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 HA Sustainable Infrastructure Capital, Inc., a Delaware 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.” We invest in projects which, among others things, are 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, 2024, as amended by our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2024 (collectively, our “2024 Form 10-K”), that was filed with the SEC . Our Business We are an investor in sustainable infrastructure assets advancing the energy transition. With more than $14 billion in managed assets, our investment strategy is focused primarily on long-lived real assets that are supported by long-term recurring cash flows. Our investments take many forms, including equity, joint ventures, real estate, receivables or securities, and other financing transactions. In addition to Net Investment Income from our portfolio, we also generate gains-on-sale from securitization transactions, as well as ongoing fees from asset management and other services. We are internally managed by an executive team that has extensive relevant industry knowledge and experience, and a team of over 150 clean energy investment, operating, and technical professionals. We have long-standing relationships with some of the leading U.S. clean energy project developers, owners and operators, utilities, and energy service companies (“ESCOs”), which provide recurring, programmatic investment and fee-generating opportunities, while also enabling scale benefits and operational and transactional efficiencies. Our investments are focused on three markets: • Behind-the-Meter (“BTM”) : distributed renewable energy projects which reduce energy cost and/or usage and increase resiliency through residential, commercial & industrial, and community solar power and energy storage deployments, as well as energy efficiency improvements such as heating, ventilation, and air conditioning systems (HVAC), lighting, energy controls, roofs, windows, building shells, and/or combined heat and power systems. The off-taker or counterparty for BTM assets may be the building owner or occupant, and our investment may be secured by the installed improvements or other real estate rights; • Grid-Connected (“GC”) : utility-scale renewable energy projects that deploy cleaner energy sources, such as solar, solar-plus-storage, and wind, to generate cleaner, lower cost energy. The off-takers or counterparties for GC assets may be utility, electric users, or participants in the wholesale electric power markets 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; and • Fuels, Transport, and Nature (“FTN”) : a range of infrastructure assets that are designed to reduce emissions and/or provide environmental benefits in projects beyond the power grid, such as transportation and fuels, including renewable natural gas (RNG) plants, transportation fleet enhancements, and ecological restoration projects, among others. For FTN assets, the off-takers may be oil and gas refiners, industrial companies, and vertically integrated electric utilities. Our primary objective is to earn attractive risk-adjusted returns that sufficiently exceed our cost of capital. We believe we are able to generate superior risk-adjusted returns in part due to our adherence to a core set of investment criteria. In particular, we are focused primarily on investments which are: • income-generating sustainable infrastructure assets; • supported by underlying, long-term recurring cash flows; • contracted with creditworthy, incentivized off-takers; • reliant upon proven commercial technologies; and • originated by programmatic clients. - 35 - We completed approximately $706 million of transactions during the three months ended March 31, 2025, compared to approximately $562 million during the same period in 2024. As of March 31, 2025, pursuant to our strategy of holding transactions on our balance sheet, we held approximately $7.1 billion of transactions on our balance sheet, which we refer to as our “Portfolio.” As of March 31, 2025, our Portfolio consisted of over 600 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, 2025, we managed approximately $7.4 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, 2025, we manage approximately $14.5 billion of assets which we refer to as our “Managed Assets”. Our equity investments in energy transition assets and infrastructure 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 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. 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. Investing greater than 10% of our assets in any single investment 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 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 finance our business through cash on hand, debt which may be either unsecured or secured, with or without recourse, and either fixed-rate or floating-rate, or equity. We may also decide to finance such transactions through the use of off-balance sheet securitization, syndication, or co-investment structures. Our revolving line of credit and our commercial paper programs allow us flexibility with regards to the timing of long-term capital markets transactions. We manage the interest rate risk associated with debt issuances through hedging activities, including the use of interest rate swaps. 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 certain investors compared to such offerings that do not qualify under these principles. We have an active strategic partnership with KKR where we have each committed to invest $1 billion into eligible projects, and we may consider further use of similar structures to allow us to expand the investments that we make or to manage our Portfolio diversification. 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 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. There can 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 of March 31, 2025, our pipeline consisted of more than $5.5 billion in new equity, debt and real estate opportunities. Of our pipeline, approximately 49% is related to BTM assets and 30% is related to GC assets, with the remainder related to FTN. 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, representing the locational marginal emissions associated with a project to determine an estimate of a project’s energy production or savings to compute an estimate of metric tons of carbon emissions avoided. In addition to carbon emission avoidance, we also consider other environmental attributes, such as water use reduction, stormwater remediation benefits and stream restoration benefits. We operate our business in a manner that permits us 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 and transaction mix of 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 maintain our exemption from registration as an investment company under the 1940 Act. We provide a summary of the factors impacting our operating results in our 2024 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, 2025. 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 2024 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 $7.1 billion as of March 31, 2025 and included approximately $3.4 billion of BTM assets, approximately $2.7 billion of GC assets, and approximately $1.0 billion of FTN assets. Approximately 54% of our Portfolio consisted of unconsolidated equity investments in renewable energy related projects. Approximately 39% consisted of fixed-rate receivables and debt securities, which are classified as investments on our balance sheet, approximately 5% consisted of floating-rate receivables, and 2% of our Portfolio was real estate leased to renewable energy projects under lease agreements. Our Portfolio consisted of over 600 transactions with an average size of $11 million and the weighted average remaining life of our Portfolio (excluding match-funded transactions) of approximately 16 years as of March 31, 2025. The table below provides details on the interest rate and maturity of our receivables and debt securities as of March 31, 2025: Balance Maturity (in millions) Floating rate receivable, interest rate of 10.36% per annum $ 378 2027 Fixed-rate receivables, interest rates less than 5.00% per annum 45 2029 to 2047 Fixed-rate receivables, interest rates from 5.00% to 6.49% per annum 88 2025 to 2061 Fixed-rate receivables, interest rates from 6.50% to 7.99% per annum 1,013 2025 to 2069 Fixed-rate receivables, interest rates from 8.00% to 9.49% per annum 1,072 2025 to 2039 Fixed-rate receivables, interest rates 9.50% or greater per annum 419 2025 to 2050 Receivables 3,015 (1) Allowance for loss on receivables (54) Receivables, net of allowance 2,961 Fixed-rate investments, interest rates less than 5.00% per annum 7 2033 to 2047 Total receivables and investments $ 2,968 (1) Excludes receivables held for sale of $92 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, 2025 2024 (dollars in millions) Portfolio, excluding equity method investments Interest income, receivables $ 66 $ 67 Average balance of receivables $ 3,041 $ 3,189 Average interest rate of receivables 8.7 % 8.5 % Interest income, investments $ — $ — Average balance of investments $ 8 $ 8 Average interest rate of investments 4.4 % 10.5 % Rental income $ — $ 2 Average balance of real estate $ 3 $ 90 Average yield on real estate 11.1 % 8.2 % Average balance of receivables, investments, and real estate $ 3,052 $ 3,287 Average yield from receivables, investments, and real estate 8.7 % 8.5 % Debt Interest expense (1) $ 64 $ 62 Average balance of debt $ 4,555 $ 4,380 Average cost of debt 5.7 % 5.7 % (1) Excludes any 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, 2025: Principal payment due by Period Total Less than 1 year 1-5 years 5-10 years More than 10 years (in millions) Receivables (excluding allowance) $ 3,015 $ 341 $ 1,294 $ 934 $ 446 Investments 7 1 1 3 2 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, 2025, • the term of our leases and a schedule of our future minimum rental income under our land lease agreements as of March 31, 2025, • 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 2059. - 38 - Results of Operations Comparison of the Three Months Ended March 31, 2025 vs. Three Months Ended March 31, 2024 Three months ended March 31, 2025 2024 $ Change % Change (dollars in thousands) Revenue Interest income $ 66,394 $ 68,692 $ (2,298) (3) % Rental income 83 1,846 (1,763) (96) % Gain on sale of assets 18,668 28,611 (9,943) (35) % Securitization asset income 6,999 4,898 2,101 43 % Other Income 4,797 1,769 3,028 171 % Total Revenue 96,941 105,816 (8,875) (8) % Expenses Interest expense 64,677 61,872 2,805 5 % Provision for loss on receivables and securitization assets 3,812 2,022 1,790 89 % Compensation and benefits 24,980 20,676 4,304 21 % General and administrative 9,378 9,053 325 4 % Total expenses 102,847 93,623 9,224 10 % Income (loss) before equity method investments (5,906) 12,193 (18,099) (148) % Income (loss) from equity method investments 87,989 158,550 (70,561) (45) % Income (loss) before income taxes 82,083 170,743 (88,660) (52) % Income tax (expense) benefit (23,898) (46,195) 22,297 (48) % Net income (loss) $ 58,185 $ 124,548 $ (66,363) (53) % • Net income decreased by $66 million due to a decrease in revenue of $9 million, a decrease in income from equity method investments of $71 million and an increase in total expenses of $9 million, partially offset by a $22 million decrease in income tax expense. • Total revenue decreased by $9 million due to a $10 million decrease in gain on sale income, the result of a change in the mix and volume of assets being securitized. Interest income decreased by $2 million due to a lower outstanding balance due to the contribution of receivables to a co-investment structure. Other income increased by $3 million due to fees recognized on the origination of assets within a co-investment structure. • Interest expense increased by $3 million primarily due to a larger average outstanding debt balance. We recorded a $4 million provision for loss on receivables and securitization assets, driven primarily by changes in macroeconomic assumptions used to predict future credit losses. • Compensation and benefits expenses increased by $4 million primarily due to the acceleration of share-based compensation related to those employees who met the age and years of service criteria of our retirement policy in the current period. • Income (loss) from equity method investments using HLBV allocations decreased by $71 million primarily due to (a) lower mark-to-market income compared to the prior period related to power purchase agreements held by certain of the projects in which we have invested, (b) increased income tax expense recognized by an equity method investee in the current period, offset by (c) higher allocations in the current period of income related to tax credits allocated to other investors in solar projects. • Income tax expense decreased by $22 million primarily due to lower pre-tax book income. - 39 - Non-GAAP Financial Measures We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our performance: (1) adjusted earnings, (2) adjusted net investment income, (3) managed assets, and (4) adjusted cash from operations plus other portfolio collections. 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. Adjusted Earnings We calculate adjusted earnings as GAAP net income (loss) excluding non-cash equity 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, or non-cash tax charges and the earnings attributable to our non-controlling interest of our Operating Partnership. We also make an adjustment to eliminate our portion of fees we earn from related-party co-investment structures, and for 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 adjusted 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, adjusted 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 adjusted 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. Additionally, we believe that our investors also use adjusted 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 adjusted 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. Given our equity method investments are in project companies, they typically have a finite expected life. We typically negotiate the purchase prices of our equity investments based on our underwritten project cash flows discounted back to a 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 period (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 adjusted 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 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 adjusted earnings measure is an important supplement to the income (loss) from equity method investments as determined under GAAP for an investor to - 40 - 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 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, 2025 and 2024. Three months ended March 31, 2025 2024 (in millions) Income (loss) under GAAP $ 88 $ 159 Collections of Adjusted earnings $ 20 $ 13 Return of Capital 6 3 Cash collected $ 26 $ 16 Adjusted 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 adjusted earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures, and accordingly, our reported adjusted 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 adjusted earnings for the three months ended March 31, 2025 and 2024. Three Months Ended March 31, 2025 2024 $ Per Share $ Per Share (dollars in thousands, except per share amounts) Net income (loss) attributable to controlling stockholders (1) $ 56,612 $ 0.44 $ 123,025 $ 0.98 Adjustments: Reverse GAAP (income) loss from equity method investments (87,989) (158,550) Equity method investments earnings adjustment (2) 69,863 55,462 Elimination of proportionate share of fees earned from co-investment structures (3) (2,703) — Equity-based expenses 12,678 9,058 Provision for loss on receivables (4) 3,812 2,022 Loss (gain) on debt modification or extinguishment 321 — Amortization of intangibles 2 171 Non-cash provision (benefit) for income taxes 23,898 46,195 Current year earnings attributable to non-controlling interest 1,573 1,523 Adjusted earnings $ 78,067 $ 0.64 $ 78,906 $ 0.68 Shares for adjusted earnings per share (5) 122,613,563 115,400,151 (1) The per share data reflects the GAAP diluted earnings per share and is the most comparable GAAP measure to our adjusted earnings per share. (2) This is a non-GAAP adjustment to reflect the return on capital of our equity method investments as described above. (3) This adjustment is to eliminate the intercompany portion of fees received from co-investment structures that for GAAP net income is included in the Equity method income line item. Since we remove GAAP Equity method income for purposes of our Adjusted Earnings metric, we add back the elimination through this adjustment. (4) In addition to these provisions, in the three months ended March 31, 2024, we concluded that an equity method investment, along with certain loans we had made to this investee, were not recoverable. The equity method investment and loans had a carrying value of $0 due to the losses already recognized through GAAP income from equity method investments as a result of operating losses sustained by the investee. We have excluded this - 41 - write-off from Adjusted earnings, as this investment was an investment in a corporate entity which is not a part of our current investment strategy and is immaterial to our Portfolio. The loss associated with this investment is included in our Average Annual Realized Loss on Managed Assets metric disclosed below. (5) Shares used to calculate adjusted earnings per share represent the weighted average number of shares outstanding including our issued unrestricted common shares, 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 compared to the conversion price. 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. We will consider the impact of any capped calls in assessing whether an instrument is equity-like or debt-like. Adjusted Net Investment Income We have a portfolio of investments that we finance using a combination of debt and equity. We calculate adjusted net investment income as shown in the table below by adjusting GAAP-based net investment income for those earnings adjustments that are applicable to adjusted 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 adjusted net investment income in this way. Our non-GAAP adjusted net investment income measure may not be comparable to similarly titled measures used by other companies. For further information on the adjustments between GAAP-based net investment income and adjusted net investment income, see the discussion above related to Adjusted Earnings. The following is a reconciliation of our GAAP-based net investment income to our adjusted net investment income: Three Months Ended March 31, 2025 2024 (in thousands) Interest income $ 66,394 $ 68,692 Rental income 83 1,846 GAAP-based investment revenue 66,477 70,538 Interest expense 64,677 61,872 GAAP-based net investment income 1,800 8,666 Equity method earnings adjustment 69,863 55,462 Loss (gain) on debt modification or extinguishment 321 — Amortization of real estate intangibles 2 171 Adjusted net investment income $ 71,986 $ 64,299 Managed Assets We consolidate assets on our balance sheet, securitize assets off-balance sheet, and manage assets in which we coinvest with other parties via equity method investments. Therefore, 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 a retained interest in cash flows. Thus, we present our investments on a non-GAAP “Managed Assets” basis. We believe that our Managed Asset information is useful to investors because it portrays the amount of both on- and off-balance sheet assets that we manage, which enables investors to understand and evaluate the credit performance associated with our portfolio of receivables, equity investments and residual assets in off-balance sheet assets. 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. - 42 - The following is a reconciliation of our GAAP-based Portfolio to our Managed Assets: As of March 31, 2025 December 31, 2024 (in millions) Equity method investments $ 3,993 $ 3,612 Receivables, net of allowance 2,961 2,896 Receivables held-for sale 92 76 Real estate 3 3 Investments 7 7 GAAP-based Portfolio 7,056 6,594 Assets held in securitization trusts 6,946 6,809 Assets held in co-investment structures (1) 494 $ 300 Managed Assets $ 14,496 $ 13,703 (1) Total assets in co-investment structures are $989 million as of March 31, 2025 . Not included in this amount is an additional $225 million related to closed transactions not yet funded as of March 31, 2025. Adjusted Cash from Operations plus Other Portfolio Collections We operate our business in a manner that considers total cash collected from our portfolio, reduced by necessary operating and debt service payments to assess the amount of cash we have available to fund dividends and investments. We believe that the aggregate of these items, which combine as a non-GAAP financial measure titled Adjusted Cash from Operations plus Other Portfolio Collections, is a useful measure of the liquidity we have available from our assets to fund both new investments and our regular quarterly dividends. This non-GAAP financial measure may not be comparable to similarly titled or other similar measures used by other companies. Although there is also not a directly comparable GAAP measure that demonstrates how we consider cash available for dividend payment, below is a reconciliation of this measure to Net cash provided by operating activities. Adjusted Cash from Operations plus Other Portfolio Collections also differs from Net cash provided by (used in) investing activities in that it excludes many of the uses of cash used in our investing activities such as Equity method investments, Purchases of and investments in receivables, Purchases of investments, and Collateral provided to and received from hedge counterparties. In addition, Adjusted Cash from Operations plus Other Portfolio Collections is not comparable to Net cash provided by (used in) financing activities in that it excludes many of our financing activities such as proceeds from common stock issuances and borrowings and repayments of unsecured debt. We evaluate Adjusted Cash from Operations plus Other Portfolio Collections on a trailing twelve month (“TTM”) basis, as cash collections during any one quarter may not be comparable to other single quarters due to, among other reasons, the seasonality of projects operations and the timing of disbursement and payment dates. Cash available for reinvestment is a non-GAAP measure which is calculated as Adjusted Cash from Operations Plus Other Portfolio Collections less dividend and distribution payments made during the period. We believe Cash available for reinvestment is useful as a measure of our ability to make incremental investments from reinvested capital after factoring in all necessary cash outflows to operate the business. Management uses Cash available for reinvestment in this way, and we believe that our investors use it in a similar fashion. Plus: Less: For the year ended, For the year ended, For the three months ended, For the three months ended, For the TTM ended, December 31, 2023 December 31, 2024 March 31, 2025 March 31, 2024 March 31, 2025 (in thousands) Net cash provided by operating activities $ 99,689 $ 5,852 $ (37,121) $ 20,931 $ (52,200) Changes in receivables held-for-sale (51,538) 29,273 23,719 (3) 52,995 Equity method investment distributions received (1) 30,140 39,142 7,642 3,762 43,022 Proceeds from sales of equity method investments — 9,472 — — 9,472 Principal collections from receivables 197,784 600,652 40,455 141,594 499,513 - 43 - Proceeds from sales of receivables 7,634 171,991 8,344 24,769 155,566 Proceeds from sales of land — 115,767 — 115,767 — Principal collections from investments (2) 3,805 47 4 — 51 Proceeds from the sale of a previously consolidated VIE (2) — 5,478 — — 5,478 Proceeds from sales of investments and securitization assets — 5,390 — — 5,390 Principal payments on non-recourse debt (21,606) (72,989) (4,348) (68,910) (8,427) Adjusted Cash from Operations plus Other Portfolio Collections 265,908 910,075 38,695 237,910 710,860 Less: Dividends (159,786) (192,269) (50,397) (45,093) (197,573) Cash Available for Reinvestment $ 106,122 $ 717,806 $ (11,702) $ 192,817 $ 513,287 (1) Represents return of capital distributions from our equity method investments included in cash provided by (used in) investing activities section of our statement of cash flows which is incremental to any equity method investment distributions found in net cash provided by operating activities. (2) Included in Other in the cash provided (used in) investing activities section of our statement of cash flows. Plus: Less: For the year ended, For the year ended, For the three months ended, For the three months ended, For the TTM ended, December 31, 2023 December 31, 2024 March 31, 2025 March 31, 2024 March 31, 2025 (in thousands) Components of Adjusted Cash from Operations plus Other Portfolio Collections: Cash collected from our Portfolio 442,322 891,250 111,249 208,907 793,592 Cash collected from sale of assets (1) 34,034 325,051 21,665 146,674 200,042 Cash used for compensation and benefit expenses and general and administrative expenses (78,681) (85,519) (36,294) (30,430) (91,383) Interest paid (2) (138,418) (172,679) (61,963) (33,207) (201,435) Securitization asset and other income 26,506 33,044 9,474 6,757 35,761 Principal payments on non-recourse debt (21,606) (72,989) (4,348) (68,910) (8,427) Other 1,751 (8,083) (1,088) 8,119 (17,290) Adjusted Cash from Operations plus Other Portfolio Collections $ 265,908 $ 910,075 $ 38,695 $ 237,910 $ 710,860 (1) Includes cash from the sale of assets on our balance sheet as well as securitization transactions. (2) For the year ended December 31, 2024, and the TTM ended March 31, 2025, interest paid includes a $20 million benefit from the settlement of a derivative which was designated as a cash flow hedge. - 44 - 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 $7.1 billion as of March 31, 2025. Unlevered portfolio yield was 8.3% as of March 31, 2025 and 8.3% as of December 31, 2024. 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, 2025. Average Annual Realized Loss on Managed Assets Average Annual Realized Loss on Managed Assets represents the average annual rate of our incurred losses, calculated as the amount of realized losses incurred in each year as a percentage of each year’s average annual Managed Assets. This metric is calculated over the ten year period ending March 31, 2025. Incurred losses include both realized losses on equity method investments and realized credit losses on receivables and investments. Although there is not a direct comparable GAAP measure, we have presented average annual recognized loss on Managed Assets as calculated under GAAP for comparison. Average Annual Realized Loss on Managed Assets differs from average annual recognized loss on Managed Assets as calculated under GAAP as the timing is based on realization of loss rather than GAAP recognition. We believe that Average Annual Realized Loss on Managed Assets provides an additional metric to our underwriting quality over our history of investing in energy transition assets and infrastructure. Our management uses it in this way and we believe that our investors use it in a similar fashion to evaluate our investment performance, and as such, we believe that its disclosure is useful to our investors. The table below shows these metrics as of March 31, 2025 is: Average Annual Recognized Loss (GAAP) on Managed Assets 0.12 % Average Annual Realized Loss on Managed Assets 0.07 % Liquidity and Capital Resources Liquidity is a measure of our available cash and committed short term borrowing capacity. We carefully manage and forecast our liquidity sources and uses on a frequent basis. Our sources of liquidity typically include collections from our Portfolio, cash proceeds from asset sales and securitizations, fee revenue, proceeds from debt transactions, and proceeds from equity transactions. Our uses of liquidity typically include funding investments, operating expenses (including cash compensation), interest and principal payments on our debt, and stockholder dividends and limited partner distributions. We typically pay our operating expenses, our debt service, 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 secured or unsecured debt, equity and off-balance sheet securitization or co-investment structures. 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. Below is a summary of our available liquidity by source: As of March 31, 2025 (in millions) Unrestricted cash $ 67 Unused capacity under our unsecured revolving credit facility (1) 1,110 Unused capacity under our Credit-enhanced Commercial Paper Program 125 Total liquidity $ 1,302 (1) As a credit enhancement for our Standalone Commercial Paper Notes, we reserve capacity under our unsecured revolving credit facility for the principal amount of any outstanding Standalone Commercial Paper Notes. As of March 31, 2025, that reserved capacity was $431 million, and we have presented the capacity under our unsecured revolving credit facility of $1,541 million as reduced by that amount. - 45 - Capital markets activity during the three months ended March 31, 2025 During the three months ended March 31, 2025, we increased the available capacity available under our unsecured revolving credit facility to $1.55 billion, adding two additional banks. We also issued $47 million in equity. As discussed in Note 8 to our financial statements in this Form 10-Q, we entered into a strategic partnership with KKR called CarbonCount Holdings 1, LLC (“CCH1”), under which we each have committed to invest $1 billion in eligible projects over an 18 month period, of which $497 million remains to be funded by each of us as of March 31, 2025. The commitment period was extended to 30 months in May 2025. Maturities of recourse debt obligations In addition to general operational obligations, which are typically paid as incurred, and dividends and distributions, which are declared by our board of directors quarterly, we have future cash needs related to the payments due at maturity of our Commercial Paper Notes, Senior Unsecured Notes, Convertible Notes, and term loan facilities. We also have maturities related to our non-recourse debt. However, as it relates to the non-recourse debt, to the extent there are not sufficient cash flows received from investments pledged as collateral for such debt, the investor has no recourse against other corporate assets to recover any shortfalls and corporate cash contributions would not be required. As it relates to the Convertible Notes, those obligations may be settled at maturity with cash, or with the issuance of shares to the extent that the market price of our common stock exceeds the strike price on our Convertible Notes. For further information on our long-term debt, see Note 8 to our financial statements of this Form 10-Q. As of March 31, 2025, the maturity profile of our long-term recourse debt obligations is shown in the table below. Amounts exclude $431 million principal amount of commercial paper notes which mature in 2025, as we have reserved capacity under our credit facility for such amounts as described above. (1) The Convertible Notes due in 2025 were repaid subsequent to March 31, 2025 with proceeds from our unsecured revolving credit facility. Additional borrowings and financial leverage management As a means of financing our business, we plan to continue to issue debt which may be either secured or unsecured and either fixed-rate or floating-rate and may issue additional equity. We also expect to use both on-balance sheet and off-balance sheet securitizations. We also use separately funded special purpose entities or co-investment vehicles to allow us to expand the investments that we make or to manage Portfolio diversification. The decision as to how we finance specific assets or groups of assets is largely driven by risk, portfolio, and financial management considerations, including the potential for gain on sale or fee income, the overall interest rate environment, prevailing credit spreads, the terms of available financing, and financial market conditions. During periods of market - 46 - 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 our target capital structure and the availability of particular types of financing and our assessment of the credit, liquidity, price volatility and other risks of such assets, and the interest rate environment. As shown in the table below, our debt to equity ratio was approximately 1.9 to 1 as of March 31, 2025, below our current board-approved leverage limit of up to 2.5 to 1. Our percentage of fixed rate debt including the impact of our interest rate derivatives was approximately 95% as of March 31, 2025, which is at the top of 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. The calculation of our fixed-rate debt and financial leverage is shown in the chart below: March 31, 2025 % of Total December 31, 2024 % of Total (dollars in millions) (dollars in millions) Floating-rate borrowings (1) $ 218 5 % $ — — % Fixed-rate debt (2) 4,505 95 % 4,400 100 % Total debt $ 4,723 100 % $ 4,400 100 % Equity $ 2,471 $ 2,405 Leverage 1.9 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 impact of our interest rate swaps and collars on debt that is otherwise floating. 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 or our affiliates may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. 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. Sources and Uses of Cash We had approximately $84 million and $150 million of unrestricted cash, cash equivalents, and restricted cash as of March 31, 2025 and December 31, 2024, respectively. The following table summarizes our cash flows for the three months ended March 31, 2025 and 2024. See our statements of cash flows for full details on the components of each category of cash flows. As discussed above, Adjusted cash from operations plus other portfolio collections was $39 million for the three months ended March 31, 2025. - 47 - For the three months ended, March 31, 2025 March 31, 2024 (in millions) Cash provided by (used in) operating activities $ (37) $ 21 Cash provided by (used in) investing activities (324) (70) Cash provided by (used in) financing activities 294 51 Increase (decrease) in cash and cash equivalents $ (67) $ 2 Discussion of changes in cash provided by (used in) operating activities Cash provided by (used in) operating activities for the three months ended March 31, 2025 was $58 million lower than the same period ended March 31, 2024. Net income was $66 million lower in the current period, offset by higher adjustments to net income of $8 million when compared to the prior period. Discussion of changes in cash provided by (used in) investing activities Cash used in investing activities for the three months ended March 31, 2025 was $254 million higher than the same period ended March 31, 2024. We invested $120 million more in equity method investments and collected $101 million less in principal from receivables in the period ended March 31, 2025 than the same period in the prior year. In the prior year, we sold $116 million of real estate, which did not recur in the current period. These changes were offset by $93 million less invested in receivables than in the same period in the prior year. Discussion of changes in cash provided by (used in) financing activities Cash provided by financing activities for the three months ended March 31, 2025 was $243 million higher than the same period ended March 31, 2024. We had higher net borrowings from our revolving credit facility and commercial paper notes of $496 million compared to the prior period, which was partially offset by no issuances of non-recourse debt or senior unsecured notes in the current period. Supplemental Guarantor Information The Company and each of Hannon Armstrong Sustainable Infrastructure, L.P., Hannon Armstrong Capital, LLC. HAC Holdings I LLC, HAC Holdings II LLC, HAT Holdings I LLC and HAT Holdings II LLC (the “Subsidiary Guarantors”) have filed registration statements with the SEC pursuant to which the Company has offered and may offer and sell debt securities from time to time and such securities have been and may be guaranteed by the Subsidiary Guarantors. The Subsidiary Guarantors are consolidated in the Company's Consolidated Financial Statements and separate Consolidated Financial Statements of the Subsidiary Guarantors have not been presented in accordance with Rule 3-10 of Regulation S-X. Furthermore, as permitted under Rule 13-01(a)(4)(vi), the Company has excluded the summarized financial information for the Subsidiary Guarantors as the assets, liabilities and results of operations of the Company and the Subsidiary Guarantors are not materially different than the corresponding amounts presented in the Consolidated Financial Statements of the Company, and management believes such summarized financial information would be repetitive and not provide incremental value to investors. Off-Balance Sheet Arrangements We have relationships with non-consolidated entities or financial partnerships, often referred to as structured investment vehicles, special purpose entities, or variable interest entities, established to facilitate the sale of securitized assets. Other than our securitization assets (including any outstanding servicer advances) of approximately $280 million as of March 31, 2025, that may be at risk in the event of defaults or prepayments in our securitization trusts and certain limited guarantees 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. - 48 - Dividends 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. The dividends declared in 2024 and 2025 are described in Note 11 to our financial statements in this Form 10-Q. Book Value Considerations As of March 31, 2025, 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, residual assets in securitized financial assets, and derivatives that are carried on our balance sheet at fair value as of March 31, 2025, 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 and cash collected from such assets. Other than the allowance for current expected credit losses applied to our 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.