Sunnova Energy International Inc (NOVA) 2021 Q2 法說會逐字稿

Good morning, and welcome to Sunnova's Second Quarter 2021 Earnings Conference Call. Today's call is being recorded, and we have allocated an hour for prepared remarks and question and answer. (Operator Instructions)

At this time, I would like to turn the conference over to Rodney McMahan, Vice President, Investor Relations at Sunnova. Thank you. Please go ahead.

Thank you, operator. Before we begin, please note, during today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in our slide presentation, earnings press release and our 2020 Form 10-K. Please see those documents for additional information regarding those factors that may affect these forward-looking statements.

Also, we will reference certain non-GAAP measures during today's call. Please refer to the appendix of our presentation as well as the earnings press release for the appropriate GAAP to non-GAAP reconciliations and cautionary disclosures.

On the call today are John Berger, Sunnova's Chairman and Chief Executive Officer; and Robert Lane, Executive Vice President and Chief Financial Officer.

I will now turn the call over to John.

Good morning, and thank you for joining us. We are proud to report that the strong growth we experienced in our dealer network, customer count and single customer margins in the first quarter carried through into the second quarter. Over the last several months, we have seen the residential solar industry enter a new phase of maturation and growth, and with it, the value proposition for customers has changed. Our industry was once solely focused on savings, and now it is driven by an acute customer focus on reliability and resiliency as well as savings.

This quarter, we continued to see improvements in many of our key financial metrics, specifically stronger-than-expected growth in adjusted EBITDA, the principal and interest we collect on solar loans and our single customer implied spread or margin. Additionally, we experienced a decline in adjusted operating expense on a per customer basis of 23% over the past year. We expect this trend of declining adjusted operating expense per customer to continue over the coming quarters.

On Slide 3, you will see some of the details of these strong operational results where we further increased our customer base, battery attachment rate and dealer network. We began the quarter on a high note with the timely closing of the SunStreet acquisition and finished the quarter by placing more solar systems into service during the month of June than in any other month in the company's history. As a result, our customer growth continues to accelerate with just over 46,000 customers added in the second quarter of 2021.

With 3 months of SunStreet integration behind us, the rapid growth of our dealer network and the expected launch of several new services later this year, we are increasing our expected year-over-year organic customer growth rate for 2022 from 40% to 50%. The combination of continued operational improvements and advantage from our increasing scale is setting Sunnova up for a strong 2022.

We saw the continued instability of regional power grids increasingly push homeowners to seek out more reliable and resilient energy services. This resulted in the continued increase in our battery attachment rate on origination, which went from 23% in Q1 2021 to 28% in Q2 2021, even when accounting for the Sunnova New Homes customers we acquired.

On the subject of supply chain constraints in batteries, we have seen continued improvement in availability, as expected. Much of this availability is being driven by increased competition amongst battery suppliers. However, given the dramatic increase in consumer demand for reliability in their power service, we are not certain if all constraints in batteries will be eliminated by late this year or if the relief comes early next year.

Our success continues to be made possible, thanks to the dedication of our 621 dealers and sub-dealers and new home installers across our rapidly expanding service territory. Over the last year, we added nearly 400 dealers and sub-dealers and new home installers, and we anticipate this count to be at or near 1,000 by the end of 2022.

Our brand visibility and value continues to grow, which, over time, will greatly contribute to both decreasing our customer acquisition costs and increasing our customer base, giving us further confidence in our future growth estimates.

For the latter point on growth, we've increased our lead generation to our dealers by over 350% compared to last year. Lastly, on this slide, we've updated our information on customer contract life and expected cash inflows. As of June 30, 2021, the weighted average contract life remaining on our customer contracts equaled 22.4 years, while the cash inflows we expect to receive over the next 12 months increased from $266 million in the previous quarter to $297 million.

Turning to Slide 4. We provide a summary of our Q2 2021 financial results. These strong results are expected to strengthen even further in the coming quarters as the growth in adjusted EBITDA and the P&I from our solar loans trend higher than customer growth, especially once meter replacement spend ends and growth investment subsides. We believe our focus on service as well as the upselling of hardware and the growth of aggregation services such as grid services and micro grids, will result in an 80% increase in the value per customer as measured by adjusted EBITDA, together with the principal and interest we receive on solar loans by 2025.

As expected, our cash flow results improved materially from the prior quarter. Rob will discuss cash in greater detail later in the call, but it's worth noting that we continue to anticipate very large year-over-year growth in adjusted operating cash flow for full year 2021, and we expect to achieve a breakeven midpoint on our recurring operating cash flow this year.

Turning to Slide 5. It is clear that customers are now expecting a long-term energy service offering that is fast and intelligent. To meet this need, we're building out our end-to-end software platform, which contains capabilities such as quoting tools for dealers, predictive service analytics for customers, and grid services software for aggregation. We are seeing significant opportunities in grid services. To date, we have 7 grid service programs in place with an estimated value of at least $45 million over the next 20 years and a pipeline with the potential for an additional $450 million in value. It should be noted that Sunnova has the contractual right and obligation to the customer for both the service to the customer and any grid services in all of our contracts. Therefore, Sunnova retains the ownership of the relationship with the customer for years to come.

Our dedicated field service technicians and customer care team are increasingly providing higher-quality service at a quicker pace to our growing customer base. The Sunnova-employed service team is focused on delivering unparalleled energy service quickly, accurately and predictively as new technologies, such as batteries, load managers, electric vehicle chargers and secondary generation, enter the market. Service is becoming the crucial differentiator in the residential energy industry, and Sunnova continues to position itself as the industry leader for service.

I will now turn the call over to Rob.

Thank you, John. Turning to Slide 7, you will see the continued improvement in our second quarter results over the past few years. Q2 2021 revenues are up over 90% from Q2 2019, while over the same period, adjusted EBITDA and the principal and interest received on solar loans increased by 121% and 199%, respectively. As John noted earlier, Q2 adjusted and recurring operating cash flows improved materially from the first quarter of this year, although they declined year-over-year. As further detailed in our 10-Q, this was because of an acceleration of certain cash expenses into the second quarter that were made in the second half of the year in 2020.

On balance, we expect AOCF to be stronger for the second half of the year than originally forecasted because of lower interest expense due to the record low-cost financings we have executed this year, the higher-than-budgeted principal payments on loans and the strong results from SunStreet. We also expect ROCF to be positive for the balance of the year and to end the year at breakeven, a significant milestone for an industry that has yet to see a cash-positive power co.

On Slide 8, you will see both our gross contracted customer value, or GCCV, and our net contracted customer value, or NCCV, are experiencing significant increases year-over-year. Using a conservative discount rate of 4%, NCCV increased from $1.2 billion on June 30, 2020 to $1.7 billion on June 30, 2021. Furthermore, in addition to increasing on an absolute basis, NCCV also increased on a per share and per customer basis over the same time frame, excluding the acquired SunStreet customers.

Overall, we expect our NCCV to increase over the balance of the year. As a reminder, both our GCCV and NCCV metrics exclude any value for growth, renewals or upsells as they only represent our existing contracted cash flow base. While these excluded items are not reflected in our contracted customer values, they do have significant value and will become more meaningful over time as the number of services sold per customer grows.

Slide 9 summarizes our recent financing activity and cash position. The 2021 financing transactions completed to date include 3 securitizations that achieved a weighted average blended yield of just over 2.5%. Our 2 most recent transactions represent a pivot in our financing strategy in that we elected not to issue high-yield tranches of our securitizations. This allows us to take the cash flows that would otherwise be subject to highly punitive amortization and better align the debt service of the underlying assets with the cash flows they generate, thereby allowing those cash flows to move from our nonrecourse SPVs to the corporate company level, in short, more cash to the equity.

Our June securitization of leases and PPAs was particularly unique in that it was the solar sector's first-ever securitization refinancing collateral from a preexisting securitization. Our July loan securitization represented another first for us as we were able to split our securitization into both an A- rated tranche and our first ever AA- rated tranche, which drove our weighted average spread to treasuries to an industry record 100 basis points.

We are especially grateful to our debt investors, several of whom have participated in our programs since our inaugural securitization in 2017, for recognizing the high credit quality, the decreasing default and delinquency rates and the reliability of our cash flows. Other financing activity included a loan warehouse restructuring of $350 million, and $375 million in closed tax equity funds, both of which saw improving terms. We also issued $575 million of convertible debt that enabled us to fund our growth for at least the next 18 months, while giving us a bridge to a corporate level bullet maturity bond.

As investors are aware, we used a portion of the proceeds of the convertible debt to purchase a capped call that effectively makes the conversion price $60 per share. These transactions are important milestones in Sunnova's transformation of its capital structure as we believe they will accelerate the strengthening of our corporate balance sheet and lead to greatly improved recurring operating cash flow.

Our total cash balance as of June 30, 2021, was $469.1 million, up from $184.4 million at June 30, 2020, and up from $263.5 million at March 31, 2021.

This sizable increase was driven by recent debt raises undertaken to ensure the company has the working capital it needs to take full advantage of the growth opportunity in front of us and to provide the company with the balance sheet flexibility needed to complete our long-term capitalization strategy. Given available unencumbered assets as of June 30, 2021, we had the ability to borrow or otherwise draw down an additional $160 million of cash from our warehouse debt and tax equity.

Beyond that, we have $600 million of additional capacity on warehouses and tax equity, subject to available collateral, giving us tremendous runway to fund our growth. Those who have known Sunnova since our days as a private company, know that recurring operating cash flow has always been our primary focus. We used the recent convertible debt offering to prefund the balance sheet so we can avoid the future issuance of high-yield tranches in our securitizations and to ensure that we have enough working capital for growth as we believe we currently have enough working capital for an annualized run rate of $3 billion of new investments.

Turning to Slide 10, we have shared our sources and uses of cash for the past 3 years as well as our forecasted sources and uses through 2023. As investors have no doubt already verified, this presentation accounts for every dollar in our GAAP statement of cash flows on a historical basis. Recall from past conference calls that in our discussion of ROCF, we have attempted to reclassify cash flows that are investing or financing per GAAP -- but we consider more operational -- into ROCF, while excluding other cash flows from operations we consider more investing or financing in nature.

Here, we complete the picture. ROCF, as we have mentioned before, is the cash flows from our existing operations. Investments in new systems includes all investing cash flows regardless of GAAP classification and are the same cash flows we consider in our fully burdened unlevered returns.

Finally, we break out our financing cash flows into net proceeds from tax equity, net proceeds from asset level debt -- which includes our warehouses, securitizations and other nonrecourse debt -- and the net proceeds from our corporate capital and any potential asset sales. We also separate out items, primarily acquisition and integration costs, that are truly onetime in nature.

So what is the takeaway? Three items of note. First, ROCF is expected to grow higher than most analysts have previously predicted as a result of our capital market pivot and the execution of our long-term capitalization strategy. Second, given our projected investment expectations, as we stated when we launched the convertible debt offering, we do not believe we will need any additional corporate capital through at least the end of 2022. And third, our options for additional corporate capital in 2023 are numerous. These include issuing another bullet maturity bond, service retained asset sales now that we have the critical mass of cash flows and assets have appreciated, or issuing additional investment-grade tranches of our securitizations.

On Slide 11, we provide additional color on unit economics. As you will see, our fully burdened unlevered return on new origination was at 9.4% as of June 30, 2021, based on the trailing 12 months, while a similarly calculated weighted average cost of debt was 2.9%. This resulted in a trailing 12-month implied spread of 6.5% as of June 30, 2021, above the 5.8% spread for the trailing 12 months as of March 31, 2021.

In other words, we are seeing an improvement in single customer margins, leading to stronger-than-expected operating leverage and cash flows.

On Slide 13, you will see our guidance ranges. Given the especially strong performance of our loan origination and prepayments, we are increasing our expected principal payments received from solar loans to $62 million to $68 million.

This, together with the expected decrease in cash interest expense from both the refinancing of 2017-1 and the utilization of convert proceeds in lieu of warehouse debt as well as the strong performance of SunStreet, has allowed us to increase AOCF guidance to $35 million to $45 million. We are holding adjusted EBITDA and ROCF unchanged as we pull forward some of the planned 2022 meter replacements and make further investments in our software platform that we believe will accelerate our ability to lower per unit operating costs and further enhance the dealer and customer experience in the second half of 2021 and beyond.

As we forecasted, the SunStreet acquisition closed on April 1, and we continue to anticipate 9,000 customers added in 2021 through our New Homes business. Additionally, as of June 30, 2021, we have spent approximately $5.5 million of the anticipated $30 million in integration and transaction costs we expect to spend over the next 2 years associated with SunStreet.

As of June 30, 2021, over 95% of the midpoint of our 2021 target revenue and solar loans P&I are already contracted through the existing customers as of that same day. We are maintaining our estimated year-over-year increase in 2022 adjusted EBITDA and the principal and interest we received on solar loans of 80%. And as John noted earlier, we are increasing our 2022 estimated year-over-year organic customer growth from 40% to 50%.

I will now turn the call back over to John.

Thanks, Rob. Since Sunnova's founding, we have been focused on doing what is right for the long term. Our conservative capitalization strategy is predicated on accumulating enough customers and cash flows to build a firm foundation with a high amount of optionality, which we've been able to do by building a company that has billions of dollars in future cash flows locked in for many years.

In our early days, we made a crucial bet that our underlying assets and the cash flow they would generate would prove to be far more valuable than the market appreciated at the time. This has clearly paid off as we now have a formidable balance sheet to drive our cost of capital even lower and pursue having the lowest cost of capital in the industry. In addition, we are now at a point where operating leverage can be increased dramatically over the next several years. One can already see this happening by the fact that our adjusted EBITDA, together with the principal and interest on solar loans, AOCF and ROCF are increasing at a rate faster than our customer growth. In fact, we are already generating cash and long-term contracted cash flows in amounts greater than some of our competitors with larger customer bases, thanks to our capitalization strategy and business model.

What this equates to is that we have successfully built a long-term, incredibly strong cash generation machine. On this firm foundation, we will continue to build out a new energy service company focused on delivering a better energy service at a better price. Our employees are concentrated on serving the customer, increasing the speed at which they're able to respond to their questions, concerns and issues in the field. In fact, we improved our service duration by 15% from Q1 to Q2 and expect a further 20% improvement by the end of the year. The technology platform we are building will enable us to provide a service that is not only fast but also intelligent, reliable and predictive. This same technology platform will enable us to aggregate our customers and drive even more value creation, which will deliver tremendous financial value for both ourselves and our customers.

Service is our real business. Financing is a key enabler. We are again thinking long term and building an energy service that is reliable, quick and enables consumers to power their own energy independence. At the end of the day, service is the crucial differentiator in our industry, and we will continue to lead in providing the best energy service.

With that, operator, please open the line for questions.

(Operator Instructions)

Your first question comes from the line of Brian Lee with Goldman Sachs & Company.

Kudos on a solid quarter here. Maybe just to start off, I know there's been a lot of questions around the growth target here for 2021, you've got, obviously, a strong Q1 and then an even better Q2 to start the year on that metric. And then you're raising the view for 2022 from 40 to 50.

So what's maybe getting lost in translation? Why not a guidance raise here for '21? Anything happening in the back half that we should be aware of? And then maybe just related to that, what was the actual organic customer growth addition for SunStreet in the second quarter for you? I know you said 9,000 is still the target for the year, but what did you see in SunStreet for 2Q?

Brian, this is John. Thanks. First, on the cost side for the back half of the year, as Rob's prepared remarks stated, [AT&T] moved up the obsolescence, and we then are looking at moving some of the meter replacement spend from '22 into '21. So that's the first thing. So it's really just a shifting -- all this is shifting and spending. And then some of the software, we're seeing a lot of the opportunities on the services side of things, whether it's EV charging, generators, load managers, et cetera, and we're trying to pull those up as well as new geographies into this year from next year.

And so it's really just a shifting of spending a little bit. Is it a little conservative? Probably so, on top of that. But that should explain any sort of shift. Is adjusted EBITDA plus P&I a little conservative for next year relative to some of the growth increase? Probably so, but we felt like we gave enough forward guidance at this point in time for next year. And we'll, of course, do what we've done historically and issue out guidance -- formal guidance for next year on our Q3 call in October.

And just as a reminder, we do that far ahead of anybody else in the industry. So I felt like that was enough, if you will.

And in terms of the -- and the other question -- part of the question, Rob, why don't you take that?

Yes. I mean we did about 3,000 SunStreet customers and homebuilder customers in the quarter, that's a pretty ratable business. So that went about as we expected, Brian.

Okay. That's helpful. Maybe, John, just to rephrase my question, and maybe I'm misinterpreting your answer. But are you saying the cost shifts are keeping your customer growth target range unchanged for this year that's having impact? Or did I miss something there? I was just wondering why you see better growth relative to original targets for 2022. But right now for '21, you're keeping things unchanged on the kind of growth side?

Yes. Sorry, I thought you were referring to adjusted EBITDA plus P&I. On the customer side of things, again, in the remarks on the supply chain, specifically, we see really not -- no material issues with regards to modules or inverters. It's really been on the battery side of things as we've been talking about for almost a year -- or, actually, been a year. And we continue to see improvement over this past quarter, over this past last 30 days, including -- and has a lot to do with more and more competition in this space, more -- Enphase is coming on very strong, as Badri went through in his call. Generac, as Aaron went through in his call, they're doing a very good job. We've got SolarEdge coming up. And then, of course, Tesla continues to ramp up as well, as well as many others out there.

So there's a lot of supply that's coming, but then you look back at our storage attachment rate because of a lot of the events that are going on, wildfires, hurricane season, just a huge -- and you've heard this from other companies in the States, including the last 2 that I mentioned, is that there's a lot of focus from consumers on reliability and resiliency.

So we're seeing demand pick up materially on the storage side of things. And then so as we continue to see the improvement we thought we would see on storage, but the demand is materially higher. So we're not entirely sure. We think we can get everything that we want, even including the higher demand by the end of the year. But if it doesn't, it may spill a bit into next year. So that's why we paused a little bit to increase guidance for customer growth this year.

Next year, it was fairly easy for us just given the trend growth rate that we're seeing -- it's very strong. Again, we'll give formal guidance in October, but that seemed it was a fairly easy lift for us to raise the growth for next year. Does that answer your question?

Okay. Absolutely makes sense. I appreciate the additional color. And maybe if I could just squeeze quick 2 follow-ups in here. One on the capital and liquidity chart, that's helpful. I appreciate you sharing that with us.

It didn't sound like you threw in equity when you're walking through some of the pieces that you'd be considering for the $500 million in 2023. Does that imply it's fairly low down the list of potential options for capital raises out in '23?

And then secondly, more of a housekeeping question. When I look at the deck here, you have the -- and I might have missed this in your prepared remarks, but the gross customer value per -- gross total customer value and contracted customer value per customer, they were both down quite a bit from Q1 to Q2 reported numbers. Is that a mix issue? Is that SunStreet? What's sort of happening with that number? And how should we think about it for future quarters? We haven't seen it down at $21,000, $25,000 per customer for a while here.

Yes. So I think that on a per customer basis, what you're really seeing there is SunStreet mix, really 2 effects. One, we picked up about 34,000 customers that we don't have NCCV on. We have -- they're pretty much 0 cash in and out right now, net, because we're paid a servicing fee and then we service the customers. So we have the service obligation, it's fully covered, but they -- but there's not additional revenue attached with them. So that's really what you're seeing there is that denominator creating that issue.

And going back to your first question on the corporate capital. It's an option. It is not -- it wouldn't be an option at today's stock prices, certainly. And there are so many other things we can do on that gap. We went over in the call -- and, again, happy to reiterate them -- but more corporate debt, we actually had the opportunity to go a little bit deeper on the investment-grade tranche, on our securitizations and of course, asset sales. We look at that as if the ducks are quacking, feed them. I mean the market right now is screaming on asset valuations and with the equity down below where we believe true value is, we would certainly go to assets before we build equity, especially given the opportunities we're seeing out there in this market. But again, key to that is service retained, growth [position].

We want to continue to have the customer, the contract, the service and that relationship. And that's always been key to our growth in the past and it certainly has been paying dividends in these last several quarters.

And Brian, this is John, just to reinforce what Rob said is, oftentimes in this sector every once in a while, you'll get where the asset values disconnect completely from the corporate equity values, and here we are again. As witnessed by our ABS offerings, which we did 2 of them, 1 lease and PPA and 1 loan, as you know, really recently and then looking at the corporate equity price. And it's not just us, but obviously, our peers as well, and there is a divorce from those valuations, and it's pretty extreme at this point in time. So something south of $60 a share certainly looks very, very compelling to us relative to the asset values at this point in time, and so we have no intention of issuing the equity.

We don't need it anytime soon. And frankly, at this point in time, we wouldn't do it. And we have a number of options, including selling some of the assets off at some of these prices. We're exploring that, and that may be something we go ahead and start putting in place. It gives us another avenue of liquidity, and it gives us another option, if you will, on the corporate capital side of things.

So I think it's -- this is what we're doing with the corporate debt side or what Rob is doing is giving us the most amount of flexibility on the financing side that anybody has in our space. And it gives us a lot of optionality, right, from doing anything on the corporate equity side.

Your next question comes from the line of Mark Strouse with JPMorgan.

Just a follow-up to Brian's question on the targets for next year. So you took up the growth targets but you left EBITDA growth unchanged. Is that just a mix of loans that's not, obviously, included in that metric, and that's why it's not going up? Or is there something else there?

Yes, Mark, it's John. Yes, it could be. I mean we're seeing loans push towards a 60% level. And we think the market is actually probably closer to 80% at this point in time is the best estimate of ours, but continues to move in that direction. And so we wanted to have a few more weeks, months of game film, if you will, before we formally give you all our 2022 guidance. And like I said, it was also some degree of conservatism as well. So we thought that given the growth rate, obviously, it's significantly above the customer growth rate, and that's why we feel comfortable about creating value on a per customer basis of adjusted EBITDA plus our principal and interest of 80% from now through 2025 on a per customer basis. So it is likely that that will move up, at least for certain on the adjusted EBITDA plus P&I, but we want to make that formal call on the next earnings call for next year.

Okay. Makes sense. And then the outside...

Mr. Strouse's line has disconnected. Your next question comes from the line of Philip Shen with ROTH Capital Partner.

With the recent securitizations, including the first refinancing of securitized assets behind you, can you talk about what's next in terms of green bond?

Yes, Phil, thanks for asking. The bottom line here is we're locked and loaded. We're in the blocks. I mean, take the analogy that you want. We would suggest that folks keep checking our IR page, hitting refresh. Make sure you're signed up on investor alerts, follow us on Twitter, whatever it is...

The [four]-yard line (multiple speakers) football.

But look, as you probably remember, before we get issued the green bond, we needed to complete a few other steps in advance, right? So the convertible debt that was setting us up, giving us a runway to be able to move. We had to launch the green financing framework, get that taken care of. To your point, refinancing 2017-1, we closed on 2 securitizations, both of which forewent the high-yield tranches of our securitization in order to open up the cash flow and allow us to move it up to the equity.

We said we'd do on all these things. We've delivered. Clearly, today, we come out with the earnings, which is you want to make sure that you can come out clean. Now look, I went over this ahead of time. The lawyers have told me in no uncertain terms that I need to emphasize that this is no formal announcement of an offering. But I think with the filing of this Q, you should expect to see us in the market very soon.

Great, and thanks for the detail. And -- go ahead, Rob.

I said that's all they will allow me to say.

Got it. Okay. And you talked about your ABS spreads. Well, in the given recent 2 transactions, your spreads have come down nicely. I think the most recent low in ABS was 100 basis point spread over base rates. And heading into 2021, we checked in with some ABS investors, and they shared with us that spreads over time could get to as low as 80 basis points. What do you see in the next 6 to 12 months? How much lower can these spreads over base rates go for your recent loan assets?

Yes. I mean we've certainly seen them come in. We believe they can continue to come in. One of the great things about it is that I would say, 2.5 or -- it's not 2.5 --, 1.5 years ago when I was at an ABS conference, I was told that we were the most disconnected asset class, that there was so much value still to be had. I think to your point, we're getting to that point where we are getting back a lot closer to what true value is.

I don't want to prognosticate as far as where those spreads can go. We do think, of course, there is room for them to come back in, especially given the incredibly strong performance that we've had. I would love to see them come in more. We are not doing our planning based on them coming in more.

But when you see, I think it's interest rates and the base rates continue to be flat or continue to rise, that's actually going to give us a little bit more room to squeeze those margins too. So we're going to continue to follow that. I think it's a very virtuous cycle. Either we'll see interest rates go down, and we may not get the spread compression, but we will get the absolute base rate compression or you'll see the base rates be flat or go up and then there's more opportunity for us to have spread compression there.

And Rob, I think to build on that, we've got roughly about 4 securitizations that we could refinance as we did back in June on that first one, which is the industry -- obviously, the industry's first refinancing the securitization. And that's probably got somewhere between 200 to 275 basis points today of spread that we could bring in on the rate on the securitizations. Now those will happen over the next 3 years or so, as it makes sense, from the market side of things versus -- and you may call payments, et cetera, but it's quite wide. It's come in quite a lot. And I think we're in a -- we're obviously in a great position to take our previous securitizations and pick up pretty significant cash flow and value on those assets because we can.

Great. One last one here. In terms of unit economics, we are seeing that improve. And then John, you talked about how you think the market could be 80% loan versus lease at 20% and maybe you're at 60%. Can you talk through a little bit on the economics for you, the unit economics for loans? And specifically, where are you seeing prepayment levels? Are you seeing that trend come down? For example, are you at -- yes, so is that coming lower? Or do you see the prepayment levels extending? And from a unit basis, you have that spread for the whole company. But if you were to look at it from a loan versus lease perspective, how much does that change?

Yes, it's a great question. No, we're seeing really good returns on the loans as well. And just to remind everybody, we do put our service to the customer plus grid services in our loans. So we're, again, finance agnostic. I think we've done a very good job of effectively putting on parity loans leased PPAs. So whatever is truly best for the customer is what we do. And we keep our service consistent and the same all the way through grid services. So that's made us to where we're agnostic about it. But we are seeing prepayment rates continue to go up further than we thought and planned. That is giving us even further cash flow that was a part of some of the cash flow that Rob spoke about in his prepared remarks, increasing far more than we had planned and guided to, and we continue to see that increasing as we move forward in time.

We also have a few things that we're putting in place, programs we're putting in place to further augment that pay down, if you will. So we do expect quite a bit of rapid paydown on the debt, particularly on the loan side as we move forward in time, and we have been seeing that so far this year.

Your next question comes from the line of Ben Kallo with Baird.

I have three. First, could you talk -- could you give us an update on Generac? I know you mentioned earlier about offerings, John, but just the partnership and how it's progressed?

Yes, Ben. It continues to be fairly strong. We're going to find -- we're obviously -- if you look at our dealer growth was well ahead of what we expected. I think when you look out at 1,000 dealers at the end of next year in our forecast we gave last quarter, we're clearly pretty far ahead of that pace. And so part of that is working with folks like Aaron and his team over at Generac to find the right dealers and really get the products moving. And so we've had some success there. I expect a lot more success in the back half of this year into next year and particularly as the number of products is -- I'll leave to Aaron to go through, and I know he went through in his call yesterday that they're launching out over the coming, call it, several quarters. So those, I think we can always do -- we want to do more and more business with them, and they have great products. They're a great company, well run, and things have come pretty well. They've done a fantastic job, clearly.

My next question is along those lines about the dealer growth. How do you recruit them? I'm sorry about this as an Aggie, but I [picture Nick's] statement laying down as national championship [greens]? But like how do you get the dealers versus your competitors?

Yes, that hurt. Just wait until this year, right? We'll see what happens in A&M football. I think that what we're seeing is a continued trend to the strategy the company is working. And you can see others moving and adopting that strategy, particularly over the last several months of this year.

And when you can come in and get a really -- we just launched another improvement, pretty dramatic improvement to our quote tool, for instance. And the commissioning app, we launched that a couple of months ago. And we're constantly improving the software applications and pieces and services that we're offering. We can always do more. And we're intent on really focusing on the service side and pushing and making sure we're getting the right services to the dealers. And then also really just service is the crucial differentiator, as I said in my remarks, to customers, and we see that being something that we can clearly outpace really anybody in the field, and really focused on the service to the customer. And that matters to the dealers as well because of referrals, et cetera.

And so once we've got all the products they want through any financing and plug into the platform. We're totally focused on them. We don't have -- we're not trying to take their deals and so forth with our own originators, installers. So there's no channel conflict, and we're adding more and more tools to improve customer service to increase referrals. And then on top of that, as I mentioned again in my prepared remarks, we have a 350% year-over-year increase in leads to our dealers as well. We want to continue to push that, still continue to push the branding. Overall, all this basket, if you will, of efforts and capabilities is really gaining a lot of traction out there in the marketplace for dealers.

We don't pay up. We're just -- we're not going to do that. I know others will, but -- and others have. But we're not going to do that. But outside that, we really believe strongly that we're clearly providing the best value for dealers who are really focused on the long term and growing their businesses over the long term.

Okay. And then just turning to the liquidity side. I had 2 questions there, so actually 4 overall questions. The first one, just going back to the ways that you can access capital, you talked about selling systems, and I get it. But one of the things that we've always talked about and you guys have always emphasized is the recurring cash flow. And doesn't that -- how do you weigh the asset sale versus ending that recurring cash flow?

Yes. I mean, I think that what we would look at is what's going to have the best total equity return for the investor. And so when we've gone through this process, we assume that there, obviously, could be more opportunities there. If there is an asset sale, if we do get proceeds from an asset sale, we probably consider that -- we'll consider that down at the bottom. It's not recurring cash, right? If you sell an asset, yes, it's cash. It is not a recurring [cash]. It is a onetime cash benefit for that specific transaction. So that's why we're throwing this out at the bottom and not considering it as a part of ROCF.

Got it. And then finally, you stick in this investment in new system of $3.5 billion for '23. I think that's implying guidance. Tell me if I'm wrong. If I just say a $25,000 system, some people get batteries, that's baked in, so I can do the math, it's 100,000 systems or plus for '23?

I think that you're directionally correct. Obviously, I think the 2 factors are going in there is, one, that we're going to have more than likely bigger tickets from a lot of investors as we add more and more batteries. Even in homebuilders, where we expect a smaller ticket, we're starting to see a lot more interest in demand to be adding things like battery storage. And then, of course, obviously, making the pivot into microgrids, as well, around that time frame.

But at the same time, I don't want to get over my skis and try to do a specific number of customer adds on guidance for that. I think that always ends up in wanting to increase. But I think that if your point is, yes, it looks a little conservative, yes. I mean there -- it could be conservative, certainly, there when you think about the growth opportunities in front of us, especially as we're well on our way to that target of having 1,000 dealers and subdealers by the end of '22.

Your next question comes from the line of Maheep Mandloi with Crédit Suisse.

One question, John, just on the high levels for the 2021 and 2022 guidance, are you seeing any impact from labor shortages, either impacting some of those demand coming in and -- or on the unleveraged IRRs on this project?

Hi, Maheep, no. We're clearly seeing unit economics move and stayed very strong, and our cost of capital has dropped further and faster than we thought it would, and at the same time, our unlevered returns. So they are cash on cash from our customers have stayed much stronger. Is that trend going to continue?

So far, it is. But it's maintained a lot of strength. We are -- because of our model, our dealers are the ones that manage the labor expenses. And therefore, some of their margins may come in a little bit, at least on a temporary basis. That also was the case with equipment. So with modules go up a little bit, which they have, they manage that, if you will. So all in all, we have not seen any sort of a true labor cost issue really impact us materially and don't expect it to.

Got it. Got it. And then maybe just like 1 small housekeeping. So the cash sales item, $6.9 million. Is that the asset sale which you were referring to on the ROCF side? Or is that SunStreet related because there might be some cash sales on SunStreet. Just want to understand that and what's the marginal EBITDA contribution from that cash sale?

Yes. No, great question. So that is actually -- we have the homebuilder and there are definitely accounting nuances sitting, there are a few line items here. So I don't want to get too deep into the weeds. But on the homebuilder section, it -- we account for it slightly differently because we're building these homes, and we don't know up until the point of the home sale if the customer is going to enter into the PPA, which is what the majority -- vast majority of customers do, or if they want to purchase the system outright and just roll it into their mortgage. So what you're seeing there is a significant portion of them are actually purchasing the system outright and rolling it into the mortgage. We're still providing service to them, but it's just being done in a -- from an accounting standpoint, it's not us selling the asset, but it is the customer purchasing the asset. Just think of it like they're purchasing the asset, paying off the loan immediately is how we're viewing it internally, but it still gets accounted for as a sale and runs through the P&L.

As far as the exact way that it is being accounted for, I would tell you that we -- a lot of folks have noticed, yes, we had a beat on the revenue, and then our operating expenses were also a little bit higher in general. And the vast majority of that beat, relative to where analysts had had us before, was attributable to those cash sales.

And maybe just like one last high-level question from me. So, John, you spoke about more -- expanding coating tool services and your general service offering. So maybe if you can expand what that solution could look like for dealers, and as you expand these offerings, does it move Sunnova towards a kind of a branded marketplace which connects customers and dealers, and for lack of a better word, kind of the Expedia of solar?

Yes, thank you. No, I don't think I'd characterize it that way. I'd characterize it as there are equipment manufacturers and there are service providers. And then, of course, there are value dealers that do the work in the field, origination and installation.

Our employees, as we've laid out, are the ones that do the service, whether that's taking calls in and solving customers' problems, whatever those problems may be, or rolling a truck into the home and making sure it gets fixed, particularly we've had some events even this -- over the last few months, where there's been events where we had to make sure that the batteries were all aligned and things have worked very, very well.

By the way we do need to roll trucks there on a moment's notice to make sure anything that goes wrong is taken care of. So this is really -- the point is that we're a wireless power company. We're a service provider -- and been saying that since we founded the company -- is that is what the industry needs, is to have a service provider or truly somebody that integrates all the pieces of equipment, regardless of manufacturer, which we're seeing an exponential rise, right, in the number and the pieces of equipment.

Specifically, instead of just going solar only with an inverter, you've got now in ESS, you're getting load managers out there, generators, EV charging, maybe fuel cells as we're involved in that as well. But there's a number of things that you can stay focused on the power side and bringing all that integration of those pieces of hardware together through an app -- of apps, if you will.

So the customer has a single portal to go to us for service and someone for service, 1 person or 1 throat to choke, if you will, is us versus trying to track everybody down, that's the purpose of this company is to provide service, excellent service to the customer.

And that's materially different than any sort of Expedia. I don't think that model works in this space, and it never has, and I don't think it ever will. But a large-scale service provider, as we are and our competitors, is definitely necessary. And frankly, a lot -- there's a lot of value there, owning that customer and making sure that customer is taken care of for years to come.

Your next question comes from the line of Sophie Karp with KeyBanc.

Congrats on a great quarter.

Thanks, Sophie.

I wanted to ask another high-level question and that's something you guys just alluded to in answering the prior question, maybe a little bit. But more broadly speaking, it seems that more and more companies are in the space, not staying in their lane, if you will, and just trying to sell products that historically have not been within their core competency, and presuming some of them are your suppliers as well. So at what point does kind of collaborative relationship become competitive? And how do you see the competitive landscape evolve and effecting your position and economics kind of moving forward, given this dynamic?

Yes, Sophie, that's a good question. That can happen instead of focusing on the business. We've seen that before, and it's been really an affliction of this industry historically. There's so much exciting things to do, right? And certainly, that now is more true than ever.

And so we have a lot of folks that are out there looking for other things to get involved with, plus there's been an immense amount of capital that's moved into the space over the last 1.5 years or so. And so what I would say is that those -- we're going to stick to our knitting. We're a service provider.

We've, again, founded the company on that business model. We're going to stick with it. There are some overlap. We see with some of the equipment providers and some of the pieces of like an app or a software piece or something like that. But we've been able so far to be able to work that out. And there are a lot of options out there on the equipment side of things, whether -- whatever that that piece of equipment may be, and may be in the future.

And so, so far, we've been very fortunate to continue to have great strong relationships with the -- all of our equipment suppliers, and we expect that to continue. But yes, there's every once a while a little bit of an overlap, but we're going to stick to our knitting. We're not going to get into the equipment manufacturing business.

I know that's something that oftentimes comes up to be a fear. We're not going to do that. We're going to stick to being a service provider and taking care of the customer, and that is definitely something that needs to be done. And I would also remind again, I said this in my prepared remarks, nobody else has the contract with the customer except us.

Great. We own the customer. It's very clear. It's in black and white. And when we are looking to upsell the customer battery or load manager or anything else and take care of the customer, it's our employees, they're rolling the trucks and getting the customer taken care of. So at the end of the day, there's no question if we want to do anything else.

And a follow-up, if I may, on owning the customer, right, as you see potentially share of loan customers increasing. Does having loan customer versus a PPA or lease customer kind of lessen the bond in any way or does it diminish your ability to include those customers, loan customers into DER offerings?

That's a great question again. What I would say is that going back to the previous parts is, what we have done is we have put on a level playing field, loan, lease, PPA, so we don't care. It does not diminish our relationship with the customer, did not diminish our obligations, either in service to the customer or grid services. So that's something I think the entire industry is going to trend towards fairly quickly. We're seeing carrying that out there. I think at the end of the day, truly giving the customer the option of whether they want to take the tax credit themselves under a loan construct or have to monetize it because they cannot, under a leasing PPA, I think, is the right direction of the industry in terms of giving the customer the true choice of what they want to do. From there on, our relationship with service and grid services, we're agnostic. So we truly are agnostic as far as whether a customer wants to choose a loan or a lease or a PPA.

Your next question comes from the line of Pavel Molchanov with Raymond James.

If we think about kind of the long-term adoption curve of rooftop solar in the U.S., part of the story is expansion beyond the coastal markets, the high power price market. In your kind of postLennar model, are you noticing any mainstreaming of demand in outside the traditional coastal markets, and I include Puerto Rico in that.

Pavel. Yes, we are. You can probably see as we're launching new states, we have more to go in the balance of this year. We're seeing -- and I made a comment about this on last earnings call, I was at least surprised that we're seeing such strong interest from consumers in the interior part of the United States, which traditionally, as you know, have relatively low power rates as opposed to the coastal states and not necessarily exposed to at least like hurricanes and some other weather induced events, fires, unfortunately are something that's a material, particularly the Western states as we've seen with Arizona, Colorado and others. But we are seeing pretty strong pickup.

And I do anticipate that we'll be probably pretty close, if not there in all 50 by next year. And we certainly are looking towards that international expansion as well. But -- and we're definitely seeing a broadening of interest from consumers in solar. The other thing that's surprising is in storage, too. So we're seeing that across in the interior United States as well. So it's very compelling as far as growth prospects on a forward basis for the industry.

I'll follow up with a kind of classic Washington type question, in the bipartisan infrastructure bill that went through the Senate, at least preliminarily yesterday, there is no extension of any tax credits ITC included. What's your expectation for the prospect of another ITC extension in some other package maybe between now and the end of the year.

I think it's pretty close to 100%. We didn't expect that to be in that bill. And we expected that if it's true bipartisan, which it looks like it's going to do, which as a citizen of the country, I'm very pleased to see that we can find some way to at least get some of the folks to get on board and do the American people's work that we were not going to be included in that mainly because you can be included in the top extenders or budget or something of that nature that's going to come later this year, whether that's in the September time frame instead of a continuing resolution, or that's in the December time frame.

We rather suspect it will be in December just because that's been the trend over the last, I don't know, several years, right? And so that's our current -- that's been our expectation. It remains our current expectation. But there's no higher priority than as the administration has laid out on the climate change. Climate change is, obviously, the top priority for them, but also when the climate change, there's no highest priority than the extension of the ITC.

So we feel extremely comfortable with that. And we'd love to just get it done and move on, right? But I think that it will get done by the end of the year. And for us, obviously, as an industry, it doesn't matter whether it gets done this month or December.

We have time for 1 more question. Your final question comes from the line of Sean Morgan with Evercore.

So in terms of the business mix, I assume most of the other -- the increase in other categories is attributed to SunStreet. And earlier, you talked about not always knowing whether the customer is going to look for a cash loan or a cash purchase or a PPA. So some of that 30,000-plus new customers, is some of that unsold, how the inventory is, is that all fully sold, and you're just not out getting it versus loans, recent PPA? And just how does that mix shift work going forward?

Yes. So I -- none of that we would really consider to be not a customer clearly. But 34,000 give or take those are the acquired SunStreet customers. The others are -- the customers that we sell serve-only contracts to which we have a fairly significant experience of doing, as you can see. And then there are some of the cash (inaudible) in there that don't fit neatly into the other 3 buckets.

There are no additional questions at this time. I'll turn the call back over to Mr. John Berger for closing remarks.

Thank you, Operator.

Thank you all for joining us for our Q2 2021 call. Very pleased that the company has continued to execute. We experienced strong margins, strong cash flow, strong growth, and we continue to see that on a forward basis. We've endeavored to lay out in great detail and on a forward basis, all of our cash flow expectation. The company has been in a very enviable spot in the industry in terms of cash flow to the equity. And we continue to see a lot of strength in our business model and look forward to having and continue to offering our customers better service, more services and strengthening our cash flow to the equity.

Look forward to seeing you in the Q3 call. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect. Everyone, have a great day.