Initiating Coverage: Competitive Servicing "Moat" Supports Residential Rooftop Solar Acquisition Strategy
Spruce Power Holding Corporation (Spruce) is one of the largest third-party owner-operators of residential solar assets. The company is not an installer of solar assets and instead grows through the acquisition of mature portfolios of residential solar assets and contracts. Spruce’s portfolio consists of residential solar power purchase agreements (PPAs) and solar lease agreements (SLAs) and has grown at a 29% CAGR since 2018, reaching 75,000 home solar assets and contracts. This included nearly 50% growth in 2023 alone following the successful completion of two major acquisitions. Spruce offers a “Power-as-a-Service” business model and has its own in-house solar servicing platform. The platform, which is technology driven, can provide integrated seamless services to residential customers of both Spruce and third-party assets. The company believes the servicing platform is the most comprehensive on the market, hard to replicate, and effectively provides a servicing “moat”. For a broader residential solar industry historically geared toward installation activities, there can be challenges in owning and maintaining residential solar customers over the long term. This can present opportunities for Spruce: (1) to provide a competitive asset servicing solution; and 2) to acquire residential solar lease / PPA portfolios as installers / asset owners looking to recycle capital into core installation activities. Spruce estimates its addressable market sits at around 2.3 million customers and continues to grow. Meanwhile, solar is still at the early stages of a megatrend. For example, residential solar currently accounts for less than 1% of US power generation. The Energy Information Administration (EIA) expects in its reference case that residential solar consumption will rise from about 200 trillion btu in 2022 to greater than 1,800 trillion btu by 2050. At its recent 1Q24 analyst briefing, CEO Chris Hayes said he thinks Spruce is in the strongest position in its corporate history. This year, the company has a strong balance sheet and abundant liquidity with a $150 million cash position (1Q24), or about $8.14 of cash per share versus the current share price of $3.11. The core solar business is inflecting toward positive cash and 1Q24 operating EBITDA of $10.7 million looks set to grow in subsequent quarters considering management’s full-year 2024 guidance range of $68-86 million.
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