(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 the "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-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, 2020, as amended by our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2020, (collectively, our "2020 Form 10-K") that was filed with the SEC. Our Business We invest in climate solutions developed by the leading companies in the 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, 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 in which the assets use proven technology and have a long-term, creditworthy off-taker or counterparties. For BTM assets, 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. For GC assets, the off-taker or counterparty may be a utility or electric user who has entered into a contractual commitment, 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. We completed approximately $509 million and $697 million of transactions during the three and six months ended June 30, 2021, respectively, compared to approximately $178 million and $364 million during the same period in 2020. As of June 30, 2021, pursuant to our strategy of holding transactions on our balance sheet, we held approximately $3.0 billion of transactions on our balance sheet, which we refer to as our "Portfolio." As of June 30, 2021, our Portfolio consisted of over 225 assets 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. 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 cash and/or residual interests in the assets and in some cases, ongoing fees. As of June 30, 2021, we managed approximately $5.0 billion in assets in these securitization trusts or vehicles that are not consolidated on our balance sheet. When combined with our Portfolio, as of June 30, 2021, we manage approximately $8.0 billion of assets which we refer to as our "Managed Assets". - 33 -
We make our investments utilizing a variety of structures including:
Factors Impacting our Operating Results
Balance Maturity (in millions) Fixed-rate receivables, interest rates less than 5.00% per annum $ 117 2023 to 2046 Fixed-rate receivables, interest rates from 5.00% to 6.50% per annum 67 2022 to 2056 Fixed-rate receivables, interest rates greater than 6.50% per annum (1) 1,010 2021 to 2069 Receivables 1,194 Allowance for loss on receivables (37) Receivables, net of allowance 1,157 Fixed-rate investments, interest rates less than 5.00% per annum 11 2035 to 2038 Fixed-rate investments, interest rates from 5.00% to 6.50% per annum 7 2047 to 2051 Total receivables and investments $ 1,175
(1)Excludes receivables held-for-sale of $9 million The table below presents, for the debt investments and real estate related holdings of our Portfolio and our interest-bearing liabilities inclusive of our credit facilities, 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 this table.
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (dollars in millions) Portfolio, excluding equity method investments Interest income, receivables $ 25 $ 23 $ 49 $ 46 Average balance of receivables $ 1,180 $ 1,133 $ 1,214 $ 1,148 Average interest rate of receivables 8.4 % 8.0 % 8.1 % 7.9 % Interest income, investments $ - $ 1 $ 1 $ 1 Average balance of investments $ 21 $ 58 $ 36 $ 66 Average interest rate of investments 4.5 % 4.4 % 3.9 % 4.4 % Rental income $ 6 $ 6 $ 13 $ 13 Average balance of real estate $ 358 $ 361 $ 358 $ 361 Average yield on real estate 7.2 % 7.2 % 7.2 % 7.2 % Average balance of receivables, investments, and real estate $ 1,559 $ 1,553 $ 1,608 $ 1,576 Average yield from receivables, investments, and real estate 8.1 % 7.7 % 7.8 % 7.6 % Debt Interest expense $ 26 $ 22 $ 53 $ 40 Average balance of debt $ 2,068 $ 1,664 $ 2,129 $ 1,532 Average cost of debt 5.0 % 5.2 % 5.0 % 5.2 %
The following table provides a summary of our anticipated principal repayments for our receivables and investments as of June 30, 2021:
Payment due by Period Less than 1-5 5-10 More than Total 1 year years years 10 years (in millions) Receivables (excluding allowance) (1) $ 1,194 $ 139 $ 185 $ 390 $ 480 Investments 18 1 2 3 12
(1)Excludes receivables held-for-sale of $9 million.
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See Note 6 to our financial statements in this Form 10-Q for information on:
30, 2020 Three months ended June 30, 2021 2020 $ Change % Change (dollars in millions) Revenue Interest income $ 25 $ 24 $ 1 4 % Rental income 6 6 - - % Gain on sale of receivables and investments 25 16 9 56 % Fee income 3 3 - - % Total Revenue 59 49 10 20 % Expenses Interest expense 41 22 19 86 % Provision for loss on receivables 1 2 (1) (50) % Compensation and benefits 12 9 3 33 % General and administrative 5 4 1 25 % Total expenses 59 37 22 59 % Income (loss) before equity method investments - 12 (12) (100) % Income (loss) from equity method investments 22 (1) 23 (2,300) % Income (loss) before income taxes 22 11 11 100 % Income tax (expense) benefit (6) 1 (7) (700) % Net income (loss) $ 16 $ 12 $ 4 33 %
Net income increased by $4 million due to an increase of $10 million in total revenue and an increase in equity method investments income of $23 million, offset by a $22 million increase in total expenses and a $7 million increase in income tax expense. These results do not reflect the non-GAAP distributable earnings adjustments discussed in the non-GAAP financial measures section below.
Income tax expense increased by $7 million primarily due to the increased HLBV income described above.
2020 Six months ended June 30, 2021 2021 2020 $ Change % Change (dollars in millions) Revenue Interest income $ 50 $ 47 $ 3 6 % Rental income 13 13 - - % Gain on sale of receivables and investments 42 21 21 100 % Fee income 6 8 (2) (25) % Total Revenue 111 89 22 25 % Expenses Interest expense 68 40 28 70 % Provision for loss on receivables 1 3 (2) (67) % Compensation and benefits 28 18 10 56 % General and administrative 10 7 3 43 % Total expenses 107 68 39 57 % Income (loss) before equity method investments 4 21 (17) (81) % Income (loss) from equity method investments 77 16 61 381 % Income (loss) before income taxes 81 37 44 119 % Income tax (expense) benefit (13) (1) (12) 1,200 % Net income (loss) $ 68 $ 36 $ 32 89 %
Net income increased by $32 million due to an increase of $22 million in total revenue and an increase in equity method investments income of $61 million, offset by a $39 million increase in total expenses and a $12 million increase in income tax expense. These results do not reflect the non-GAAP distributable earnings adjustments discussed in the non-GAAP financial measures section below.
Aug 06, 2021
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