Good afternoon and welcome to the Hannon Armstrong's Conference Call on its Third Quarter 2021 Financial Results. Leadership will be utilizing a slide presentation for this call, which is available now for download on the company's Investor Relations page at investors.hannonarmstrong.com. At this time, I would like to turn the call over to Chad Reed, Vice President, Investor Relations and ESG for the company. Thank you. You may precede, Mr. Reed.

Thank you, Operator. Good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing our third quarter 2021 results, a copy of which is available on our website. This conference call is being webcast live on the Investor Relations page of our website, where a replay will be available later today. Before the call begins, I'd like to remind you that some of the comments made in the course of this call are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934 as amended. The company claims the protections of the safe harbor for forward-looking statements contained in such sections. The forward-looking statements made in this call are subject to the risks and uncertainties described in the Risk Factors section of the company's Form 10-K and other filings with the SEC. Actual results may differ materially from those described during the call. In addition, all forward-looking statements are made as of today, and the company does not undertake any responsibility to update any forward-looking statements based on new circumstances or revised expectations. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core financial results and guidance. A presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. A reconciliation of GAAP to non-GAAP financial measures is available on our posted earnings release and slide presentation. Joining me on today's call are Jeff Eckel, the company's Chairman and CEO; and Jeff Lipson, our CFO and COO. With that, I'd like to turn the call over to Jeff, who will begin on slide three. Jeff?

Jeff. Thanks Chad, and good afternoon, everyone. Today, we're reporting strong results for the third quarter with distributable earnings of $0.41 per share, a 14% increase year-over-year and distributable net investment income of $32 million, a 79% increased year-over-year. Continuation of our programmatic investment relationship with SunRun, which I will discuss in the subsequent slide. 45% growth of our portfolio year-over-year to $3.2 billion and 28% growth in our managed assets to $8.2 billion, and declaration of $0.35 per share dividend. And starting this quarter, we will highlight the carbon count of one transaction in order to generate a more understanding of this important metric. As a reminder, carbon count measures the efficiency with which capital is used to reduce carbon emissions, something the financial industry needs to pay attention to, but does not currently. As a reference point, the average investment this quarter has a carbon count of 0.3 metric tons of greenhouse gas, reduced for $1,000 of investment. Our featured transaction has a carbon count of 2.7, nine times more efficient than the average. This is a behind the meter energy as a service investment and a digital and digital controls for HVAC at a top retailer. This is part of a larger programmatic client relationship, an example of the power of digitization in the electric sector to save customers money and reduce carbon. While every investment we make improves our climate future, not every investment is equally efficient at doing so. And we believe this level of rigor is where the market needs to go. A few words on the legislative efforts in Washington, both the proposed infrastructure and reconciliation bills are positive for our business. The biggest positives are the extension of tax credits for renewables and expansion of the tax credits to storage and EV…

Thanks, Jeff. Summarizing our results on Slide 7 for the quarter we recorded distributable earnings per share of $0.41 at a strong quarter of distributable net investment income of $32 million, and another active quarter in our securitization program recording gain on sale of over $16 million. On a year-to-date basis we've achieved impressive growth in each of these metrics. In the upper right we know distributable EPS year-to-date growth was 19% as growth in equity method investment income and gain on sale primarily drove this result. In addition as shown on the lower left distributable net investment income was $95 million year-to-date reflecting annual growth of 42% driven by a larger portfolio and stronger margins. Lastly, our gain on sale from securitized assets with $64 million year-to-date representing a 34% increase. These very significant year-to-date growth rates of 42% in distributable NII and 34% in gain on sale represent ongoing success of our dual revenue model. Our guidance of 7% to 10% compound annual growth in distributable EPS through 2023 remains unchanged. Turning to Slide 8, we demonstrate that our margins have improved as we've increased our portfolio yield while decreasing our cost of funds. Over the last three years, despite a competitive investing environment, our portfolio yield has increased by 80 basis points and now sits at 7.6%. Over the same period our interest expense, as a percent of our average debt balance has dropped by 70 basis points to 4.7% as we have optimized our debt platform and taken advantage of tightening corporate debt spreads and the strong bid for credible ESG debt. As we discus last quarter and consistent with most-broader markets, the yield for certain climate positive transactions is compressing, although we have not experienced an impact of this trend. To the extent these market…

Terrific job. Thanks, Jeff. To turning to Slide 13, we note a number of ESG accomplishments. With our carbon count based commercial paper program we're seeking to differentiate debt products based on calculated carbon reductions rather than some green label not related to carbon. As Jeff said, our credibility in reporting carbon impact stands in contrast to the amount of greenwashing going on in the financial services industry today. On the social front, we're excited to meet with the initial cohort of our climate solution scholars from Morgan State and Miami Universities in the coming weeks to support their interest in the growing climate solutions field. Finally, we've met with multiple SEC commissioners and their staff on the necessity of mandatory ESG and especially carbon emission disclosures so their investors, consumers, and employees at the information they need to evaluate the impact companies they're investing in buying from or working for or working for. We'll conclude on Slide 14, on the three competitive advantages this quarter demonstrated. Our multi client, multi asset class investment platform affords us the ability to invest in a wide range of climate solutions, providing stability to the business. Second, our flexible funding platform drives strong and stable margins. And finally, we remain a leader on ESG and continue our advocacy for credible carbon metrics for investment frameworks. To sum up, our growth prospects remain and bright and our ability to generate value for both shareholders and stakeholders remain strong. Operator, we would be glad to take some questions.

The first question comes from Philip Shen with Roth Capital Partners. Please proceed.

Hey guys, thanks for taking my questions. The first one is on, hey, Jeff and Jeff. First one is around what you're seeing with solar and how that might impact your pipeline specifically with projects possibly getting delayed. There's a meaningful amount of module supply, that's not hitting the U.S. shores. And so think through the risk there, are you guys working to diversify your end markets to bring in other opportunities? And how do you expect that to kind of play out for you guys ahead? Thanks.

Well, Phil, I think that it was really the point around the diversity of our asset classes and our clients. As solar is important, but it is not – is not our sole business. Obviously the behind the meter market is much more diverse than just solar. So, I think we may not have anticipated module delays, but we've always anticipated that some markets hit and some don't in any one quarter in any one-year. I certainly hope the solar industry is back on its feet soon, but I'm confident we are fine, and one of the reasons Jeff reiterated guidance was exactly to make that point that we're fine.

Fantastic. So that said, do you expect the slowdown in your grid connected and maybe even probably less so resi, but especially with the grid connected solar side, so you see that a real slowdown happening in your business and becoming couple quarters in certainly the diversity of end markets is a strength of yours, but I just want to understand if that is a challenge ahead? Thanks.

Well, I think one of the differences that I think the market is saying is that large established developers, I think C1 reported earlier kind of made this point are going to do fine. They might be delayed by a month or a quarter. They're going to get a priority of what supply is available. And fortunately ClearWay and NG and others are – and our client base are large companies. I think the smaller developers are probably going to be at the end of that line that should not affect us.

That's great. Okay. Thank you for that, Jeff. One last question here as it relates to gain on sale; was wondering if you guys could help us think through what kind of gain on sale we could see in Q4 and in 2020. The level came down to touch in Q3, but any way to help us think through what that could be? Thanks.

So, Phil, I think last quarter we had said that gain on sale for 2021 would be greater than $75 million so we'll stick with that expectation for now. And then as for 2022, we'll have more to say on the fourth quarter call in terms of our expectations going forward. But we did say it'll be greater than $55 million already but we'll put a finer point on that next quarter.

Okay. Great. Thank you, both. I'll pass it on.

Thank you, Mr. Shin. The next question comes from Eric Borden with Berenberg Capital Market. Please proceed.

Hey guys. Thanks for taking my questions. I was wondering if you could expand on the volume this quarter. Did you have any new clients that you signed? And then on the total transactions, is it fair to say of the $359 million of the transactions closed in the quarter; $200 million was on balance sheet and the remaining $159 million was from securitizations or is there some equity method investments baked in there as well?

Why don't I take the client question first? And Eric, I think this is the first time you and I have had a chance to talk, so nice to meet you and thanks for following the business. We don't typically disclose clients every quarter and who's new and who's not but over time, you'll start to get a sense of when we add new clients. I mean, today we mentioned some at , but they've been a client since 2019, but we've never talked about them before. So we're trying to provide a little more color on the client base to demonstrate the diversity. So we don't really disclose it, but we'll give you information here as the quarters progressed.

So Eric, on the second part of the question, just clarify transactions closed as announced on Page 3 relates specifically only that a transaction has closed, not that it's funded. So I don't think you can take that $359 million and fully allocate it to either balance sheet or securitization because some of it has not funded yet, which is why we provide the supplemental back on Page 11 as to how much of this quarter's investments have funded, which was $167 million. We don't really do any other disclosures other than what's been closed and what's funded. So I think that gives you a way to triangulate a primary answer to your question, but we don't give very specific, this is exactly how much was securitized in the quarter.

Now, that's helpful. Thank you guys. And then kind of going forward, how should we think about volumes into Q4 and into 2022? And then how should we think about new opportunities for how the – are you currently in conversations to deploy capital into offshore wind projects, kind of given the concerns around higher input costs for onshore. Any color there would be really appreciative?

The primary goal we have is to follow the best energy and infrastructure companies into whatever market they develop. We certainly are paying attention to offshore win; we're paying attention to hydrogen and of course storage. But really until our clients start to do those at scale and they become proven, it's not one that's really on our radar. We know who they are, but there's work to do in the industry to get those to, that's a lot. Frankly, the tax credits would help those storage and hydrogen if the reconciliation bill can ever pass. So we're going to continue to talk about the conventional markets and when we have a market that's more than $100 million of annual volume, that's when we'll start to talk about it on these calls until then we're kind of fiddling around the edges. In terms of volumes for the year, again the diversity of our asset classes gives us good comfort that will be in fine shape for obviously 2021 and 2022.

Perfect. That's all for me. Thank you guys. And it was nice to talk to you, Jeff and Lipson.

Thank you.

Thank you, Mr. Borden. The next question comes from Christopher Souther with B. Riley. Please proceed.

Hey guys thanks for taking my question here. The first one maybe you could touch on how the higher power prices impacted the equity method investments. Can you just walk through which types of projects were impacted, what the total impact was there? What we should be watching for further issues there? And then further on that, just our higher prices impacting the overall kind of portfolio yield or things that you're looking at adding onto the balance sheet. I'm just trying to get a sense of where that year-end portfolio yield should shake out given we almost saw a slight decline here but you had given kind of a wider range on the last call? Thanks.

And perhaps I'll start and, and Jeff can add. As a reminder, Chris, on our non-GAAP measure, we take a long term view as to the yield on an investment and accrue income accordingly. So short-term fluctuations in power prices don't affect the non-GAAP yield on our portfolio. They do affect the underlying projects, but we generally view that as a short-term phenomenon, unless it's something that causes us to change our long-term yield assumption. And at the project level there's a fair amount of hedging going on. So in the same way that that reductions in power prices don't affect us very much, increases don't affect us very much either. So and the earnings impacts of higher power prices on the existing portfolio is virtually zero

And just to build on that when we do prep-equity in those grid connected projects, it's a conscious view that we would much rather avoid the negative impacts of $2 gas persistently low $2 gas than enjoy the upside of $6 gas we're willing to make that trade.

Okay. Understood. So is that looking forward at some of the project additions, that kind of wide range you'd given kind of trending, at kind of the high end given, where at 7.6 at the end of this quarter or how should we thinking about, I guess, kind of the fourth quarter?

Well, I think the 7.6 is a portfolio yield on a $3.2 billion portfolio. So I think it's fair to assume that the incremental balance sheet investments in the fourth quarter won't move that number very much at all. Just given...

Relatively because they don't hit first day of the quarter.

Given the relative size of the portfolio, we're likely to close an individual quarter. So I wouldn't look for a big change in that number.

Okay, cool. And then looking at that 15 clients – over 15 clients in the grid connected pipeline, I'm curious how many of those are ones that are historically you've done projects with versus new folks that came out, maybe post the ENGIE or ClearWay deals?

Well, I think most of them have been existing clients. I mean, we've been in the tax equity tail business for wind projects for a long time. We do a lot of land business with a variety of clients. I wouldn't call it like a coming of our party with ENGIE and ClearWay where people finally realize we existed, but there's a few new ones, we'll expect to add a few new ones, but generally they're clients we've transacted with multiple times.

Okay. That's fair. And then just looking at the $575 million that yet to be funded. I think last quarter you had given kind of a graph that looked – looked at the fourth quarter is kind of a large – a large quarter for some of those funding, it's somewhere between $150 million, $200 million. So I'm curious how much of that do you think is pushed into 2022 given some of the supply chain and pricing challenges?

That's still uncertain Chris. So some of that may fund here in the remaining days of this quarter, some of it may slip into the first quarter. We're not even entirely sure ourselves yet on a couple of these projects.

And that's why we collapsed the two because everybody's trying like heck to get these projects to close, but this is a tough market for grid connected developers.

Okay. Understood. Thanks, Jeff.

Thank you.

Thank you, Mr. Souther. The next question comes from Noah Kaye with Oppenheimer. Please proceed.

Hey, good afternoon. Thanks for taking the questions.

Hi Noah.

I think the pervasive dynamic for this quarter last quarter, just really robust demand and tight supply. Broadly speaking, but certainly for renewable sector as well, and the cost inflation that we're seeing, whether its steel or the labor shortages pushing labor prices up, et cetera, et cetera, just for a very capital intensive industry. I think the first question here is really about project economics yields for developers potentially getting compressed, and whether that puts any incremental pricing pressure on you as a capital provider. It sounds like that may be the case in the future, but you haven't yet, just want to understand how that dynamic is impacting your pricing discussions?

So no, I think we've talked about this a few years ago, but one of the reasons I'm so enamored with energy efficiency is the high internal rates return just in case interest rates went up or supply costs went up. And so obviously that's a big part of our business. That's you can take the same analogy to the solar business of yes. The costs are going up and solar is always been a bit more challenged. It's again, it's you've got the larger developers are going to do than the smaller developers. It's a challenge for everybody, and I would say they wouldn't be a very good developer if their development fee was getting pressured and they didn't want to make everybody help share the pain. But we're not obligated to invest in those projects either. If we don't like the return, we won't do it, but I would say every developer asks that's their job and, and I think higher PPA prices are part of the…

Yes, it's a counter, yes.

Future economics as well. So…

Yes. I mean, we've actually seen PPA prices start to go higher for the first time in forever. So maybe that mitigates a little bit the pressure on you guys as well. I guess sort of the flip side – go head.

First time in my life, they really go up. It is pretty crazy. But this sort of other part of this is just around yield hunting in an environment where team mates stay stubbornly low. We've seen some aggressively priced private equity money come into some of these portfolio deals. So they announced publicly just your thoughts on the competitive environment, and I know you're well diversified but I need dynamics to call out there?

Well, I think Jeff L did a great job of yes we expect yield compression at some point. And what really matters to us is not the gross yield, but the net margin, and some of that same pressure that drives yields down will benefit us with a correlated cost of capital. I will let Jeff L...

What you said that will exactly.

I guess it has been.

Yes. I guess last one is really around the incentives that are being discussed and have been discussed right for many quarters now in potential reconciliation that will, how does that actually impact dynamics of capital financing for projects at this point? I mean, if we're – if we're getting close to the finished line and there's a potential for a greatly simplified capital backend projects, whether it's a direct pay as well as exactly around the incentives, is that having any impact on some of the business developments for you or for your customers? And do we get kind of any kind of an potentially, and then once we get clarity the floodgates open, or is it just not the case?

I think working long hours at some of our developer clients doing two models, one under the current tax regime and one under the proposed new one. And they would probably be the great beneficiaries of Congress passing and the President signing, they send a law, so they can only do one model. But seriously, I think that's what – that's what everybody has to do now. And development is a tough, tough business, and this is about as tough an environment as that's seen in a long time.

Great. Appreciate the color. And for the sake of those analysts, hopefully we get some clarity. Thanks so much.

Yes. Thanks, Noah.

Thank you, Mr. Kaye. The next question comes from Julien Dumoulin-Smith with Bank of America. Please proceed.

Hey guys, this is Anya stepping in for Julian.

Hi, Anya.

So I guess first off, I wanted to ask, hey, how are you? I was wondering, could you talk about the energy efficiency opportunity under the current administration? I know one of your clients has been talking of the RFP activity on Federal ESPCs and just wondering, just the potential for you guys to benefit from that that trend?

Absolutely. I think there was some expectation of an executive order for the Federal ESPC Program. And then I think the relevant agency with DOE said, we really don't need to do an executive order because the prior legislation or authorization said, you shall do these. So it's already codified for the federal government to do these. And it's a market that we continue to benefit from and as RESCO or Schneider or Siemens grows, those are our long term clients we expect to grow as well. I don't mean to eliminate other clients, but those are three that come to mind. So it'll be good news. It also doesn't happen overnight as I didn't listen to RESCO's call. I'm sure they're very cautious in good intentions in RFP activity at the federal government may take 12 to 18 months to produce investible transaction, so it doesn't turn overnight. But it's going definitely in the right direction.

Okay, perfect. Thank you. And then next this was a follow-up, just wanted to follow-up on the questions on portfolio yields. So it looks like the overall portfolio yield has kind of creeped down some 7.7% or 7.6%. And then just looking at BG behind the meter investment that's kind of gone down from to 8.1% a little bit there, so I'm assuming that's driven by the SunRun investment that implied yield on the SunRun yield. Do you think that's indicative of current yield sort of in the near future, at least in the resi solar space? Or are you already seeing rising PPA prices just rising prices helping to adjust for that?

So I think the yield movements that you refer to are in fact relatively minor. And I think that's what we're seeing so far is not anything too significant we're certainly cognizant of some spread compression as we talked about. And I think it's fair to assume, for example, the SunRun deal was done at market levels considering what we just did the deal. So, I think we would sort of stick by the theme that we had talked about in the prepared remarks that we're not seeing yield compression yet, we may see it and we've already pre-positioned ourselves with tightening costs of funds to offset it.

Okay, great. Thanks. I'll step back in the queue.

Thanks.

Thank you. The next question comes from Ben Kallo with Baird. Please proceed.

Hey guys thanks for taking my question. Just maybe on the mix sorry if you addressed this just going if I look at where your mix is now, the community to public sector just maybe future opportunities with storage, you called out in RESCO and they had a big project going on in . Where are the opportunities and how do we see this progress in your portfolio? And then what does that mean for, I know there was a question about 10 basis points about your portfolio compressing, but how has that change?

Well, I think Ben we'll finish the year with interesting mix of projects across the asset classes. I don't know exactly how to address it other than what we said in the prepared remarks that we don't control, which transactions closed in which quarter, but they generally with enough diversity on clients and asset classes we've, I think, shown over almost eight years that there is enough diversity to produce a good result. And again, that's why Jeff re-emphasized the guidance. On the 10 basis point, I'm not – go ahead, Ben.

No, just the last question was about the compression of your yields. It was like 7.7 to 7.6.

Again, – sorry, go ahead.

No, no I'm just wondering how we think that trends?

Well, again, as we talked about with Anya, I wouldn't read too much into one quarter coming up 7.7 and subsequent quarter 7.6, especially with rounding that could be a very, very minor change in the overall.

things out of the portfolio they are going to be lower yielding. It's hard to get at the point you're trying to get out through data present.

Yes. And the reverse phenomenon we may be holding some things at a lower yield that will securitize in the future. So, I wouldn't read too much into 7.7 to 7.6 quarter-over-quarter yield movement. I think the broader context of yield as we mentioned a few times, is how to think about it.

And you guys have always been kind of leaders in the space here, and now there's so much capital flowing into the space. And I hate to ask competition because you've got it forever. But how is it changing right now? Just different people, different entrants into the financing world, from everything you do from solar, to wind, to the efficiency in the future. Thank you.

Thanks Ben. Well, I think there is more competition, as we've said, in the larger grid connected projects. We see some strong beds. And some of those may not be for us, but frankly that has not been our bread and butter for the eight years we've been public. We're also seeing just as there are new providers of capital there's new clients and we're not at all bashful about our ability to compete with our cost of capital against anybody coming into the market. The question we ask ourselves is, is that the right price for the deal? And if it's not, we have the luxury to not invest in something that we think is not priced correctly. And over time, this all sorts itself out.

Got it. Thank you.

Thank you, Ben.

Thanks Bet.

Thank you, Mr. Kallo. The next question comes from Jeff Osborne with Cowen & Company. Please proceed.

Yes, good afternoon guys. Most of my questions have been addressed. But just to Jeff Eckel, you had mentioned EV charging in your prepared remarks. Can you just give us an update on EV charging, have you done any investments there and as the buildout happens, hopefully with reconciliation bill, how are you thinking about tackling that market, is it more direct, just standalone EV charging, are you looking at more like corporate fleets with a microgrid solution, solar paired with storage paired with charging?

I think I've mentioned in the context of SunRun who announced their partnership with Ford as expansion of a home service also noted the tax credits that will make storage whether it's integrated or standalone. More economic has just positives. We have done AV storage. We haven't – or excuse me, EV projects they've been related to – integrated into other offerings. But if there's something notable, we'd be delighted to talk about it, but at this point there's nothing we've disclosed.

Got it. And then my last question is just one of the, I think, the pieces of the reconciliation framework is moving to the cash payment. And so, two-part question I'm curious what you think that does to both the SunStrong JV in terms of lease volume that's coming in the door? Would you anticipate if cash grants are provided directly for consumers that maybe don't have taxable income, that that would have an impact on, on leases and then sort of the counter point of that question is would you consider investing in solar loans directly?

I’ll take the last one. We've been reluctant to do direct consumer lending. And I'm not sure much has changed in our view on that. There are certainly a lot of great companies doing a great job with it that just doesn't feel exactly like our kind of business. In terms of the direct pay, I would be thrilled to have the opportunity to widen our participation in the capital stack and frankly, make these transactions close more efficiently than they do now with three parties including tax equity and maybe get it down to two. So, we look forward to direct pay.

Got it. Thank you. That's all I had.

Thanks Jeff.

Thank you, Mr. Osborne. There are no additional questions waiting at this time. I would like to pass the conference back to the management team for closing remarks.

That concludes the call now. Thank you.