Trinity Capital Inc. (NASDAQ:TRIN) Q3 2023 Earnings Call Transcript

Trinity Capital Inc. (NASDAQ:TRIN) Q3 2023 Earnings Call Transcript November 1, 2023

Trinity Capital Inc. reports earnings inline with expectations. Reported EPS is $0.55 EPS, expectations were $0.55.

Operator: Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Trinity Capital’s Third Quarter 2023 Earnings Conference Call. Our hosts for today’s call are Steve Brown, Chairman and Chief Executive Officer; Kyle Brown, President and Chief Investment Officer; David Lund, Chief Financial Officer; Michael Testa, Chief Accounting Officer and Ben Malcolmson, Director of Investor Relations; Gerry Harder, Chief Operating Officer; Ron Kundich, Chief Credit Officer and Sarah Stanton, Chief Compliance and General Counsel, are also on the call. This call is being recorded and will be available for replay beginning at approximately 3:00 p.m. Eastern Time. The replay dial-in number is 888-214-9523 and no conference ID is required for access.

At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the call over to Trinity Capital’s Director of Investor Relations, Ben Malcolmson. Please go ahead.

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Ben Malcolmson: Thank you, Mike, and welcome, everyone, to Trinity Capital’s earnings conference call for the third quarter of 2023. Trinity’s third quarter financial results were released earlier this morning and can be accessed from Trinity’s Investor Relations website at ir.trinitycap.com. A replay of the call will be available on Trinity’s website or by using the telephone number provided in today’s earnings release. Before we begin, I would like to remind everyone that certain statements that are not based on historical facts made during this call, including any statements relating to financial guidance may be deemed forward-looking statements under federal securities laws. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could create – that could cause actual results to differ materially from those expressed or implied by these forward-looking statements.

We encourage you to refer to our most recent SEC filings for information on some of these risk factors. Trinity Capital assumes no obligation or responsibility to update any forward-looking statements. Please note that the information reported on this call, speaks only as of today, November 1, 2023. Therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Now please allow me to introduce Trinity Capital’s Chairman and CEO, Steve Brown.

Steve Brown: Thank you, Ben, and thanks, everyone, for joining us today. As you have seen in the earnings release, we generated strong third quarter results with record net investment income fueled by a robust originations pipeline. Net investment income for the quarter was $23.4 million or NII per share of $0.58, providing 118% coverage on our regular dividend. NAV increased by $0.02 to $13.17 per share due in part to a healthy balance sheet and the stability of our portfolio, which out-earned our distributions. We further strengthened our liquidity during the quarter by accretive stock issuances under our ATM program, as well as our $82 million equity raise in August. I’m especially pleased that we have increased our quarterly dividend by 2.1%, marking the 11th consecutive quarter of dividend increases.

Last month, we increased our quarterly regular dividend to $0.49 per share in addition to a supplemental dividend of $0.05 per share to comply with tax regulations. The Board will further evaluate our tax position in Q4 and determine if additional supplemental dividends are required. As we previously announced, effective January 1, 2024, and consistent with the company’s long-term succession plan, I will become Executive Chairman of the Board of Directors, while continuing to serve on the company’s investment committee, and Kyle Brown will become Chief Executive Officer. As CEO of Trinity for the past 15 years, I have had the privilege of leading a best-in-class team, and together, we took the platform public, creating significant returns for our investors.

Since our IPO in 2021, Trinity has delivered more than $169 million in cumulative distributions. Also, we have been approved to launch an RIA and have successfully started the JV, both of which provide off-balance sheet growth opportunities that give us the ability to generate accretive returns for our BDC investors. I look forward to transitioning into this new role and partnering with Kyle as he leads this team toward our next phase of growth. Since joining the firm in 2015, Kyle has played an important role in his capacity as President and Chief Investment Officer, where he has overseen the company’s lending policies and investment strategy. He has been a driving force in building this team and our business, and he is in a prime position to lead us to even better places.

This is an exciting next chapter for Trinity. And with that, I’ll turn the call over to Kyle. Kyle?

Kyle Brown: Thank you, Steve. I’m looking forward to stepping into the role of CEO and continue to work with our record-setting team and building this platform for our portfolio companies and shareholders. As Steve mentioned, this planned transition is a result of a long-term strategy, an extensive preparation to position the company for tremendous opportunities ahead. Our vision and mission remains the same: to build the world’s leading credit platform for the global growth economy. We’ll continue to maximize Trinity’s track record and trajectory as we expand the portfolio to add value for our shareholders. We focus on doing three things exceptionally well here at Trinity, exhibiting uncommon care for our employees and partners, be more than money for our clients, and providing outsized returns for investors.

Looking at the macro environment, the VC industry remains an attractive place to make debt investments given the mismatch between supply and demand for lending. High-quality growth companies are going to continue to need to raise capital and debt will be a preferred avenue over heavily dilutive equity down rounds. Interest from investors seeking to partner with company founders to build positions in companies remains high. And the dry powder in the VC industry remains at record numbers. The level of opportunity can be gauged by looking at the volume of deals in the market, including the latest data from Q3, the estimated number of deals in each quarter of 2023 continue to surpass all previous years, except for the unusual activity in ’21 and ’22.

We have exceptional relationships with our portfolio companies and the breadth of our relationships with sponsors and investors allows us to see even more opportunities as we work with more than 900 different equity sponsors in our history. Despite a somewhat challenging fundraising environment, our portfolio continued to get funded and to see opportunities to raise additional capital. Year-to-date, 45 of our portfolio companies have raised an aggregate of more than $2.4 billion in new capital to drive their next phase of growth. Volatility in the banking industry and a more conservative approach towards lending continue to drive additional opportunities for Trinity’s direct lending solutions. We finished the quarter with a strong pipeline of $348 million in unfunded commitments, all of which are subject to milestones, ongoing diligence and approval by our investment committee.

We remain very selective and committed to adhering, to our rigorous diligence process with a smaller percentage of deals reaching the underwriting stage. Our distinct structure and collaborative origination credit and portfolio teams takes a proactive approach to managing our inbound opportunities in active portfolio companies, which greatly mitigate risk and position us to excel in all cycles. Gross fundings in Q3, were approximately $149 million and proceeds received from repayments of the company’s debt investments during Q3 totaled approximately $177 million. Our Q3 fundings were comprised of $81 million to five new portfolio companies and $66 million to 10 existing portfolio companies and $2 million of capital calls to our joint venture.

The composition of our portfolio remains consistent with prior quarters, shows diversification across 19 different industries. We have intentionally constructed that portfolio with varied industry segmentation with our large industry exposure, representing only 13% of the portfolio at cost. As announced earlier this year, we have further built out our life science vertical by making key hires and opening a new office in San Diego, which places us in the heart of a major life science research and innovation hub. We continue to be enthusiastic about the prospects of our life science vertical, and believe the industry holds immense potential for growth. Our team has built an attractive platform to support the financing needs of growth stage companies.

Our people are Trinity’s biggest assets. And as we continue to build and grow the organization, we never forget that our culture is built on humility, trust, integrity, uncommon care and continuous learning. And an entrepreneurial spirit as we serve our customers and partners. We believe this mindset makes us a destination for the best talent in the industry, and we continue to make strategic hires to bolster our team for the exciting road ahead. In the third quarter, we also continue to realize the benefits of our direct lending joint venture. This off-balance sheet growth provides incremental returns that flow to our shareholders. Our RIA is positioned to be an opportunistic off-balance sheet growth lever. Our team is engaging with several potential investment partners, and we expect to have more progress, to share in the coming quarters.

We are focused on building a platform both on and off-balance sheet that is accretive for investors. As a reminder, we are an internally managed BDC. And the fees charged to our off-balance sheet entities will directly benefit shareholders. Looking ahead, we believe companies will need to seek lending solutions that offer strategic partnership and less dilutive growth capital. We want to be the go-to lender for growth-oriented companies providing a wide range of financing solutions. And we are well positioned to profitably grow the balance sheet. And as we increase our off-balance sheet activity, we’ll seek new ways to improve returns for our shareholders. Our CFO, David Lund will now discuss our operating performance in more detail. Dave?

David Lund: Thank you, Kyle, and welcome to everyone joining us today. We generated strong operational performance in the third quarter, underscored by the strength of our balance sheet and the ability to execute our strategic vision. In Q3, we recorded total investment income of $46.4 million, a 20% increase over the same period in 2022. This growth was attributable to interest earned on the higher average loan balances in our investment portfolio, the benefit of increases in the prime rate since Q3 of 2022 and OID acceleration. Our effective yield on the portfolio for Q3, was 16.7% compared to 16.2% in the second quarter. Our core yield, which excludes non-recurring fee income increased to 15.5% from 14.8% in the prior quarter.

This yield growth was contributed to our solid NII performance in the quarter. Our debt portfolio remains well positioned against interest rate increases with 74% of our debt investments at floating rates. While on the borrowing side, 19% of our outstanding debt at the end of the third quarter was at a variable SOFR rate, contributing to a solid net interest margin or NIM of 12.9% for the quarter. Net investment income for the third quarter was a record $23.4 million or $0.58 per basic share, an increase of 25.6%, compared to $18.6 million, or $0.56 per basic share in the same period of the prior year. Our operating activities generated strong returns for our shareholders with ROAE based on NII over average equity of 17.6% and ROAA based on NII over average total assets of 8%.

Lastly, as of September 30, 2023, NAV increased 18.1% to $569.5 million and NAV per share increased to $13.17, compared to $13.15 in Q2. The increase in NAV per share was primarily the result of net investment income that exceeded the company’s declared dividend and accretive stock issuances. I will now hand the call over to Mike Testa, our Chief Accounting Officer, who will discuss our credit performance, liquidity and capital allocation.

Michael Testa: Thanks, Dave. The credit quality of our portfolio companies remain strong and stable with approximately 97% of our portfolio performing at fair value. Our average internal credit rating for the third quarter stood at 2.8 based on our 1 to 5 rating system with 5 indicating very strong performance. This rating is in line with our average credit rating in each of the last four quarters and reinforces Trinity’s track record of low loss rates. We currently have four portfolio companies on non-accrual with a total fair value of approximately $28 million, representing just 2.6% of the total debt portfolio. Moving to liquidity. As of September 30, 2023, we had total liquidity of approximately $257 million, comprised of approximately $250 million of undrawn capacity under our credit facility and $7 million in unrestricted cash and cash equivalents.

Additionally, we’ve continued to co-invest with our joint venture, which provides additional investment liquidity and as of Q3, had $134 million of assets under management. Our net leverage ratio, which represents principal debt outstanding with cash on hand, improved to 0.92 times this quarter as a result of $82 million follow-on equity offering and increased portfolio repayments. We also utilized our ATM program during the quarter, raising approximately $13 million in gross proceeds at a premium to NAV, further supporting long-term growth of Trinity. The health of our capital structure and balance sheet remains the top priority for Trinity. As Kyle mentioned, this commitment is underscored further by the successful execution of the joint venture and potential investment partner discussions under the RIA.

These vehicles provide accretive earnings to the BDC, while providing additional liquidity to the platform, and we look forward to providing additional updates as appropriate. At this time, we’d like to open up the line for questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] And we have our first question from Kyle Joseph with Jefferies.

Kyle Joseph: Good morning, guys. Thanks for taking my questions. And congrats on a good quarter. I just want to get your take or six-plus months out since the Silicon Valley fallout. And just give us a sense for how the markets evolved in those six months and whether you guys have seen some stabilization and how that’s impacted competition as well?

Kyle Brown: Hi Kyle, this is Kyle. So a couple of things and maybe just start with some of the data we’ve seen internally. We have seen this year a pretty significant uptick in senior loan. The percentage of loans and opportunities that are senior secured, and I’d say that’s primarily for even later-stage companies where we might have seen the bank providing some term debt or maybe some of the debt needs there. We just internally have seen a really significant uptick in senior loan opportunities. Now we primarily lend on senior secured loans. But that data alone for more mature companies was really interesting. It just shows that they’re lending less money to us. Opportunities have significantly increased top of funnel. And – but I would say that banks are kind of doing what banks have traditionally done, which is focused on receivable financing. So we’re seeing banks kind of focusing on what they do best, and we think that, that trend probably continues going forward.

Kyle Joseph: Got it. Very helpful. And so yes, that’s a good segue. Next one is just the investment in the pipeline really going forward, obviously, you guys delevered a lot, some from repayments, some from the equity raise, but with your balance sheet where it is, should we take that as a sign that the pipeline is really strong? And then how do you guys think about managing leverage going forward?

Kyle Brown: Yes, I’ll touch on it, Mike, you can also touch on it. But we really want to make sure that we keep that leverage in a place where we have liquidity. We can take advantage of the market and opportunities in front of us. The combination of on an off-balance sheet capital gives us some additional levers there to keep leverage low, but also continue to drive up earnings. And so, we’re really focused on continuing to increase earnings per share, ROE and increase that dividend. And so, the ability for us to offload deals to some of our off-balance sheet entities yet drive up to new income while decreasing our leverage ratio, that’s – those are really interesting tools that we’re going to continue to use going forward.

Michael Testa: And just to provide color on the backlog in Kyle’s prepared remarks, he covered $348 million of unfunded commitments. We also have quite a bit of term sheets accepted. So over to $600 million in our backlog and a good portion of that, is to our equipment financing products.

Kyle Joseph: Got it. Very helpful. Thanks for answering my questions.

Operator: And our next question comes from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan: Steve, congratulations on your transition, and Kyle, congratulations on your transition. I guess going forward, given the dividend, the common dividend yield is roughly 14% right now. Where do you stand in terms of cost of capital for further equity raises?

Kyle Brown: It’s a little tough here yes, Chris. I think you said how do you feel about future equity raises? Is that right?

David Lund: Cost of capital for future equity raises?

Christopher Nolan: Yes. The dividend yield is 14%. And are you comfortable with raising equity, were you paying out a 40% dividend yield on that new equity?

Kyle Brown: Yes. So on future equity raises, we are really dedicated to making sure we do not dilute investors. We’re really dedicated on increasing our ROE. We are very dedicated to increasing that earnings per share. And so – to the extent that we go when we raise additional equity, those things are front of mind. We do have a significant pipeline. We have great opportunities in front of us, but increasing AUM for the sake of AUM growth just does – that’s not – we’re not structured to focus on that first. And so, we’ll raise additional equity as we need to, but not at the sake of diluting shares and decreasing returns for investors.

Christopher Nolan: And then I guess – yes, please go ahead.

Michael Testa: Yes. The only thing to add is like we have some good flexibility and opportunities to raise capital through the ATM or equity offerings, but also from a debt perspective, we have a good amount of liquidity in our credit facility and at the lower end of our leverage ratio, have some flexibility there.

Christopher Nolan: Got you. And then I guess what’s – I know you guys have raised the dividend consistently for the last 11 quarters, and congratulations. But – what are you thinking in terms of incremental raises? Are they really needed to support the stock price or anything? What’s the thoughts around that, please?

Kyle Brown: As our off-balance sheet income continues to increase, and those earnings flow to the BDC, we will continue to have new earnings to share with investors. So – we’re not a traditional BDC. Our story is not going to replicate traditional BDCs. We are going to be very consistent with the dividend and then we’re going – we’re trying to create a growth story for our shareholders.

David Lund: And I would also point to our dividend coverage 118%.

Christopher Nolan: That’s it from me. Thank you.

Operator: And our next question comes from Ryan Lynch with KBW.

Ryan Lynch: Hi. Good morning. Kind of following up on Kyle’s earlier question about leverage. Obviously, with the equity raise and kind of the minimal growth this quarter in the portfolio, you guys are in a really good leverage spot. I understand that you guys are looking at ways to increase the operating ROE. You guys have different tools out there like the JV that can increase the operating ROE by growing that? But at this point, do you guys foresee – is it kind of the expectation that leverage will move back up into kind of that targeted range in a one-point kind of 2-ish area, 1.2, 1.3-ish area – or is the expectation that, it will kind of hover around these levels, and you will continue to enhance the ROE by investing in the JV and potentially the RIA at some point?