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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations In this Form 10-Q, unless specifically stated otherwise or the context otherwise indicates, references to "we," "our," "us," and "HASI" 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-Q as our "Operating Partnership." Our business is focused on reducing the impact of 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. The following discussion is a supplement to and should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes and with our Annual Report on Form 10-K for the year ended December 31, 2019, as amended by our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2019, (collectively, our "2019 Form 10-K") that was filed with the SEC. Our Business We make investments in climate change solutions by providing capital to leading companies in energy efficiency, renewable energy and other sustainable infrastructure markets. We believe we are one of the first U.S. public companies solely dedicated to such climate change investments. Our goal is to generate attractive returns from a diversified portfolio of projects with long-term, predictable cash flows from proven technologies that reduce carbon emissions or increase resilience to climate change. 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. 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 efficiency 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 Sustainable Infrastructure: upgraded transmission and distribution systems, water and storm water infrastructure, and other projects that improve water or energy efficiency, increase resiliency, positively impact the environment or more efficiently use natural resources.

We prefer investments that use proven technology and that often have contractually committed agreements with an 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 power produced by a renewable energy project at a minimum price with potential price escalators for a portion of the project's estimated life.

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We make our investments utilizing a variety of structures including:

                 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 and energy efficiency 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 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 31,000 acres of land that are leased under long-term agreements to over 60 renewable energy projects, where our investment returns are typically senior to most project costs, debt, and equity.

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Factors Impacting our Operating Results

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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, Impairment or the establishment of an allowance under Topic 326 for our Portfolio, and Securitization of Receivables. We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions. We provide additional information on our critical accounting policies and use of estimates under Item

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.

The table below provides details on the interest rate and maturity of our receivables and debt securities as of March 31, 2020:

                                                                       Balance         Maturity
                                                                    (in millions)
        Fixed-rate receivables, interest rates less than 5.00% per
        annum                                                      $         239     2020 to 2045
        Fixed-rate receivables, interest rates from 5.00% to 6.50%
        per annum                                                            102     2020 to 2056
        Fixed-rate receivables, interest rates greater than 6.50%
        per annum                                                            817     2020 to 2069
        Receivables                                                        1,158
        Allowance for loss on receivables                                    (26 )
        Receivables, net of allowance                                      1,132
        Fixed-rate investments, interest rates less than 5.00% per
        annum                                                                 43     2035 to 2038
        Fixed-rate investments, interest rates from 5.00% to 6.50%
        per annum                                                             20     2030 to 2051
        Total receivables and investments                          $       1,195

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The table below presents, for the debt investments and real estate related holdings 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 this analysis. Our net investment margin represents the difference between the interest and rental income generated by our Portfolio and the interest expense, divided by the average balance of those assets.

                                                                        Three Months Ended March 31,
                                                                          2020                  2019
                                                                            (dollars in millions)
        Interest income, receivables                               $          23           $          16
        Average monthly balance of receivables                             1,150                     904
        Average interest rate of receivables                                 7.9 %                   6.9 %
        Interest income, investments                                           1                       2
        Average monthly balance of investments                                73                     172
        Average interest rate of investments                                 4.4 %                   4.4 %
        Rental income                                                          6                       6
        Average monthly balance of real estate                               362                     365
        Average yield on real estate                                         7.2 %                   7.1 %
        Average monthly balance of receivables, investments, and
        real estate                                                        1,585                   1,441
        Average yield from receivables, investments, and real
        estate                                                               7.6 %                   6.6 %
        Interest expense (1)                                                  16                      13
        Average monthly balance of debt (1)                                1,314                   1,137
        Average interest rate of debt (1)                                    4.9 %                   4.5 %
        Average interest spread (1)                                          2.7 %                   2.1 %
        Net investment margin (1)                                            3.5 %                   3.1 %

(1) Excludes amounts related to the non-recourse debt used to finance the equity method investments because our earnings from these assets are not included in total revenue.

The following table provides a summary of our anticipated principal repayments for our receivables and investments as of March 31, 2020:

                                      Payment due by Period
                                Less than      1-5      5-10      More than
                     Total       1 year       years     years      10 years
                                          (in millions)
        Receivables $ 1,132    $       93    $  188    $  272    $       579
        Investments      63             5         4        12             42

See Note 6 to our financial statements in this Form 10-Q for information on:

the term of our leases and a schedule of our future minimum rental income under our land lease agreements as of March 31, 2020,

the Performance Ratings of our Portfolio, and

the receivables on non-accrual status.

For information on our residual assets relating to our securitization trusts, see Note 5 to our financial statements in this Form 10-Q. The residual assets do not have a contractual maturity date and the underlying securitized assets have contractual maturity dates until 2055.

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        Results of Operations
        Comparison of the Three Months Ended March 31, 2020 vs. Three Months Ended March
        31, 2019
                                                  Three Months Ended March 31,
                                                    2020                  2019            $ Change        % Change
                                                                      (dollars in millions)
        Interest income                      $          24           $          18     $         6             33  %
        Rental income                                    6                       6               -              -  %
        Gain on sale of receivables and
        investments                                      5                       7              (2 )          (29 )%
        Fee income                                       6                       2               4            200  %
        Total revenue                                   41                      33               8             24  %
        Interest expense                                18                      15               3             20  %
        Provision for loss on receivables                1                       -               1             NM
        Compensation and benefits                        9                       8               1             13  %
        General and administrative                       3                       3               -              -  %
        Total expenses                                  31                      26               5             19  %
        Income before equity method
        investments                                     10                       7               3             43  %
        Income (loss) from equity method
        investments                                     16                       5              11            220  %
        Income (loss) before income taxes               26                      12              14            117  %
        Income tax (expense) benefit                    (2 )                     2              (4 )         (200 )%
        Net income (loss)                    $          24           $          14     $        10             71  %

NM-Percentage change is not meaningful.

Total revenue increased by $8 million due to a $6 million increase in interest income resulting from higher yielding assets in the portfolio and a higher average balance. There was a $2 million increase in gain on sale and fee income primarily from additional advisory fees.

Interest expense increased by $3 million primarily due to higher average outstanding borrowings and higher cost of debt. We recorded a $1 million provision for loss on receivables in the current quarter primarily due to the impact of the COVID-19 pandemic on the expected cash flows of certain of our investments.

Compensation and benefit expense increased by $1 million as a result of an increase in our employee headcount.

Income from equity method investments increased by $11 million, primarily due to the realization of tax attributes by our co-investors which increased our HLBV allocation of earnings.

Non-GAAP Financial Measures

May 11, 2020

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