Hannon Armstrong (NYSE:HASI) stock is falling lower by over 15% following the release of a short report by Muddy Waters Research. The report alleges that the company uses complex and misleading accounting strategies to the point where its financials are “effectively meaningless.” In addition, the activist short seller believes that Hannon’s 2021 generally accepted accounting principles (GAAP) income should actually be lower by $362.7 million, which would equate to a loss of $235.4 million at the midpoint. Muddy ultimately believes that most of Hannon’s income is both “non-cash and unrealizable.”
Meanwhile, executives at Hannon have been selling out. They have disposed of $22.9 million of HASI stock in the past two years, of which $17.1 million is attributable to CEO Jeff Eckel.
The firm also accuses Hannon of abusing the equity method investment (EMI) technique.
The EMI technique is when a company records profits through its investment or ownership in another company. The method can be used when one company has significant influence over another company. Hannon has utilized this strategy through its EMI, SunStrong. Since 2018, Hannon has made $502 million of loans to SunStrong, failing to disclose a related party relationship. Muddy believes that this places “outsized risk” for HASI and creates the appearance of cash flows and earnings.
HASI Stock: Muddy Waters Releases Short Report
For 2020, the short seller estimates that Hannon inflated income by 540%, or $40.4 million using the EMI strategy. During 2021, Muddy believes that an accounting loophole turned a net loss into a net gain. The firm claims that Hannon improperly booked tax incentives when they should have been booked by its tax equity partner.
Muddy also accuses Hannon of improperly lowering its discount rate to boost its financials. In 2020 and 2021, the activist investor believes gains on securitization were inflated by 34% and 60%, respectively. The company is known for performing “securitization of receivables from government-linked and commercial projects.” It receives a fee for securitization and also retains residual interest that is recognized as income. The discount rates for residuals were 4.3% in 2021 compared to between 8% to 10% during 2013.
Finally, Muddy notes that the “vast majority” of HASI’s dividends have been financed through equity and debt raises. Since Hannon’s initial public offering (IPO), only 9% of dividends have been attributed to internal cash flows. The remaining 91% is attributable to “recycling equity and debt investors’ capital.”
Muddy has disclosed that is shorting HASI stock.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.