Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spruce Power Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Bronson Fleig, Head of Investor Relations for Spruce Power. Please go ahead.

Thank you. Good afternoon, and welcome to Spruce Power's conference call to discuss results for the fourth quarter and full year 2022. With me today are Christian Fong, our Chief Executive Officer; and Donald Klein, our Chief Financial Officer. Our call this afternoon will include statements that speak to the company's expectations, outlook or predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may cause our actual results to differ materially from those expressed in or implied by these statements. Similarly, out of our control is the timing of some of the processes we will discuss today, which could impact the expectation related statements you will hear shortly. We are not obliged to revise or update any forward-looking statements, except as maybe required by law. Please refer to our disclosures regarding risk factors and forward-looking statements in today's earnings release, our Annual Report on Form 10-K, and our other Securities and Exchange Commission 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 the call are reconciled to the U.S. 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, Christian Fong. Christian, go ahead.

Thanks, Bronson, and thanks to everyone for joining us on the call today. Welcome to our first earnings call as the new Spruce Power. Although our Q4 and full year 2022 financials will reflect the results of the divested operations of XL Fleet, as we speak to you today, the transformation to Spruce Power is largely complete. Last quarter, we talked about our post-merger path being three steps that is finishing the strategic review of the legacy XL businesses; then transitioning the management team; and finally, resuming growth through portfolio acquisitions. With the exit from legacy XL businesses, our sole business now is owning, operating and servicing rooftop solar installations. I resumed the CEO role on February 1st, and the company is led predominantly by the executive team that builds Spruce Power over the last five years. Our name has changed and our headquarters moved to Denver. In all regards, we are a pure-play residential rooftop solar company. Finally, we hit the ground running on portfolio growth. We announced earlier today that we acquired a portfolio of over 22,000 customers, more on that in a moment. Bottom line, we executed the plan we described last fall and our future has never been brighter. Strategically, Spruce starts 2023 in a position of strength with a stable portfolio that generates significant recurring revenue. Importantly, during turbulent economic times, we have access to substantial growth capital. We started 2023 with over $200 million of cash. Furthermore, our common stock when properly valued by the market can be used to fund future growth. Simply put, cash is king, and we have it. Including today's portfolio acquisition, we own rooftop solar assets and contracts in 18 states, powering over 70,000 homes. We also provide billing, maintenance and renewable energy credit services to third-party clients for…

Thanks, Christian. Before we discuss our fourth quarter results, I’d like to walk through a few items that impacted our financial reporting. As Christian mentioned, with the completion of the acquisition of Spruce and transitioned to solar, we announced that we were pursuing a strategic alternatives for our Drivetrain business. In December, we exited the Drivetrain business including the sale of a portion of the business, which closed in January. We also explored alternatives for the XL Grid operations, which primarily consisted of World Energy Efficiency Services. In January, we completed the sale of World Energy. Because of these exits, both are treated as discontinued operations in the fourth quarter. The related operating results are presented as a single line in our income statement, loss from discontinued operations. For the fourth quarter, our revenues and continuing operating results reflect the results of Spruce as well as certain corporate functions of the legacy XL operations. This gives a clear picture of our results from continuing operations, but note that the results include restructuring charges and costs that we expect to run off in 2023 as we finish up integration of the two businesses. Starting in Q1 2023, results will more fully reflect operations of Spruce Power rooftop solar business. With that, let’s move on to results. Fourth quarter revenue, which consisted exclusively of Spruce related revenue was $18.1 million, compared to $5.1 million in the third quarter of 2022. Third quarter revenue had only 21 days of contribution from Spruce. Keep in mind that fourth quarter is typically a lower revenue generating quarter for us due to weather related impacts on solar production. Fourth quarter selling, general, administrative expenses were $28.6 million, compared to $27 million last quarter and $11.6 million in the fourth quarter of 2021. Fourth quarter SG&A includes…

Thank you. [Operator Instructions] Your first question comes from the line of Joseph Osha with Guggenheim Securities. Your line is now open.

Hey, there? Can you guys hear me, okay?

We can, Joe.

Hey, so thanks for this. That was really interesting. I got a couple of questions here. First, when you buy a portfolio like the one you just bought. Does that typically come? Are you bringing the existing debts along with it? And if so, what opportunities exist as you bring this business onto your platform to potentially refinance that debt?

So we did assume the non-recourse project debt for this portfolio of $125 million was the – was that loan – single tranche senior loan. And this – it is more rare to assume the debt, but that in some ways is a function of what the capital markets and the debt markets had been, when we made previous acquisitions, where because of our size. We were often able to get such attractive debt that it was more favorable to get a debt released and put new debt on. That’s been our MO in the past. But clearly with the increase in rates recently debt that is on was favorable to leave on and as a result we could make sure that we negotiated and successfully assumed that debt.

Okay. And you’ve shared with us kind of a target IRR unlevered I assume for your portfolio. So kind of the logical question would be what is the current number and perhaps target in terms of your cost of that capital?

Sure. Well, let’s start with the overall cost of debt that we’ve got in the portfolio right now, and it’s between 5.5% and 5.6%, for the entire stack. Let me say it, in a bit of a debt perspective, we are often seeing spreads in kind of the 2.25% to 2.50% [ph] range, similar to what some of our other public peers have experienced. I think the recent turbulence may test to that, but we don’t have anything further beyond that. I think what’s important to note, Joe, is that because we are acquiring the portfolios, it’s the – to a return in the teens, we simply can adjust the bids and the cost that we’re paying for the equity portion. And so the there’s a natural buffer as debt cost change to still be able to get the yields that we’ve been targeting by adjusting the pricing in a similar way that, I suppose, an originator would adjust their pricing to a customer and pass that through. So in that similar way, we’ve been able to maintain the yields or the returns on the assets.

Okay. Would you go – I mean, so now you’ve got $470 million – $475 million in nonrecourse project debt, which is a pretty chunky number, right? Let’s assume for a minute that this Mosaic deal gets off the runway for some kind of halfway reasonable pricing here. Could we see you guys try to take this increasing sort of portfolio of business and go out and perhaps refinance the whole thing and debt or ABS markets if the pricing was reasonable?

Yes, absolutely. We have four different tranches of senior debt, each of them – a good amount of scale for the bank loans that all four of them were. But to your point, now that we are getting into that $400 million to $500 million range, you certainly start getting large enough to support a different part of the capital markets. And we continue to actively talk to the folks that would provide things like structured finance or some folks may be aware, and it’s certainly public because of the ratings that at one point, we had looked at even doing a term loan B and had rated debt, though didn’t finish the swing and actually issuing that debt. But we’ve actively and transparently been approaching the capital markets because of that scale. And we think that could be a potential opportunity, though, again, the market turbulence right now makes it hard to lock anything in.

Right. And we’ll see how Mosaic goes. Two more questions from me and then I’ll jump off. The first, you’re disclosing a gross contracted and renewal customer value, which is great. I guess I’m just wondering why you don’t go the next step and do that simple math. And disclose a net number because it’s not bad, it’s 741, less 470 plus 220, right, which getting you kind of the 500 range. So why not disclose that, right, especially seeing those debt number is roughly five times your current market cap.

Yes. This is Don. I think that’s a good question. It’s something that we’re definitely working through the evolution from XL to Spruce with the KPIs, and that’s probably one at the top of the list and better defining, refining how we’re presenting that. But obviously that information is available as you noted.

Right. Okay. And then the last one before I go away, just looking at the operating expense, if you take that 28 million about 12 of it looks like it was kind of one time stuff associated with restructuring or SEC and this net that, right? So if we assume, can we think about this business of having of the SG&A at kind of a $16 million run rate? Is that a reasonable assumption and is that sustainable? Can you scale the organization on that run rate? Thank you.

Yes, I think that number is directionally reasonable. But we’ve definitely had discussions of continuing to drive costs down and fourth quarters we, I said in the script and it’s in there that we pulled out certain numbers for restructuring. But there’s inherently redundancies and transition costs in there. So I think some of those will fall off. And we alluded to in Q1, that’s going to be a better picture. But there’ll still be a little bit of noise in there and we’ll try to get that clear when we announce the Q1 earnings, but it’s directionally, that’s correct.

Okay. Thank you. I’ll jump back in queue here and let someone else talk. Thanks very much.

[Operator Instructions] Your next question comes from the line of Jordan Levy with Truist. Your line is now open.

Good afternoon, all. And thanks for taking my questions. And also congratulations on the acquisition announcement. Clearly based on your announcement, there’s deals to be had in the market. I am recognizing some of the volatility we’re seeing right now. Christian, maybe for you, I just wanted to get your thoughts around the current landscape and the pipeline for other deals and any recent shifts you’ve seen in sort of the broader picture there?

Yes. The – there’s always this cadence of looking at deals, picking the best ones, have the best characteristics, and then closing. So obviously today is the culmination of going through that cycle. We are in active discussions, so it’s not a on-off switch to – between finding and closing. And so those continue. I don’t want to project when our next deal would be, or how large it is. I’d just say that we are inactive bilateral negotiations on things currently. I am seeing a more active market. I think when – let’s say some things are shaking loose – there’s some well-known private installers that have gone under or are struggling trying to raise equity themselves. And sometimes instead of raising equity, recycle the capital from selling the assets that you own. So between asset owners and developer installers needing to find capital. It is an active market right now.

Thanks for that. And maybe just as a quick follow-up on the different front, you mentioned some of the initiatives around the enterprise technology stack. Just wanted to see if I could – if we could get a little more color there on what that allows you to do from a customer servicing perspective and that sort of thing?

There’s no – there’s not like dialing up a sales force representative and saying, hey, hand me your package of residential solar tools. This is a new industry and the tools are being invented and developed by the participants. There's pluses and minuses to that. It does take longer. So, for example, we just – we just launched the billing platform that I talked about and that took a lot more months than again, pulling something off the shelf and stalling. So what we're working on going forward is an enterprise wide, where all our systems of records are effectively talking to each other so that when a – when a customer calls in or logs in again, previous I talked about a single sign-in process. Every time you build something for security reasons, you end up having a different sign and it's a very clunky customer experience. So even the process of giving what may seem to be obvious, like you just sign-in with a log-in and password like we're all used to in many apps that is something that has to be built inside this industry. It actually creates a moat as folks get to 30,000 or 50,000 customers, it's impossible to do things by spreadsheet to do things with legacy older technology. And these things all have to be built. What I'm happy to be able to share is that all the different portions of an enterprise technology stack have been built. And so in 2023 and 2024, by connecting them all together, a customer will be able to log in and see every aspect, whether it's the performance of the system or a bill or a customer service question, if there may be a – an asset component replacement or something that is going on. And so their experience then becomes very real time in being able to interact with their or to see their – the power that's on the rooftop and interact with Spruce and of course from a future sales standpoint to be able to select and begin a sale process or an acquisition process of their own to buy the next piece of that home power systems. So that's what we anticipate coming in the next two years leading to higher customer satisfaction, better customer experiences all the way through, so, one call, one answer situations and ideally greater sales as additional components come to market.

Really interesting. Thanks for the commentary.

[Operator Instructions] Your next question comes again from the line of Joseph Osha with Guggenheim. Your line is now open.

I'm back. I wanted to return to that interesting point you made Christian about, yes, sort of some dealers. Sort of being forced to sell the, the family jewels to stay in business and that's quite interesting given I expect where loan pricing in particular is going to go again depending on what happens today, tomorrow with Mosaic and the implications for that. How big an opportunity is that? And do you have a mechanism in place to perhaps go out and start looking at who might be prospective sellers in that market?

Yes. I mean the Mosaic; we’re all watching that very closely.

Hasn’t hit today. I’m looking at it as we take.

Thanks for the real-time update...

Actually no, it literally just hit.

All right. Pulling back talking about a competitor. And look, we’re watching that. And the shift to PPAs and leases was sudden and we saw that to the discussions that we have with installers are ongoing, so we can see what’s going on at their level. Yes, it is dramatic. Let’s put it that way. And I think other folks have talked about the percentage shift to PPAs versus the loans. So in terms of the opportunities, the calls are coming in to us. We’re a well-known buyer within the market. Those of us that have built the company have been doing this for five years within this company, but 15 years for many of us that have been active in solar power and wind before that. Incoming calls give us insight that there are public renewable power companies that are actively looking for buyers of blocks of their assets. And those incoming calls have given us visibility that it’s not just limited to the private markets that are always trying to raise cash and optimize what they hold versus the warehouse finance facilities that they have, but that this is extending to our public peers as well as they may be doing normal rebalancing. We don’t have necessarily the visibility into why, we just know the what. And I’ll leave it there for obvious reasons. I can’t talk about specific names.

Okay. All right. Thank you. That’s very helpful. And just I wanted to check on one other bit of simple math I was doing looking at your current financials, right? If you had a gross margin of $10 million, you had, I would argue, recurring operating expenses of $16 million. And then a depreciation add-back of, I think I want to say it was worth to be like $5.5 million. So on kind of an organic basis right now today, I would argue that you’re sort of running at cash flow breakeven. Is that a fair way to think of it?

Yes. I think that’s accurate. In light of the debt structure and the principal payments, I think there’s a healthy amount of scheduled principal that’s made each quarter. So I think that’s one of the legacy Spruce carryovers and something that we’ve talked about revisiting again as we look at refinancing to get more cash flow positive.

Okay. All right. Well, thank you.

Yes.

This concludes our Q&A for today. I now would like to turn the call back over to Bronson Fleig.

Thank you, operator, and thank you again 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. You may all disconnect.