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HASI:“ESG”isforExaggerating,Scamming,andGrifting

WeareshortHannonArmstrongSustainableInfrastructureCapital,Inc.(HASI)becauseitsaccountingissocomplexandmisleadingthatitsfinancialstatementsareeffectivelymeaningless.HASIisaprimeexampleofhowpublicmarketincentivescanwarpacompanyintorelentlesslydestroyingvaluetofeedaWallStreetgrowthnarrative.MostofHASI’sincomeisbothnon-cashandunrealizable:Ithaslittlerelationshipwithcashtobereceivedinthefuture.HASImisleadinglyinflatesGAAPearningsthreeways:1)Throughaloopholeinthearcanaofaccountingforrenewablessubsidies,HASIbooksnon-cashunrealizableincomerelatingtothirdparties’taxcreditsthatwillbereversed;2)HASIproducesnon-cashincomebymanipulatingthediscountrateitappliestoresidualassetstoimplausiblylowlevels,therebyinflatingitsgainsonsecuritizations;and,3)HASIbooksinterestincomefromnon-cash“PaidinKind”(“PIK”)interestpayments,whichareessentiallyIOUsfromstressedborrowers.

Overall,weadjustHASI’s2020GAAPincomedownwardby$66.3millionto$16.5millionatthemidpointofourestimate.1WeadjustHASI’s2021GAAPincomedownby$362.7milliontoanetlossof($235.4million)atthemidpoint.2HASI’snon-GAAP“DistributableEarnings”misleadinvestorswhobelievetheyareaproxyforcashearnings–weestimate2021cashearningsasnegative.HASI’sdividendisalmostentirelyfinancedthroughcapitalraises.WebelievethatHASI’soperatingcashflowismisleadinglyhigh–weconservativelyadjustitdownwardbyapproximately39.3%.

HASI’sSunStrongEMIisanexampleofhowHASIengagesinseeminglynon-substantive–ifnotoutrightvaluedestructive–transactionswithanequitymethodinvestment(“EMI”)companytocreatetheappearanceofcashflowsandearningsbyroundtrippingmoney.Wecount$502millionofloansthatHASImadetoSunStrongsince2018withoutdisclosureasrelatedpartytransactions,indicatingthatthecosttoHASIforsuchfinancialstatementflatteryisoutsizedrisk.3ThegaintoHASI’sexecutives,meanwhile,isclear:theyhavedisposedof$22.9millionofstockinthepasttwoyears,withCEOJeffEckelhavingliquidatedorgifted$17.1million.

1MWmidpointestimate.

2MWmidpointestimate.

3OurcountofundisclosedHASIloanstoSunStrongstartsfromNovember2018andisbasedontotalborrowableprincipleatthetimeoforigination.ThecountassumesHASIfunded50%ofthe8point3SolarInvestco3Holdings,LLCloanmadeinJune2019byKeyBankandHASI.

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WeadjustGAAPearningssignificantlydownwardbecauseHASImisleadinglyinflatesGAAPearningsinthreeways:

oWeestimatethatHASIinflated2020incomefromEMIsby$40.4million,or540%atthemidpointofourestimate,andturnedalossintopositiveincomein

2021byusinganaccountingloopholetobooknon-cash,unrealizableincomewhenthetaxincentivesassociatedwiththeprojectarerealizedbythetaxequitypartner.4

oWeestimatethatbymanipulatingthediscountratetoimplausiblylowlevels,HASIinflatedgainsonsecuritizationin2020and2021,respectively,by34%($13million)and60%($25million).5HASIperformssecuritizationofreceivablesfromgovernment-linkedandcommercialprojects.HASIreceivesasmallsecuritizationfee,butretainsaresidualinterestresponsibleforsignificantpaperincome.HASIinflatesitsgainsonsecuritizationsbyusingwhatHASIcallsa“market-basedrisk-freerate”tovaluetheresiduals,ratherthanacomparablemarketratewithdefaultandotherriskconsiderations.Bydroppingdiscountratesonresidualsto4.3%in2021from8%-10%in2013,HASIcanwriteupthevaluesofthoseresidualssignificantlyonitsbalancesheet.

oWeestimatethatPIKinterestincomeinflatedHASI’sreportedinterestincomein

2020and2021,respectively,by16.1%($13.2million)and15.1%($14.0million).6HASIinflatesearningsbybookingundisclosed,non-cashPIKinterestincome.Whenacompany“PIKs”,itessentiallyissuesIOUsfortheinterest

payments.

?HASI’spreferrednon-GAAPmetric,“DistributableEarnings”,hasalmostnorelationshipwithcashearnings.HASI’sDistributableEarningsisa“havemycakeandeatittoo”metric.Asshouldbeexpected,HASIaddsbacknon-cashexpenses.Criticallythough,HASIdoesnotexcludenon-cashincome.Weestimatethatin2021,non-cashincomewas$362.7million,whichwas2.3xHASI’sreportedDistributableEarningsof$158.7million.DistributableEarningsisthereforesignificantlydistortedbyHASI’snon-cashincome.

oIncontrasttoothercompaniesthatcollectcashfortheirrevenue,HASI’srevenueshaveasignificantnon-cashcomponent,stemmingfromPIKinterestincome,gainsonsecuritizations,andnon-cashincomefromEMIsornon-cashHLBVincome.HASIdoesnotremovenon-cashincome,onlyaddingbacknon-cashexpensesandinvestmentstocalculateitsDistributableEarnings.

oHASImakesanadjustmenttoincomefromEMIs,butthisadjustmentdoesnotcorrespondtoEMIs’actualcashgenerationpower.HASIreplacesEMIincomewithanothernon-cashmetric,aso-called“EquityMethodInvestmentsEarnings”,whichisprojectedfutureincomebasedonscenariosthatseemgreatlyoptimisticbasedontheirperformancestodate.

4MWmidpointestimate.

5MWmidpointestimate.

6MWmidpointestimate.

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oWeadjust2021DistributableEarningsdownfrom$158.7milliontoalossof($181.4million)byremovingincomethatislikelyorentirelynon-cash.

?ThevastmajorityofHASI’sdividendshavebeenfinancedbyreturnsofcapital,notreturnsoncapital–inotherwords,HASIprimarilypaysitsdividendsthroughequityanddebtraises.IntheeightyearssinceHASI’sIPO,only9%ofdividendscamefrominternallygeneratedcashflowsonaverage:91%wasjustrecyclingequityanddebtinvestors’capital.

?WeadjustHASI’s2019-2020OperatingCashFlow(OCF)downby-39.3%.Webelievethisisconservative.

oNon-cashHLBVincomeenablesHASItoinflateOCF.HASIdisclosesthatitaccountsforanycashdistributedfromEMIsasOCF,uptotheamountofincomebookedoneachinvestment.Inthisway,HASI’spaperincomealsoinflatesOCF.

oWeestimatethatHASIusednon-cash,unrealizableHLBV-relatedincomeandreturnsofHASI’sowncapitalfromEMIsSunStrongandBuckeyetoinflateOCF.Weadjust2019-2020OCFdownwardby-39.3%,or-$39.4million.

?HASI’sSunStrongEMIisaprimeexampleofhowHASIusesitsEMIstomanipulateearningsandcashflowsthroughmultipleaggressiveroundtrippingmechanismsandwithoutappropriatedisclosures.

oHASIpaidonly$10millionforits49%equityinterestin2018.Weestimatethatfrom2019to2021,HASIhasbookednon-cash,unrealizableHLBVincomeof$15.3million,forapaperIRRof10.2%.

oHASIhasmade$645millioninmezzanineloanstoSunStrongsince2018,ofwhich$373millionwerestilloutstandingatyear-end2021.Theseloansappeartoberelatedpartyloansinsubstance,yetHASIhasfailedtomakerelatedpartytransactiondisclosuresregardingloanstotaling$502million.WeseethefailuretodiscloseasanattempttoobscurefrominvestorshowHASIusesSunStrongtomanipulateitsfinancials.HASIhasgenerated$20million-$30millioninannualinterestincomefromtheseloans,ofwhich~40%isnon-cashPIKinterestthatissettledbyconvertinginteresttoadditionalloanprincipal.

oSunStronghasincurredmillionsofdollarsinlossesfrominceptiontodate.Atthesametime,HASIhasrefinancedcertainofitsloanstoSunStrongtwicewithatbestcosmeticbenefitstotheinterestburdenorloanmaturity.Theserefinancingsgivethemisleadingappearanceofhealthymezzanineloanrepaymentactivity.

oPIKloansenableHASItokeepincreasinginterestincomefromSunStrong,eventhoughSunStrong’sdebtburdenisextreme.

oWesuspectthatHASI’ssaleofHAHelixtoSunStrong,whichwasessentiallyforapaymentofmoneyborrowedfromHASI,inappropriatelyinflatedHASI’soperatingcashflowwhilegivingthemisleadingappearancethatitcollectedcashonaccruedPIKinterestandprincipal.

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?WeviewHASI’smisleadinggovernancepracticesasobscuringthenon-cash,circularnatureofitsbusiness.

oHASIshowsHLBVincomefromEMIsthatisone-time,non-cash,andunrealizable.7HASIisnotobligatedtoshowthisincome.Toeliminatethesignificantamountofnon-cashHLBVincomeithasrecordedandproperlyapplyaccountingrules,HASIshouldtakeimpairmentsoruserealizablebookvaluesunderHLBV.However,HASIchoosestocontinuereportinginflatednon-cashincome.

?HASI’sEMIshaveexperiencedapproximately($449million)inlossesfromhedgesandothercausesthatremainpoorlyexplainedbythecompany.Yet,HASIreportsrecordincomefromEMIsduetonon-cashunrealizableHLBVincome.

?HASIexecutiveshavecashedout$22.9millionofstockinthelasttwoyears,ledbyCEOJeffEckel.Thecompany’smisleadingnon-cash“Distributable”metricsdrove$8.6millionin2021executivebonuspayments.8

?AfterestimatingHASI’sincomeinflation,weadjustHASI’s2021GAAPincomedownwardby$362.7milliontoanetlossof($235.4million).9

?WeadjustHASI’s2020GAAPincomedownwardby$66.3milliontonetincomeof$16.5million.10

HASIisarenewables-focusedfinancialcompanythattodayoperatesthreemainincomestreams.ThelargestsourceofreportedincomeisitsEquityMethodInvestments(EMIs)inrenewableenergyprojects.Mostoftheseareminorityinvestmentsinwind,residentialsolar,andutility-scalesolarprojects.HASIaccountsforEMIincomethrough“HypotheticalLiquidationatBookValue”(“HLBV”),whichcreatessignificantnon-cashandunrealizableincome.Thesecondkeysegmentissecuritizationofreceivablesfromgovernment-linkedandcommercialprojects.Historically,HASI’ssecuritization-relatedincomewaslargelyafeeequivalenttoasmallpercentageofthesecuritizations.However,HASIincreasinglyretainsresidualinterestsinthesereceivables,whichasexplainedinfra,generatessignificantpaper(non-cash)gains.HASI’sthirdmajorincomesourceisinterestincomefromcommercialandgovernmentloanreceivables.HASIregularlybooksnon-cashPIKinterestfromsuchreceivables,evenwhentheentityguaranteeingthereceivablesappearshighlyleveredandgenerateslittleprofit.Allthreebusinessareashavesignificantnon-cashincomecomponentsthatallowHASItoreportunrealizableincome.

HASIillustratestheperversemarketincentivesthatcanwarpabusinessoncepublic.BeforeHASIbecamereliantonlargelyunrealizable,non-cashgains,itwasaboring,cash-basedbusiness.For32yearsbeforegoingpublicinApril2013,HASIwas100%fee-based,primarily

7Whenwerefertonon-cashHLBVincome,wearereferringtonon-cashHLBVincomethatreversesovertime,asnotedine.g.HASI202110-K,p.101

8HASI2022ProxyStatement,p.54

9MWmidpointestimate.

10MWmidpointestimate.

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generatingfeesfromloans,landleases,andsecuritizations.11Beforeits2013IPO,HASI’smanagedportfolioconsistedoffixedrateamortizingloansordirectfinancingleases,with~99%oftheportfolioconsistingofU.S.federalgovernmentobligations,themajorityofwhichwereenergyefficiencyfinancing.12HASIonlybeganinvestingheavilyinEMIspost-IPO,in

2014.HASI’sinvestmentportfoliohaschangedsignificantlysincethen.Asofyear-end2021,EMIswereHASI’slargestassetclass,equalto42.4%ofHASI’sassetvalue;investmentsinreceivables,bothcommercialandgovernment,combiningfor~34%,ofwhichcommercialreceivablesare91.3%ofthereceivablebalance.13

SunStrongEMIIllustratesHASI’sBrazenEarningsandCashFlowManipulation

TounderstandthelengthstowhichHASIgoestomanipulateitsfinancials,oneneedlooknofurtherthanHASI’srelationshipwithits49%-ownedEMI,SunStrongCapitalHoldings,LLC(“SunStrong”).SunStrongshowstwoofthethreetechniquesHASIusestomanipulateitsGAAPearnings:non-cashHLBVincomeandPIKinterest.Thesenon-cashincomestreamsalsomisleadinglyboostoperatingcashflow,andcreateamisleadingimageofahealthyloanportfolio.SunStrongappearstobeastressedproject.14HASI’sentryasajointventurepartnerresultsfromrestructuringdistressedloansitmadetoSPWR.SunStronghasacumulativelosssincethejointventurewasformedin2018,despitetheassetshavinggoneintooperationasearly

as2014.

Yet,HASIrecordssignificantincomefromtheSunStrongjointventure–thisincomeissubstantiallynon-cash.HASIrecordsnon-cashHLBVincomeatavalueroughlyequaltoitsproportionalshareofathirdparty’staxcredits,despiteHASIreversingallofthisincomeovertimeandreceivingnotaxbenefitorcashincomeitself.HASIalsorecordsincomeandoperatingcashflowbyreceivingPaid-in-Kind(“PIK”)interest–PIKinterestisessentiallyIOUs.HASIusesSunStrongtomanipulateitsinvestingcashflowbymakingveryquestionablenewloanstoSunStrongthatareusedtopayoffexistingloansfromHASIthatcanbeover20yearsfrommaturity.HASIappearstohavegoneevenfurthertouseSunStrongtomanipulateitsoperatingcashflowwhenHASIconveyedaportfoliotoSunStronginaconvolutedmannerthateffectivelyroundtrippedcashbacktoHASI;yetreducedtheamountofprincipalandPIKinterestSunStrongowesHASI.ThisappearstohaveenabledHASIto(improperlyinourview)recordoperatingcashflow.HASIalsolikelyuseda$21.6millioncashdistributionfromSunStrongtorecordoperatingcashflowinayearinwhichSunStrongbookedanetlossandPIKeditsinterestexpense,implyingaprimarypurposeforthedistributionofmanipulatingHASI’sfinancials.BasedonHASI’sscantdisclosuresarounditsrelationshipwithSunStrong,HASIappearstobesensitivetoinvestorsknowingthefullpictureofthetwocompanies’dealings.Asjustoneexample,HASIappearstohavemadenodisclosuresaboutanyofthetenadditionalroundsof

11HASISpecialCallHostedbyMorganStanley,July2020

12HASIFormS-11A,pp.6-9

13HASI202110-K,p.80

14