Shares of Hannon Armstrong (NYSE:HASI) stock are in focus following the release of a short report by Muddy Waters. Hannon focuses on and invests in solutions related to the reduction of carbon emissions.
The short report starts off by accusing the company of improperly booking about $300 million of non-cash income in 2021. Hannon reported 2021 net income of $127 million, which should be a loss of $173 million if the short seller is correct. Muddy adds that the 2021 non-cash income “largely arises from tax benefits that others claim, and is a quirk of the esoteric partnership accounting used for many renewables projects.”
The rest of the report focuses on three of Hannon’s assets: Jupiter, Rosie and Vivint Solar 3. Let’s get into the details.
HASI Stock: Muddy Waters Releases Short Report
Jupiter returned a loss of €439 million from 2020 to 2021. In 2021, Jupiter’s total equity fell by €629 million to €703 million. Hannon invested $540 million into the project between 2020 and 2021, which Muddy contends has enabled Jupiter’s joint venture (JV) partner, Engie, to take its equity investment off the table. Engie’s majority reduction of its investment points to trouble on Hannon’s claim that its “preferred returns on equity investments help insulate it from project risks.”
Next, Muddy questions Hannon’s Rosie investment. Rosie operates as a holding company with ownership over a grid-connected solar project in California. Hannon operates a JV partnership with Clearway Energy (NYSE:CWEN) for Rosie. Hannon’s JV interest gives it the rights to 50% of available cash after paying back member loans. On the other hand, Hannon’s preferred returns do not begin until 2035. During then, 85.4% of Rosie’s “contracted capacity under power purchase agreements rolls off.” Hannon has also leased land to Rosie that will expire in 2052. However, this is 17 years after Rosie’s first two solar power purchase agreements (PPAs) expire.
Similar to Jupiter, Muddy explains that the sponsor for Vivint Solar 3, Vivint, has largely cashed out. Hannon made a $140 million subordinated loan to Vivint 3 in 2020 and purchased a 49% equity stake for only $10,000. Muddy estimates that Hannon booked non-cash and unrealizable gains of $34.8 million during 2021 from Vivint 3. However, the project only brought in net income of $603,000 that year, while Hannon received no cash distributions from it.
Muddy concludes that Hannon is “dumb money” that makes risky investments in order to satisfy narratives. The short seller is open to changing his mind if Hannon can “demonstrate that it has found an even greater fool to buy investments off it.”
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.
