This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
2/25/2021
Good morning and welcome to Sanova's fourth quarter and full year 2020 earnings conference call. Today's call is being recorded and we have allocated an hour for prepared remarks and questions and answers. At this time, I would like to turn the conference over to Rodney McMahon, Vice President, Investor Relations at Sanova. Thank you. Please go ahead.
Rodney McMahon Thank you, operator. And good morning, everyone. Yesterday, we released our earnings press release and posted a slide presentation to the investor relations portion of our website, which will be referenced during this call. Joining me today are John Berger, Synovus Chairman and Chief Executive Officer, and Robert Lane, Executive Vice President and Chief Financial Officer. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Delegation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risk, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risk and other factors are set forth in our press releases and filings with the Securities and Exchange Commission. We do not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. The reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release. I will now turn the call over to John. Thank you, Rodney.
Good morning and thank you for joining us. We are pleased to report we closed out the year with another quarter of strong results. which allowed us to achieve our 2020 guidance objectives. This makes 2020 the second consecutive year we have met our increased guidance targets, demonstrating the strong forward visibility and predictability of our business, even through nearly a year of the pandemic. In the fourth quarter of 2020, we experienced record setting growth as we added more customers than any other quarter in the company's history, eclipsing a record set just last quarter. As we move through 2021, we will continue to focus on optimizing recurring operational cash flow, or ROCF, through exceptional customer growth, stable unit economics, declining costs on a per customer basis, and our declining cost of capital. On slide three, you will see the details of our strong operational results, where we increased our customer base and greatly expanded our dealer network. We continued our rapid growth by adding approximately 29,000 customers in 2020, which is a 57% increase from the number of customers added in 2019. This exceptional growth is fueled by our 435 dealers and subdealers who continue to power our differentiated low-cost model. We have nearly tripled our number of dealers over the past 12 months by selectively adding 280 dealers and subdealers in that timeframe. This robust dealer growth is driven by the attractiveness of Sanova's business model and technology platform to successful, established entrepreneurs in the industry. The benefits of becoming a Sanova dealer are more apparent than ever, as reflected by the fact that nearly half of the 280 dealer and subdealer additions in 2020 occurred in the fourth quarter. On storage, life to date, we've now performed over 1,100 battery retrofits, an increase of 226 from September 30, 2020. Our storage attachment rate on origination decreased from the previous quarter primarily due to the supply constraints and the energy storage system, or ESS, market, as we saw demand greatly outpace available inventory over the past several months. However, we are glad to report we have seen the battery supply constraints subside over the last few weeks as battery manufacturers ramp up production and new ESS providers enter the market. As a result, our storage attachment rate has been improving over the last few weeks. When considering how we have progressed in creating value with our storage service offerings, we believe a better metric is the storage penetration rate on our full customer base, which nearly tripled in 2020 to 9.2%. We expect the penetration rate to increase into the mid to upper teens by the end of the year, on a base of what we expect to be roughly 200,000 customers. Turning to slide four, we provide a summary of our 2020 financial results, which are further expanded on slide five. Our total customer account, adjusted EBITDA, the principal and interest we collect in solar loans, and our adjusted operating cash flow were all within guidance ranges, despite the unique challenges we faced in 2020. While many companies retracted their guidance, We never wavered from the targets we set, even though we raised our targets just days before the global pandemic impacted all of our lives. This achievement was made possible by our flexible, technology-enabled service business model and the quick response of our dealers to modify the way they do business, which allowed Persinova to not only survive, but thrive in this environment. On slide six, 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. This translates directly into shareholder value creation. Using what is now a conservative discount rate of 4%, NCCV increased from $1.2 billion on December 31, 2019, to $1.7 billion on December 31, 2020. This equates to roughly $17 per share as of December 31st, 2020, which is approximately a 20% increase year over year and a 29% increase since our IPO. These increases in NCCV per share clearly show that despite our torrid growth, we are creating value for shareholders. Looking forward, we expect NCCV per share to experience more gradual increases in 2021 due to the SunStreet acquisition. However, We fully expect that trend to pick up as we anticipate NCCV per share to increase more rapidly once the accretive nature of the SunStreet acquisition fully takes hold in 2022. Please note both our GCCV and NCCV metrics represent only our existing contracted cash flow base after MSA fees, which we collect and use to service customers and after payments to tax equity providers. It excludes all future contract renewals. It assumes we sell no complimentary products or energy services to existing customers. And it assumes no growth of our customer base. While these items are not reflected in our contracted customer values, they do have a significant value and will become more meaningful to SNOVA as the number of services sold per customer grows. And while a discount rate of 4% is the lowest rate we used in our contracted customer value calculations, Even that rate assumes a higher cost of capital than what the market is currently reflecting, given the fact that our latest securitization achieved roughly a 2% cost of capital on the Fully Burdened Cost Act. I will now turn the call over to Rob to walk you through our financial results, our recent financing activities, and our guidance in greater detail.
Thank you, John. Slide 8 shows the period-over-period changes in our key financial performance metrics. Year-over-year, Sunova's revenues and adjusted EBITDA are up 22% and 23% respectively. When viewed together with the principal and interest we receive on our solar loans, our adjusted EBITDA and P&I increased 44% year-over-year, which compares favorably to our 37% increase in net customer count. Slide 9 summarizes our recent financing activity. In 2020, Sunova raised over $2 billion in new financing, highlighted by $800 million in new securitizations, $450 million in new tax equity funds, multiple expansions of our third-party operated warehouse facilities, and a new $60 million purpose-built loan facility. We also raised $339 million in equity and convertible debt, the latter of which has, of this week, all been converted to common stock. Additionally, While we have been raising the capital to grow the business, we have also been paying down previously issued securitizations to the tune of $77 million in principal in 2020. Our securitized debt is structured with a much shorter term compared to the average contract life of our service offerings, which leads to heavy amortization on the front end. This results in a significant increase in shareholder value as the securitization ages, which grows both in CCV per share and ROCF metrics. We expect paydowns to further increase this year. There is an increased appetite for the low-risk, long-term, utility-like cash flows we generate. What is more subtle, and this is something which we can take a bit more credit for, is the way in which investors are appreciating and rewarding the strong underwriting criteria, credit performance, corporate balance sheet, and the great customer service that Sanova provides regardless of contract type. For example, just last week, Sanova closed on its first loan securitization of the year. The transaction was sized at $189 million, saw opening bid interest of more than 12 times the opportunity available to investors, and achieved an industry-leading 2.08% weighted average cost of capital, including its A-tronch, which priced at a 1.8% coupon. That is the best the industry has seen to date, hands down. Slide 10 puts this latest securitization success in context. Sunova has issued eight securitizations since its first ABS in 2017. Each successive securitization has yielded a lower weighted average cost of capital than its predecessor. As a result, we have been able to drive down the weighted average cost of debt since our first securitization. The current weighted average cost of debt represents approximately 100% of our fully burdened costs for each new customer as represented by our recent securitization. This means that as we achieve positive ROCF, any corporate capital we require is a small portion of our working capital. Because of the ITC extension in late December, we did not need the corporate capital for safe harbor and are therefore comfortable with our current liquidity despite our significant growth rate and pending acquisition of SunStreet. However, we will be opportunistic with regards to corporate capital, and we will look to maintain our long-term debt-to-asset ratio of 55% to 60% measured over several years. Turning to slide 11, the reason we retain our residuals and prefer not to sell off our cash flows is to flow value to the corporate balance sheet through capturing more margin through loan payoffs and fewer defaults. Right now, our most punitive securitization in terms of both interest expense and amortization sweep is 2017-1. So one of our first steps will be to put those assets into a new securitization, market permitting, by the middle of this year. This will allow us to refinance and re-securitize this de-risked pool of collateral while dramatically lowering both the interest rate and the amortization sweep. We expect this first step in refinancing to further increase ROCF. We are also working with our lenders to modify our warehouses to reflect both the increased quality of our asset credit metrics and the demand from the securitization markets. As we look to our new securitizations, we are working to increase the advance rate on the investment-grade tranche, primarily by continuing to focus on customer service, securing customer payments, and increasing loan payoffs. As we grow and mature, Sunova intends to continue methodically directing more and more cash flows to the balance sheet. We intend to continually thicken these cash flows by incorporating structural improvements to our securitizations. We believe this will put us in the best position to be able to issue a green bond within the next 18 months. On slide 12, we provide additional color around unit economics. For the full year 2020, our fully burdened unlevered return on new origination was 8.7%, while the weighted average cost of debt from the three securitizations we priced last year, including our June securitization that helped reopen the market, was 3.6%. This resulted in a 5.1% achieved spread in 2020. Our fourth quarter fully burdened on leverage return was 9.7%. We think a great deal about what the proper metrics are for this business. As we have discussed in the past, we use a number of legacy metrics that can become misleading when applying numerators and denominators that do not match up, or when costs are addressed without any context as to the true return on investment. One that has always befuddled us is net system value, or NSV, often expressed in a per watt basis. As we have mentioned in the past, we feel this metric is increasingly less useful to investors, especially as the numerator expands to include such items as batteries that are measured in kilowatt hours and items like load management hardware and new roofs that have no official energy value. Loans present another issue altogether as the net system value metric does not properly capture the repayment rates and, therefore, loan growth will inaccurately decrease in S&P. Add in other factors, such as significant differences across states in standalone storage and secondary generation, and neither NSV per system nor NSV per watt provide investors with the insights that might have existed in a single-state, solar-only, lease-and-PPA-only market. Therefore, we will end on a strong NSV showing in the fourth quarter and discontinue the calculation and disclosure of this metric going forward, as we believe that disclosing the fully burdened unlevered return provides much greater insight for investors as to the value creation per dollar invested. On slide 14, we are raising our 2021 guidance. We now expect customer additions of 55,000 to 58,000. The primary driver of this increase is approximately 9,000 new customers we project to add to our planned acquisition of SunStreet. This represents nearly a 100% planned increase in customer growth compared to 2020. At the same time, we expect total services per customer will decline slightly as the existing SunStreet customers on average have received fewer services than Sunova's legacy customer base. We expect services per customer to rise again once we have an opportunity to offer the full suite of Sunova services to both existing and new SunStreet customers. We expect the financial uplift from SunStreet to really hit its stride in 2022. Nonetheless, we are also increasing our 2021 adjusted EBITDA and recurring operating cash flow guidance due to higher growth, deleveraging, higher than expected cash flow, and the acquisition of SunStreet. we are moving the midpoint of our ROCF forecast to breakeven and believe we are in an excellent position to be potentially ROCF positive in 2021 and fully expect significant ROCF growth in 2022 and beyond. We are maintaining our guidance on the principal and interest received from solar loans, as solar loans are not generally sold in the new home market, and we are maintaining our guidance range for adjusted operating cash flow, or AOCF. Although we do expect the increase in adjusted EBITDA, as well as our extremely strong interest rate on most recent securitization, to accrete to AOCF, we also expect to increase the advanced rate on our warehouses, which will increase our working capital interest expense. As a stronger borrow should enhance our liquidity, we believe this is a prudent move in this interest rate environment. We expect to spend approximately $30 million in integration and transaction costs on Sun Street over 2021 and 2022. We will closely monitor these costs and be fully transparent with their progress going forward. These expenses are included in our liquidity forecast. While the addition of Sun Street is moderately accretive to 2021 financial metrics, we expect to see a more material impact in 2022. 2021 will be a partial year of ownership, and it will take some time for the impact of customer growth to manifest in the financial results. But we believe that scaling the business, keeping down costs, and adding SunStreet will result in a 75% increase in our 2022 adjusted EBITDA plus the principal and interest we receive on solar loans compared to 2021. Further, we are maintaining our year-over-year increase in customer growth of 40% for 2022 over our revised 2021 levels. We are highly confident in our ability to hit our 2021 targets just as we did in 2020 and 2019. The nature of our business provides excellent visibility, which is reflected in the fact that approximately 82% of the midpoint of our 2021 targeted revenue and solar loan P&I are already contracted through existing customers as of January 31, 2021. Based on our forecast, we expect to capture approximately 15% of our adjusted EBITDA and P&I in the first quarter of 2021, increasing to 25% in Q2, 30% in Q3, and 30% in Q4. We expect our customer additions to occur more towards the back half of the year, with approximately 30% of our forecasted customer additions weighted to the first half of the year, with the balance over the last six months. This is primarily due to the timing of the Sun Street acquisition, the battery supply situation, and the onboarding of new dealers in the first half of the year. Our customer base and business model is expected to continue to produce industry-leading operating leverage. This was reflected by the fact that our adjusted operating expense per weighted average customer declined by just under 10% in 2020. We expect this metric to continue to decline on a per customer basis, even with the meter replacement costs of just over $10 million in 2021 and $9 million in 2022. In total, we expect to reduce our adjusted operating expense per customer by an additional 25% between 2020 and 2022, even after updating our forecast for significant increases in growth in 2021 and 2022. I will now turn the call back over to John.
Thanks, Rob. Last week we announced a definitive agreement with Lennar Corporation, one of the nation's leading home builders, to acquire SunStreet, their residential solar platform. In addition to our acquisition of SunStreet, we will also become Lennar's exclusive residential solar and storage service provider for all new home communities across the country. This all-stock transaction and partnership will position Sunova as a market leader in the home builder space as well as a leader in the development and management of microgrids. Slide 16 through 18 provide an overview of the acquisition, partnership, and SunStreet itself, as well as a summary of the advantages of the agreement. The three main reasons we acquired SunStreet were to significantly increase our growth both in new customers and through the upselling of existing customers, to reduce cost per customer more quickly, and to build a partnership around what we see as the ultimate endpoint for our industry, microgrids for large-scale communities. Beginning on slide 20, you will see how energy options for homeowners have evolved over time from the traditional energy service model reliant entirely upon centralized electric grids to the new energy paradigm of distributed solar and solar plus storage. As more energy technologies converge in the home, residential solar, battery storage, and energy management are quickly transitioning from being disjointed product sales to a managed, integrated technology service from Sunova. By utilizing the latest technologies in solar, storage, secondary generation, and demand control, we're returning our customers' homes into partially or even fully self-sufficient nanogrids, whereby our customers will no longer need to solely rely on centralized power to power their lives. We are aggregating these nanogrids into what we call the Synova network. This network will create value for consumers, Synova stakeholders, and even the centralized grids. On slide 21 and 22, you will see how we plan to scale these nanogrids to deliver grid services and then ultimately into microgrids to deliver consumer, grid, and community value. As we develop these community microgrids, we will be able to provide even more energy savings, energy resilience, and energy independence. An example of grid services is our recent clearing of 85 megawatts in the ISO New England Ford capacity auction, the largest deal in our industry's history. Our ability to win capacity in a competitive auction with the largest aggregation of distributed renewables to date demonstrates our commitment to leading the energy transition in the region. More importantly, Sunova is looking forward to supporting ISO New England on their path to a clean, resilient power system while providing homeowners with the affordable and reliable energy they deserve. Overall, Sunova's commitment priced at nearly $3 per kilowatt month across the region which translates into a first-year value of approximately $2 million and approximately $38 million of gross value across the 20-year term, assuming similar pricing and cleared megawatts. This win is a convincing demonstration of our growing scale and the ability to create long-term value for shareholders with the software and services that make up the Sunova network and platform. We remain firm and our conviction that the transition to distributed solar plus energy storage technologies will be one of the most significant events of our lifetime, and we are proud to be at the forefront of bringing these energy solutions and opportunities together for homeowners to create a cleaner and more resilient new energy future. Sunova's founding vision was to be amongst the world's first and largest wireless power companies, where we would create value for our shareholders, our customers, in our communities while making a positive and substantial impact upon the world by redefining the way people source and use energy. And as you can see, we are bringing this vision to life through efficient execution and the build-out of our energy service and software platform, the Sunova Network. And as demonstrated by last week's energy crisis here in our home state of Texas, The time for a better energy service and distributed energy service offerings is now. We feel strongly that the current discussion shouldn't be solely centered around renewables versus fossil fuels. It should be about the power of decentralized generation and services and how we can bring homeowners the most affordable, sustainable, and reliable energy they need. The energy paradigm is shifting from being highly centralized to more decentralized. and eventually looking more like the Internet does today. Instead of having 100% centralized resources and control, intelligence is pushing to the grid edge with endpoints taking on generation, energy management, and grid support roles. The U.S. power industry is heading towards a hybrid of centralized and decentralized that will become more durable, more reliable or decarbonized and more personalized to the consumers it serves whether it's wildfires in california hurricanes in florida or winter storms in texas now more than ever it's clear the way we power our homes and businesses must change with that operator please open the line for questions ladies and gentlemen in order to ask a question
please press star 1 on your telephone keypads. Again, to ask a question, please press star 1 on your telephone keypads. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Brian Lee from Goldman Sachs and Company.
Hey, guys. Good morning. Thanks for taking the questions. I hope everyone's doing well out there in Texas. In the guidance here, John, the 9,000, I think you mentioned, customer additions coming from the Sun Street acquisition here in the 21 guidance. So two parts on that. It would imply there's 2 to 3,000 new customers that are just organically being added to the guidance here on top of the Sun Street acquisition. So just wondering, you know, that's about a 5% to 6%. growth versus the prior guidance, what's driving that more bullish view here, even outside of Sun Street. And then the second part of the question on guidance is the 9,000 Sun Street, that's about, you know, accounting for three-fourths of the year since you don't own it for the entire year. So the run rate is maybe 12,000, 13,000 customers a year. Is that the way we should think about the run rate heading into kind of a full year potential 22 impact, I guess, with some growth on top of that?
Hi, Brian. Thanks. Yeah, both of your calculations are correct. So in terms of the first, what's driving us, the dealer and subdealer growth rate obviously was tremendous. We've been talking about it for the last couple of quarters, foreshadowing that we thought that the fourth and the first quarter would be quite significant. We were right. We were more right than we thought. And so we see an increasing number of contractors coming on board and being dealers with us and sub dealers. The other is that we're increasingly offering new technologies. We talked a lot about storage. We are seeing that loosen up quite significantly. We see new providers coming into the marketplace, Enphase. We made that announcement last year, making that first purchase. SolarEdge is coming to market in a few months, as you know. So there's a lot happening. Generac's got great new products coming out. So there's a lot to sell these customers. And I think that's Really what we need to focus on more and more is how do we go back and upsell these customers more and more energy services? And it is becoming very clear to me, and that's not fully reflected in our back half, and certainly in the 2022, that these other services and products such as load management, secondary generation, All these things coming together are going to provide a lot more growth on a per-customer basis to both our new customers that were coming in with these new dealers and then also upselling these new customers. And that was, again, a prime driver for the Lenar transaction and buying SunStreet. We are getting a ton of new customers to run through, create leads and upsell batteries, low-control EV charging, secondary generation like GenZets, There's a list that keeps growing, and we should have all of those secondary technologies in place by next year, if not most by the end of this year. The next is on SunStreet, yes, we fully expect to be very clear about this. We kept 40% in as a relative conservative for 2022, but it is off the new base that's roughly about 100% growth from last year. And so, yes, that's the right way to think about SunStreet, but we expect that business to pick up, as we mentioned on the SunStreet call, that we expect new home builders to come on board as well to further drive the growth in that platform.
Okay, that's great. And then maybe a second question. You mentioned the dealers. That was a big number here in 4Q. It sounds like it's going to be a big number in 1Q as well. So the 165 dealers you added, that's about more than five times the previous best quarter here. You mentioned technology, but beyond that? any other drivers as to why you saw the huge uptick here in 4Q and you're seeing more momentum, and then also any sense on a kind of mix, whether it's geographies or size of dealers, or maybe if you can also touch upon the exclusivity of some of the new dealers, if you have that information at hand on the new ads in 4Q here.
Yeah, certainly. In terms of sizing, it's been a mixture, some very large ones, some midsize, and then some smaller ones that are growing at obviously a much faster rate coming off a lower base, if you will, and then some of the sub-dealers being added to some of our large wholesale dealers. And in terms of the regions, you know, it's been across the board. I would say that primarily in the West, we're seeing a huge amount of market share pick up there. The interesting thing is that we can now say that we will launch in a number of states, at least 10 new states this year. And that's going to be primarily on the East Coast and in the Midwest. So we see a lot more demand there than we had expected even towards the end of last year. We're seeing a broad basing of growth, if you will, across the board. That's also going into the storage attachment, by the way. We continue to see a lot of interest in storage and markets. Like Texas, obviously, has got just in the last few days, including last night, was our highest ever in a single day credit acceptance in terms of number of customers in our company's history. A lot is driven by Texas. There is a huge amount of interest in storage generators. Anything in this seems, I think, makes sense, right, that this is the solution. We are the solution that people are looking for instead of politicians bickering about who did what to cause the catastrophe, what fuel didn't show up, and all these other things. People don't care. They want power to show up at their house so that they don't have to go through the hell that we went through last week, and we're the solution to that. So we're seeing a lot more growth, and I expect that to continue as we move forward. In terms of exclusivity, we do have a few more. I don't have the number with me at hand on exclusivity, but we do have a number of, in fact, quite a large number of discussions going on on the exclusivity side. of things, but more and more folks are coming to our platform because we provide everything. We've got all the products. We've got the broadest product array. If they want to sell loans, they can sell loans. If they want to sell leases or PPAs, that's fine. Everything's got storage. They've got new technologies. The quote tool is getting revamped and launched out. We've got really cool technology on our technology platforms being launched out, and some have already been made available to our dealers. So It's just a broad basing of continuing to invest in that Sinova network or platform that is attracting more and more dealers to come on board and do all their business with us.
Okay, that's great. Maybe one last one, if I could squeeze it in for Rob. I appreciate all the color around the financings here and sort of being transparent about the refi here that's coming up. Can you maybe quantify, Rob, a bit the impact – Of the 2017 ABS refi you're talking about here in Q2, it looks like that was a $300 million deal or so done out of whack, over 5%. So maybe a 300 basis point improvement given where you just did the last one. How much more capital and cash flow do you see from that if you can execute similar to what you just did in February?
Yeah, thanks for the question, Brian. There's a little bit more art to it. I mean, when we first put those assets in, those are some of our oldest assets we had. We have some puts and takes in there. Our production estimates are much better now than they were there, so we're probably going to reshape the ADSAP a couple million dollars in there before we take it to market. But I think what's more key to remember is that the advance rate there was so much lower. I mean, our entire advance rate for that securitization is basically what we get in the investment grade or the ATRONCH advance rate now. And the sweep is also much more punitive in that securitization. As you know, the final tranche usually has a very heavy sweep of many excess cash flows after scheduled amortization and interest payments have been made in these securitizations. It's usually about 75%. That one has a 90% sweep on it. So we expect to pick up cash flow there. And with the reduction interest rate, yeah, we're thinking about the same thing that you are about those 300 basis points, possibly more given just how strong the demand is. And frankly, where Kroll really gives the biggest penalties is in the first five years of the asset's life. that's where it tends to pack the defaults. So it should be viewed very much as a de-risked asset class to Kroll. This includes assets that have gone through Maria where we've been made whole. It includes really assets where we have some of our longest, most loyal customers. So we expect that this can be a very strong securitization when we end up taking it to market.
All right. Thanks, guys. I'll pass it on. Thanks, Brent.
Your next question comes from the line of Joseph Osha from JMP Securities.
Hello, this is actually Hillary on for Joe and appreciate you taking our questions this morning. I wanted to first just kind of touch back on those attach rates, understanding that, you know, battery supply is starting to return to a little bit more of a normal level. But any color you could provide on how you see that in the next quarter or two, as well as perhaps next year once you bring on that new customer base with the transaction?
Yeah, certainly. It's moving up quite significantly, quite quickly, back to where it was. We're not all the way back there, but I do expect that to happen over the next few weeks. I'm also seeing a lot of dealers get it and that people need storage. I can tell you, again, referencing back the catastrophe last week here in Texas, more and more people are turning and saying, okay, I get why customers, because I want it myself, want storage. And so I see a point here where storage could really accelerate. We're starting to see some signs where even in markets that I wouldn't have guessed have a very high storage attachment rate, the dealers are getting very good at making sure and communicating effectively to consumers about what that battery and that storage service can do for them And so they're picking it up. So I wouldn't be surprised if we end up going into 2022 and it's substantially higher than we peaked at storage attachment rate, or at least to be able to talk towards that in 2022. And I think part of that is I wanted to foreshadow is our penetration rate on storage. You know, on a base of 200,000 customers, maybe more at the end of the year, we're projecting that to be the mid to high teens. That's a pretty – it's a very significant growth rate on the storage side of things. I also can tell you that that extends into secondary generation as well, such as gensets. That market is on fire. They're simply – the manufacturers like Generac simply cannot make them fast enough. And I see a lot of demand, a tremendous amount of demand. And we're going to take a piece of that market as well, maybe a large piece, and incorporate gensets in with our solution offerings and possibly fuel cells with our deal with Enphase in the fuel cell area. We're testing the fuel cells in the field. So we see quite a strong market for the storage market. And we're quite happy to see a lot of providers come to the market because we need the supply to meet the demand.
Okay, great. And then last one for me is just kind of wondering when you look at that existing customer base with the Lenar transaction, when you look at it kind of ramping up that number of services per customer, just kind of how you see that trending in the next year. So it would be helpful. Thank you.
Yeah, thanks, Hillary. You know, look, we've got a lot to do. We've got a lot of opportunity. We're going to take a north of 40,000, I think 46,000 customers that currently exist. About 31,000, 32,000 of those are under lease agreements and term agreements. agreements, and we're going to go to them because none of them have batteries, and we're going to be able to sell the batteries. We're going to sell low-control gensets, looking at EV charging coming on a little bit later as well. And so we see a tremendous amount of opportunity just in those customers. And then we have 250,000 customers and counting of Lenar customers that never bought even solar, and we're going to upsell them. Plus, our lead flow is going through the roof. A lot more people are attracted to the Sunova brand. We're getting a lot of partners coming through, and we're feeding those leads as fast as we can to our dealers, which is another reason, I should have mentioned it earlier, that more and more dealers are showing up, is we have a lot of leads, and more and more are coming, and it's not a small increase. I expect to double, triple, or even more than that in lead flow this year from last year. And so all of that is giving us a very strong opportunity to upsell these new customers that are coming in, both the existing base and the potential base that's coming with our friends at Lenar. And that is, of course, in addition to what we already have and what we're doing and upselling our existing customer base of roughly 100,000 customers now. So a lot of work to do and a lot of opportunity, and we're going to get after it.
Great. Thank you.
Thank you.
Your next question comes from Art Lee from B of A. Hey, good morning.
Thanks for taking the question. Can you hear me?
Absolutely. Good to hear you.
Yeah, so I just wanted to ask just on the storage trends, you're talking about, you know, increased demand from consumers. across multiple markets where, you know, you might not have historically seen resi solar, for instance, like Texas, Florida, et cetera.
Would you say increasingly in many markets, storage is becoming the anchor product for the broader sale of called solar plus storage and entry into the home? Is storage attached potentially not even the right way to think about it in these markets? I don't think we're there yet. I think we're going there fairly quickly. And, you know, I would expect to see that over the next couple of quarters, again, we're seeing a lot of dealers understand and finally get on board and say, okay, I've got to, you know, this is what consumers want. We can make some more money here. Let's go do this. You know, it's hard to change. People don't like to change. You have to change your operations. The bigger the dealer, it's a really involved process. And so, you know, I understand it. But at the same time, this is what people want. This is what they demand. This is a much better energy service. So I do think by 2022, next year, we will have. and increasing a large number of states that that will absolutely be the case. As of now, we do have 100% attachment rates in all our island markets, and we continue to see the attachment rates in areas that experience, you know, and have experienced more recently natural disasters like Florida, Texas, California with wildfires to have a rapidly rising attachment rate and interest from consumers as well.
Got it. And on the SunStreet acquisition and Lennar partnership, could you just talk about your expectations around increasing NCCV from $14K per customer to $18K to $20K per customer by 2025?
Does this acquisition and deal accelerate that? And how do you think about the strategy and timing of those upsell opportunities post-acquisition close?
Certainly. So we do see, and that is primarily, if not all, driven by upsell opportunities, as I've been speaking about with the storage that you just asked about, secondary generation, load management, EV charging, and some of the other software services that we're going to be able to provide. Either we do provide or we'll provide in the not-too-distant future to our customers. And so we do see that increase coming, as I just mentioned. and answering Hillary's question, we will immediately get on as soon as we close the transaction with the customers that are coming from SunStreet. And so that will be something that we'll hope to start to see in the back half of the year, certainly in 2022. We see the increase in number of value, if you will, per customer. The other part of that is the unlevered returns. You'll notice it was a pretty decent jump. in our margins. Those are fully burdened. And we do expect to continue to see a decent amount of strength there. And particularly, I think that's interesting as it relates to the cost of capital dropping so much. And I'm happy to answer questions about that, because I know there's some concerns out there from the rise of the risk-free rate and so forth, and to put a lot of those concerns in proper context and answer them. But we do expect and continue to see us providing more and more scale. And that's another thing that SunStreet gave us was more of the ability to scale our operations and drop our costs and therefore increase our fully burdened unlevered returns. So any which way you look at it, you know, margins are pretty strong and we like the trend.
Got it. One last question from my end. and then I'll pass it back to Deque here. Could you just talk about what else is needed to pursue further grid services beyond your CPower partnership with wholesale power markets? What would you need to be able to directly contract with utilities, munis, CCAs?
And are there any potential software partnerships that you're engaging in discussions here on? We don't want to talk about those software partnerships, but, yes, there are. And, you know, we certainly at the end of the day could incorporate that as part of our software platform as well. But most likely we would partner in the next year or so. But that's not as – and necessary, and it's certainly something that will be a part of what we do. But right now we have a number of transactions that we are working on and that we expect to announce over the coming months if we're successful in winning those, which we do expect so. So there's not a lot that we need to add right now other than we need more people. We are growing quite rapidly. We're building a great team. and looking to have a lot of excited, hardworking folks to come join the Sanova family. But other than that, we've really got a strong platform and just continue to build on it. And the customer base that we have is fantastic. And as we have a higher and higher penetration rate of storage, that customer base is a lot more valuable to folks like New England ISO and other independent system operators and utilities.
Thank you.
Next question comes from the line of Philip Shen from Ross Capital Partners.
Hi, everyone. Thanks for taking my questions. First one is on guidance. When you think about your non-Sunstreet growth in 21 and you look back at your geographies for Q420, we saw tremendous growth in Puerto Rico. in California, but a lot of the other geographies and states were flat, obviously due to COVID. But when you think about the non-sensory growth this year, do you expect Puerto Rico to continue to grow at that clip? And can you talk through also the attach rate that you're seeing in Puerto Rico and California specifically? Thanks, John.
Thanks, Phil. Yeah, first of all, we do have 100% attachment rate in Puerto Rico. We have 100% attachment rate in Hawaii and pretty close to that, if not that, in Guam, Saipan. I would tell you that the way that we conservatively count customers, again, cautioned this in the past, is that we do break out by state. No one else does, or state or U.S. territory. And, you know, that can give you the information that I think you and others would like, and we're happy to provide that. But be very careful about looking quarter-over-quarter trends or even six-months-over-six-months trends. It can be very challenging. deceptive either way and one of those is is that we had a constriction in battery supply in the third quarter as you well know that started to loosen up somewhat in the fourth quarter and therefore we got the batteries and were able to put these customers in service so those sales were made a long time prior to that in the earlier part of last year and they as soon as we got batteries were to put them in service we still have some of that in in the backlog so that tells you again When we forecast out, you know, to go answer that question is we have a tremendous amount of backlog already sold that in our competitor's definition of a customer would already be a customer. We don't count it until that customer is paying us and in service. And so things like battery supply issues can move a customer becoming a customer in our metric from one quarter to the next. And that's exactly what happened with Puerto Rico. You'll probably see that again in Q1 here until we get that backlog of the battery customers kind of caught up, if you will, which we expect to do by next quarter.
Great. Thanks for the color. And also thanks for the detail on slide 12 for the unit economics for full year 2020. Looking ahead, do you expect to continue to provide that color, perhaps on a trailing 12-month basis? And how do you expect that fully burdened, unlevered return to trend? And maybe you alluded to this in the prior answer or to answer the prior question, but ultimately, where does that full year spread, implied spread trend, given where rising rates are going or how rates are rising and offset by the reduction in premiums. Just talk through that slide a bit, if you can, on a look-ahead basis. Thanks.
Certainly, Phil. And thanks for noticing and pointing that out. We will provide that, and we will provide that on a trailing basis as well, and we'll continue to update that. We do expect that the fully burdened unlevered return, again, as we're getting more and more scale in our costs, that will probably stay in the range that it's been of roughly, you know, 8.5% to maybe 11%, somewhere in that range. That's our expectation. Obviously, we'll do everything we can to continue to push that up. We are getting, as reflected in there, better and better terms on the tax equity marketplace, and that is giving us a lower cost of capital. So we see all the trends in the margin staying strong at this point in time, and we fully expect that to continue, and we'll continue to provide that visibility there. And I just want to point out that between the recurring operational cash flow and these fully burdened unlevered returns, everybody is getting a complete view of every penny that's spent, complete view. And so there's nothing else that goes in some other metric or is not mentioned and is put in the corner someplace on non-GAAP metrics. This is giving you a full picture. Answer your question on the interest rate side. I think it's very materially important. There's a lot of misunderstanding here, so I wanted to set the record straight. I do have several points here, so this will be obviously a recorded phone call that you all can all play back so you don't have to take notes. But the majority of the value that we achieve as an industry is on the risk premium. In our view, we still have, even with that record securitization that Rob mentioned in their opening comments, We still have at least 100 basis points of excess risk premium left, and that's our long-term view on this asset class. So we've got a significant amount of cushion. Again, Rob mentioned this. Our debt is heavily front-end weighted, and therefore we're paying our debt off at a very brisk pace. And here's where I don't think that there is a full understanding. Our weighted average life of debt, the term of debt, is 9 to 10 years. It's really about closer to 9. When you look at our term securitizations, once we refinance the 17-1, we're not going to have any debt due for over six years. So we've locked a lot of this debt in, and it is heavily front-end weighted. So looking out towards a 20-year treasury or a 30-year treasury is not correct. It's more of looking at somewhere in the 5- to 10-year range. So when you term securitize like we did in that 5- to 7-year range, we are – locking and terming out our cost of debt for the vast majority, if not potentially all of it, given the quickening payoff rate, especially on our loan securitizations as that one we just did a few days ago. Our customer value is essentially indexed to hydrocarbon and centralized power. I don't think that's fully understood. So as inflationary pressures, if they were to continue to push up, like the price of oil is pushing up the grid power rates in Hawaii, for instance, more and more customers have a huge financial incentive that's growing to pay us. And therefore, that's why our delinquency and default rates, or it's part of the reason, continue to plummet, continue to improve. And so we're getting more and more cash, again, to pay this debt off faster and faster. Growth is more important to the equity than any sort of move in interest rates, even going from a 10-year risk-free of 60 basis points or so to roughly about 144 basis points this morning or even higher. I just want to point that out. Look at the NLP market in the decade before last as an example of this. And increasing more of our revenues or earnings are coming from services, not necessarily financing. And I'll point to that. that grid service contract is not baked into our unlevered returns or any of our forecasting, and that's additional cash. We also are getting additional services off customers as we've gone through several times. Payoffs are accelerating on our debt. Rob made reference to that. We expect that to continue to accelerate as we move through the year. We can raise prices of the industry as we move forward in time if that risk-free materially goes up. And then we hedge the interest rates in our warehouses. So actually, as we've been hedging, there is a possibility that we could have additional cash flow up front. We don't plan for it. Last year, we had some cash flow that went out because we broke the hedges. You pay those out as you do the term securitization. So it's not all bad for us as rates move up. It's certainly not any sort of catastrophe, as some others have referenced. And I would also make mention of this. The So if you look at the spread between the five-year and the 10-year Treasury, it looks, of course, the 10-year Treasury has moved up. But our reference rate on the spread of that securitization was 60 basis points. And now the five-year is 67 basis points. So even if you took the 10-year out, you're talking about 77 basis points, and we printed at almost a 2%. We're discounting at a 4%. We've got a massive amount of headroom here that we're not putting in any of the calculations, and mainly due to conservatism and concern about rising rates. We have plenty of room for rates to rise faster and certainly will cause a lot more impact on other companies and other parts of the economy first, and therefore I think would put a cap on rates before we have a material issue and impact here. And it wouldn't surprise me to see that risk premium come in over the course of the next few securitizations, both ours and our competitors over the next few months. So we've got a lot of cushion built in.
Great. Thanks for all the callers.
Your next question comes from the line of Mark Stroud from J.P. Morgan.
Yeah, good morning. Thanks for taking our questions. John, that was extremely helpful. Thank you. I just had one question. One question remaining, and it's regarding the Safe Harbor inventory. Can you just remind us how much you have left? I realize you didn't do or you might not have done as much at the end of 2020, but how much is still left over from 2019? And what are your plans for that inventory going forward now that the ITC has been extended?
I think our plans are to deploy as fast as possible to reduce our interest costs. But, Rob?
Yeah, we've got about 60% to 70% of that left. I think that we're going to, you know, one great thing about the Sun Street acquisition is that we've, you know, got another area to deploy those assets into. So we're probably going to use that up much faster than expected. We had bought what we thought was going to be about two and a half years' worth of inventory. I would be very surprised if we had anything left when we get to the end of this year.
Okay. That's it for me. Thank you very much. Thanks.
Our next question comes from the line of Ben Callow from Baird.
Hey, good morning. Thank you, guys. I have a few questions. First, John, on the pricing for the Lenard deal, the way that I did it, the quick math was like $10,000 per customer. You know, they do 10,000 homes. So, you know, you paid $160 million in stock, I guess, roundabout for $110 million of the first year. I know it's only 9,000 homes, but if I just keep that run rate, is that how you guys did the math there? And then my follow-up question is on the earn-outs. I've been trying to read through the K. I'm slow, but could you talk to us? I think it's a five-year earn-out for the customer growth, but could you give us any color on what that means and how that's targeted? And I have a couple follow-ups.
Yeah, certainly. Yeah, I think it's a three-year earn out. Is that right?
It's a four-year earn out on production, yeah.
Okay. So that is to tie and obviously align Lenar and ourselves with, you know, and it's awesome. you know, being conservative with the equity as you would expect and demand then. But essentially saying, look, you have to hit these targets that we've laid out. And these are continued growth targets as we move forward in time to get the full earn out there. So, you know, the way to think about it, the way we thought about it was, Essentially, we can pay for this transaction. And, again, it's in stock. And, again, Stuart Miller, Executive Chairman of Lenar, made it very clear he sees this as a long-term investment. This is not a stock that's going to see the market anytime soon, to be blunt about it. And we see this as a long-term relationship, as we do with many relationships with Sanova. And we're just excited about what this can do and also move us into we will do a master plan community with microgrids with Lenar. I don't know exactly when, but it's something we'll be working on immediately post-close. So that's part of the earn-out as well. And so I think that's pretty interesting. I think it's highly interesting. We're not just going to talk, Stuart and I, philosophically about doing microgrids. We put our money where our mouth is and said, look, we've got to make this happen or the earn-out doesn't happen. So obviously Lenar is very incentivized to making that happen. So I want to point that earn-out piece out. And essentially, the rest of this is, you're right, we pay for the acquisition fairly quickly. Your math is directionally correct. That doesn't count all the existing customers that we get the opportunity to upsell, right? We essentially get a lot of that. I wouldn't say free, but it's fairly clear that there's not a lot of value that's needed to be ascribed to that, as opposed to what's reflected in the valuations of possibly a bit with our current equity valuation and certainly pretty significant optionality valuations on existing customer base and our competitors' equity pricing. So I think this transaction, frankly, is hands down a tremendously good transaction for the SNOVA shareholders, which obviously includes myself and Rob here. So it's a very, very compelling valuation from anything else we saw out there in the marketplace.
I have two more, three more. Just on the tax equity, I saw the $200 million with Lennar. Could you talk about how that's staged? If you haven't, and if I missed, I'm sorry. And then just, you know, you talked about interest rates, and I don't know who's talking about that, but how that impacts the cost of tax equity unrelated to Lennar. Maybe that's for you, Rob.
Yeah, happy to take it. We're basically getting tax equity on commercial terms, on arms-length commercial terms. uh with uh with bernard um but it was uh very important to both of us one they've always used sun street as uh as a place to uh exercise some of their tax capacity in the past so we're preserving that and certainly for us uh we want to continue to use uh tax equity to help lower uh the cost to the consumer and we'll continue to do that as well so it's something that really benefits uh benefits both of us in in multiple ways And basically, you know, we have an overall commitment and we'll cut funds, really the sort of deadline on funds as we need to. So most of our timing of our securitizations is really based on when we're able to close off our tax equity funds. I think we have a little bit more flexibility with Lennar on that timing. And it's also, I would point out, a minimum commitment. Lennar could certainly use more. And at the same time, we have other tax equity funds that really like the home builder space as well. Our priority is to make sure that every single one of Lennar's homes has an immediate home for tax equity. And that goes really to give them a priority to make that happen. But as far as the interest rates, we really don't think it's, again, going to have that much of an impact. Exactly going back to all the points that John had made, we think that there's, you know, the one thing that we might hear is, or we have heard, is okay, you know, you have very low interest rates right now. What happens if interest rates increase and you have fewer home buyers? And really the idea is we're still at historic lows. We've been at historic lows now for quite some time. For the past several years, the home builder market really has only increased because of historically low interest rates. And even if interest rates go up, it's not going to prevent folks from buying new homes, we're not going to be getting up to egregious interest rates where it doesn't make sense anymore for folks to finance new homes. And at the same time, it's also really not going to do anything to really dramatically affect our cost of capital either, as John said.
Yeah, Ben, I would add to that is we certainly didn't see any decline in tax equity costs as rates plummeted. So why would we expect to see that as they come back up, right? So it's really just been immune to it, and I think our competitors have made some commentary to that. The other thing about the home builder market is we have, as an industry, such a low penetration rate. And then we have a very small, even with this acquisition, market share rate within there. So we can have a lot of things go wrong in the overall economy and home building industry and so forth, and we could still be growing at a rapid rate, just trying to catch up into some decent penetration rates as an industry and as a company. So we feel confident about the move.
I guess on grid services, the way I think it is, it's all margin going forward. I wonder, because I think someone asked earlier about the different opportunities with utilities and bilateral agreements and different jurisdictions, but how is it with customers making them be part of offering their house or their solar system or their battery into these services, and do you ever see that as a impediment for that to grow because I think a lot of people are excited about the opportunity there.
Yeah, that's a great question, Ben. What I would say is that we will share some of the economics, maybe not on this type of transaction with its capacity market transaction, but as we move forward in time, there's a lot to be figured out there as far as when do you have control over the the system on a customer's home to be able to do some of these other, like, energy grid services and really just, again, think about it as a microgrid, too, is when you can help your neighbor out and so forth. One of the deficits, by the way, just personally, I was pumping out so much solar power. I was powering almost my entire, at least half of my block and not block. My circuit shouldn't have been shut down by Centerpoint or ERCOT. And that's a shame that they didn't have that information flow. And that was power. That was generation obviously was in acute need. And so we've got to do a better job, and we can, with pulling all these new technologies together, gensets, batteries, solar load management, and then we can share some of those economics with the customer and still have, you're right, this is 100% margin, but still have very nice accretion, if you will, with regards to an addition margin, which we're already doing. pretty well at, particularly as what we're seeing now on margins we went through in the prior questions. So I see that if you're not part of a network, if you're trying to do this on a cash sale or something like that, I don't think that's going to look very good to the customer in terms of economics. I think you're going to have to be a part of the network, like the Sinova network, to really have a compelling proposition for the customer. So I think this is another area that needs to be fully explored, talked about more, and so forth, and saying, wait a minute, that's going to provide more consolidation in the industry towards these big service providers like Synova.
And my last two, just, you know, you've been kind of running and got in with all of the capital market activity, Sun Street, Generac partnership. What does your board think about, you know, your ability to continue to grow, I guess, you know, through acquisition maybe and, you know, the throttle that you have on that front? And maybe I'll just leave it there.
Yeah, look, the statistics are not good on M&A across the economy, right? You learn that almost three-fourths of these are not creative to shareholders ultimately. So I think there needs to be a healthy degree of apprehension, maybe even fear sometime with CEOs in particular. CFOs are always there to govern us. But, you know, that's why this took so long for us. It took years, right? It took eight years for me to find the right deal with the right partner with just a fantastic group of people that run a great company like Lenar. And the pricing was right as we went through, and they're invested alongside us, withholding the stock for years. So, you know, all of that had to make sense for me to do this. And if it wasn't something that made that kind of compelling decision, really hugely compelling sense, I'm not going to do it. So I don't, you know, in terms of the board, the board trusts me on that. They are interested in us continuing to grow and look at other opportunities. We are doing that. Obviously, we're not going to talk in any detail about that. But I've also been very clear. We are going to be very disciplined In pricing, we're going to understand how we integrate these companies. We're going to do it very well, very efficiently, and we are also going to stick to our business model and our strategic plan. We're not going to go off in the rough and start doing an acquisition. You're not going to wake up one morning someplace in the world and go, I can't believe that John signed off on this or the board signed off on this. This is going to be a very disciplined company. It always has been. It always will. Great. Thank you. Thanks, Ben.
Your next question comes from Michael Weinstein from Credit Suisse.
Hi, guys. Hey, thanks for taking my call. Hey, on loans versus leases, the loan mix, you know, you talked about it. You originally talked, Paul, about a higher loan mix in 2021 going up to about 40%. But, you know, with Lenore, are we talking – about returning back to maybe a 20% to 30% loan mix, more leases involved? And how much tax equity visibility do you have for 2021 from 1R, anyway?
Yeah. Hi, Michael. So on the tax equity side, we are extremely comfortable. We we've got Rob's done a hell of a job. We've got a very good runway of tax equity. This bill gives us multiple years of runway on tax equity and the minimum amount that was in the in the transaction. Obviously, post-close, we'll be able to start tranching and using that capital. It's just that, as Rob said, a minimum amount. And we fully expect to continue to grow our relationship with Lenar and have more tax equity provided there. I'm not aware it's possible to exist out there of anybody else having a multi-year tax equity relationship. So our runway on tax equity is awesome at this point in time, and we continue to to go out there and search for more tax equity partners, but we're in great shape, and Rob's done a fantastic job there. In terms of loan lease slash PPA mix, it's actually more kind of in the mid-40s, as we talked about on October 29th of last year. I would say that we can't predict what that mix will be. The only thing that I demand is that we make a good unnumbered return, and therefore we're making great returns, whether it's a loan or a lease. And we certainly are doing that as witnessed by our improvement in our unlevered returns, and we've talked to some of that. Our language around even the grid services side is consistent across contract types. And so we've really done a – and really led the industry here. And I think the entire industry is going to have to go to this point where you're agnostic on financing type. I just want to know, and you should want to know, and investors want to know, are you making money or not? And on a fully burdened basis – And we are. So we're not going to get into forecasting what the end of the mix will be because, quite plainly, we don't really care. And if the payoff rate continues to accelerate, there is actually a little bit more of an inclination of us to take in loans rather than leasing PPAs. And I would say that, you know, yes, leases are very attractive in the home builder market, and that's going to push that rate split down a little bit on the loan side. But I don't know if we're going to go back to 30% or so, something of that nature. I would expect to say that the market's going to stay, you know, more loan. Supposedly it's roughly about 70-30%. percent away from us. And, you know, I expect the market to continue to be roughly in the mix where we are right now. But could we be higher in a couple of quarters on loans versus lease? We could. Could we be lower because of the home builder? That's possible as well.
And the only other thing I'd add on that is, as you all continue to build your models, and we really appreciate having some of the most knowledgeable analysts in the industry covering us, is that when you do see us start to pick up that loan piece, keep in mind that that means that you should expect the P&I to be a little bit higher and the revenue to be not quite as high, all things considered. We know a lot of analysts are focused on EBITDA without looking at the P&I, but as we've stated, you know, even in the pre-IPO meetings, right, we look at it all together because of that agnostic view on earnings, sorry, on financing.
Robert Harrison Hey, also, could you break out the amount of growth of the 40 percent this year from Lennar and how much is from other sources?
You're talking about for 2022? Yeah, yeah, exactly.
Sorry.
Yeah, sure. You know, we haven't broken that out yet, but I would expect that the home builder business would grow at the 40%, and then the rest of the business would grow at roughly that as well. So that's really much of a non-answer. But at the end of the day, we've looked at it and said, hey, look, this looks pretty good on the trend trajectory. If I had to take a guess about where we'd get more if we were to hurdle that 40% I would say it probably comes off the existing retrofit business just because it's so much bigger. So the math works in that way, but that would be a guess on my part.
Yeah, and you spoke briefly about grid services giving, like, I guess people needing to be on a lease or be beneficial to a lease in order to be part of the network. Is it possible for owners to join Sonoba Network and get the advantage of grid services aggregated by you guys in the future?
Absolutely, and we've led that. And so actually, to correct you a little bit there, Michael, is that we see we have the same language, loan lease or PPA. So you don't have to choose one or the other to really get the benefits here with us. You do have to with other people, but you don't have to do that with us.
And just one final question on the loan versus lease debate, which we can begin into every day with clients. Do you see an advantage or maybe a financial advantage for Sunova and one or the other over time as you look into the future? As tax credit programs start to sunset, et cetera, as equipment prices come down, do you think that one will be better for Sunova than the other? loans or leases?
Yeah, I think that you have to guess or estimate what happens in the world, which is increasingly harder to do, right, with, you know, tell me what the politicians in Washington are going to do, you know, this year versus next year and so forth. And so, you know, that goes into the ITC, right? There's a permanent ITC in lease and PPA. There's not in the loan. I think and hope that, and I expect that to be corrected in for at least when they do an ITC extension for the next five years. So that would make those roughly equivalent from a policy standpoint again, which I think should be done and I think will be done. With regards to the different financing or cash flow attributes of the loans versus leases, I do like the mix. I like the long-term contracted cash flows. You do get more cash over a period of time as a company with a lease or PPA. But on the loan side of things, or you tend to, on the loan side of things, you tend to get that cash much faster. And so therefore, we're paying down our debt faster. We're putting cash flow to the equity faster. And so that combination, again, it's unique to us. We love it. And I just want to also point out that we're capturing the full spread. So when you originate something and you flip it to somebody else, the folks that you're selling it to, whether it's a loan or you know, asset-level equity on lease and PPA, you know, they're not stupid. They know what they're doing. They're pricing that in, and we're the only ones that are keeping, and I think this will be an industry trend, keeping the asset, whether it's a loan, lease, or PPA, wringing out the cash because we see faster payoffs. We see that we're taking care of the customers better, so the delinquency and default data is going lower and lower, and therefore we're collecting more cash out of that spread than the originating and selling it off. And so that's working. And obviously, the assets are appreciating far more than I think any of us thought at a far quicker pace and going through what we went through last year with the pandemic crisis and showing the debt capital market investors about what the fantastic performance of the paper, not just us, but the entire industry, right? Michael, I think all that is clearly going to lead to a tremendous amount of cash to our equity. And so the capitalization strategy is working, and it's working phenomenally well. Great. Thanks, John. Thank you.
Your last question comes from the line of Graham Price from Raymond James.
Hey, good morning. This is Graham Price on for Pavel Molchanov. You referenced the recent Texas grid crisis, and with that in mind, we're just wondering, do you plan to participate in the ERCOT grid services market kind of the way you are already doing on the East Coast? Hey, Graham. We won't go market by market. There's a lot of markets out there, particularly us, that have a lot of customer base involved in, but It's safe to say if it's in our footprint, which our cut is, we are active in it and we're trying to get the deals that make sense for us and our customers. You know, there's probably going to be some changes in ERCOT. We don't have enough time to go through all those at this point in time. But, you know, hopefully they'll facilitate and they need to understand that we are the solution. Distributed power, you know, the service that Sanova provides is the solution. It's certainly a big part of the solution that the politicians in Austin ought to pay a lot of attention to more so than some of the other things that have been floated out there like capacity market, et cetera. So we think that actually what we provide here in Texas will become more valuable if logic prevails, which I know it doesn't always do, particularly with government. But if logic prevails, then we think that there's a lot more opportunities in Texas than there was prior to the last week's catastrophe and event. You know, the other thing about that is a lot more people understand that we are the solution. So regardless of what government does, they're moving into our direction and coming and looking for service. And like I said, the number of leads and interest has really exploded over the last few days, as you would expect to see from folks in my fellow Texans. Got it. Thanks. That's helpful. And then? I guess more broadly, just curious if you have any expectations for how the ITC discussions in Congress might progress. Maybe if you see any chance of a long-term extension there. Yeah, thanks, Graham. We still do. I think it's a matter of when, not if, that happens. Most likely it looks like it's going to happen either probably in an infrastructure bill or a separate bill sometime in the next few months, so the first half of this year. There's a lot of pressure that the Democrats are putting upon themselves to get things passed because the margin of majority is so thin that any sort of issue, such as the death of a member or something like that, could really cause a lot of turmoil and monkey-rich a lot of the plan. So More and more, I think the impetus is to do something sooner rather than later. And I also think that the refundability is going to happen as well. I think that's been talked about so much that I would be really surprised if it wasn't a part of a long-term extension of roughly five years, either at 26% or 30%. I've heard more at 30%, but it's possible it could be 26%. We could also see something more permanent. I do think that that would be the right way to go, and certainly to provide that permanent on the loan side of things or the personal ownership, not just the lease and PPA, would be fair. I have heard less about that. I don't know if that really happens, but we will get a long-term extension, and I think we will get refundability for at least a year or two. Got it. Thanks. Yep, that's it for me. Thanks, Fran.
There are no further questions at this time. I will now turn the call back to Mr. John Berger for closing remarks.
Thank you, everyone. A couple of things to end on here. First, I wanted to thank all of my employees and my dealers for an unbelievable job through a lot of hardships last year to raise guidance right before the pandemic crisis fell upon us to have the capital markets fall completely apart, both the debt and equity markets, to not know how you're going to sell without having to be able to go to the home, and to then still persevere and hit the numbers and have a fantastic year is just unbelievable. And I really, from the bottom of my heart, appreciate all the sacrifice and effort that went in on my employees and dealers. Secondly, last week was an utter catastrophe here in texas and for my fellow texans and it gives meaning to what we do we are integrating all these new energy technologies together solar inverters batteries secondary generation supplies like gen sets fuel cells load management we're putting all those together as a company then we're delivering them in a simple fashion as services that these combined technologies can produce for our customers. And we support this service with fast, efficient service when things go wrong, which they do. That's who we are. That's what Texans should have had last week, all my fellow Texans. And it's what all Americans will want over the next few years. And we're looking forward to serving all of you with this new energy service. And I hope that what happened in Texas is a warning that the system must change. And we are the solution and the way forward to a better energy service at a better price. Thank you.
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now all disconnect.