On December 4, 2023, Hannon Armstrong Sustainable Infrastructure Capital, Inc., a Maryland corporation (the “Company”), through its indirect subsidiaries HAT Holdings I LLC, a Maryland limited liability company (“HAT I”), and HAT Holdings II LLC, a Maryland limited liability company (“HAT II”, and together with HAT I, the “Issuers”) issued a preliminary offering memorandum in connection with the Issuers’ offering of $500 million aggregate principal amount of Green Senior Unsecured Notes due 2027 in which the following was set forth. References herein to “we,” “our,” “us” and “our company” refer to the Company, Hannon Armstrong Sustainable Infrastructure, L.P., and any of the Company’s other subsidiaries.
Investments Overview
Our investments in climate solutions are focused on three markets:
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Behind-the-Meter (“BTM”): distributed building or facility projects that reduce energy usage or cost through the use of solar generation and energy storage or energy efficient improvements, including heating, ventilation and air conditioning systems (“HVAC”), lighting, energy controls, roofs, windows, building shells, and/or combined heat and power systems; |
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Grid-Connected (“GC”): renewable projects that deploy cleaner energy sources, such as solar, solar-plus-storage, stand-alone-storage, and wind, to generate or shift power production where the off-taker or counterparty may be part of the wholesale electric power markets; and |
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Fuels, Transport, and Nature (“FTN”): renewable natural gas (RNG) plants, transportation fleet enhancements, and ecological restoration projects, among others, that increase resiliency or more efficiently use natural resources. |
As of September 30, 2023, we had over $5 billion of transactions in our pipeline that could potentially close in the next 12 months, of which 49% are related to BTM assets, 36% are related to GC assets and 15% are related to FTN assets. We believe the Inflation Reduction Act, signed into law on August 16, 2022, incentivizes the construction of and investment in climate solutions and will result in additional investment opportunities in the markets in which we invest over the next several years, which may result in increases in our pipeline in the future. We prefer investments in which the assets use proven technology and have a long-term, creditworthy off-taker or counterparties. For BTM assets, the off-taker or counterparty may be the building owner or occupant, and our investment may be secured by the installed improvements or other real estate rights. For GC assets, the off-takers or counterparties may be utility or electric users who have entered into contractual commitments, such as power purchase agreements, to purchase power produced by a renewable energy project at a specified price with potential price escalators for a portion of the project’s estimated life. There can, however, be no assurance with regard to any specific terms of such pipeline transactions or that any or all of the transactions in our pipeline will be completed.
We have ten identified near-term investment opportunities in various stages ranging from negotiating term sheets and letters of intent to executed term sheets and letters of intent with an aggregate size of greater than $500 million and a weighted average anticipated yield of approximately 11% (collectively, the “Identified Projects”). More specifically, we have identified four such BTM investments with a weighted average anticipated yield range of approximately 10.25% to 11.75%, two such GC investments with a weighted average anticipated yield range of approximately 10.25% to 11.00%, and four such FTN investments with a weighted average anticipated yield range of approximately 10.50% to 12.00%.
An “anticipated yield” represents the yield that we calculate when evaluating potential investments and is the rate at which we discount the estimated cash flows of such investments. In calculating anticipated yields, we make the same assumptions as those used in our calculation of underwritten yield as described under the heading “Portfolio Yield” in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 (the “Q3 2023 Form 10-Q”). The anticipated yield amounts shown are based on various assumptions and estimates based on our model. Assumptions and estimates may prove to be inaccurate and actual results may prove materially different and will vary between periods based on market conditions and other factors.
With respect to these investment opportunities, an assumed cost of debt of approximately 8% to 8.5% and leverage of approximately 2.0x, results in an anticipated return on equity of approximately 16% to 17%. There can, however, be no assurance with regard to any specific terms of such pipeline transactions, including our ability to close on and realize yields on our identified investment opportunities, or that any or all of the transactions in our pipeline will be completed.
As of September 30, 2023, pursuant to our strategy of holding transactions on our balance sheet, we held approximately $5.5 billion of transactions on our balance sheet, which we refer to as our “Portfolio,” an increase of approximately 28% from December 31, 2022. As of September 30, 2023, our Portfolio consisted of approximately eight asset classes, with an unlevered portfolio yield of 7.9%. Our closed transactions for the nine months ended September 30, 2023 yielded over 9% on average. We seek to manage the diversity of our Portfolio by, among other