In this Form 10-Q, unless specifically stated otherwise or the context otherwise indicates, references to "we," "our," "us," and the "Company" refer toHannon Armstrong Sustainable Infrastructure Capital, Inc. , aMaryland corporation,Hannon Armstrong Sustainable Infrastructure, L.P. , and any of our other subsidiaries.Hannon Armstrong Sustainable Infrastructure, L.P. is aDelaware 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 endedDecember 31, 2020 , as amended by our Amendment No. 1 to our Annual Report on Form 10-K for the year endedDecember 31, 2020 , (collectively, our "2020 Form 10-K") that was filed with theSEC . Our Business We invest in climate solutions developed by the leading companies in the energy efficiency, renewable energy and other sustainable infrastructure markets. We believe we are one of the firstU.S. public companies solely dedicated to such climate change investments. Our goal is to generate attractive returns from a diversified portfolio of projects with long-term, predictable cash flows from proven technologies that reduce carbon emissions or increase resilience to climate change. We are internally managed, and our management team has extensive relevant industry knowledge and experience, dating back more than 30 years. We have long-standing relationships with the leading energy service companies ("ESCOs"), manufacturers, project developers, utilities, owners and operators. Our origination strategy is to use these relationships to generate recurring, programmatic investment and fee-generating opportunities. Additionally, we have relationships with leading banks, investment banks, and institutional investors from which we are referred additional investment and fee generating opportunities. Our investments are focused on three areas: •Behind-the-Meter ("BTM"): distributed building or facility projects, which reduce energy usage or cost through the use of solar generation and energy storage or energy efficiency improvements including heating, ventilation and air conditioning systems, lighting, energy controls, roofs, windows, building shells, and/or combined heat and power systems; •Grid-Connected ("GC"): projects that deploy cleaner energy sources, such as solar and wind to generate power where the off-taker or counterparty is part of the wholesale electric power grid; and •Sustainable Infrastructure: upgraded transmission and distribution systems, water and storm water infrastructure, and other projects that improve water or energy efficiency, increase resiliency, positively impact the environment or more efficiently use natural resources. We prefer investments in which the assets use proven technology and have a long-term, creditworthy off-taker or counterparties. For BTM assets, the off-taker or counterparty may be the building owner or occupant, and we may be secured by the installed improvements or other real estate rights. For GC assets, the off-taker or counterparty may be a utility or electric user who has entered into a contractual commitment, such as a power purchase agreement ("PPA"), to purchase power produced by a renewable energy project at a minimum price with potential price escalators for a portion of the project's estimated life. We completed approximately$509 million and$697 million of transactions during the three and six months endedJune 30, 2021 , respectively, compared to approximately$178 million and$364 million during the same period in 2020. As ofJune 30, 2021 , pursuant to our strategy of holding transactions on our balance sheet, we held approximately$3.0 billion of transactions on our balance sheet, which we refer to as our "Portfolio." As ofJune 30, 2021 , our Portfolio consisted of over 225 assets and we seek to manage the diversity of our Portfolio by, among other factors, project type, project operator, type of investment, type of technology, transaction size, geography, obligor and maturity. For those transactions that we choose not to hold on our balance sheet, we transfer all or a portion of the economics of the transaction, typically using securitization trusts, to institutional investors in exchange for cash and/or residual interests in the assets and in some cases, ongoing fees. As ofJune 30, 2021 , we managed approximately$5.0 billion in assets in these securitization trusts or vehicles that are not consolidated on our balance sheet. When combined with our Portfolio, as ofJune 30, 2021 , we manage approximately$8.0 billion of assets which we refer to as our "Managed Assets". - 33 - -------------------------------------------------------------------------------- We make our investments utilizing a variety of structures including: •Equity investments in either preferred or common structures in unconsolidated entities; •Government and commercial receivables or securities, such as loans for renewable energy and energy efficiency projects; and •Real estate, such as land or other assets leased for use by GC projects typically under long-term leases. Our equity investments in renewable energy and energy efficiency projects are operated by various renewable energy companies or by joint ventures in which we participate. These transactions allow us to participate in the cash flows associated with these projects, typically on a priority basis. Our energy efficiency debt investments are usually assigned the payment stream from the project savings and other contractual rights, often using our pre-existing master purchase agreements with the ESCOs. Our debt investments in various renewable energy or other sustainable infrastructure projects or portfolios of projects are generally secured by the installed improvements or other real estate rights. We also own, directly or through equity investments, or manage over 31,000 acres of land that are leased under long-term agreements to over 60 renewable energy projects, where our investment returns are typically senior to most project costs, debt, and equity. We often make investments where we hold preferred or mezzanine position in a project which is subordinated to project debt and/or preferred forms of equity. Investing greater than 15% of our assets in any individual project 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 that are designed to increase potential returns to our stockholders. We may finance our investments through the use of non-recourse debt, recourse debt, or equity and may also decide to finance such transactions through the use of off-balance sheet securitization structures. We often provide, and our sources of financing are increasingly interested in, the estimated carbon emission savings or environmental ratings associated with our financings. We believe that certain debt we have issued meets the environmental eligibility criteria for green bonds as defined by theInternational 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 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 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 ofJune 30, 2021 , our pipeline consisted of more than$3.0 billion in new equity, debt and real estate opportunities. Of our pipeline, 49% is related to BTM assets and 34% is related to GC assets, with the remainder related to other sustainable infrastructure. 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 CO2 equivalent basis, from theU.S. Government or theInternational 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 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 forU.S. federal income tax purposes, commencing with our taxable year endedDecember 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. - 34 - -------------------------------------------------------------------------------- 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 which 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, the impacts of climate change, and the impact of the novel coronavirus (COVID-19). We provide a summary of the factors impacting our operating results in our 2020 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 ofJune 30, 2021 . The uncertainty surrounding COVID-19 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 Variable Interest Entity 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 2020 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$3.0 billion as ofJune 30, 2021 and included approximately$1.5 billion of BTM assets and approximately$1.5 billion of GC assets. Approximately 39% consisted of fixed-rate government and commercial receivables and debt securities, which are classified as investments, on our balance sheet. Approximately 48% of our Portfolio consisted of unconsolidated equity investments in renewable energy related projects and approximately 13% of our Portfolio was real estate leased to renewable energy projects under lease agreements. Our Portfolio consisted of over 225 transactions with an average size of$13 million and the weighted average remaining life of our Portfolio (excluding match-funded transactions) of approximately 17 years as ofJune 30, 2021 . Our Portfolio included the following as ofJune 30, 2021 : •Equity investments in either preferred or common structures in unconsolidated entities; •Government and commercial receivables, such as loans for renewable energy and energy efficiency projects; •Real estate, such as land or other assets leased for use by GC projects typically under long-term leases; and •Investments in debt securities of renewable energy or energy efficiency projects. The table below provides details on the interest rate and maturity of our receivables and debt securities as ofJune 30, 2021 : - 35 - -------------------------------------------------------------------------------- Balance Maturity (in millions) Fixed-rate receivables, interest rates less than 5.00% per annum $ 117 2023 to 2046
Fixed-rate receivables, interest rates from 5.00% to 6.50% per annum
67 2022 to 2056
Fixed-rate receivables, interest rates greater than 6.50% per annum (1)
1,010 2021 to 2069 Receivables
1,194
Allowance for loss on receivables
(37)
Receivables, net of allowance
1,157
Fixed-rate investments, interest rates less than 5.00% per annum 11 2035 to 2038
Fixed-rate investments, interest rates from 5.00% to 6.50% per annum
7 2047 to 2051 Total receivables and investments $
1,175
(1)Excludes receivables held-for-sale of$9 million The table below presents, for the debt investments and real estate related holdings of our Portfolio and our interest-bearing liabilities inclusive of our credit facilities, the average outstanding balances, income earned, the interest expense incurred, and average yield or cost. Our earnings from our equity method investments are not included in this table. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (dollars in millions) Portfolio, excluding equity method investments Interest income, receivables $ 25$ 23 $ 49$ 46 Average balance of receivables$ 1,180 $ 1,133 $ 1,214 $ 1,148 Average interest rate of receivables 8.4 % 8.0 % 8.1 % 7.9 % Interest income, investments $ -$ 1 $ 1$ 1 Average balance of investments $ 21$ 58 $ 36$ 66 Average interest rate of investments 4.5 % 4.4 % 3.9 % 4.4 % Rental income $ 6$ 6 $ 13$ 13 Average balance of real estate $ 358$ 361 $ 358 $ 361 Average yield on real estate 7.2 % 7.2 % 7.2 % 7.2 % Average balance of receivables, investments, and real estate$ 1,559 $ 1,553 $ 1,608 $ 1,576 Average yield from receivables, investments, and real estate 8.1 % 7.7 % 7.8 % 7.6 % Debt Interest expense $ 26$ 22 $ 53$ 40 Average balance of debt$ 2,068 $ 1,664 $ 2,129 $ 1,532 Average cost of debt 5.0 % 5.2 % 5.0 % 5.2 %
The following table provides a summary of our anticipated principal repayments
for our receivables and investments as of
Payment due by Period Less than 1-5 5-10 More than Total 1 year years years 10 years (in millions)
Receivables (excluding allowance) (1)
$ 390 $ 480 Investments 18 1 2 3 12
(1)Excludes receivables held-for-sale of
- 36 - -------------------------------------------------------------------------------- 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 ofJune 30, 2021 , •the term of our leases and a schedule of our future minimum rental income under our land lease agreements as ofJune 30, 2021 , •the Performance Ratings of our Portfolio, and •the receivables on non-accrual status. For information on our residual assets relating to our securitization trusts, see Note 5 to our financial statements in this Form 10-Q. The residual assets do not have a contractual maturity date and the underlying securitized assets have contractual maturity dates until 2056. Results of Operations Comparison of the Three Months EndedJune 30, 2021 vs. Three Months EndedJune 30, 2020 Three months ended June 30, 2021 2020 $ Change % Change (dollars in millions) Revenue Interest income $ 25$ 24 $ 1 4 % Rental income 6 6 - - % Gain on sale of receivables and investments 25 16 9 56 % Fee income 3 3 - - % Total Revenue 59 49 10 20 % Expenses Interest expense 41 22 19 86 % Provision for loss on receivables 1 2 (1) (50) % Compensation and benefits 12 9 3 33 % General and administrative 5 4 1 25 % Total expenses 59 37 22 59 % Income (loss) before equity method investments - 12 (12) (100) % Income (loss) from equity method investments 22 (1) 23 (2,300) % Income (loss) before income taxes 22 11 11 100 % Income tax (expense) benefit (6) 1 (7) (700) % Net income (loss) $ 16$ 12 $ 4 33 % •Net income increased by$4 million due to an increase of$10 million in total revenue and an increase in equity method investments income of$23 million , offset by a$22 million increase in total expenses and a$7 million increase in income tax expense. These results do not reflect the non-GAAP distributable earnings adjustments discussed in the non-GAAP financial measures section below. •Total revenue increased by$10 million due to a$1 million increase in interest income resulting from a higher average Portfolio balance and rate and a$9 million increase in gain on sale and fee income primarily from a change in mix of assets being securitized, partially offset by lower fee generating activities. •Interest expense increased by$19 million due primarily to a one-time loss on the redemption of senior unsecured notes, as well as additional expense due to a higher outstanding debt balance. •Compensation and benefits expense increased by$3 million as a result of an increase in our employee headcount and compensation. •Income from equity method investments increased by$23 million primarily due to new investments which were not in the portfolio in the prior period. - 37 - -------------------------------------------------------------------------------- •Income tax expense increased by$7 million primarily due to the increased HLBV income described above. Comparison of the Six Months EndedJune 30, 2021 vs. Six Months EndedJune 30, 2020 Six months ended June 30, 2021 2021 2020 $ Change % Change (dollars in millions) Revenue Interest income $ 50$ 47 $ 3 6 % Rental income 13 13 - - % Gain on sale of receivables and investments 42 21 21 100 % Fee income 6 8 (2) (25) % Total Revenue 111 89 22 25 % Expenses Interest expense 68 40 28 70 % Provision for loss on receivables 1 3 (2) (67) % Compensation and benefits 28 18 10 56 % General and administrative 10 7 3 43 % Total expenses 107 68 39 57 % Income (loss) before equity method investments 4 21 (17) (81) % Income (loss) from equity method investments 77 16 61 381 % Income (loss) before income taxes 81 37 44 119 % Income tax (expense) benefit (13) (1) (12) 1,200 % Net income (loss) $ 68$ 36 $ 32 89 % •Net income increased by$32 million due to an increase of$22 million in total revenue and an increase in equity method investments income of$61 million , offset by a$39 million increase in total expenses and a$12 million increase in income tax expense. These results do not reflect the non-GAAP distributable earnings adjustments discussed in the non-GAAP financial measures section below. •Total revenue increased by$22 million due to a$3 million increase in interest income resulting from a higher average Portfolio balance and rate and a$19 million increase in gain on sale and fee income primarily from a change in mix of assets being securitized, partially offset by lower fee generating activities. •Interest expense increased by$28 million due to a one time loss on the redemption of senior unsecured notes, as well as additional expense due to a larger outstanding debt balance. •Compensation and benefits expense increased by$10 million as a result of an increase in our employee headcount, compensation and one-time employee-related costs. General and administrative expenses increased by$3 million due primarily to an increase in the size of the company. •Income from equity method investments increased by$61 million primarily due to new investments which were not in the portfolio in the prior period. •Income tax expense increased by$12 million primarily due to the increased HLBV income described above. 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. 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 - 38 - -------------------------------------------------------------------------------- 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 ourOperating 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 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 and 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 assessment of the expected cash flows we will receive from these projects discounted back to the net present value, based on a target investment rate, with the expected 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. 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. 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. 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 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. The following table provides results related to our equity method investments for the three and six months endedJune 30, 2021 and 2020. - 39 - --------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 (in millions) Income (loss) under GAAP $ 22 $
(1) $ 77
Distributable earnings $ 27$ 11 $ 51$ 27 Return of capital/(deferred cash collections) (17) 19 (30) 79 Cash collected $ 10$ 30 $ 21$ 106 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 and six months endedJune 30, 2021 and 2020. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Per Per Per Per $ Share $ Share $ Share $ Share
(dollars in thousands, except per share amounts)
Net income (loss) attributable to
controlling stockholders (1)
$ 0.51 Distributable earnings adjustments: Reverse GAAP (income) loss from equity method investments (22,252) 590 (76,734) (15,999) Equity method investments earnings 26,834 11,018 50,671 27,103 Equity-based compensation charges 4,289 3,975 9,787 7,524 Provision for loss on receivables 906 2,523 1,411 3,171 Loss (gain) on debt modification or extinguishment 14,584 - 16,083 - Amortization of intangibles 823 824 1,645 1,646 Non-cash provision (benefit) for income taxes 5,981 (1,407) 12,760 515 Current year earnings attributable to non-controlling interest 434 50 626 152 Distributable earnings (2)$ 47,573 $ 0.57 $ 29,581 $ 0.40 $ 83,247 $ 1.01 $ 60,429 $ 0.84 (1)This is 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 82,832,735 shares and 82,723,380 shares for the three and six months endedJune 30, 2021 and 74,543,045 shares and 72,095,539 shares for the three and six months endedJune 30, 2020 , 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 ourOperating Partnership . We include any potential common stock issuance in this calculation related to our convertible notes using the treasury stock method and any potential common stock issuances related to share based compensation units in the amount we believe is reasonably certain to vest. We believe the use of the treasury stock method is an appropriate representation of the potential dilution when considering the economic behaviors of the holders of the instrument. - 40 - -------------------------------------------------------------------------------- Distributable Net Investment Income We have a portfolio of investments in climate solutions which we finance using a combination of debt and equity. We calculate distributable net investment income by adjusting GAAP-based net investment income for those distributable earnings adjustments described above which impact 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. The following is a reconciliation of our GAAP-based net investment income to our distributable net investment income: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Interest income$ 25,016 $ 23,649 $ 50,117 $ 47,539 Rental income 6,462 6,469 12,931 12,939 GAAP-based investment revenue 31,478 30,118 63,048 60,478 Interest expense 40,463 21,664 68,045 39,798 GAAP-based net investment income (8,985) 8,454 (4,997) 20,680 Equity method earnings adjustment 26,834 11,018 50,671 27,103 Loss (gain) on debt modification or extinguishment 14,584 - 16,083 - Amortization of real estate intangibles 773 773 1,543 1,546
Distributable net investment income
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 June 30, 2021 December 31, 2020 (dollars in millions) Equity method investments$ 1,489 $ 1,280 Government receivables 131 248 Commercial receivables, net of allowance 1,026 965 Receivables held-for sale 9 - Real estate 358 359 Investments 18 55 GAAP-based Portfolio 3,031 2,907 Assets held in securitization trusts 4,973 4,308 Managed Assets$ 8,004 $ 7,215 - 41 -
-------------------------------------------------------------------------------- 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$3.0 billion as ofJune 30, 2021 . Unlevered portfolio yield was 7.7% and 7.6% as ofJune 30, 2021 andDecember 31, 2020 , respectively. 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 ofJune 30, 2021 . Environmental Metrics 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 understand the impact our investments are having on climate change. In this calculation, which we refer to as CarbonCount®, we apply emissions factor data from theU.S. Government or theInternational 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 estimate that our investments originated during the quarter endedJune 30, 2021 , will avoid annual carbon emissions by approximately 115,000 metric tons, equating to a CarbonCount® of 0.23. We estimate that our investments made since 2013 have cumulatively avoided annual carbon emissions by over 17 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, including ongoing commitments to repay borrowings, fund and maintain our current and future assets, make distributions to our stockholders and other general business needs. We will use significant cash to make investments in climate solutions, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations. 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 ofJune 30, 2021 , with unrestricted cash balances of$583 million , an unsecured revolving credit facility with an unused capacity of$375 million and$67 million of available capacity in our secured revolving credit facilities. During 2021, in addition to entering into our$400 million unsecured revolving credit facility, we have issued$103 million in equity, and issued$1 billion in senior unsecured notes, with$500 million being used to redeem our 2024 senior unsecured notes. As ofJune 30, 2021 , we had$453 million of non-recourse borrowings. We have$1.8 billion of senior unsecured notes and$294 million of convertible notes outstanding. 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 gain on sale securitization transactions with large institutional investors such as life insurance companies. As ofJune 30, 2021 , the outstanding principal balance of our assets financed through the use of these off-balance sheet transactions was approximately$5.0 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 will have future cash needs related to the maturity of the non-amortizing balances of our Senior Unsecured Notes and the balances of our credit facilities. We also have maturities related to our non-recourse debt and Senior 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 required. As it relates to the Senior Convertible Notes, it is possible those obligations will be settled with the issuance of shares. For further information on non-recourse debt and our Senior Convertible Notes, 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): - 42 - -------------------------------------------------------------------------------- [[Image Removed: hasi-20210630_g1.jpg]] For further information on non-recourse debt and our convertible notes, see Note 8 to our financial statements of this Form 10-Q. We plan to raise additional equity capital and continue to use fixed and floating rate borrowings which may be in the form of additional bank credit facilities (including term loans and revolving facilities), warehouse facilities, 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 the 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, the interest rate environment and the credit quality of our financing counterparties. As shown in the table below, our debt to equity ratio was approximately 1.9 to 1 as ofJune 30, 2021 , below our current board-approved leverage limit of 2.5 to 1. Our percentage of fixed rate debt was approximately 98% as ofJune 30, 2021 , which is within our targeted fixed rate debt percentage range of 75% to 100%. - 43 - -------------------------------------------------------------------------------- The calculation of our fixed-rate debt and financial leverage is shown in the chart below: June 30, 2021 % of Total December 31, 2020 % of Total (dollars in (dollars in millions) millions)
Floating-rate borrowings $ 45 2 % $ 23 1 % Fixed-rate debt 2,492 98 % 2,166 99 % Total debt (1)$ 2,537 100 % $ 2,189 100 % Equity$ 1,323 $ 1,210 Leverage 1.9 to 1 1.8 to 1 (1)Floating-rate borrowings include borrowings under our floating-rate credit facilities. 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$609 million and$310 million of unrestricted cash, cash equivalents, and restricted cash as ofJune 30, 2021 andDecember 31, 2020 , respectively. Cash flows relating to operating activities Net cash used in operating activities was approximately$2 million for the six months endedJune 30, 2021 , driven primarily by net income of$68 million offset by adjustments for non-cash and other items of$70 million . The non-cash and other adjustments consisted of decreases of$63 million related to equity method investments,$9 million related to purchases of receivables held-for-sale,$27 million related to gains on securitizations, and$4 million related to other items. These decreases were partially offset by a loss on debt extinguishment of$15 million and by increases of$10 million related to equity-based compensation,$7 million of depreciation and amortization, and$1 million related to provision for loss on receivables. Net cash provided by operating activities was approximately$40 million for the six months endedJune 30, 2020 , driven primarily by net income of$36 million and adjustments for non-cash and other items of$4 million . The non-cash and other adjustments consisted of increases of$3 million related to provision for loss on receivables,$19 million related to equity method investments,$2 million of depreciation and amortization,$3 million of amortization of financing costs, and$8 million related to equity-based compensation. These were offset by$20 million related to gains on securitizations and$11 million related to changes in accounts payable and accrued expenses and other items. Cash flows relating to investing activities Net cash used in investing activities was approximately$199 million for the six months endedJune 30, 2021 . We made$202 million of investments in receivables and fixed rate debt-securities, funded escrow accounts for$12 million and made$137 million of equity method investments. We collected$51 million of principal payments from receivables and fixed rate debt-securities,$91 million from the sales of financial assets,$8 million from equity method investments in excess of income recognized to date under GAAP and received$2 million from escrow accounts and other items. Net cash provided by investing activities was approximately$14 million for the six months endedJune 30, 2020 . We made$81 million of investments in receivables and fixed rate debt-securities, funded escrow accounts for$7 million and made$150 million of equity method investments. We collected$74 million from equity method investments representing the return - 44 - -------------------------------------------------------------------------------- of capital determined under GAAP,$62 million from receivables and fixed rate debt-securities,$110 million from the sales of financial assets, and received$6 million from escrow accounts and other items. Cash flows relating to financing activities Net cash provided by financing activities was approximately$500 million for the six months endedJune 30, 2021 . We received$1 billion from the issuance of senior unsecured notes,$103 million of net proceeds from issuances of common stock, and$25 million of borrowings from credit facilities, which were offset by$514 million related to the redemption of senior unsecured notes,$26 million of principal prepayments on non-recourse debt,$15 million for debt issuance costs,$3 million of principal payments on credit facilities,$14 million for withholding requirements resulting from the vesting of employee shares and paid$56 million of dividends, distributions and other items. Net cash provided by financing activities was approximately$410 million for the six months endedJune 30, 2020 . We borrowed$126 million from our credit facilities, had non-recourse debt borrowings of$16 million , issued$400 million of senior unsecured notes, and received$159 million of net proceeds from issuances of common stock. We made$91 million of principal payments on non-recourse debt,$127 million of principal payments on credit facilities, paid$17 million for withholding requirements as a result of the vesting of employee shares and paid$56 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$194 million as ofJune 30, 2021 , 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. DividendsU.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 have been taxed as ordinary income to our stockholders. 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 portfolio, 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 - 45 - -------------------------------------------------------------------------------- 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 allowU.S. individuals, trusts, and estates to deduct up to 20% of such amounts, subject to certain limitations, resulting in an effective maximumU.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 2020 and 2021 are described in Note 11 to our financial statements in this Form 10-Q. Book Value Considerations As ofJune 30, 2021 , we carried only our investments and residual assets in securitized financial assets 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 ofJune 30, 2021 , 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. Other than the allowance for current expected credit losses applied to our government and commercial 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 market value. Item 3. Quantitative and Qualitative Disclosures about Market Risk We anticipate that our primary market risks will be related to the credit quality of our counterparties and project companies, market interest rates, the liquidity of our assets, commodity prices, and environmental factors. We will seek to manage these risks while, at the same time, seeking to provide an opportunity to stockholders to realize attractive returns through ownership of our common stock. Many of these risks have been magnified due to the continuing economic disruptions caused by the COVID-19 pandemic; however, while we continue to monitor the pandemic its impact on such risks remains uncertain and difficult to predict. Credit Risks We source and identify quality opportunities within our broad areas of expertise and apply our rigorous underwriting processes to our transactions, which, we believe, will generally enable us to minimize our credit losses and maintain access to attractive financing. In the case of various renewable energy and other sustainable infrastructure projects, we will be exposed to the credit risk of the obligor of the project's PPA or other long-term contractual revenue commitments, as well as to the credit risk of certain suppliers and project operators. While we do not anticipate facing significant credit risk in our assets related to government energy efficiency projects, we are subject to varying degrees of credit risk in these projects in relation to guarantees provided by ESCOs where payments under energy savings performance contracts are contingent upon achieving pre-determined levels of energy savings. We are exposed to credit risk in our other projects that do not benefit from governments as the obligor such as on balance sheet financing of projects undertaken by universities, schools and hospitals, as well as privately owned commercial projects. Our level of credit risk has increased, and is expected to continue to increase, as our strategy contemplates additional investments in mezzanine debt and equity. We seek to manage credit risk through thorough due diligence and underwriting processes, strong structural protections in our transaction agreements with customers and continual, active asset management and portfolio monitoring. Nevertheless, unanticipated credit losses could occur and during periods of economic downturn in the global economy, our exposure to credit risks from obligors increases, and our efforts to monitor and mitigate the associated risks may not be effective in reducing our credit risks. We utilize a risk rating system to evaluate projects that we target. We first evaluate the credit rating of the obligors involved in the project using an average of the external credit ratings for an obligor, if available, or an estimated internal rating based on a third-party credit scoring system. We then estimate the probability of default and estimated recovery rate based on the obligors' credit ratings and the terms of the contract. We also review the performance of each investment, including through, as appropriate, a review of project performance, monthly payment activity and active compliance monitoring, regular communications with project management and, as applicable, its obligors, sponsors and owners, monitoring the financial performance of the collateral, periodic property visits and monitoring cash management and reserve accounts. The results of our reviews are used to update the project's risk rating as necessary. Additional detail of the credit risks surrounding our Portfolio can be found in Note 6 to our financial statements in this Form 10-Q. - 46 - -------------------------------------------------------------------------------- Interest Rate and Borrowing Risks Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. We are subject to interest rate risk in connection with new asset originations and our borrowings, including our credit facilities, and in the future, any new floating rate assets, credit facilities or other borrowings. Because short-term borrowings are generally short-term commitments of capital, lenders may respond to market conditions, making it more difficult for us to secure continued financing. If we are not able to renew our then existing borrowings or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under any of these borrowings, we may have to curtail our origination of new assets and/or dispose of assets. We face particular risk in this regard given that we expect many of our borrowings will have a shorter duration than the assets they finance. Increasing interest rates may reduce the demand for our investments while declining interest rates may increase the demand. Both our current and future credit facilities and other borrowings may be of limited duration and are periodically refinanced at then current market rates. We attempt to reduce interest rate risks and to minimize exposure to interest rate fluctuations through the use of fixed rate financing structures, when appropriate, whereby we seek to (1) match the maturities of our debt obligations with the maturities of our assets, (2) borrow at fixed rates for a period of time, or (3) match the interest rates on our assets with like-kind debt (i.e., we may finance floating rate assets with floating rate debt and fixed-rate assets with fixed-rate debt), directly or through the use of interest rate swap agreements, interest rate cap agreements or other financial instruments, or through a combination of these strategies. We expect these instruments will allow us to minimize, but not eliminate, the risk that we must refinance our liabilities before the maturities of our assets and to reduce the impact of changing interest rates on our earnings. In addition to the use of traditional derivative instruments, we also seek to mitigate interest rate risk by using securitizations, syndications and other techniques to construct a portfolio with a staggered maturity profile. We monitor the impact of interest rate changes on the market for new originations and often have the flexibility to negotiate the term of our investments to offset interest rate increases. Typically, our long-term debt is at fixed rates or we may at times use interest rate hedges that convert most of the floating rate debt to fixed rate debt. If interest rates rise, and our fixed rate debt balance remains constant, we expect the fair value of our fixed rate debt to decrease and the value of our hedges on floating rate debt to increase. See Note 3 to our financial statements in this Form 10-Q for the estimated fair value of our fixed rate long-term debt, which is based on having the same debt service requirements that could have been borrowed at the date presented, at prevailing current market interest rates. Our credit facilities are variable rate lines of credit with approximately$45 million outstanding as ofJune 30, 2021 . Increases in interest rates would result in higher interest expense while decreases in interest rates would result in lower interest expense. As described above, we may use various financing techniques including interest rate swap agreements, interest rate cap agreements or other financial instruments, or a combination of these strategies to mitigate the variable interest nature of these facilities. A 50 basis point increase in LIBOR would increase the quarterly interest expense related to the$45 million in variable rate borrowings by$50 thousand . Such hypothetical impact of interest rates on our variable rate borrowings does not consider the effect of any change in overall economic activity that could occur in a rising interest rate environment. Further, in the event of such a change in interest rates, we may take actions to further mitigate our exposure to such a change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the analysis assumes no changes in our financial structure. We record certain of our assets at fair value in our financial statements and any changes in the discount rate would impact the value of these assets. See Note 3 to our financial statements in this Form 10-Q. Liquidity and Concentration Risk The assets that comprise our Portfolio are not and are not expected to be publicly traded. A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions. Certain of the projects in which we invest have one obligor and thus we are subject to concentration risk for these investments and could incur significant losses if any of these projects perform poorly or if we are required to write down the value of any of these projects. Many of our assets, or the collateral supporting those assets, are concentrated in certain geographic areas, which may make those assets or the related collateral more susceptible to natural disasters or other regional events. See also "Credit Risks" discussed above. Commodity Price Risk When we make equity or debt investments for a renewable energy project that acts as a substitute for an underlying commodity, we may be exposed to volatility in prices for that commodity. The performance of renewable energy projects that produce electricity can be impacted by volatility in the market prices of various forms of energy, including electricity, coal and natural gas. This is especially true for utility scale projects that sell power on a wholesale basis such as many of our GC projects - 47 - -------------------------------------------------------------------------------- as opposed to BTM projects which compete against the retail or delivered costs of electricity which includes the cost of transmitting and distributing the electricity to the end user. Although we generally focus on renewable energy projects that have the majority of their operating cash flow supported by long-term PPAs or leases, many of our projects have shorter term contracts (which may have the potential of producing higher current returns) or sell their power in the open market on a merchant basis, the cash flows of such projects, and thus the repayment of, or the returns available for, our assets, are subject to risk if energy prices change. We also attempt to mitigate our exposure through structural protections. These structural protections, which are typically in the form of a preferred return mechanism, are designed to allow recovery of our capital and an acceptable return over time. When structuring and underwriting these transactions, we evaluate these transactions using a variety of scenarios, including natural gas prices remaining low for an extended period of time. Despite these protections, as low natural gas prices continue or PPAs expire, the cash flows from certain of our projects are exposed to these market conditions and we work with the projects sponsors to minimize any impact as part of our on-going active asset management and portfolio monitoring. In the case of utility scale solar projects, we focus on owning the land under the project where our rent is paid out of project operational costs before the debt or equity in the project receives any payments. Certain of the projects in which we invest may also be obligated to physically deliver energy under PPAs or related agreements, and to the extent they are unable to do so may be negatively impacted. We believe the current low prices in natural gas will increase demand for some types of our projects, such as combined heat and power, but may reduce the demand for other projects such as renewable energy that may be a substitute for natural gas. We seek to structure our energy efficiency investments so that we typically avoid exposure to commodity price risk. However, volatility in energy prices may cause building owners and other parties to be reluctant to commit to projects for which repayment is based upon a fixed monetary value for energy savings that would not decline if the price of energy declines. Environmental Risks Our business is impacted by the effects of climate change, including extreme weather events, and various related regulatory responses. We discuss the risks and opportunities associated with the impacts of climate change in our Form 10-K Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of climate change on our future operations. This discussion outlines potential qualitative impacts to our business, quantitative illustrations of sensitivity as well as our strategy and resilience to these risks and opportunities. Risk Management Our ongoing active asset management and portfolio monitoring processes provide investment oversight and valuable insight into our origination, underwriting and structuring processes. These processes create value through active monitoring of the state of our markets, enforcement of existing contracts and asset management. As described above, we engage in a variety of interest rate management techniques that seek to mitigate the economic effect of interest rate changes on the values of, and returns on, some of our assets. While we have either written off or specifically identified only two transactions amounting to approximately$19 million (net of recoveries) on the over$7 billion of loans and real estate transactions we originated since 2012, which represents an aggregate loss of approximately 0.3% on cumulative such transactions originated over this time period, there can be no assurance that we will continue to be as successful, particularly as we invest in more credit sensitive assets or more equity investments and engage in increasing numbers of transactions with obligors other thanU.S. federal government agencies. We seek to manage credit risk using thorough due diligence and underwriting processes, strong structural protections in our loan agreements with customers and continual, active asset management and portfolio monitoring. Additionally, we have aFinance and Risk Committee of our board of directors which discusses and reviews policies and guidelines with respect to our risk assessment and risk management for various risks, including, but not limited to, our interest rate, counter party, credit, capital availability, and refinancing risks. As it relates to environmental risks, when we underwrite and structure our investments the environmental risks and opportunities are an integral consideration to our investment parameters. While we cannot fully protect our investments, we seek to mitigate these risks by using third-party experts to conduct engineering and weather analysis and insurance reviews as appropriate. Once a transaction has closed we continue to monitor the environmental risks to the portfolio. We further discuss our strategy to managing these risks in our Form 10-K, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of climate change on our future operations. Item 4. Controls and Procedures The Company's Chief Executive Officer and Chief Financial Officer, based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that as ofJune 30, 2021 , the Company's disclosure controls and procedures were effective to give reasonable assurances to the timely collection, evaluation and disclosure of information - 48 -
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relating to the Company that would potentially be subject to disclosure under the Exchange Act and the rules and regulations promulgated thereunder. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports. Changes in Internal Controls over Financial Reporting There have been no changes in the Company's "internal control over financial reporting" (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three-month period endedJune 30, 2021 , that have materially affected, or was reasonably likely to materially affect, the Company's internal control over financial reporting.
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