Good morning and welcome to Sunnova'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 question and answers. At this time, I would like to turn the conference over to Rodney McMahan, Vice President, Investor Relations at Sunnova. Thank you. Please go ahead..

Thank you, operator. 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. .

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 3, you'll 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. .

Thank you, John. Slide 8 shows the period-over-period changes in our key financial performance metrics. Year-over-year, Sunnova'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, Sunnova raised over $2 billion in new financing, highlighted by $800 million in new securitizations, $415 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 NCCV per share and ROCF metrics.

We expect paydowns to further increase this year. .

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 Sunnova as a market leader in the home builder space as well as a leader in the development and management of microgrids. Slides 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 costs per customer more quickly, and to build a partnership around what we see as the ultimate end point 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 Sunnova.

By utilizing the latest technologies in solar, storage, secondary generation, and demand control, we are turning 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 Sunnova Network. This network will create value for consumers, Sunnova stakeholders, and even the centralized grids. On slides 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 Forward 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, Sunnova 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, Sunnova'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 Sunnova Network and platform.

We remain firm in 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.

Sunnova'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 and 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 Sunnova 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 US power industry is heading towards a hybrid of centralized and decentralized that will become more durable, more reliable, more 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..

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

In the guidance here, John, the 9,000, I think you mentioned, customer additions coming from the SunStreet acquisition here in the 2021 guidance, so two parts on that. It would imply there's 2,000 to 3,000 new customers that are just organically being added to the guidance here on top of the SunStreet accretion.

So, just wondering, that's about a 5% to 6% growth versus the prior guidance, what's driving that more bullish view here even outside of SunStreet? And then the second part of the question on guidance is the 9,000 SunStreet that's about 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 2022 impact, I guess, with some growth on top of that?.

Brian, thanks. 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 onboard and being dealers with us and subdealers. 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 in phase.

We made that announcement in the 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 has 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 into 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 Lennar transaction and buying SunStreet. We are getting a ton of new customers to run through, create leads and upsell batteries, load control, EV charging, secondary generation like gensets, 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 homebuilders to come on board as well to further drive the growth in that platform. .

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 5 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 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 adds in 4Q here?.

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 subdealers being added to some of our large wholesale dealers. And in terms of the regions, it's been across the board.

I would say that primarily in the West, we're seeing a huge amount of market share pickup 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. So 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 in markets like Texas.

Obviously, you've 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. And a lot is driven by Texas.

There is a huge amount of interest in storage, generators, anything – and 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 in hand on exclusivity, but we do have a number of – in fact, quite a large number of discussions going 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 got new technologies. The quote tool is getting revamped and launched out.

We've got some 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 Sunnova Network or platform that is attracting more and more dealers to come onboard and do all their business with us..

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 at a WACC 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?.

There's a little bit more art to it. When we first put those assets in, those are some of our oldest assets we had, we had 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 asset. A couple of 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. Our entire advance rate for that securitization is basically what we get in the investment-grade or the A tranche 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 any 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 in interest rate.

And yes, 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 coal 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 derisked asset class to coal. Includes assets that had 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..

Next question comes from the line of Joseph Osha from JMP Securities..

This is actually Hilary on for Joe. I appreciate you taking our questions this morning. I wanted to, first, just kind of touch back on those attach rates, understanding that 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?.

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 or 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 at a 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 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. 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. 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, a large piece, and incorporate gensets in with our solution offerings and possibly fuel cells with our deal with Enphase in the fuel cell array. We're testing the fuel cells in the field.

So, we see quite a strong market for the storage and we're quite happy to see a lot of providers come to the market because we need the supply to meet the demand. .

Last one for me is, just kind of wondering when you look at the existing customer base with the Lennar 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?.

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, 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 load 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 Lennar 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 Sunnova 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 that is giving us a very strong opportunity to upsell these new customers that are coming in, both the existing base and the potential bases coming with our friends at Lennar.

And that is, of course, in addition to what we already have and what we're doing in 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..

Your next question comes from Aric Lee from BofA..

I just wanted to ask just on the storage trends, you're talking about increased demand from consumers across multiple markets where 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, call it, 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 I would expect to see that, over the next couple of quarters, again, we're seeing a lot of dealers understand and finally get onboard and say, okay, this is what consumers want and we can make some more money here, let's go do this. 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 I understand. 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 an 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 end markets and we continue to see the attachment rates in areas that experience 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..

On the SunStreet acquisition and Lennar partnership, could you just talk about your expectations around increasing NCCV from $14,000 per customer to $18,000 to $20,000 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 will provide in the not-too-distant future to our customers.

And so, we do see that increase coming. As I just mentioned, in answering Hilary'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 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, margins are pretty strong and we like the trend. .

One last question from my end and then I'll pass it back to the queue 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, meaning CCAs? And are there any potential software partnerships that you're engaging in discussions here on?.

Well, we don't want to talk about the software partnerships. But, yes, there are. And 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 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 hard-working folks to come join the Sunnova 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..

Next question comes from the line of Philip Shen from ROTH Capital Partners..

First one is on guidance. When you think about your non-SunStreet growth in 2021 and you look back at your geographies for Q4 2020, we saw tremendous growth in Puerto Rico, in California, but a lot of the other geographies in States were flat, obviously, due to COVID.

But when you think about the non-SunStreet growth in this year, do you expect Puerto Rico to continue to grow at that clip? And can you talk through also the attach rates that you're seeing in Puerto Rico and California specifically?.

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, state or US territory.

And 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 deceptive either way.

And one of those 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 we're 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 as soon as we got batteries, we were to put them in service. We still have some of that in the backlog. So that tells you, again, when we forecast out to go answer that question is, we have a tremendous amount of backlog already sold that, in our competitors' 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..

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 you alluded to this in the prior answer or to the 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 for noticing and pointing that out. We will provide that and we will provide that on a trailing basis as well as – 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 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.

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 it's put in the corner someplace on non-GAAP metrics, this is giving you a full picture. The answer to your question on the interest rate side, I think it's very materially important. There's a lot of misunderstanding here. So, I want 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 playback, 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 the 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 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, 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 2017-1, 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 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 five to seven-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 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 MLP market in the decade before last is 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 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 as an 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 upfront. We don't plan for it. Last year, we had some cash flow that went out because as 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 will also make mention of this. If you look at the spread between the 5-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 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..

Our next question comes from the line of Mark Strouse from J.P. Morgan..

John, that was extremely helpful. I just had one question remaining. And it's regarding the safe harbor inventory.

Can you just remind us how much you have left? Realize 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 it as fast as possible as to reduce our interest costs.

But Rob?.

Yes, we've got about 60% to 70% of that left. I think that we're going to – one great thing about the SunStreet acquisition is that we've got another area to deploy those assets into. So we're probably going to use that up much faster than we 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 less when we get to the end of this year..

Our next question comes from the line of Ben Kallo from Baird..

I have a few questions. First, John, on the pricing for the Lennar deal, the way that I did it, the quick math was like $10,000 per customer, they do 10,000 homes.

So you paid $160 million in stock, I guess, around about for $110 million of the first year of – 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 questions on the earn-out. So, 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 of follow-ups..

Certainly. 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 a tie and, obviously, align Lennar and ourselves with – and it's us being conservative with the equity, as you expect, and demand, Ben. But it's 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, 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 Lennar, made it very clear, he sees this as a long-term investment. This is not 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 Sunnova. And we're just excited about what this can do and also move us into – we will do a master-planned community with microgrids with Lennar. 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 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 earnout doesn't happen. So, Lennar is very incentivized to making that happen.

So I want to point that earnout piece out. And essentially, the rest of this is, you're right, we paid 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 Sunnova 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 staged, if I missed, I'm sorry? And then just, you talked about the 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..

Happy to take it. We're basically getting tax equity on commercial terms, on arm's length commercial terms with Lennar, but it was very important to both of us. One, they've always used SunStreet as a place to exercise some of their tax capacity in the past. So, we're preserving that.

And certainly, for us, we want to continue to use tax equity to help lower the cost to the consumer and we'll continue to do that as well. So, it's something that really benefits both of us in multiple ways. And basically, 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 can certainly use more.

And at the same time, we have other tax equity funds that really like the homebuilder 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 – the one thing that we might hear is, or we have heard is, okay, you have very low interest rates right now.

What happens if interest rates increase and you have fewer homebuyers. 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 homebuilder 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 the 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..

Ben, I would add to that, is we certainly didn't see any decline in tax equity cost 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 homebuilder 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 homebuilding industry and so forth, and we could still be growing at a rapid rate, just trying to catch up some decent penetration rates as an industry and as a company. So, we feel confident about the move..

I guess on the grid services, the way I think it is, it's all margin going forward.

And I wonder – because I think someone asked earlier about the different opportunities with utilities and bilateral agreements and what different jurisdictions, 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 an impediment for that to grow because I think a lot of people are excited about the opportunity there?.

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, was 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 nanogrid, right, the system on the customer's home to be able to do some of these other energy, grid services and really just, again, think about it as a microgrid, too, so you could 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 Sunnova 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 Sunnova..

And my last two, you've been kind of running and got in with all of the capital market activity, SunStreet, Generac partnership, what does your Board think about your ability to continue to grow, I guess, through acquisition maybe and the throttle that you have on that front? And maybe I'll just leave it there..

Look, the statistics are not good on M&A across the economy, right? You learn that almost three-fourths of these are not accretive 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 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 Lennar. And the pricing was right as we went through and they took – and they're invested alongside us, withholding the stock for years.

So, all of that had to make sense for me to do this. And if it wasn't something that made that kind of compelling, really hugely compelling sense, I'm not going to do it. So, in terms of the board, the board trust 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 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..

Your next question comes from Michael Weinstein from Credit Suisse..

On loans versus leases, the loan mix, you talked about – you originally talked about a higher loan mix 2021, going up to about 40%.

But with Lennar, 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 for Lennar anyway?.

On the tax equity side, we are extremely comfortable. Rob's done a hell of a job. We have got a very good runway of tax equity. This deal with Lennar gives us multiple years of runway on tax equity.

And the minimum amount that was in the transaction, obviously, post close, we'll be able to start tranching and using that capital is just that, as Rob said, a minimum amount. And we fully expect to continue to grow our relationship with Lennar and have more tax equity provided there. I'm not aware.

It's possible they exist out there, if anybody else having a multiyear tax equity relationship. So, our runway on tax equity is awesome at this point in time, and we continue to go out there and search for more tax equity partners, but we're in great shape. And Rob has done a fantastic job there.

In terms of loan lease/PPA mix, it's actually more kind of in the mid-40s, as we talked about on October 29 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 unlevered 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 talk 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 frankly, 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, yes, leases are very attractive in the homebuilder 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 as something of that nature. I would expect to say that the market is going to stay more loan.

Supposedly, it's roughly about 70%/30% away from us, and I expect the market to continue to be roughly in the mix of 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 homebuilder? 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 honorable 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 even in the pre-IPO meetings, right, we look at it all together because of that agnostic view on earnings -- sorry, on financing. .

Also, maybe could you break out the amount of growth of the 40% this year from Lennar and how much is from other sources?.

You're talking about for 2022?.

Yes, yes, exactly. Sorry..

Yes, sure. We haven't broken that out yet. But I would expect that the homebuilder business would grow at the 40%, and then the rest of the business would grow at some -- at roughly that as well. So that's really much of a non-answer.

But at the end of the day, we feel -- 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, I guess, on my part..

And you spoke briefly about grid services giving – and I guess, people needed to be on a lease or be beneficial to release in order to be part of the network.

Is it possible for owners to join Sunnova 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 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 seem to get into every day with clients. Do you see an advantage or maybe a financial advantage for Sunnova and one or the other over time, as you look into the future.

Is tax cutting programs such as SunStreet, et cetera, just – do you think – or as equipment prices come down, do you think that one will be better for Sunnova than the other, loans or leases?.

I think that has – you have to guess or estimate what happens in the world, which is increasingly harder to do, right? Tell me what the politicians in Washington are going to do this year versus next year and so forth. And so, 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 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 that 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 equity to – sorry, our 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 asset level equity on lease and PPA, 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 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 with the fantastic performance of the paper, not just us, but the entire industry, right, Michael.

I think all of 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. .

Your last question comes from the line of Graham Price from Raymond James..

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're already doing on the East Coast?.

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 fits in our footprint, which ERCOT is, we are active in it and we're trying to get the deals that make sense for us and our customers. 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 hopefully, they'll facilitate, and they need to understand that we are the solution, distributed power, the service that Sunnova 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. 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, my fellow Texans. .

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?.

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 rage a lot of the plan.

So, more and more, I think that 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 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 permit 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. I think we will get refundability for at least a year or two..

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 their 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, 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 of these new energy technologies together – solar, inverters, batteries, secondary generation supplies like gensets, 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 of 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..