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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 September 30, 2021
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 Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareHASINew 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: 84,693,740 shares of common stock, par value $0.01 per share, outstanding as of November 3, 2021 (which includes 197,256 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, 2020, as amended by our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2020 (collectively, our “2020 Form 10-K”), that was filed with the U.S. Securities and Exchange Commission (the “SEC”), and this Form 10-Q and other periodic reports that we file with the SEC.
Other important factors that we think could cause our actual results to differ materially from expected results are summarized below, including the ongoing impact of the current outbreak of the novel coronavirus ("COVID-19"), on the U.S., regional and global economies, the U.S. climate solutions market and the broader financial markets. The current outbreak of COVID-19 has also impacted, and is likely to continue to impact, directly or indirectly, many of the other important factors below and the risks described in the Form 10-K and in our subsequent filings under the Exchange Act. Other factors besides those listed could also adversely affect us. In addition, we cannot assess the impact of each factor 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. In particular, it is difficult to fully assess the impact of COVID-19 at this time due to, among other factors, uncertainty regarding new virus variants and uncertainty regarding whether "herd immunity" can be achieved through vaccination campaigns.
Statements regarding the following subjects, among others, may be forward-looking:
negative impacts from a continued spread of COVID-19, including on the U.S. or global economy or on our business, financial position or results of operations;
 our expected returns and performance of our investments;
the state of government legislation, regulation and policies that support or enhance the economic feasibility of projects that reduce carbon emissions or increase resilience to climate change, which we refer to as climate solutions, including energy efficiency and renewable energy projects and the general market demands for such projects;
market trends in our industry, energy markets, commodity prices (including continued low natural gas prices), interest rates, the capital markets or the general economy;
our business and investment strategy;
the availability of opportunities to invest in climate solutions, 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 company’s 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;
the credit quality of our assets;
changes in the value of our assets, our portfolio of assets and our investment and underwriting process;
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the impact of weather conditions, natural disasters, accidents, equipment failures or other events that disrupt the operation of our investments or negatively impact the value of 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 and the market value of our assets and target assets;
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 or commodity price volatility;
the impact of and changes in accounting guidance;
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”);
the 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.
The risks included here are not exhaustive. 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.


 

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TABLE OF CONTENTS
 
 


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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)
(UNAUDITED)
September 30, 2021 (unaudited)December 31, 2020
Assets
Cash and cash equivalents$413,259 $286,250 
Equity method investments1,468,282 1,279,651 
Commercial receivables, net of allowance of $39 million and $36 million, respectively
1,224,741 965,452 
Government receivables126,412 248,455 
Real estate356,861 359,176 
Investments17,637 55,377 
Securitization assets203,625 164,342 
Other assets130,046 100,364 
Total Assets$3,940,863 $3,459,067 
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable, accrued expenses and other$77,395 $59,944 
Credit facilities25,483 22,591 
Non-recourse debt (secured by assets of $574 million and $723 million, respectively)
438,051 592,547 
Senior unsecured notes1,771,264 1,283,335 
Convertible notes155,285 290,501 
Total Liabilities2,467,478 2,248,918 
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, 84,275,179 and 76,457,415 shares issued and outstanding, respectively
843 765 
Additional paid in capital1,671,747 1,394,009 
Accumulated deficit(225,933)(204,112)
Accumulated other comprehensive income (loss)7,746 12,634 
Non-controlling interest18,982 6,853 
Total Stockholders’ Equity1,473,385 1,210,149 
Total Liabilities and Stockholders’ Equity$3,940,863 $3,459,067 

See accompanying notes.
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HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2021202020212020
Revenue
Interest income$26,236 $23,508 $76,352 $71,046 
Rental income6,430 6,469 19,361 19,408 
Gain on sale of receivables and investments13,072 13,628 54,988 34,449 
Fee income3,144 4,984 8,769 13,115 
Total revenue48,882 48,589 159,470 138,018 
Expenses
Interest expense27,349 26,085 95,394 65,884 
Provision for loss on receivables1,485 2,458 2,896 5,629 
Compensation and benefits12,218 9,012 39,850 27,223 
General and administrative4,964 3,918 14,814 11,181 
Total expenses46,016 41,473 152,954 109,917 
Income before equity method investments2,866 7,116 6,516 28,101 
Income (loss) from equity method investments(7,215)16,506 69,519 32,505 
Income (loss) before income taxes(4,349)23,622 76,035 60,606 
Income tax (expense) benefit1,250 (2,345)(11,510)(2,860)
Net income (loss) $(3,099)$21,277 $64,525 $57,746 
Net income (loss) attributable to non-controlling interest holders
(261)102 366 255 
Net income (loss) attributable to controlling stockholders$(2,838)$21,175 $64,159 $57,491 
Basic earnings (loss) per common share$(0.04)$0.28 $0.81 $0.80 
Diluted earnings (loss) per common share$(0.04)$0.28 $0.79 $0.78 
Weighted average common shares outstanding—basic79,335,173 74,012,788 78,407,028 71,376,004 
Weighted average common shares outstanding—diluted79,335,173 76,131,252 82,069,464 72,644,626 
See accompanying notes.
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HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Net income (loss)$(3,099)$21,277 $64,525 $57,746 
Unrealized gain (loss) on available-for-sale securities, net of tax benefit (provision) of $0.1 million and $0.3 million for the three and nine months ended September 30, 2021 and $0.0 million and $(1.1) million for the three and nine months ended September 30, 2020
(900)872 (8,268)12,280 
Unrealized gain (loss) on interest rate swaps, net of tax benefit (provision) of $0.9 million and $(1.0) million for the three and nine months ended September 30, 2021 and $(0.3) million and $1.3 million for the three and nine months ended September 30, 2020
(2,703)990 3,351 (4,071)
Comprehensive income (loss)(6,702)23,139 59,608 65,955 
Less: Comprehensive income (loss) attributable to non-controlling interest holders
(274)110 337 289 
Comprehensive income (loss) attributable to controlling stockholders$(6,428)$23,029 $59,271 $65,666 

See accompanying notes.
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HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Non-controlling interestsTotal
SharesAmount
Balance at June 30, 202178,419 $784 $1,487,103 $(193,530)$11,335 $16,855 $1,322,547 
Net income (loss)— — — (2,838)— (261)(3,099)
Unrealized gain (loss) on available-for-sale securities— — — — (896)(4)(900)
Unrealized gain (loss) on interest rate swaps— — — — (2,693)(10)(2,703)
Issued shares of common stock857 9 48,803 — — — 48,812 
Equity-based compensation— — 985 — — 2,730 3,715 
Conversion of convertible notes4,999 50 134,856 — — — 134,906 
Dividends and distributions— — — (29,565)— (328)(29,893)
Balance at September 30, 202184,275 $843 $1,671,747 $(225,933)$7,746 $18,982 $1,473,385 
Balance at June 30, 202073,319 $733 $1,250,976 $(198,719)$9,619 $5,355 $1,067,964 
Net income (loss)— — — 21,175 — 102 21,277 
Unrealized gain (loss) on available-for-sale securities— — — — 864 8 872 
Unrealized gain (loss) on interest rate swaps— — — — 991 (1)990 
Issued shares of common stock875 10 29,238 — — — 29,248 
Equity-based compensation— — 1,617 — — 1,285 2,902 
Other59 — 913 — — (859)54 
Dividends and distributions— — — (25,370)— (200)(25,570)
Balance at September 30, 202074,253 $743 $1,282,744 $(202,914)$11,474 $5,690 $1,097,737 
See accompanying notes.
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Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Non-controlling interestsTotal
SharesAmount
Balance at December 31, 202076,457 $765 $1,394,009 $(204,112)$12,634 $6,853 $1,210,149 
Net income (loss)
— — — 64,159 — 366 64,525 
Unrealized gain (loss) on available-for-sale securities
— — — — (8,219)(49)(8,268)
Unrealized gain (loss) on interest rate swaps— — — — 3,331 20 3,351 
Issued shares of common stock2,496 25 151,676 — — — 151,701 
Equity-based compensation— — 5,226 — — 12,739 17,965 
Issuance (repurchase) of vested equity-based compensation shares323 3 (14,020)— — — (14,017)
Conversion of convertible notes4,999 50 134,856 — — — 134,906 
Dividends and distributions— — — (85,980)— (947)(86,927)
Balance at September 30, 202184,275 $843 $1,671,747 $(225,933)$7,746 $18,982 $1,473,385 
Balance at December 31, 201966,338 $663 $1,102,303 $(169,786)$3,300 $3,432 $939,912 
Net income (loss)
— — — 57,491 — 255 57,746 
Adoption of ASU 2016-13, net of tax effect— — — (14,031)— (74)(14,105)
Unrealized gain (loss) on available-for-sale securities
— — — — 12,222 58 12,280 
Unrealized gain (loss) on interest rate swaps— — — — (4,048)(23)(4,071)
Issued shares of common stock7,319 75 188,723 — — — 188,798 
Equity-based compensation— — 8,098 — — 3,543 11,641 
Issuance (repurchase) of vested equity-based compensation shares537 5 (17,293)— — — (17,288)
Other59 — 913 — — (860)53 
Dividends and distributions— — — (76,588)— (641)(77,229)
Balance at September 30, 202074,253 $743 $1,282,744 $(202,914)$11,474 $5,690 $1,097,737 
See accompanying notes.
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HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
 Nine Months Ended September 30,
 20212020
Cash flows from operating activities
Net income (loss)$64,525 $57,746 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loss on receivables2,896 5,629 
Depreciation and amortization2,811 2,685 
Amortization of financing costs8,445 5,824 
Equity-based compensation13,503 11,615 
Equity method investments(45,684)14,024 
Non-cash gain on securitization
(37,521)(36,866)
(Gain) loss on sale of receivables and investments(720)8,671 
Loss on debt extinguishment14,584  
Changes in accounts payable and accrued expenses11,606 5,906 
Change in accrued interest on receivables and investments(9,516)(21,925)
Other(3,243)(1,447)
Net cash provided by (used in) operating activities21,686 51,862 
Cash flows from investing activities
Equity method investments(155,461)(322,948)
Equity method investment distributions received10,936 90,920 
Proceeds from sales of equity method investments300  
Purchases of and investments in receivables(407,517)(92,232)
Principal collections from receivables87,548 94,780 
Proceeds from sales of receivables75,582 52,329 
Purchases of investments(4,830)(22,777)
Principal collections from investments256 1,981 
Proceeds from sales of investments and securitization assets15,197 58,018 
Funding of escrow accounts(12,069)(7,783)
Withdrawal from escrow accounts1,538 6,300 
Other290 3,200 
Net cash provided by (used in) investing activities(388,230)(138,212)
Cash flows from financing activities
Proceeds from credit facilities25,000 126,000 
Principal payments on credit facilities(22,441)(134,594)
Proceeds from issuance of non-recourse debt
 15,938 
Principal payments on non-recourse debt
(29,900)(118,623)
Proceeds from issuance of senior unsecured notes1,000,000 771,250 
Proceeds from issuance of convertible notes 143,750 
Redemption of senior unsecured notes(500,000) 
Net proceeds of common stock issuances151,501 188,197 
Payments of dividends and distributions(83,354)(74,295)
Withholdings on employee share vesting(14,018)(17,287)
Redemption premium paid (14,101) 
Payment of debt issuance costs(17,672)(14,382)
Other(13)(623)
Net cash provided by (used in) financing activities495,002 885,331 
Increase (decrease) in cash, cash equivalents, and restricted cash128,458 798,981 
Cash, cash equivalents, and restricted cash at beginning of period310,331 106,586 
Cash, cash equivalents, and restricted cash at end of period$438,789 $905,567 
Interest paid$74,962 $57,310 
Supplemental disclosure of non-cash activity
Residual assets retained from securitization transactions$45,578 $38,081 
Right-of-use asset obtained in exchange for lease liability 4,628  
Issuance of common stock from conversion of convertible notes135,800  
Deconsolidation of non-recourse debt126,139  
Deconsolidation of assets pledged for non-recourse debt130,513  
See accompanying notes.
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HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2021
 
1.The Company
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (the “Company”) invests in climate solutions by providing capital to leading companies in the energy efficiency, renewable energy and other sustainable infrastructure markets. Our goal is to generate attractive returns from a diversified portfolio of projects with long-term and predictable cash flows from proven technologies that reduce carbon emissions or increase resilience to climate change.
The Company and its subsidiaries are hereafter referred to as “we,” “us” or “our.” Our investments take various forms, including equity, joint ventures, real estate ownership, or lending or other financing transactions, and typically benefit from contractually committed high credit quality obligors. We also generate on-going fees through off-balance sheet 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 investments in either preferred or common structures in unconsolidated entities;
government and commercial receivables, such as loans for renewable energy and energy efficiency projects;
real estate, such as land or other assets leased for use by 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.
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 Investment Company Act of 1940 (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, 2020, 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 three- and nine-month periods ended September 30, 2021 and 2020, 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 Accounting Standards Codification (“ASC”) 810, Consolidation ("ASC 810"), references in this report to our earnings per share and our net income and stockholders’ equity attributable to common stockholders do not include amounts attributable to non-controlling interests.
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Consolidation
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 assets that are not consolidated in our financial statements as described below in Securitization of Financial Assets.
Since 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 assets on our balance sheet, we have concluded we are the primary beneficiary and should consolidate these entities under the provisions of ASC 810. We also have certain subsidiaries we deem to be voting interest entities that we control through our ownership of voting interests and accordingly consolidate.
Certain of our equity method investments were determined to be interests in VIEs in which we are not the primary beneficiary, as we do not direct the significant activities of these entities, and thus we account for those investments as Equity Method Investments as discussed below. Our maximum exposure to loss through these investments is limited to their recorded values. However, we may provide financial commitments to these VIEs or guarantees of certain of their obligations. Certain other entities in which we have equity investments have been assessed to be voting interest entities and are not consolidated as we exert significant influence rather than control through our ownership of voting interests, and accordingly account for them as equity method investments described below.
Equity Method Investments
We have made equity investments in various renewable energy and energy efficiency projects. These 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 priority distribution of all or a portion of the project's cash flows, and in some cases, tax attributes. Once the preferred 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.
Our equity investments in renewable energy or energy efficiency projects are accounted for under the equity method of accounting. 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 that 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 if the investee were to liquidate all of its assets at the 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 referred to as the hypothetical liquidation at book value method (“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 each equity method investment are classified as operating activities to the extent of cumulative earnings for each investment 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 typically recognize earnings one quarter in arrears for certain of these investments to allow for the receipt of financial information.
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 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 at amortized cost, net of any unamortized acquisition premiums or discounts and include
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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, which is assessed on an individual asset basis. 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 an allowance as determined under ASC Topic 326 Financial Instruments- Credit Losses (“Topic 326”) and for our internally derived asset performance categories included in Note 6 to our financial statements in this Form 10-Q 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.
We determine our allowance based on the current expectation of credit losses over the contractual life of our receivables as required by Topic 326. We use a variety of methods in developing our allowance, including discounted cash flow analysis and probability-of-default/loss given default (“PD/LGD”) methods. In developing our estimates, we consider our historical experience with our and similar assets in addition to our view of both current conditions and what we expect to occur within a period of time for which we can develop reasonable and supportable forecasts, typically two years. For periods following the reasonable and supportable forecast period, we revert to historical information when developing assumptions used in our estimates. In developing our forecasts, we consider a number of qualitative and quantitative factors in our assessment, including 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 climate solutions sector, the effect of local, industry, and broader economic factors, such as unemployment rates and power prices, the impact of any variation in weather and the historical and anticipated trends in interest rates, defaults and loss severities for similar transactions. For those assets where we record our allowance using a discounted cash flow method, we have elected to record the change in allowance due solely to the passage of time through the provision for loss on receivables in our income statement. For assets where the obligor is a publicly rated entity, we consider the published historical performance of entities with similar ratings in developing our estimate of an allowance, making adjustments determined by management to be appropriate during the reasonable and supportable forecast period. We have made certain loan commitments that are within the scope of Topic 326. When estimating an allowance for these loan commitments we consider the probability of certain amounts to be funded and apply either a discounted cash flow or PD/LGD methodology as described above. We charge off receivables against the allowance, if any, when we determine the unpaid principal balance is uncollectible, net of recovered amounts. Any provision we record for an allowance is a non-cash reconciling item to cash from operating activities in our consolidated statements of cash flows.
Real Estate
Real estate consists of land or other real property 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, Leases, and thus are accounted for similarly 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 that 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 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 that 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 off-market lease values are amortized as an adjustment of rental income 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 be credit related, on available-for-sale debt securities are recorded as a component of accumulated other comprehensive income (“AOCI”) in equity on our balance sheet. When a security is sold, we reclassify the AOCI to earnings based on specific identification. 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 impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Our impairment 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 several qualitative and quantitative factors in our assessment. The primary factor in our assessment is the current fair value of the security, while other factors 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 impairment for a security, intend to hold the investment to maturity, and do not expect that we will be required to sell the security prior to recovery of the amortized cost basis, we will recognize only the credit component of the unrealized loss in earnings by recording an allowance against the amortized cost of the asset as required by Topic 326. 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 a fair value less than the amortized cost and 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 Financial Assets
We have established various special purpose entities or securitization trusts for the purpose of securitizing certain financial assets. 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 certain trusts because we do not have power over those 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 financial assets to these securitization trusts as sales pursuant to ASC 860, Transfers and Servicing (“ASC 860”), when we have concluded the transferred assets 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 assets. When we are unable to conclude that we have been sufficiently isolated from the securitized financial assets, we treat such trusts 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 and non-consolidation legal opinions for all of our securitization trust structures to support our conclusion regarding the transferred financial assets. When we sell financial assets 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 financial assets 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 assets 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 similar to available-for-sale debt securities and carried at fair value. Income related to the residual assets is recognized using the effective interest rate method and included in fee income in the income statement. Our residual assets are evaluated for impairment on a quarterly basis. A residual asset is impaired if its fair value is less than its carrying value. The credit component of impairments, if any, are recognized by recording an allowance against the amortized cost of the asset. For changes in expected cash flows, we 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 our income related to these assets.
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 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 to our financial statements in this Form 10-Q 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. If converted, the carrying value of each bond is reclassified into stockholders' equity.
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 (“TRS”) that are taxed separately, and that 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 several 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 TRS 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
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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 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. Any deferred tax impacts resulting from transfers of assets to or from our TRS are recorded as an adjustment to additional paid-in capital, as it is a transfer amongst entities under common control.
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 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 to our financial statements to this Form 10-Q). 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 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
Accounting standards updates issued before November 5, 2021, and effective after September 30, 2021, 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 September 30, 2021 and December 31, 2020, only our residual assets related to our securitization trusts and investments 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.
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 senior unsecured notes and 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 September 30, 2021
 Fair ValueCarrying
Value
Level
 (in millions)
Assets
Government receivables$139 $126 Level 3
Commercial receivables1,397 1,225 Level 3
Investments (1)
18 18 Level 3
Securitization residual assets (2)
198 198 Level 3
Liabilities (3)
Credit facilities$25 $25 Level 3
Non-recourse debt487 449 Level 3
Senior unsecured notes1,838 1,793 Level 2
Convertible notes 203 158 Level 2
(1)The amortized cost of our investments as of September 30, 2021, was $17 million.
(2)Included in securitization assets on the consolidated balance sheet. This amount excludes securitization servicing assets, which are carried at amortized cost. The amortized cost of our securitization assets as of September 30, 2021 was $184 million.
(3)Fair value and carrying value exclude unamortized financing costs.
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 As of December 31, 2020
 Fair ValueCarrying
Value
Level
 (in millions)
Assets
Government receivables$282 $248 Level 3
Commercial receivables1,018 965 Level 3
Investments (1)
55 55 Level 3
Securitization residual assets (2)
159 159 Level 3
Liabilities (3)
Credit facilities$23 $23 Level 3
Non-recourse debt678 605 Level 3
Senior unsecured notes1,362 1,299 Level 2
Convertible notes 552 296 Level 2
(1)    The amortized cost of our investments as of December 31, 2020, was $51 million.
(2)    Included in securitization assets on the consolidated balance sheet. This amount excludes securitization servicing assets, which are carried at amortized cost. The amortized cost of our securitization assets as of December 31, 2020 was $141 million.
(3)    Fair value and carrying value exclude unamortized financing costs.

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 September 30,For the nine months ended September 30,
 2021202020212020
 (in millions)
Balance, beginning of period$18 $46 $55 $75 
Purchases of investments 5 5 23 
Principal payments on investments   (2)
Sale of investments  (38)(53)
Realized gains on investments recorded in gain on sale of receivables and investments   5 
Unrealized gains (losses) on investments recorded in OCI 1 (4)4 
Balance, end of period$18 $52 $18 $52 

The following table illustrates our investments in an unrealized loss position:
Estimated Fair Value
Unrealized Losses (1)
Securities with a loss shorter than 12 monthsSecurities with a loss longer than 12 monthsSecurities with a loss shorter than 12 monthsSecurities with a loss longer than 12 months
(in millions)
September 30, 2021$7 $ $0.2 $ 
December 31, 2020 6  0.3 
(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 market-based risk-free rate and a range of interest rate spreads of approximately 1% to 4% based upon transactions involving similar assets as of September 30, 2021 and December 31, 2020. The weighted average discount rate used to determine the fair value of our investments as of September 30, 2021 and December 31, 2020 were 3.6% and 3.2%, respectively.

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Securitization residual assets
The following table reconciles the beginning and ending balances for our Level 3 securitization residual assets that are carried at fair value on a recurring basis:
 For the three months ended September 30,For the nine months ended September 30,
 2021202020212020
 (in millions)
Balance, beginning of period$