HA Sustainable Infrastructure Capital, Inc. 10-Q

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, 2022, as amended by our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2022 (collectively, our “2022 Form 10-K”), that was filed with the SEC . Our Business We are a climate positive investment firm that actively partners with clients to deploy real assets that facilitate the energy transition. With more than $10 billion in managed assets, our vision is that every investment improves our climate future. Our investments take many forms, including equity, joint ventures, land ownership, lending, and other financing transactions. In addition to Net Investment Income from our portfolio, we also generate ongoing fees through gain-on-sale securitization transactions, asset management, and other services. We are internally managed, and our management team has extensive relevant industry knowledge and experience. We have long-standing relationships with the leading energy service companies (“ESCOs”), manufacturers, project developers, utilities, owners and operators that provide recurring, programmatic investment and fee-generating opportunities. Our investments are focused on three markets: • 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 • Fuels, Transport, and Nature (“FTN”) : renewable natural gas (RNG) plants, transportation fleet enhancements, and ecological restoration projects, among others, that increase resiliency 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 our investment may be secured by the installed improvements or other real estate rights. For GC assets, the off-takers or counterparties may be utility or electric users who have entered into contractual commitments, such as power purchase agreements (“PPAs”), to purchase power produced by a renewable energy project at a specified price with potential price escalators for a portion of the project’s estimated life. We completed approximately $389 million of transactions during the three months ended March 31, 2023, compared to approximately $331 million during the same periods in 2022, respectively. As of March 31, 2023, pursuant to our strategy of holding transactions on our balance sheet, we held approximately $4.7 billion of transactions on our balance sheet, which we refer to as our “Portfolio.” As of March 31, 2023, our Portfolio consisted of over 350 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 March 31, 2023, we managed approximately $5.7 billion in assets in these securitization trusts or vehicles that are not consolidated on our balance sheet. When combined with our Portfolio, as of March 31, 2023, we manage approximately $10.4 billion of assets which we refer to as our “Managed Assets”. - 35 - We make our investments utilizing a variety of structures including: • equity investments in either preferred or common structures in unconsolidated entities; • commercial and government receivables or securities; and • real estate. Our equity investments in climate solutions 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, land which is leased under long-term agreements to renewable energy projects, where our investment returns are typically senior to most project costs, debt, and equity. We often make investments where we hold a preferred or mezzanine position in a project company where we are subordinated to project debt and/or preferred forms of equity. Investing greater than 10% of our assets in any individual project company 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 the maintenance of our REIT qualification and our exemption from registration as an investment company under the 1940 Act. We believe we have available a broad range of financing sources as part of our strategy to fund our investments. We may finance our investments through the use of cash on hand, non-recourse debt, recourse debt, convertible securities, or equity and may also decide to finance such transactions through the use of off-balance sheet securitization structures. When issuing debt, we generally provide the estimated carbon emission savings using CarbonCount. In addition, certain of our debt issuances meet the environmental eligibility criteria for green bonds as defined by the International Capital Markets Association’s Green Bond Principles, which we believe makes our debt more attractive for many investors compared to such offerings that do not qualify under these principles. We have a large and active pipeline of potential new opportunities that are in various stages of our underwriting process. We believe the Inflation Reduction Act signed into law on August 16, 2022, that incentivizes the construction of and investment in climate solutions will result in additional investment opportunities in the markets in which we invest over the next several years, which may result in increases in our pipeline in the future. We refer to potential opportunities as being part of our pipeline if we have determined that the project fits within our climate solutions 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 relevant 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 March 31, 2023, our pipeline consisted of more than $5.0 billion in new equity, debt and real estate opportunities. Of our pipeline, approximately 41% is related to BTM assets and 46% is related to GC assets, with the remainder related to FTN. 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. 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 quantify the carbon impact of our investments. In this calculation, which we refer to as CarbonCount, we use emissions factor data, expressed on a CO 2 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. Refer to “MD&A — Environmental Metrics” below for a discussion of the carbon emissions avoided as a result of our investments. In addition to carbon, we also consider other environmental attributes, such as water use reduction, stormwater remediation benefits and stream restoration benefits. 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, and operate our business in a manner that will permit us to continue to maintain our exemption from registration as an investment company under the 1940 Act. - 36 - 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 that 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, our ability to qualify as a REIT and maintain our exemption from registration as an investment company under the 1940 Act, and the impact of climate change. We provide a summary of the factors impacting our operating results in our 2022 Form 10-K under MD&A – Factors Impacting our Operating Results. 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. Understanding our accounting policies and the extent to which we make judgments and estimates in applying these policies is integral to understanding our financial statements. We believe the estimates and assumptions used in preparing our financial statements and related footnotes are reasonable and supportable based on the best information available to us as of March 31, 2023. Various uncertainties may materially impact the accuracy of the estimates and assumptions used in the financial statements and related footnotes and, as a result, actual results may vary significantly from estimates. 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, Equity Method Investments, Impairment or the establishment of an allowance under Topic 326 for our Portfolio and Securitization of Financial Assets. 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 7. MD&A—Critical Accounting Policies and Use of Estimates in our 2022 Form 10-K and under Note 2 to our financial statements in this Form 10-Q. Financial Condition and Results of Operations Our Portfolio Our Portfolio totaled approximately $4.7 billion as of March 31, 2023 and included approximately $2.5 billion of BTM assets and approximately $2.0 billion of GC assets, with the remainder in FTN assets. Approximately 48% of our Portfolio consisted of unconsolidated equity investments in renewable energy related projects. Approximately 45% consisted of fixed-rate commercial and government receivables and debt securities, which are classified as investments, on our balance sheet, and 7% of our Portfolio was real estate leased to renewable energy projects under lease agreements. Our Portfolio consisted of over 350 transactions with an average size of $13 million and the weighted average remaining life of our Portfolio (excluding match-funded transactions) of approximately 18 years as of March 31, 2023. The table below provides details on the interest rate and maturity of our receivables and debt securities as of March 31, 2023: Balance Maturity (in millions) Fixed-rate receivables, interest rates less than 5.00% per annum $ 119 2023 to 2047 Fixed-rate receivables, interest rates from 5.00% to 6.50% per annum 347 2024 to 2057 Fixed-rate receivables, interest rates from 6.50% to 8.00% per annum 746 2024 to 2069 Fixed-rate receivables, interest rates from 8.00% to 9.50% per annum 367 2025 to 2035 Fixed-rate receivables, interest rates greater than 9.50% per annum 525 2024 to 2061 Receivables 2,104 (1) Allowance for loss on receivables (43) Receivables, net of allowance 2,061 Fixed-rate investments, interest rates less than 5.00% per annum 4 2035 to 2047 Fixed-rate investments, interest rates from 5.00% to 6.50% per annum 6 2047 to 2051 Total receivables and investments $ 2,071 (1) Excludes receivables held for sale of $17 million. - 37 - The table below presents, for the debt investments and real estate related holdings of our Portfolio and our interest-bearing liabilities inclusive of our short-term commercial paper issuances and revolving 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 March 31, 2023 2022 (dollars in millions) Portfolio, excluding equity method investments Interest income, receivables $ 42 $ 30 Average balance of receivables $ 2,020 $ 1,459 Average interest rate of receivables 8.2 % 8.2 % Interest income, investments $ — $ — Average balance of investments $ 12 $ 17 Average interest rate of investments 4.5 % 4.0 % Rental income $ 6 $ 6 Average balance of real estate $ 352 $ 357 Average yield on real estate 7.4 % 7.3 % Average balance of receivables, investments, and real estate $ 2,384 $ 1,833 Average yield from receivables, investments, and real estate 8.1 % 8.0 % Debt Interest expense (1) $ 37 $ 27 Average balance of debt $ 3,096 $ 2,512 Average cost of debt 4.8 % 4.2 % (1) Excludes loss on debt modification or extinguishment included in interest expense in our income statement. The following table provides a summary of our anticipated principal repayments for our receivables and investments as of March 31, 2023: Payment due by Period Total Less than 1 year 1-5 years 5-10 years More than 10 years (in millions) Receivables (excluding allowance) $ 2,104 $ 57 $ 332 $ 1,131 $ 584 Investments 10 — 1 2 7 See Note 6 to our financial statements in this Form 10-Q for information on: • the anticipated maturity dates of our receivables and investments and the weighted average yield for each range of maturities as of March 31, 2023, • the term of our leases and a schedule of our future minimum rental income under our land lease agreements as of March 31, 2023, • the Performance Ratings of our Portfolio, and • the receivables on non-accrual status. For information on our securitization assets relating to our securitization trusts, see Note 5 to our financial statements in this Form 10-Q. The securitization assets do not have a contractual maturity date and the underlying securitized assets have contractual maturity dates until 2058. - 38 - Results of Operations Comparison of the Three Months Ended March 31, 2023 vs. Three Months Ended March 31, 2022 Three months ended March 31, 2023 2022 $ Change % Change (dollars in thousands) Revenue Interest income $ 43,108 $ 30,242 $ 12,866 43 % Rental income 6,487 6,499 (12) — % Gain on sale of receivables and investments 15,719 17,099 (1,380) (8) % Securitization income 3,432 2,741 691 25 % Other Income 355 1,895 (1,540) (81) % Total Revenue 69,101 58,476 10,625 18 % Expenses Interest expense 37,216 26,652 10,564 40 % Provision for loss on receivables 1,883 621 1,262 203 % Compensation and benefits 18,369 14,929 3,440 23 % General and administrative 8,022 7,138 884 12 % Total expenses 65,490 49,340 16,150 33 % Income (loss) before equity method investments 3,611 9,136 (5,525) (60) % Income (loss) from equity method investments 22,418 47,566 (25,148) (53) % Income (loss) before income taxes 26,029 56,702 (30,673) (54) % Income tax (expense) benefit (1,431) (10,999) 9,568 (87) % Net income (loss) $ 24,598 $ 45,703 $ (21,105) (46) % • Net income decreased by $21 million due to a decrease in equity method investments income of $25 million and a $16 million increase in total expenses, offset by an $11 million increase in total revenue and a $10 million decrease in income tax expense. • Total revenue increased by $11 million due to a $14 million increase in interest income and securitization income, driven by a higher average Portfolio balance and by higher Managed Assets. This was partially offset by decreases in gain on sale and other income, driven by a change in the mix and volume of assets being securitized and fewer fee generating opportunities. • Interest expense increased by $11 million primarily due to a larger average outstanding debt balance and a higher average interest rate. We recorded a $2 million provision for loss on receivables, driven primarily by loans and loan commitments made during the quarter. • Compensation and benefits and general and administrative expenses increased by $4 million due to share-based compensation recognized upon the grant of awards as a result of our retirement policy, as well as additional investment in corporate infrastructure. • Income (loss) from equity method investments using HLBV allocations decreased by $25 million primarily due to fewer tax attributes recognized by our co-investors which decreases our HLBV allocation of earnings. • Income tax expense decreased by $10 million primarily due to the decrease in GAAP net income before taxes. Non-GAAP Financial Measures We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our performance: (1) distributable earnings, (2) distributable net investment income, and (3) 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. - 39 - Distributable Earnings We calculate distributable earnings as GAAP net income (loss) excluding non-cash equity compensation expense, provisions for loss on receivables, amortization of intangibles, non-cash provision (benefit) for taxes, losses or (gains) from modification or extinguishment of debt facilities, 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 to our equity method investments in the renewable energy projects as described below. We will use judgment in determining when we will reflect the losses on receivables in our distributable earnings, and will consider certain circumstances such as the time period in default, sufficiency of collateral as well as the outcomes of any related litigation. In the future, distributable earnings may also exclude one-time events pursuant to changes in GAAP and certain other adjustments as approved by a majority of our independent directors. We believe a non-GAAP measure, such as distributable earnings, that adjusts for the items discussed above is and has been a meaningful indicator of our economic performance in any one period and is useful to our investors as well as management in evaluating our performance as it relates to expected dividend payments over time. As a REIT, we are required to distribute substantially all of our taxable income to investors in the form of dividends, which is a principal focus of our investors. Additionally, we believe that our investors also use distributable 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 distributable earnings is useful to our investors. Certain of our equity method investments in renewable energy and energy efficiency projects are structured using typical partnership “flip” structures where the investors with cash distribution preferences receive a pre-negotiated 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 common equity investor, often the operator or sponsor of the project, receives more of the cash flows through its equity interests while the previously preferred investors retain an ongoing residual interest. We have made investments in both the preferred and common equity of these structures. Regardless of the nature of our equity interest, we typically negotiate the purchase prices of our equity investments, which have a finite expected life, based on our underwritten project cash flows discounted back to the net present value, based on a target investment rate, with the 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. The investment tax credit available for election in solar projects is a one-time credit realized in the quarter when the project is considered operational for tax purposes and is fully allocated under HLBV in that quarter (subject to an impairment test), while the production tax credit required for wind projects and electable for solar projects is a ten year credit and thus is allocated under HLBV over a ten year period. 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 in a given period. We also consider the impact of any OTTI in determining our income from equity method investments. The cash distributions for those equity method investments where we apply HLBV are segregated into a return on and return of capital on our cash flow statement based on the cumulative income (loss) 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 in any one period. Thus, in calculating distributable earnings, for certain of these investments where there are characteristics as described above, we further adjust GAAP net income (loss) to take into account our calculation of the return on capital (based upon the underwritten 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 equity method investment adjustment to our GAAP net income (loss) in calculating our distributable 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 where HLBV income can differ substantially from the economic returns in any one period. We have acquired equity investments in portfolios of renewable energy projects which have the majority of the distributions payable to more senior investors in the first few years of the project. The following table provides results related to our equity method investments for the three months ended March 31, 2023 and 2022. - 40 - Three months ended March 31, 2023 2022 (in millions) Income (loss) under GAAP $ 22 $ 48 Collections of Distributable earnings $ 9 $ 8 Return of Capital 3 5 Cash collected $ 12 $ 13 Distributable 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 distributable earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures, and accordingly, our reported distributable earnings may not be comparable to similar metrics reported by other companies. The table below provides a reconciliation of our GAAP net income (loss) to distributable earnings for the three months ended March 31, 2023 and 2022. Three Months Ended March 31, 2023 2022 $ Per Share $ Per Share (dollars in thousands, except per share amounts) Net income (loss) attributable to controlling stockholders (1) $ 24,106 $ 0.26 $ 45,346 $ 0.51 Distributable earnings adjustments: Reverse GAAP (income) loss from equity method investments (22,418) (47,566) Equity method investments earnings adjustment 33,957 31,598 Equity-based expenses 9,435 3,540 Provision for loss on receivables 1,883 621 Amortization of intangibles 772 839 Non-cash provision (benefit) for income taxes 1,431 10,999 Current year earnings attributable to non-controlling interest 492 357 Distributable earnings (2) $ 49,658 $ 0.53 $ 45,734 $ 0.52 (1) The per share data reflects the GAAP diluted earnings per share and is the most comparable GAAP measure to our distributable earnings per share. (2) Distributable earnings per share are based on 93,266,916 shares for the three months ended March 31, 2023, and 87,206,540 shares for the three months ended March 31, 2022, respectively, which represents the weighted average number of fully-diluted shares outstanding including our restricted stock awards, restricted stock units, long-term incentive plan units, and the non-controlling interest in our Operating Partnership. We include any potential common stock issuances related to share based compensation units in the amount we believe is reasonably certain to vest. As it relates to Convertible Notes, we will assess the market characteristics around the instrument to determine if it is more akin to debt or equity based on the value of the underlying shares upon conversion. If the instrument is more debt-like then we will include any related interest expense and exclude the underlying shares issuable upon conversion of the instrument. If the instrument is more equity-like and is more dilutive when treated as equity then we will exclude any related interest expense and include the weighted average shares underlying the instrument. - 41 - Distributable Net Investment Income We have a portfolio of investments in climate solutions that we finance using a combination of debt and equity. We calculate distributable net investment income as shown in the table below by adjusting GAAP-based net investment income for those distributable earnings adjustments that are applicable to distributable net investment income. We believe that this measure is useful to investors as it shows the recurring income generated by our Portfolio after the associated interest cost of debt financing. Our management also uses distributable net investment income in this way. Our non-GAAP distributable net investment income measure may not be comparable to similarly titled measures used by other companies. For further information, see the discussion above related to Distributable Earnings. The following is a reconciliation of our GAAP-based net investment income to our distributable net investment income: Three Months Ended March 31, 2023 2022 (in thousands) Interest income $ 43,108 $ 30,242 Rental income 6,487 6,499 GAAP-based investment revenue 49,595 36,741 Interest expense 37,216 26,652 GAAP-based net investment income 12,379 10,089 Equity method earnings adjustment 33,957 31,598 Amortization of real estate intangibles 772 771 Distributable net investment income $ 47,108 $ 42,458 Managed Assets As we both consolidate assets on our balance sheet and securitize assets off-balance sheet, 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 Assets” 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 off-balance sheet securitized receivables. Our management also uses Managed Assets in this way. 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-based Portfolio to our Managed Assets: As of March 31, 2023 December 31, 2022 (in millions) Equity method investments $ 2,250 $ 1,870 Commercial receivables, net of allowance 1,963 1,887 Government receivables 98 103 Receivables held-for sale 17 85 Real estate 352 353 Investments 10 10 GAAP-based Portfolio 4,690 4,308 Assets held in securitization trusts 5,686 5,486 Managed Assets $ 10,376 $ 9,794 - 42 - Other Metrics Portfolio Yield We calculate portfolio yield as the weighted average underwritten yield of the investments in our Portfolio as of the end of the period. Underwritten yield is the rate at which we discount the expected cash flows from the assets in our Portfolio to determine our purchase price. In calculating underwritten yield, we make certain assumptions, including the timing and amounts of cash flows generated by our investments, which may differ from actual results, and may update this yield to reflect our most current estimates of project performance. We believe that portfolio yield provides an additional metric to understand certain characteristics of our Portfolio as of a point in time. Our management uses portfolio yield this way and we believe that our investors use it in a similar fashion to evaluate certain characteristics of our Portfolio compared to our peers, and as such, we believe that the disclosure of portfolio yield is useful to our investors. Our Portfolio totaled approximately $4.7 billion as of March 31, 2023. Unlevered portfolio yield was 7.5% as of March 31, 2023 and 7.5% as of December 31, 2022. See Note 6 to our financial statements and MD&A - Our Business in this Form 10-Q for additional discussion of the characteristics of our portfolio as of March 31, 2023. Environmental Metrics As a part of our investment process, we calculate the estimated metric tons of CO 2 equivalent emissions, or carbon emissions avoided by our investments by applying 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 then determine the metric tons of carbon emissions avoided per thousand dollars of investments, in a calculation we refer to as CarbonCount, which enables us to measure the impact our investments have on reducing carbon emissions. We estimate that our investments originated during the quarter ended March 31, 2023, will avoid annual carbon emissions by approximately 92,000 metric tons, equating to a CarbonCount® of 0.24. We estimate that our investments made since 2013 have cumulatively avoided annual carbon emissions by over 23 million metric tons. Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential short term (within one year) and long term cash requirements. We carefully manage and forecast our liquidity sources and uses on a frequent basis. Our sources of liquidity typically include collections from our Portfolio, proceeds from sales and securitizations (including gains-on-sale), fee revenue, proceeds from debt transactions, and proceeds from equity transactions. Our uses of liquidity typically include operating expenses (including cash compensation), interest and principal payments on our debt, shareholder dividends, and funding investments. We maintain sufficiently available liquidity in the form of unrestricted cash and immediately available capacity on our credit facilities to manage our net cash flow. We typically pay our operating expenses, including interest on our debt, and dividends from collections on our Portfolio and proceeds from sales of Portfolio investments. 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 primarily with non-recourse or recourse debt, equity and off-balance sheet securitization structures. We have adequate liquidity as of March 31, 2023, with unrestricted cash balances of $142 million, an unsecured revolving credit facility with an unused capacity of $350 million, and $2 million of available capacity in our secured revolving credit facilities. As of March 31, 2023, we had used the available $100 million capacity in our green commercial paper program. During 2023, we have issued $24 million in equity. As of March 31, 2023, we had $404 million of non-recourse borrowings, $1.8 billion of senior unsecured notes, $383 million in term loans, and $344 million of Convertible Notes outstanding. For further information, see Note 8 to our financial statements of this Form 10-Q. 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. We have continued to complete off-balance sheet securitization transactions with large institutional investors such as life insurance companies. As of March 31, 2023, the outstanding balance of our assets financed through the use of these off-balance sheet transactions was approximately $5.7 billion. In addition to general operational obligations, which are typically paid as incurred, and dividends, which are declared by our board of directors quarterly, we have future cash needs related to the payments due at maturity on our Senior Unsecured Notes, and loans under our term loan facility and the balances of our short-term commercial paper issuances and revolving credit facilities. We also have maturities related to our non-recourse debt and Convertible Notes. However, as it relates to the non-recourse debt, to the extent there are not sufficient cash flows received from those investments pledged as collateral, the investor has no recourse against other corporate assets to recover any shortfalls and corporate cash contributions would not be - 43 - required. As it relates to the Convertible Notes, those obligations may be settled at maturity with the issuance of shares or with cash. For further information on our long-term debt, see Note 8 to our financial statements of this Form 10-Q. The maturity profile of these obligations are as follows (excluding non-recourse debt): We plan to raise additional equity capital and continue to use fixed and floating rate borrowings, which may be in the form of short-term commercial paper issuances, revolving credit facilities, recourse or non-recourse debt, convertible securities, repurchase agreements, and public and private debt issuances as a means of financing our business. We also expect to use both on-balance sheet and off-balance sheet securitizations. We may also consider the use of separately funded special purpose entities or funds to allow us to expand the investments that we make or to manage Portfolio diversification. The decision on how we finance specific assets or groups of assets is largely driven by 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. During periods of market disruptions, certain sources of financing may be more readily accessible than others which may impact our financing decisions. Over time, as market conditions change, we may use other forms of debt and equity in addition to these financing arrangements. The amount of financial 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 interest rate environment. As shown in the table below, our debt to equity ratio was approximately 2.0 to 1 as of March 31, 2023, below our current board-approved leverage limit of up to 2.5 to 1. Our percentage of fixed rate debt was approximately 87% as of March 31, 2023, which is within our targeted fixed rate debt percentage range of 75% to 100%. Our targeted fixed rate debt range allows for percentages as low as 70% on a short term basis if we intend to repay or swap floating rate borrowings in the near term. - 44 - The calculation of our fixed-rate debt and financial leverage is shown in the chart below: March 31, 2023 % of Total December 31, 2022 % of Total (dollars in millions) (dollars in millions) Floating-rate borrowings (1) $ 439 13 % $ 431 14 % Fixed-rate debt 2,921 87 % 2,545 86 % Total debt (2) $ 3,360 100 % $ 2,976 100 % Equity $ 1,659 $ 1,665 Leverage 2.0 to 1 1.8 to 1 (1) Floating-rate borrowings include borrowings under our floating-rate credit facilities and commercial paper issuances with less than six months original maturity, to the extent such borrowings are not hedged using interest rate swaps. (2) Fixed-rate debt includes the portion of debt that is hedged using interest rate swaps. Debt excludes securitizations that are not consolidated on our balance sheet. We intend to use financial 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 limit, if our board of directors approves a material change to this limit, 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. We believe our identified sources of liquidity will be adequate for purposes of meeting our short-term and long-term liquidity needs, which include funding future investments, debt service, 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 increase the need to replenish capital for growth and our operations. Sources and Uses of Cash We had approximately $164 million and $176 million of unrestricted cash, cash equivalents, and restricted cash as of March 31, 2023 and December 31, 2022, respectively. Cash flows relating to operating activities Net cash provided by operating activities was approximately $49 million for the three months ended March 31, 2023, driven primarily by net income of $25 million plus adjustments for non-cash and other items of $24 million. The non-cash and other adjustments consisted of increases of $8 million related to equity-based compensation, $4 million of depreciation and amortization, $3 million related to changes in accounts payable and accrued expenses and other items, $2 million related to provision for loss on receivables, and $37 million in changes in receivables held-for-sale. These were partially offset by decreases of $11 million related to equity method investments, $7 million related to gains on securitizations, and $12 million related to portfolio accrued interest. Net cash used in operating activities was approximately $32 million for the three months ended March 31, 2022, driven primarily by net income of $46 million offset by adjustments for non-cash and other items of $78 million. The non-cash and other adjustments consisted of $43 million in changes in receivables held-for-sale, decreases of $39 million related to equity method investments, $5 million related to gains on securitizations, $3 million related to portfolio accrued interest, and $8 million related to other items. These decreases were partially offset by increases of $4 million related to equity-based compensation, $4 million of depreciation and amortization, $11 million related to changes in accounts payable and accrued expenses, and $1 million related to provision for loss on receivables. - 45 - Cash flows relating to investing activities Net cash used in investing activities was approximately $449 million for the three months ended March 31, 2023. We made $97 million of investments in receivables and fixed rate debt-securities, made collateral deposits of $21 million, and made $363 million of equity method investments. We collected $23 million of principal payments from receivables and fixed rate debt-securities, $1 million from equity method investments in excess of income recognized to date under GAAP, and $8 million from the sale of receivables and investments. Net cash used in investing activities was approximately $95 million for the three months ended March 31, 2022. We made $35 million of investments in receivables and fixed rate debt-securities, made $79 million of equity method investments, purchased $5 million of real estate, and had $2 million of other investing cash outflows. We collected $20 million of principal payments from receivables and fixed rate debt-securities and $6 million from equity method investments in excess of income recognized to date under GAAP. Cash flows relating to financing activities Net cash provided by financing activities was approximately $388 million for the three months ended March 31, 2023. We received $312 million from our credit facilities, $23 million of net proceeds from issuances of common stock and $100 million of net proceeds from the issuance of green commercial paper notes, which were offset by $5 million of payments on credit facilities, $5 million of principal prepayments on non-recourse debt, $1 million for withholding requirements resulting from the vesting of employee shares and payments of $36 million of dividends, distributions and other items. Net cash provided by financing activities was approximately $32 million for the three months ended March 31, 2022. We received $50 million of net proceeds from issuances of common stock and $25 million of net proceeds from the issuance of green commercial paper notes, which were offset by $6 million of principal prepayments on non-recourse debt, $3 million for financing costs, $2 million for withholding requirements resulting from the vesting of employee shares and paid $32 million of dividends, distributions and other items. 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 $200 million as of March 31, 2023, that may be at risk in the event of defaults or prepayments in our securitization trusts and as discussed below, and except as disclosed in Note 9 to our financial statements in this Form 10-Q, 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 to our financial statements in this Form 10-Q. In connection with some of our transactions, we have provided certain limited guarantees 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. In some transactions, 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. The taxable income of the REIT can vary from our GAAP earnings due to a number of different factors, including the book to tax timing differences of income and expense recognition from our transactions as well as the amount of taxable income of our TRS distributed to the REIT. See Note 10 to our financial statements in our Form 10-K regarding the amount of our distributions that are treated as ordinary taxable income to our stockholders. - 46 - 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 assets, 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 TRS. 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 2022 and 2023 are described in Note 11 to our financial statements in this Form 10-Q. Book Value Considerations As of March 31, 2023, we carried only our investments, residual assets in securitized financial assets, and derivatives 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 and the residual assets in securitized financial assets that are carried on our balance sheet at fair value as of March 31, 2023, 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, adjusted for income or loss recognized on such assets. Other than the allowance for current expected credit losses applied to our commercial and governmental receivables, 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 fair market value.