water scarcity, and changes in wind patterns. Each of these events could impact the operation of our assets through
physical damage, higher operating expenses, and/or degraded performance. When considering the structure of our investments
and environmental risks that may impact our results of operations, we typically negotiate contractual protections to insulate our
financial returns from such downside risks outlined above and/or obtain insurance policies intended to mitigate our exposure to
physical damage that may occur.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions
that involve the exercise of judgment and use of assumptions as to future uncertainties. The following discussion addresses the
accounting policies that we use including areas that involve the use of significant estimates. Our most critical accounting
policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues
and expenses. We believe that all of the decisions and assessments upon which our financial statements are based are
reasonable at the time made and based upon information available to us at that time. Our critical accounting policies and
accounting estimates may be expanded over time. Those material accounting policies and estimates that we expect to be most
critical to an investor’s understanding of our financial results and condition and require complex management judgment are
discussed below. See Note 2 of the audited financial statements in this Form 10-K for further details on our accounting policies.
We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on
changing conditions. Additionally, there were certain newly issued accounting pronouncements that may be relevant to our
business. See Note 2 of the audited financial statements in this Form 10-K for further details on these newly issued accounting
pronouncements.
We have identified the following accounting policies as critical because they require significant judgments and
assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and
assumptions could have a material impact on our reported results of operations or financial condition. These critical accounting
policies govern:
Consolidation and Equity Method Investments
We account for our investment in entities that are considered voting or variable interest entities under ASC 810,
Consolidation. We perform an ongoing assessment and make judgments to determine the primary beneficiary of each entity as
required by ASC 810, which includes an assessment of the type of control we have over the entity. If we would conclude that
certain of these entities should be consolidated, we would include the entities assets, liabilities and related activity in our
financial statements. Refer to discussion below relating to consolidation considerations for the securitization of receivables. We
further discuss our process for evaluating these judgments in Note 2 of the audited financial statements of this Form 10-K.
For those transactions not consolidated, we generally determine our income allocations under the equity method of
accounting based on the change in our claim on net assets of the investee entity using a method commonly referred to as the
hypothetical liquidation at book value method or (“HLBV”). This method uses a hypothetical liquidation scenario that may
require judgment in its application and could have a material impact on our reported financial results. Any changes in this
method of application or in certain assumptions could either increase or decrease our net income. We further discuss our
process for applying this method of income allocations in Note 2 of the audited financial statements of this Form 10-K.
Impairment of our Portfolio
We evaluate the various assets in our Portfolio on at least a quarterly basis, and more frequently when economic or other
conditions warrant such an evaluation, for potential delinquencies or other events that may indicate a potential impairment of
the such asset. If an asset is determined to be impaired, any impairment charges would be recorded in the income statement and
reduce our net income. We further discuss our process for evaluating these judgments in Note 2 of the audited financial
statements in this Form 10-K.
- 55 -
Securitization of Receivables
We have established various special purpose entities or securitization trusts for the purpose of securitizing certain
receivables or other debt investments. We make judgments, based in part, on supporting legal opinions, on whether these
entities should be consolidated as a variable interest entity, as defined in ASC 810, Consolidation, and whether the transfers to
these entities are accounted for as a sale of a financial asset or a secured borrowing under ASC 860, Transfers and Servicing. If
we would conclude that certain of these special purpose entities or securitization trusts should be consolidated, we would
include the assets and liabilities of the entity and their related activity in our financial statements. If sale accounting is not met
in these transactions it would be treated as a secured borrowing rather than a sale in our financial statements. We further discuss
our process for evaluating these judgments in Note 2 of the audited financial statements of this Form 10-K.
Results of Operations
We focus on reducing the impact of, or increasing resiliency to, climate change by providing capital and our specialist
expertise to the energy efficiency, renewable energy and other sustainable infrastructure markets. Our goal is to generate
attractive returns for our stockholders by investing capital in assets or projects that generate long-term, recurring and
predictable cash flows or cost savings from proven technologies. We believe we were one of the first U.S. public companies
focused on building a diversified portfolio that addresses climate change. Our investments take various forms including equity,
joint ventures, lending or other financing transactions, as well as land ownership and typically benefit from contractually
committed high credit quality obligors. We also generate on-going fees through gain-on-sale securitization transactions,
advisory services and asset management. We manage our business as a single portfolio and report all of our activities as one
business segment.
We completed approximately $1.2 billion of transactions during 2018, compared to approximately $1.0 billion during
2017. Our strategy includes holding a large portion of these transactions on our balance sheet. We refer to the transactions we
hold on our balance sheet as of a given date as our “Portfolio.” Our Portfolio was approximately $2.0 billion as of
December 31, 2018 and December 31, 2017.
Portfolio
Our Portfolio totaled approximately $2.0 billion as of December 31, 2018, and included approximately $1.0 billion of
BTM assets, approximately $0.9 billion of GC assets and approximately $0.1 billion of other sustainable infrastructure
investments. Approximately 23% of our Portfolio consisted of unconsolidated equity investments in renewable energy related
projects and approximately 20% of our Portfolio was real estate used in renewable energy projects. The remainder consisted of
fixed-rate government and commercial receivables and debt securities which we generally refer to as debt investments. Our
Portfolio consisted of over 185 transactions with an average size of $10 million and the weighted average remaining life of our
Portfolio (excluding match-funded transactions) of approximately 14 years as of December 31, 2018.
Our Portfolio included the following as of December 31, 2018:
• Equity investments in either preferred or common structures in unconsolidated entities;
• Government and commercial receivables, such as loans for renewable energy and energy efficiency projects;
• Real estate, such as land or other assets leased for use by sustainable infrastructure projects typically under long
term leases; and
•
Investments in debt securities of renewable energy or energy efficiency projects.
- 56 -
The table below provides details on the interest rate and maturity of our debt investments as of December 31, 2018:
Fixed-rate receivables, interest rates of less than 5.00% per annum
Fixed-rate receivables, interest rates from 5.00% to 6.50% per annum
Fixed-rate receivables, interest rates greater than 6.50% per annum
Receivables
Allowance for credit losses
Receivables, net of allowance
Fixed-rate investments, interest rates of less than 5.00% per annum
Fixed-rate investments, interest rates from 5.00% to 6.50% per annum
Total receivables and investments
Balance
(in millions)
Maturity
$
$
2020 to 2046
2020 to 2046
2019 to 2069
2019 to 2044
2028 to 2049
403
156
386
945
—
945
136
34
1,115
The table below presents, for each major category of our Portfolio and the related interest-bearing liabilities, the average
outstanding balances, income earned, the interest expense incurred, and average yield or cost. Our earnings from our equity
method investments are not included in total revenue and thus we have excluded the income and related interest expense for
our equity method investments from these calculations. Our net investment margin represents the difference between the
interest and rental income generated by our Portfolio and the interest expense, divided by our average Portfolio balance.
Years Ended December 31,
Interest income, receivables
Average monthly balance of receivables
Average interest rate of receivables
Interest income, investments
Average monthly balance of investments
Average interest rate of investments
Rental income
Average monthly balance of real estate
Average yield on real estate
Average monthly balance of Portfolio
Average yield from Portfolio
Interest expense (1)
Average monthly balance of debt (1)
Average interest rate of debt (1)
Average interest spread (1)
Net investment margin (1)
$
$
$
$
$
$
$
$
$
2018
68
1,001
2017
(dollars in millions)
$
$
57
1,062
$
$
$
$
$
$
$
$
$
6.8%
7
163
4.1%
25
350
7.0%
1,514
6.5%
62
1,275
4.9%
1.6%
2.4%
$
$
$
$
$
$
$
5.3%
5
122
4.2%
20
284
7.0%
1,468
5.6%
49
1,079
4.6%
1.0%
2.2%
2016
48
858
5.6%
2
44
4.1%
12
163
7.3%
1,064
5.8%
31
719
4.3%
1.5%
2.9%
(1)
Excludes amounts related to the non-recourse debt used to finance the equity method investments in the renewable energy projects
because our earnings from these equity investments are not included in total revenue.
The following table provides a summary of our anticipated principal repayments for our receivables and investments as
of December 31, 2018:
- 57 -
Receivables
Investments
Total
Less than
1 year
$
$
945
170
Payment due by Period
1-5 years
(in millions)
123
$
17
$
37
68
5-10 years
More than
10 years
$
185
23
600
62
See Note 6 of our audited financial statements in this Form 10-K for information on:
•
•
•
•
the anticipated maturity dates of our receivables and investments and the weighted average yield for each range of
maturities as of December 31, 2018,
the term of our leases and a schedule of our future minimum rental income under our land lease agreements as of
December 31, 2018,
the credit quality of our Portfolio, and
the receivables on non-accrual status.
For information on our residual assets relating to our securitization trusts, see Note 5 of our audited financial statements
in this Form 10-K. The residual assets do not have a contractual maturity date and the underlying securitized assets have
contractual maturity dates until 2055.
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Revenue
Interest income, receivables
Interest income, investments
Rental income
Gain on sale of receivables and investments
Fee income
Total revenue
Expenses
Interest expense
Compensation and benefits
General and administrative
Total expenses
Income before equity method investments
Income (loss) from equity method investments
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
NM—Percentage change is not meaningful.
$
$
Years ended
December 31,
2018
2017
$ Change
% Change
(dollars in millions)
68
7
24
33
6
138
77
26
13
116
22
22
44
(2)
42
$
$
57
5
20
21
3
106
65
20
11
96
10
22
32
(1)
31
$
$
11
2
4
12
3
32
12
6
2
20
12
—
12
(1)
11
19 %
40 %
20 %
57 %
100 %
30%
18 %
30 %
18 %
21%
120%
— %
38%
100 %
35%
• Net income increased by approximately $11 million as a result of a $32 million increase in total revenue, partially
offset by a $20 million increase in total expenses, including a $12 million increase in interest expense, and a non-
cash $1 million income tax expense increase. These results do not include the Non-GAAP core earnings adjustment
related to equity method investments, which is discussed in the Non-GAAP Financial Measures section below.
•
Interest income, receivables and investments increased by $13 million due primarily to an increase in average yield
on our receivables, as well as prepayment fees recognized in the fourth quarter of 2018 as described below. Rental
income grew by $4 million due to an approximately $66 million increase in the average real estate balance in our
- 58 -
Portfolio as compared to 2017. Gain on sale of receivables and investments and fee income grew by $15 million due
primarily to an increase in securitization activity and related fees.
•
•
In the fourth quarter, approximately $300 million of residential solar assets and our related $250 million of debt was
prepaid. Both interest income and interest expense were impacted by this transaction as we recorded approximately
$9 million of prepayment fees and the remaining portion of the unamortized loan fees of approximately $4 million
in interest income offset by approximately $9 million of costs recorded in interest expense relating to the debt
repayment.
Interest expense for the year rose by approximately $12 million as a result of the prepayment expense described
above and higher fixed-rate debt, primarily in the first three quarters of the year. The higher interest expense for the
year was offset by a series of transactions in the fourth quarter which lower our interest costs including refinancing
our primary credit facility, reducing the levels of our interest rate swaps and the $250 million debt repayment which
reduced our leverage.
• Compensation and benefits and general and administrative increased by $8 million due primarily to growth in the
Company and additional performance-based compensation.
Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016
Revenue
Interest income, receivables
Interest income, investments
Rental income
Gain on sale of receivables and investments
Fee income
Total revenue
Expenses
Interest expense
Compensation and benefits
General and administrative
Total expenses
Income before equity method investments
Income (loss) from equity method investments
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
NM -- Percentage change not meaningful
$
$
Years ended
December 31
2017
2016
$ Change
% Change
(dollars in millions)
57
5
20
21
3
106
65
20
11
96
10
22
32
(1)
31
$
$
48
2
12
17
2
81
45
19
8
72
9
6
15
—
15
$
$
9
3
8
4
1
25
20
1
3
24
1
16
17
(1)
16
19 %
150 %
67 %
24 %
50 %
31%
44 %
5 %
38 %
33%
11%
267 %
113%
NM
107%
• Net income increased by approximately $16 million as a result of a $25 million increase in total revenue and
$16 million increase in income from equity method investments, partially offset by a $24 million increase in total
expenses, including a $20 million increase in interest expense, and a $1 million income tax expense. These results
do not include the Non-GAAP core earnings adjustment related to equity method investments, which is discussed in
the Non-GAAP Financial Measures section below.
•
Interest income, receivables increased by $9 million due to an approximately $200 million increase in the average
receivables balance in our Portfolio as compared to 2016, offsetting a slight decrease in the average yield from 5.6%
to 5.3%. Rental income grew by $8 million due to an approximately $120 million increase in the average real estate
balance in our Portfolio as compared to 2016. Gain on sale of receivables and investments grew by $4 million due
primarily to an increase in securitization margins and related fees.
• The increase in revenue was offset by $20 million of higher interest expense due to an increase in the average
outstanding balance of our debt and higher fixed rate debt amounts outstanding during the year ended December 31,
2017, when compared to the same period in 2016.
- 59 -
• Compensation and benefits increased by $1 million due to higher staffing costs and general and administrative costs
increased by approximately $3 million primarily due to additional transaction specific costs, professional services
fees, and other administrative costs.
• The $16 million increase in income from equity method investments is primarily driven by new equity investments
in 2017 as well as increased income from existing investments as a result of tax attributes realized primarily by our
co-investors. Income tax expense increased by $1 million due to this higher income from our equity method
investments held in our TRSs. See the Non-GAAP Financial Measures section below for more information.
Non-GAAP Financial Measures
We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our
performance: (1) core earnings and (2) managed assets. These non-GAAP financial measures should be considered along with,
but not as alternatives to, net income or loss as measures of our operating performance. These non-GAAP financial measures,
as calculated by us, may not be comparable to similarly named financial measures as reported by other companies that do not
define such terms exactly as we define such terms.
Core Earnings
We calculate core earnings as GAAP net income excluding non-cash equity compensation expense, non-cash provision
for credit losses, amortization of intangibles, any one-time acquisition related costs or non-cash tax charges and the earnings
attributable to our non-controlling interest of our Operating Partnership. We also make an adjustment for our equity method
investments in the renewable energy projects as described below. In the future, core earnings may also exclude one-time events
pursuant to changes in GAAP and certain other non-cash charges as approved by a majority of our independent directors.
Certain of our equity method investments in renewable energy projects are structured using typical partnership “flip”
structures where we, along with any other institutional investors, if any, receive a pre-negotiated preferred return consisting of
priority distributions from the project cash flows, in many cases, along with tax attributes. Once this preferred return is
achieved, the partnership “flips” and the renewable energy company, which operates the project, receives more of the cash
flows through its equity interests while we, and any other institutional investors, retain an ongoing residual interest. We
typically negotiate the purchase prices of our equity investments, which have a finite expected life, based on our assessment of
the expected cash flows we will receive from these projects discounted back to the net present value, based on a target
investment rate, with the expected cash flows to be received in the future reflecting both a return on the capital (at the
investment rate) and a return of the capital we have committed to the project. We use a similar approach in the underwriting of
our receivables.
Under GAAP, we account for these equity method investments utilizing the HLBV method. Under this method, we
recognize income or loss based on the change in the amount each partner would receive, typically based on the negotiated
profit and loss allocation, if the assets were liquidated at book value, after adjusting for any distributions or contributions made
during such quarter. The HLBV allocations of income or loss may be impacted by the receipt of tax attributes, as tax equity
investors are allocated losses in proportion to the tax benefits received, while the sponsors of the project are allocated gains of a
similar amount. In addition, the agreed upon allocations of the project’s cash flows may differ materially from the profit and
loss allocation used for the HLBV calculations.
The cash distributions for our equity method investments are segregated into a return on and return of capital on our cash
flow statement based on the cumulative income that has been allocated using the HLBV method. However, as a result of the
application of the HLBV method, including the impact of tax allocations, the high levels of depreciation and other non-cash
expenses that are common to renewable energy projects and the differences between the agreed upon profit and loss and the
cash flow allocations, the distributions and thus the economic returns (i.e. return on capital) achieved from the investment are
often significantly different from the income or loss that is allocated to us under the HLBV method. Thus, in calculating core
earnings, we further adjust GAAP net income to take into account our calculation of the return on capital (based upon the
investment rate) from our renewable energy equity method investments, as adjusted to reflect the performance of the project
and the cash distributed. We believe this core equity method investment adjustment to our GAAP net income in calculating our
core earnings measure is an important supplement to the HLBV income allocations determined under GAAP for an investor to
understand the economic performance of these investments.
For the year ended December 31, 2018, we recognized $22.2 million in income under GAAP for our equity investments
in renewable energy projects. We reversed the GAAP income and recorded $40.9 million for core earnings as discussed above
- 60 -
to reflect our return on capital from these investments for the year ended December 31, 2018. This compares to the collected
cash distributions from these equity method investments of approximately $114.6 million for the year ended December 31,
2018, with the difference between core earnings and cash collected representing a return of capital.
For the year ended December 31, 2017, we recognized $22.3 million in income under GAAP for our equity investments
in renewable energy projects. We reversed the GAAP income and recorded $42.7 million for core earnings as discussed above
to reflect our return on capital from these investments for the year ended December 31, 2017. This compares to the collected
cash distributions from these equity method investments of approximately $89.7 million for the year ended December 31, 2017,
with the difference between core earnings and cash collected representing a return of capital.
For the year ended December 31, 2016, we recognized $6.1 million in income under GAAP for our equity investments in
renewable energy projects. We reversed the GAAP income and recorded $30.5 million for core earnings as discussed above to
reflect our return on capital from these investments for the year ended December 31, 2016. This compares to the collected cash
distributions from these equity method investments of approximately $55.8 million for the year ended December 31, 2016, with
the difference between core earnings and cash collected representing a return of capital.
We believe that core earnings provides an additional measure of our core operating performance by eliminating the
impact of certain non-cash expenses and facilitating a comparison of our financial results to those of other comparable
companies with fewer or no non-cash charges and comparison of our own operating results from period to period. Our
management uses core earnings in this way. We believe that our investors also use core earnings, or a comparable supplemental
performance measure, to evaluate and compare our performance to that of our peers, and as such, we believe that the disclosure
of core earnings is useful to our investors.
However, core earnings does not represent cash generated from operating activities in accordance with GAAP and should
not be considered as an alternative to net income (determined in accordance with GAAP), or an indication of our cash flow
from operating activities (determined in accordance with GAAP), or a measure of our liquidity, or an indication of funds
available to fund our cash needs, including our ability to make cash distributions. In addition, our methodology for calculating
core earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental
performance measures, and accordingly, our reported core earnings may not be comparable to similar metrics reported by other
companies.
We have calculated our core earnings for the years ended December 31, 2018, 2017 and 2016. The table below provides a
reconciliation of our GAAP net income to core earnings:
- 61 -
2018
$
For the Years Ended December 31,
2017
Per Share
(dollars in thousands, except per share amounts)
Per Share
$
$
2016
Per Share
$
41,577
$
0.75
$
30,856
$
0.57
$
14,652
$
0.32
(22,162)
(22,289)
(6,110)
Net income attributable to controlling
stockholders
Core earnings adjustments
Reverse GAAP income from equity
method investments
Add back core equity method
investments earnings
Non-cash equity-based compensation
charges
Amortization of intangibles
Non-cash provision (benefit) for taxes
Current year earnings attributable to non-
40,923
10,066
3,207
1,968
controlling interest
Core earnings (1)
221
75,800
$
$
1.38
$
42,707
11,304
2,622
756
179
66,135
$
1.27
$
30,491
10,054
1,338
—
104
50,529
$
1.20
(1) Core earnings per share is based on 54,742,869 shares, 52,231,030 shares and 41,940,480 shares for the years ended December 31,
2018, 2017 and 2016, respectively, which represents the weighted average number of fully-diluted shares outstanding including our
restricted stock awards and restricted stock units and the non-controlling interest in our Operating Partnership. We include any potential
common stock issuance in this calculation related to our convertible notes using the treasury stock method.
Managed Assets
As we both consolidate assets on our balance sheet and securitize assets, certain of our receivables and other assets are
not reflected on our balance sheet where we may have a residual interest in the performance of the investment, such as
servicing rights or a retained interest in cash flows. Thus, we present our investments on a non-GAAP “managed” basis, which
assumes that securitized receivables are not sold. We believe that our Managed Asset information is useful to investors because
it portrays the amount of both on- and off-balance sheet receivables that we manage, which enables investors to understand and
evaluate the credit performance associated with our portfolio of receivables, investments, and residual assets in securitized
receivables. Our non-GAAP Managed Assets measure may not be comparable to similarly titled measures used by other
companies.
The following is a reconciliation of our GAAP Portfolio to our Managed Assets as of December 31, 2018, 2017, and
2016:
2018
As of December 31,
2017
(dollars in millions)
2016
$
$
471
497
447
365
170
3,334
5,284
0.0%
$
$
523
535
477
341
151
2,709
4,736
0.0%
363
526
516
172
58
2,298
3,933
0.0%
$
$
Equity method investments
Government receivables (1)
Commercial receivables (2)
Real estate
Investments
Assets held in securitization trusts
Managed assets
Credit losses as a percentage of assets under management
(1)
(2)
Includes receivables held-for-sale of $16 million in 2017.
Includes receivables held-for-sale of $3 million in 2017.
- 62 -
Other Financial Measures
The following are certain other financial measures for the years ended December 31, 2018, 2017 and 2016.
Return on assets
Return on equity
Average equity to average total assets ratio
Environmental Metrics
Years Ended
December 31,
2018
2017
2016
1.9%
5.7%
32.9%
1.5%
5.1%
30.5%
0.9%
2.9%
31.3%
As discussed in Item 1. Business, as part of our investment process, we calculate the estimated metric tons of CO2
equivalent emissions, or carbon emissions avoided by our investments. In this calculation which we refer to as CarbonCount®,
we apply emissions factor data from the U.S. Government or the International Energy Administration to an estimate of a
project’s energy production or savings to compute an estimate of metric tons of carbon emissions avoided. We estimate that our
investments originated in 2018 will reduce annual carbon emissions by approximately 496 thousand metric tons.
In assessing our performance and results of operations, we also consider the impact of our operations on the environment.
We utilize the carbon emissions categorizations established by the World Resources Institute Greenhouse Gas Protocol
Corporate Standards ("Standards") to set goals and calculate our estimated emissions. The categorizations are as follows:
• Scope 1 GHG emissions - Direct emissions - Emissions from operations that are owned or controlled by the
reporting company.
• Scope 2 GHG emissions - Indirect emissions - Emissions from the generation of purchased or acquired energy such
as electricity, steam, heating or cooling, consumed by the reporting company.
• Scope 3 GHG emissions - Indirect emissions - All other indirect emissions that occur in the value chain of the
reporting company, including both upstream and downstream emissions.
The table below illustrates our goals and performance for 2018 in metric tons ("MT").
Category
Scope 1 GHG emissions
Scope 2 GHG emissions
Scope 3 GHG emissions
Goal
0 MT
0 MT
0 MT2
Performance
0 MT
0 MT1
< 500 MT2
(1) Performance stated is market-based which includes the impact of purchasing carbon offsets.
(2) Our stated actual performance for Scope 3 GHG emissions does not include the carbon emissions reductions as a result of our investments. The first
year carbon emissions reductions as a result of our investments originated in 2018 are 496,000 MT.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential short term (within one year) and long term cash requirements,
including ongoing commitments to repay borrowings, fund and maintain our current and future assets, make distributions to our
stockholders and other general business needs. We will use significant cash to make investments in sustainable infrastructure,
repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations. We use
borrowings as part of our financing strategy to increase potential returns to our stockholders and have available to us a broad
range of financing sources. We finance our investments through the use of non-recourse or recourse debt, equity and may
finance transactions through the use of off-balance sheet securitization structures.
In December 2018, we entered into two senior secured revolving credit facilities ("Rep-Based Facility" and "Approval-
Based Facility") with several lenders with a combined maximum outstanding balance of $450 million, to repay and replace our
- 63 -
existing credit facility. For additional information on our credit facilities, see Note 7 to our audited financial statements on this
Form 10-K.
As of December 31, 2018, we had approximately $835 million of non-recourse borrowings. In the fourth quarter of 2018,
we repaid approximately $250 million of non-recourse debt ("HASI SYB Loan Agreement 2015-3" and "HASI SYB Loan
Agreement 2016-1") as a result of the repayment of the assets leveraged by those loans.
We also continue to utilize off-balance sheet securitization transactions, where we transfer the loans or other assets we
originate to securitization trusts or other bankruptcy remote special purpose funding vehicles that are not consolidated on our
balance sheet. As of December 31, 2018, the outstanding principal balance of our assets financed through the use of these off-
balance sheet transactions was approximately $3.3 billion.
Large institutional investors, primarily insurance companies and commercial banks, have provided the financing for these
non-recourse and off-balance sheet financings. We have worked to expand our liquidity and access to the debt and bank loan
markets and have entered into transactions with a number of new institutional investors in the last year. For further information
on the credit facilities, asset backed non-recourse debt, convertible notes, and securitizations, see Notes 5, 7 and 8 to our
audited financial statements of this Form 10-K.
During the year ended December 31, 2018, we raised approximately $187 million through the issuance of equity,
including approximately $108 million of common equity in December 2018 through a public offering, and approximately $79
million under our “at-the-market” equity distribution program, or our ATM program, pursuant to which we can offer to sell,
from time to time, up to an aggregate amount of $150 million of our common stock. For additional information related to our
equity raises see Note 11 to our audited financial statements of this Form 10-K.
We plan to raise additional equity capital and continue to use fixed and floating rate borrowings which may be in the
form of additional bank credit facilities (including term loans and revolving facilities), warehouse facilities, repurchase
agreements and public and private equity and debt issuances as a means of financing our business. We also expect to use both
on-balance sheet and non-consolidated securitizations and also believe we will be able to customize securitized tranches to
meet investment preferences of different investors. We may also consider the use of separately funded special purpose entities
or funds to allow us to expand the investments that we make.
The decision on how we finance specific assets or groups of assets is largely driven by capital allocations and risk and
portfolio and financial management considerations, including the potential for gain on sale or fee income, as well as the overall
interest rate environment, prevailing credit spreads and the terms of available financing and market conditions. Over time, as
market conditions change, we may use other forms of debt and equity in addition to these financings arrangements.
The amount of leverage we may deploy for particular assets will depend upon the availability of particular types of
financing and our assessment of the credit, liquidity, price volatility and other risks of those assets, the interest rate environment
and the credit quality of our financing counterparties. As shown in the table below, our debt to equity ratio was approximately
1.5 to 1 as of December 31, 2018, which is below our leverage target of up to 2.5 to 1. Given our historical and present leverage
levels of below 2.5 to 1, our board of directors as of February 2019 has clarified the leverage target to be up to 2.5 to 1 versus
the prior level of 2.5 to 1. We will continue to evaluate the appropriate level of debt and may, over time, make additional
changes to our targeted levels. Our percentage of fixed rate debt was approximately 74% as of December 31, 2018, which is
within our targeted fixed rate debt percentage range of 60% to 85%.
The calculation of our fixed-rate debt and leverage as of December 31, 2018 and 2017 is shown in the chart below:
Floating-rate borrowings
Fixed-rate debt
Total debt (1)
Equity
Leverage
December 31, 2018
% of Total
December 31, 2017
% of Total
(dollars in millions)
317
$
925
1,242
805
1.5 to 1
$
$
26% $
74%
100% $
$
(dollars in millions)
110
1,318
1,428
643
2.2 to 1
8%
92%
100%
(1) Floating-rate borrowings include borrowings under our floating-rate credit facilities and approximately $58 million and approximately
$40 million of non-recourse debt with floating rate exposure as of December 31, 2018 and December 31, 2017, respectively.
- 64 -
Approximately $32 million of the 2018 and 2017 floating rate exposure is hedged beginning in 2019. Fixed-rate debt includes the
present notional value of non-recourse debt that is hedged using interest rate swaps. Debt excludes securitizations that are not
consolidated on our balance sheet.
We intend to use leverage for the primary purpose of financing our Portfolio and business activities and not for the
purpose of speculating on changes in interest rates. While we may temporarily exceed the leverage or fixed rate debt targets, if
our board of directors approves a material change to these targets, we anticipate advising our stockholders of this change
through disclosure in our periodic reports and other filings under the Exchange Act.
While we generally intend to hold our target assets that we do not securitize upon acquisition as long term investments,
certain of our investments may be sold in order to manage our interest rate risk and liquidity needs, to meet other operating
objectives and to adapt to market conditions. The timing and impact of future sales of receivables and investments, if any,
cannot be predicted with any certainty. Since we expect that our assets will generally be financed, we expect that a significant
portion of the proceeds from sales of our assets (if any), prepayments and scheduled amortization will be used to repay
balances under our financing sources.
We believe these identified sources of liquidity in addition to our cash on hand will be adequate for purposes of meeting
our short-term and long-term liquidity needs, which include funding future investments, operating costs and distributions to our
stockholders. To qualify as a REIT, we must distribute annually at least 90% of our REIT’s taxable income without regard to
the deduction for dividends paid and excluding net capital gains. These dividend requirements limit our ability to retain
earnings and thereby replenish or increase capital for growth and our operations.
Sources and Uses of Cash
We had approximately $59 million, $118 million and $59 million of unrestricted cash, cash equivalents, and restricted
cash as of December 31, 2018, 2017 and 2016, respectively.
Cash Flows Relating to Operating Activities
Net cash provided by operating activities was approximately $59 million for the year ended December 31, 2018, driven
primarily by net income of $42 million, plus adjustments for non-cash and other items of $17 million. The non-cash and other
adjustments consisted of increases of $15 million of depreciation and amortization, $13 million related to receivables held-for-
sale, $10 million related to equity-based compensation, $7 million related to accounts payable and accrued expenses, $4 million
related to equity method investments, and $9 million related to cost associated with the repayment of the residential solar
related debt. These were offset by $26 million related to gains on securitizations and $15 million related to other items.
Net cash provided by operating activities was approximately $12 million for the year ended December 31, 2017, driven
primarily by net income of $31 million and adjustments for non-cash items of $24 million, consisting primarily of equity-based
compensation and depreciation and amortization. This was offset by $29 million in non-cash items related to the sale of
receivables (including the change in receivables held-for-sale), a net adjustment related to our equity method investments of
$8 million and other operating cash net outflows of $6 million.
Net cash provided by operating activities was approximately $57 million for the year ended December 31, 2016, driven
primarily by net income of $15 million, impact from the sale of receivables (including the change in receivables held-for-sale)
and investments of $33 million, and adjustments for non-cash items of $19 million, consisting primarily of equity-based
compensation and depreciation and amortization. This was offset by net changes in accounts payable and accrued expenses and
other of $10 million.
Cash Flows Relating to Investing Activities
Net cash provided by investing activities was approximately $51 million for the year ended December 31, 2018. We
collected $351 million from receivables and fixed rate debt securities, which includes the $300 million collected from the
repayment of the residential solar assets. We also collected $88 million from equity method investments representing the return
of capital determined under GAAP, received $36 million from the sale of equity method investments, and withdrew $33 million
from escrow accounts. We made $318 million of investments in receivables and fixed rate debt-securities, made $28 million of
investments in real estate, made $76 million of equity method investments, and funded escrow accounts for $35 million.
- 65 -
Net cash used in investing activities was approximately $298 million for the year ended December 31, 2017. We used
$133 million to purchase receivables and investments, $171 million to purchase real estate, cash of $233 million for additional
equity investments in renewable energy projects, and $23 million for other cash outflows. We collected cash from principal
payments on our receivables and investments of $102 million. In addition, we received $85 million from the sale of receivables
and investments and cash distributions not reflected in operating activities from our investment in our renewable energy
projects of $75 million.
Net cash used in investing activities was approximately $191 million for the year ended December 31, 2016. We used
$332 million to purchase receivables and investments, $18 million to purchase real estate, and net cash of $61 million for
additional renewable energy projects, and $1 million for other cash outflows. We collected cash from principal payments on our
receivables and investments of $118 million. In addition, we received $54 million from the sale of receivables and investments
and cash distributions not reflected in operating activities from our investment in our renewable energy projects of $49 million.
Cash Flows Relating to Financing Activities
Net cash used in financing activities was approximately $168 million for the year ended December 31, 2018. We had non-
recourse debt borrowings of $69 million, borrowings from our credit facilities of $172 million, and received $187 million of net
proceeds from the issuance of common stock. We made $390 million of principal payments on non-recourse debt, which
includes the $250 million debt repayment related to the repayment of the residential solar assets. We also made, $47 million of
principal payments on credit facilities, $74 million of payments on deferred funding obligations, paid $71 million of dividends
and distributions, and had other cash outflows of $14 million.
Net cash provided by financing activities was approximately $345 million for the year ended December 31, 2017. This
includes credit facility and non-recourse debt borrowings of $912 million, convertible debt proceeds of $150 million, and net
proceeds of $97 million from the sale of our common stock. These cash inflows were partially offset by payments to reduce our
borrowings under the credit facility, deferred funding obligations, and non-recourse debts totaling $720 million, the payment of
dividends and distributions to our stockholders and OP unit holders of $68 million, and other cash outflows of $26 million.
Net cash provided by financing activities was approximately $114 million for the year ended December 31, 2016. This
includes credit facility and non-recourse debt borrowings of $406 million and net proceeds of $177 million from the sale of our
common stock. These cash inflows were partially offset by payments to reduce our borrowings under the credit facility,
deferred funding obligations, and non-recourse debts totaling $407 million, the payment of dividends and distributions to our
stockholders and OP unit holders of $49 million, and a change in other cash outflows of $13 million.
Contractual Obligations and Commitments
The following table provides a summary of our contractual obligations as of December 31, 2018:
Contractual Obligations
Non-recourse debt (1)
Interest on non-recourse debt (1)
Credit facilities
Interest on credit facilities (2)
Convertible notes (3)
Interest on convertible notes
Deferred funding obligations
Deferred funding obligations interest
Operating lease obligations
Total
$
$
Payment due by Period
Total
Less than
1 year
1 - 3 Years
3 - 5 Years
(in millions)
More than
5 years
852
314
259
44
150
23
72
1
5
1,720
$
$
139
35
11
10
—
7
51
1
1
255
$
$
50
60
16
20
—
12
21
—
1
180
$
$
88
54
232
14
150
4
—
—
1
543
$
$
575
165
—
—
—
—
—
—
2
742
(1) Our non-recourse debt is secured by the assets that were financed with no recourse to our general assets and excludes the $17 million of
unamortized debt issuance costs. Debt service, in the majority of the cases, is equal to or less than the value of the assets. Interest is
- 66 -
(2)
calculated based on the interest rate in effect at December 31, 2018, including the effect of interest rate hedges as applicable. Interest
paid on these obligations was $58 million and $38 million for the years ended December 31, 2018 and 2017, respectively.
Interest is calculated based on the interest rate in effect at December 31, 2018, and includes all interest expense incurred and expected
to be incurred in the future based on the current principal balance through the contractual maturity of the credit facilities. Interest paid
on credit facilities was $6 million and $9 million for the years ended December 31, 2018 and 2017 respectively.
(3) Excludes $4 million of unamortized debt issuance costs. Interest paid on convertible notes was $6 million in 2018. No interest
payments were made on convertible notes in 2017.
Off-Balance Sheet Arrangements
We have relationships with non-consolidated entities or financial partnerships, such as entities often referred to as
structured investment vehicles, or special purpose or variable interest entities, established to facilitate the sale of securitized
assets. Other than our securitization assets (including any outstanding servicer advances) of approximately $72 million as of
December 31, 2018, that may be at risk in the event of defaults or prepayments in our securitization trusts and as discussed
below, we have not guaranteed any obligations of non-consolidated entities or entered into any commitment or intent to provide
additional funding to any such entities. A more detailed description of our relations with non-consolidated entities can be found
in Note 2 of our audited financial statements included in this Form 10-K.
In connection with some of our transactions, we have provided certain limited guaranties to other transaction participants
covering the accuracy of certain limited representations, warranties or covenants and provided an indemnity against certain
losses from "bad acts" including fraud, failure to disclose a material fact, theft, misappropriation, voluntary bankruptcy or
unauthorized transfers. We have also guaranteed our compliance with certain tax matters, such as negatively impacting the
investment tax credit and certain other obligations in the event of a change in ownership or our exercising certain protective
rights.
Dividends
U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income,
without regard to the deduction for dividends paid and excluding net capital gains, and that it pays tax at regular corporate rates
to the extent that it annually distributes less than 100% of its REIT taxable income. Our current policy is to pay quarterly
distributions, which on an annual basis will equal or exceed substantially all of our REIT taxable income. Any distributions we
make will be at the discretion of our board of directors and will depend upon, among other things, our actual results of
operations. These results and our ability to pay distributions will be affected by various factors, including the net interest and
other income from our portfolio, our operating expenses and any other expenditures. In the event that our board of directors
determines to make distributions in excess of the income or cash flow generated from our assets, we may make such
distributions from the proceeds of future offerings of equity or debt securities or other forms of debt financing or the sale of
assets. To the extent that in respect of any calendar year, cash available for distribution is less than our taxable income, or our
declared distribution we could be required to sell assets, borrow funds, or raise additional capital to make cash distributions or
make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. We will
generally not be required to make distributions with respect to activities conducted through our domestic TRSs.
To the extent that we generate taxable income, distributions to our stockholders generally will be taxable as ordinary
income, although all or a portion of such distributions may be designated by us as a qualified dividend or capital gain.
Beginning in 2018 (and through taxable years ending in 2025), a deduction is permitted for certain pass-through business
income, including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that are not designated as
capital gain dividends or qualified dividend income), which will allow U.S. individuals, trusts, and estates to deduct up to 20%
of such amounts, subject to certain limitations, resulting in an effective maximum U.S. federal income tax rate of 29.6% on
such qualified REIT dividends. In the event we make distributions to our stockholders in excess of our taxable income, the
excess will constitute a return of capital. In addition, a portion of such distributions may be taxable stock dividends payable in
our shares. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding
year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain.
The dividends declared in 2018 and 2017 are described under Note 11 of the audited financial statements in this Form 10-
K.
- 67 -
Book Value Considerations
As of December 31, 2018, we carried only our investments, interest rate swaps and residual assets in securitized
receivables (included in other assets) at fair value on our balance sheet. As a result, in reviewing our book value, there are a
number of important factors and limitations to consider. Other than our investments, interest rate swaps and the residual assets
in securitized receivables that are carried on our balance sheet at fair value as of December 31, 2018, the carrying value of our
remaining assets and liabilities are calculated as of a particular point in time, which is largely determined at the time such assets
and liabilities were added to our balance sheet using a cost basis in accordance with GAAP. As such, our remaining assets and
liabilities do not incorporate other factors that may have a significant impact on their value, most notably any impact of
business activities, changes in estimates, or changes in general economic conditions, interest rates or commodity prices since
the dates the assets or liabilities were initially recorded. Accordingly, our book value does not necessarily represent an estimate
of our net realizable value, liquidation value or our market value as a whole.
Inflation
We do not anticipate that inflation will have a significant effect on our results of operations. However, in the event of a
significant increase in inflation, interest rates could rise and our projects and investments may be materially adversely affected.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We anticipate that our primary market risks will be related to, the credit quality of our counterparties and project
companies, market interest rates, the liquidity of our assets, and commodity prices. We will seek to manage these risks while, at
the same time, seeking to provide an opportunity to stockholders to realize attractive returns through ownership of our common
stock.
Credit Risks
We source and identify quality opportunities within our broad areas of expertise and apply our rigorous underwriting
processes to our transactions, which, we believe, will generally enable us to minimize our credit losses and keep financing costs
low. While we do not anticipate facing significant credit risk in our assets related to government energy efficiency projects, we
are subject to varying degrees of credit risk in these projects in relation to guarantees provided by ESCOs where payments
under energy savings performance contracts are contingent upon achieving pre-determined levels of energy savings. We are
also exposed to credit risk in our other projects that do not benefit from governments as the obligor such as on balance sheet
financing of projects undertaken by universities, schools and hospitals, as well as privately owned commercial projects. In the
case of various renewable energy and other sustainable infrastructure projects, we will also be exposed to the credit risk of the
obligor of the project’s PPA or other long-term contractual revenue commitments, as well as to the credit risk of certain
suppliers and project operators. Our level of credit risk has increased, and is expected to continue to increase, as our strategy
increasingly includes mezzanine debt, real estate and equity investments. We seek to manage credit risk through due diligence
and underwriting processes, strong structural protections in our transaction agreements with customers and continual, active
asset management and portfolio monitoring. Nevertheless, unanticipated credit losses could occur and during periods of
economic downturn in the global economy, our exposure to credit risks from obligors increases, and our efforts to monitor and
mitigate the associated risks may not be effective in reducing our credit risks.
We utilize a risk rating system to evaluate projects that we target. We first evaluate the credit rating of the obligors
involved in the project using an average of the external credit ratings for an obligor, if available, or an estimated internal rating
based on a third-party credit scoring system. We then evaluate the probability of default and estimated recovery rate based on
the obligors’ credit ratings and the terms of the contract. We also review the performance of each investment, including
through, as appropriate, a review of project performance, monthly payment activity and active compliance monitoring, regular
communications with project management and, as applicable, its obligors, sponsors and owners, monitoring the financial
performance of the collateral, periodic property visits and monitoring cash management and reserve accounts. The results of
our reviews are used to update the project’s risk rating as necessary. Additional detail of the credit risks surrounding our
Portfolio can be found in Note 6 of our financial statements included in this Form 10-K.
Interest Rate and Borrowing Risks
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors beyond our control.
We are subject to interest rate risk in connection with new asset originations and our borrowings, including our credit
facilities, and in the future, any new floating rate assets, credit facilities or other borrowings. Because short-term borrowings
- 68 -
are generally short-term commitments of capital, lenders may respond to market conditions, making it more difficult for us to
secure continued financing. If we are not able to renew our then existing borrowings or arrange for new financing on terms
acceptable to us, or if we default on our covenants or are otherwise unable to access funds under any of these borrowings, we
may have to curtail our origination of new assets and/or dispose of assets. We face particular risk in this regard given that we
expect many of our borrowings will have a shorter duration than the assets they finance. Increasing interest rates may reduce
the demand for our investments while declining interest rates may increase the demand. Both our current and future credit
facilities and other borrowings may be of limited duration and are periodically refinanced at then current market rates. We
attempt to reduce interest rate risks and to minimize exposure to interest rate fluctuations through the use of fixed rate financing
structures, when appropriate, whereby we seek to (1) match the maturities of our debt obligations with the maturities of our
assets, (2) borrow at fixed rates for a period of time, like in our asset backed securitizations, or (3) match the interest rates on
our assets with like-kind debt (i.e., we may finance floating rate assets with floating rate debt and fixed-rate assets with fixed-
rate debt), directly or through the use of interest rate swap agreements, interest rate cap agreements or other financial
instruments, or through a combination of these strategies. We expect these instruments will allow us to minimize, but not
eliminate, the risk that we have to refinance our liabilities before the maturities of our assets and to reduce the impact of
changing interest rates on our earnings. In addition to the use of traditional derivative instruments, we also seek to mitigate
interest rate risk by using securitizations, syndications and other techniques to construct a portfolio with a staggered maturity
profile. We monitor the impact of interest rate changes on the market for new originations and often have the flexibility to
negotiate the term of our investments to offset interest rate increases.
Typically, our long-term debt is at fixed rates or we have used interest rate hedges that convert the majority of the floating
rate debt to fixed rate. If interest rates rise, and our fixed rate debt balance remains constant, we expect the fair value of our
fixed rate debt to decrease and the value of our hedges on floating rate debt to increase. See Note 3 to our financial statements
in this Form 10-K for the estimated fair value of our fixed rate long-term debt, which is based on having the same debt service
requirements that could have been borrowed at the date presented, at prevailing current market interest rates. We carry our
interest rate hedges at fair value in our balance sheet as described in Note 8 to our financial statements in this Form 10-K.
Our credit facilities contain variable rate loans with approximately $259 million outstanding as of December 31, 2018
and we have approximately $58 million of variable rate exposure under our non-recourse debt. Significant increases in interest
rates would result in higher interest expense while decreases in interest rates would result in lower interest expense. As
described above, we may use various financing techniques including interest rate swap agreements, interest rate cap agreements
or other financial instruments, or a combination of these strategies to mitigate the variable interest nature of these facilities. A
50 basis point increase in LIBOR would increase the quarterly interest expense related to the $317 million in variable rate
borrowings by $0.4 million. Such hypothetical impact of interest rates on our variable rate borrowings does not consider the
effect of any change in overall economic activity that could occur in a rising interest rate environment. Further, in the event of
such a change in interest rates, we may take actions to further mitigate our exposure to such a change. However, due to the
uncertainty of the specific actions that would be taken and their possible effects, the analysis assumes no changes in our
financial structure.
We record certain of our assets at fair value in our financial statements and any changes in the discount rate would impact
the value of these assets. See Note 3 of the audited financial statements in this Form 10-K.
Liquidity and Concentration Risk
The assets that comprise our asset portfolio are not and will not be publicly traded. A portion of these assets may be
subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. The illiquidity of
our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in
economic and other conditions. Many of the projects in which we invest have one obligor and thus we are subject to
concentration risk for these investments and could incur significant losses if any of these projects perform poorly or if we are
required to write down the value of any of these projects. Many of our assets, or the collateral supporting those assets, are
concentrated in certain geographic areas, which may make those assets or the related collateral more susceptible to natural
disasters or other events. See also “Credit Risks” above.
Commodity Price Risk
When we make equity or debt investments for a renewable energy project that acts as a substitute for an underlying
commodity, we may be exposed to volatility in prices for that commodity. The performance of renewable energy projects that
produce electricity can be impacted by volatility in the market prices of various forms of energy, including electricity, coal and
natural gas. This is especially true for utility scale projects that sell power on a wholesale basis such as many of our wind
- 69 -
projects as opposed to distributed renewable projects or energy efficiency projects which compete against the retail or delivered
costs of electricity which includes the cost of transmitting and distributing the electricity to the end user.
Although we generally focus on renewable energy projects that have the majority of their operating cash flow supported
by long term PPAs, to the extent that the projects have shorter term contracts (which may have the potential of producing higher
current returns) or sell their power in the open market on a merchant basis, the cash flows of such projects, and thus the
repayment of, or the returns available for, our assets, are subject to risk if energy prices change. We also attempt to mitigate our
exposure through structural protections. These structural protections, which are typically in the form of a preferred return
mechanism, are designed to allow recovery of our capital and an acceptable return over time. When structuring and
underwriting these transactions, we evaluate these transactions using a variety of scenarios, including natural gas prices
remaining low for an extended period of time. Despite these protections, as low natural gas prices continue or PPAs expire, the
cash flows from certain of our projects are exposed to these market conditions and we work with the projects sponsors to
minimize any impact as part of our on-going active asset management and portfolio monitoring. In the case of utility scale solar
projects, we focus on owning the land under the project where our rent is paid out of project operational costs before the debt or
equity in the project receives any payments.
We believe the current low prices in natural gas will increase demand for some types of our projects, such as combined
heat and power, but may reduce the demand for other projects such as renewable energy that may be a substitute for natural gas.
We seek to structure our energy efficiency investments so that we typically avoid exposure to commodity price risk. However,
volatility in energy prices may cause building owners and other parties to be reluctant to commit to projects for which
repayment is based upon a fixed monetary value for energy savings that would not decline if the price of energy declines.
Risk Management
Our ongoing active asset management and portfolio monitoring processes provide investment oversight and valuable
insight into our origination, underwriting and structuring processes. These processes create value through active monitoring of
the state of our markets, enforcement of existing contracts and receivables management. Subject to maintaining our
qualification as a REIT, and as described above, we engage in a variety of interest rate management techniques that seek to
mitigate the economic effect of interest rate changes on the values of, and returns on, some of our assets. While there has only
been one credit loss, amounting to approximately $11 million (net of recoveries) on the over $5 billion of transactions we
originated since 2012, which represents an aggregate loss of less than approximately 0.2% on cumulative transactions
originated over this time period, there can be no assurance that we will continue to be as successful, particularly as we invest in
more credit sensitive assets or more equity positions and engage in increasing numbers of transactions with obligors other than
U.S. federal government agencies. We seek to manage credit risk using thorough due diligence and underwriting processes,
strong structural protections in our loan agreements with customers and continual, active asset management and portfolio
monitoring. Additionally, we have established a Finance and Risk Committee of our board of directors which discusses and
reviews policies and guidelines with respect to our risk assessment and risk management for various risks, including, but not
limited to, our interest rate, counter party, credit, capital availability, and refinancing risks.
- 70 -
Item 8.
Financial Statements and Supplementary Data
Hannon Armstrong Sustainable Infrastructure Capital, Inc., Consolidated Financial Statements, For the Years
Ended December 31, 2018, 2017 and 2016
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
72
73
74
75
76
77
78
79
- 71 -
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Hannon Armstrong Sustainable Infrastructure Capital, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hannon Armstrong Sustainable Infrastructure Capital, Inc.
(the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company at December 31, 2018, and 2017, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated February 22, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1983.
Tysons, Virginia
February 22, 2019
- 72 -
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Hannon Armstrong Sustainable Infrastructure Capital, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Hannon Armstrong Sustainable Infrastructure Capital, Inc.’s internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hannon
Armstrong Sustainable Infrastructure Capital, Inc. (the Company) maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated
statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period
ended December 31, 2018, and the related notes and our report dated February 22, 2019 expressed an unqualified opinion
thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tysons, Virginia
February 22, 2019
- 73 -
HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Assets
Equity method investments
Government receivables
Commercial receivables
Receivables held-for-sale
Real estate
Investments
Cash and cash equivalents
Other assets
Total Assets
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable, accrued expenses and other
Deferred funding obligations
Credit facilities
Non-recourse debt (secured by assets of $1,105 million and $1,545 million,
respectively)
Convertible notes
Total Liabilities
Stockholders’ Equity:
Preferred stock, par value $0.01 per share, 50,000,000 shares authorized, no shares
issued and outstanding
Common stock, par value $0.01 per share, 450,000,000 shares authorized, 60,510,086
and 51,665,449 shares issued and outstanding, respectively
Additional paid in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
Non-controlling interest
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
December 31,
2018
December 31,
2017
$
471,044
$
497,464
447,196
—
365,370
169,793
21,418
522,615
519,485
473,452
19,081
340,824
151,209
57,274
$
$
182,628
2,154,913
$
166,232
2,250,172
36,509
$
72,100
258,592
25,645
153,308
69,922
834,738
148,451
1,350,390
1,210,861
147,655
1,607,391
—
605
965,384
(163,205)
(1,684)
3,423
—
517
770,983
(131,251)
(1,065)
3,597
804,523
2,154,913
$
642,781
2,250,172
$
See accompanying notes.
HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31,
2018
2017
2016
Revenue
Interest income, receivables
Interest income, investments
Rental income
Gain on sale of receivables and investments
Fee income
Total revenue
Expenses
Interest expense
Compensation and benefits
General and administrative
Total expenses
Income before equity method investments
Income (loss) from equity method investments
Income before income taxes
Income tax (expense) benefit
Net income (loss)
$
67,711
$
56,734
$
6,636
24,606
32,928
5,927
137,808
76,874
25,651
13,503
116,028
21,780
22,162
43,942
(2,144)
41,798
221
41,577
0.75
0.75
$
$
$
5,079
19,831
20,956
2,973
105,573
65,472
19,708
10,762
95,942
9,631
22,289
31,920
(885)
31,035
179
30,856
0.57
0.57
$
$
$
48,202
1,822
11,933
17,425
1,816
81,198
45,241
18,877
8,293
72,411
8,787
6,110
14,897
(141)
14,756
104
14,652
0.32
0.32
Net income (loss) attributable to non-controlling interest holders
Net income (loss) attributable to controlling stockholders
Basic earnings per common share
Diluted earnings per common share
$
$
$
Weighted average common shares outstanding—basic
Weighted average common shares outstanding—diluted
52,780,449
52,780,449
50,361,672
50,361,672
40,290,717
40,290,717
See accompanying notes.
- 75 -
HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
Net income (loss)
Years Ended December 31,
2018
2017
2016
$
41,798
$
31,035
$
14,756
Unrealized gain (loss) on available-for-sale securities, net of tax
(provision) benefit of $0.1 million, $0.1 million and $0.0 million in
2018, 2017, and 2016 respectively
Unrealized gain (loss) on interest rate swaps, net of tax (provision)
benefit of $0.0 million in 2018, 2017, and 2016
Comprehensive income (loss)
Less: Comprehensive income (loss) attributable to non-controlling interest
holders
Comprehensive income (loss) attributable to controlling stockholders
$
(1,177)
1,275
(828)
555
41,176
(1,233)
31,077
218
40,958
$
178
30,899
$
1,348
15,276
107
15,169
See accompanying notes.
- 76 -
HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(AMOUNTS IN THOUSANDS)
Common Stock
Shares
37,011
Amount
370
$
Additional
Paid-in
Capital
$ 482,431
Accumulated
Other
Comprehensive
Income (Loss)
Non-
controlling
Interest
(1,905) $
3,911
Accumulated
Deficit
(52,701) $
14,652
$
9,096
91
176,148
11,644
(750)
386
4
(6,479)
46,493
$
465
$ 663,744
$
(53,414)
(92,213) $
30,856
(822)
1,339
(1,388) $
1,269
(1,226)
Balance at December 31, 2015
Net income
Unrealized gain (loss) on
available-for-sale
securities
Unrealized gain (loss) on
interest rate swaps
Issued shares of common
stock
Equity-based compensation
Issuance (repurchase) of
vested equity-based
compensation shares
Dividends and distributions
Balance at December 31, 2016
Net income
Unrealized gain (loss) on
available-for-sale
securities
Unrealized gain (loss) on
interest rate swaps
Impact of adoption of ASU
2017-12
Issued shares of common
stock
Equity-based compensation
Issuance (repurchase) of
vested equity-based
compensation shares
(280)
280
(69,614)
$ (131,251) $
41,577
(1,065) $
(1,171)
552
5,023
50
97,886
11,065
149
2
(1,712)
Dividends and distributions
Balance at December 31, 2017
51,665
$
517
$ 770,983
Net income
Unrealized gain (loss) on
available-for-sale
securities
Unrealized gain (loss) on
interest rate swaps
Issued shares of common
stock
Equity-based compensation
Issuance (repurchase) of
vested equity-based
compensation shares
Redemption of OP units
8,611
86
186,808
10,715
226
8
2
(3,055)
(67)
Dividends and distributions
Balance at December 31, 2018
60,510
$
605
$ 965,384
(73,531)
$ (163,205) $
(1,684) $
See accompanying notes.
- 77 -
Total
$ 432,106
104
14,756
(6)
9
64
(828)
1,348
176,239
10,958
(6,475)
(53,765)
$ 574,339
31,035
(351)
3,731
179
6
(7)
64
1,275
(1,233)
—
97,936
11,129
(1,710)
(69,990)
$ 642,781
41,798
(376)
3,597
221
(6)
3
57
(1,177)
555
186,894
10,772
(3,053)
(146)
(73,901)
$ 804,523
(79)
(370)
3,423
HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Equity-based compensation
Equity method investments
Non-cash gain on securitization
Gain on sale of receivables and investments
Changes in receivables held-for-sale
Loss on debt extinguishment
Changes in accounts payable and accrued expenses
Other
Net cash provided by operating activities
Cash flows from investing activities
Equity method investments
Equity method distributions received
Proceeds from sales of equity method investments
Purchases of receivables
Principal collections from receivables
Proceeds from sales of receivables
Purchases of real estate
Purchases of investments
Principal collections from investments
Proceeds from sales of investments
Funding of escrow accounts
Withdrawal from escrow accounts
Other
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from credit facilities
Principal payments on credit facilities
Proceeds from issuance of non-recourse debt
Principal payments on non-recourse debt
Proceeds from issuance of convertible notes
Payments on deferred funding obligations
Net proceeds of common stock issuances
Payments of dividends and distributions
Other
Net cash provided by (used in) financing activities
Increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Interest paid
Non-cash changes in deferred funding obligations (financing activity)
Non-cash changes in non-recourse debt (financing activity)
Non-cash changes in receivables and investments (investing activity)
Non-cash changes in residual assets (investing activity)
See accompanying notes.
- 78 -
Years Ended December 31,
2018
2017
2016
$
41,798
$
31,035
$
14,756
15,253
10,066
4,312
(25,728)
—
12,685
9,245
6,882
(15,720)
58,793
(76,349)
88,160
35,849
(292,834)
345,956
—
(27,549)
(25,308)
5,252
—
(34,980)
33,108
(505)
50,800
171,783
(46,604)
69,255
(390,537)
—
(73,946)
187,265
(70,989)
(14,644)
(168,417)
(58,824)
118,177
59,353
72,078
(6,973)
—
(248)
(25,827)
$
$
13,171
11,304
(7,746)
(28,915)
2,137
(3,338)
—
(327)
(5,604)
11,717
(232,811)
75,114
6,044
(111,161)
98,482
78,857
(170,982)
(22,115)
3,733
—
(37,613)
15,986
(1,414)
(297,880)
302,612
(515,777)
609,332
(79,459)
150,000
(124,785)
96,899
(68,234)
(25,392)
345,196
59,033
59,144
$ 118,177
48,865
$
107,283
(5,959)
(85,933)
(28,777)
$
$
7,658
10,054
781
(10,912)
(2,015)
46,204
—
3,312
(12,983)
56,855
(60,774)
48,870
—
(300,511)
116,432
39,978
(17,693)
(31,335)
1,768
13,914
—
—
(1,280)
(190,631)
307,900
(271,968)
97,660
(69,097)
—
(65,741)
177,294
(49,481)
(12,863)
113,704
(20,072)
79,216
59,144
37,858
127,630
—
(142,551)
(10,912)
HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
1. The Company
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (the “Company”) focuses on solutions that reduce carbon
emissions and increase resilience to climate change by providing capital and specialized expertise to the leading companies in
the energy efficiency, renewable energy and other sustainable infrastructure markets. Our goal is to generate attractive returns
for our shareholders by investing in a diversified portfolio of assets and projects that generate long-term, recurring and
predictable cash flows or cost savings from proven commercial technologies.
The Company and its subsidiaries are hereafter referred to as “we,” “us,” or “our.” Our investments take various forms,
including equity, joint ventures, lending or other financing transactions, as well as land ownership and typically benefit from
contractually committed high credit quality obligors. We also generate on-going fees through gain-on-sale securitization
transactions, advisory services and asset management. We refer to the income producing assets that we hold on our balance
sheet as our “Portfolio.” Our Portfolio may include:
• Equity investments in either preferred or common structures in unconsolidated entities;
• Government and commercial receivables, such as loans for renewable energy and energy efficiency projects;
• Real estate, such as land or other assets leased for use by sustainable infrastructure projects typically under long-
term leases; and
•
Investments in debt securities of renewable energy or energy efficiency projects.
We finance our business through cash on hand, borrowings under credit facilities and debt transactions, various asset-
backed securitization transactions and equity issuances. We also generate fee income through securitizations and syndications,
by providing broker/dealer services and by servicing assets owned by third parties. Some of our subsidiaries are special purpose
entities that are formed for specific operations associated with investing in sustainable infrastructure receivables for specific
long-term contracts.
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “HASI.” We have qualified as
a real estate investment trust (“REIT”) and also intend to operate our business in a manner that will maintain our exemption
from registration as an investment company under the 1940 Act, as amended. We operate our business through, and serve as the
sole general partner of, our operating partnership subsidiary, Hannon Armstrong Sustainable Infrastructure, L.P., (the
“Operating Partnership”), which was formed to acquire and directly or indirectly own our assets.
2. Summary of Significant Accounting Policies
Basis of Presentation
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and
such differences could be material. Certain amounts in the prior years have been reclassified to conform to the current year
presentation. The consolidated financial statements include our accounts and controlled subsidiaries, including the Operating
Partnership. All significant intercompany transactions and balances have been eliminated in consolidation.
Following the guidance for non-controlling interests in Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 810, Consolidation ("ASC 810"), references in this report to our earnings per share and our net
income and stockholders’ equity attributable to common stockholders do not include amounts attributable to non-controlling
interests.
- 79 -
Consolidation and Equity Method Investments
We account for our investments in entities that are considered voting interest entities or variable interest entities (“VIEs”)
under ASC 810 and assess whether we should consolidate these entities on an ongoing basis. We have established various
special purpose entities or securitization trusts for the purpose of securitizing certain receivables or other debt investments
which are not consolidated in our financial statements as described in Securitization of Receivables below.
Substantially all of the activities of the special purpose entities that are formed for the purpose of holding our government
and commercial receivables and investments on our balance sheet are closely associated with our activities. Based on our
assessment, we determined that we have power over and receive the benefits of these special purpose entities; hence, we are the
primary beneficiary and should consolidate these entities under the provisions of ASC 810.
We have made equity investments in various renewable energy projects. We share in the cash flows, income, and tax
attributes according to a negotiated schedule (which typically does not correspond with our ownership percentages) and we
typically receive a stated preferred return consisting of a priority distribution of all or a portion of the project’s cash flows, and
in some cases, tax attributes. Our renewable energy projects are typically owned in holding companies (using limited liability
companies (“LLCs”), taxed as partnerships) where we partner with either the operator of the project or other institutional
investors. Once our preferred return, if applicable, is achieved, the partnership “flips” and the operator of the project receives a
larger portion of the cash flows through its interest in the holding company and we, along with any other institutional investors,
will have an on-going residual interest.
These equity investments in renewable energy projects are accounted for under the equity method of accounting. Certain
of our equity method investments were determined to be VIEs in which we are not the primary beneficiary, as we do not direct
the significant activities of those entities in which we invest. Our maximum exposure to loss associated with the continued
operation of the underlying projects in our equity method investments is limited to our recorded value of our investments.
Under the equity method of accounting, the carrying value of these equity method investments is determined based on amounts
we invested, adjusted for the equity in earnings or losses of the investee allocated based on the LLC agreement, less
distributions received. For the LLC agreements which contain preferences with regard to cash flows from operations, capital
events and liquidation, we reflect our share of profits and losses by determining the difference between our claim on the
investee’s book value at the beginning and the end of the period, which is adjusted for distributions received and contributions
made. This claim is calculated as the amount we would receive (or be obligated to pay) if the investee were to liquidate all of
its assets at recorded amounts determined in accordance with GAAP and distribute the resulting cash to creditors and investors
in accordance with their respective priorities. This method is commonly referred to as the hypothetical liquidation at book value
method or (“HLBV”). Any difference between the amount of our investment and the amount of underlying equity in net assets
is generally amortized over the life of the assets and liabilities to which the difference relates. Cash distributions received from
these equity method investments are classified as operating activities to the extent of cumulative HLBV earnings in our
consolidated statements of cash flows. We have elected to recognize earnings from these investments one quarter in arrears to
allow for the receipt of financial information.
We have also made an investment in a joint venture which holds land under solar projects that we have determined to be a
voting interest entity. This investment entitles us to receive an equal percentage of both cash distributions and profit and loss
under the terms of the LLC operating agreement. The investment is accounted for under the equity method of accounting with
our portion of income being recognized in income (loss) from equity method investments in the period in which the income is
earned. Cash distributions received from this equity method investment are classified as operating activities to the extent of
cumulative earnings in our consolidated statements of cash flows. Our initial investment and additional cash distributions
beyond that which is classified as operating activities are classified as investing activities in our consolidated statements of cash
flows.
We evaluate on a quarterly basis whether our investments accounted for using the equity method have an other than
temporary impairment (“OTTI”). An OTTI occurs when the estimated fair value of an investment is below the carrying value
and the difference is determined to not be recoverable. This evaluation requires significant judgment regarding, but not limited
to, the severity and duration of the impairment; the ability and intent to hold the securities until recovery; financial condition,
liquidity, and near-term prospects of the issuer; specific events; and other factors.
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Government and Commercial Receivables
Government and commercial receivables (“receivables”), include project loans and receivables. These receivables are
separately presented in our balance sheet to illustrate the differing nature of the credit risk related to these assets. Unless
otherwise noted, we generally have the ability and intent to hold our receivables for the foreseeable future and thus they are
classified as held for investment. Our ability and intent to hold certain receivables may change from time to time depending on
a number of factors, including economic, liquidity and capital market conditions. At inception of the arrangement, the carrying
value of receivables held for investment represents the present value of the note, lease or other payments, net of any unearned
fee income, which is recognized as income over the term of the note or lease using the effective interest method. Receivables
that are held for investment are carried, unless deemed impaired, at amortized cost, net of any unamortized acquisition
premiums or discounts and include origination and acquisition costs, as applicable. Our initial investment and principal
repayments of these receivables are classified as investing activities and the interest collected is classified as operating
activities in our consolidated statements of cash flows. Receivables that we intend to sell in the short-term are classified as
held-for-sale and are carried at the lower of amortized cost or fair value on our balance sheet. The net purchases and proceeds
from receivables that we intend to sell at origination are classified as operating activities in our consolidated statements of cash
flows, otherwise the net purchases and proceeds are classified as investing activities. Interest collected is classified as an
operating activity in our consolidated statements of cash flows.
We evaluate our receivables for potential delinquency or impairment on at least a quarterly basis and more frequently
when economic or other conditions warrant such an evaluation. When a receivable becomes 90 days or more past due, and if
we otherwise do not expect the debtor to be able to service all of its debt or other obligations, we will generally consider the
receivable delinquent or impaired and place the receivable on non-accrual status and cease recognizing income from that
receivable until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a receivable’s status
significantly improves regarding the debtor’s ability to service the debt or other obligations, we will remove it from non-accrual
status.
A receivable is also considered impaired as of the date when, based on current information and events, it is determined
that it is probable that we will be unable to collect all amounts due in accordance with the original contracted terms. Many of
our receivables are secured by energy efficiency and renewable energy infrastructure projects. Accordingly, we regularly
evaluate the extent and impact of any credit deterioration associated with the performance and value of the underlying project,
as well as the financial and operating capability of the borrower, its sponsors or the obligor as well as any guarantors. We
consider a number of qualitative and quantitative factors in our assessment, including, as appropriate, a project’s operating
results, loan-to-value ratio, any cash reserves, the ability of expected cash from operations to cover the cash flow requirements
currently and into the future, key terms of the transaction, the ability of the borrower to refinance the transaction, other credit
support from the sponsor or guarantor and the project’s collateral value. In addition, we consider the overall economic
environment, the sustainable infrastructure sector, the effect of local, industry, and broader economic factors, the impact of any
variation in weather and the historical and anticipated trends in interest rates, defaults and loss severities for similar
transactions.
If a receivable is considered to be impaired, we will determine if an allowance should be recorded. We will record an
allowance if the present value of expected future cash flows discounted at the receivable’s contractual effective rate is less than
its carrying value. This estimate of cash flows may include the currently estimated fair market value of the collateral less
estimated selling costs if repayment is expected from the collateral. We charge off receivables against the allowance, if any,
when we determine the unpaid principal balance is uncollectible, net of recovered amounts.
Real Estate
Real estate consists of land or other real estate and its related lease intangibles, net of any amortization. Our real estate is
generally leased to tenants on a triple net lease basis, whereby the tenant is responsible for all operating expenses relating to the
property, generally including property taxes, insurance, maintenance, repairs and capital expenditures. Scheduled rental revenue
typically varies during the lease term and thus rental income is recognized on a straight-line basis, unless there is considerable
risk as to collectability, so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the
aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line
basis and is recorded in other assets. Expenses, if any, related to the ongoing operation of the leases where we are the lessor are
charged to operations as incurred. Our initial investment is classified as investing activities and income collected for rental
income is classified as operating activities in our consolidated statements of cash flows.
- 81 -
We typically record our real estate purchases as asset acquisitions that are recorded at cost, including acquisition and
closing costs. When we record our real estate purchases as asset acquisitions we allocate our cost to each tangible and
intangible asset acquired on a relative fair value basis.
The fair value of the tangible assets of an acquired leased property is determined by valuing the property as if it were
vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements, if any, based on the
determination of the fair values of these assets. The as-if-vacant fair value of a property is typically determined by management
based on appraisals by a qualified appraiser. In determining the fair value of the identified intangibles of an acquired property,
above-market and below-market in-place lease values are valued based on the present value (using an interest rate which
reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant
to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured
over a period equal to the remaining term of the lease, including renewal periods likely of being exercised by the lessee.
The capitalized above-market lease values are amortized as a reduction of rental income and the capitalized below-
market lease values are amortized as an increase to rental income, both of which are amortized over the term used to value the
intangible. We also record, as appropriate, an intangible asset for in-place leases. The value of the leases in place at the time of
the transaction is equal to the potential income lost if the leases were not in place. The amortization of this intangible occurs
over the initial term unless management believes that it is likely that the tenant would exercise the renewal option, in which
case the amortization would extend through the renewal period. If a lease were to be terminated, all unamortized amounts
relating to that lease would be written off.
Investments
Investments are debt securities that meet the criteria of ASC 320, Investments—Debt and Equity Securities. We have
designated our debt securities as available-for-sale and carry these securities at fair value on our balance sheet. Unrealized
gains and losses, to the extent not considered to have an OTTI, on available-for-sale debt securities are recorded as a
component of accumulated other comprehensive income (“AOCI”) in equity on our balance sheet. Our initial investment and
principal repayments of these investments are classified as investing activities and the interest collected is classified as
operating activities in our consolidated statements of cash flows.
We evaluate our investments for OTTI on at least a quarterly basis, and more frequently when economic or market
conditions warrant such an evaluation. Our OTTI assessment is a subjective process requiring the use of judgments and
assumptions. Accordingly, we regularly evaluate the extent and impact of any credit deterioration associated with the financial
and operating performance and value of the underlying project. We consider a number of qualitative and quantitative factors in
our assessment. We first consider the current fair value of the security and the duration of any unrealized loss. Other factors
considered include changes in the credit rating, performance of the underlying project, key terms of the transaction, the value of
any collateral and any support provided by the sponsor or guarantor.
To the extent that we have identified an OTTI for a security and intend to hold the investment to maturity and we do not
expect that we will be required to sell the security prior to recovery of the amortized cost basis, we recognize only the credit
component of the OTTI in earnings. We determine the credit component using the difference between the security’s amortized
cost basis and the present value of its expected future cash flows, discounted using the effective interest method or its estimated
collateral value. Any remaining unrealized loss due to factors other than credit is recorded in AOCI.
To the extent we hold investments with an OTTI and if we have made the decision to sell the security or it is more likely
than not that we will be required to sell the security prior to recovery of its amortized cost basis, we recognize the entire portion
of the impairment in earnings.
Premiums or discounts on investment securities are amortized or accreted into interest income using the effective interest
method.
Securitization of Receivables
We have established various special purpose entities or securitization trusts for the purpose of securitizing certain
receivables or investments. We determined that the trusts used in securitizations are VIEs, as defined in ASC 810. We typically
serve as primary or master servicer of these trusts; however, as the servicer, we do not have the power to make significant
decisions impacting the performance of the trusts. Based on an analysis of the structure of the trusts we have concluded that we
- 82 -
are not the primary beneficiary of the trusts as we do not have power over the trusts’ significant activities. Therefore, we do not
consolidate these trusts in our consolidated financial statements.
We account for transfers of receivables or investments to these securitization trusts as sales pursuant to ASC 860,
Transfers and Servicing, when we have concluded the transferred receivables have been isolated from the transferor (i.e., put
presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership) and we have
surrendered control over the transferred receivables. We have received true-sale-at-law opinions for all of our securitization
trust structures and non-consolidation legal opinions for all but one legacy securitization trust structure that support our
conclusion regarding the transferred receivables. When we sell receivables in securitizations, we generally retain interests in the
form of servicing rights and residual assets, which we refer to as securitization assets.
Gain or loss on the sale of receivables is calculated based on the excess of the proceeds received from the securitization
(less any transaction costs) plus any retained interests obtained over the cost basis of the receivables sold. For retained interests,
we generally estimate fair value based on the present value of future expected cash flows using our best estimates of the key
assumptions of anticipated losses, prepayment rates, and current market discount rates commensurate with the risks involved.
Cash flows related to our securitizations at origination are classified as operating activities in our consolidated statements of
cash flows.
We initially account for all separately recognized servicing assets and servicing liabilities at fair value and subsequently
measure such servicing assets and liabilities using the amortization method. Servicing assets and liabilities are amortized in
proportion to, and over the period of, estimated net servicing income with servicing income recognized as earned. We assess
servicing assets for impairment at each reporting date. If the amortized cost of servicing assets is greater than the estimated fair
value, we will recognize an impairment in net income.
Our other retained interest in securitized assets, the residual assets, are accounted for as available-for-sale securities and
carried at fair value on the consolidated balance sheets in other assets. We generally do not sell our residual assets. Our residual
assets are evaluated for impairment on a quarterly basis. Interest income related to the residual assets is recognized using the
effective interest rate method. If there is a change in the expected cash flows related to the residual assets, we calculate a new
yield based on the current amortized cost of the residual assets and the revised expected cash flows. This yield is used
prospectively to recognize interest income.
Cash and Cash Equivalents
Cash and cash equivalents include short-term government securities, certificates of deposit and money market funds, all
of which had an original maturity of three months or less at the date of purchase. These securities are carried at their purchase
price, which approximates fair value.
Restricted Cash
Restricted cash includes cash and cash equivalents set aside with certain lenders primarily to support deferred funding
and other obligations outstanding as of the balance sheet dates. Restricted cash is reported as part of other assets in the
consolidated balance sheets. Refer to Note 3 for disclosure of the balances of restricted cash included in other assets.
Convertible Notes
We have issued convertible senior notes that are accounted for in accordance with ASC 470-20, Debt with Conversion
and Other Options, and ASC 815, Derivatives and Hedging ("ASC 815"). Under ASC 815, issuers of certain convertible debt
instruments are generally required to separately account for the conversion option of the convertible debt instrument as either a
derivative or equity, unless it meets the scope exemption for contracts indexed to, and settled in, an issuer’s own equity. Since
this conversion option is both indexed to our equity and can only be settled in our common stock, we have met the scope
exemption, and therefore, we are not separately accounting for the embedded conversion option. The initial issuance and any
principal repayments are classified as financing activities and interest payments are classified as operating activities in our
consolidated statements of cash flows.
- 83 -
Derivative Financial Instruments
We utilize derivative financial instruments, primarily interest rate swaps, to manage, or hedge, our interest rate risk
exposures associated with new debt issuances, to manage our exposure to fluctuations in interest rates on variable rate debt, and
to optimize the mix of our fixed and floating-rate debt. In addition, we use forward-starting interest rate swap contracts to
manage a portion of our interest rate exposure for anticipated refinancing of our long-term debts. Our objective is to reduce the
impact of changes in interest rates on our results of operations and cash flows. The fair values of our interest rate swaps
designated and qualifying as effective cash flow hedges are reflected in our consolidated balance sheets as a component of
other assets (if in an unrealized asset position) or accounts payable, accrued expenses and other (if in an unrealized liability
position) and in net unrealized gains and losses in AOCI. The cash settlements of our interest rate swaps are classified as
operating activities in our consolidated statements of cash flows.
The interest rate swaps we use are designated as cash flow hedges and are considered highly effective in reducing our
exposure to the interest rate risk that they are designated to hedge. This effectiveness is required in order to qualify for hedge
accounting. Instruments that meet the required hedging criteria are formally designated as hedges at the inception of the
derivative contract. Derivatives are recorded at fair value. If a derivative is designated as a cash flow hedge and meets the
highly effective threshold, the change in the fair value of the derivative is recorded in AOCI, net of associated deferred income
tax effects and is recognized in earnings at the same time as the hedged item, including as a result of the accrual of interest, or
if there is a prepayment of the related debt. For any derivative instruments not designated as hedging instruments, changes in
fair value would be recognized in earnings in the period that the change occurs. We assess, both at the inception of the hedge
and on an ongoing basis, whether the derivatives designated as cash flow hedges are highly effective in offsetting the changes
in cash flows of the hedged items. We do not hold derivatives for trading purposes.
Interest rate swap contracts contain a credit risk that counterparties may be unable to fulfill the terms of the agreement.
We attempt to minimize that risk by evaluating the creditworthiness of our counterparties, who are limited to major banks and
financial institutions, and do not anticipate nonperformance by the counterparties.
Income Taxes
We elected and qualified to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year
ended December 31, 2013. We also have taxable REIT subsidiaries ("TRSs") which are taxed separately, and which will
generally be subject to U.S. federal, state, and local income taxes as well as taxes of foreign jurisdictions, if any. To qualify as a
REIT, we must meet on an ongoing basis a number of organizational and operational requirements, including a requirement that
we currently distribute at least 90% of our REIT's net taxable income before dividends paid, excluding capital gains, to our
stockholders. As a REIT, we are not subject to U.S. federal corporate income tax on that portion of net income that is currently
distributed to our owners.
We account for income taxes under ASC 740, Income Taxes ("ASC 740") for our TRSs using the asset and liability
method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the
differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is
recognized in earnings in the period when the new rate is enacted. We evaluate any deferred tax assets for valuation allowances
based on an assessment of available evidence including sources of taxable income, prior years taxable income, any existing
taxable temporary differences and our future investment and business plans that may give rise to taxable income. We treat any
tax credits we receive from our investments in renewable energy projects as reductions of federal income taxes of the year in
which the credit arises.
We apply ASC 740 with respect to how uncertain tax positions should be recognized, measured, presented, and disclosed
in the financial statements. This guidance requires the accounting and disclosure of tax positions taken or expected to be taken
in the course of preparing our tax returns to determine whether the tax positions are “more likely than not” to be sustained by
the applicable tax authority. We are required to analyze all open tax years, as defined by the statute of limitations, for all major
jurisdictions, which includes U.S. federal and certain states.
- 84 -
Equity-Based Compensation
In 2013, we adopted our equity incentive plan (the “2013 Plan”), which provides for grants of stock options, stock
appreciation rights, restricted stock units, shares of restricted common stock, phantom shares, dividend equivalent rights, long-
term incentive-plan units (“LTIP units”) and other restricted limited partnership units issued by our Operating Partnership and
other equity-based awards. From time to time, we may make equity or equity based awards as compensation to members of our
senior management team, our independent directors, employees, advisors, consultants and other personnel under our 2013 Plan.
Certain awards earned under the plan are based on achieving various performance targets, which are generally earned between
0% and 200% of the initial target, depending on the extent to which the performance target is met.
We record compensation expense for grants made under the 2013 Plan in accordance with ASC 718, Compensation—
Stock Compensation. We record compensation expense for unvested grants that vest solely based on service conditions on a
straight-line basis over the vesting period of the entire award based upon the fair market value of the grant on the date of grant.
Fair market value for restricted common stock is based on our share price on the date of grant. For awards where the vesting is
contingent upon achievement of certain performance targets, compensation expense is measured based on the fair market value
on the grant date and is recorded over the requisite service period (which includes the performance period). Actual performance
results at the end of the performance period determines the number of shares that will ultimately be awarded. We have also
issued restricted stock units where the vesting is contingent upon service being provided for a defined period and certain market
conditions being met. The fair value of these awards, as measured at the grant date, is recognized over the requisite service
period, even if the market conditions are not met. The grant date fair value of these awards was developed by an independent
appraiser using a Monte Carlo simulation.
Earnings Per Share
We compute earnings per share of common stock in accordance with ASC 260, Earnings Per Share. Basic earnings per
share is calculated by dividing net income attributable to controlling stockholders (after consideration of the earnings allocated
to unvested grants under the 2013 Plan, if applicable) by the weighted-average number of shares of common stock outstanding
during the period excluding the weighted average number of unvested grants under the 2013 Plan, if applicable (“participating
securities” as defined in Note 12). Diluted earnings per share is calculated by dividing net income attributable to controlling
stockholders (after consideration of the earnings allocated to unvested grants under the 2013 Plan, if applicable) by the
weighted-average number of shares of common stock outstanding during the period plus other potential common stock
instruments if they are dilutive. Other potentially dilutive common stock instruments include our unvested restricted stock,
restricted stock units and convertible notes. The restricted stock and restricted stock units are included if they are dilutive using
the treasury stock method. The treasury stock method assumes that theoretical proceeds received for future service provided is
used to purchase treasury stock at our stock’s average market price, which is deducted from the amount of stock included in the
calculation. When unvested grants are dilutive, the earnings allocated to these dilutive unvested grants are not deducted from
the net income attributable to controlling stockholders when calculating diluted earnings per share. The convertible notes are
included if they are dilutive using the if-converted method. The if-converted method removes interest expense related to the
convertible notes from the net income attributable to controlling stockholders and includes the weighted average shares over
the period issuable upon conversion of the note. No adjustment is made for shares that are anti-dilutive during a period.
Segment Reporting
We make equity and debt investments in the energy efficiency, renewable energy, and other sustainable infrastructure
markets. We manage our business as a single portfolio and report all of our activities as one business segment.
Recently Issued Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an
entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to
customers. The updated standard replaces most existing revenue recognition guidance in GAAP and permits the use of either
the retrospective or modified retrospective transition method. We have adopted ASU 2014-09 effective January 1, 2018, and
have elected the modified retrospective transition method. The adoption of ASU 2014-09 did not have a material impact on our
consolidated financial statements and related disclosures as the majority of our sources of revenue, e.g., investments in
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receivables, debt and equity securities, land leasing, and the securitization of receivables are not within the scope of the new
standard.
Leases
In February 2016, the FASB issued guidance codified in ASC Topic 842 ("Topic 842"), Leases, which amends the guidance
in former ASC Topic 840, Leases. The main principle of Topic 842 requires lessees to recognize the assets and liabilities that arise
from nearly all leases on the balance sheet. Lessor accounting remains mainly consistent with current guidance, with the majority
of changes allowing for better alignment with the new lessee model and Topic 606. The standard is effective for interim and annual
reporting periods beginning after December 15, 2018, with early adoption permitted. Topic 842 provides companies with a choice
of transitioning to the new standard using one of two modified retrospective transition approaches; one that requires companies
to adjust comparative periods upon adoption and another where the impact of adoption is reflected in retained earnings and
comparative periods are not adjusted.
As a lessee, the classification of our leases is not expected to change, but we will be required to recognize a lease liability
and corresponding right-of-use asset on our consolidated balance sheet for all of our leases. We have elected the package of practical
expedients which allows us to not reassess (1) whether existing contracts contain leases, (2) the lease classification for existing
leases, and (3) whether existing initial direct costs meet the new definition.
The accounting for leases where we are the lessor are expected to be relatively unchanged, apart from the narrower definition
of initial direct costs that can be capitalized. The new lease standard defines initial direct costs as only the incremental costs of
signing a lease.
We have adopted Topic 842 effective January 1, 2019 and have elected to apply the new leases standard at the adoption
date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We
have completed our assessment of the impacts of the new lease standard, and have determined that adoption will not have a
material impact on our financial statements.
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses—Measurement of Credit Losses
on Financial Instruments ("Topic 326"). Topic 326 significantly changes how entities will measure credit losses for most
financial assets and certain other instruments that are not measured at fair value through net income. Topic 326 will replace the
“incurred loss” approach under existing guidance with an “expected loss” model for instruments measured at amortized cost,
and require entities to record allowances for expected losses from available-for-sale debt securities rather than reduce the
amortized cost, as currently required. It also simplifies the accounting model for purchased credit-impaired debt securities and
loans. Topic 326 is effective for fiscal years beginning after December 15, 2019 and is to be adopted through a cumulative-
effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are
currently evaluating the impact the adoption of Topic 326 will have on our consolidated financial statements and related
disclosures.
Other accounting standards updates issued before February 22, 2019 and effective after December 31, 2018, are not
expected to have a material effect on our consolidated financial statements and related disclosures.
3. Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction
between market participants on the measurement date. The fair value accounting guidance provides a three-level hierarchy for
classifying financial instruments. The levels of inputs used to determine the fair value of our financial assets and liabilities
carried on the balance sheet at fair value and for those which only disclosure of fair value is required are characterized in
accordance with the fair value hierarchy established by ASC 820, Fair Value Measurements. Where inputs for a financial asset
or liability fall in more than one level in the fair value hierarchy, the financial asset or liability is classified in its entirety based
on the lowest level input that is significant to the fair value measurement of that financial asset or liability. We use our
judgment and consider factors specific to the financial assets and liabilities in determining the significance of an input to the
fair value measurements. As of December 31, 2018 and December 31, 2017, only our residual assets related to our
securitization trusts, interest rate swaps and investments, if any, were carried at fair value on the consolidated balance sheets on
a recurring basis. The three levels of the fair value hierarchy are described below:
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• Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date.
• Level 2—Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
• Level 3—Unobservable inputs are used when little or no market data is available.
The tables below illustrate the estimated fair value of our financial instruments on our balance sheet. Unless otherwise
discussed below, fair value for our Level 2 and Level 3 measurements is measured using a discounted cash flow model,
contractual terms and inputs which consist of base interest rates and spreads over base rates which are based upon market
observation and recent comparable transactions. An increase in these inputs would result in a lower fair value and a decline
would result in a higher fair value. Our convertible notes are valued using a market based approach and observable prices. The
receivables held-for-sale, if any, are carried at the lower of cost or fair value.
Assets
Government receivables
Commercial receivables
Investments (1)
Securitization residual assets (2)
Liabilities
Credit facilities
Non-recourse debt (3)
Convertible notes (3)
As of December 31, 2018
Fair
Value
Carrying
Value
Level
(in millions)
$
$
$
$
487
443
170
71
259
835
139
497
447
170
71
259
852
152
Level 3
Level 3
Level 3
Level 3
Level 3
Level 3
Level 2
(1) The amortized cost of our investments as of December 31, 2018, was $173 million.
(2)
(3) Fair value and carrying value exclude unamortized debt issuance costs.
Included in other assets on the consolidated balance sheet.
Assets
Government receivables
Commercial receivables
Receivables held-for-sale
Investments (1)
Securitization residual assets (2)
Liabilities
Credit facilities (3)
Non-recourse debt (3)
Convertible notes (3)
As of December 31, 2017
Fair
Value
Carrying
Value
Level
(in millions)
$
$
$
519
464
20
151
45
70
$
1,239
156
519
473
19
151
45
70
1,238
152
Level 3
Level 3
Level 3
Level 3
Level 3
Level 3
Level 3
Level 2
(1) The amortized cost of our investments as of December 31, 2017, was $153 million.
(2)
(3) Fair value and carrying value exclude unamortized debt issuance costs.
Included in other assets on the consolidated balance sheet.
Investments
The following table reconciles the beginning and ending balances for our Level 3 investments that are carried at fair
value on a recurring basis:
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Balance, beginning of period
Purchases of investments
Payments on investments
Transfers to investments (1)
Unrealized gains (losses) on investments recorded in OCI
Balance, end of period
$
$
For the year ended
December 31,
2018
2017
$
(in millions)
151
25
(5)
—
(1)
170
$
58
78
(3)
17
1
151
(1)
In 2017, certain receivables on our balance sheet became securities and thus we classify them as investments available for sale.
The following table illustrates our investments in an unrealized loss position:
Estimated Fair Value
Unrealized Losses (1)
Securities with a loss
shorter than 12 months
Securities with a loss
longer than 12 months
Securities with a loss
shorter than 12 months
Securities with a loss
longer than 12 months
December 31, 2018
December 31, 2017
$
$
82
26
(in millions)
$
67
46
$
1
1
3
2
(1) Loss position is due to interest rates movements. We have the intent and ability to hold these investments until a recovery of fair value.
In determining the fair value of our investments, we used a range of interest rate spreads of approximately 1% to 4%
based upon comparable transactions as of December 31, 2018 and 2017.
Interest Rate Swap Agreements
The fair values of the derivative financial instruments are determined using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash flows of each derivative. We have determined that the significant
inputs, such as interest yield curves and discount rates, used to value our derivatives fall within Level 2 of the fair value
hierarchy and that the credit valuation adjustments associated with our counterparties and our own credit risk utilize Level 3
inputs, such as estimates of current credit spreads to evaluate the likelihood of our or our counterparties default. As of
December 31, 2018, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of
our derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of our
derivatives. As a result, we determined that our derivative valuations in their entirety are classified in Level 2 of the fair value
hierarchy. See Note 8 for further information on our interest rate swap agreements.
Non-recurring Fair Value Measurements
Our financial statements may include non-recurring fair value measurements related to acquisitions and non-monetary
transactions, if any. Assets acquired in a business combination are recorded at their fair value. We may use third party valuation
firms to assist us with developing our estimates of fair value.
Concentration of Credit Risk
Government and commercial receivables, investments and leases consist primarily of U.S. federal government-backed
receivables, investment grade state and local government receivables and receivables from various sustainable infrastructure
projects and do not, in our view, represent a significant concentration of credit risk. See Note 6 for an analysis by type of
obligor and the method of rating. Additionally, our investments are collateralized by projects concentrated in certain geographic
regions throughout the United States. We have structural credit protections to mitigate our risk exposure and, in most cases, the
projects are insured for estimated physical loss which helps to mitigate the possible risk from these concentrations. As
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described above, we do not believe we have a significant credit exposure to our interest rate swap providers. We had cash
deposits that are subject to credit risk as shown below:
Cash deposits
Restricted cash deposits (included in other assets)
Total cash deposits
Amount of cash deposits in excess of amounts federally insured
4. Non-Controlling Interest
December 31,
2018
2017
(in millions)
$
$
$
21
38
59
57
$
$
$
57
61
118
116
Units of limited partnership interests in the Operating Partnership (“OP units”) that are owned by limited partners other
than us are included in non-controlling interest on our consolidated balance sheets. The outstanding OP units held by outside
limited partners represent less than 1% of our outstanding OP units and are redeemable by the limited partners for cash, or at
our option, for a like number of shares of our common stock. We exchanged 7,406 OP units for shares of common stock during
the year ended December 31, 2018. No OP units were exchanged for either cash or shares of our common stock during the year
ended December 31, 2017. The non-controlling interest holders are generally allocated their pro rata share of income, other
comprehensive income and equity transactions.
5. Securitization of Receivables
The following summarizes certain transactions with our securitization trusts:
Gains on securitizations
Purchase of receivables securitized
Proceeds from securitizations
Residual and servicing assets included in other assets
Cash received from residual and servicing assets
As of and for the year ended December 31,
2018
2017
(in millions)
2016
$
33
$
21
$
688
721
72
3
466
487
46
4
17
532
549
19
2
In connection with securitization transactions, we typically retain servicing responsibilities and residual assets. In certain
instances, we receive annual servicing fees of up to 0.20% of the outstanding balance. We may periodically make servicer
advances, which are subject to credit risk. Included in other assets in our consolidated balance sheets are our servicing assets at
amortized cost, our residual assets at fair value, and our servicing advances at cost, if any. Our residual assets are subordinate to
investors’ interests, and their values are subject to credit, prepayment and interest rate risks on the transferred financial assets.
The investors and the securitization trusts have no recourse to our other assets for failure of debtors to pay when due. In
computing gains and losses on securitizations, we use the same discount rates we use for the fair value calculation of residual
assets, which are determined based on a review of comparable market transactions including Level 3 unobservable inputs
which consist of base interest rates and spreads over base rates. Depending on the nature of the transaction risks, the discount
rate ranged from 4% to 7%.
As of December 31, 2018 and December 31, 2017, our Managed Assets totaled $5.3 billion and $4.7 billion, respectively,
of which $3.3 billion and $2.7 billion, respectively, were securitized assets held in unconsolidated securitization trusts. There
were no securitization credit losses in the years ended December 31, 2018, 2017, or 2016. As of December 31, 2018, there was
approximately $2.6 million in payments from certain debtors to the securitization trusts that was greater than 90 days past due.
The securitized assets generally consist of receivables from contracts for the installation of energy efficiency and other
technologies in facilities owned by, or operated for or by, federal, state or local government entities where the ultimate obligor
is the government. The contracts may have guarantees of energy savings from third party service providers, which typically are
entities rated investment grade by an independent rating agency. Based on the nature of the receivables and experience-to-date,
we do not currently expect to incur any credit losses of our residual interests related to the receivables sold.
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6. Our Portfolio
As of December 31, 2018, our Portfolio included approximately $2.0 billion of equity method investments, receivables,
real estate and investments on our balance sheet. The equity method investments represent our non-controlling equity
investments in renewable energy projects and land. The receivables and investments are typically collateralized by
contractually committed debt obligations of government entities or private high credit quality obligors and are often supported
by additional forms of credit enhancement, including security interests and supplier guaranties. The real estate is typically land
and related lease intangibles for long-term leases to wind and solar projects.
The following is an analysis of our Portfolio as of December 31, 2018:
Investment Grade
Government (1)
Commercial
Investment
Grade (2)
Commercial
Non-
Investment
Grade (3)
Subtotal,
Debt
and Real
Estate
(dollars in millions)
Equity
Method
Investments
Total
Equity investments in renewable
energy projects
Receivables (4)
Real estate (5)
Investments
Total
% of Debt and real estate portfolio
Average remaining balance (6)
$
$
$
— $
— $
— $
— $
449
$
498
—
102
600
41%
12
$
$
148
365
68
581
39%
6
$
$
299
—
—
299
20%
14
$
$
945
365
170
1,480
100%
9
$
$
—
22
—
471
N/A
16
$
$
449
945
387
170
1,951
N/A
10
(1) Transactions where the ultimate obligor is the U.S. federal government or state or local governments where the obligors
are rated investment grade (either by an independent rating agency or based upon our internal credit analysis). This
amount includes $384 million of U.S. federal government transactions and $216 million of transactions where the
ultimate obligors are state or local governments. Transactions may have guaranties of energy savings from third party
service providers, which typically are entities rated investment grade by an independent rating agency.
(2) Transactions where the projects or the ultimate obligors are commercial entities that have been rated investment grade
(either by an independent rating agency or based on our internal credit analysis). Of this total, $9 million of the
transactions have been rated investment grade by an independent rating agency.
(3) Transactions where the projects or the ultimate obligors are commercial entities that either have ratings below investment
grade (either by an independent rating agency or using our internal credit analysis) or where the nature of the
subordination in the asset causes it to be considered non-investment grade. This category of assets includes $273 million
of mezzanine loans made in 2018 on a non-recourse basis to special purpose subsidiaries of residential solar companies
where the nature of the subordination causes it to be considered non-investment grade. These loans are secured by
residential solar assets and we rely on certain limited indemnities, warranties, and other obligations of the residential solar
companies or their other subsidiaries. This amount also includes $18 million of transactions made in 2018 where the
projects or the ultimate obligors are commercial entities that have ratings below investment grade using our internal credit
analysis, and $8 million of loans on non-accrual status. See Receivables and Investments below for further information.
(4) Total reconciles to the total of the government receivables and commercial receivables lines of the consolidated balance
(5)
sheets.
Includes the real estate and the lease intangible assets (including those held through equity method investments) from
which we receive scheduled lease payments, typically under long-term triple net lease agreements.
(6) Excludes approximately 170 transactions each with outstanding balances that are less than $1 million and that in the
aggregate total $64 million.
Equity Method Investments
We have made non-controlling equity investments in a number of renewable energy projects as well as in a joint venture
that owns land with a long-term triple net lease agreement to several solar projects that we account for as equity method
investments. As of December 31, 2018, we held the following equity method investments:
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Investment Date
Investee
Various
Various
2007 Vento I, LLC
Northern Frontier Wind, LLC
December 2015
Buckeye Wind Energy Class B Holdings, LLC
December 2018
3D Engie, LLC
October 2016
Invenergy Gunsight Mountain Holdings, LLC
Various
Various
Helix Fund I, LLC
Other transactions
Total equity method investments
Carrying Value
(in millions)
$
$
92
75
72
49
37
26
120
471
In December 2018, we sold for approximately $24 million an equity interest in a portfolio of behind-the-meter solar
projects which we acquired in 2016 for $27 million, and from which we had received cash of $10 million since we made our
investment. At the time of sale, we had a carrying value of approximately $29 million due to the income allocations from
HLBV in excess of cash received. Thus, we recognized a non-cash loss of approximately $5 million on the sale which is
included in our income from equity method investments on our consolidated statement of operations.
An underlying solar project associated with one of our equity method investments located in the U.S. Virgin Islands was
materially damaged in the 2017 hurricanes. Although there can be no assurance in this regard, we continue to believe that the
project's insurance as well as other existing assets in the project will be sufficient to recover our carrying value of
approximately $10 million (which includes non-cash HLBV allocations that have occurred since the damaging event).
As of December 31, 2017, we held a $25 million investment in a wind project that was purchased as part of a portfolio at
a significant discount to the project’s book value, in part, due to the lack of a power purchase agreement and some operational
issues. The sponsor recorded a material write-down of the project in its 2017 annual financial statements due to these issues and
this write-down is recognized in our financial statements using HLBV as an $8 million non-cash loss in the first quarter of 2018
as we account for this investment one quarter in arrears. There have been no additional write-downs of the project recorded by
us subsequent to the first quarter of 2018. The sponsor is presently reviewing the project for any additional impairment for their
2018 annual financial statements as a result of these issues. If the sponsor records an impairment, the resulting HLBV impact
will be recorded in our financial statements in the first quarter of 2019. Although there can be no assurance in this regard, we
believe there are sufficient cash flows to recover the carrying value of our investment as of December 31, 2018.
Based on an evaluation of our equity method investments, inclusive of these projects, we determined that no OTTI had
occurred as of December 31, 2018, 2017, or 2016.
Receivables and Investments
The following table provides a summary of our anticipated maturity dates of our receivables and investments and the
weighted average yield for each range of maturities as of December 31, 2018:
Receivables
Maturities by period
Weighted average yield by period
Investments
Maturities by period
Weighted average yield by period
Total
Less than 1 year
1-5 years
5-10 years
More than 10
years
(dollars in millions)
$
$
945
$
6.6%
$
170
4.2%
1
$
3.4%
$
64
3.6%
17
$
6.0%
— $
—%
57
$
4.8%
$
13
4.1%
870
6.7%
93
4.7%
In November 2018, approximately $307 million of senior investment grade loans we had made to certain subsidiaries of
the SunPower Corporation were repaid. We used $250 million of this repayment to repay the related non-recourse debt, and we
received pre-payment fees of approximately $9 million, and we recognized approximately $4 million of unamortized loan fees
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which are included in interest income. These amounts were offset by approximately $9 million of costs recorded in interest
expense relating to the debt repayment.
In 2018, we provided mezzanine loans with a carrying value as of December 31, 2018 of approximately $273 million to
subsidiaries of residential solar providers owning portfolios of residential solar systems and our loans are subordinate to senior
debt and other minority tax equity investments. The cash flows from the residential solar assets, in most cases, are first applied
to the minority tax equity investments and the senior debt and then to our mezzanine loan. In the event there is not sufficient
cash for payment on the mezzanine loan, the interest is paid-in-kind. Due to the mezzanine nature of these loans, we have
classified these loans as a non-investment grade commercial receivable on our balance sheet.
Our non-investment grade assets also consist of two commercial receivables with a combined total carrying value of
approximately $8 million as of December 31, 2018 that we consider impaired and that are on non-accrual status. These
receivables, which we acquired as part of our acquisition of American Wind Capital Company, LLC in 2014, are assignments of
land lease payments from two wind projects (the “Projects”) which became past due in the second quarter of 2017. We have
been informed by the owner of the Projects that the Projects are experiencing a decline in revenue. The owner of the Projects is
seeking to terminate the lease. In July 2017, we filed a legal claim against the owners of the Projects in order to protect our
interests in these Projects and the amounts due to us under the land lease assignments. In January 2018, we received a $1.6
million payment from the Projects and we continue to pursue our legal claims. We have received no payments since January
2018. Although there can be no assurance in this regard, we believe that we have the ability to recover the carrying value from
the Projects based on projected cash flows, and thus have not recorded an allowance for losses as of December 31, 2018.
Other than discussed above, we had no receivables or investments that were impaired or on non-accrual status as of
December 31, 2018 or 2017. There was no provision for credit losses or troubled debt restructurings as of December 31, 2018
or December 31, 2017.
Real Estate
Our real estate is leased to renewable energy projects, typically under long-term triple net leases with expiration dates
that range between the years 2033 and 2057 under the initial terms and 2047 and 2080 if all renewals are exercised. The
components of our real estate portfolio as of December 31, 2018 and 2017, were as follows:
Real estate
Land
Lease intangibles
Accumulated amortization of lease intangibles
Real estate
December 31,
2018
2017
(in millions)
$
$
269
$
104
(8)
365
$
247
99
(5)
341
In the first quarter of 2017, we purchased a portfolio of over 4,000 acres of land and related long-term triple net leases to
over 20 individual solar projects with investment grade off-takers at a cost of approximately $145 million. Approximately $21
million (1,100 acres) of this real estate portfolio was acquired through an equity method investment in a joint venture that we
account for under the equity method of accounting and approximately $56 million of our purchase price was allocated to
intangible lease assets on a relative fair value basis. This transaction was accounted for as an asset acquisition.
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As of December 31, 2018, the future amortization expense of the intangible assets and the future minimum rental income
payments under our land lease agreements are as follows:
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total
Deferred Funding Obligations
Future
Amortization
Expense
Minimum
Rental
Payments
(in millions)
$
$
$
3
3
3
3
3
81
96
$
22
22
22
22
23
788
899
In accordance with the terms of purchase agreements relating to certain equity method investments, receivables, and
investments, payments of the purchase price are scheduled to be made over time and as a result, we have recorded deferred
funding obligations of $72 million and $153 million as of December 31, 2018 and December 31, 2017, respectively. We have
secured financing for, or placed in escrow, approximately $68 million and $90 million of the deferred funding obligations as of
December 31, 2018 and December 31, 2017, respectively. As of December 31, 2017, we had pledged approximately $29
million of our equity method investments as collateral for a deferred funding obligation of $20 million, which was fully funded
in 2018.
The outstanding deferred funding obligations to be paid are as follows:
Year Ending December 31,
2019
2020
2021
Total
7. Credit Facilities
Senior Credit Facilities
Future Payments
(in millions)
$
$
51
16
5
72
In December of 2018, we entered into two senior revolving credit facilities, a representation-based loan agreement (the
“Rep-Based Facility") and an approval-based loan agreement (the “Approval-Based Facility”) with various lenders, which
mature in July 2023. The Rep-Based Facility is a senior secured revolving limited-recourse credit facility with a maximum
outstanding principal amount of $250 million and the Approval-Based Facility is a senior secured revolving recourse credit
facility with a maximum outstanding principal amount of $200 million. The proceeds from these credit facilities were used to
pay off our existing senior secured revolving credit facility, which was terminated upon repayment.
The following table provides additional detail on our senior credit facilities as of December 31, 2018:
Outstanding balance
Value of collateral pledged to credit facility
Weighted average short-term borrowing rate
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Rep-Based
Facility
Approval-Based
Facility
(dollars in millions)
$
$
134
188
3.9%
125
164
4.2%
Loans under the Rep-Based Facility bear interest at a rate equal to one-month LIBOR plus 1.40% or 1.85% (depending on
the type of collateral) or, in certain circumstances, the Federal Funds Rate plus 0.40% or 0.85% (depending on the type of
collateral) and loans under the Approval-Based Facility bear interest at a rate equal to one-month LIBOR plus 1.50% or 2.00%
(depending on the type of collateral) or, under certain circumstances, the Federal Funds Rate plus 0.50% or 1.00% (depending
on the type of collateral).
Inclusion of any financings of the Company in the borrowing base as collateral under the Rep-Based Facility will be
subject to the Company making certain agreed upon representations and warranties. We have provided a limited guaranty
covering the accuracy of the representations and warranties, and the repayment by the borrowers of certain amounts relating to
any such financing is the exclusive remedy with respect to any breach of such representations and warranties under the Rep-
Based Facility. Inclusion of any financings of the Company in the borrowing base as collateral under the Approval-Based
Facility will be subject to the approval of a super-majority of the lenders, and we have provided a guaranty of the Approval-
Based Facility.
The amount eligible to be drawn under the facilities is based on a discount to the value of each included investment based
upon the type of collateral or an applicable valuation percentage. The sum of included financings after taking into account the
applicable valuation percentages and any changes in the valuation of the financings in accordance with the Loan Agreements
determines the borrowing capacity, subject to the overall facility limits described above. Under the Rep-Based Facility, the
applicable valuation percentage is 85% in the case of a land-lease obligor or a U.S. Federal Government obligor, 80% in the
case of an institutional obligor or state and local obligor, and with respect to other obligors or in certain circumstances, such
other percentage as the administrative agent may prescribe. Under the Approval-Based Facility, the applicable valuation
percentage is 85% in the case of certain approved financings and 67% or such other percentage as the administrative agent may
prescribe, including in the case of one asset, an agreed-upon amortization schedule. The stated minimum maturities to be paid
under the amortization schedule to meet the required target loan balances as of December 31, 2018 are as follows:
For the year ended December 31,
2019
2020
2021
2022
2023
Total
Future Minimum Maturities
(in millions)
$
$
10
8
8
8
15
49
We have approximately $8 million of remaining unamortized costs associated with the credit facilities that have been
capitalized and included in other assets on our balance sheet and are being amortized on a straight-line basis over the term of
the credit facilities. Administrative fees are payable annually to the administrative agent under each of the Loan Agreements
and letter agreements with the administrative agent. Under the Rep-Based Facility, we pay to the administrative agent on each
monthly payment date, for the benefit of the lenders, certain availability fees for the Rep-Based Facility equal to 0.60%,
divided by 365 or 366, as applicable, multiplied by the excess of the available total commitments under the Rep-Based Loan
Agreement over the actual amount borrowed under the Rep-Based Facility.
The credit facilities contain terms, conditions, covenants, and representations and warranties that are customary and
typical for a transaction of this nature, including various affirmative and negative covenants, and limitations on the incurrence
of liens and indebtedness, investments, fundamental organizational changes, dispositions, changes in the nature of business,
transactions with affiliates, use of proceeds and stock repurchases. We were in compliance with our covenants as of
December 31, 2018.
The credit facilities also include customary events of default, including the existence of a default in more than 50% of
underlying financings. The occurrence of an event of default may result in termination of the credit facilities, acceleration of
amounts due under the credit facilities, and accrual of default interest at a rate of LIBOR plus 2.00% in the case of both the
Rep-Based Facility and the Approval-Based Facility.
- 94 -
Term Loans
In August 2018, we borrowed $40 million from a financial institution under a recourse credit facility that was repaid in
November 2018. In February 2017, we borrowed $102 million under a recourse credit facility that was repaid in October 2017.
8. Long-term Debt
Non-recourse debt
We have outstanding the following asset-backed non-recourse debt and bank loans:
Outstanding
Balance as of
December 31,
2018
2017
Interest
Rate
Maturity
Date
Anticipated
Balance at
Maturity
Carrying Value of
Assets Pledged
as of December 31,
2018
2017
(dollars in millions)
Description of Assets
Pledged
HASI Sustainable
Yield Bond 2013-1
ABS Loan Agreement (1)
HASI Sustainable
Yield Bond 2015-1A
HASI Sustainable
Yield Bond 2015-1B
Note
$
55
$
—
90
13
67
81
94
14
2.79%
—%
December
2019
$
—
4.28%
October 2034
5.41%
October 2034
2017 Credit Agreement
112
180
4.12%
January 2023
HASI SYB Loan
Agreement 2015-2
HASI SYB Loan
Agreement 2015-3 (3)
HASI SYB Loan
Agreement 2016-1 (3)
HASI SYB Trust 2016-2
2017 Master Repurchase
Agreement
HASI ECON 101 Trust
HASI SYB Trust 2017-1
Other non-recourse
debt (4)
Debt issuance costs
Non-recourse debt (5)
32
—
—
77
56
133
159
125
36
6.89%
(2)
December
2023
143
121
81
35
134
162
90
—%
—%
—
—
4.35%
5.13%
(2)
April 2037
July 2019
3.57%
3.86%
3.15% -
7.45%
May 2041
March 2042
2019 to 2046
(17)
(27)
$
835
$ 1,211
51
$
76
$
86 Receivables
—
—
—
—
—
—
—
—
53
—
—
18
—
135
135
79 Equity interest in Strong Upwind
Holdings I, LLC
137 Receivables, real estate and real
estate intangibles
137 Class B Bond of HASI
Sustainable Yield Bond 2015-1
151
226 Equity interests in Strong Upwind
Holdings I, II, III, and IV LLC,
and Northern Frontier Wind, LLC
72
—
—
81
67
137
208
178
68 Equity interest in Buckeye Wind
Energy Class B Holdings LLC,
related interest rate swap
171 Residential solar receivables,
related interest rate swaps
143 Residential solar receivables,
related interest rate swaps
86 Receivables
38 Receivables and investments
140 Receivables and investments
209 Receivables, real estate and real
estate intangibles
162 Receivables
(1) This non-recourse debt agreement was re-financed through our credit facilities in 2018.
(2)
Interest rate represents the current period’s LIBOR based rate plus the spread. Also see the interest rate swap contracts shown in the
table below, the value of which are not included in the book value of assets pledged or the interest rate of the debt instrument.
(3) These non-recourse debt agreements were repaid in the fourth quarter of 2018 from proceeds of prepayment of the related assets. See
Note 6. Our Portfolio for further information.
(4) Other non-recourse debt consists of various debt agreements used to finance certain of our receivables for their term. Debt service
payment requirements, in a majority of cases, are equal to or less than the cash flows received from the underlying receivables.
(5) The total collateral pledged against our non-recourse debt was $1,105 million and $1,545 million as of December 31, 2018 and
December 31, 2017, respectively. In addition, $35 million and $59 million of our restricted cash balance was pledged as collateral to
various non-recourse loans as of December 31, 2018 and December 31, 2017
We have pledged the financed assets, and typically our interests in one or more parents or subsidiaries of the borrower
that are legally separate bankruptcy remote special purpose entities as security for the non-recourse debt. There is no recourse
for repayment of these obligations other than to the applicable borrower and any collateral pledged as security for the
obligations. Generally, the assets and credit of these entities are not available to satisfy any of our other debts and obligations.
The creditors can only look to the borrower, the cash flows of the pledged assets and any other collateral pledged, to satisfy the
- 95 -
debt and we are not otherwise liable for nonpayment of such cash flows. The debt agreements contain terms, conditions,
covenants, and representations and warranties that are customary and typical for transactions of this nature, including
limitations on the incurrence of liens and indebtedness, investments, fundamental organizational changes, dispositions, changes
in the nature of business, transactions with affiliates, use of proceeds and stock repurchases. The agreements also include
customary events of default, the occurrence of which may result in termination of the agreements, acceleration of amounts due,
and accrual of default interest. We typically act as servicer for the debt transactions. We are in compliance with all covenants as
of December 31, 2018 and 2017.
We have guaranteed the accuracy of certain of the representations and warranties and other obligations of certain of our
subsidiaries under certain of the debt agreements and provided an indemnity against certain losses from “bad acts” of such
subsidiaries including fraud, failure to disclose a material fact, theft, misappropriation, voluntary bankruptcy or unauthorized
transfers. In the case of the debt secured by certain of our renewable energy equity interests, we have also guaranteed the
compliance of our subsidiaries with certain tax matters and certain obligations if our joint venture partners exercise their right
to withdraw from our partnerships.
In connection with several of our non-recourse debt borrowings, we have entered into the following interest rate swaps
that are designated as cash flow hedges:
Notional Value
as of December 31,
Fair Value
as of
December 31,
Base Rate
Hedged
Rate
2018
2017
2018
2017
Term
HASI SYB Loan
Agreement 2015-2
HASI SYB Loan
Agreement 2015-2
HASI SYB Loan
Agreement 2015-3 (1)
HASI SYB Loan
Agreement 2016-1 (1)
HASI SYB Loan
Agreement 2016-1 (1)
2017 Master Repurchase
Agreement
Total
3 month
LIBOR
3 month
LIBOR
1 month
LIBOR
3 month
LIBOR
3 month
LIBOR
3 month
LIBOR
(dollars in millions)
1.52% $
— $
31
$
— $
0.1
December 2015 to
December 2018
2.55%
2.34%
1.88%
2.73%
2.42%
$
29
—
—
—
32
61
29
119
120
107
32
$
438
$
—
—
—
—
0.3
0.3
$
December 2018 to
December 2024
(0.2)
November 2020 to
August 2028
November 2016 to
November 2021
November 2021 to
October 2032
August 2019 to
March 2033
—
1.1
(1.1)
—
(0.1)
(1) These interest rate swaps were financially settled in November 2018.
The fair values of our interest rate swaps designated and qualifying as effective cash flow hedges are reflected in our
consolidated balance sheets as a component of other assets (if in an unrealized gain position) or accounts payable, accrued
expenses and other (if in an unrealized loss position) and in net unrealized gains and losses in AOCI. As of December 31, 2018
and 2017, all of our derivatives were designated as hedging instruments which were deemed to be effective. The following is a
presentation of the total balance of the financial statement line item related to our hedging activities in our consolidated
statements of operations and the impact of our hedges that is included in this total balance.
Total interest expense
Impact of hedging
Year ended December 31,
2018
2017
2016
$
76,874
(8,034) (1)
(in thousands)
$
65,472
$
972
45,241
1,316
(1) There was an approximately $8 million gain on the settlement of these instruments that is classified in interest expense in our
consolidated statement of operations.
- 96 -
The stated minimum maturities of non-recourse debt as of December 31, 2018, were as follows:
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total minimum maturities
Deferred financing costs, net
Total non-recourse debt
Future minimum
maturities
(in millions)
$
$
139
24
26
27
61
575
852
(17)
835
The stated minimum maturities of non-recourse debt above include only the mandatory minimum principal payments. To
the extent there are additional cash flows received from our investments in renewable energy projects serving as collateral for
certain of our non-recourse debt facilities, these additional cash flows are required to be used to make additional principal
payments against the respective debt. Any additional principal payments made due to these provisions may impact the
anticipated balance at maturity of these financings.
Convertible Senior Notes
We issued $150 million aggregate principal amount ($145 million net of issuance costs) of 4.125% convertible senior
notes due September 1, 2022. Holders may convert any of their convertible notes into shares of our common stock at the
applicable conversion rate at any time prior to the close of business on the second scheduled trading day immediately preceding
the maturity date, unless the convertible notes have been previously redeemed or repurchased by us. The convertible notes are
senior unsecured obligations of ours and have an initial conversion rate of 36.7107 shares for each $1,000 principal amount of
convertible notes which is equal to a total of approximately 5.5 million shares with an initial conversion price of $27.24. The
conversion rate is subject to adjustment for dividends declared above $0.33 per share per quarter and certain other events that
may be dilutive to the holder. As of December 31, 2018, none of these dilutive events have occurred and the conversion rate
remains at the initial rate. In February of 2019, our board of directors approved an increase to the dividend, which will change
the conversion rate to an amount to be determined on the ex-dividend date of April 3, 2019.
Following the occurrence of a make-whole fundamental change, we will, in certain circumstances, increase the
conversion rate for a holder that converts its convertible notes in connection with such make-whole fundamental change. There
are no cash settlement provisions in the convertible notes and the conversion option can only be settled through physical
delivery of our common stock. Additionally, upon the occurrence of certain fundamental changes involving us, holders of the
convertible notes may require us to redeem all or a portion of their convertible notes for cash at a price of 100% of the principal
amount outstanding, plus accrued and unpaid interest.
We have a redemption option to call the convertible notes prior to maturity (i) on or after March 1, 2022 and (ii) at any
time if such a redemption is deemed reasonably necessary to preserve our qualification as a REIT. The redemption price will be
equal to the principal of the notes being redeemed, plus accrued and unpaid interest. In the event of redemption after March 1,
2022, there will be an additional make-whole premium paid to the holder of the redeemed notes unless the redemption is
deemed reasonably necessary to preserve our qualification as a REIT.
- 97 -
The following table presents a summary of the components of the convertible notes:
Principal
Accrued interest
Less:
Unamortized financing costs
Carrying value of convertible notes
Interest expense
9. Commitments and Contingencies
Leases
As of and for the year ended
December 31,
2018
2017
(in millions)
150
$
2
(4)
148
7
$
$
150
3
(5)
148
3
$
$
$
We lease office space at our headquarters in Annapolis, Maryland under an operating lease entered into in 2011 and
amended in 2013 and 2017 to add additional space. The lease provides for operating expense reimbursements and annual
escalations that are amortized over the respective lease terms on a straight-line basis. Lease payments under this lease
commenced in 2012 and incremental payments related to the amendments commenced in 2014 and 2017. The lease expires in
2027.
Rent expense was less than $1 million for each of the years ended December 31, 2018, 2017, and 2016, respectively.
Future gross minimum lease payments are less than $1 million per year during the remaining term of the lease.
Litigation
The nature of our operations exposes us to the risk of claims and litigation in the normal course of our business. We are
not currently subject to any legal proceedings that are probable of having a material adverse effect on our financial position,
results of operations or cash flows.
Guarantees to other transaction participants
In connection with some of our transactions, we have provided certain limited representations, warranties, covenants and/
or provided an indemnity against certain losses resulting from our own actions, including related to certain investment tax
credits. As of December 31, 2018, there have been no such actions resulting in claims against the Company.
10. Income Tax
We recorded a tax expense of approximately $2 million, for the year ended December 31, 2018, $1 million for the year
ended December 31, 2017 and $0 million for the year ended 2016, related to the activities of our TRS. The federal income tax
expense and benefits recorded were determined using a rate of 21% in 2018 and 35% in 2017 and 2016. Our deferred tax assets
and liabilities were measured using a federal rate of 21% in 2018. Below is a reconciliation between the statutory rates of our
TRS entities as of December 31, 2018 and our effective tax rates for the years ended December 31:
- 98 -
Federal statutory income tax rate
Reduction in rate resulting from:
Share-based compensation
Equity method investments
Other
Valuation allowance
TCJA rate revaluation adjustment
Effective tax rate
2018
2017
2016
21 %
35 %
35 %
(1)%
(11)%
2 %
2 %
— %
13 %
(8)%
(83)%
6 %
49 %
1 %
— %
(373)%
(847)%
9 %
1,176 %
— %
— %
We recorded a deferred tax liability of $2 million and $1 million as of December 31, 2018 and 2017, respectively, related
to the activities of our TRS. Our deferred tax liability is included in accounts payable, accrued expenses and other on our
consolidated balance sheet. Deferred income taxes represent the tax effect from continuing operations of the differences
between the book and tax basis of assets and liabilities. Deferred tax assets (liabilities) include the following as of
December 31:
Receivables basis difference
Equity method investments
Gross deferred tax liabilities
Net operating loss (NOL) carryforwards
Tax credit carryforwards
Share-based compensation
Valuation allowance
Gross deferred tax assets
Net deferred tax liabilities
2018
2017
(in millions)
(9) $
(31)
(40)
34
12
3
(11)
38
(2) $
(8)
(22)
(30)
27
10
3
(11)
29
(1)
$
$
We have unused NOLs of $142 million and tax credits of approximately $12 million. Approximately, $132 million of our
NOLs will begin to expire in 2034. If our TRS entities were to experience a change in control as defined in Section 382 of the
Internal Revenue Code, the TRS’s ability to utilize NOL in the years after the change in control would be limited. Similar rules
and limitation may apply for state tax purposes as well. Of our NOLs, $10 million were added in 2018, which are not subject to
expiration but are limited to 80% of taxable income.
We have no examinations in progress, none are expected at this time, and years 2015 through 2018 are open. As of
December 2018 and 2017, we had no uncertain tax positions. Our policy is to recognize interest expense and penalties related
to income tax matters as a component of general and administrative expense. There were no accrued interest and penalties as of
December 31, 2018 and 2017, and no interest and penalties were recognized during the years ended December 31, 2018, 2017,
or 2016.
For federal income tax purposes, the cash dividends paid for the years ended December 31, 2018 and 2017 are
characterized as follows:
Common distributions
Ordinary income
Return of capital
2018
2017
— %
100 %
100%
15 %
85 %
100%
- 99 -
U.S. Federal Income Tax Legislation
The TCJA, which was signed into law on December 22, 2017, made significant changes to the U.S. federal income tax
laws applicable to businesses and their owners, including REITs and their stockholders. Certain key provisions of the TCJA
impact us and could impact us in the future , include the following:
• Reduced tax rates - the highest individual U.S. federal income tax rate on ordinary income is reduced from 39.6% to
37% (through taxable years ending in 2025), and the maximum corporate income tax rate is reduced from 35% to
21%. In addition, individuals, trust, and estates that own our stock are permitted to deduct up to 20% of dividends
received from us (other than dividends that are designated as capital gain dividends or qualified dividend income),
generally resulting in an effective maximum U.S. federal income tax rate of 29.6% on such dividends (through
taxable years ending in 2025). Further, the amount that we are required to withhold on distributions to non-U.S.
stockholders that are treated as attributable to gains from our sale or exchange of U.S. real property interests is
reduced from 35% to 21%.
• Net operating losses - we and our TRSs may not use net operating losses generated beginning in 2018 to offset more
than 80% of our or our TRSs’ taxable income (prior to the application of the dividends paid deduction). Net
operating losses generated beginning in 2018 can be carried forward indefinitely but can no longer be carried back.
•
Limitation on interest deductions - the amount of net interest expense that certain taxpayers, including us and our
TRSs, may deduct for a taxable year is limited to the sum of (i) the taxpayer’s business interest income for the
taxable year, and (ii) 30% of the taxpayer’s “adjusted taxable income” for the taxable year. For taxable years
beginning before January 1, 2022, adjusted taxable income means earnings before interest, taxes, depreciation, and
amortization (“EBITDA”); for taxable years beginning on or after January 1, 2022, adjusted taxable income is
limited to earnings before interest and taxes (“EBIT”).
• Alternative Minimum Tax - the corporate alternative minimum tax is eliminated.
•
Income accrual - we and our TRSs are required to recognize certain items of income for U.S. federal income tax
purposes no later than we would report such items on our financial statements. Earlier recognition of income for
U.S. federal income tax purposes could impact our ability to satisfy the REIT distribution requirements. This
provision generally applies to taxable years beginning after December 31, 2017, but will apply with respect to
income from a debt instrument having “original issue discount” for U.S. federal income tax purposes only for
taxable years beginning after December 31, 2018.
•
Tax credits - the TCJA modifies the availability and the use by certain taxpayers of certain tax credits for
investments in certain wind, solar, and other renewable energy assets.
11. Equity
Dividends and Distributions
Our board of directors declared the following dividends in 2017 and 2018:
Announced Date
Record Date
Pay Date
Amount per share
3/15/2017
6/1/2017
9/12/2017
12/12/2017
2/21/2018
5/31/2018
9/12/2018
12/12/2018
4/5/2017
7/6/2017
10/5/2017
12/26/2017 (1)
4/4/2018
7/5/2018
10/3/2018
12/26/2018 (1)
$
4/13/2017
7/13/2017
10/16/2017
1/11/2018
4/12/2018
7/12/2018
10/11/2018
1/10/2019
0.33
0.33
0.33
0.33
0.33
0.33
0.33
0.33
(1) These dividends are treated as distributions in the following year for tax purposes.
We have an effective universal shelf registration statement registering the potential offer and sale, from time to time and
in one or more offerings, of any combination of our common stock, preferred stock, depositary shares, debt securities, warrants
and rights (collectively referred to as the “securities”). We may offer the securities directly, through agents, or to or through
underwriters by means of ordinary brokers’ transactions on the NYSE or otherwise at market prices prevailing at the time of
- 100 -
sale or at negotiated prices and may include “at the market” (“ATM”) offerings or sales “at the market,” to or through a market
maker or into an existing trading market on an exchange or otherwise. We completed the following public offerings (including
ATM issuances) of our common stock in 2017 and 2018:
Closing Date
1/20/17 to 2/2/17
3/10/2017
5/17/17 to 6/22/17
5/18/18 to 6/25/18
11/15/18 to 12/11/2018
12/17/2018
Common Stock
Offerings
Shares
Issued (1)
Price
Per Share
Net
Proceeds (2)
ATM
Public Offering
ATM
ATM
ATM
Public Offering
(amounts in millions, except per share amounts)
$
0.197
3.450
1.376
0.834
2.777
5.000
19.18 (3) $
18.73 (4)
22.71 (3)
18.76 (3)
23.37 (3)
21.60 (4)
4
64
31
15
64
108
Includes shares issued in connection with the exercise of the underwriters’ option to purchase additional shares.
(1)
(2) Net proceeds from the offerings are shown after deducting underwriting discounts, commissions and other offering costs.
(3) Represents the average price per share at which investors in our ATM offerings purchased our shares.
(4) Represents the price per share at which the underwriters in our public offerings purchased our shares.
Awards of Shares of Restricted Common Stock and Restricted Stock Units under our 2013 Plan
We have 5,135,043 awards authorized for issuance under our 2013 Plan. As of December 31, 2018, we have issued
awards with service, performance and market conditions and have 1,829,609 awards remaining available for issuance. During
the year ended December 31, 2018, our board of directors awarded employees and directors 630,234 shares of restricted stock
and restricted stock units that vest from 2019 to 2023. As of December 31, 2018, as it relates to previously issued restricted
stock awards with performance conditions, we have concluded that it is probable that the performance conditions will be met.
A summary of equity-based compensation expense and the fair value of shares vested on the vesting date for the years
ended December 31, 2018, 2017, and 2016 is as follows:
Equity-based compensation expense
Fair value of awards vested on vesting date
2018
2017
(in millions)
2016
$
$
10
7
$
11
5
10
14
The total unrecognized compensation expense related to awards of shares of restricted stock and restricted stock units
was approximately $12 million as of December 31, 2018. We expect to recognize compensation expense related to these
awards over a weighted-average term of approximately 2 years. A summary of the unvested shares of restricted common stock
that have been issued is as follows:
- 101 -
Ending Balance—December 31, 2015
Granted
Vested
Forfeited
Ending Balance—December 31, 2016
Granted
Vested
Forfeited
Ending Balance—December 31, 2017
Granted
Vested
Forfeited
Ending Balance—December 31, 2018
Restricted Shares of
Common Stock
Weighted Average
Share Price
Value
(in millions)
1,248,069
661,055
(716,264)
(11,188)
1,181,672
452,864
(230,424)
(4,519)
1,399,593
454,106
(370,072)
(96,871)
1,386,756
$
$
$
$
15.16
18.62
14.03
17.25
17.76
19.06
14.41
18.72
18.73
19.72
18.88
18.92
19.00
$
$
$
$
18.9
12.3
(10.0)
(0.2)
21.0
8.6
(3.3)
(0.1)
26.2
9.0
(7.0)
(1.8)
26.4
A summary of the unvested shares of restricted stock units that have market based vesting conditions that have been
issued is as follows:
Ending Balance—December 31, 2016
Granted
Vested
Forfeited
Ending Balance—December 31, 2017
Granted
Vested
Forfeited
Ending Balance—December 31, 2018
12. Earnings per Share of Common Stock
Restricted Stock
Units
Weighted Average
Share Price
Value
(in millions)
— $
— $
257,284
(376)
(1,202)
255,706
176,128
(20,368)
(18,318)
393,148
$
$
18.99
18.99
18.99
18.99
20.24
18.99
19.05
19.55
$
$
—
4.9
—
—
4.9
3.5
(0.4)
(0.3)
7.7
Both the net income or loss attributable to the non-controlling OP units and the non-controlling limited partners’
outstanding OP units have been excluded from the basic earnings per share and the diluted earnings per share calculations
attributable to common stockholders. Unvested share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per
share pursuant to the two-class method.
- 102 -
The computation of basic and diluted earnings per common share of common stock is as follows:
Numerator:
Net income (loss) attributable to controlling stockholders and participating
securities
Less: Dividends paid on participating securities
Undistributed earnings attributable to participating securities
Net income (loss) attributable to controlling stockholders
Denominator:
Weighted-average number of common shares—basic
Weighted-average number of common shares—diluted
Basic earnings per common share
Diluted earnings per common share
Other Information:
Weighted-average number of OP units
Unvested restricted common stock outstanding (i.e., participating
securities)
13. Equity Method Investments
Year ended December 31,
2018
2017
2016
(dollars in millions, except share and per share data)
$
$
$
$
41.6
(1.8)
—
39.8
52,780,449
52,780,449
0.75
0.75
$
$
$
$
30.9
(1.9)
—
29.0
50,361,672
50,361,672
0.57
0.57
$
$
$
$
14.7
(1.8)
—
12.9
40,290,717
40,290,717
0.32
0.32
281,106
284,992
284,992
1,386,756
1,399,593
1,181,672
We have non-controlling unconsolidated equity investments in renewable energy projects. During the years ended
December 31, 2018, 2017, and 2016 we recognized income (loss) of $22.2 million, $22.3 million, and $6.1 million
respectively, from our equity method investments. We describe our accounting for the non-controlling equity investments in
Note 2.
The following is a summary of the consolidated financial position and results of operations of the significant entities
accounted for using the equity method.
- 103 -
Balance Sheet
As of September 30, 2018
Current assets
Total assets
Current liabilities
Total liabilities
Members’ equity
As of December 31, 2017
Current assets
Total assets
Current liabilities
Total liabilities
Members’ equity
Income Statement
For the nine months ended September 30, 2018
Revenue
Income from continuing operations
Net income
For the year ended December 31, 2017
Revenue
Income from continuing operations
Net income
For the year ended December 31, 2016
Revenue
Income from continuing operations
Net income
Buckeye Wind
Energy Class
B Holdings,
LLC
MM Solar
Parent LLC
Helix Fund I,
LLC
Other
investments (1)
Total
$
4
$
280
3
13
267
3
286
1
11
275
10
(5)
(5)
12
(8)
(8)
13
(6)
(6)
$
4
84
5
33
51
3
85
5
36
49
8
4
4
11
4
4
12
5
5
1
27
—
—
27
1
28
—
—
28
2
1
1
2
1
1
—
—
—
$
248
$
3,713
108
955
2,758
130
2,866
70
319
2,547
197
19
19
248
(49)
(49)
283
23
23
257
4,104
116
1,001
3,103
137
3,265
76
366
2,899
217
19
19
273
(52)
(52)
308
22
22
(1)
Represents aggregated financial statement information for investments not separately presented.
14. Defined Contribution Plan
We administer a 401(k) savings plan, a defined contribution plan covering substantially all of our employees. Employees
in the plan may contribute up to the maximum annual IRS limit before taxes via payroll deduction. Under the plan, we provide
a dollar for dollar match for the first 4% of the employee's contributions and a $0.50 per dollar match for the next 2% of
employee contributions. We contributed less than $1 million under the plan for the years ended December 31, 2018, 2017, and
2016, respectively.
- 104 -
15. Selected Quarterly Financial Data (Unaudited)
The following table summarizes our quarterly financial data which, in the opinion of management, reflects all
adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations
(Amounts for the individual quarters when aggregated may not agree to the full year due to rounding):
For the Three-Months Ended
(in millions, except for per share data)
March 31, 2018
June 30, 2018
Sept. 30, 2018
Dec. 31, 2018
Total revenue
Total expenses
Income before equity method investments
Income (loss) from equity method investments
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Net income (loss) attributable to controlling stockholders
Basic and diluted earnings (loss) per common share
$
$
$
27,908
$
26,833
1,075
(2,285)
(1,210)
(18)
(1,228)
(1,223) $
(0.03) $
35,826
$
34,883
$
28,903
6,923
10,583
17,506
(153)
17,353
17,262
0.32
$
$
29,041
5,842
11,671
17,513
(939)
16,574
16,483
0.30
$
$
39,192
31,251
7,941
2,192
10,133
(1,034)
9,099
9,055
0.16
For the Three-Months Ended
(in millions, except for per share data)
March 31, 2017
June 30, 2017
Sept. 30, 2017
Dec. 31, 2017
Total revenue
$
23,800
$
28,275
$
26,402
$
Total expenses
Income before equity method investments
Income (loss) from equity method investments
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Net income (loss) attributable to controlling stockholders
Basic and diluted earnings (loss) per common share
$
$
20,697
3,103
4,171
7,274
(32)
7,242
7,199
0.14
$
$
24,159
4,116
8,377
12,493
(83)
12,410
12,340
0.23
$
$
25,298
1,104
6,876
7,980
(5)
7,975
7,933
0.14
$
$
27,095
25,788
1,307
2,866
4,173
(766)
3,407
3,383
0.06
- 105 -
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
A review and evaluation was performed by our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Form 10-K. Based on that
review and evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure
controls and procedures, as designed and implemented, were effective. Notwithstanding the foregoing, a control system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover
failures within our company to disclose material information otherwise required to be set forth in our periodic reports.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a
process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our
board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those
policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of our company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate
because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In
making this assessment, our management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework (2013 Framework).
Based on this assessment, our management believes that, as of December 31, 2018, our internal control over financial
reporting was effective based on those criteria.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Our company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the
effectiveness of our company’s internal control over financial reporting. This report appears on page 73 of this annual report on
Form 10-K.
Item 9B. Other Information
None.
- 106 -
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information regarding our directors, executive officers and certain other matters required by Item 401 of Regulation
S-K is incorporated herein by reference to our definitive proxy statement relating to our annual meeting of stockholders (the
“Proxy Statement”), to be filed with the SEC within 120 days after December 31, 2018.
The information regarding compliance with Section 16(a) of the Exchange Act required by Item 405 of Regulation S-K is
incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2018.
The information regarding our Code of Business Conduct and Ethics required by Item 406 of Regulation S-K is
incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2018.
The information regarding certain matters pertaining to our corporate governance required by Item 407(c)(3), (d)(4) and
(d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within 120 days after
December 31, 2018.
Item 11.
Executive Compensation
The information regarding executive compensation and other compensation related matters required by Items 402 and
407(e)(4) and (e)(5) of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC
within 120 days after December 31, 2018.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The tables on equity compensation plan information and beneficial ownership of our Company required by Items 201(d)
and 403 of Regulation S-K are incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120
days after December 31, 2018.
Item 13.
Certain Relationships and Related Transactions and Director Independence
The information regarding transactions with related persons, promoters and certain control persons and director
independence required by Items 404 and 407(a) of Regulation S-K is incorporated herein by reference to the Proxy Statement
to be filed with the SEC within 120 days after December 31, 2018.
Item 14.
Principal Accountant Fees and Services
The information concerning principal accounting fees and services and the Audit Committee’s pre-approval policies and
procedures required by Item 14 is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120
days after December 31, 2018.
- 107 -
Item 15.
Exhibits and Financial Statement Schedules
Documents filed as part of the report
PART IV
The following documents are filed as part of this Form 10-K in Part II, Item 8 and are incorporated by reference:
(a)(1) Financial Statements:
See index in Item 8—“Financial Statements and Supplementary Data,” filed herewith for a list of financial statements.
(3) Exhibits Files:
Exhibit
number
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Exhibit description
Articles of Amendment and Restatement of Hannon Armstrong Sustainable Infrastructure Capital, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No.
001-35877), filed on August 9, 2013)
Bylaws of Hannon Armstrong Sustainable Infrastructure Capital, Inc. (incorporated by reference to Exhibit 3.2 to
the Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Amended and Restated Agreement of Limited Partnership of Hannon Armstrong Sustainable Infrastructure, L.P.
(incorporated by reference to Exhibit 3.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No.
001-35877), filed on August 9, 2013)
Specimen Common Stock Certificate of Hannon Armstrong Sustainable Infrastructure Capital, Inc. (incorporated
by reference to Exhibit 4.1 to Amendment No. 3 to the Registrant’s Form S-11 (No. 333-186711), filed on
April 12, 2013)
Indenture, dated as of August 22, 2017, between Hannon Armstrong Sustainable Infrastructure Capital, Inc. and
U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K
(No. 001-35877), filed on August 22, 2017)
First Supplemental Indenture, dated as of August 22, 2017, between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and U.S. Bank National Association, as Trustee (including the form of 4.125% Convertible Senior
Note due 2022) (incorporated by reference to Exhibit 4.2 to the Registrant’s Form 8-K (No. 001-35877), filed on
August 22, 2017)
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.5 to Amendment No. 3 to the
Registrant’s Form S-11 (No. 333-186711), filed on April 12, 2013)
Amended and Restated 2013 Hannon Armstrong Sustainable Infrastructure Capital, Inc. Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2017
(No. 001-35877), filed on May 4, 2017)
Restricted Stock Award Agreement dated April 23, 2013 between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Jeffrey W. Eckel (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the
quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Form of Restricted Stock Award Agreement (Executive Officers) (incorporated by reference to Exhibit 10.3 to the
Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Form of Restricted Stock Award Agreement (Non-employee Directors) (incorporated by reference to Exhibit 10.4
to the Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Amended and Restated Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit
10.2 to the Registrant’s Form 10-Q for the quarter ended March, 31 2017 (No. 001-35877), filed on May 4, 2017)
Registration Rights Agreement, dated April 23, 2013, by and among Hannon Armstrong Sustainable
Infrastructure Capital, Inc. and the parties listed on Schedule I thereto (incorporated by reference to Exhibit 10.6
to the Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
- 108 -
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.2
10.21
Employment Agreement, dated April 17, 2013, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Jeffrey Eckel (incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-Q for the
quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Employment Agreement, dated April 17, 2013, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and J. Brendan Herron, Jr. (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-Q
for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Employment Agreement, dated April 17, 2013, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Steven L. Chuslo (incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-Q for
the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Employment Agreement, dated April 17, 2013, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Nathaniel J. Rose (incorporated by reference to Exhibit 10.10 to the Registrant’s Form 10-Q for
the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Letter Agreement, dated as of April 5, 2018, between M. Rhem Wooten, Hannon Armstrong Sustainable
Infrastructure Capital, Inc. and Hannon Armstrong Capital Inc. (incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 10-Q for the quarter ended March 31, 2018 (No. 001-35877), filed on May 4, 2018)
Employment Agreement, dated April 17, 2013, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Daniel McMahon (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for
the quarter ended June 30, 2015 (No. 001-35877), filed on August 7, 2015)
Agreement and Plan of Merger, dated as of April 23, 2013, by and among Hannon Armstrong Sustainable
Infrastructure Capital, Inc., HA Merger Sub I LLC, HA Merger Sub III LLC, MissionPoint HA Parallel Fund,
LLC, MissionPoint ES Parallel Fund I, L.P., MissionPoint HA Parallel Fund I Corp. and MissionPoint HA
Parallel Fund, L.P. (incorporated by reference to Exhibit 10.12 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Agreement and Plan of Merger, dated as of April 23, 2013, by and among Hannon Armstrong Sustainable
Infrastructure Capital, Inc., HA Merger Sub II LLC, HA Merger Sub III LLC, MissionPoint HA Parallel Fund II,
LLC, MissionPoint ES Parallel Fund II, L.P. MissionPoint HA Parallel Fund II Corp. and MissionPoint HA
Parallel Fund, L.P. (incorporated by reference to Exhibit 10.13 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Trust Agreement relating to HASI SYB 2013-1 Trust, dated as of December 20, 2013, among HASI SYB 2013-1
Trust, HASI SYB I LLC, HAT SYB I LLC, The Bank of New York Mellon as Trustee and Hannon Armstrong
Sustainable Infrastructure Capital, Inc. (incorporated by reference to Exhibit 10.26 to the Registrant’s Form 10-K
for the year ended December 31, 2013 (No. 001-35877), filed on March 18, 2014)
Note Purchase Agreement, dated as of December 20, 2013, among HASI SYB 2013-1 Trust, HASI SYB I LLC,
HAT SYB I LLC, The Bank of New York Mellon as Trustee and the purchaser of the notes thereunder
(incorporated by reference to Exhibit 10.27 to the Registrant’s Form 10-K for the year ended December 31, 2013
(No. 001-35877), filed on March 18, 2014)
Unit Purchase Agreement, dated as of May 28, 2014, by and among Hannon Armstrong Sustainable
Infrastructure Capital, Inc., American Wind Capital Company, LLC, Northwharf Nominees Limited, DBD AWCC
LLC, NGP Energy Technology Partners II, L.P. and C.C. Hinckley Company, LLC (incorporated by reference to
Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2014 (No. 001-35877), filed on
August 14, 2014)
Agreement for Professional Services, dated as of May 28, 2014, by and among Hannon Armstrong Capital, LLC
and AWCC Capital, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2014 (No. 001-35877), filed on August 14, 2014)
Indenture, dated as of September 30, 2015, among HASI SYB Trust 2015-1, the Bank of New York Mellon and
Hannon Armstrong Capital, LLC (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the
quarter ended September 30, 2015 (No. 001-35877), filed on November 5, 2015)
Bond Purchase Agreement (Class A), dated as of September 30, 2015, among HASI SYB Trust 2015-1, HA Land
Lease Holdings, LLC and the purchasers named therein (incorporated by reference to Exhibit 10.5 to the
Registrant’s Form 10-Q for the quarter ended September 30, 2015 (No. 001-35877), filed on November 5, 2015)
- 109 -
10.22
10.23
10.24
10.25
10.26*
10.27*
10.28*
Contribution and Sale Agreement, dated as of September 30, 2015, among HASI SYB Trust 2015-1, and HA
Land Lease Holdings, LLC (incorporated by reference to Exhibit 10.6 to the Registrant’s Form 10-Q for the
quarter ended September 30, 2015 (No. 001-35877), filed on November 5, 2015)
Indemnity Agreement, dated as of September 30, 2015, by Hannon Armstrong Sustainable Infrastructure Capital,
Inc. in favor of the Bank of New York Mellon (incorporated by reference to Exhibit 10.7 to the Registrant’s Form
10-Q for the quarter ended September 30, 2015 (No. 001-35877), filed on November 5, 2015)
Employment Agreement, dated March 15, 2017, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Charles Melko (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the
quarter ended March 31, 2017 (No. 001-35877), filed on May 4, 2017)
Form of Amended and Restated Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.57 to
the Registrant's Form 10-K (No. 001-35877) for the year ended December, 31, 2017, filed on February 23, 2018)
Loan Agreement (Rep-Based), dated as of December 13, 2018 by and among certain subsidiaries of the Company,
Bank of America, N.A., as administrative agent, and each lender from time to time party thereto
Loan Agreement (Approval-Based), data as of December 13, 2018, by and among certain subsidiaries of the
Company, Bank of America, N.A., as administrative agent, and each lender from time to time party thereto
Limited Guaranty (Rep-Based), dated as of December 13, 2018, by the Company and Hannon Armstrong Capital,
LLC
10.29* Guaranty (Approval-Based), dated as of December 13, 2018, by the Company and Hannon Armstrong Capital,
LLC
21.1*
23.1*
24.1*
List of subsidiaries of Hannon Armstrong Sustainable Infrastructure Capital, Inc.
Consent of Ernst & Young LLP for Hannon Armstrong Sustainable Infrastructure Capital, Inc.
Power of Attorney (included on signature page)
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes—Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1** Certification of Chief Executive Officer pursuant to section 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes—Oxley Act of 2002
32.2**
Certification of Chief Financial Officer pursuant to section 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes—Oxley Act of 2002
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
101.LAB* XBRL Taxonomy Extension Label Linkbase
101 PRE* XBRL Taxonomy Extension Presentation Linkbase
* Filed herewith.
** Furnished with this report.
Item 16.
Form 10-K Summary
None.
- 110 -
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 22, 2019
HANNON ARMSTRONG SUSTAINABLE
INFRASTRUCTURE CAPITAL, INC.
(Registrant)
/s/ Jeffrey W. Eckel
Jeffrey W. Eckel
Chairman, Chief Executive Officer and President
/s/ Charles W. Melko
Charles W. Melko
Chief Accounting Officer and Senior Vice President
- 111 -
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Jeffrey W. Eckel and Charles W. Melko, and each of them, with full power to act without the other, such person’s true and
lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign this Form 10-K and any and all amendments thereto, and to file the same, with
exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every
act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his
or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
By:
/s/ Jeffrey W. Eckel
Jeffrey W. Eckel
By:
/s/ J. Brendan Herron
J. Brendan Herron
By:
/s/ Charles W. Melko
Charles W. Melko
By:
/s/ Rebecca B. Blalock
Rebecca B. Blalock
By:
/s/ Teresa M. Brenner
Teresa M. Brenner
By:
/s/ Mark J. Cirilli
Mark J. Cirilli
By:
/s/ Charles M. O'Neil
Charles M. O’Neil
By:
/s/ Richard J. Osborne
Richard J. Osborne
By:
/s/ Steven G. Osgood
Steven G. Osgood
Chairman of the Board, President
February 22, 2019
and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer and
Executive Vice President
(Principal Financial Officer)
February 22, 2019
Chief Accounting Officer and
February 22, 2019
Senior Vice President
(Principal Accounting Officer)
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
- 112 -
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35877
HANNON ARMSTRONG SUSTAINABLE
INFRASTRUCTURE CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
1906 Towne Centre Blvd
Suite 370
Annapolis, MD
(Address of principal executive offices)
46-1347456
(I.R.S. Employer
Identification No.)
21401
(Zip Code)
(410) 571-9860
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 par value
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
No
1
Indicate by check mark whether the registrant has submitted electronically Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of June 30, 2018, the aggregate market value of the registrant’s common stock (includes unvested restricted stock) held by non-
affiliates of the registrant was $1.0 billion based on the closing sales price of the registrant’s common stock on June 30, 2018 as reported on
the New York Stock Exchange.
On March 22, 2019, the registrant had a total of 63,251,500 shares of common stock, $0.01 par value, outstanding (which includes
983,655 shares of unvested restricted common stock).
Portions of the registrant’s proxy statement for the 2019 annual meeting of stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
2
AMENDMENT NO. 1
EXPLANATORY NOTE
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (the “Company,” “we,” “our,” or “us”) is filing this
amendment (the “Form 10-K/A”) to our Annual Report on Form 10-K for the year ended December 31, 2018, originally filed
with the Securities and Exchange Commission (“SEC”) on February 22, 2019 (the “Original Form 10-K”), solely for the
purpose of complying with Regulation S-X, Rule 3-09 ("Rule 3-09"). Rule 3-09 requires that Form 10-K contain separate
financial statements for unconsolidated subsidiaries and investees accounted for by the equity method when such entities are
individually significant.
We have determined that our equity method investment in Buckeye Wind Energy Class B Holdings, LLC and
Subsidiaries, which is not consolidated in our financial statements was significant under the income test of Rule 3-09 in
relationship to our financial results for the year ended December 31, 2018. Additionally, our equity method investments in MM
Solar Parent, LLC and Subsidiaries and Helix Fund I, LLC, which are also not consolidated in our financial statements, were
significant under the income test of Rule 3-09 in relationship to our financial results for the year ended December 31, 2017.
Since the financial statements as of and for the year ended December 31, 2018 of the aforementioned investees were not
available until after the date of the filing of our Original Form 10-K, Rule 3-09 provides that the financial statements may be
filed as an amendment to our Original Form 10-K within 90 days after the end of our fiscal year ended December 31, 2018.
Therefore, this Form 10-K/A amends Item 15 of our Original Form 10-K filed on February 22, 2019 to include the
following Exhibits:
• Exhibit 23.2 – Consent of EKS&H LLLP for MM Solar Parent, LLC and Subsidiaries,
• Exhibit 23.3 – Consent of CohnReznick LLP for Helix Fund I, LLC,
• Exhibit 23.4 – Consent of Deloitte & Touche LLP for Buckeye Wind Energy Class B Holdings LLC
• Exhibit 99.1 – MM Solar Parent, LLC and Subsidiaries, Consolidated Financial Statements as of December 31, 2018
and 2017 and for the years then ended and for the year ended December 31, 2016,
• Exhibit 99.2 – Helix Fund I LLC, Financial Statements as of and for the year ended December 31, 2018
• Exhibit 99.3 – Helix Fund I LLC, Financial Statements as of December 31, 2017 and January 1, 2017 and for the year
ended December 31, 2017 and the period from December 2, 2016 (inception) through January 1, 2017, and
• Exhibit 99.4 – Buckeye Wind Energy Class B Holdings LLC and Subsidiaries, Consolidated Financial Statements as
of December 31, 2018 and 2017 and for each of the three years in the period ended December 31, 2018
This Form 10-K/A does not amend or otherwise update any other information in the Original Form 10-K (including
the exhibits to the Original Form 10-K, except for Exhibits 31.1, 31.2, 32.1 and 32.2). Accordingly, this Form 10-K/A should be
read in conjunction with our Original Form 10-K. In addition, in accordance with applicable rules and regulations promulgated
by the SEC, this Form 10-K/A includes updated certifications from our Chief Executive Officer and Chief Financial Officer as
Exhibits 31.1, 31.2, 32.1 and 32.2.
3
Item 15.
Exhibits and Financial Statement Schedules.
Documents filed as part of the report
The following documents are filed as part of this Form 10-K/A in Part II, Item 8 and are incorporated by reference:
(a)(1) Financial Statements:
See index in Item 8—“Financial Statements and Supplementary Data,” filed with the Original Form 10-K for a list of financial
statements.
(3) Exhibits Files:
Exhibit
number
Exhibit description
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Articles of Amendment and Restatement of Hannon Armstrong Sustainable Infrastructure Capital, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No.
001-35877), filed on August 9, 2013)
Bylaws of Hannon Armstrong Sustainable Infrastructure Capital, Inc. (incorporated by reference to Exhibit 3.2 to
the Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Amended and Restated Agreement of Limited Partnership of Hannon Armstrong Sustainable Infrastructure, L.P.
(incorporated by reference to Exhibit 3.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No.
001-35877), filed on August 9, 2013)
Specimen Common Stock Certificate of Hannon Armstrong Sustainable Infrastructure Capital, Inc. (incorporated
by reference to Exhibit 4.1 to Amendment No. 3 to the Registrant’s Form S-11 (No. 333-186711), filed on
April 12, 2013)
Indenture, dated as of August 22, 2017, between Hannon Armstrong Sustainable Infrastructure Capital, Inc. and
U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K
(No. 001-35877), filed on August 22, 2017)
First Supplemental Indenture, dated as of August 22, 2017, between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and U.S. Bank National Association, as Trustee (including the form of 4.125% Convertible Senior
Note due 2022) (incorporated by reference to Exhibit 4.2 to the Registrant’s Form 8-K (No. 001-35877), filed on
August 22, 2017)
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.5 to Amendment No. 3 to the
Registrant’s Form S-11 (No. 333-186711), filed on April 12, 2013)
Amended and Restated 2013 Hannon Armstrong Sustainable Infrastructure Capital, Inc. Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2017
(No. 001-35877), filed on May 4, 2017)
Restricted Stock Award Agreement dated April 23, 2013 between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Jeffrey W. Eckel (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the
quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Form of Restricted Stock Award Agreement (Executive Officers) (incorporated by reference to Exhibit 10.3 to the
Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Form of Restricted Stock Award Agreement (Non-employee Directors) (incorporated by reference to Exhibit 10.4
to the Registrant's Form 10-Q for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013).
Amended and Restated Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit
10.2 to the Registrant’s Form 10-Q for the quarter ended March, 31 2017 (No. 001-35877), filed on May 4, 2017)
Registration Rights Agreement, dated April 23, 2013, by and among Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and the parties listed on Schedule I thereto (incorporated by reference to Exhibit 10.6 to the
Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Employment Agreement, dated April 17, 2013, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Jeffrey Eckel (incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-Q for the
quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Employment Agreement, dated April 17, 2013, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and J. Brendan Herron, Jr. (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-Q
for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
4
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Employment Agreement, dated April 17, 2013, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Steven L. Chuslo (incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-Q for
the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Employment Agreement, dated April 17, 2013, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Nathaniel J. Rose (incorporated by reference to Exhibit 10.10 to the Registrant’s Form 10-Q for
the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Letter Agreement, dated as of April 5, 2018, between M. Rhem Wooten, Hannon Armstrong Sustainable
Infrastructure Capital, Inc. and Hannon Armstrong Capital Inc. (incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 10-Q for the quarter ended March 31, 2018 (No. 001-35877), filed on May 4, 2018)
Employment Agreement, dated April 17, 2013, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Daniel McMahon (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for
the quarter ended June 30, 2015 (No. 001-35877), filed on August 7, 2015)
Agreement and Plan of Merger, dated as of April 23, 2013, by and among Hannon Armstrong Sustainable
Infrastructure Capital, Inc., HA Merger Sub I LLC, HA Merger Sub III LLC, MissionPoint HA Parallel Fund,
LLC, MissionPoint ES Parallel Fund I, L.P., MissionPoint HA Parallel Fund I Corp. and MissionPoint HA Parallel
Fund, L.P. (incorporated by reference to Exhibit 10.12 to the Registrant’s Form 10-Q for the quarter ended
June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Agreement and Plan of Merger, dated as of April 23, 2013, by and among Hannon Armstrong Sustainable
Infrastructure Capital, Inc., HA Merger Sub II LLC, HA Merger Sub III LLC, MissionPoint HA Parallel Fund II,
LLC, MissionPoint ES Parallel Fund II, L.P. MissionPoint HA Parallel Fund II Corp. and MissionPoint HA
Parallel Fund, L.P. (incorporated by reference to Exhibit 10.13 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2013 (No. 001-35877), filed on August 9, 2013)
Trust Agreement relating to HASI SYB 2013-1 Trust, dated as of December 20, 2013, among HASI SYB 2013-1
Trust, HASI SYB I LLC, HAT SYB I LLC, The Bank of New York Mellon as Trustee and Hannon Armstrong
Sustainable Infrastructure Capital, Inc. (incorporated by reference to Exhibit 10.26 to the Registrant’s Form 10-K
for the year ended December 31, 2013 (No. 001-35877), filed on March 18, 2014)
Note Purchase Agreement, dated as of December 20, 2013, among HASI SYB 2013-1 Trust, HASI SYB I LLC,
HAT SYB I LLC, The Bank of New York Mellon as Trustee and the purchaser of the notes thereunder
(incorporated by reference to Exhibit 10.27 to the Registrant’s Form 10-K for the year ended December 31, 2013
(No. 001-35877), filed on March 18, 2014)
Unit Purchase Agreement, dated as of May 28, 2014, by and among Hannon Armstrong Sustainable Infrastructure
Capital, Inc., American Wind Capital Company, LLC, Northwharf Nominees Limited, DBD AWCC LLC, NGP
Energy Technology Partners II, L.P. and C.C. Hinckley Company, LLC (incorporated by reference to Exhibit 10.1
to the Registrant’s Form 10-Q for the quarter ended June 30, 2014 (No. 001-35877), filed on August 14, 2014)
Agreement for Professional Services, dated as of May 28, 2014, by and among Hannon Armstrong Capital, LLC
and AWCC Capital, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2014 (No. 001-35877), filed on August 14, 2014)
Indenture, dated as of September 30, 2015, among HASI SYB Trust 2015-1, the Bank of New York Mellon and
Hannon Armstrong Capital, LLC (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the
quarter ended September 30, 2015 (No. 001-35877), filed on November 5, 2015)
Bond Purchase Agreement (Class A), dated as of September 30, 2015, among HASI SYB Trust 2015-1, HA Land
Lease Holdings, LLC and the purchasers named therein (incorporated by reference to Exhibit 10.5 to the
Registrant’s Form 10-Q for the quarter ended September 30, 2015 (No. 001-35877), filed on November 5, 2015)
Contribution and Sale Agreement, dated as of September 30, 2015, among HASI SYB Trust 2015-1, and HA
Land Lease Holdings, LLC (incorporated by reference to Exhibit 10.6 to the Registrant’s Form 10-Q for the
quarter ended September 30, 2015 (No. 001-35877), filed on November 5, 2015)
Indemnity Agreement, dated as of September 30, 2015, by Hannon Armstrong Sustainable Infrastructure Capital,
Inc. in favor of the Bank of New York Mellon (incorporated by reference to Exhibit 10.7 to the Registrant’s Form
10-Q for the quarter ended September 30, 2015 (No. 001-35877), filed on November 5, 2015)
Employment Agreement, dated March 15, 2017, by and between Hannon Armstrong Sustainable Infrastructure
Capital, Inc. and Charles Melko (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the
quarter ended March 31, 2017 (No. 001-35877), filed on May 4, 2017)
Form of Amended and Restated Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.57 to
the Registrant's Form 10-K (No. 001-35877) for the year ended December, 31, 2017, filed on February 23, 2018)
Loan Agreement (Rep-Based), dated as of December 13, 2018 by and among certain subsidiaries of the Company,
Bank of America, N.A., as administrative agent, and each lender from time to time party thereto (incorporated by
reference to Exhibit 10.26 to the Registrant's Form 10-K (No. 001-35877) filed on February 22, 2019)
5
10.27
10.28
10.29
21.1
23.1
23.2*
23.3*
23.4*
24.1
31.1*
31.2*
32.1**
32.2**
99.1*
99.2*
99.3*
99.4*
Loan Agreement (Approval-Based), data as of December 13, 2018, by and among certain subsidiaries of the
Company, Bank of America, N.A., as administrative agent, and each lender from time to time party thereto
(incorporated by reference to Exhibit 10.27 to the Registrant's Form 10-K (No. 001-35877) filed on February 22,
2019)
Limited Guaranty (Rep-Based), dated as of December 13, 2018, by the Company and Hannon Armstrong Capital,
LLC (incorporated by reference to Exhibit 10.28 to the Registrant's Form 10-K (No. 001-35877) filed on February
22, 2019)
Guaranty (Approval-Based), dated as of December 13, 2018, by the Company and Hannon Armstrong Capital,
LLC (incorporated by reference to Exhibit 10.29 to the Registrant's Form 10-K (No. 001-35877) filed on February
22, 2019)
List of subsidiaries of Hannon Armstrong Sustainable Infrastructure Capital, Inc. (incorporated by reference to
Exhibit 21.1 to the Registrant’s Form 10-K (No. 001-35877), filed on February 22, 2019)
Consent of Ernst & Young LLP for Hannon Armstrong Sustainable Infrastructure Capital, Inc. (incorporated by
reference to Exhibit 23.1 to the Registrant’s Form 10-K (No. 001-35877), filed on February 22, 2019)
Consent of EKS&H LLLP for MM Solar Parent, LLC and Subsidiaries
Consent of CohnReznick LLP for Helix Fund I, LLC
Consent of Deloitte & Touche LLP for Buckeye Wind Energy Class B Holdings LLC and Subsidiaries
Power of Attorney (incorporated by reference to Exhibit 24.1 to the Registrant’s Form 10-K (No. 001-35877),
filed on February 22, 2019)
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to section 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes—Oxley Act of 2002
Certification of Chief Financial Officer pursuant to section 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes—Oxley Act of 2002
MM Solar Parent LLC and Subsidiaries, Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years then ended and for the year ended December 31, 2016
Helix Fund I LLC, Consolidated Financial Statements as of and for the year ended December 31, 2018
Helix Fund I LLC, Consolidated Financial Statements as of December 31, 2017 and January 1, 2017 and for the
year December 31, 2017 and the period from December 2, 2016 (inception) through January 1, 2017
Buckeye Wind Energy Class B Holdings LLC and Subsidiaries, Consolidated Financial Statements as of
December 31, 2018 and 2017 and for each of the three years in the period ended December 31, 2018
101.INS XBRL Instance Document (incorporated by reference to Exhibit 101.INS to the Registrant’s Form 10-K (No.
001-35877), filed on February 23, 2018)
101.SCH XBRL Taxonomy Extension Schema (incorporated by reference to Exhibit 101.SCH to the Registrant’s Form 10-
K (No. 001-35877), filed on February 22, 2019)
101.CAL XBRL Taxonomy Extension Calculation Linkbase (incorporated by reference to Exhibit 101.CAL to the
Registrant’s Form 10-K (No. 001-35877), filed on February 22, 2019)
101.DEF XBRL Taxonomy Extension Definition Linkbase (incorporated by reference to Exhibit 101.DEF to the
Registrant’s Form 10-K (No. 001-35877), filed on February 22, 2019)
101.LAB XBRL Taxonomy Extension Label Linkbase (incorporated by reference to Exhibit 101.LAB to the Registrant’s
Form 10-K (No. 001-35877), filed on February 22, 2019)
101 PRE XBRL Taxonomy Extension Presentation Linkbase (incorporated by reference to Exhibit 101.PRE to the
Registrant’s Form 10-K (No. 001-35877), filed on February 22, 2019)
*
**
Filed herewith.
Furnished with this report.
6
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 26, 2019
Date: March 26, 2019
HANNON ARMSTRONG SUSTAINABLE
INFRASTRUCTURE CAPITAL, INC.
By:
Name:
Title:
/s/ Jeffrey W. Eckel
Jeffrey W. Eckel
Chairman, Chief Executive Officer and President
By:
Name:
Title:
/s/ Charles W. Melko
Charles W. Melko
Chief Accounting Officer and Senior Vice President
7
CORPORATE INFORMATION
BOARD OF DIRECTORS
Rebecca B. Blalock
Mark J. Cirilli
Chair,
Compensation
Committee
Teresa M. Brenner
Chair,
Nominating,
Governance and
Corporate
Responsibility
Committee
Jeffrey W. Eckel
Chairman
Charles M. O’Neil
Chair,
Finance and Risk
Committee
Richard J. Osborne
Lead Independent
Director
Steven G. Osgood
Chair,
Audit Committee
Jeffrey W. Eckel
Chairman, President
& Chief Executive Officer
J. Brendan Herron
Executive Vice President
EXECUTIVE MANAGEMENT
Jeffrey A. Lipson
Executive Vice President &
Chief Financial Officer
Nathaniel J. Rose, CFA
Executive Vice President &
Chief Investment Officer
CONTACT
Steven L. Chuslo
Executive Vice President &
General Counsel
Daniel K. McMahon, CFA
Portfolio Management
Executive Vice President
Corporate Headquarters
1906 Towne Centre Boulevard, Suite 370
Stock Listing
Hannon Armstrong
Annapolis, MD 21401
info@hannonarmstrong.com
Phone: 410 -571-9860
Investor Relations Contact
Investors@hannonarmstrong.com
Phone: 410 -571- 6189
Sustainable Infrastructure
Capital, Inc.’s common
stock is listed on the
New York Stock Exchange
under the symbol “HASI”.
Annual Report Design
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© 2019 Hannon Armstrong Sustainable Infrastructure Capital, Inc. All Rights Reserved.
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INVESTING IN CLIMATE CHANGE SOLUTIONS
S M
2018 ANNUAL REPORT