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Operator: Thank you for standing by. My name is John and I’ll be your conference operator for today. At this time, I would like to welcome everyone to the Spruce Power Third Quarter 2024 Earnings Conference Call. All lines have been placed in mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Bronson Fleig, Head of Investor Relations. Please go ahead.

Bronson Fleig : Good afternoon and welcome to Spruce Power’s Conference Call to discuss results for the third quarter of 2024. With me today are Chris Hayes, our Chief Executive Officer; and Sarah Wells, our Chief Financial Officer. Our call this afternoon will include statements that speak to the company’s expectations, outlook, and predictions of the future which are considered forward-looking statements. These forward-looking statements are subject to risk and uncertainties, many of which are beyond our control, which may cause actual results to differ materially from those expressed in or implied by these statements. We are not obliged to revise or update any forward-looking statements, except as may be required by law.

Please refer to our disclosures regarding risk factors and forward-looking statements in today’s earnings release and other SEC filings. A copy of our press release has been posted to the Investor Relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the US GAAP equivalent and can be found in the press release that we issued this afternoon. With that, I will turn the call over to our CEO. Chris, Go ahead.

Chris Hayes : Thank you, Bronson, and good afternoon to everyone. Our top priority is to grow our distributed energy platform through the acquisition of operating residential solar assets and by expanding our capital light, third-party service offerings, Spruce Pro. On both fronts, our commercial teams are poised to convert some long-standing opportunities in our growth pipeline. We’re focused on executing on these opportunities, which will enable us to further scale our owner-operator platform and drive an inflection in free cash flow generation. I’ll make more detailed remarks on our pipeline and outlook shortly. First, I want to briefly address third quarter results and operations. Later, Sarah will dive deeper into financial results.

Our core business delivered solid results supported by the predictable monthly cash flows from over 75,000 solar assets and contracts. Third quarter revenue was $21.4 million and operating EBITDA was $17.7 million. Ability and predictability of financial results is often measured by a metric known as annual recurring revenue or ARR. Similarly, here at Spruce, management uses an internal measure called business cash inflows, which accounts for top-line recurring revenue, as well as other sources of consistent cash inflows that do not flow through GAAP P&L. Our results this quarter affirm our previously referenced run rate of between $120 million to $130 million of annual run rate business cash inflows. Our balance sheet is also rock solid with total cash of $150 million at quarter end unchanged from the second quarter period.

Our unrestricted cash per share as of quarter end was $6.11. Our receivables are also rock solid with great collections performance due to the nature of our customers. Most of our customers own their homes and are early adopters of solar with an average system age of approximately 10 years. Our customers are highly incented to pay us because rooftop solar offers compelling economic value. Inflation in retail utility rates across our geographies means that our customers save meaningfully through the consumption of power generated from our solar systems sitting on their rooftops. Collections are also influenced by customer satisfaction, an intense area of focus for us. Spruce spent many years building an integrated solar servicing organization, which we believe is best in class.

Underscoring our view, one of our project finance lenders recently stated, and I quote, Spruce servicing is the top servicer in residential solar. Our review is also supported by continuous improvement in our customer satisfaction scores, what we refer to as CSAT. During the quarter, our CSAT score was 81% versus 75% a year ago, a significant gain. I want to thank all Spruce employees for their dedication in making Spruce a leader in customer service in our industry. Now let’s turn to an update on near-term growth initiatives. For context, the Spruce business model is unique in our sector, combining predictable high margin cash flow from our portfolio rooftops with less predictable, but large step function growth through disciplined acquisitions.

Our stable cash flow enables that discipline. Unlike peers who need to support a high fixed cost origination machine, we are never forced to make a bad acquisition for the sake of growth. During the third quarter, we signed a non-binding letter of intent to acquire a portfolio of close to 10,000 home solar systems, all with long-term contracts. The counterparty is a highly credible operator in consumer energy markets. We expect a close in the fourth quarter of 2024 if completed this deal should generate impressive cash on cash returns for years to come. We expect to fund the equity portion of the acquisition with cash on hand with leverage coming from non-recourse senior debt at attractive pricing. Beyond this information, we can’t comment on any more details and always keep in mind nothing is certain until the ink is dry.

However, we can say that we are excited about the growth and free cash flow prospects of this deal. Extending our M&A strategy, we are evaluating what we call programmatic offtake. Under this approach, Spruce would acquire solar lease and PPA contracts from installers earlier in asset life, right at the time when the solar system is installed and granted permission to operate. This opportunity is exciting because we see a substantial need for long-term capital providers that can not only own but also service solar lease and PPA contracts for decades. Looking more broadly at the M&A environment, our deal team continues to evaluate the pipeline of seasoned solar portfolios in the secondary market. If deals are in various stages of evaluation.

We cannot offer any more comments on definitive timelines and conversion probabilities. On top of this M&A activity, we are now ramping up our Spruce Pro servicing business, which offers strong growth potential as we add customers and predictable revenue as we serve those customers over a multi-year contract. We’re off to a strong start by cultivating a pipeline of servicing opportunities. After quarter end, we’re centered a memorandum of understanding with a large residential solar installer to provide servicing solutions to a portfolio with thousands of residential solar customers. The framework in place establishes visibility to recurring revenue through a multi-year servicing agreement. We expect to execute the agreement in the fourth quarter.

We’re excited about this milestone for Spruce Pro. The agreement is a testament to the broad capabilities of our servicing team and is a significant step in unlocking value from our investment using the platform, which until now has managed in large part only our own assets and a few third-party-owned portfolios. Our commercial teams remain active in developing additional servicing opportunities and indications of interest are accelerating. Strong fundamental factors underpin Spruce Pro, such as the increased popularity of lease and PPA financing versus loans, new market entrants with unsophisticated or lack of integrated servicing capabilities, and the permanent exit of some legacy residential solar firms. We believe Spruce is poised to capture a growing number of third-party servicing customers in the near term.

Now let’s discuss our disciplined capital allocation strategy. Our robust balance sheet enables us to pursue these growth opportunities. As I mentioned earlier, at quarter ends, Spruce had $114 million in unrestricted cash. We intend to deploy some unrestricted cash over the near-term for M&A, such as the imminent 10,000 rooftop deal, which offers an effective yield on our equity investment. Keep in mind that we are a levered buyer of assets. So our cash balance mostly influences the equity portion of future M&A. Our buying power far exceeds that $114 million balance. Our model is evolving from our private ownership model, which prioritized raising maximum leverage, to instead focus on more equity value, thus yielding more cash flow to Spruce.

Because our business is running close to cash flow breakeven today, the net cash flow from any new acquisition should flow mostly to the bottom-line. We are acutely focused on driving this cash flow inflection point and this is the reason that I often state Spruce is really just at the starting blocks. Looking at our long-term capital allocation strategy, we envision a growing portfolio of long duration, cash flow generating assets that maximize our flexibility to create value. We do this through more asset acquisitions, debt reduction, and potentially other shareholder return initiatives such as share buyback. Our flexibility enables us to pursue any of those options at any time, depending on which offers the most attractive return. In assessing our current growth opportunity set, capital position, and current trading levels of our common shares, we have decided to resume common stock repurchase activity, which may occur as early as this quarter.

We expect to be opportunistic under our repurchase program, though notably we will aim to balance repurchases with retaining adequate dry powder to also execute on what we view as a strong growth opportunity set for Spruce. The amount, time, manner, and price of repurchases will be determined in our discretion and we may affect repurchases through open market transactions, privately negotiated transactions, rules 10b5-1 trading plans, and other means. In closing, we have our head down, focused on execution and profitably growing our platform through M&A and aggressive expansion of our servicing organization into the third-party market. Our company is naturally poised to be the Number #1 owner-operator and servicer of residential solar assets.

With that, I’ll hand the call to Sarah to address second quarter financials.

Sarah Wells : Thanks, Chris. I’ll provide more details related to our third quarter 2024 financial results, as well as our business outlook for the remainder of the year. Third quarter revenue was $21.4 million compared to $23.3 million in the prior year period, with the decrease primarily attributable to lower SREC revenues and higher performance guarantee payments. Second quarter core OpEx, which we define as SG&A and portfolio O&M excluding depreciation, was $17.4 million in total as compared to $15.9 million for the prior year period. Breaking this out, portfolio O&M expense moderately increased to $3.9 million in the third quarter from $3.5 million in the prior year period. The increase is tied to higher non-routine servicing costs such as expenses tied to hardware replacements.

SG&A’s expense increased to $13.5 million in the third quarter from $12.4 million in the prior year period. For the quarter, SG&A was negatively impacted by an increase in legal costs incurred in connection with legal settlements and other ongoing legal proceedings. These costs amounted to $1.4 million during the quarter. Spruce generated a GAAP net loss attributable to stockholders of $53.5 million. As a reminder, we consider operating EBITDA as a key measure in evaluating the company’s financial performance, which is defined as adjusted EBITDA plus several items that represent material cash inflows from our ongoing business and strategy. Operating EBITDA was $17.7 million for the third quarter versus $19.8 million in the prior year period.

Please see our press release filed prior to today’s call for reconciliation of this non-GAAP measure. At the end of the third quarter, total cash, inclusive of unrestricted cash and restricted cash on our balance sheet was approximately $150 million unchanged sequentially. Our unrestricted cash balance at quarter end was approximately $114 million versus $117 million at the end of the second quarter. The sequential decline in unrestricted cash is largely a result of higher O&M and legal costs tied to legal settlements and ongoing legal proceedings. The total principal balance of long-term debt was $631 million at the end of the third quarter with a blended interest rate of 5.9% including the impact of hedge arrangements. All of Spruce’s debt is non-recourse and serviced by customer collections of our various portfolio companies.

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 $19 million at quarter end. Before getting into our outlook, I want to address one housekeeping item. For the third quarter, Spruce recorded a non-cash Goodwill impairment charge of approximately $29 million. Due to the continuous decline in our stock price and market capitalization, we wrote down the Goodwill balance historically reflected in our consolidated balance sheet from $29 million to 0 during the quarter. The goodwill previously reflected on our consolidated balance sheet entirely arose following Legacy Spruce’s acquisition by Legacy XL Fleet in September, 2022, and was determined by a new basis recognition event due to change of control under which the estimated fair value of the net acquired assets of Legacy Spruce resulted in the recognition of approximately $29 million of goodwill.

Last, I’ll move to full year guidance, which can be found on Slide 20 of our investor relations deck. Based on financial results to-date and current business trends and other factors, Spruce is adjusting its guidance range for the full year 2024. We now expect that the midpoint adjusted operating EBITDA to be $60 million and adjusted free cash flow to be negative $10 million below the low ends of our previously provided ranges. Our portfolio of over 75,000 home solar assets and contracts continues to generate strong cash flows in-line with our expectations, though both higher than expected and unanticipated expense items through the first three quarters of the year have emerged. The low end of our previous operating EBITDA range for the full year 2024 was $68 million, which included no acquisition activity, and that has been the case thus far in 2024.

So I will bridge the primary drivers of the negative variance from that $68 million figure to $60 million, which represents the midpoint of our new full year 2024 operating EBITDA range of $57 million to $62 million. The negative variance can be attributed to two primary areas. The first is tied to O&M or operations and maintenance expense. Non-routine operations and maintenance expenditures have turned it higher thus far in 2024 than we originally anticipated. These are costs tied to rolling trucks to repair or replace hardware. For perspective, these expenses have represented close to a $5 million headwind through the first three quarters of the year versus initial budget. We believe this outside spend is somewhat transitory and related to the timing of failure rates of equipment versus underwritten expectations.

We also have a heightened focus in our asset management organization on efficiently deploying capital to maintain our fleet of solar systems. The second area is corporate level expenses. This does include cost tied to our CEO transition. It also includes cost tied to other ongoing legal proceedings. Together, these corporate level expenses have represented a headwind of about $3 million through the first three quarters of the year versus initial budget. Last, please note that our updated 2024 outlook does not include any impact of acquisition activity for the remainder of the year, including the non-binding LOI that Chris mentioned to acquire approximately 10,000 customers. This concludes our prepared remarks. Operator, please open the line for questions.

Operator: Thank you. We will now begin our question-and-answer session. [Operator Instructions] Our first question comes from the line of Peter Gastreich with Water Tower Research. Please go ahead.

Peter Gastreich: Thank you very much for the presentation and congratulations to Chris and team on your announced acquisition, and also great to see the commitment to your share buyback program coming in. So I think I’ll start there actually with the — a question about the acquisition. It looks like a good place to start. It looks like this will grow your rooftop solar assets and contracts by more than 10%. Can you share any perspective details about the financial impact of the portfolio? For example, how should we think about the profitability of this asset when compared to your existing portfolio? Thank you.

Chris Hayes: Yes. Thanks for the question, Peter. We are super excited about this opportunity. If we complete it, it lets us build on our high-margin cash flow base and obviously, realized synergies within our servicing organization as we continue to scale our platform. We can’t comment on specific deal economics. So you should think about any prospective acquisition activity to align with the framework we’ve historically publicly provided. And I’ll just lastly share that we’re aggressively working to close the acquisition as quickly and as efficiently as possible, and we’ll provide incremental details at the appropriate juncture, assuming a successful close.

Peter Gastreich: Okay. That’s great. Thank you. My next question is about Spruce Pro. It’s great to see that you signed an MOU recently. Are you able to expand a little bit on that opportunity? And related to that, how would you define success for Spruce Pro entering 2025? So for example, when would you expect to land your first customers and generate revenue? And what type of customers are you looking at?

Chris Hayes: Sure. Thanks for the question. So as you can imagine, we are really excited about signing this MOU. It’s an excellent proof-point for Spruce Pro. And in-line with the past commentary, this is a capital-light endeavor. And we are levering existing investment to date in our servicing platform, so that people, technology and allows us to provide advanced servicing solutions to third-party, which this should prove, assuming we ink the deal. We can’t offer a lot of specifics right now on the scope and economic impact to Spruce despite the MOUs in place, but we are working towards an executed service agreement in the fourth quarter. As to the second part of your question, with respect to 2025 and success points, so as earlier mentioned, we are not issuing guidance for any top-line revenue projection for Spruce Pro in 2025.

However, I would define success based on our quality of pipeline, and I suggest there is a high probability we close a deal or two in 2025, and that’s how I’d look at success.

Peter Gastreich: Okay. Thanks. That’s very clear. Let me just ask one more question here before getting back in the queue. So I’ve got a few more. But I’m sure you asked this a lot, especially recently, but I’d really like to know your views here. So we are past the election now. I’m just curious what your thoughts are about how this would impact Spruce? How durable would you do your business model in the face of any risk of changes to policy when compared to our industry peers?

Chris Hayes: Well, it is a great question. I’ll tell you, I am thrilled that we are a third-party owner of solar. And I would say this to you, while we can’t predict the future, obviously all we need to be a successful business is to continue having new solar put on rooftops and the economics continue to remain strong. And so long as that happens, we will have new acquisition opportunities. And we are not sort of subject to the whims of Washington DC and whatnot. So it is quite probable both on already installed solar and presumably, much more going in, there is a very active M&A pipeline for us. And then, of course for Spruce Pro, there’s a huge market out there that we can service. So we think that it’s as good an environment as it was two weeks ago and remain super bullish.

Peter Gastreich: Okay, that great to hear. I guess I will get back in the queue, unless there’s any other questions from other analysts.

Operator: [Operator Instructions] And we have another question from Mr. Peter Gastreich with Water Tower Research. Please go ahead.

Peter Gastreich: Great. Thank you very much. I’ve got more of a macro question here. So there’s been a lot of structural macro drivers out there for power demand, including AI data centers, crypto now and so forth. These are all driving very strong power demand growth outlook. And there is some uncertainty out there emerging in terms of whether utility scale capacity can keep up with that. I’m just curious, how do you see these factors affecting grid electricity rates? And what would that mean for the future of rooftop solar?

Chris Hayes: Well, look, again, it’s super hard to predict the future, but if you forced me to do so, I would say, not solely on commodity prices, but more on the wire and line business, all of the inflation associated with that and demand growth with AI and all this other stuff. I would imagine that utility rates are going to continue rising through time. Ultimately, that is a great backwind for us, about 50% of our portfolio, [or] (ph) power purchase agreements. And so rising utility rates, both make solar more economically compelling and also increase many of the underlying contracts. So we are excited about that trend for our business.

Peter Gastreich: Okay. Thank you. I’ve got two more questions, if I may. The first one is, would it be possible to provide any guidance as far as where we stand so far in the fourth quarter? For example, if you look at last year, the fourth quarter was a bit lower than expected, and I recall that was due to some weather-related issues. I would also be interested to the extent you can provide any additional commentary on O&M and legal items.

Sarah Wells: Peter, this is Sarah. Thanks for the question. Go ahead, Chris.

Chris Hayes: No, Sarah, please.

Sarah Wells: I was just going to say, Peter, that we have given updated guidance in the script, and so we’re just going to stick with that for now.

Peter Gastreich: Okay. Okay. Got it. So just a final question here, a bit more about your stocks. So we see that it’s now trading below cash. Based on your conversations with investors, can you make any comment on perceived sentiments? Or maybe what do you think are some of the key things that the market is missing here?

Chris Hayes: Yes, it is a great question. I mean look, I would say this, you heard mentioned in my commentary earlier, the company has issued a share buyback plan. We have agreed to purchase $1 million per quarter pursuant to all underlying rules. So of course hopefully, that is received as a bullish sentiment. It is difficult to comment on the market. But I think given some of the earlier comments, I think we are just in the starting blocks. I mean we are so bullish on this business on the growth prospects on Spruce Pro. And the last piece to your question are the legal expenses. We are materially through all one-time charges. We don’t see anything even close to any of the past numbers that we’ve seen and that is very close to being behind us and we’re thrilled for it.

Peter Gastreich: Okay, great. Thanks very much, Chris.

Operator: And that does conclude the question-and-answer session. I would like to turn the call over back to Bronson Fleig for any closing remarks.

Bronson Fleig: Thanks, operator, and thank you to everyone for joining us today and for your continued support. If you have any questions, please contact me or our Investor Relations team. This concludes our call today.