Participants

Scott Kozak; Head of Investor Relations; Spruce Power Holding

Christopher Hayes; Independent Chairman of the Board; Spruce Power Holding Corp

Sarah Wells; Chief Financial Officer, Head of Sustainability; Spruce Power Holding Corp

Peter Gastreich; Analyst; Water Tower Research

Presentation

Operator

Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spruce Power first quarter 2025 earnings conference call. (Operator Instructions)
 At this time, I would like to turn the call over to Scott Kozak, Director of Investor Relations. Sir, you may go ahead.

Scott Kozak

Thank you, operator. Good afternoon, everyone, and welcome to Spruce Power's first quarter 2025 earnings conference call. Joining me today are Chris Hayes, Spruce's Chief Executive Officer; and Sarah Wells, our Chief Financial Officer and Head of Sustainability.
 Before we begin, I would like to remind you that we will comment on our financial performance using both GAAP and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to the comparable GAAP measures is included in our earnings release for the first quarter of 2025.
 Our discussion will also include forward-looking statements. These statements are not statements of historical fact, reflect our current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed. There could be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement, except as required by applicable law. Please refer to our earnings release and our other SEC filings for further discussion of Spruce Power's risk factors and other important information regarding our forward-looking statements.
 All comments made during today's call are subject to that safe harbor statement.
 With that, I will turn it over to Chris.

Christopher Hayes

Thanks, Scott, and hello, everyone. Our first quarter results reflected the positive impact of last year's acquisition of rooftop assets from NJR, New Jersey Resources. Revenue grew 30% from the year earlier period, and operating EBITDA increased 15%. Our balance sheet remains robust with close to $100 million in cash, the majority of which is unrestricted. We are excited by the opportunities ahead of us in 2025 and are actively seeking new acquisition opportunities that meet our disciplined return hurdles.
 Spruce is determined to achieve our goal of generating positive free cash flow. We believe our path to achieving that objective is continued growth and scale in our portfolio of solar installations, coupled with a prudent cost containment. Spruce generates predictable recurring revenue and cash flow from the approximately 85,000 home solar assets and contracts we own and operate and roughly 60,000 residential solar systems that we service as a third party.
 This is a great foundation for our business, but to meet our free cash flow objective, we need to scale our business with acquisitions of installed systems and programmatic offtake partnerships as well as through the growth of Spruce PRO servicing. We continue to take a disciplined approach to portfolio acquisitions, only purchasing assets that meet our internal rate of return requirements. We believe this discipline has served us well, but it can also slow down growth when market conditions are challenging, which is the case now.
 Thus far, in 2025, we have proceeded cautiously with new growth opportunities, given uncertainty and rapidly shifting dynamics across the market. Our cash burn during the period reflected normal winter seasonality, combined with a small delay in the start of payment collections of the assets acquired from NJR, which dampened revenue.
 Spruce PRO is off to a good start with the ADT deal, and we expect that revenue to ramp up gradually in the months ahead. So the immediate top line impact was not significant. Down the P&L, costs are still running a bit hot as we roll off the earlier-than-expected operations and maintenance or O&M expenses we began experiencing last year. Overall, our O&M expenses remained outsized in the first quarter of 2025 compared to our long-term expectations. Although to give you a sense for trajectory, we did spend less O&M dollars sequentially.
 Spruce experienced higher O&M expenses beginning in 2024 with the early arrival of anticipated maintenance. Initially, we did not have a technology platform or team in place to optimize the management of resources such as when to roll a truck or ensuring the truck was carrying the right componentry to complete the job. This led to inefficiency and added costs. However, we are confident that the O&M initiatives we have put in place will drive a material decrease in this expense line in the second through fourth quarters of this year.
 Changes implemented over the past year include the onboarding of experienced hires, technology investments and a revamped strategy to intelligently route service calls from customers, limit truck rolls, rightsize inventory on the truck and appropriately manage to the customer contract in the most cost-effective manner possible. The platform and detailed operational strategy we implemented began producing the results we are seeking in late February and has continued to gain ground thus far in the second quarter. We believe these improvements are sustainable and will sharply reduce O&M expense as 2025 progresses.
 In addition, we are making operational enhancements through strategic sourcing and procurement and better vendor management. We believe these efforts will drive improved operating efficiency and margin expansion in 2025. We expect these cost containment actions are transitioning the business toward a more sustainable model with the financial resources and liquidity needed to support our long-term strategy.
 Next, I will discuss each of the company's key revenue drivers. Executing on these initiatives is imperative for achieving the scale we need to achieve positive free cash flow. The first revenue driver is opportunistic M&A. This is when Spruce acquires portfolios of installed systems, then sells additional services and leverages strategic partnerships to drive profitable expansion. We have been able to command a higher return on opportunistic M&A because of our scale and expertise in this area.
 Given these advantages, coupled with a limited pool of potential buyers, we're able to be selective and only pursue agreements that meet our deal terms and density objectives. The NJR acquisition that closed in November 2024, in which Spruce acquired approximately 9,800 installations in New Jersey is the most recent example of this type of transaction. To be clear, though, even an opportunistic deal, half the size of NJR would share the same deal flow characteristics, so this is a target-rich environment for Spruce.
 The second revenue driver is programmatic offtake. At this time, I can only speak to this opportunity in general terms as we are still working to secure our first programmatic agreement. However, our expectations for programmatic as a derisked revenue driver are high. With programmatic, we are looking to acquire or potentially service newly installed systems on an ongoing basis as our partners complete them.
 These partners may include homebuilders, legacy solar loan operators or lease originators that are pivoting into TPO or third-party ownership leases and PPAs. Increasingly, these established players want to focus on origination rather than servicing. We anticipate that our future programmatic partners will take the risk of getting systems through construction to operations, and only then will we buy or begin servicing these installations at an agreed-upon price. While this channel has long lead times, we are confident Spruce is gaining traction. And when we deploy our programmatic offtake initiative, we will ultimately generate double-digit IRRs.
 The third and final primary revenue driver is Spruce PRO, our third-party solar servicing platform. For this channel, we leverage the company's decade-plus experience in management of our wholly owned residential solar assets to offer a suite of services that can be tailored for third-party owners of distributed generation assets.
 In December 2024, we finalized a third-party agreement with ADT, covering approximately 60,000 systems. By partnering with Spruce PRO, third parties like ADT can leverage our experience and maximize productivity, uptime and efficiencies in areas such as financial asset management, billing and collections, asset operations, account services, homeowner support, IT support and implementation and finally, solar renewable energy credits or SREC marketplace.
 We believe the Spruce PRO channel plays to our strengths and has strong potential to deliver capital-light growth. We have a defined and growing pipeline of potential Spruce PRO partners that include traditional residential solar players, large owners of solar installations, developers, private equity and numerous midsized and local companies that own residential and commercial and industrial or C&I solar sites. Potential scope ranges from full wrap servicing to piecemeal O&M, billing and collections, harvesting SRECs or some combination. While each of these third-party agreements will be customized, we are confident the company can source other partnerships like ADT.
 Last month, we announced a Spruce PRO partnership to monetize SRECs in California with C&I and residential solar installer Hot Purple Energy. We see considerable potential for generating high-margin cash flow by registering, managing and reporting California SRECs. Spruce is among a very small number of companies that have completed the approval process to enable monetization of dormant SREC revenue within all three of California's largest utility zones. This puts Spruce in a unique position to capitalize on a meaningful market opportunity. We are in active discussions for the rights to acquire SRECs from significant third-party installers as well as numerous midsized and local companies that own residential and C&I solar sites in the state.
 We have already completed the hard work of creating a Spruce PRO servicing infrastructure capable of handling portfolios that come to market. This is a difficult business, but many do not have the platform or experience to service successfully. Importantly, for us and our shareholders, Spruce PRO is unlevered, and there will be no debt financing associated with these agreements.
 As we prepare, plan and execute our business development strategy, there are a few overarching themes to point out. First, we are in an environment of pent-up demand for TPO residential solar as utility rates continue to increase, driven by higher load levels. Further, there is a lot of solar going in. Originators want the developer fee, but many don't want to own or service the installations over the long term. While it is incumbent on us to deliver on the opportunities in our business development pipeline, I will reiterate that the revenue and cash flows generated by the installations we already own and service remain highly predictable, whether conditions in the residential solar sector are favorable or distressed.
 We are confident in our ability to identify, structure and execute new agreements that add shareholder value. While our investments and revenue drivers have weighed on near-term profitability, we are confident they will position us to cost effectively participate in the largest and fastest growing parts of the residential solar market.
 As we scale up, I wanted to highlight the hiring of Chris Hayden as Senior Vice President of IT and Enterprise Applications. Chris will focus on advancing Spruce's service platform, scaling the Spruce PRO service offering and driving innovation across the company's IT function, including strategy, infrastructure, application development and security. Chris previously served as Chief Technology Officer and Executive Vice President at Sunnova and has deep expertise in the solar industry. At Spruce, he will be focused on optimizing technology to drive scalability and accelerate growth with a strong focus on the customer experience.
 Before concluding, I wanted to highlight that we do not need to refinance any of the nonrecourse debt associated with our portfolios in 2025. With that said, we always keep the lines of communication open with creditors and the feedback we are receiving leads us to believe that we can roll over our first debt maturity associated with our SP 1 portfolio and due in April 2026 on like-for-like terms if we choose to proceed. In addition, we have identified additional credit options that could be even more favorable, although those options and our ability to roll financing on a like-for-like basis will be subject to ongoing developments in the financing markets.
 While Spruce plans to continue to make the investments needed to execute our strategy, we believe that the actions we are taking will safeguard the funding necessary to continue our opportunistic share buyback program. I would add that Spruce's Board of Directors has approved the renewal of the company's share repurchase program as our previous program expires May 15. We remain confident the company will continue to make the investments needed to drive long-term shareholder value, and we view cost discipline as the compass that drives effective execution, helping teams stay on track to both prioritize and achieve measurable results.
 My last comments will be on the residential solar sector. While recent challenges in the sector are well known and although we are not immune to those factors, Spruce is differentiated. Unlike many of our peers who are heavily dependent on aggressive new customer acquisition strategies, externally financed working capital, continuous growth in new solar installations and government assistance, Spruce Power is not a seller, installer or originator of new solar installations and does not have significant fixed costs. In addition, our financial health is not contingent on new sales, external capital markets or IRA investment tax credits. Rather, our business is predicated on maximizing the value of existing solar assets through operational efficiencies, maintenance and superior asset management.
 Spruce maintains a clear focus and renewed intensity to deliver on our objectives. We are motivated by the progress we are seeing as we execute our strategy and realize our vision. The revenue opportunities we are pursuing and the operational improvements we are driving will support efforts to deliver a combination of performance, flexibility and value that is compelling to customers, partners, creditors, investors and other key stakeholders. That is the mindset driving us forward as we continue to build a stronger company.
 Next, I'll pass it over to Sarah, who will provide a detailed review of our financial results and outlook. This will be Sarah's final quarter as CFO at Spruce as she is leaving the company to pursue another opportunity. I would like to thank Sarah for her numerous contributions to Spruce's growth and development, and we wish her the best going forward. She leaves here as a friend. We expect to announce an interim CFO soon and are engaged in a search to fill the position on a permanent basis.
 Sarah, can you please provide our financial summary?

Story Continues

Sarah Wells

Thank you, Chris, and good afternoon, everyone. First, I'd like to comment that it has been gratifying to contribute to Spruce's growth and development over the last 7 years. I will now provide additional details regarding our first quarter 2025 financial results.
 As Chris mentioned, Spruce is taking steps to strengthen our financial position and enhance operational efficiency. First quarter revenue was $23.8 million, up from $20.2 million in the fourth quarter, and $18.3 million in the prior year period. The increase from the year earlier period is primarily attributable to higher revenues associated with the NJR acquisition. The Spruce PRO service agreement with ADT and improved system performance made smaller contributions to the year-over-year revenue improvement.
 First quarter core OpEx, which we define as SG&A and portfolio O&M, was $18 million in total as compared to $16.6 million for the prior year period. Breaking this out, portfolio O&M expense was $3.9 million in the first quarter, down from $5.3 million in the fourth quarter. This represents a sequential decline of more than 25%. SG&A expense was $14.1 million in the first quarter, down from $15.5 million in the fourth quarter, but up from $13.5 million in the prior year period. Most of the SG&A change in the first quarter was timing related, although given our density of systems in the state, we did add a small O&M field servicing team in New Jersey.
 Spruce generated a GAAP net loss attributable to stockholders of $15.3 million. As a reminder, we consider operating EBITDA a key measure in evaluating the company's financial performance, which we define as adjusted EBITDA plus several items that represent material cash inflows from our ongoing business and strategy. Operating EBITDA was $12.3 million for the first quarter versus $10.7 million in the prior year period. Again, this change was primarily attributable to the NJR acquisition, partially offset by higher expenses and lower interest income. On the strength of the NJR acquisition, we anticipate reporting operating EBITDA improvement for all quarters in 2025 relative to the year earlier periods.
 At the end of the first quarter, total cash, inclusive of unrestricted and restricted cash on our balance sheet was approximately $96.5 million. Our unrestricted cash balance at quarter end was approximately $61.9 million versus $72.8 million at the end of the fourth quarter. The sequential decline in unrestricted cash is largely due to NJR collections timing and typical business seasonality, although the share repurchase and ongoing operational spend, including O&M costs as well as legal expense also contributed.
 The total principal balance of long-term debt was $723.8 million at the end of the first quarter with a blended interest rate of 6%, including the impact of hedge arrangements. All debt consists of project finance loans that are nonrecourse to the company itself. Nonrecourse debt is incurred at the project level and does not impact Spruce's cash on hand balances. At quarter end, all our floating rate debt instruments were materially hedged with interest rate swaps extending into the early 2030s. These hedge arrangements had a net mark-to-market of positive $18.1 million at quarter end.
 Spruce will continue to take proactive measures to achieve profitability and positive free cash flow that is commensurate with the current market conditions as we invest in and execute our strategy. We remain optimistic that reduced spending, operating efficiencies and competitive revenue drivers will keep us on track to achieve our objectives. Thank you. We will now open the line for questions.

Question and Answer Session

Operator

Peter Gastreich, Water Tower Research.

Peter Gastreich

Congratulations to Chris and team on your results. Thanks for the presentation. It's great to see the NJR acquisition supporting EBITDA expansion and also see Spruce picking up your repurchase program again. Just a few questions here. I'd like to start with Spruce PRO.
 Great to see Spruce PRO landing ADT with 60,000 solar systems. How should we think about the scale of revenue opportunity there and the lead times to building up that business to a critical mass? And also be interested to hear if you could share how your other conversations and marketing at Spruce PRO have been going so far this year.

Christopher Hayes

Sure. Thanks, Peter. I appreciate the question. So you know Spruce PRO is a capital-light endeavor. These are leveraging the infrastructure investments we've made over the last 5 to 7 years, and we have capacity in the system.
 So from a margin expansion perspective, it's a great business line. What I can tell you, obviously, unable to share any forward-looking information is we have a deep pipeline of prospects in this business. We'd love to make another announcement in the next quarter and have been really excited about the team we built, the reception in the market, and I feel like we can do it profitably.

Peter Gastreich

Next question, I'd just like to ask about financing. I understand, I think you mentioned that Spruce will refinance its SP 1 loan next year in April. What does the environment look like for that refinancing?

Christopher Hayes

Yes. So I appreciate the question. So that portfolio is due in April of 2026, so a little under a year from now. And we have -- we are certain we can get like-for-like terms, but we've been looking at other credit options that we think will be more favorable. And so what I can tell you is we're out in the market.
 And based on the feedback that we're seeing, I remain super confident in our liquidity profile and ability to refinance it.

Peter Gastreich

Okay. I'd just like to ask next about Spruce 5. Could you give a little bit more color on the SRECs for that acquisition? They're quite chunky, as you know, they make up close to 2/3 of the revenue for SP 5. Just curious why is that so high compared to your other assets?
 And should we think about that level as being recurring?

Christopher Hayes

Sure. So it's a great question. So look, New Jersey has both deep liquidity in the SREC market and high prices. So we expect that, that would continue in the future and are excited that, that's an element of the deal. And for sure, we would look at it based on a recurring level.

Peter Gastreich

Next, I just wanted to ask about your CFO transition. Could you comment on what drove the decision and what your plans are to fill the role?

Christopher Hayes

Yes, for sure. So Sarah has been with us for 7 years, and she's done a super job supporting the company's growth and development. She made a decision to move to a private company. And while we will miss her, we understand this move aligns with her personal objectives and we respect her decision. As it relates to the search, we expect we will have an interim announcement in the very near future and have been pleased with the candidates we've been meeting thus far for the Chief Financial Officer position.
 So keep an eye on that. We're aggressively looking for a replacement.

Peter Gastreich

I'll squeeze one more question here before I get back in the queue. So we're now a few months into the new administration. Could you talk about the durability of your business model from that policy perspective when compared to your industry peers?

Christopher Hayes

Yes. So look, it's a great question. I don't want to be too redundant with the script that you just heard from me. But I would tell you that given this administration and some of the concerns you read and hear about, we are victim to very few of them. In other words, being a third-party operator and owner allows us to buy portfolios after they've been installed, after tax credits have been monetized.
 So we continue to see deep liquidity in our pipeline of M&A opportunities.
 And look, if you were a believer in utility rates going up, that is quite helpful to a large percentage of our book. And so I would just say that I think given some of the uncertainty, it is much less applicable in our world, which we're super grateful for.

Operator

(Operator Instructions) That concludes our Q&A session. I will now turn the call back over to Chris Hayes for closing remarks. You may go ahead.

Christopher Hayes

Thank you, operator. Our focus in 2025 is on scaling our platform, containing costs and delivering improved financial performance. Thank you so much for your interest in Spruce Power and for participating in our call today, and we look forward to updating you again next quarter. Really appreciate it.

Operator

This concludes today's conference call. You may disconnect.

View Comments