Sunnova Energy International, Inc. (NYSE:NOVA) Q3 2022 Earnings Conference Call October 27, 2022 8:00 AM ET
Company Participants
Rodney McMahan – VP, IR
William Berger – Chairman, President & CEO
Robert Lane – EVP & CFO
Conference Call Participants
Philip Shen – ROTH Capital Partners
Julien Dumoulin-Smith – Bank of America Merrill Lynch
Maheep Mandloi – Crédit Suisse
Sophie Karp – KeyBanc Capital Markets
David Peters – Wolfe Research
Sean Morgan – Evercore ISI
Pavel Molchanov – Raymond James & Associates
James Bardowski – GLJ Research
Brian Lee – Goldman Sachs
Praneeth Satish – Wells Fargo Securities
Abhishek Sinha – Northland Capital Markets
Elvira Scotto – RBC Capital Markets
Kasope Harrison – Piper Sandler & Co.
Mark Strouse – JPMorgan Chase & Co.
Operator
Good morning, and welcome to Sunnova’s Third Quarter 2022 Earnings Conference Call. Today’s call is being recorded, and we have allocated an hour for prepared remarks and question and answer. 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.
Rodney McMahan
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 reconciliations and cautionary disclosures. On the call today are John Berger, Sunnova’s Chairman and Chief Executive Officer; and Robert Lane, Executive Vice President and Chief Financial Officer. I will now turn the call over to John.
William Berger
Good morning, and thank you for joining us. When I founded Sunnova, I 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 Trifecta, energy affordability, energy security and climate change.
Now as we look to celebrate our 10-year anniversary, it is clear that Sunnova has built high credit quality, long-term cash flows that have created a strong balance sheet to ride 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 position Sunnova for what we had anticipated to be a more challenging macro environment. This meant working with our dealers to raise pricing as well as fortifying Sunnova’s balance sheet are raising more liquidity than projected and on an accelerated basis.
These actions, coupled with our long-term contracted cash flows, have placed the company in what we believe to be an optimal liquidity position for these challenging economic times. 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 NCCV and the fully burdened unlooked 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 refinancing and mortgages and overall concerns about the economy have caused our loan customers to keep cash on hand rather than make unscheduled 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 to Sunnova. As a result, we are lowering our full year 2022 guidance for the principle 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 of 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 cease 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 this same interest rate movement has had a positive impact on the mark-to-market value of Sunnova’s interest rate hedges.
As of September 30, 2022, our derivative asset position on these hedges stood at $118 million. As rising interest rates reduce 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 to receive 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 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 4 summarizes the growth in Sunnova’s customers, battery penetration and dealer network. In the third quarter of 2022, we added approximately 21,800 customers, more unique customer additions than in any other quarter in the company’s history. This brings our total customer count to nearly 0.25 million as of September 30, 2022. While this record is impressive, we expect to add over 30,000 customers in the fourth quarter to put us within guidance range of 85,000 to 89,000 customer additions for full year 2022.
Our battery attachment rate on origination for the third quarter of 2022 was 30%. More importantly, our battery penetration rate continues to grow and reached 14.5% as of September 30, 2022, inclusive of over 2,200 battery retrofits we have performed live to date. The availability 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 1,000 dealers, sub-dealers and new homes installers with our latest de-tracount currently standing at 1,033 as of September 30, 2022. Our ability to surpass this target ahead of schedule was driven by the attractiveness of Sunnova’s dealer-friendly business model and technology platform.
Finally, on Slide 4, we updated our information on customer contract life and expected cash inflows. As of September 30, 2022, the weighted average contract life remaining on our customer contracts equaled 22.3 years and expected cash inflows from those customers over the next 12 months increased to $459 million, an increase of 39% from September 30, 2021. I will now hand the call over to Rob.
Robert Lane
Thank you, John. Starting on Slide 6, 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 complemented by our growing gain on sale revenue stream. Gain on sale earnings can and will generate material revenues at a strong margin and include activities such as equipment sales to dealers, repair services to our Sunnova 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 in the inflation Reduction Act, or IRA, which we will update pending guidance from the Department of the Treasury. This activity will provide additional sources of liquidity while bringing Sunnova 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 towards enhancing and complementing shareholder value and long-term cash flows. Slide 7 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, a $690 million warehouse restructuring for our leases and power purchase agreements and a $575 million loan warehouse restructuring. While our securitizations continue to price yields above prior year issuances, our weighted average cost of debt and issuance remains well within the 400 basis point range at 4.3%. 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 cap 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 markets should continue to weaken. This debt issuance addressed the 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 17.
Included in our $841 million of liquidity as of September 30, 2022, 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 available unencumbered assets as of September 30, 2022, this 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 of in-the-money interest rate hedges or further warehouse expansions later this year.
On Slide 8, you will see our fully burdened unlevered return on new origination increased to 9.4% as of September 30, 2022, based on a trailing 12 months. On a quarter-to-date basis, this return equaled 10.2% as of September 30, 2022, an increase of 50 basis points since June 30, 2022, 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, gives Sunnova significant pricing power. We expect this pricing power to continue leading to even further increases in our fully burdened unlevered return over the final 3 months of the year and into 2023.
Please note these spread metrics do not take into account the large in-the-money position of our interest rate hedges. While 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 Sunnova. Sunnova is cheaper and more reliable with the centralized power monopoly, which means consumers exercising even a minimum of personal economic sanity will 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 9 reflects the strong growth we have seen in both our gross contracted customer value or GCCV and NCCV. As of September 30, 2022, NCCV was $2.6 billion discounted at 4%, an increase of 42% compared to September 30, 2021. Our September 30, 2022, NCCV at this discount rate equates to approximately $10,400 per customer and $22.38 per share. At a 6% discount rate, our September 30, 2022, NCCD was $2 billion or $17.65 per share, an increase of 48% since September 30, 2021. And our September 30, 2022, NCCV at a 5% discount rate was $2.3 billion or $19.85 per share.
We use NCCV to demonstrate a floor valuation for Sunnova. Nonetheless, it remains an overly punitive way to view our blowdown value as it gives us 0 value for growth even in a post IRA world, our platform or the customer option value we retain. It includes no value for customer upsells, up-powerings or renewals, 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 our record low default and delinquency rates, the NCCD we realized as we move through time is well above the discounted value. This directly benefits Sunnova as we have elected to retain our long-term contracted cash flows, but it also gives us option value for those cash flows in the future.
In short, NCCV is locked in cash flows against lock in interest rates that is unaffected by the fluctuations in the credit markets today. And as we continue to add NCCV, we continue to do so at positive implied spreads even in this interest rate environment. Slides 11 through 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 in response to the decline in unscheduled principal payments from our customers, driven by increasing interest rates. 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 and $60 million, reducing adjusted operating cash flow from between $143 million and $153 million to 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 year 2020 guidance for customer additions and adjusted EBITDA remains unchanged. We updated the liquidity forecast to reflect the move in net proceeds from corporate capital from 2023 to 2022 due to the August convertible debt issuance. We have also modified the expected split between net proceeds from tax equity and net borrowings from nonrecourse debt over the 2 years shown to reflect a greater utilization of tax equity going forward as we anticipate a sizable shift in contract mix away from loans to leases and PPAs.
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 30, 2022, 100% and 88% of the midpoint 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 clarity, approximately 30% 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.
William Berger
Thanks, Rob. Spurred by our success and expertise in residential solar and the increasing demand we are seeing for the Sunnova Adaptive Home. We’ve expanded into the commercial solar market to offer the Sunnova adaptive business. 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 Sunnova Adaptive Home and Sunnova Adaptive business offerings will help us realize our vision of operating Sunnova adaptive communities. We continue to see strong growth in service only customers, including non-Sunnova customers in need of repair and maintenance service.
Our ability to provide this high-margin last-mile service is unique to the industry and 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 move Sunnova closer to positive GAAP EPS over time, enhance 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.
Sunnova’s 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 our potentially affected solar plus storage customer systems into backup mode to prepare for power outages. It was incredibly beneficial to be a Sunnova 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 lead for our storage attached customers was only 1 hour across a 5.5-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 service 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 mere 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 Nova as an essential energy service. Indeed, a growing number of our customers would consider Sunnova as their primary power source for their home.
As our equity valuation exhibits, many in the investment community have concerns about headwinds facing Sunnova, our industry and the global economy. We remain bullish in our company due to the following reasons: a strong balance sheet, coupled with high credit quality long-term cash flows, which has us prepared for difficult economic conditions, a 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 Sunnova 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 in the global energy industry. With that, operator, please open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question today comes from the line of Philip Shen from ROTH Capital Partners.
Philip Shen
Given the rising rate environment, we’re 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 resi-solar segment. I think you guys are very well positioned with your lease business and things should accelerate with the ITC adders available for lease as well and those not being available for the loan. That said, what kind of risk do you see for your ’23 growth outlook? How do you expect your lease versus loan mix trend as we get through ’23? And are you seeing demand for your loans slow down? If not, why do you think your loans may not be slowing down versus the industry?
William Berger
Phil, this is John. Thanks for the question. We’re actually looking 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 has been mixed in over time, that’s probably not well understood. I think we could all understand home improvement is 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 maybe next month or December. And I don’t think we’d see it any later than January just given where the ITC adders and guidance from treasury are 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 debt, 100% of the capital structure is debt, are very disadvantaged with regards to 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 the end of the day, going through these hurricanes, whether it was a loan or a lease, we responded to 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 are recognizing that service from us is becoming their primary power source.
And that has, I think, a lot of implications, remarkable implications for the entire power industry but certainly for our industry that I think a lot of investors need to rethink 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, almost decade that Sunnova’s been alive. And we’re certainly seeing that and have 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.
Philip Shen
Great. you’ve been ahead of the pack when it comes to raising prices. Let’s talk about unit economics. year-to-date, how much have you raised prices on average, 10%, 20% 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 additionally, as you survey your addressable markets in states, do you see states were lease or 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 in minimum levered IRRs for your lease and loan products? And how do they compare with the past? In other words, have you lowered or increased these targets?
William Berger
Yes. If you look at our Q4 fully burdened unlevered return of last year, that was 8.7%. The forward on this past quarter was 10.2%. 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 the Q2 call. So 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 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 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 has definitely come off over the last few months, particularly natural gas.
I think roughly about last time that was around $8 a an it’s right about $55 at the hub at this point in time in the U.S. That’s going to translate to something around $0.02, $0.025 a kilowatt hour. But a lot of those fuel prices moving from, say, call it, 250 for where the natural gas was for several years, has not been fully baked in by — in 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, we’re expecting to see something for instance, in Georgia, out a southern company that’s quite a large power increase to pay for the massive cost overruns of Vobal.
So 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 a couple of quarters. I don’t know, Rob, do you have anything you wanted to comment on?
Robert Lane
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 because folks realize that it’s not just about savings, it’s about the reliability as well. If they’re going to be paying for savings. They want to make sure that they’re getting the power at the same time and that they’re not having to fall back on an ever-increasing price grid. We’re able to sell that with sells through, we think, a lot of the folks who are just competing merely on price.
William Berger
And one final thing, Phil, I’ll add is the ITC adder. It seems like everybody has forgotten about those over the past few weeks. Those are all on just leases and PPAs as you made the comments on and that’s 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 here. And I think the glass is definitely more than half full instead of half empty as the market clearly is seeing at this point in time with regards to margins.
Operator
The next question today comes from the line of Julien Dumoulin-Smith from Bank of America.
Julien Dumoulin-Smith
Just to keep on going on the same theme here, if I can. 23, you guys are reaffirming your Triple Double Triple can you comment on the backfill for the 530 that you guys have to obviously prepay moving around. But what are the other moving pieces there? Perhaps there’s a little bit of a leading conversation in the not what else is driving positive offsets?
Robert Lane
Julien, it’s Rob. I certainly don’t want to spill any surprises we might have in a couple of weeks. But you’re absolutely right about the prepayments, but it has a couple of knock-on effects. One is that the scheduled principle is now higher in our forecast, even though we are budgeting for next year, lower prepayments than we had previously put in but we’re also originating loans at higher interest rates over the 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 the fully burden number of returns.
Those returns translate directly as higher revenue 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 mention in the prepared comments some of the gain on sale catalyst that we continue to see increasing. Some of that was already always in there. Some of those opportunities are increasing, especially on the new home side. We’re seeing more folks look just opt to go ahead and just purchase.
But there’s — the other big one is the services. oil across the board at what’s been differentiating Sunnova and where we’ve seen some negative press as far as some of the other dealers out there in the market where you find bankruptcy and the like. It really comes back to service. This is giving us a huge number of opportunities to come back into the market, find new customers, provide them the high-margin repair service and then start to bring them in as service customers beyond that. So really just a combination of things that is going to show higher interest income even with lower principal payments, but much higher adjusted EBITDA.
Julien Dumoulin-Smith
Got it. Okay. Excellent. And then if I can pivot here a little bit. Obviously, prepaid is moving around here. I just wonder a firm that doesn’t change, obviously, the unlevered IRR repayment and then also your NAV calculations, just 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 IRRs, what’s your expectation on that metric on a leading indicator on a trailing basis, the ability to continue to raise that. But again, if we can hit the first part on clarifying the NAV and IRR and then separately the expectations, respectively.
Robert Lane
Yes. I mean it really hasn’t hit the IRR all that much. I mean when we do the pricing, we look at a very long-term CPR, the prepayment rate. So we look at it with projections across interest rate cycles. So sometimes there’s just a little bit of timing. But we usually have fairly modest prepayment rates within our projections to assume what the loan prepayments are going to end up being over the life. We always expect that there’s going to be increases. We always expect that there’s going to be decreases in that folks will take advantage of those decreases, while the folks will just want to make sure that they just pay their loan on a steady state throughout the life of the loan.
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 the expectations for increasing in the 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 for that on was back in the fourth quarter of last year. So that’s going to be coming out.
So in the 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, and 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 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.
William Berger
I think, Julien, 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, I think we’re still using parts of the bond that we did a couple of… So that’s something that the — we have a cost of capital advantage, full stop, no argument on that versus the competition. And we’ve talked about this over the years, right? This is the point of having a balance sheet is 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 and closings that we can discuss here in the near future that we think is going to be able to give us a cost of capital advantage to as well. So 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 be able to push up. And as we get the ITC adders and here as we move into the new year, we’re confident in continuing to push that unlevered return out if the current rate environment continues.
Julien Dumoulin-Smith
Got it. But not too materially impacting the NAV IRR in terms of prepayment assumptions just to reaffirm that.
William Berger
Yes, we didn’t answer the NAV, you’re right. Sorry about that. It does not affect the NAV at all. The NCCV per share at all. Correct.
Operator
The next question today comes from the line of Maheep Mandloi from Credit Suisse.
Maheep Mandloi
First is on the tax credits under the expecting guidance from the treasury. But could you just talk about like moving from the 26% to 30%. Could we 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? Go ahead.
William Berger
I’d say that there’s some effects this year where existing tax equity funds are going to have 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 either lower their longer-term cash income from the fund in order to make sure it goes back to the original IRRs. In some cases, we’ve had folks who have wanted to take advantage to put more capital into 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 23 as far as how we’re going to be treating those, how it’s going to be reflected in the fully burden on number of return, really, you’re not really going to see any much of a change because we didn’t — we’re not going back and recalculating something even if it is now at a higher return because that wasn’t the return that was originated. We want to try to keep our metrics truly what they are and not try to go back and say, Oh, now this metric is better. But I think that from a practical standpoint, that is true. Some of our prior originated leases in PCs are actually now at a higher return than we originally expected them to be. We will be using though the adders where appropriate and the higher ITCs in order to enhance our returns, but also to enhance the opportunities and savings for the customer. Got it.
And just to clarify, so for this year’s leases prepaid at the prior where you had that uplift. Most of that will probably be shared with the tax equity, either in paying down the…
Robert Lane
It actually comes back — it actually comes back mostly to us in that case, but it really depends on how they want to treat it. Do they want to put in more capital today? Or do they want to have a decreased fewer less cash return to them in the future in order to reach the same IRRs.
Maheep Mandloi
Got you. Appreciate we’ll definitely get more clarity on November 17 on that. And just a quick follow-up just on the cash flows or cash needs here. Just looking at this quarter, excluding the convertible debt proceeds, it looks like you had a cash draw out, right? So just trying to wonder — try to see if I’m missing something over there? And how should we think about tax equity needs?
Robert Lane
Yes. So ABS and tax equity really hasn’t 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 in the warehouses, even though we have significant collateral and capability to do so. we could have drawn several hundred million dollars 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 hasn’t changed 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.
Operator
The next question today comes from the line of Pavel Molchanov from Raymond James.
Pavel Molchanov
Last month, you announced that you’re getting into the commercial market. 2 questions on that. What is the profile for margins and profitability compared to the traditional residential business.
William Berger
Pavel, 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 in this business. It’s on the smaller side, for the most part, is commercial. And we are seeing quite a bit of demand to say the least. I think at this point, we’re starting to not be able to even analyze business. It’s been that heavy on this. 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 obviously are 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 returns and the demand in that area of the market.
Pavel Molchanov
And will the financing model or the mix of between securitization tax equity remain the same as you move more into the commercial space?
William Berger
It really depends on the opportunity that’s afforded to us. There are 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 there are out there that the ITC provides us and that the different leverage markets provide us as well. There’s not a need at this point to take — to plant a flag and say this is exactly what we’re going to be doing because there are so many opportunities out there. But we will provide more guidance.
Operator
The next question today comes from the line of Sophie Karp from KeyBanc.
Sophie Karp
Could you given the interest volatility, interest rate volatility after the close of the quarter, do you have any sense or something you could share about what the cost of capital of the spread would look like today versus 90, I guess, is what you showed in your slide?
William Berger
I think I’ll let Rob comment on the corporate capital. But again, Sophie, this is John, by the way. The plan, as we laid out was pretty conservative. So 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, again, 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 may mention avail reference of additional pieces of 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 unlocked return more than we expected even 30 days ago to your point. So a lot of competition is, frankly, in a very desperate situation where they have to continue to raise rates. They were too slow to do it in the first part of the year, we raised the earliest above anybody, and we’re in a nice enable position that we didn’t burn capital in the first part of the year, and we’ll continue to weigh margin over growth, and growth has been pretty good. In fact, one comment I would make is, as I look into 2023, just to remind everybody the Triple Double Triple has a guidance down essentially of growth rate over a period of years.
And we continue to see, as I mentioned in the first question, very strong growth as recently as this quarter — this 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, as 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 growth. And there’s no reason for us to raise that kind of guidance at this point in time because frankly, where the share price is, why do it? But I think that more and more, it’s like there’s going to be some higher growth and stronger growth and certainly more confidence in growth as we look forward in time. Rob you have any more comments on the capital?
Robert Lane
Yes, new specifically to the interest rates right now, Sophie. I mean I think that the ABS market, you can take a look at some of the more recent prints, the spreads have been a little bit wider and the difference in spreads between attachment points have been a little bit wider than we would have seen, say, a year ago. I think that what 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 you’ll see other asset classes, especially consumer asset classes that still get rated about the same as us along certain attachment points.
But there’s really not a high correlation so our BBB is a much higher certainty of being paid than you might find like a subprime auto BBB. But where we’re being confident is someone who can buy the subprime auto, BBB versus buying our BBB. If you looked at how the other markets have gone, that’s really what we’re fighting. We think 2 things really need to happen. One is that the increases 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 in stabilization will bring those spreads in significantly.
But we have, within our forecasting, including when we recut our liquidity forecasting, we had already taken down the assumed ABS proceeds that we thought that we would get about 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 and a low advance rate for the next 18 months that softens a bit into mid-2024. So our capital needs, to John’s point earlier, they’re taking care of even taking into account what we would say is probably a less firmly environment than we first started showing that slide.
Sophie Karp
Last question I had was how thin of a percentage of your business is new home construction. Is it material or something we need to track as it relates to your business?
Robert Lane
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, has been a fairly big bear in the economy and the inflation problem for a while. 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 business certainly into next year. 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 a very — we already have bearish forecasting planned into our Triple Double Triple plan for next year.
Sophie Karp
Got it. One last for me. Would you get to comment on the response that’s filed in your Mysore pocket in California?
Robert Lane
My only comment is that I think people deserve choice. They deserve the better 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 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 people. It’s something that is time has come. We need — we have new technologies. We have the ability to bring service where these monopolies refused to even offer service.
That’s not well known out there, but there is a growing number of communities across the country where the utility monopoly says, no, I can’t get to you anytime soon, like for years. And so that there’s 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. We want essentially a quality on both sides of the meter.
How do you argue against the quality there is 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 home as far as energy goes, they should be able to do that. I think that’s just a fundamental right as an American. And we expect that the growing number of people across the country will continue to scream ever allowed or 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.
Operator
The next question today comes from the line of Mark Strouse from JPMorgan.
Mark Strouse
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. Curious in your fears, if that’s something that’s 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 and you prove that out.
William Berger
Mark… Yes, thanks for the question. I think it is a good one because the key part here is 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’re important. We’re not dismissing it, but at the same time, nothing is more important than people paying you. That’s just fundamental in the 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 that people are paying us more and more because they’re valuing the service, their value and the pricing 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 is 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 where they get too happy when the market is doing well, and they get too negative when the market is doing poorly like it is now. But always, there’s 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 shouldn’t have a risk premium that’s 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 we 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 an essential service, so whether you have fears of the future in terms of economics, which a growing number of people do, if not all Americans do at this point, you’re going to prioritize those essential bills, and we’re in the central build, just given that you can’t cut off the energy and the water to your home. And 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, end of next year. But at some point, the market is going to reflect it. And that risk premium regardless of where the Fed has rates and the market has rates in terms of the base and risk-free rates, that risk premium is going to come in to reflect those actual default rates.
Mark Strouse
Okay. Great. And then I’ll avoid names here just because I want to focus on Sunnova. But one of the relatively smaller installers in the industry recently filed for bankruptcy, siting equipment failures. And I believe that you use some of the equipment that, that company was using. So I just want to make sure that whether or not you are seeing similar issues with that equipment and if that’s something that might lead to kind of elevated expenses near term?
William Berger
Yes. I’ll avoid names, too. And they were a pretty decent sized shop as far as contracting alpha. First of all, the equipment 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 have it 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 a good job of owning and taking care of the customers with us and maybe some others.
But in terms of any sort of real systemic issue and so forth with that equipment, we don’t see it. And we certainly have seen other equipment failures over the years. And as the customer base in the United States gets bigger in terms of speaking of residential solar, you’re going to expect to see these pieces of equipment fail and who’s fixing all that. No one, except us. That’s flat out everybody else in the entire industry, including equipment manufacturers to focus on the new customers, not the existing ones. So that’s a business that we feel quite strongly about. We’ve talked about that over the years, as you know, so it’s not a new thing.
And we’re seeing tremendous growth. We’re seeing contracts being issued to us. And so the stability of that business in terms of Sunnova repair 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 taking 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 buy a product. But I think things are going to work out fine there with the respect of equipment manufacturer that’s been dealing with all this. I think they’ll be fine.
Operator
The next question today comes from the line of Elvira Scotto from RBC Capital Markets.
Elvira Scotto
Noticed that the battery attach rate this quarter was a little lower versus last quarter despite an improvement in availability of batteries that you mentioned in your prepared remarks. Can you provide any detail as to that decline? And then where do you see battery attach rate headed over the next 5 quarters or so exiting 2023? And what’s embedded in Triple Double Triple?
William Berger
This is John. So first of all, we’ve 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 have told you the same thing. That’s immaterial. And I could not stress that more. It’s immaterial in a big way. I would not look at that delta at all, even something that’s a little bit wider than that, meaningless. Look at the penetration rate and that continue to move up. 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 and where we have been. 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 NCCV per share as we move forward in time next year.
Elvira Scotto
Great. That’s very helpful. And then just wanted to follow up on the adjusted EBITDA, that $530 million EBITDA plus P&I in 2023. What are some of the puts and takes that you’re looking at that in terms of we still haven’t heard kind of like anything on California and NeM3.0. And then obviously, IRA is going to be a positive and then 3.0 could be a negative. I’m not sure what’s embedded in the guidance there? And then on top of that, just also just supply availability to actually see the growth, I guess?
Robert Lane
This is Rob. I think we gave some of the guidance as far as some of the particulars in our answer to Julien’s question earlier, so I don’t want to restate that. We don’t think NM 3.0 is 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 availability. So we really don’t see that as something that’s going to be a mass growth. And just take a look at shipping rates across the Pacific. Now they’re back down to pretty much pre-pandemic levels. That should give you some pretty good indications right there as far as equipment is involved.
Operator
The next question today comes from the line of Abhishek Sinha from Northland Financial.
Abhishek Sinha
I just wanted to maybe get a more deeper dive on the commercial space. I know you talked about how the demand is high and that’s a surprise. But if you could talk about a little bit more specific, like have you got any contracts within retailers? Anything more specific that we can harp on. And then also, if you could remind us how does IRA differ in terms of the impact on the residential side versus commercial side, if there’s anything specific.
William Berger
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 it at Analyst Day, but I appreciate the question.
Operator
The next question today comes from the line of from the line of .
Sean Morgan
This is Sean with Evercore ISI. Guys, if you can hear me. So with regards to some of the adders for the IRA, I think a lot of the market has been focused on sort of the contracting manufacturing side. But with respect to the IRA and for the residential market in particular, do you think that you’ll do apply some of these low income, domestic content or perhaps some of the Census Bureau tracks for sort of regions disadvantaged by the energy transition to sort of add to the 30% ITC. And if so, what do you think the upper limit is for sort of recaps on the total CapEx for a typical system, I guess, in the best case and sort of a basic case scenario?
William Berger
Best case scenario is 70%, right? So that’s — I think that one is pretty clear. And if you look at it from an F&B standpoint and just comparing it to CapEx but not total cost because you have to be trying to take into account the total cost, you could see even more of the stack being financed that way. We think that in some of our markets, we’ve taken a look and we’d already be at about 45% ITC in some of those markets. So that’s pretty encouraging right there for us. And that would end up translating to given some of our tax equity more than half the cost of our stack. If we took a step back and just looked at just on a pure cost basis, obviously, 45 translates to 45.
But we believe we’ll be able to take significant advantage of it. And 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 domestic content, that’s going to come in, we think, a lot more in the next 2, 3 years, once 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 some other components that are manufactured right here in the U.S. very few of the inverters are manufactured in the U.S. So that’s one thing that we can’t use for most of our content adders. But again, to your point, a lot of the other adders are not individual based, but are based more on zones, economic zones or ZIP codes that are defined by the IRS. And so you could still find very high credit quality customers within those zones that we would have sold to anyway. So for us, it’s really just land at.
Sean Morgan
Okay. And then you talked a little bit about delinquency at the start of the prepared remarks. Just wondering what proportion of any delinquency risk is retained after you kind of go through the ABS process, whether it’s via support tranches that you maintain? Or if you kind of look at that business mix kind of after things exit the warehouse financing, what proportion of that of, say, a typical delinquency would Sunnova wear 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 and it starts with our credit and underwriting goes through our service and continues through our doing. We were all of it.
Operator
The next question today comes from the line of Kashy Harrison from Piper Sandler.
Kasope Harrison
I think you guys in the past have provided a rule of thumb that $0.015 per kilowatt hour offset 100 bps in 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?
William Berger
This is John. That’s a good question, and I don’t have an answer for you. It’s definitely increased, and we’re seeing more increases in this fourth quarter, but we’ll have to get back to you on that. We don’t have a specific answer for you to your question.
Kasope Harrison
Okay. Yes. And I’ll follow up with you offline. And then my second question, the full year customer guide, as you indicated, implies north of 30,000 customer additions in 4Q. 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 in the connections and the utilities.
William Berger
Yes. First of all, we are pretty well covered up in batteries at this point in time. That’s a material difference than last year where we were limited in some regards to the supply chain or supply batteries. And the other is that our service business has been as I mentioned earlier, I think I called it a rocket ship, right? And that’s been really taking off 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 sold in out the door by the end of the year, and so that’s another big push. We also are seeing some on the PTO side, a little bit slow over the last 3 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 numbers for next year, for the last 6 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 supply chain 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 that’s another thing that doesn’t go to customer account, but certainly goes to NCCV. And when you look at NCCV per share at any discount rate, it’s pretty low, right? And so we’re going to expect to see that in CCB per share increase pretty strongly this quarter. And that’s another thing that points to just overall, the growth has been strong. We expect it to be strong, but also be very profitable.
Robert Lane
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 2 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 to get folks in service. So a lot of that in-service got pushed out into October.
Operator
The next question today comes from the line of David Peters from Wolfe Research.
David Peters
I just wanted to squeeze one in quickly here. Just some of the offsets that you expect for the lower expected principal payments, I guess, into ’23. Specific to the loan sales, just how should we be thinking about timing, magnitude of that versus, I guess, kind of what you hold today? And is this just something you guys are looking at to do opportunistically? Or should it kind of be a reoccurring thing going forward?
Robert Lane
And just to clarify, we actually expect scheduled principal payments to increase. It is the unscheduled 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 and continuing 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. We 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. So certainly, if there are opportunistic things out there, we’ll take advantage of it. But it’s really just a thin layer, we think, of what we’re going to be doing from as far as the Triple Double Triple. We don’t think that’s a sort of make or break part of the triple-triple is just an adder to it.
David Peters
Okay. And then, like, if you were to rank, I guess, kind of the offsets that you highlighted, Rob, like what would you say is most to kind of lease impact for offsetting that unscheduled principal piece?
Robert Lane
I think the biggest one that you should match up against the lack of the unscheduled is the increase in the scheduled and the increase in interest income. I think that there’s going to be definitely more gain on sale, that’s sort of how we would look and say, well, how are you growing the adjusted EBITDA portion of it. And there’s some IRA opportunities we’re looking at as well to try to take advantage of that we think can enhance it further. And again, this goes to a question to a point that Tom 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 try to raise the states. We’re really focusing on hitting that triple-double triple if we can do better than that with opportunistically, we’ll certainly do so.
Operator
The next question today comes from the line of Brian Lee from Goldman Sachs.
Brian Lee
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 — is 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.
William Berger
We’ve always talked about 5% being the long-term target that we were talking about that we still think we can get to 6 at some time here in the next couple of quarters. So when we look at our modeling, we model long term at 5%, but we still think we can get to 6 here in the early part of 2023. But the markets could make that more difficult and the markets can make that easier, but that’s definitely still what we’re pushing towards, Brian.
Brian Lee
Okay. Understood. Fair enough. And then just a question around the growth guidance here. If I look year-to-date, 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, your lease and PPA customer adds are up like 10% and loan customers are up more than double so literally, all your growth this year has come from the loan book. So as you think about the Triple Double Triple targets, it’s 42% customer growth for ’23.
It seems like a lot of that is going to come from lease and PPA now versus what you saw this year. So 2-part question here. One is you’re saying demand is really good. You see 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 you’re seeing? And then 2, I didn’t see tax equity in your liquidity forecast pick up too much. I mean I think it’s up $100 million versus what you guys said last quarter. Do you have the capacity to accommodate a whole lot more lease in PPA customers if that’s what the composition is going to look like next year.
William Berger
Yes, Brian, this is John. I’ll let Rob answer the last part there as far as capital. But we expect to see — it’s 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 maybe 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 something in terms of a breakout in the forecast of 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 is 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 breakout, we’re not going to do it. But we certainly look at the math. And I think coming away with any other assumption, then leasing PPA goes up materially. I don’t know how you would get there. And I think that’s your point, and we agree with your point, Rob, the capital structure.
Robert Lane
Yes. I mean we’re looking at increasing — we did increase the tax equity portion a little bit. Again, to John, we’re not really shifting the mix too much in our modeling, even though we think that there’s definitely more upside on the leases and PPAs. But really, the part of that tactics a little bit of a reflection of the fact that we think there’s going to be higher ITCs we’ll be able to take advantage of. But again, we’re not looking at a huge shift we think that there definitely could be one. But we’re not — because to John’s point, we’re seeing the market is a battleship, not a destroyer. So we’re seeing the turn to be a little bit slower, and we’re probably just forecasting that.
Operator
The next question today comes from the line of James Bardowski from GLJ Research.
James Bardowski
Just a few of mine in. First, just in light of the record free cash flow burn this quarter of $3 million, $12 million, which is almost half of what we saw all of last year. And 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 looking at you guys are now selling inventory to your dealers, which I think you started in April. And it seems like further not a lot you could tentially turn around and buy those same projects back from your dealers. So should we expect this to be a recurring theme? Is this 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.
Robert Lane
Yes. I think that on the inventory side, that’s a fairly good question. But we’re exchanging higher — we’re having 2 things. One is higher inventory purchases because we’re bringing more of that inventory in and we haven’t been bringing it in before. And then, of course, there’s the AR side of that as well. So I think that’s really what you’re seeing. We expect that to stabilize a little bit going into next year. But again, when you look at the investing and the financing, that’s balancing out pretty good, which is also good as you know, why we do that corporate cash reconciliation. So you could see how we’re truly looking at the ongoing business versus the DevCo side of the business. GAAP is not necessarily our friend. But you know what, we’ll own it. As we said in the prepared comments, we’re looking to try to get to GAAP earnings positive and GAAP OCF positive. So it’s definitely, I think, a bit of a change when it comes to how we’re accounting for it because of how we’re moving the equipment. But at the end of the day, we expect that cash flow burn to not be the negative cash flow to neutralize.
James Bardowski
That’s extremely helpful. Just 2 more for my income. So when I look at the discount rate you guys are currently using, since 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 1Q ’21. However, in 1Q ’21, the 10-year yield was at 1.74% and today, it’s sitting at 4.07 36%, so much higher on the 10-year yield. So the discount rate you’re 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 will you keep it the same?
And then the last question for me is, we talked about this before, Robert, I just want to get some clarification here. You guys are still using these appraisers, Nova Granda and Alvarez & Marcell to do your appraisals. And I think one of your peers and everybody in your 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 are valued is because the appraisals include — I guess — I’m sorry, the overall costs include warranty costs, underwriting cost services costs, et cetera, that aren’t included in arm’s league sales.
However, from our understanding IRS guidelines using the cost approach do not include any warranty underwriting or service costs in the price you show them. So is there the potential, given there’s been roughly 4 million systems sold, 1 million of which were cash transaction that you guys will shift the approach you’re using to show the IRS, the cost of these systems to get tax credit through an Arles approach versus this appraisal approach.
William Berger
Yes. No, I’m happy to address those. So I think that your first question was on the discount rate. And I think as we told your colleague get 2 quarters ago, here’s whatever discount rate you want. We’re showing 4, 5 and 6. So feel free to use whatever discount rate you feel is most appropriate. What we would just point out is that almost everything that is included in there is locked in cash flows against locked-in debt that does — and that debt, we don’t have any refinancings for another 4-plus years. So plenty of time for us to go back to 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 there’s a bit of a misnomer when folks say that they’re going to compare it to a cash sale from some guy out of the back of the truck who’s going to go ahead and just drop off the panels at your home and have you install themselves or someone who’s not going to stand behind the work or in the case of somebody who’s just doing a cash sale without providing any additional service, I mean that’s all that they’re paying for. From our standpoint, the customer is buying that equipment, and they’re buying the installation. And yes, they’re buying the service behind it. But the warranty, the FMBs that we’re getting on the warranty are usually less than the NCCV that we would — or sorry, the GCCV, that we would actually value that system at.
So we do use third parties like algorithm, Marcelo to be able to provide us with a true third-party valuation for those assets for tax purposes. This is something that is — that isn’t new, right? This is something that definitely is industry practice. And where you have seen folks get into trouble on think you and I have talked about this before, is when there’s actually been fraud. There’s no fraud that’s going on here. It is backed up by a great deal of data, a great deal of analysis and 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 treat them truly at an arm’s length.
Operator
Last question today comes from the line of Praneeth Satish from Wells Fargo.
Praneeth Satish
Just one quick question. I was just wondering if you could talk about just or elaborate on the appetite for solar 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 demand? And then is there any way to help frame how much faster growth could be in these regions because of the hurricanes versus historical trends?
William Berger
This is John. It doesn’t take very long at all, and it does dissipate and a relative quickly fashion as well. It’s more of human behavior. So we’ve already seen that surge in both those markets, in particular, Puerto Rico, and it’s gone back to trend rates already. But again, the growth, as I mentioned a couple of times this month is the strongest in the company’s history but that’s an overall comment across the board and across all regions.
There are no further questions at this time. So I will pass the conference back over to John Berger for closing remarks.
William Berger
Thank you all again for joining us and for the thoughtful questions. In closing, let me say that service matters, liquidity matters, cash flows matter — while there may be still a wide value separating Sunnova’s true value from that reflected in its stock price, we believe that as we go through the anticipated economic downturn and once again entered the inevitable economic recovery, Sunnova’s business model and financial results will continue to stand out 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.
Operator
This concludes today’s conference call. Thank you all for your participation. You may now disconnect your lines.
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