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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

 FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-35877
 
 
HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
(Exact name of registrant as specified in its charter)
 
 
Maryland
 
46-1347456
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1906 Towne Centre Blvd
Suite 370
 
21401
Annapolis,
Maryland
 
(Address of principal executive offices)
 
(Zip code)
(410) 571-9860
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 per value per share
HASI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  




Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
  
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 65,689,228 shares of common stock, par value $0.01 per share, outstanding as of July 29, 2019 (which includes 772,784 shares of unvested restricted common stock).
 




FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are subject to risks and uncertainties. For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, we intend to identify forward-looking statements.
Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in the forward-looking statements. Factors that could cause actual results to differ materially from those described in the forward-looking statements are contained in our Annual Report on Form 10-K for the year ended December 31, 2018, as amended by our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2018 (collectively, our “2018 Form 10-K”) that was filed with the U.S. Securities and Exchange Commission (the “SEC”), and include risks discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q and in other periodic reports that we file with the SEC. Statements regarding the following subjects, among others, may be forward-looking:
 our expected returns and performance of our investments;
the state of government legislation, regulation and policies that support or enhance the economic feasibility of sustainable infrastructure projects, including energy efficiency and renewable energy projects and the general market demands for such projects;
market trends in our industry, energy markets, commodity prices, interest rates, the debt and lending markets or the general economy;
our business and investment strategy;
availability of opportunities to invest in projects that reduce carbon emissions or increase resilience to climate change including energy efficiency and renewable energy projects and our ability to complete potential new opportunities in our pipeline;
our relationships with originators, investors, market intermediaries and professional advisers;
competition from other providers of capital;
our or any other companies’ projected operating results;
actions and initiatives of the federal, state and local governments and changes to federal, state and local government policies, regulations, tax laws and rates and the execution and impact of these actions, initiatives and policies;
the state of the U.S. economy generally or in specific geographic regions, states or municipalities, and economic trends;
our ability to obtain and maintain financing arrangements on favorable terms, including securitizations;
general volatility of the securities markets in which we participate;
changes in the value of our assets, our portfolio of assets and our investment and underwriting process;
the impact of weather conditions, natural disasters, accidents or equipment failures or other events that disrupt the operation of our investments or negatively impact the value our assets;
rates of default or decreased recovery rates on our assets;
interest rate and maturity mismatches between our assets and any borrowings used to fund such assets;
changes in interest rates, including the flattening of the yield curve, and the market value of our assets and target assets;
changes in commodity prices, including continued low natural gas prices;
effects of hedging instruments on our assets or liabilities;
the degree to which our hedging strategies may or may not protect us from risks, such as interest rate volatility;
impact of and changes in accounting guidance;

- i -



our ability to maintain our qualification as a real estate investment trust ("REIT") for U.S. federal income tax purposes;
our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”);
availability of and our ability to attract and retain qualified personnel;
estimates relating to our ability to generate sufficient cash in the future to operate our business and to make distributions to our stockholders; and
our understanding of our competition.
Forward-looking statements are based on beliefs, assumptions and expectations as of the date of this Form 10-Q. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events or otherwise.
The risks included here are not exhaustive. Other sections of this Form 10-Q or our 2018 Form 10-K may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

 


- ii -



TABLE OF CONTENTS
 
 
 
Page
 
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 



- iii -



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
June 30, 2019 (unaudited)
 
December 31, 2018
Assets
 
 
 
Equity method investments
$
458,267

 
$
471,044

Government receivables
342,606

 
497,464

Commercial receivables
508,286

 
447,196

Real estate
363,809

 
365,370

Investments
124,370

 
169,793

Cash and cash equivalents
37,892

 
21,418

Other assets
192,191

 
182,628

Total Assets
$
2,027,421

 
$
2,154,913

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and other
$
38,264

 
$
36,509

Deferred funding obligations
5,814

 
72,100

Credit facilities
209,653

 
258,592

Non-recourse debt (secured by assets of $920 million and $1,105 million, respectively)
740,003

 
834,738

Convertible notes
148,943

 
148,451

Total Liabilities
1,142,677

 
1,350,390

Stockholders’ Equity:
 
 
 
Preferred stock, par value $0.01 per share, 50,000,000 shares authorized, no shares issued and outstanding

 

Common stock, par value $0.01 per share, 450,000,000 shares authorized, 64,912,741 and 60,510,086 shares issued and outstanding, respectively
649

 
605

Additional paid in capital
1,060,086

 
965,384

Accumulated deficit
(180,217
)
 
(163,205
)
Accumulated other comprehensive income (loss)
968

 
(1,684
)
Non-controlling interest
3,258

 
3,423

Total Stockholders’ Equity
884,744

 
804,523

Total Liabilities and Stockholders’ Equity
$
2,027,421

 
$
2,154,913



See accompanying notes.
- 1 -



HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
Interest income, receivables
$
15,122

 
$
12,756

 
$
30,642

 
$
25,604

Interest income, investments
1,793

 
1,589

 
3,676

 
3,129

Rental income
6,469

 
5,967

 
12,946

 
11,909

Gain on sale of receivables and investments
2,167

 
14,208

 
9,006

 
20,465

Fee and other income
5,717

 
1,615

 
8,141

 
3,221

Total revenue
31,268

 
36,135

 
64,411

 
64,328

Expenses
 
 
 
 
 
 
 
Interest expense
14,869

 
19,033

 
30,300

 
37,744

Compensation and benefits
6,650

 
6,335

 
14,089

 
11,656

General and administrative
3,739

 
3,844

 
7,080

 
6,930

Total expenses
25,258

 
29,212

 
51,469

 
56,330

Income before equity method investments
6,010

 
6,923

 
12,942

 
7,998

Income (loss) from equity method investments
7,624

 
10,583

 
12,131

 
8,298

Income (loss) before income taxes
13,634

 
17,506

 
25,073

 
16,296

Income tax (expense) benefit
(839
)
 
(153
)
 
1,430

 
(171
)
Net income (loss)
$
12,795

 
$
17,353

 
$
26,503

 
$
16,125

Net income (loss) attributable to non-controlling interest holders
55

 
91

 
117

 
86

Net income (loss) attributable to controlling stockholders
$
12,740

 
$
17,262

 
$
26,386

 
$
16,039

Basic earnings (loss) per common share
$
0.20

 
$
0.32

 
$
0.41

 
$
0.29

Diluted earnings (loss) per common share
$
0.19

 
$
0.32

 
$
0.41

 
$
0.29

Weighted average common shares outstanding—basic
63,772,549

 
52,051,253

 
62,766,318

 
51,882,021

Weighted average common shares outstanding—diluted
64,429,155

 
52,051,253

 
63,394,220

 
51,882,021



See accompanying notes.
- 2 -



HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
12,795

 
$
17,353

 
$
26,503

 
$
16,125

Unrealized gain (loss) on available-for-sale securities, net of tax benefit (provision) of $0.4 million and $0.1 million in each of the three and six month periods ended 2019, and $0.0 million in each of the three and six month periods ended 2018
4,597

 
(303
)
 
6,596

 
(3,032
)
Unrealized gain (loss) on interest rate swaps, net of tax benefit (provision) of $0.0 million in each of the three and six month periods ended 2019 and 2018, respectively
(3,249
)
 
2,082

 
(3,932
)
 
7,979

Comprehensive income (loss)
14,143

 
19,132

 
29,167

 
21,072

Less: Comprehensive income (loss) attributable to non-controlling interest holders
61

 
101

 
128

 
113

Comprehensive income (loss) attributable to controlling stockholders
$
14,082

 
$
19,031

 
$
29,039

 
$
20,959




See accompanying notes.
- 3 -



HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Non-controlling interests
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance at March 31, 2019
62,876

 
$
629

 
$
1,009,346

 
$
(170,953
)
 
$
(375
)
 
$
3,414

 
$
842,061

Net income (loss)
 
 
 
 
 
 
12,740

 
 
 
55

 
12,795

Unrealized gain (loss) on available-for-sale securities
 
 
 
 
 
 
 
 
4,577

 
20

 
4,597

Unrealized gain (loss) on interest rate swaps
 
 
 
 
 
 
 
 
(3,234
)
 
(15
)
 
(3,249
)
Issued shares of common stock
1,926

 
19

 
50,352

 
 
 
 
 
 
 
50,371

Equity-based compensation
 
 
 
 
2,955

 
 
 
 
 
12

 
2,967

Issuance (repurchase) of vested equity-based compensation shares
111

 
1

 
(2,567
)
 
 
 
 
 
 
 
(2,566
)
Dividends and distributions
 
 
 
 
 
 
(22,004
)
 
 
 
(228
)
 
(22,232
)
Balance at June 30, 2019
64,913

 
$
649

 
$
1,060,086

 
$
(180,217
)
 
$
968

 
$
3,258

 
$
884,744

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2018
51,827

 
$
518

 
$
770,922

 
$
(150,052
)
 
$
2,086

 
$
3,478

 
$
626,952

Net income (loss)
 
 
 
 
 
 
17,262

 
 
 
91

 
17,353

Unrealized gain (loss) on available-for-sale securities
 
 
 
 
 
 
 
 
(302
)
 
(1
)
 
(303
)
Unrealized gain (loss) on interest rate swaps
 
 
 
 
 
 
 
 
2,071

 
11

 
2,082

Issued shares of common stock
833

 
8

 
15,348

 
 
 
 
 
 
 
15,356

Equity-based compensation
 
 
 
 
4,078

 
 
 
 
 
21

 
4,099

Issuance (repurchase) of vested equity-based compensation shares
68

 
1

 
(1,219
)
 
 
 
 
 
 
 
(1,218
)
Dividends and distributions
 
 
 
 
 
 
(17,834
)
 
 
 
(91
)
 
(17,925
)
Balance at June 30, 2018
52,728

 
$
527

 
$
789,129

 
$
(150,624
)
 
$
3,855

 
$
3,509

 
$
646,396

 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes.
- 4 -



 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Non-controlling interests
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2018
60,510

 
$
605

 
$
965,384

 
$
(163,205
)
 
$
(1,684
)
 
$
3,423

 
$
804,523

Net income (loss)
 
 
 
 
 
 
26,386

 
 
 
117

 
26,503

Unrealized gain (loss) on available-for-sale securities
 
 
 
 
 
 
 
 
6,567

 
29

 
6,596

Unrealized gain (loss) on interest rate swaps
 
 
 
 
 
 
 
 
(3,915
)
 
(17
)
 
(3,932
)
Issued shares of common stock
3,994

 
40

 
97,144

 
 
 
 
 
 
 
97,184

Equity-based compensation
 
 
 
 
6,550

 
 
 
 
 
29

 
6,579

Issuance (repurchase) of vested equity-based compensation shares
409

 
4

 
(8,992
)
 
 
 
 
 
 
 
(8,988
)
Dividends and distributions
 
 
 
 
 
 
(43,398
)
 
 
 
(323
)
 
(43,721
)
Balance at June 30, 2019
64,913

 
$
649

 
$
1,060,086

 
$
(180,217
)
 
$
968

 
$
3,258

 
$
884,744

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
51,665

 
$
517

 
$
770,983

 
$
(131,251
)
 
$
(1,065
)
 
$
3,597

 
$
642,781

Net income (loss)
 
 
 
 
 
 
16,039

 
 
 
86

 
16,125

Unrealized gain (loss) on available-for-sale securities
 
 
 
 
 
 
 
 
(3,016
)
 
(16
)
 
(3,032
)
Unrealized gain (loss) on interest rate swaps
 
 
 
 
 
 
 
 
7,936

 
43

 
7,979

Issued shares of common stock
838

 
8

 
15,391

 
 
 
 
 
 
 
15,399

Equity-based compensation
 
 
 
 
5,817

 
 
 
 
 
31

 
5,848

Issuance (repurchase) of vested equity-based compensation shares
225

 
2

 
(3,042
)
 
 
 
 
 
 
 
(3,040
)
Redemption of OP Units
 
 
 
 
(20
)
 
 
 
 
 
(46
)
 
(66
)
Dividends and distributions
 
 
 
 
 
 
(35,412
)
 
 
 
(186
)
 
(35,598
)
Balance at June 30, 2018
52,728

 
$
527

 
$
789,129

 
$
(150,624
)
 
$
3,855

 
$
3,509

 
$
646,396

 
 
 
 
 
 
 
 
 
 
 
 
 
 


See accompanying notes.
- 5 -



HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income (loss)
$
26,503

 
$
16,125

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,793

 
2,314

Amortization of deferred financing costs
3,359

 
5,122

Equity-based compensation
6,989

 
5,225

Equity method investments
3,874

 
5,572

Non-cash gain on securitization
(8,351
)
 
(16,009
)
Changes in receivables held-for-sale

 
3,143

Changes in accounts payable and accrued expenses
(6,443
)
 
(766
)
Other
(7,234
)
 
(6,207
)
Net cash provided by (used in) operating activities
20,490

 
14,519

Cash flows from investing activities
 
 
 
Equity method investments
(30,903
)
 
(347
)
Equity method investment distributions received
37,558

 
56,353

Purchases of and investments in receivables
(97,280
)
 
(3,466
)
Principal collections from receivables
36,130

 
16,912

Proceeds from sales of receivables
96,690

 

Purchases of real estate

 
(15,842
)
Purchases of investments
(14,916
)
 
(6,384
)
Principal collections from investments
4,010

 
682

Proceeds from sales of investments
61,659

 

Funding of escrow accounts
(26,340
)
 
(21,518
)
Withdrawal from escrow accounts
21,790

 
14,660

Other
1,756

 
(728
)
Net cash provided by (used in) investing activities
90,154

 
40,322

Cash flows from financing activities
 
 
 
Proceeds from credit facilities
81,500

 
32,938

Principal payments on credit facilities
(130,501
)
 

Proceeds from issuance of non-recourse debt
33,302

 
46,673

Principal payments on non-recourse debt
(103,121
)
 
(62,067
)
Payments on deferred funding obligations
(13,886
)
 
(57,039
)
Net proceeds of common stock issuances
96,669

 
15,332

Payments of dividends and distributions
(42,073
)
 
(35,277
)
Other
(9,601
)
 
(3,447
)
Net cash provided by (used in) financing activities
(87,711
)
 
(62,887
)
Increase (decrease) in cash, cash equivalents, and restricted cash
22,933

 
(8,046
)
Cash, cash equivalents, and restricted cash at beginning of period
59,353

 
118,177

Cash, cash equivalents, and restricted cash at end of period
$
82,286

 
$
110,131

Interest paid
$
27,973

 
$
33,284

Non-cash changes in deferred funding obligations and non-recourse debt (financing activity)
(78,172
)
 
1,674

Non-cash changes in receivables and investments (investing activity)
60,143

 

Non-cash changes in residual assets (investing activity)
(11,458
)
 
(16,883
)
Non-cash changes in escrow accounts (investing activity)
18,029

 


See accompanying notes.
- 6 -



HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2019
 
1.
The Company
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (the “Company”) focuses on making investments in climate change solutions by providing capital to the leading companies in the energy efficiency, renewable energy and other sustainable infrastructure markets. Our goal is to generate attractive returns for our stockholders by investing in a diversified portfolio of investments that generate long-term, recurring and predictable cash flows from proven commercial technologies.  
The Company and its subsidiaries are hereafter referred to as “we,” “us,” or “our.” Our investments take various forms, including equity, joint ventures, lending or other financing transactions, as well as real estate ownership and typically benefit from contractually committed high credit quality obligors. We also generate on-going fees through gain-on-sale securitization transactions, advisory services and asset management. We refer to the income producing assets that we hold on our balance sheet as our “Portfolio.” Our Portfolio may include:     
Equity 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 sustainable infrastructure projects typically under long-term leases; and
Investments in debt securities of renewable energy or energy efficiency projects.
We finance our business through cash on hand, borrowings under credit facilities and debt transactions, asset-backed securitization transactions and equity issuances. We also generate fee income through securitizations and syndications, by providing broker/dealer services and by managing and servicing assets owned by third parties. Some of our subsidiaries are special purpose entities that are formed for specific operations associated with investing in sustainable infrastructure receivables for specific long-term contracts.
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “HASI.” We have qualified as a real estate investment trust (“REIT”) and also intend to continue to operate our business in a manner that will maintain our exemption from registration as an investment company under the 1940 Act, as amended. We operate our business through, and serve as the sole general partner of, our operating partnership subsidiary, Hannon Armstrong Sustainable Infrastructure, L.P., (the “Operating Partnership”), which was formed to acquire and directly or indirectly own our assets.
2.Summary of Significant Accounting Policies
Basis of Presentation
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and such differences could be material. These financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2018, as filed with the SEC. In the opinion of management, all adjustments necessary to present fairly our financial position, results of operations and cash flows have been included. Our results of operations for the quarterly and six month periods ended June 30, 2019, are not necessarily indicative of the results to be expected for the full year or any other future period. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. Certain amounts in the prior years have been reclassified to conform to the current year presentation.
The consolidated financial statements include our accounts and controlled subsidiaries, including the Operating Partnership. All material intercompany transactions and balances have been eliminated in consolidation.
Following the guidance for non-controlling interests in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation ("ASC 810"), references in this report to our earnings per share and our net

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income and stockholders’ equity attributable to common stockholders do not include amounts attributable to non-controlling interests.
Consolidation and Equity Method Investments
We account for our investments in entities that are considered voting interest entities or variable interest entities (“VIEs”) under ASC 810 and assess whether we should consolidate these entities on an ongoing basis. We have established various special purpose entities or securitization trusts for the purpose of securitizing certain receivables or other debt investments which are not consolidated in our financial statements as described in Securitization of Receivables below.
We have assessed that we have power over and receive the benefits from those special purpose entities that are formed for the purpose of holding our government and commercial receivables and investments on our balance sheet; hence, we are the primary beneficiary and should consolidate these entities under the provisions of ASC 810.
We have made equity investments in various renewable energy projects. Our renewable energy project investments are typically owned in holding companies (using limited liability companies ("LLCs") taxed as partnerships) where we partner with either the operator of the project or other institutional investors. We share in the cash flows, income, and tax attributes according to a negotiated schedule (which typically does not correspond with our ownership percentages). Investors, if any, in a preferred return position typically receive a stated preferred return consisting of a priority distribution of all or a portion of the project's cash flows, and in some cases, tax attributes. Once the stated return, if applicable, is achieved, the partnership “flips” and the operator of the project along with any other common equity investors receive a larger portion of the cash flows, with the previously preferred investors retaining an on-going residual interest.
These equity investments in renewable energy projects are accounted for under the equity method of accounting. Certain of our equity method investments were determined to be VIEs in which we are not the primary beneficiary, as we do not direct the significant activities of those entities in which we invest. Our maximum exposure to loss associated with the continued operation of the underlying projects in our equity method investments is limited to our recorded value of our investments. Under the equity method of accounting, the carrying value of these equity method investments is determined based on amounts we invested, adjusted for the equity in earnings or losses of the investee allocated based on the LLC agreement, less distributions received. For the LLC agreements which contain preferences with regard to cash flows from operations, capital events and liquidation, we reflect our share of profits and losses by determining the difference between our claim on the investee’s book value at the beginning and the end of the period, which is adjusted for distributions received and contributions made. This claim is calculated as the amount we would receive (or be obligated to pay) if the investee were to liquidate all of its assets at recorded amounts determined in accordance with GAAP and distribute the resulting cash to creditors and investors in accordance with their respective priorities. This method is commonly referred to as the hypothetical liquidation at book value method or (“HLBV”). Any difference between the amount of our investment and the amount of underlying equity in net assets is generally amortized over the life of the assets and liabilities to which the difference relates. Cash distributions received from these equity method investments are classified as operating activities to the extent of cumulative HLBV earnings in our consolidated statements of cash flows. Our initial investment and additional cash distributions beyond that which are classified as operating activities are classified as investing activities in our consolidated statements of cash flows. We have elected to recognize earnings from these investments one quarter in arrears to allow for the receipt of financial information.
We have also made an investment in a joint venture which holds land under solar projects that we have determined to be a voting interest entity. This investment entitles us to receive an equal percentage of both cash distributions and profit and loss under the terms of the LLC operating agreement. The investment is accounted for under the equity method of accounting with our portion of income being recognized in income (loss) from equity method investments in the period in which the income is earned. Cash distributions received from this equity method investment are classified as operating activities to the extent of cumulative earnings in our consolidated statements of cash flows. Our initial investment and additional cash distributions beyond that which are classified as operating activities are classified as investing activities in our consolidated statements of cash flows.
We evaluate on a quarterly basis whether our investments accounted for using the equity method have an other than temporary impairment (“OTTI”). An OTTI occurs when the estimated fair value of an investment is below the carrying value and the difference is determined to not be recoverable. This evaluation requires significant judgment regarding, but not limited to, the severity and duration of the impairment; the ability and intent to hold the securities until recovery; financial condition, liquidity, and near-term prospects of the issuer; specific events; and other factors.
Government and Commercial Receivables
Government and commercial receivables (“receivables”), include project loans and receivables. These receivables are separately presented in our balance sheet to illustrate the differing nature of the credit risk related to these assets. Unless otherwise noted, we generally have the ability and intent to hold our receivables for the foreseeable future and thus they are classified as held for investment. Our ability and intent to hold certain receivables may change from time to time depending on

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a number of factors, including economic, liquidity and capital market conditions. At inception of the arrangement, the carrying value of receivables held for investment represents the present value of the note, lease or other payments, net of any unearned fee income, which is recognized as income over the term of the note or lease using the effective interest method. Receivables that are held for investment are carried, unless deemed impaired, at amortized cost, net of any unamortized acquisition premiums or discounts and include origination and acquisition costs, as applicable. Our initial investment and principal repayments of these receivables are classified as investing activities and the interest collected is classified as operating activities in our consolidated statements of cash flows. Receivables that we intend to sell in the short-term are classified as held-for-sale and are carried at the lower of amortized cost or fair value on our balance sheet. The purchases and proceeds from receivables that we intend to sell at origination are classified as operating activities in our consolidated statements of cash flows. Interest collected is classified as an operating activity in our consolidated statements of cash flows. Certain of our receivables may include the ability to defer required interest payments in exchange for increasing the receivable balance at the borrower's option. We generally accrue this paid-in-kind ("PIK") interest when collection is expected, and cease accruing PIK interest if there is insufficient value to support the accrual or we expect that any portion of the principal or interest due is not collectible.
We evaluate our receivables for potential delinquency or impairment on at least a quarterly basis and more frequently when economic or other conditions warrant such an evaluation. When a receivable becomes 90 days or more past due, and if we otherwise do not expect the debtor to be able to service all of its debt or other obligations, we will generally consider the receivable delinquent or impaired and place the receivable on non-accrual status and cease recognizing income from that receivable until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a receivable’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, we will remove it from non-accrual status.
A receivable is also considered impaired as of the date when, based on current information and events, it is determined that it is probable that we will be unable to collect all amounts due in accordance with the original contracted terms. Many of our receivables are secured by energy efficiency and renewable energy infrastructure projects. Accordingly, we regularly evaluate the extent and impact of any credit deterioration associated with the performance and value of the underlying project, as well as the financial and operating capability of the borrower, its sponsors or the obligor as well as any guarantors. We consider a number of qualitative and quantitative factors in our assessment, including, as appropriate, a project’s operating results, loan-to-value ratio, any cash reserves, the ability of expected cash from operations to cover the cash flow requirements currently and into the future, key terms of the transaction, the ability of the borrower to refinance the transaction, other credit support from the sponsor or guarantor and the project’s collateral value. In addition, we consider the overall economic environment, the sustainable infrastructure sector, the effect of local, industry, and broader economic factors, the impact of any variation in weather and the historical and anticipated trends in interest rates, defaults and loss severities for similar transactions.
If a receivable is considered to be impaired, we will determine if an allowance should be recorded. We will record an allowance if the present value of expected future cash flows discounted at the receivable’s contractual effective rate is less than its carrying value. This estimate of cash flows may include the currently estimated fair market value of the collateral less estimated selling costs if repayment is expected from the collateral. We charge off receivables against the allowance, if any, when we determine the unpaid principal balance is uncollectible, net of recovered amounts.
Real Estate
Real estate consists of land or other real estate and its related lease intangibles, net of any amortization. Our real estate is generally leased to tenants on a triple net lease basis, whereby the tenant is responsible for all operating expenses relating to the property, generally including property taxes, insurance, maintenance, repairs and capital expenditures. Certain real estate transactions may be characterized as "failed sale-leaseback" transactions as defined under ASC Topic 842 ("Topic 842"), Leases, and thus are accounted for similar to our Commercial Receivables as described above in Government and Commercial Receivables.
For our other real estate lease transactions that are classified as operating leases, the scheduled rental revenue typically varies during the lease term and thus rental income is recognized on a straight-line basis, unless there is considerable risk as to collectability, so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis and is recorded in other assets. Expenses, if any, related to the ongoing operation of leases where we are the lessor, are charged to operations as incurred. Our initial investment is classified as investing activities and income collected for rental income is classified as operating activities in our consolidated statements of cash flows.
When our real estate transactions are treated as an asset acquisition with an operating lease, we typically record our real estate purchases as asset acquisitions that are recorded at cost, including acquisition and closing costs, which is allocated to each tangible and intangible asset acquired on a relative fair value basis.

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The fair value of the tangible assets of an acquired leased property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements, if any, based on the determination of the fair values of these assets. The as-if-vacant fair value of a property is typically determined by management based on appraisals by a qualified appraiser. In determining the fair value of the identified intangibles of an acquired property, above-market and below-market in-place lease values are valued based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease, including renewal periods reasonably certain of being exercised by the lessee.
The capitalized above-market lease values are amortized as a reduction of rental income and the capitalized below-market lease values are amortized as an increase to rental income, both of which are amortized over the term used to value the intangible. We also record, as appropriate, an intangible asset for in-place leases. The value of the leases in place at the time of the transaction is equal to the potential income lost if the leases were not in place. The amortization of this intangible occurs over the initial term unless management believes that it is reasonably certain that the tenant would exercise the renewal option, in which case the amortization would extend through the renewal period. If a lease were to be terminated, all unamortized amounts relating to that lease would be written off.
Investments
Investments are debt securities that meet the criteria of ASC 320, Investments-Debt and Equity Securities. We have designated our debt securities as available-for-sale and carry these securities at fair value on our balance sheet. Unrealized gains and losses, to the extent not considered to have an OTTI, on available-for-sale debt securities are recorded as a component of accumulated other comprehensive income (“AOCI”) in equity on our balance sheet. Our initial investment and principal repayments of these investments are classified as investing activities and the interest collected is classified as operating activities in our consolidated statements of cash flows.
We evaluate our investments for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Our OTTI assessment is a subjective process requiring the use of judgments and assumptions. Accordingly, we regularly evaluate the extent and impact of any credit deterioration associated with the financial and operating performance and value of the underlying project. We consider a number of qualitative and quantitative factors in our assessment. We first consider the current fair value of the security and the duration of any unrealized loss. Other factors considered include changes in the credit rating, performance of the underlying project, key terms of the transaction, the value of any collateral and any support provided by the sponsor or guarantor.
To the extent that we have identified an OTTI for a security and intend to hold the investment to maturity and we do not expect that we will be required to sell the security prior to recovery of the amortized cost basis, we recognize only the credit component of the OTTI in earnings. We determine the credit component using the difference between the security’s amortized cost basis and the present value of its expected future cash flows, discounted using the effective interest method or its estimated collateral value. Any remaining unrealized loss due to factors other than credit is recorded in AOCI.
To the extent we hold investments with an OTTI and if we have made the decision to sell the security or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, we recognize the entire portion of the impairment in earnings.
Premiums or discounts on investment securities are amortized or accreted into interest income using the effective interest method.
Securitization of Receivables
We have established various special purpose entities or securitization trusts for the purpose of securitizing certain receivables or investments. We determined that the trusts used in securitizations are VIEs, as defined in ASC 810. When we conclude that we are not the primary beneficiary of the trusts as we do not have power over the trusts' significant activities, we do not consolidate the trust. We typically serve as primary or master servicer of these trusts; however, as the servicer, we do not have the power to make significant decisions impacting the performance of the trusts.
We account for transfers of receivables or investments to these securitization trusts as sales pursuant to ASC 860, Transfers and Servicing ("ASC 860"), when we have concluded the transferred receivables have been isolated from the transferor (i.e., put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership) and we have surrendered control over the transferred receivables. We treat those trusts where we are unable to conclude that we have been isolated from the securitized receivables as secured borrowings, retaining the assets on our balance sheet and recording the amounts due to the trust investor as non-recourse debt.

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For transfers treated as sales under ASC 860, we have received true-sale-at-law opinions for all of our securitization trust structures and non-consolidation legal opinions for all but one legacy securitization trust structure that support our conclusion regarding the transferred receivables. When we sell receivables in securitizations, we generally retain interests in the form of servicing rights and residual assets, which we refer to as securitization assets.
Gain or loss on the sale of receivables is calculated based on the excess of the proceeds received from the securitization (less any transaction costs) plus any retained interests obtained over the cost basis of the receivables sold. For retained interests, we generally estimate fair value based on the present value of future expected cash flows using our best estimates of the key assumptions of anticipated losses, prepayment rates, and current market discount rates commensurate with the risks involved. Cash flows related to our securitizations at origination are classified as operating activities in our consolidated statements of cash flows.
We initially account for all separately recognized servicing assets and servicing liabilities at fair value and subsequently measure such servicing assets and liabilities using the amortization method. Servicing assets and liabilities are amortized in proportion to, and over the period of, estimated net servicing income with servicing income recognized as earned. We assess servicing assets for impairment at each reporting date. If the amortized cost of servicing assets is greater than the estimated fair value, we will recognize an impairment in net income.
Our other retained interest in securitized assets, the residual assets, are accounted for as available-for-sale securities and carried at fair value on the consolidated balance sheets in other assets. We generally do not sell our residual assets. Our residual assets are evaluated for impairment on a quarterly basis. Interest income related to the residual assets is recognized using the effective interest rate method. If there is a change in the expected cash flows related to the residual assets, we will assess whether the asset is impaired and will calculate a new yield based on the current amortized cost of the residual assets and the revised expected cash flows. This yield is used prospectively to recognize interest income.
Cash and Cash Equivalents
Cash and cash equivalents include short-term government securities, certificates of deposit and money market funds, all of which had an original maturity of three months or less at the date of purchase. These securities are carried at their purchase price, which approximates fair value.
Restricted Cash
Restricted cash includes cash and cash equivalents set aside with certain lenders primarily to support deferred funding and other obligations outstanding as of the balance sheet dates. Restricted cash is reported as part of other assets in the consolidated balance sheets. Refer to Note 3 for disclosure of the balances of restricted cash included in other assets.
Convertible Notes
We have issued convertible senior notes that are accounted for in accordance with ASC 470-20, Debt with Conversion and Other Options, and ASC 815, Derivatives and Hedging ("ASC 815"). Under ASC 815, issuers of certain convertible debt instruments are generally required to separately account for the conversion option of the convertible debt instrument as either a derivative or equity, unless it meets the scope exemption for contracts indexed to, and settled in, an issuer’s own equity. Since this conversion option is both indexed to our equity and can only be settled in our common stock, we have met the scope exemption, and therefore, we are not separately accounting for the embedded conversion option. The initial issuance and any principal repayments are classified as financing activities and interest payments are classified as operating activities in our consolidated statements of cash flows.
Income Taxes
We elected and qualified to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ended December 31, 2013. We also have taxable REIT subsidiaries ("TRSs") which are taxed separately, and which will generally be subject to U.S. federal, state, and local income taxes as well as taxes of foreign jurisdictions, if any. To qualify as a REIT, we must meet on an ongoing basis a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our REIT's net taxable income before dividends paid, excluding capital gains, to our stockholders. As a REIT, we are not subject to U.S. federal corporate income tax on that portion of net income that is currently distributed to our owners.
We account for income taxes under ASC 740, Income Taxes ("ASC 740") for our TRSs using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. We evaluate any deferred tax assets for valuation allowances based on an assessment of available evidence including sources of taxable income, prior years taxable income, any existing

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taxable temporary differences and our future investment and business plans that may give rise to taxable income. We treat any tax credits we receive from our equity investments in renewable energy projects as reductions of federal income taxes of the year in which the credit arises.
We apply ASC 740 with respect to how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. This guidance requires the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more likely than not” to be sustained by the applicable tax authority. We are required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes U.S. federal and certain states.
Equity-Based Compensation
In 2013, we adopted the 2013 Hannon Armstrong Sustainable Infrastructure Capital, Inc. Equity Incentive Plan (as amended, the “2013 Plan”), which provides for grants of stock options, stock appreciation rights, restricted stock units, shares of restricted common stock, phantom shares, dividend equivalent rights, long-term incentive-plan units (“LTIP units”) and other restricted limited partnership units issued by our Operating Partnership and other equity-based awards. From time to time, we may grant equity or equity-based awards as compensation to members of our senior management team, our independent directors, employees, advisors, consultants and other personnel under our 2013 Plan. Certain awards earned under the plan are based on achieving various performance targets, which are generally earned between 0% and 200% of the initial target, depending on the extent to which the performance target is met. In addition to performance targets, certain LTIP units issued by our Operating Partnership also require a certain level of appreciation of partnership interests to occur before parity is reached and LTIP units can be converted to limited partnership units.
We record compensation expense for grants made under the 2013 Plan in accordance with ASC 718, Compensation-Stock Compensation. We record compensation expense for unvested grants that vest solely based on service conditions on a straight-line basis over the vesting period of the entire award based upon the fair market value of the grant on the date of grant. Fair market value for restricted common stock is based on our share price on the date of grant. For awards where the vesting is contingent upon achievement of certain performance targets, compensation expense is measured based on the fair market value on the grant date and is recorded over the requisite service period (which includes the performance period). Actual performance results at the end of the performance period determines the number of shares that will ultimately be awarded. We have also issued awards where the vesting is contingent upon service being provided for a defined period and certain market conditions being met. The fair value of these awards, as measured at the grant date, is recognized over the requisite service period, even if the market conditions are not met. The grant date fair value of these awards was developed by an independent appraiser using a Monte Carlo simulation.
Earnings Per Share
We compute earnings per share of common stock in accordance with ASC 260, Earnings Per Share. Basic earnings per share is calculated by dividing net income attributable to controlling stockholders (after consideration of the earnings allocated to unvested grants under the 2013 Plan, if applicable) by the weighted-average number of shares of common stock outstanding during the period excluding the weighted average number of unvested grants under the 2013 Plan, if applicable (“participating securities” as defined in Note 12). Diluted earnings per share is calculated by dividing net income attributable to controlling stockholders (after consideration of the earnings allocated to unvested grants under the 2013 Plan, if applicable) by the weighted-average number of shares of common stock outstanding during the period plus other potential common stock instruments if they are dilutive. Other potentially dilutive common stock instruments include our unvested restricted stock, other equity-based awards, and convertible notes. The restricted stock and other equity-based awards are included if they are dilutive using the treasury stock method. The treasury stock method assumes that theoretical proceeds received for future service provided is used to purchase shares of treasury stock at the average market price per share of common stock, which is deducted from the total shares of potential common stock included in the calculation. When unvested grants are dilutive, the earnings allocated to these dilutive unvested grants are not deducted from the net income attributable to controlling stockholders when calculating diluted earnings per share. The convertible notes are included if they are dilutive using the if-converted method. The if-converted method removes interest expense related to the convertible notes from the net income attributable to controlling stockholders and includes the weighted average shares of potential common stock over the period issuable upon conversion of the note. No adjustment is made for shares of potential common stock that are anti-dilutive during a period.
Segment Reporting
We make equity and debt investments in the energy efficiency, renewable energy, and other sustainable infrastructure markets. We manage our business as a single portfolio and report all of our activities as one business segment.

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Recently Issued Accounting Pronouncements
Leases
In February 2016, the FASB issued guidance codified in Topic 842, which amends the guidance in former ASC Topic 840, Leases. The main principle of Topic 842 requires lessees to recognize the assets and liabilities that arise from nearly all leases on the balance sheet. Lessor accounting remains relatively consistent with some changes to align Topic 842 with ASC Topic 606, Revenue from Contracts with Customers, including changes to the guidance on classification of real estate lease transactions. The standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. Topic 842 provides companies with a choice of transitioning to the new standard using one of two modified retrospective transition approaches; one that requires companies to adjust comparative periods upon adoption and another where the impact of adoption is reflected in retained earnings and comparative periods are not adjusted.
We have adopted Topic 842 effective January 1, 2019 and have elected to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We have also elected the package of practical expedients which allowed us to not reassess (1) whether existing contracts contain leases, (2) the lease classification for existing leases, and (3) whether existing initial direct costs meet the new definition. The adoption of Topic 842 did not have a material impact on our financial statements. Subsequent to adoption of Topic 842, due to the changes in the lessor rules for classification of real estate leasing transactions, certain of our real estate leasing transactions may be accounted for as commercial receivables rather than being treated as real estate asset acquisitions with operating leases.
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments ("Topic 326"). Topic 326 significantly changes how entities will recognize and measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Topic 326 will replace the “incurred loss” approach under existing guidance with an “expected loss” model for instruments measured at amortized cost, and require entities to record allowances for expected losses from available-for-sale debt securities rather than reduce the amortized cost, as currently required. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. Topic 326 is effective for fiscal years beginning after December 15, 2019 and is to be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the impact the adoption of Topic 326 will have on our consolidated financial statements and related disclosures.
Other accounting standards updates issued before August 2, 2019, and effective after June 30, 2019, are not expected to have a material effect on our consolidated financial statements and related disclosures.
3.Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a three-level hierarchy for classifying financial instruments. The levels of inputs used to determine the fair value of our financial assets and liabilities carried on the balance sheet at fair value and for those which only disclosure of fair value is required are characterized in accordance with the fair value hierarchy established by ASC 820, Fair Value Measurements. Where inputs for a financial asset or liability fall in more than one level in the fair value hierarchy, the financial asset or liability is classified in its entirety based on the lowest level input that is significant to the fair value measurement of that financial asset or liability. We use our judgment and consider factors specific to the financial assets and liabilities in determining the significance of an input to the fair value measurements. As of June 30, 2019 and December 31, 2018, only our residual assets related to our securitization trusts, interest rate swaps and investments, if any, were carried at fair value on the consolidated balance sheets on a recurring basis. The three levels of the fair value hierarchy are described below:
Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date.
Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3 — Unobservable inputs are used when little or no market data is available.

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The tables below illustrate the estimated fair value of our financial instruments on our balance sheet. Unless otherwise discussed below, fair value for our Level 2 and Level 3 measurements is measured using a discounted cash flow model, contractual terms and inputs which consist of base interest rates and spreads over base rates which are based upon market observation and recent comparable transactions. An increase in these inputs would result in a lower fair value and a decline would result in a higher fair value. Our convertible notes are valued using a market based approach and observable prices. The receivables held-for-sale, if any, are carried at the lower of cost or fair value.
 
As of June 30, 2019
 
Fair Value
 
Carrying
Value
 
Level
 
(in millions)
 
 
Assets
 
 
 
 
 
Government receivables
$
352

 
$
343

 
Level 3
Commercial receivables
513

 
508

 
Level 3
Investments (1)
124

 
124

 
Level 3
Securitization residual assets (2)
79

 
79

 
Level 3
Liabilities
 
 
 
 
 
Credit facilities (3)
$
210

 
$
210

 
Level 3
Non-recourse debt (3)
773

 
756

 
Level 3
Convertible notes (3)
167

 
152

 
Level 2
(1)
The amortized cost of our investments as of June 30, 2019, was $122 million.
(2)
Included in other assets on the consolidated balance sheet.
(3)
Fair value and carrying value exclude unamortized debt issuance costs.
 
As of December 31, 2018
 
Fair Value
 
Carrying
Value
 
Level
 
(in millions)
 
 
Assets
 
 
 
 
 
Government receivables
$
487

 
$
497

 
Level 3
Commercial receivables
443

 
447

 
Level 3
Investments (1)
170

 
170

 
Level 3
Securitization residual assets (2)
71

 
71

 
Level 3
Liabilities
 
 
 
 
 
Credit facilities (3)
$
259

 
$
259

 
Level 3
Non-recourse debt (3)
835

 
852

 
Level 3
Convertible notes (3)
139

 
152

 
Level 2
(1)    The amortized cost of our investments as of December 31, 2018, was $173 million.
(2)    Included in other assets on the consolidated balance sheet.
(3)    Fair value and carrying value exclude unamortized debt issuance costs.


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Investments
The following table reconciles the beginning and ending balances for our Level 3 investments that are carried at fair value on a recurring basis:
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Balance, beginning of period
$
178

 
$
152

 
$
170

 
$
151

Purchases of investments
8

 
3

 
15

 
6

Payments on investments
(1
)
 
(1
)
 
(2
)
 
(1
)
Sale of investments
(65
)
 

 
(65
)
 

Unrealized gains (losses) on investments recorded in AOCI
4

 

 
6

 
(2
)
Balance, end of period
$
124

 
$
154

 
$
124

 
$
154


The following table illustrates our investments in an unrealized loss position:
 
Estimated Fair Value
 
Unrealized Losses (1)
 
Securities with a loss shorter than 12 months
 
Securities with a loss longer than 12 months
 
Securities with a loss shorter than 12 months
 
Securities with a loss longer than 12 months
 
(in millions)
June 30, 2019
$

 
$
24

 
$

 
$
1

December 31, 2018
82

 
67

 
1

 
3

(1)    Loss position is due to interest rates movements. We have the intent and ability to hold these investments until a recovery of fair value.
In determining the fair value of our investments, we used a range of interest rate spreads of approximately 1% to 4% based upon comparable transactions as of June 30, 2019 and December 31, 2018.
Non-recurring Fair Value Measurements
Our financial statements may include non-recurring fair value measurements related to acquisitions and non-monetary transactions, if any. Assets acquired in a business combination are recorded at their fair value. We may use third party valuation firms to assist us with developing our estimates of fair value.
Concentration of Credit Risk
Government and commercial receivables, real estate leases, and debt investments consist primarily of U.S. federal government-backed receivables, investment grade state and local government receivables and receivables from various sustainable infrastructure projects and do not, in our view, represent a significant concentration of credit risk. See Note 6 for an analysis by type of obligor and the method of rating. Additionally, our investments are collateralized by projects concentrated in certain geographic regions throughout the United States. We have structural credit protections to mitigate our risk exposure and, in most cases, the projects are insured for estimated physical loss which helps to mitigate the possible risk from these concentrations.
We had cash deposits that are subject to credit risk as shown below:
 
June 30, 2019
 
December 31, 2018
 
(in millions)
Cash deposits
$
38

 
$
21

Restricted cash deposits (included in other assets)
44

 
38

Total cash deposits
$
82

 
$
59

Amount of cash deposits in excess of amounts federally insured
$
81

 
$
57



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4.
Non-Controlling Interest
Units of limited partnership interests in the Operating Partnership (“OP units”) that are owned by limited partners other than us are included in non-controlling interest on our consolidated balance sheets. The non-controlling interest holders are generally allocated their pro rata share of income, other comprehensive income and equity transactions.
The outstanding OP units held by outside limited partners represent less than 1% of our outstanding OP units and are redeemable by the limited partners for cash, or at our option, for a like number of shares of our common stock. No OP units held by our non-controlling interest holders were exchanged during the six months ended June 30, 2019, and 3,703 OP units were exchanged for the same number of shares during the same period in 2018.
We have also granted to officers and directors LTIP Units pursuant to the 2013 plan. These LTIP Units are held by HASI Management HoldCo LLC. The LTIP Units are designed to qualify as profits interests in the Operating Partnership and initially will have a capital account balance of zero and, therefore, will not have full parity with OP units with respect to liquidating distributions or other rights. However, the amended and restated agreement of limited partnership of the Operating Partnership (the "OP Agreement") provides that “book gains,” or economic appreciation, in the Operating Partnership will be allocated first to the LTIP Units until the capital account per LTIP Units is equal to the capital account per-unit of the OP units. Under the terms of the OP Agreement, the Operating Partnership will revalue its assets upon the occurrence of certain specified events, and any increase in valuation from the time of grant until such event will be allocated first to the holders of LTIP Units to equalize the capital accounts of such holders with the capital accounts of OP unit holders. Once this has occurred, the LTIP Units will achieve full parity with the OP units for all purposes, including with respect to liquidating distributions and redemption rights. In addition to these attributes, there are vesting and settlement conditions similar to our other equity-based awards as discussed in Notes 2 and 11.
5.
Securitization of Receivables
The following summarizes certain transactions with our securitization trusts: 
 
As of and for the six months ended June 30,
 
2019
 
2018
 
(in millions)
Gains on securitizations
$
9

 
$
20

Purchase of receivables securitized
506

 
286

Proceeds from securitizations
515

 
306

Residual and servicing assets included in other assets
80

 
62

Cash received from residual and servicing assets
5

 
2


In connection with securitization transactions, we typically retain servicing responsibilities and residual assets. In certain instances, we receive annual servicing fees of up to 0.20% of the outstanding balance. We may periodically make servicer advances, which are subject to credit risk. Included in other assets in our consolidated balance sheets are our servicing assets at amortized cost, our residual assets at fair value, and our servicing advances at cost, if any. Our residual assets are subordinate to investors’ interests, and their values are subject to credit, prepayment and interest rate risks on the transferred financial assets. The investors and the securitization trusts have no recourse to our other assets for failure of debtors to pay when due. In computing gains and losses on securitizations, we use the same discount rates we use for the fair value calculation of residual assets, which are determined based on a review of comparable market transactions including Level 3 unobservable inputs which consist of base interest rates and spreads over base rates. Depending on the nature of the transaction risks, the discount rate ranged from 4% to 7%.
As of June 30, 2019 and December 31, 2018, our managed assets totaled $5.5 billion and $5.3 billion, respectively, of which $3.7 billion and $3.3 billion, respectively, were securitized assets held in unconsolidated securitization trusts. There were no securitization credit losses in the six months ended June 30, 2019 or 2018. As of June 30, 2019, there were less than $1 million in payments from certain debtors to the securitization trusts that were greater than 90 days past due. The securitized assets generally consist of receivables from contracts for the installation of energy efficiency and other technologies in facilities owned by, or operated for or by, federal, state or local government entities where the ultimate obligor is the government. The contracts may have guarantees of energy savings from third party service providers, which typically are entities rated investment grade by an independent rating agency. Based on the nature of the receivables and experience-to-date, we do not currently expect to incur any credit losses of our residual interests related to the receivables sold.

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6.
Our Portfolio
As of June 30, 2019, our Portfolio included approximately $1.8 billion of equity method investments, receivables, real estate and investments on our balance sheet. The equity method investments represent our non-controlling equity investments in renewable energy projects and land. The receivables and investments are typically collateralized by contractually committed debt obligations of government entities or private high credit quality obligors and are often supported by additional forms of credit enhancement, including security interests and supplier guaranties. The real estate is typically land and related lease intangibles for long-term leases to wind and solar projects.
The following is an analysis of our Portfolio as of June 30, 2019:
 
Investment Grade
 
 
 
 
 
 
 
Government (1)
 
Commercial Investment Grade (2)
 
Commercial Non-Investment Grade (3)
 
Subtotal,
Debt and
Real Estate
 
Equity 
Method
Investments
 
Total
 
(dollars in millions)
Equity investments in renewable energy projects
$

 
$

 
$

 
$

 
$
436

 
$
436

Receivables (4)
343

 
156

 
352

 
851

 

 
851

Real estate (5)

 
364

 

 
364

 
22

 
386

Investments
40

 
84

 

 
124

 

 
124

Total
$
383

 
$
604

 
$
352

 
$
1,339

 
$
458

 
$
1,797

% of Debt and real estate portfolio
29
%