ANNAPOLIS, Maryland–(BUSINESS WIRE)–Hannon Armstrong Sustainable Infrastructure Capital, Inc. (“Hannon Armstrong”, “we”, “us”, or the “Company”) (NYSE: HASI), a leading investor in climate solutions, today released today the following statement in response to baseless allegations made in a short misleading attack report by Muddy Waters Capital LLC on July 12, 2022.
For more than 40 years, Hannon Armstrong has operated with the highest level of integrity, which includes providing audited, accurate and timely financial statements. The Muddy Waters report calls into question the integrity of these financial statements based on factual errors and inflammatory and misleading statements. Hannon Armstrong believes that its accounting is fully compliant with GAAP and SEC regulations and is an accurate representation of our financial performance. We supplement our GAAP financial statements with certain non-GAAP measures, including a measure we call distributable income. We believe these non-GAAP measures are a useful supplement to our GAAP earnings for our investors and we fully disclose our methodology and distributable earnings adjustments in our SEC filings. In addition to EY as our independent auditor, Hannon Armstrong works with another of the “big four” accounting firms on risk management and disclosure controls, including on our investments under the equity method. We believe this comprehensive approach and commitment to financial integrity stands in stark contrast to the false claims made in the report.
The report contains both a series of factual errors and numerous inflammatory and misleading statements demonstrating a fundamental lack of understanding of our financial statements and business. It insinuates that our non-cash earnings (a) indicate a lack of cash available to pay our dividend, (b) lead to inflated earnings, and (c) reflect struggling borrowers/projects. In fact, our non-cash earnings do not impact our ability to fund our dividend, are intentionally structured at the time of subscription, and are not indicative of distress.
While we do not engage in a tit-for-tat rebuttal of every lie in the report, it is important to set the record straight on the following key points:
- We have sufficient portfolio cash flow to pay our dividend. The report assumes that the non-cash earnings shown in our financial statements result in insufficient cash flow needed to fund our dividend each year. It is absolutely false. We have internal processes to rigorously model our liquidity and expected cash flows and our expectations consistently reflect that portfolio cash flows remain adequate to cover our dividend. In order to provide the most up-to-date information, we will introduce additional non-GAAP information to support this statement in our second quarter earnings report scheduled for August 4, 2022.
- Because HLBV accounting is complex and does not reflect our economic condition in any given period, we use distributable earnings as supplemental information. For certain equity method investments in renewable energy projects, GAAP permits the use of hypothetical liquidation at book value (“HLBV”). These investments also typically include a tax equity investor who is allocated tax credits. At the time of these tax credit allocations, the remaining investors (including Hannon Armstrong) are often allocated a large gain. The report suggests there is something inappropriate in our HLBV allocations since there is no matching money. However, this accounting is required when the HLBV methodology is used, and we fully disclose that we expect to recover the carrying amount of our investment over time. In addition, we perform an impairment analysis quarterly to substantiate the carrying value of these investments. We provide our non-GAAP distributable earnings measure in part to reverse our HLBV allocations and make an adjustment that reflects earnings that are consistent with our economic data for the period. The report also alleges that tax credits are attributed to us, that we inflate our profits inappropriately, that we move cash around with our investments under the equity method and that we do not disclose the related party transactions. All of these claims are false. The report lacks a basic understanding of revenues and cash flows associated with renewable energy projects and standard accounting practices for these projects.
- SunStrong’s cash flows come from residential solar portfolios, which are one of the best performing ABS asset classes. All transactions have commercial substance and are executed at arm’s length. As is customary in joint venture transactions, we do not exercise unilateral governance control and we do not exercise voting rights with respect to related party transactions. None of the revenue we have booked with SunStrong is unachievable. All related party transactions are disclosed as such. We don’t “round trip” cash from SunStrong to inflate our revenue.
- We have had no losses on our securitization residuals over the past 20 years and our market-based discount rates reflect this. Although the report erroneously claims that we manipulate the discount rate of our securitizations and residuals, resulting in inflated gains and residual balances, the fact is that we use market-based assumptions to calculate the rates discount. These assumptions use interest rates and market risk premiums, and our residuals are fully supported by expected future cash flows. The report mentions that our discount rate is reasonably expected to be in the “high teens” for a subordinated interest in trade receivables, regardless of whether the receivables we securitize have a quality high credit ratings and in many cases are with government debtors or other debtors with low risk assets, as evidenced by our historical zero loss rate on residuals. A lower discount rate is therefore to be expected.
- The PIK of our loans is intentionally structured to match the cash flows of the underlying projects. The report alleges incorrect recording of payment-in-kind (“PIK”) interest. Our PIK interest is not indicative of distressed borrowers and has been fully considered in our underwriting. This PIK interest typically results from investors participating in the tax equity being allocated cash in the early years of the transaction, causing our cash flow allocation to be lower than our loan interest rate. Because there is enough cash to pay all of our interest, those loans that are classified as PIK in the early years have cash flows that exceed income in later years. This accounting is in accordance with GAAP and consistent with our economic results. We disclose our policies for recognizing our trade and government receivables, in which we assess the collectability of amounts we have recognized as revenue and will cease recognizing revenue if we believe there is substantial doubt about our ability to collect these amounts. We perform this analysis quarterly and have concluded that our PIK interest is fully achievable.
“We have a long history of adhering to the highest ethical and professional standards, and we will communicate proactively with our investors, customers and other stakeholders,” said Jeffrey W. Eckel, chairman and CEO of Hannon Armstrong. “We are committed to fiercely defending our business, while continuing to prove our investment thesis of achieving better risk-adjusted returns by investing on the right side of the climate change line.
About Hannon Armstrong
Hannon Armstrong (NYSE: HASI) is the first U.S. public company dedicated exclusively to climate solutions investments, providing capital to assets developed by leading companies in energy efficiency, renewable energy and other energy markets. sustainable infrastructure. With $9 billion in assets under management, our primary focus is to make climate-positive investments with superior risk-adjusted returns. For more information, please visit hannonarmstrong.com or follow us on Twitter and LinkedIn.
Certain of the information contained in this press release is forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. . For these statements, we claim the protections of the safe harbor for forward-looking statements contained in these sections. These forward-looking statements include information about possible or expected 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 mean identify statements to search.
Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned not to place undue reliance on such statements. Actual results may differ materially from those set forth in the forward-looking statements. Factors that could cause actual results to differ materially from those described in the forward-looking statements include those discussed under “Risk Factors” included in our most recent Annual Report on Form 10-K as well as in other periodic reports. that we deposit. with the United States Securities and Exchange Commission
Forward-looking statements are based on beliefs, assumptions and expectations as of the date of this press release. We undertake no obligation to publish the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this press release.