Q3 2022 Sunnova Energy International Inc Earnings Call
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Hello, Ladies and gentlemen, thank you will feel patients the conference call will begin momentarily. If you would like to ask a question during the Q&A session of today's call. Please press star followed by one on your telephone keypad.
As a reminder, we will be beginning momentarily. Thank you.
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Good morning, and welcome to Synovus third quarter 2022, and conference call today's call is being recorded and we've allocated in Alice our prepared remarks and question and answer.
At this time I would like turn the conference over to Rodney Mcmahan, Vice President Investor Relations. Thank.
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 2021 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 reconciliation and cautionary disclosures on the call today are John Berger, <unk>, Chairman and Chief Executive Officer, and Robert Lane, Executive Vice President and Chief Financial Officer, I will now turn.
On the call over to John .
Good morning, and thank you for joining us.
Founded smell that I've set out to build a company capable of withstanding virtually any market scenario and to solve a multifaceted global energy crisis.
The world is in desperate need of clean resilient and reliable energy and we are focused on delivering a superior energy service to address the global energy crisis tried vector <unk>.
Energy affordability energy security and climate change.
Now as we look to celebrate our 10 year anniversary. It is clear that <unk> has built high credit quality long term cash flows that have created a strong balance sheet dried out inevitable bad economic cycles over the past several quarters, we have had a more negative view of the broader economy as such we decided to pause.
<unk>, but for what we had anticipated to be a more challenging macro environment. This is not working with our dealers to raise pricing as well as fortifying <unk> balance sheet by raising more liquidity than projected.
Accelerated basis.
These actions coupled with our long term contracted cash flows have placed the company and what we believe to be an optimal liquidity position for these challenging economic times in.
In addition to strengthening our balance sheet. This past quarter. We also experienced strong year over year growth in customers revenue adjusted EBITDA net contracted customer value or NPV and the fully burdened unlevered return on newly originated customers.
However.
As we have discussed over the last few months, we have seen a slowdown in principal prepayments on our solar loans.
This has resulted in stronger than expected interest income, but less than expected principal payments on those loans rising interest rates a decline in the housing market materially lower refinancings of mortgages and overall concerns about the economy have caused our loan customers to keep cash on hand, rather than make on schedule.
Principal payments, however, scheduled payments and collections of delinquent or previously defaulted accounts were all better than expected.
Investors should consider the unscheduled payments merely delayed cash flow and thus there is no loss of cash just to Nova.
As a result, we are lowering our full year 2022 guidance for the principal we expect to receive from solar loans as well as our guidance for both recurring and adjusted operating cash flow due to the fact that principal payments, both scheduled and unscheduled flow through both of those metrics. However, please note that the liquidity impact.
<unk> at the lower than expected principal payments is not material as much of the cash flow from these payments was assumed to pay down debt quicker than obligated.
In fact, even if all unscheduled loan prepayments were to seats in the near future, which we do not expect it would have very little impact upon our liquidity.
While rising interest rates are expected to curtail unscheduled principal payments.
The same interest rate movement has had a positive impact on the mark to market value of synovus interest rate hedges.
As of September 32022, our derivative asset position on these hedges stood at $118 million.
As rising interest rates reduced our customer prepayments, our hedges have allowed us to accumulate significant value that is well in excess of the expected shortfall.
While we intend to continue to monetize these hedges over time, they represent an option that could immediately bring in a significant amount of cash and have therefore improved our overall liquidity more than we expected.
As I mentioned earlier higher interest income will partially offset the lower unscheduled principal payments. Therefore, we are raising our full year 2022 guidance for the interest we expect received from solar loans.
There are no changes to our full year 2022 estimates for adjusted EBITDA or customer additions and we are reaffirming our intermediate term major metric growth plan, the triple double triple plan, including our targeted $530 million of adjusted EBITDA together with the principal and interest we collect on solar loans for the year.
Ended December 31 2023.
While we expect the inflow of unscheduled principal payments to remain depressed into next year. We also believe that we will achieve greater adjusted EBITDA and interest income collected on solar loans than originally forecasted.
Slide four summarizes the growth in synovus customers battery penetration and dealer network in the third quarter of 2022, we added approximately 21800 customers more unique customer additions.
Any other quarter in the company's history. This brings our total customer count to nearly a quarter of $1 million as of September 32022, while this record is impressive we expect to add over 30000 customers in the fourth quarter to put us within guidance range of 85000 to 89000 customer additions for full year 2022.
Our battery attachment rate on originations for the third quarter of 2022 was 30%.
More importantly, our battery penetration rate continues to grow and reached 14, 5% as of September 32022 inclusive of over 2200 battery retrofits. We are performed life to date.
The variability of battery supply grew materially in the third quarter and we expect this battery availability trend to continue.
In the third quarter, we eclipsed our year end target of 1000 dealer sub dealers and new homes installers with our latest data their count currently standing at 1033 as of September 32022.
Our ability to surpassed this target ahead of schedule was driven by the attractiveness of synovus dealer friendly business model and technology platform.
Finally on slide four we updated our information on customer contract life and expected cash inflows.
As of September 32022, the weighted average contract life remaining on our customer contracts equaled 22, three years and expected cash inflows from those customers over the next 12 months increased to $459 million, an increase of 39% from September 32021.
I will now hand, the call over to Rob.
Thank you John starting on slide six you will see the year over year improvement in our third quarter results. This includes a 117% increase in revenues significant increases to both adjusted operating cash flow and recurring operating cash flow and a 63% year over year increase in the adjusted EBITDA.
Together with the principal and interest we collect on solar loans.
Revenues for the third quarter of 2022 included $45 $5 million from revenue from inventory sales, excluding that number our revenue increase was 51%.
Our long term recurring revenues are increasingly complement our growing gain on sale revenue stream.
Gain on sale earnings can and will generate material revenues and a strong margin and include activities such as equipment sales to dealers repair services to our some of our repair business cash sales on our new homes business and elsewhere and in the coming quarters anticipated loan sales.
We expect other opportunities to enhance our P&L as a result of provisions and the inflation reduction act or <unk>, which we will update pending guidance from the department of the Treasury.
This activity will provide additional sources of liquidity, while bringing sonoma closer to positive GAAP EPS and operating cash flow over the next several quarters again, we will make any gain on sale decision with a view toward enhancing and complementing shareholder value and long term cash flows.
Slide seven summarizes our recent financing activity and liquidity position. The 2022 financing transactions completed to date include $272 million in tax equity funds $881 million in asset backed securitizations at $690 million warehouse restructuring for our leases.
Power purchase agreements and a $575 million loan warehouse restructuring.
While our securitizations continue to pricing yields above prior year issuances, our weighted average cost of debt issuance remains well within the 400 basis point range at four 3%.
Additionally, during the third quarter, we issued $600 million of convertible debt as investors are aware, we used a portion of the proceeds to purchase a capped call effectively making the conversion price of $46 10 per share.
As John noted earlier, we raised more capital than needed to further fortify our balance sheet.
This provides the liquidity on hand to capitalize on the expected growth opportunity in front of us even if the capital market should continue to weaken.
Debt issuance addressed previously forecasted corporate capital need in 2023, eliminating the need for further corporate capital not only next year, but also for 2024, given our current growth plans, we will update our liquidity forecast further during our upcoming analyst day on November 17th.
Included in our $841 million of liquidity as of September 32022 are both our restricted and unrestricted cash as well as the available collateralized liquidity, we can draw upon from our tax equity and warehouse credit facilities given.
Given available unencumbered assets as of September 32020 to.
Available collateralized liquidity equaled $301 million beyond that subject to available collateral, we had $358 million of additional capacity in our warehouses and open tax equity funds.
That represents $1 2 billion of liquidity available exclusive of any additional tax equity funds securitization closures $118 million in the money interest rate hedges or further warehouse expansion later this year.
On slide eight you'll see our fully burdened unlevered return on new origination increased to nine 4% as of September 32022, based on a trailing 12 months.
On a quarter to date basis. This return equaled 10, 2% as of September 32022, an increase of 50 basis points. Since June 32022, and an increase of 150 basis points. Since December 31, 2021, our ability to grow. This return is primarily driven by the rapidly.
Increasing monopoly power rates seen across the country that in turn Gibson, Nova significant pricing power. We expect this pricing power to continue leading to even further increases in our fully burdened unlevered return over the final three months of the year and into 2023.
Please note the spread metrics do not take into account the large in the money position of our interest rate hedges.
While the other consumer debt classes may be experiencing poor collections as the economy weakens that is not the case for some of our residential solar service peers and certainly not for Sundar. So nobody is cheaper and more reliable centralized power monopoly, which means consumers exercising even a minimum personal economic sanity.
We'll prioritize paying their solar bill.
As a result, our default rates continue to reach new lows, resulting in even more cash to our equity.
Slide nine reflects the strong growth we have seen in both our gross contracted customer value or <unk> and in CTV.
As of September 32022, <unk> was $2 $6 billion discounted at 4% an increase of 42% compared to September 32021.
Our September 32022 in CTV at this discount rate equates to approximately $10400 per customer and $22 38 per share and a 6% discount rate. Our September 32022 in PCB was $2 billion or $17 65 per.
A share an increase of 48% since September 32021, and September 32022, <unk> and a 5% discount rate was $2 3 billion or $19 85 per share.
We use <unk> to demonstrate our floor valuation for similar nonetheless, it remains an overly punitive way to view, our blowdown value as it gives us zero value for growth even in a post <unk> world our platform or the customer option value. We've retained and include no value for customer Upsells are powering.
Over Newell's, nor does it include value for grid services and other ancillary cash flows we expect to achieve as our customer base grows. Additionally, driven by a record low default and delinquency rates. The <unk>, we realize as we move through time is well above the discounted value.
This directly benefits and other as we have elected to retain a long term contracted cash flows but it also gives us option value for those cash flows in the future in.
In short <unk> is locked in cash flows against locked in interest rates and is unaffected by the fluctuations in the credit markets today.
And as we continue to add to NCB, we continue to do so at positive implied spreads even in this interest rate environment.
<unk> of 11% to 13 provide our detailed 2022 guidance liquidity forecast and our major metric growth plan the triple double triple.
As John noted earlier, we are updating a few of our key metrics as it relates to our full 2022 guidance and response from the decline in unscheduled principal payments from our customers driven by increasing interest rates east.
These changes include reducing the principal payments, we expect to receive from solar loans from between $134 million and $154 million to between $90 million and $100 million.
Increasing the interest payments, we expect to receive from solar loans from between $45 million and $55 million to between $50 million $60 million.
Using adjusted operating cash flow from between $143 million and $153 million to.
Do you have between $115 million and $125 million and reducing recurring operating cash flow from between $39 million and $59 million to between $15 million and $25 million full.
Full year 2020, do guidance for customer additions and adjusted EBITDA remains unchanged.
We updated our liquidity forecast to reflect the move in net proceeds from corporate capital from 2023 to 2022 due to the August convertible debt issuance. We've also modified the expected split between net proceeds from tax equity and net borrowings from non recourse debt over the two years shown to reflect a greater you.
Utilization of tax equity going forward as we anticipate a sizable shift in contract mix away from loans to leases and Ppas there.
There are no changes to our triple double Triple plan, including our $530 million estimate for adjusted EBITDA together with the principal and interest we collect on solar loans for the year ended December 31 2023.
Our ability to maintain this guidance. Despite expected continued pressure on unscheduled principal payments from our customers is driven by higher interest collected on solar loans due to higher principal balances from lower unscheduled principal payments and higher adjusted EBITDA than expected on our service only business loan sales.
Equipment sales cash sales and other initiatives.
As of September , 32020% to 100% and 88% of the mid points of the total 2022, and 2023 targeted customer revenue and principal and interest we expect to collect on solar loans was locked into existing customers as of that same day, respectively for.
For clarity approximately 13% and 14% of those totals represent anticipated prepayments of our solar loans for 2022, and 2023, respectively. I will now turn the call back over to John .
Thanks, Rob.
Spurred by our success and expertise in residential solar and the increasing demand we are seeing where the Sonoma adaptive home, we've expanded into the commercial solar market to offer this.
So Nova adaptive business we.
We offer businesses, a complete suite of energy technologies and services tailored to meet their specific energy needs business goals and local utility rate structures.
The Sonoma adaptive hall, and Sonoma adaptive business offerings will help us realize our vision of operating Sonoma adaptive communities.
We continue to see strong growth in service only customers, including <unk> and other customers in need of repair and maintenance service.
Our ability to provide this high margin last mile service is unique to the industry and it is a key part of our energy as a service business model.
As Rob noted earlier this type of activity as well as other gain on sale transactions will moves to Nova closer to positive GAAP EPS overtime enhanced liquidity for the company and simplify our financial statements.
While growth through new origination is important it is also crucial to ensure our existing customers are receiving our energy service at the reliability and cost they expect synovus.
<unk> excellence in both customer service and system performance was on full display during the recent hurricanes impacting Puerto Rico and Florida.
Prior to the storms, we proactively placed are potentially affected solar plus storage customer systems into backup mode to prepare for a power outages.
It was incredibly beneficial to be a sort of a customer and to have our superior energy service during and after these hurricanes, particularly in one of our largest markets Puerto Rico.
In fact, the median Puerto Rican customer power disruption linked for our storage attached customers was only one hour across a five five day grid disruption solar systems battery storage and other energy technologies have traditionally been purchased by consumers to deliver power that has historically been delivered as a <unk>.
<unk> by centralized monopolies.
We believe that those energy technologies should be integrated together through software and timely technician service to deliver a more reliable power service at a better price.
In our opinion solar panels batteries, EV Chargers and other technologies should not be considered mirror products purchased by consumers, but they should collectively constitute a service purchased by consumers.
Based on our own customers' responses and reactions over the course of this year, we have clearly established as an essential energy service.
Indeed, our growing number of our customers would consider Sonoma as their primary power source for their home.
As our equity valuation exhibits many of the investment community have concerns about headwinds facing so nova our industry and the global economy.
We remain bullish on our company due to the following reasons.
Strong balance sheet, coupled with high credit quality long term cash flows which has us prepare for difficult economic conditions.
Stable and diverse supply chain with enough equipment to achieve our growth targets through 2023.
Long term growth visibility underpinned by the 10 year extension to the investment tax credit plus other incentives included in the inflation reduction act and robust pricing power due to rising monopoly electricity rates offsetting the increased cost of capital.
Finally.
We look forward to seeing many of you in a few weeks for our first ever analyst day at this event, we will focus on sort of as an energy as a service company and how we are enabled by software financing supply chain management curated hardware and the best energy solution products and the global energy.
<unk>.
With that operator, please open the line for questions.
Thank you.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you would like to take that question. Please press star followed by two.
As a reminder, if you are using speaker phone. Please remember to pick up your handset before asking your question.
Our first question today comes from the line of Philip Shen from Roth Capital Partners. Please go ahead. Your line is now open.
Hey, guys. Thanks for taking my questions.
Given the rising rate environment, we are hearing about demand for loans slowing down for a number of your peers that could result in a much slower than expected first half of next year.
For the overall <unk> solar segment.
You guys are very well positioned with your lease business and things should accelerate with the ITC adders available for lease as well.
Those not being available for alone.
What kind of risk do you see full year 'twenty three growth outlook, how do you expect your lease versus loan mix trend.
As we get through 'twenty three.
And are you seeing demand for your loans slowdown if not why do you think your loans may not be slowing down versus the industry.
Hey, Phil This is John good morning, Thanks for the question.
We're actually looking at at this point for the month of October to have our largest monthly net origination month in the company's history. So we are not seeing that slowdown.
I think I have some ideas about why that may be I think the general.
Home improvement loans, there's been mixed in over time, that's probably not well understood I think we could all understand home improvement.
Probably on the decline out there just given the housing market.
Your point about lease PPA I think is a very good one we haven't seen that turn yet, but we do expect to see that as soon as may be next month or December .
And I don't think we'd see at any later than January .
Just given where the the ITC adders in guidance from Treasury is going to come out in terms of the timing.
We.
Do see that the cost of capital is just given that loans are in terms of that 100% of the capital structure is debt are very disadvantage with regards to cost cost of capital over lease PPA in this rapidly rising interest rate environment. So that's another push as well on the cost of capital piece of this.
I think in terms of why our products are selling over those that just do finance.
With service at.
At the end of the day going through these hurricanes, whether it was alone release. We've responded the customer just the same and that makes all the difference in the world and again as we laid out in our prepared remarks.
This is a service this is not a product full stop.
And more and more.
Customers and consumers out there.
Recognizing that service from us is becoming their primary power source and that has.
Yes, I think.
A lot of implications remarkable implications for the entire power industry, but certainly for our industry and I think a lot of investors need to rethink where they where they think this business is going in terms of this industry. It's going to a service you can clearly see that and so people are buying a service rather than buying financing products and I've talked about that over and over the years.
As you know about the decade.
Most decade, Thats been alive, and we're certainly seeing that and have you seen quite a.
Large amount of evidence of that just given the hurricanes over the last few weeks that we've had to deal with so.
I think the simple answer is service matters and it's all about service.
Great. Thanks, John .
<unk> been ahead of the pack when it comes to raising prices.
Let's talk about <unk>.
Economics.
To date, how much have you raised prices on average 10% <unk>.
Or more percent.
Can you talk about how much more headroom do you think you have to raise prices, especially with interest rates continuing to go higher and then Additionally, as you survey your addressable markets in states.
You see states, where lease or a loan economics no longer pencil.
Have you seen your addressable market decrease because of your higher pricing if not why not and then finally.
What are your targeted and minimum levered IRR for your lease and loan products and how do you how do they compare with the past in other words have you lowered or increase these targets. Thanks, Sean.
Yes, if you look at our Q4.
Fully burdened Unlevered return of last year that was eight 7%.
Ford on this past quarter was $10 two.
So it's 150 basis points increase over that period of time.
Are we expecting more we are we are going to put in more price increases over the next few days and weeks.
That was more than even we thought in the last time, we got together for.
For the Q2 call.
We continue to see a lot of headroom in the price.
Raising capabilities or ability to raise price rather.
Against the monopoly power rate.
Why why is that it is because the monopoly power rates have to catch up to the fuel prices the higher interest rates and remember a lot of people forget.
Most of the utilities, the second largest cost they have outside fuel is interest rates because they have a large amount of debt and if you look at all the cost inputs they've been going up as everybody is more than aware.
If you look at natural gas oil is definitely come off over the last few months, particularly natural gas I think roughly about last time, we met was around $8. An M. It's right about 550 name at the hub at this point in time in the U S. That's going to translate to something around two two and a half cents.
Kilowatt hour, but a lot of those fuel prices moving from say call. It two to $2 50 an M.
<unk>.
The worthy natural gas was for several years has not been fully baked in by.
And a large amount by most utilities out there and we expect that to continue to happen, particularly in the core lower cost markets. The central part of the United States, the southeast et cetera.
Expecting to see something for it for instance in Georgia out of Southern company. That's quite is quite a large power increase to pay for the massive cost overruns are global so we have we have a lot of confidence in the ability to raise price even further.
Regardless of where the cost of capital goes and we're going to continue.
To exercise that and be able to show those higher returns over a period of the next few months and couple of quarters. Rob do you have anything you wanted to comment on no.
No I mean, I think that just generally speaking the market continues to favor our flexibility and it continues to favor as John always says the service model.
As folks realize that it's not just about savings is about it's about the reliability as well as theyre going to be paying for savings and want to make sure that they're getting the power at the same time.
And that they're not having to.
Paul back on an ever increasing price grid.
To sell that would sell through we think a lot.
The folks who are just competing merely on price.
And one final thing Phil I'll add is the ITC adders. It seems like everybody has forgotten about those over the past few weeks.
Those are all on just leases and Ppas as you as you made the comments on and Thats going to definitely more than offset to say the least.
Any sort of cost of capital increase that I think we realistically see over the next few months so.
There's a lot going on the positive side are here and I think that the glass is definitely more than half full instead of half empty as a as the market clearly is seeing at this point in time with regards to margins.
Great. Thanks, guys I'll pass it on.
Thank you.
The next question today comes from the line of Julien Dumoulin Smith from Bank of America.
Please go ahead.
It is now.
Hey, good morning, John Rob Thanks, Zack.
Just to keep going on the same theme here. If I can yes, 23, you guys are reaffirming your triple double Triple can you comment on the backfill for the $5 30 that you guys have obviously prepay moving around but what are the other what are the other moving pieces there, perhaps there's a little bit of a leading.
Conversation in Vienna stay, but what else is driving positive asset.
Hey, Julien, it's Rob I, certainly don't want to spoil any surprises we might have in a couple of weeks, but youre absolutely right about the prepayments, but it has a couple of knock on effects. One is that the scheduled principle is now higher than our forecast, even though we are budgeting for next year lower prepayments.
And we had previously put in but we're also originating loans at higher interest rates over the past several passive.
Past several months and those are going to be going into service here at the end of the year and into next year that combined with the higher overall principal balance is going to create a higher interest income.
We have been as we've been showing you over the past couple of months increasing.
Fully burdened unlevered returns and those returns translate directly.
As higher revenue.
Into our into our P&L and that flows down through as higher adjusted EBITDA and generally speaking there are other higher adjusted EBITDA opportunities. We think that's going to be much higher we did mentioned in the prepared comments some of the gain on sale catalysts that we continue to see increasing.
Yes. Some of that was already was already always in there some of those opportunities are increasing especially on.
On the.
On the new home side, we are seeing more folks.
Opt to go ahead, and just purchase but.
There is the other big one is the services.
When we look at.
Really across the board at what's been differentiating Sonoma and where we've seen some negative some negative press as far as some of the other.
Dealers out there in the market, where you can find bankruptcies in real life.
It really comes back to service this is giving us.
Huge number of opportunities.
Pardon me to come back into the market by new customers and provide them a higher margin repair service and then start to bring them in as service customers.
And that so really just a combination of things is going to show higher interest income, even with lower principal payments, but much higher adjusted EBITDA.
Got it okay excellent and then if I could pivot here a little bit obviously prepayments move it around here just wondering affirm that doesn't change obviously, the unlevered IRR repayment and then also your NAV calculations.
To reaffirm that and then critically as you think about going into next year, given the pivot from loan to lease given the ability to raise prices and given this higher rate environment Unlevered IRR is what's your expectation on that.
Trick on a leading indicator on a trailing basis the ability to continue to raise that but again, if we can hit the first part I'm clarifying the NAV.
And IRR and then separately the.
The expectations respectively.
Yes, I mean, it really hasnt hit the IRR all that much I mean, we're looking when we do the pricing we look at it very long term.
<unk>.
The prepayment rate. So we look at it with projections across interest rate cycles. So sometimes it's just a little bit of timing, but we usually have fairly modest prepayment rates within our projections.
I assume with the loan prepayments are going to end up being over the life.
We always expect that theres going to be increases, we always expect that theres going to be decreases in that Brooks will take advantage of those decreases where other folks will just want to make sure that they just pay their loan on a steady state throughout the life of alone and so it really doesn't affect those economics much at all.
And of course, it has almost no effect on the economics of the leases and Ppas because those continue to pay ratably.
Over time as far as your expectations for increasing and fully burdened unlevered return, especially on the trailing 12 months basis I think it's important to note that really the low point of our quarterly metric.
That was back in the fourth quarter of last year, So that's going to be coming out on a trailing 12 months. We certainly expect that to continue to increase we had already guided to the fact that we expect those numbers to continue to go up.
We have been increasing pricing.
Along with others within our space. So it's not as if we're going to be undercut out there in the market.
So generally speaking we do expect it to come but I don't want to I don't want to give guidance as far as a full quantification of it but we continue to target the spread of.
At least 500 basis points on that implied spread so you could probably try to read into that I.
I think Julian and the other thing is is that just to remind everybody that we locked in the lower tranches of our securitization loan lease PPA with the corporate capital obviously that was a good move the corporate capital.
We're still using the parts of the bond that we did a couple about halfway through that so that that's something that.
We have a cost of capital advantage full stop.
Argument on that versus the competition.
We've talked about this over the years right. This is the point of having a balance sheet as the point of keeping the cash flow. So that's going to give us a pretty strong advantage in liquidity and cost of capital and then we have some other.
Capital pieces in closings that.
We can we can discuss here in the near future that we think theres going to be able to give us a cost of capital advantage too.
As well so there's a there's some things impacting.
That are unique to us on the cost side of that.
Spread equation and then we're going to continue to see be able to push up and as we get the ITC adders in here as you move into the new year. We're comprehend continue to push that Unlevered return out there if the current rate environment.
It continues.
Got it but not too materially impacting the NAV or IRR prepayment assumptions just to reaffirm that yes, we didn't enter the NAV youre right sorry about that.
It does not affect the <unk> <unk> per share at all correct.
Thank you for clarifying I appreciate it.
Thank you.
The next question today comes from the line of heat <unk> from Credit Suisse. Please go ahead. Your line is now open.
Okay.
Hey, good morning, Thanks for taking.
<unk>.
Just on the tax credits.
Yes.
<unk>.
Expecting guidance from the Treasury, but could you just talk about like moving from the 26% to 30%.
Do you see that on the next call.
Or what kind of guidance do we have to wait for that.
And then next year like how should we think about that metric.
Great.
Say that there is some FX this year, where existing tax equity funds are going to have.
Higher.
Higher returns from the tax credits themselves and so therefore, we've been working with a number of funds in order to make sure that we can.
Lower there longer term.
Cash income from the fund in order to make sure. It goes back to the original IRR is where in some cases, we've had folks who wanted to take advantage to put more capital in.
To an existing fund in order to true that fund up.
From the 26% to 30 as we look to next year, we've been in discussions with those who have funds that are going from 22 to 'twenty three as far as how we're going to be treating those.
How it's going to be reflected in the fully burdened unlevered return really.
Not really going to see any much of a change because we didn't.
Going back to recalculating, something even if it is now at a higher return because that wasn't a return that was originated that we wanted to try to keep our our metrics truly what they are and not try to not try to go back and say Oh now this metrics better.
But I think from a practical standpoint that is true some of our prior originated leases and Ppas are actually now at a higher return than we originally expected them to be.
We'll be using though the adders, where appropriate in the higher itc's in order to enhance our returns, but also to enhance the opportunities.
<unk> for the customer.
Got it and just to clarify.
She has leases ppas as the prior where you had that uplift.
Most of that will probably be shared with the <unk>.
It could be either.
Paying down debt.
Got.
It actually comes back it actually comes back mostly to us in that case.
But the but it really depends on how they want to treat it do they want to have do they want to put in more capital today or do they want to have a decreased.
Less cash returned to them in the future in order to reach the same IRR.
Got you and I appreciate it will definitely get more clarity on November 17th on that and then just.
A quick follow.
Well look just from the.
Cash flows or cash needs here.
This quarter.
Excluding the convertible debt.
Proceeds.
It looks like you had a gosh.
Draw outright so just trying to wonder.
I'm trying to see if I'm missing something.
And how should we think of no.
The tax equity needs.
Yes, sure ABS and tax equity really hasnt changed at all the only thing that's happening is as long as we've already brought in the cash.
We're not going out looking to overdraw, the warehouses, even though we have significant collateral and capability to do so.
We could have drawn several $100 million more and put that onto the balance sheet, but I don't need the negative carry especially in this interest rate environment. So that isn't what we're looking to do our actual cash needs are basically the same if you go through and look at the total amount of cash in and out it really hasnt changed.
<unk> at all it's just been that because we brought forward the corporate capital, we don't need to draw so hard on the warehouses right now.
Got you I appreciate it.
Ill.
The rest offline. Thank you.
Thanks Brent.
The next question today comes from the line of Tahoe, most enough from Raymond James.
Go ahead. Your line is now open.
Thanks for taking the question.
Last month, you announced that you're getting into the commercial market.
Two questions on that.
What is the.
Profile for.
Our margins and profitability compared to the traditional residential business.
Hey, Paul this is John .
We're going to talk a little bit more about that in the analyst day, but as we made mention we expect commensurate returns.
Business, it's on the smaller side.
For the most part of the commercial.
We are seeing quite a bit of demand to say the least I think at this point, we're starting to.
<unk> not been able to even analyze business, it's been it's been that heavy.
So that's a pleasant surprise and we're looking to see how we can execute on some of these projects a little bit sooner than we had anticipated and we are.
Obviously, our prioritizing based on returns as you would expect so.
We have ample amount of demand out there that we don't have to lower our return expectations and we will not so.
We are pleasantly surprised so far about the the returns and the demand in that area of the market.
And will the financing model or the mix between securitization tax equity remain the same.
As you move more into the commercial space.
It really depends on the opportunity that's afforded to US there is some.
There is some opportunities with nonprofits that we might take advantage of and finance a little bit differently.
At this point, we're having a lot of discussions with folks about different ways that we can look to finance. These but I think that we will continue to try to take full advantage of whatever opportunities are out there that the ITC provides us.
And that the different the different leveraged markets provide us as well.
There is not.
There's not a need at this point to stake.
To plant a flag and say this is exactly what we're going to be doing.
Because there are so many opportunities out there.
Okay.
And but we will provide more guidance.
Yes, absolutely.
Yes.
Thank you.
The next question today comes from the line of Sophie Karp from Keybanc. Please go ahead. Your line is now open.
Hi, Good morning, and thank you for taking my question.
Could you.
And then just volatility interest rates volatility after the close of the quarter do you have any sense.
I was hoping you could share about what the cost of capital the spread look like today versus.
<unk> I guess is what you show them this slide.
I think I'll, let Rob comment on the corporate capital, but again.
Sophie is John by the way.
The plan as we laid out was pretty conservative so I don't I don't see as Rob said much change in the corporate capital, but I'll, let him add any more commentary on that piece of it in terms of.
The spread if you will.
Then there are several pieces of the capital stack the bottom part of the capital stack that we locked in.
And we obviously raised quite a bit more capital than we.
Expected to need against the capital plan and so.
And again I made mentioned availed reference of additional <unk>.
The capital lower cost that we're going to be closing on here in the near future. So there are on the cost of capital we feel we're in a very very strong competitive position as I laid out.
The other side of this is we are raising rates the unmet return more than we expected even 30 days ago to your point so.
A lot of competition has frankly in a very desperate situation, where they have to continue to raise rates. They were too slow to do it on the first part of the year, we raised earlier the earliest above anybody.
We're in a nice in the whole position that we didn't.
Burn capital in the first part of the year and we will continue to.
Wei margin over over growth and growth's been pretty good in fact.
One comment I would make is as I look into 2023.
Remind everybody of the triple double Triple has a guidance down essentially of growth rate over a period of years and we continue to see Mitch.
Mentioned in the first question very strong growth as recently as this quarter is this a month rather.
Will be the strongest growth in the company's history, I think that starts to look and portend as a lot of these different types of businesses that Rob mentioned earlier service only.
And we just had a question on the commercial business. There's a lot of things that are starting to really hit and I think as you look towards next year.
I'm seeing some pretty strong growth.
<unk>.
There's no reason for us to raise that kind of guidance at this point in time because.
It frankly, where the share prices why do it but I think that more and more it's like there is going be some higher growth and stronger growth in certainly more confidence in growth as we look forward in time I mean do you have any more comments on the capitals, yeah, specifically to the interest rates right now so I think that the ABS Margaret you can take a look at some of the more recent prints the spreads had been a <unk>.
Wider and the difference in spreads between.
But between the attachment points have been a little bit wider than we were just seen say a year ago.
I think that with the market is looking for generally speaking is a little bit of stability.
But I think the other thing that's sort of.
Hitting the market is that youll see other asset classes.
Especially consumer asset classes that still get right at about the same as us.
Along certain attachment points, but theres really not a high correlation so our triple B has a much higher certainty of being paid and you might find in subprime auto Triple B.
But where we're being comped against is someone who can buy the subprime auto triple b versus buying our triple B.
If you've looked at if you looked at how the other markets have gone that's really what we're fighting we think two things really need to happen one is that the increases by the by the fed.
Interest.
In the base interest rates and the fed funds that needs to slow.
And stabilize it doesn't even need to drop I think that just the slow and stabilization will help bring those spreads insignificantly.
We have within our forecasting.
Including when we've redone our liquidity forecasting we had already taken down the assumed avs proceeds that we thought that we would get on it fairly significantly.
And we had already increased our interest rates so that liquidity slide that you see that's reflecting a high interest rate environment for the next 18 months in a low advance rate for the next 18 months that softens a bit into mid 2024.
So our our capital needs to John's point earlier, they are taking care of even taking into account what we would say, it's probably a less friendly environment than we first started showing that slide.
Thank you for the color.
Question I had was then.
Thank you.
Percentage of your business.
Home consumption.
Is it material thats, something we need to track.
Right.
You bet.
No it is not.
It's roughly been about 10%, maybe a little bit higher Sophie.
I will say that our forecast for next year look I think everybody knows a been a fair fairly big bear in the economy and the inflation problem for a while and.
And with that fairly big very bearish on the new home market throughout this year and actually a little bit before and so we've heavily discounted our expected growth rate in that in that business certainly into next year or so.
We're seeing things.
Not so bad not as bad as I would have thought in the new homes business, but at the same time, we're anticipating that to get a lot worse.
And I think it will but it's not it's something that we can easily make up through other parts of our business as I was commenting earlier and indeed, we've had we've already have bearish forecasting.
Planned into our triple double Triple plan for next year.
Got it thanks.
Last for me would you care to comment on the spot that's filed and Youll, Mike great blocking it in California.
Yeah.
My only comment is is that I think people deserve choice they deserve.
Our energy service and be able to get the best price they can get on the marketplace.
Competition and capitalism has made this country great and.
The fact is that we don't have it in the U S power industry is something that.
Is very detrimental to the growth of this country and the health of its.
Of its people.
It's something that as time has come we.
We need we have new technologies, we have the ability to bring service where these monopolies refused to even offer service that is not well known out there, but there is a growing number of communities across the country, where the utility monopoly.
I can't get to you anytime soon like for years.
So that theres no option because they have a monopoly right to provide power like why do you need a monopoly right to provide power there's ways to go about addressing low income households, we want the same credit rep.
Essentially a quality on both sides of the meter.
How do you argue against the quality.
There's a technological shift that's occurred here and we need the regulatory bodies to understand that and the people deserve to have the choice. If they can negotiate a better service at a better price for their homes as far as energy goes they should be able to do that I think thats, just a fundamental right as an American and.
We expect that.
Growing the number of people across the country, we will continue to.
Scream ever louder for the ability to do what they can do in any other part of their life and so eventually this will be successful across the board not just in California, but across the entire country.
Thank you.
Thank you.
The next question today comes from the line of Mark Strouse from JP Morgan. Please go ahead. Your line is now open.
Yes. Good morning, Thanks for taking my questions you mentioned in the prepared remarks that the default rates have been declining.
Obviously, we have been seeing that since kind of the onset of COVID-19.
Just curious.
In Europe , there is if thats something thats showing up in your cost of capital or do you think that there is room for further improvement as we.
Potentially go through a recession.
Can you prove that out.
Hey, Mark.
Yes.
Thanks for the question.
I think it's.
It is a good one because the key part here as we've laid out over the years.
Is that do people pay us or not.
A lot of these other movements interest rates and so forth. They are important we're not dismissing it but at the same time nothing is more important than people paying you.
Fundamental in our business, particularly one that has long term.
Cash flows.
And has capital such as debt up against those long term cash flows right and so what we're seeing is is that people are paying us more and more because their value in the service their value in the pricing of that of that essential service.
And so is that reflected in the ABS market, Rob went through that a little bit ago. The answer is no way is it reflected this as the proverbial baby going out with the Bathwater you can talk to anybody in the ABS market the numbers do not add up.
That happens in markets as we all know they get dislocated.
They get too happy and.
When the market is doing well and they get too negative when the market's doing poorly like it is now but always there is the pendulum that swings back towards the middle here and we fully expect that to happen because the math doesn't make any sense. So you shouldnt have a risk premium thats going out as your default rate is going down.
And indeed, that's exactly where we stand today. So we don't expect that default rate to move up we're not seeing any signs of that whatsoever.
Is it possible sure it's possible, but you would get some sort of heads up on in the data and we're not seeing that and it makes sense why that is again.
Utilities monopolies raising their rates and this being a central service or whether you have fears of the future in terms of economics, which growing number of people do if not all Americans do at this point.
Youre going to Youre going to prioritize those essential bills and we are in the central Bill just given that you can't cut off the energy and the water to your own.
So we think the market is going to start to reflect the actual numbers and payments. It probably goes into in terms of the timing of this certainly at this point I think into next year, but at some point the market is going to reflect it and that risk premium regardless of where the fed has rates in the market as rates in terms of the base in risk free rates.
That risk premium is going to come in to reflect those actual default.
Rates.
Okay, Great and then.
<unk> named here, just because I want to focus on <unk>.
One of the relatively smaller installers in the industry recently filed for bankruptcy sighting.
Equipment failures.
And I believe that you use some of the equipment that that company was using so just want to make sure that you are whether or not you are seeing similar issues with that equipment and if that's something that might lead to elevated expenses near term.
Yes.
I'll avoid names too and they were a pretty decent sized shop as far as contracting outfit.
First of all the equipment is.
It was a safety item.
And it's something that.
I don't think it sounds like the authorities believe that there is necessary for a recall I'm not going to get into that that's not our position to do that what I would tell you is that we have a very small amount of that equipment.
And we've been either habit, all repaired or in the process of doing so over the next few days and we're fixing those for others in the marketplace.
And that equipment manufacturer I think has done.
Good job of owning.
Owning and taking care of the customers with with us and maybe some others, but in terms of any sort of real systemic issue and so forth with the with that equipment, we don't see it.
And we certainly.
We've seen other equipment failures over the years and and as the customer base in the United States gets bigger in terms of speaking of residential solar.
Youre going to expect to see these pieces of equipment fail and whose fixing all that no one except us.
Flat out.
The body else in the entire industry, including equipment manufacturer to focus on the new customers not the existing one so that's a business that we we feel quite strongly about we've talked about over the years. As you know is not a new thing and we're seeing tremendous growth, we're seeing contracts being issued to us and so there is the stability of that business in terms of <unk>.
Their service is taking off I'd say fair to say like a rocket and we see a lot of opportunity there to go out there and make sure people are taken care of so this is something that.
We predicted that the industry is going to deal with it's going to get more so it's not going to be specific to any manufacturer and this is why I keep pounding the table, saying customers buy service they don't byproduct.
I think things are going to work out fine there with irrespective.
Quick.
Factor of that that's been dealing with all this I think I think they'll be fine.
Got it thank you John .
Thank you.
Thank you.
The next question today comes from the line of Scott <unk> from RBC capital markets.
Please go ahead.
Your line is now live.
Hi, good morning, everyone.
I noticed that the battery attach rate this quarter was a little lower.
Since last quarter despite.
An improvement in availability of batteries that you mentioned in your prepared remarks can you provide any detail.
That decline and then where do you see badly attach rate headed over the next five quarters or so.
<unk> 2023, and what's embedded in triple double checked off.
This is John .
So first of all we have.
Been clear that the quarterly forward origination attachment rate is very volatile for a variety of reasons on origination seasonality being primary.
And what I would say is that the delta between 31 and 30.
I would not focus on if it had been 32 I would've told you the same thing that's inventory.
And I could not stressed that mortgage and material in a big way I would not look at that that delta at all.
Even something thats, a little bit wider than that is meaningless.
Look at the penetration rate and that continuing to move up we're.
We're going to see I think.
Quite confident we'll see a big penetration.
Movement this quarter, just given the deliveries of the batteries, where we had thing.
And as far as attachment rate on a forward basis, we don't guide to that and we're not going to but I would say that we're going to continue to create a lot more CTV per share as we move forward in time next year.
Great. That's very helpful. Thank you and then just wanted to follow up on the adjusted EBIT does that 530 million.
EBITDA P&I in 2023, what are some of the puts and takes that you are.
Looking at that in terms of we still have been hired kind of like anything on Californian entry point now.
And then obviously you're going to be a positive and as we pointed out.
Negative that I'm not sure what's embedded in the guidance there and then on top of that just also just supply availability to actually.
Feed the growth.
Yeah.
Yes. This is Rob I think we gave some of the guidance as far as some of the particulars and our answer to Julians question earlier, So I don't want to restate that we don't think NIM three point I was going to make a very big difference there and as far as the equipment, we're seeing a lot more.
And we've got very good equipment availabilities that we really don't see that as something thats going to be Macy's broken if you take a look at shipping rates across the Pacific now they are back down to a pretty much pre pandemic levels that should give you some pretty good indications rates there as far as the.
It's full of equipment available.
Yeah.
Excellent. Thank you very much.
Thank you.
The next question today comes from the line.
At the center.
Ocwen financials. Please go ahead. Your line is now open.
Yeah. Good morning, I, just wanted to maybe get a.
More deeper dive on the commercial space I know you talked about.
Talk about a little bit more specific like have you got any any contracts with any retailers anything more specific that we can heartburn and then.
Does it differ in terms of the impact.
To finish with that what's the assumption was that if theres anything specific.
This is John .
I apologize, we're not going to be able to comment on any specific contracts at this point in time, but.
And I think we've talked and said everything we can say about the commercial business at this point, we will talk some more about at analyst day, but.
The next question today comes from the line of Susan Morgan.
We assume this is shown on your question with that ever shown.
With regards to some of the adders for the IRA I think a lot of the market has been focused on sort of the.
Best case scenario, a 70% rate. So that's I think that one is pretty clear and if you look at it from an F&B standpoint.
Just on a pure cost basis, obviously 45 translates to <unk> 45.
But.
Hi.
We believe we'll be able to take significant advantage of it while.
While we're still being conservative in a lot of our forecasting and just predicting a little bit over 30% ITC sort of across the board. The facts are that we're probably going to get much much higher than that but a lot of the domestic content, that's going to come and we think a lot more in the next two three years a lot more domestic content here in the U S. We do have.
A lot of our panels that are sourced directly here in the U S.
We do have others have.
Some other components that are manufactured right here in the U S. Very few of the Inverters are manufactured in the U S. So.
One thing that we can't use for most of our <unk>.
Content adders, but again to your point a lot of the other adders are not individual base, but are based more on zones economic zones are zip codes are defined by the IRS and so you could still find very high credit quality customers within those zones that we would've sold to anyway, so for us it.
It's really just land yet.
Yes.
Okay. Thanks, and then you talked a little bit about delinquency.
Startup.
Prepared remarks, just wondering what what proportion of any delinquency risk is retained after you kind of go through the ABS process, whether its the support tranches that you maintain or you kind of look at that business mix kind of after things exit the warehouse financing.
What proportion of that.
Say a typical delinquency.
Sonoma, where from a corporate perspective.
We were all of it that's why we're focused on service and that's why we continue to drive down our delinquency and default rates, but it starts with our credit underwriting goes through our service and continues through our Dunning, we were all of it.
Okay. Thanks, a lot.
My wife will be surprised to hear about my my newly.
I guess announced gender transition.
Yes.
Congratulations.
Thanks.
Thank you. Thanks, John the next question today comes from the line of Cachet Harrison from Piper Sandler. Please go ahead. Your line is now open.
Good morning, John and Robert Thank you for taking the questions squeezing me in here.
I think you guys in the past I've provided a rule of thumb that one five per kilowatt hours offset the 100 bps and your cost of capital.
Can you give us a sense of what you saw in Q3 for the year over year change in retail rates on a weighted average basis for your markets.
This is John .
That's a good question and I don't have an answer for you.
It's definitely been a definitely increased and we're seeing more increases in this fourth quarter.
But we'll have to get back to you on that when we don't have a specific answer for you on.
To your question.
Okay, yeah, thanks for that.
And I'll follow up with you offline.
And then my second question before.
The full year customer guide as you indicated implies north of 30 K customer additions in <unk> can you just give us some context on what gives you the confidence that this target is achievable just given some of the challenges you've had with the year to date and in connections and the utilities.
Yes first of all we are pretty well covered up in batteries at this point in time that is a material difference from last year, where we were limited.
In some regards to.
To the supply chain.
Our supply of batteries.
And the other is is that our service business has been.
As I mentioned earlier.
I think I called it a rocket.
Shift right and Thats been really taking off quite a quite a bit over the last few weeks and months and really we expect to see a lot. This fourth quarter. We had some of that in the third quarter as you can see see more in the fourth quarter.
We see a lot of new homebuilders pushing to get their inventory.
And out the door by the end of the year and so thats another big push.
We also are seeing some on the PTO side, a little bit slow over the last three weeks, but we've had conversations with those monopolies those utilities and they expect those to be released over the coming days. So I think largely we feel like we're in pretty good shape. We'll also say that we've been originating at essentially the pace we need to hit.
<unk> for next year for the last six months and.
So we've got a huge huge backlog, we talked we spoke to that on the Q2 call, but it's gotten even bigger as growth has been bigger than we expected.
As recently as this month as I've said, a couple of times so.
We've got a huge backlog we've got the.
The supply chain and the right.
In the right spot to say the least and.
We're seeing a huge growth in the service only business so.
Batteries by the way Upsells have been really strong as well over the last few weeks and.
So thats another thing that doesn't go to customer count, but certainly goes to NCB and when you look at <unk> <unk> per share at any discount rate, it's pretty it's pretty low right and so we can we're going to expect to see that in <unk>.
<unk> per share increase.
Pretty pretty strongly this quarter and thats another thing that points to just overall.
The growth as we expected it has been strong we expect it to be strong, but also be very profitable and if you go back the last several years fourth quarter is always our biggest in service quarter.
During the year and keep in mind that we had two major hurricanes go through the.
Go through to our service territories at the end of the quarter, usually that's when our biggest push occurs.
Get folks in service so a lot of that in service got pushed out into October .
Excellent color. Thank you.
Thank you.
The next question today comes from the line of David <unk> from Wolfe Research. Please go ahead. Your line is now open.
Yeah, Hey, good morning, I just wanted to squeeze wondering quickly here just.
Some of the offsets that you expect for the lower expected principal payments I guess into 'twenty three.
Specific to the loan sales just how should we be thinking about timing magnitude of that versus I guess kind of what you hope today and is.
This is just something you guys are looking at to do opportunistically or should it kind of be a reoccurring thing going forward. Thanks.
And just to clarify we actually expect scheduled principal payments to increase it as the unscheduled or the or the prepayments we expect to be lesser on a go forward basis as far as the loan sales.
We had anticipated.
Doing that in the second half of this year, we think that.
Definitely with the increase in interest rates that it was less attractive to us.
To go with the ABS market here in the second half of this year, but we've already gone and entered into.
Programs to be able to do some forward flow when you expect that to be definitely a piece of what we're doing next year.
And the idea is to make it programmatic and profitable not necessarily opportunistic, though certainly there are opportunistic things out there, we'll take advantage of it but it's really just a thin.
Didn't layer, we think of what we're going to be doing front as far as the triple double triple its.
It's not.
We don't think thats, the sort of make or break part of the triple double triple as just an added to it.
Okay, and then like if you were to rank I guess kind of the offsets that you highlighted Rob but like what would you say is most kind of least impactful for offsetting that unscheduled principal piece.
I think the biggest one that you should match up against the lack of the unscheduled as the increase in the scheduled and the increase in interest.
And interest income.
I think that theres going to be definitely more gain on sale that that's sort of how we would look and say well how are we growing the adjusted EBITDA portion of it.
And there are some I array of opportunities.
Well to try to take advantage of that we think can enhance it further.
Okay. Thank you and again.
And this goes to your question.
Appointed John was making earlier on customer count if we were to look and say hey, we could probably beat that triple double triple the market is not rewarding us for growing even by one customer. So it doesn't really help us to go out there and.
And try to raise the states, where we're really focusing on on hitting that triple double triple if we can do better than that.
Opportunistically, we will certainly do so.
Yes.
Okay.
Thank you.
The next question today comes from the line of Brian Lee from Goldman Sachs. Please go ahead. Your line is now open.
Hey, guys I might have missed this but.
Are you changing your.
Target spread to 5% now versus the 6% and if so could you speak to that just a cost of capital issue or something else, but I thought you guys had always been talking about 6%. It seems like the messaging is more like 5% today.
We've always talked about <unk> being the long term target.
Talking about that we still think we can get to six.
At some time here in the next couple of quarters. So we are when we look at our modeling we model long term at 5% but.
But we still think we can get to six here.
In the early part of 2023.
The market the market's could make that more difficult in the markets can make that easier, but that's definitely store, we're pushing towards Brian .
Okay understood fair enough and then just a question around the growth guidance here.
If I look year to date.
No.
I appreciate John you've been out in front of this versus your peers talking about this.
Loan to lease mix shift, which has implications for you because if I look at year to date.
On your lease and PPA customer adds are up 10% and loan customers are up more than double so literally all your growth. This year has come from from the loan book. So as you think about the triple double triple targets at 42% customer growth for 'twenty three it seems like.
A lot of that is going to come from lease and PPA now versus what you saw this year. So two part question here one is.
Youre, saying demand is really good you see the the order book can you give us a sense of the composition that gives you confidence that.
Your loan to lease mix shift is represented in kind of the demand trends youre seeing in Q I didn't see tax equity.
And your liquidity forecast pick up too much I mean, I think it's up to 100 million Bucks versus what you guys said last quarter do you have.
The capacity.
To accommodate a whole lot more leasing PPA customers. If that's what the composition is going to look like next year. Thanks guys.
Yeah, Brian This is John I'll, let Rob answer the last part there as far as capital.
<unk>.
We expect to see its just math the movement towards lease and PPA as I said earlier, we have not yet seen that strongly but we expect to see that as early as may be next month.
Or December for certain by January and.
In terms of the triple double Triple the overall composition is again agnostic to whether it was loans or leases or ppas and that's.
Thats something in terms of a breakout in the forecast at a balance.
We're not going to do we've stressed the fact that we're a service company.
And we're agnostic on the financing and financing as an enabler just like software is for us and we spend a lot of money and time and focus on software. So in terms of.
Giving a break out we're not going to do it.
But we certainly look at the map and I think.
Coming away with any other assumption than leasing PPA goes up materially.
How you would get there and I think Thats your point and we agree with your point.
The capital structure, Yes, I mean, we are looking at increasing.
We did increase the tax equity portion a little bit.
John we're not really shifting the mix too much in our modeling, even though we think that there's definitely more upside on leases and ppas.
But.
Really the part of that tax equity is a little bit.
A reflection of the fact that we think there's going to be higher.
ITC will be able to take advantage of it.
Again, we're not looking at a huge shift.
We are.
We think that there definitely could be one.
But we're not.
Because the John's point, we're seeing the shift.
Really the market is a battleship not a destroyer so we're seeing that turn to be a little bit slower than we are probably just forecasting that.
Alright, thanks, guys.
Thank you.
Thank you.
The next question today comes from the line of Johnson.
G. L. J research. Please go ahead. Your line is now open.
Hey, guys. Thanks for the questions just a few on my end first.
First just in light of the record free cash flow burn this quarter of $312 million, which is almost half of what we saw all of last year.
The cash flow from operations and cash flow from investing being negative $660 million this quarter versus negative $600 million last quarter.
I'm just I'm looking at you guys are now selling inventory.
To your dealers, which I think you started in April .
And it seems like further would not allow you could potentially turn around and buy those same projects back from your dealers. So should we expect it to be a recurring theme in forward revenue guidance.
And is there going to be an actual exchange of cash or should we consider this to be cash flow neutral and then I have a follow up thanks.
Yes, I think that on the inventory side.
They are fairly good question, but we're exchanging.
Higher we're having two things one is higher inventory purchases, because we're bringing more of that inventory and where we hadn't been bringing in before and then of course there is.
A side of that as well, so I think thats really what youre seeing.
Pardon me, we do you expect that to stabilize a little bit going into into next year.
But again.
When you look at the investing in the financing.
It's balancing out pretty good which is also Gordon as you know why do we do that corporate cash reconciliation. So you could see how we're truly looking.
At the at the ongoing business versus the <unk> side of the business GAAP is not necessarily our friends.
Well on it as we said in the prepared comments, we're looking to try to get to GAAP.
GAAP earnings positive and GAAP Ocs positive so.
<unk>.
It's definitely I think a bit of a change when it comes to.
How we're how we're accounting for it because of how we're moving the equipment but.
But at the end of the day, we expect that that cash flow burn to.
Not burden the negative cash flow to neutralize.
That's extremely helpful. Just two more from my end pump so when I looked at the discount rate you guys are currently using that came out. This morning. It looks like you kept that discount rate flat at 4%.
You guys lowered that rate from 6% to 4% in <unk> 'twenty. One however in <unk> 'twenty one the 10 year yield was at 174% today, it's sitting at 4.0736% so much higher on the 10 year yield. So the discount rate you are using right now is actually below where the 10 year yield is.
Is there any potential that you guys will raise that discount rate to reflect current rates or would you keep it the same and then the last question for me is we talked about this before Rob I just wanted to get some clarification here you guys are still using these.
Appraisers, Nova Grand back in algorithm Marcel.
Do your appraisals and I think one of your peers.
The industry is but one of your peers have said that the reason why you guys use the appraisers versus using arm's length transactions.
To show the IRS the price at which these systems or value is because.
The appraisals include.
I guess I'm, sorry that the overall cost include warranty calls underwriting call services cost et cetera that arent included in arguably cells. However from ours understanding IRS guidelines using the cost approach do not include any warranty underwriting our servicing cost and the price you show them. So is there the potential.
Given there's been roughly $4 million system sold 1 million of which were cash transaction that you guys will shift the approach youre using to show the IRS the cost of the system to get tax credits going honestly approach versus the appraisal approach. Thank you again for the question.
Yeah.
Yes, no happy.
To address those so I think that your first question was on the discount rate and I think as we told you probably get two quarters ago use whatever discount rate Q1, we're showing four five and six.
So.
Free to use whatever discount rate you feel is most appropriate.
We would just point out is it.
Almost everything is included in there is locked in cash flows against locked in that.
That does and that that we don't have any refinancings for another four plus years.
So plenty of time for us to go back through refinance those still.
At favorable rates.
When the market is most appropriate.
And again.
The appraisal process is one that takes into account arm's length transactions I think that theres a bit of a misnomer when folks say that theyre going to.
Compare it to our cash sales from some guy out of the back of the truck is going to go ahead, and just drop off the panels at your home and have you install themselves or someone who is not going to stand behind the work or in the case, if somebody who is just doing a cash sale without without providing any additional service I mean, that's all that they are paying for it from our standpoint the customer.
Is buying.
<unk> is buying that equipment and they are buying the installation and yes. They are buying they're buying the service behind it.
But the warranty the F&B, where we're getting on the warranty are usually less than the <unk>.
So the <unk> that we would actually value that system that so we do use third parties like Alvarez and marsal to be able to.
To be able to provide us with a true third party valuation.
For those assets.
For tax purposes. This is something that is.
That.
Is it new right this is something that.
It definitely is industry practice, and where you have seen folks getting into trouble I think you are.
And I have talked about this before is when theres actually been fraud, there's no fraud thats going on here.
It is it is backed up by by a great deal of data great deal of analysis and certainly.
Certainly whenever we work with our appraisers, we try to make sure that they have every last bit of detail. If they can answer all their questions and and treat them truly at an arm's length.
Hey, Thanks again for the questions.
Okay.
Thank you.
Our final question today comes from the line of <unk> Satish from Wells Fargo. Please go ahead. Your line is now open.
Thanks, Thanks for squeezing me in just one quick question I was just wondering if you could talk about just elaborate on the appetite for solar and in Puerto Rico, and Florida right now I guess, how long does it usually take after you see a major hurricane to kind of see an uptick in in demand and then is there any way to help frame how much faster growth.
B in these regions because of the hurricane versus historical trends. Thank you.
This is John .
It doesn't take very long at all.
And it does dissipate.
Relative quickly fashion as well.
It's more of human behavior. So we've already seen that that surge in both those markets in particular, Puerto Rico and its gone back the trend rates already but again the growth as I mentioned a couple of times. This this month is the strongest in the company's history, so, but thats an overall comment across.
The board and across all regions.
Thank you.
Thank you.
There are no further questions at this time, so I'll pass the conference back over to John Berger for closing remarks.
Okay.
Thank you all again for joining us and for the thoughtful questions in closing, let me say this service matters liquidity matters cash flows matter, while there may be still a wide value separating some of its true value from that reflected in our stock price. We believe that as we go through the anticipated economic downturn.
And once again enter the inevitable economic recovery scenarios business model and financial results will continue continue to standout as truly best in class. Thank you for joining US look forward to seeing you again in the next quarter and most importantly analyst day in a couple of weeks. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect your lines.