Q4 2022 Trinity Capital Inc Earnings Call
Speaker 1: Thanks for watching!
Speaker 2: Good afternoon. My name is Chelsea and I will be your conference operator today.
Speaker 2: At this time, I would like to welcome everyone to the Trinity Capital's 4th Quarter and full year 2022 Earnings Conference call.
Speaker 2: 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 Sarah Stanton, General Counsel.
Speaker 2: and Ron Kundit, Chief Credit Officer, are also present.
Speaker 2: Today's call is being recorded and will be made available for replay at 8pm Eastern Time.
Speaker 2: The replay dial number is 1-800-934-3336 and no conference ID is required for access.
Speaker 2: 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.
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Speaker 2: We ask that when posing your question, you please pick up your handset to allow optimal sound quality.
Speaker 2: Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the call over to Sarah Stanton. Please go ahead.
Speaker 3: Thank you, Kelcey, and welcome everyone to Trinity Capital's earnings conference call for the fourth quarter and full year 2022.
Speaker 3: Trinity's fourth quarter and full year 2022 financial results were released just after today's market close and can be accessed from Trinity's investor relations website at ir.trinitycap.com.
Speaker 3: A replay of the call is 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.
Speaker 3: Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements.
Speaker 3: We encourage you to refer to our most recent SEC filings for information on some of these risk factors.
Speaker 3: Trinity Capital assumes no obligation or responsibility to update any forward-looking statement.
Speaker 3: Please note that the information reported on this call speaks only as of today, March 2nd, 2023.
Speaker 3: Therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay, listening, or transcript reading.
Speaker 3: Now, please allow me to introduce Trinity Capital's Chairman and CEO , Steve Brown.
Speaker 4: Thank you, Sarah. Thank you to everyone joining us today. As you saw in our earnings release this afternoon, we generated strong fourth quarter results to finish an incredible year, exceeding expectations and breaking records on many financial metrics.
Speaker 4: Our talented team delivered an exceptional performance in 2022 for our shareholders, and I'd like to start by recapping just a few of our many achievements.
Speaker 4: First, our originations and fundings brought us to $1.1 billion in total assets.
Speaker 4: growing our total asset position by 20% as compared to the end of 2021. Second, our investment portfolio at cost grew by 45%, which generated a 145.5 million in total investment income.
Speaker 4: Third, our net investment income came in at $21.6 million for the fourth quarter and $71.6 million for the year, representing increases of 104% and 83% over the prior year periods.
Speaker 4: This outstanding performance allowed us to deliver NII of 62 cents and $2.26 per share for the quarter and the year.
Speaker 4: We just delivered our eighth straight quarter of dividend increases.
Speaker 4: For 2022, we declared combined regular and supplemental dividends, totaling $2.33 per share for our shareholders, and an 85% increase over the 2021 dividends.
Speaker 4: Our NII per share of 62 cents for Q4 represents a 6 cent increase from the prior quarter and 135 percent coverage on our core dividend.
Speaker 4: Our return on average equity based on NIIC increased to 17.9%.
Speaker 5: Fourth.
Speaker 4: In the first quarter, we realized gains from the sale of our investment positions in Lucid and Matterport that contributed to the $33 million or $0.94 per share of realized gains on the ending share basis. Lastly, we ended 2022 with approximately $60 million or $1.73 of undistributed income.
Speaker 4: As a reminder, the undistributed income from 2021 of approximately 19 million was distributed through the 60 cent supplemental dividends we declared and paid in 2022.
Speaker 4: Shifting to our capitalization and liquidity, we remain very active during the year despite a challenging market. We raised additional accretive capital, upsized our credit facility, and reopened our 7% notes in order to maintain strong liquidity for our growing investment portfolio.
Speaker 4: The successful completion of two publicly underwritten offerings in 2022 and the use of our ATM program supported the continued long-term growth of Trinity.
Speaker 4: All of these capital raising activities allowed us to deliver a record year for both commitments and deployments.
Speaker 4: We originated $976 million in new commitments and funded $631 million across 66 portfolio companies.
Speaker 4: Throughout the course of 2022, we continued to invest in the company's platform, infrastructure, and people. To that end, we added talent to all levels of our organization and have grown the team by almost 40% this year to 57 employees. We also expanded our platform with the addition of an experienced life science team to help us build the future of our organization.
Speaker 4: adding originations in this important market vertical.
Speaker 4: Our results in Q4 and 2022 demonstrate the strength of our team, our ability to meaningfully grow our portfolio, generate significant yields, manage credits, even in a volatile market. I will now hand it over to Kyle Brown, our President and Chief Investment Officer.
Speaker 4: to provide updates on our portfolio composition and investment performance. Kyle? Great, thanks Steve. We are truly pleased with the performance of our originations and credit teams during 2022. Having originated $976 million in commitments and $631 million in investments, our portfolio grew to $1.1 billion on a fair value basis, an increase of $25.
Speaker 4: new portfolio companies and $15.4 million in gross deployments to nine existing portfolio companies.
Speaker 4: We finished the quarter with $393 million of unfunded commitments, which provides us with a strong pipeline for continued funding leading into 2023. And as a reminder, our unfunded commitments are subject to ongoing diligence and approval by our Investment Committee.
Speaker 4: Our pipeline activity remains solid for Q1 despite narrowing our funnel and tightening our investment criteria.
Speaker 4: To meet this growing opportunity, we completed two transformative initiatives in 2022 with the close of our joint venture and SEC-exemptive release for our RIA. We are encouraged by the multiple growth levers we have in place, which are differentiating ourselves in the BBC industry. Our JB structure not only allowed us to expand the portfolio, but it also allowed us to expand the portfolio.
Speaker 4: but also generate predictable fee income while keeping the balance sheet healthy and nimble.
Speaker 4: The RIA structure will allow us to raise funds off the balance sheet, providing outsized returns for investors in a complementary way. We can now raise co-investment type vehicles to grow the platform with the ability to raise capital from multiple channels all to the benefit of the BDC, which owns 100% of this RIA.
Speaker 4: At Trinity, we believe our internal management structure enhances our shareholder alignment and ability to stink outside the box. This off-balance sheet growth is one example of that. As we enter 2023, we are proceeding with caution as we review our investment opportunities. The number of growth sage companies looking for structured debt is increased while pressure persists on the revaluation of these companies.
Speaker 4: We believe this is a time for opportunity, but it must be navigated with sound debt judgment. Continuous village and monitoring of our portfolio companies is an essential component to our successful credit management.
Speaker 4: We maintain a dedicated portfolio management staff whose sole function it is to monitor our credit risk, keep a watchful eye on the market impact and stay in constant communication with management teams and their equity stakeholders.
Speaker 4: Our focus is on building a trusted partnership supported by ongoing two-way communication. This combination has proven to be successful, as demonstrated by our solid investment track record and reputation in partnering with our portfolio companies. So that ends during 2022. We added to our credit team to ensure that we remain attentive to the performance of our portfolio companies.
Speaker 4: The composition of our portfolio remains relatively consistent with prior quarters.
Speaker 4: The composition of our portfolio remains relatively consistent with prior quarters and represents diversification across 19 industries.
Speaker 4: This corner we revise our industry breakdown to further underscore the granularity and diversification of our portfolio.
Speaker 4: Our debt investments are primarily split between venture debt and equipment financing.
Speaker 4: At fair value, 73% of our debt portfolio or $802.9 million is comprised of secure loans. While 23% or $246 million is invested in equipment finance. The remainder of our portfolio is $45.5 million, which is comprised of equity and warrants. Our credit quality and portfolio will remain stable, with 95% of our debt investments at cost performing.
Speaker 4: I'd like to address one investment in industry in particular that has been an area of concern for investors that being digital asset technologies.
Speaker 4: We continue to reduce our exposure to these investments. These are fully amortizing payments on 36 month schedules, which is resulting in a decrease in balance of 3% per month. Two of our three investments in the space are in the performing category as of year-end. Our investment with course scientific remains in default, but the loan is collateralized by critical computing equipment with a cost basis of $23. We continue to reduce our exposure to critical computing equipment with a cost basis of $23.
Speaker 4: since this mark should benefit course operating performance in liquidity position. We remain in close communication with the company and are exploring all available options to obtain the best possible outcomes as benefit of our shareholders.
Speaker 4: Subsequent to the end of the fourth quarter, another of our publicly traded digital asset portfolio companies, HAD-8, mining, announced a merger with US Bitcoin Corp. According to companies, that transaction is expected to close in a second quarter of 2023. That would trigger a payoff event and further reduce our investment in digital asset technologies.
Speaker 4: We continue to monitor the progress of the closing and expect to have more to share over the next couple quarters.
Speaker 4: In Q4, the number of loans on not a cruel remains the same. With four debt investments with cumulative investment costs and fair value of approximately 49.2 million and 17.8 million. Respectively or 4.3% and 1.6% as a percentage of the company's total investment portfolio at cost and value respectively.
Speaker 4: Lastly, as of December 31, 2022, now per share decreased to $13.15 compared to $13.74. The decrease in now per share was primarily the result of net investment income that exceeded the company's declared dividend by one cent per share offset by the unrealized appreciation.
Speaker 4: our operating performance in more detail. Thank you.
Speaker 4: Thank you, Kyle. As Steve and Kyle mentioned, this was an outstanding quarter and year of paternity across multiple performance fronts. Turning specifically to our fourth quarter financial performance, our portfolio growth of 45% during 2022 and the increase in benchmark rates contributed to our total investment income of $41.5 million.
Speaker 4: A 75.8% increase over the same period in 2021, and a 7.3% increase over the third quarter of 2022.
Speaker 4: The income decreased to $909,000 as our early loan repayments totaled only $14.8 million in the quarter.
Speaker 4: Our effective yield on the portfolio for Q4 was 15.5% and increased from 15.2% in the third quarter.
Speaker 4: Our core yield, which excludes non-recurring fee income, increased to 14.2% from 13.5% in the part of quarter.
Speaker 4: Both are effective yield and core yield, primarily increased due to the rise in benchmark rates.
Speaker 4: Year over year, total investment income increased by 77% to a record $145.5 million in 2022 from $82.2 million in 2021. Our consistent originations helped drive this increase while we maintained a consistently high effective yield across the portfolio.
Speaker 4: Our debt portfolio continues to be well-positioned ahead of anticipated future rate hikes with 68% of our debt investment at floating rates.
Speaker 4: Well, on the borrowing side, only 30% of our outstanding debt at the end of the fourth quarter, what is a variable rate at so-for?
Speaker 4: We incurred a total of $10.3 million in interest expense and amortization and deferred financing costs on various debt facilities as compared to $9.3 million in Q3. The increase in interest expense was primarily due to the full quarter of expense incurred under the $57.5 million of additional debt.
Speaker 4: has compared to approximately $10.8 million during Q3.
Speaker 4: The decrease of approximately 11% was primarily driven by a decrease in variable compensation expense and lower excise tax expense.
Speaker 4: As a result of this operating activity, net investment income for the fourth quarter was $21.6 million or 62 cents per basic share, an increase of 16 percent compared to $18.6 million or 56-
Speaker 4: since per basic sharing Q3.
Speaker 4: For the full year of 2022, that investment income increased to $71.5 million as compared with $39 million in 2021, an increase of 83% year over year.
Speaker 4: We recovered net unrealized appreciation. We recorded net unrealized appreciation of $13.6 million during the quarter.
Speaker 4: We recognize unrealized appreciation of $23.2 million in our debt portfolio and $885,000 in our equity and war and portfolio.
Speaker 4: offset by the flip of $10.5 million to realize losses on portfolio investment previously depreciated on an unrealized basis.
Speaker 4: Approximately $18.2 million of the unrealized appreciation in the Deathboard Polio was related to the performance issues with the two portfolio companies that Kyle previously reviewed.
Speaker 4: The remainder of the unrealized appreciation was primarily attributed to market adjustment due to general market volatility and interest rate changes.
Speaker 4: Our operating activities generated stronger turns for our shareholders with our ROAE based on NII over average equity of 17.9 percent, and our ROAA based on NII over average to the last set of 7.7 percent. I will now hand the call over to Mike Tester, our Chief Accounting Officer.
Speaker 4: We'll discuss our credit performance, liquidity, and capital allocation. Mike?
Speaker 4: Thanks, Dave. Starting with credit quality, our portfolio companies continue to perform well in full quarter of 2022, with approximately 95% of our portfolio performing at cost. As Kyle mentioned at the end of the quarter, we have four investments on non-accrual, representing just 1.7% of the fair value of the investment portfolio.
Speaker 4: Our average credit rating for the fourth quarter stood at 2.8 based on our 1 to 5 rating system with 5 indicating very slow performance.
Speaker 4: This rating is just slightly lower than our average credit rating at 2.9 and 2.3.
Speaker 4: Our overall credit quality has remained solid. You've taken practical approach to all of those in our portfolio.
Speaker 4: We continue to diligently monitor our portfolio company's performance, being mindful of the macro environments that could impact our operations.
Speaker 4: Moving to Equality, as of December 31, 2022, we had total Equality of approximately 173 million, comprise of approximately 162 million of undriving capacity under our credit facility.
Speaker 4: and $11 million in unrestricted cash and cash equivalent. Our net leverage ratio, which represents dead outstanding less cash on hand, increased to 1.33 times this quarter as a result of our borrowings on our credit facility, which contribute to our portfolio growth.
Speaker 4: As of December 31, total debt principal outstanding was $620 million.
Speaker 4: and had a weighted average cost of debt of 6.8% up from 6.3% at September 30th due to the higher base rates on their credit score.
Speaker 4: Unsecured debt represented 70% of the toll debt at quarter-end, down slightly from the prior quarter as we borrowed under our credit system.
Speaker 4: With the majority of our investment portfolio and floating reinvestment, compared.
Speaker 4: Compared to the majority of our outstanding borrowings at fixed rates, we expect that further increases in the base rates in 2023 with positive impact on net interest margin and NII margin.
Speaker 4: Our leverage position, liquidity strength, and access to the capital continue to be at the forefront of our strategy.
Speaker 4: Continue to explore all capital options that will be accreted to our shareholders.
Speaker 4: This includes funding investments under our recent announced JD and the RIA.
Speaker 4: funding investments under our recent announced JD and the RIA that we are looking at launching 20 clicks.
Speaker 4: which will allow for complementary off balance sheet growth and additional fee income to Trinity. In Q4 we announce our stock repurchase program that will allow us to repurchase up to 25 million of our common stock.
Speaker 4: These leaves that stock buybacks are an accreted use of shareholder capital when the stock is treating at a meaningful discount to math.
Speaker 4: To that end, we repurchased approximately 186,000 shares at an average price of $10.77 per share for an aggregated repurchase price of $2 million.
Speaker 4: The program demonstrates our commitment to creating values for our shareholders as a repurchase had a creative impact of 2 cents per share on NAD. In conclusion, on December 15, 2022, our board declared a cash dividend of 46 cents per share for the fourth quarter of 2022, representing a 2 percent increase from Q3, 2022.
Speaker 4: This is the eighth quarter in a row that we have increased our core digits. Our gap in an I-generated coverage of approximately 135 percent of our regular digits for the quarter. Additionally, we have a number of numbers of the number of digits in the quarter. We have a number of numbers of the number of digits in the quarter.
Speaker 4: The board approved a 15 set per share supplemental divin. All dividends were paid on January 13, 2023. Board of Directors, Jelly.
Speaker 4: makes a determination of our dividend distributions on a QoA basis and we anticipate making an announcement of our Q1 2023 in the second half of March.
Speaker 4: With that, I'll now open the line up for questions, Alberta.
Speaker 2: Thank you, sir. At this time, if you would like to ask a question, please press star one on your touch-tone phone.
Speaker 2: You may remove yourself from the queue at any time by pressing star queue. Once again that is star one to ask a question.
Speaker 2: And our first question will come from Sinead O'Shea with Wells Fargo. Your line is open.
Speaker 2: from the Sinead O'Shea with Wells Fargo. Your line is open.
Speaker 6: Hi everyone, thanks and good afternoon. Our first question, are you able to provide us any color on the portfolio company level, liquidity, cash runway, and so forth, and maybe at higher level fundraising backdrop?
Speaker 4: Yeah, this is Ron. In terms of portfolio cash runway, we're obviously actively monitoring our portfolio on a monthly if not more often basis.
Speaker 7: We track those numbers on a company by company basis.
Speaker 7: We do not have an aggregate. We don't keep track of the aggregate, but we take each of those into account as we grade and value the portfolio regularly. For all new investments then we do track and you know I'd say the one maybe adjustment to underwriting that we're considering is we really want to see 18 to 24 months or more but one way for any new investment.
Speaker 7: that we commit training equity to get vehicle started. That's a good question. I think part of the purpose of the RAA is to manage and show the people's money. The goal will be to generate new fee income and carry interest.
Speaker 7: in a fund structure utilizing someone else's capital primarily. You know, we are in process currently. We have begun those discussions with investors and potential investors.
Speaker 4: And we believe that funds managed by the RA have the potential generated significant amount of income to the BDC in the future. Thank you for watching.
Speaker 7: And the structure of it would also be, you know, I think primarily at least initially a co-investment vehicle, which would be complimentary and help us continue to make new investments, generate new income and not and give us the again, just like the JV the ability to be nimble to be the level maximize our capital there.
Speaker 7: And then for investments that don't fit the BDC, whether it's bad income or, you know, there's a variety of reasons we can come up with. But we have a significant portfolio and pipeline opportunities, not everything fits inside of the BDC. So we want our shareholders to be able to capitalize on those investments as well.
Speaker 7: And so we see a future where we have funds that can take advantage of those opportunities as well.
Great. Thanks so much. But Thank you. Thank you.
As a reminder, that is star one to get to the questioning queue. And our next question will come from Christopher Nolan with Latinburg Thalman. Your line is open.
Hey guys, um, Steve what is the leverage level that you guys are looking for?
Hey guys, Steve, what is the leverage level that you guys are looking for at the range?
Yeah, the range is sort of the 115 to 135 range. We're at the upper end of that right now. We do plan to keep within the upper end of that range going forward. That's been our policy for some time and still is.
Okay, and your stock is just slightly above book value, but it's...
I mean if it get any thoughts of de-risk and the portfolio at all taking the I mean I know
Any thoughts of equity races, given that your stock is slightly above book?
I think we're going to look at equity raises cautiously. We have proven the ability with our existing portfolio as it sits today to generate meaningful numbers relative to income, that investment income and distributions.
And so we can certainly continue, we believe, to perform like that if we don't grow the portfolio, which means if we don't raise money. But obviously, if our stock price reacts positively and we have the ability to raise some capital and do it judiciously, we'll certainly do that. As Kyle mentioned, with the off balance sheet.
activity now, we can raise capital there and we can continue to be active in the marketplace on a co-investment basis. And that gives us effectively the liquidity as a platform to go do what we do in the marketplace with the benefit all coming back to the BDC shareholders.
And then on the dividend, did you guys indicate that there'll be a supplemental dividend in the first quarter or did I miss something?
So we have not determined that. We're going to be visiting with the board here later this month, I think as Mike said in his prepared remarks. And we do have still over income. As you know, we've continued to grow our core dividend and for the eighth trade quarter we increased it.
So we'll sit down with the board and look at all of those factors and make a decision later this month. Okay, thank you. You bet it's great. Thanks, Chris. Thank you. As a reminder, that is Star 1 to ask a question. And our next question comes from Ryan Lynch with KBW. Your line is open.
Hey, good afternoon. First question I have, following up on the question regarding the RIA. I'm just curious, I know there's a lot of variables and a lot of uncertainty, all the timing of things. But as we stick with today, did you guys have any sort of expectation of when you would hope to get the first fund up and running?
and capital of the void and when potentially that could actually get to the side work, it could start contributing to the BDC.
So timing's not unabcensored. I think you can expect sometime the next six months that we'll have that ramped up and we'll be deploying capital out of it. We mentioned the JV, we begun deploying out of that. Steven mentioned this before that also provides us with an old code of VEC level because we're...
Okay, my other question was, what's just your guys perspective on what is the pulse of venture capital investors in this environment, their willingness and ability to support portfolio companies that?
aren't cratering but that maybe performing slightly below expectations in this environment. At one point there was kind of free money and it felt like everybody was with getting capital. Certainly the strong companies who are outperforming expectations I think would still be able to get capital the ones who are
So you're the underperforming probably art, but I'm curious about those companies that are maybe just slightly underperforming expectations and venture capital participants and willingness and ability to continue to help support those companies.
Yes, Ryan, this is Kyle. So a couple things. You know, one, I don't think, as intercapital private equity generally are supporting companies that are cratering anyway, in good markets or bad markets. We have, we believe, the way we've underwritten.
that our companies have a real true mode around the technology. They're growing in the face of headwinds. We've seen this over and over again with the investments we've made over the last couple of years. And when they need more capital, they get it. But I would say what companies are having to come to grips with is that that money is not free, like you said. It's not cheap.
maybe like it was in 2021, 2022, they're in our own portfolio and the new investments we make, founders and CEOs are having to come to grips with the fact that that company's just not worth the multiple that existed for them a year or two ago. And so.
Well, we continue to see our companies get funded. We see it quite regularly at our portfolio, and they're getting the capital they need to get a couple of years down the road and continue to grow in the face of headwinds. But the valuation is decreasing. As a secured lender, you know, I'd be cautious to not say this. It's not that we don't care. We do care.
But the majority of our returns are fee income, rate and fee income, current income. And so the valuation, whether it's high with the free money or it's low with more premium capital, that doesn't affect our returns. It doesn't inhibit our ability to collect from our borrowers. So it doesn't necessarily affect our returns.
hurt our position. So we monitor, we track it, you know, we want to see our company continue to receive capital and they are getting it. Most of those comes are getting it at a re-evaluation a lower belt.
Yeah, probably the only thing I'd add to that line is, you know, the expectation on the founders is no longer unsettled growth, but pivoting to profitability. Right? Let's make this capital last. Let's make the cash life last.
That's why the cash-like question is difficult one, right? Because you get a much different answer in a trailing 12-month basis than you do on a forward 12-day basis across virtually any company within the portfolio, right? Because they're all talking about...
pivoting to profitability. And there's real enterprise value in the company's vendor right? So they're getting the equity. It just may not be the valuation that the Congress would love. Okay, understood. I appreciate the time this afternoon.
Thanks Ryan. Thanks Ryan. Thank you. As a reminder that is star one to ask a question and our next question comes from Bright Row with B. Riley. Your line is open.
Thanks a bunch. Good afternoon. Let's see. We wanted to maybe start with the confline and thoughts about operating expenses. Obviously, you've grown the head count quite a bit to ramp up. You noted your 57 employees now. How should we think about the growth of the employee base?
as we look out over the next couple of years. Yeah, I can tell you, you know, Bryson, our annual plan for this year. There's very modest tech count growth. You know, some of it is within, you know, the finance and operations team as we do add.
the off-balance sheet entities, right? There's a bit of complexity in Mike's team on the back end, but we're growing judiciously. We mentioned in our prepared remarks, we've added a life sciences practice in 2022. We will be expanding that.
per our plans, but the head counter is going to be very moderated in 2023 compared to last year.
Okay, that's helpful. And maybe shifting gears here, just thinking about the comment you made around core scientific and where it's marked as of December 31 and relative to maybe the performance of Bitcoin here in 2023. How, when was that mark kind of determined? Oh, okay.
And was there any ability to kind of go back and reflect, you know, what the mark might look like today with some of the, some of the better information you have to work with?
Yeah, but you're going to see us be real consistent with our marks and our valuations.
On 1231, that was the value of that equipment. And we have to look at it that way. The way we look at it is what could we...
sell this for right now, right, you know, today. And listen, we could argue about it all day long about what it's worth today. It doesn't matter as a 1231. That's what it was worth.
Is Bitcoin up 40% since then? Yes. You know, we are working with the company. We're going to do our best to collect every dollar that and Now we'll see what happens here, but as a 1231 that was evaluation. That's what reporting and you're gonna see us be rural assistant on the valuations Okay, that's helpful
And then maybe last one for me, you've got a chart in the K and in the presentation about kind of internal risk ratings. Can you walk through kind of the some of the migration we saw quarter over quarter? Is it kind of more reflection of the, I guess, the environment than anything else?
Yeah, I mean, happy to, you know, where we saw migration within the portfolio was, you know, we, as you know, we have five bins, you know, three of which are our different levels of performance. And so, you know, we saw more companies in that, you know, center performance bin versus one of the higher. Yeah.
And so these are still performing loans. You know, that doesn't indicate distress. When you look at our risk rating performance to plan. Is the very big aspect to that, right? And so, you know, our portfolio companies faced quite an inflection within 2022, where now we just spoke about earlier the growth plans that they may have mind of late. But we know that their our stage of debt. And so it didn't necessarily happen, you know. So this video just
there in that migration, but it reflects the reality as of your end. Got it. That's helpful. Appreciate you guys answering the questions. Have a good one.
Thanks, Bryce. Thank you. Thank you. As a reminder, that is star 1 to ask a question.
And at this time we have no further questions in the queue.
We do have one last question from Vilas Abraham with UBS. Your line is open.
Hi everyone, thanks for taking the last second question. Just on loan spreads, what are you guys seeing there now? Are you trying to push those at all with new borrowers and new investments?
This is Kyle. We do continue to push on pricing. We continue to push on boards. And we have seen that trend up. And we have seen that trend up.
We will continue to be aggressive on transactions that make the finish line from a pricing perspective. So on a percentage basis, it's not a significant increase, but it has been increasing nonetheless.
And this tape, we keep a relatively constant spread over a prime. So you'll see it anywhere from 6.5 to 7.5 percent over prime on most of our underwriting. So it's going to move more with the prime than necessarily we're moving the spread.
That makes sense. And then just maybe just a broader question on M&A. When do you think that picks up again particularly since it seems like the sentiment is that valuations are...
are pretty reasonable or close to the bottom here. What are your general thoughts around there? And I guess how that plays into, you know, new investments and the conversations around how I think it could look like at some point. Thanks, bye.
Yeah, you can be fun with this guy a little bit here, but all starts this is Kyle. I think we have seen a lot of PV interests. I think that will continue to be an M&A. We'll see him may increase that category. You know, I think the IPO and traditional exit markets, public markets are probably less interesting for the time being. Yeah, and uh...
But I think private equity is absolutely significant around and you might see more of that here. You know, it's about 2023. Yeah, if you look at our Q4, right, the early repayments was, you know, pretty much a low watermark. I think sat at 14 million days. 14.8. 14.8. So.
which makes the 62 cents even more impressive right to the wasn't built on early repayment fees. We don't see that material picking up in Q1, but maybe second half of the year I think we'll see a little bit more activity. That's what the crystal ball says, but we don't really know. Okay, that's it for me. Thank you.
Thanks, Neil. Thank you. Our next question will come from Casey Alexander with Compass Point. Your line is open. Hi, good afternoon. One is a technical question and then one is more of a broader picture question. First, the technical question.
In relation to Hut 8, normally if an equipment finance loan pre-pays, my understanding is that they have to pre-pay the principal and all contractual interest payments that would have been due to the end of the loan. In the case of a merger,
where you're calling for a payoff, is it the same? Is it the same or do they just have to pay off the principal?
Hey Casey, it's Kyle. We can force a payoff and they are on the hook for all future payments.
Okay, that's great. Thank you. Secondly, from a bigger picture, it's obviously a volatile time in venture capital and venture debt. I mean, we're seeing that with most of the earnings reports and we've seen that with yours also. So, I'm going to do you from up.
Strategic sort of sense, do you think it's the right time to be intentionally running at the top end of the leverage range? And do you think by doing so is it your opinion that credit is going to improve over the next two or three quarters? So a couple things. You know, I think the JV provides us with liquidity.
We believe we're also going to be able to recycle capital in the BDC. The portfolio as it is right now, even with these non-accruals, is generating a significant amount of income. We believe that will continue. Then the additional off balance should activity that we are in the process of raising right now is really going to fill out a nice void or just continue to help us.
Providing incremental deployment. So that's that leverageory. Io is going to swing between the range of Steve datia, utilizing that capital.
And also we're going to start seeing some of the loans come off of interest only. And so we're going to be able to recycle some of that capital back into the marketplace to support our companies and continue investing. So it's a time for good opportunity, Casey.
Thanks for taking my questions.
Thank you. Thanks, Jason. Thank you. At this time, there are no further questions in the queue. So I would like to turn the call back over to Steve Brown, Chairman and CEO , for closing remarks. Thank you. And again, thanks to everybody that dialed in today. We appreciate your support. And we're excited about the results for
2022 in the fourth quarter. We look forward to getting back with you at the end of Q1 to talk about how we've done. Thanks, guys.
Thank you ladies and gentlemen. This does conclude today's telecomference and we appreciate your participation. You may disconnect at any time.
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Good afternoon. My name is Chelsea and I will be your conference operator today.
At this time, I would like to welcome everyone to the Trinity Capital's 4th Quarter and full year 2022 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 Sarah Stanton, General Counsel. Jerry Harder, Chief Operating Officer, and Ron Kundit, Chief Credit Officer, are also present.
Today's call is being recorded and will be made available for replay at 8pm Eastern Time. The replay dial number is 1-800-934-3336 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. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two.
We ask that when posing your question, you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero.
It is now my pleasure to turn the call over to Sarah Stanton. Please go ahead. Thank you, Kelcey, and welcome, everyone, to Trinity Capital's Earnings Conference call for the fourth quarter and full year 2022. Trinity's fourth quarter and full year 2022 financial results.
were released just after she made Market Clothes and can be accessed from Trinity's Investor Relations website at ir.treneticap.com.
A replay of the call is 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 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 statement. Please note that the information reported on this call speaks only as of today, March 2, 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. Thank you, Sarah. Thank you to everyone joining us today. As you saw in our earnings release this afternoon, we generated strong fourth quarter results to finish an incredible year, exceeding expectations and breaking records on many financial metrics. Our talented team delivered an exceptional performance in 2022 for our shareholders.
And I'd like to start by recapping just a few of our many achievements. First, our originations and fundings brought us to $1.1 billion in total assets.
growing our total at that position by 20% has compared to the end of 2021. Second, our investment portfolio at cost grew by 45%, which generated a $145.5 million in total investment income. Third, our net investment income came in at 21.6 million for the fourth quarter and 71.6 million for the-
eight straight quarter of dividend increases. For 2022 we declared combined regular and supplemental dividends totaling $2.33 per share for our shareholders and 85% increase over the 2021 dividends. Our NII per share of 62 cents for Q4 represents a 6 cent increase from the prior quarter
and 135% coverage on our core dividend. Our return on average equity based on NII increased to 17.9%. Fourth.
In the first quarter, we realized gains from the sale of our investment positions in Lucidon Matterport that contributed to the $33 million or 94 cents per share of realized gains on the ending share basis. Lastly, we ended 2022 with approximately $60 million or $1.73 of undistributed income.
As a reminder, the undistributed income from 2021 of approximately 19 million was distributed through the 60-cent supplemental dividends we declared and paid in 2022. Shifting to our capitalization and liquidity, we remained very active during the year despite a challenging market. We raised additional accretive capital, upsized our credit facility, and reopened our 7% notes in order to maintain our capitalization.
at 976 million in new commitments and funded 631 million across 66 portfolio companies.
Throughout the course of 2022, we continued to invest in the company's platform, infrastructure, and people. To that end, we added talent to all levels of our organization and have grown the team by almost 40% this year to 57 employees. We also expanded our platform with the addition of an experienced life science team to help us build the future of our organization.
adding originations in this important market vertical. Our results in Q4 and 2022 demonstrate the strength of our team, our ability to meaningfully grow our portfolio, generate significant yields, manage credits, even in a volatile market.
I will now hand it over to Kyle Brown, our President and Chief Investment Officer, to provide updates on our portfolio composition and investment performance. Kyle? Great, thanks Steve. We are truly pleased with the performance of our originations and credit team during 2022. We have originated 976 million in commitments and 631 million in investments.
Our portfolio grew to $1.1 billion on a fair value basis, an increase of 25% on a fair value basis. The investment activity led to the addition of 34 new portfolio companies during 2022. During the fourth quarter, we entered into commitments of $239.5 million and funded $121.4 million, including $71 million into plans to seven new portfolio companies and $15.4 million in gross deposits.
despite marrying our funnel and hiding our investment criteria. To meet this growing opportunity, we completed two transformative initiatives in 2022 with the close of our joint venture and SEC's exemptive release for our RIA. We are encouraged by the multiple growth levers we have in place, which are differentiating ourselves in the BDC industry.
Our JV structure not only allows us to expand the portfolio, but also generate predictable fee income while keeping the balance sheet healthy and nimble. The RIA structure will allow us to raise funds off the balance sheet, providing outsized returns for investors in a complementary way. We can now raise co-investment type vehicles to grow the platform with the ability to raise capital from multiple channels, all to the benefit of the BBC, which owns 100% of this RIA.
At Trinity, we believe our internal management structure enhances our shareholder alignment and ability to think outside the box. This off-balance sheet growth is one example of that. As we enter 2023, we are proceeding with caution as we review our investment opportunities. The number of growth stage companies looking for structured debt has increased while pressure persists on a revaluation of these companies.
We believe this is a time for opportunity, but it must be navigated with sound judgment.
Continuous village and monitoring of our portfolio companies is an essential component to our successful credit management. We maintain a dedicated portfolio management staff who sole function to be the monitor our credit risk, keep a watchful eye on the market impact, and stay in constant communication with management teams and their equity stakeholders. Our focus is on building a trusted partnership supported by ongoing two-way communication.
This combination has proven to be successful, as demonstrated by our solid investment track record and reputation partnering with our portfolio companies. To that end, during 2022, we added to our credit team to ensure that we remain attentive to performance of our portfolio companies. The composition of our portfolio remains relatively consistent with prior quarters and represents diversification across 19 industries. This quarter, we will rise our industry breakdown to further underscore the granularity and diversification of our portfolio. Thank you for spending 20 yeas
Our debt investments are primarily split between venture debt and equipment financing. At fair value 73% of our debt portfolio or $802.9 million is comprised of secure loans. While 23% or $246 million is invested in equipment financing, the remainder of our portfolio is $45.5 million. The Chair values comprise equity and profits as yea. They have. They have.
Our credit quality and portfolio will remain stable with 95% of our debt investments at cost performing.
I'd like to address one investment in industry in particular that has been an area of concern for investors that being digital asset technologies.
We continue to reduce our exposure to these investments. These are fully amortizing payments on 36 month schedules, which is resulting in a decrease in balance of 3% per month. Two of our three investments in the space are in the performing category as of year end. Our investment with Core Scientific remains in default, but the loan is collateralized by critical computing equipment with a cost basis of $23 million.
should benefit cores operating performance in liquidity position. We remain in close communication with the company and are exploring all available options to obtain the best possible outcomes to benefit of our shareholders. Subsequent to the end of the fourth quarter, another of our publicly traded digital asset portfolio companies, High 8 Mining, announced a merger with US Bitcoin Corp.
According to the companies, that transaction is expected to close in the second quarter of 2023. That would trigger a payoff event and further reduce our investments in digital asset technologies. We continue to monitor the progress of the closing and expect to have more to share over the next couple quarters.
In Q4, the number of loans on not a cruel remains the same. With four debt investments, with cumulative investment costs and fair value of approximately 49.2 million, and 17.8 million. Respectively or 4.3% and 1.6% as a percentage of the company's total investment portfolio at cost and value respectively.
Lastly, as of December 31, 2022, now per share decreased to $13.15 compared to $13.74. The decrease in now per share was primarily the result of net investment income that exceeded the company's declared dividend by one cent per share offset by the unrealized appreciation and realized losses.
Recognize during the fourth quarter approximately 75% of the unrelized depreciation is related to two portfolio companies, STEM Tech Health and Core Scientific previously identified as trouble predatory prior quarters.
I'm going to pass the call today to discuss our operating performance in more detail. David. Thank you, Kyle. As Steve and Kyle mentioned, this was an outstanding quarter and year of paternity across multiple performance fronts. Turning specifically to our fourth quarter financial performance, our portfolio growth of 45% during 2022 and the increase in benchmark rates contributed to our total investment income of $41.5 million.
a 75.8% increase over the same period in 2021, and a 7.3% increase over the third quarter of 2022.
B income decreased to $909,000 as our early loan repayments totaled only $14.8 million in the quarter. Our effective yield on the portfolio for Q4 was 15.5%, an increase from 15.2% in the third quarter.
Our core yield, which excludes non-recurring fee income, increased to 14.2% from 13.5% in the prior quarter. Both our effective yield and core yield primarily decrease due to the rise in benchmark rates.
Year over year, total investment income increased by 77% to a record $145.5 million in 2022 from $82.2 million in 2021.
Our consistent origination helped drive this increase while we maintained a consistently high effective yield across the portfolio. Our debt portfolio continues to be well-positioned ahead of anticipated future rate hikes with 68 percent of our debt investment at floating rates, while on the borrowing side, only 30 percent of our outstanding debt.
An increase in interest expense was primarily due to the full quarter of expense incurred under the $57.5 million of additional 7 percent notes issued in Q3 and an increase in the interest rate and weighted average borrowings outstanding during the quarter under our key bank credit facility.
Our other operating expenses were approximately $9.6 million during Q4 as compared to approximately $10.8 million during Q3.
The decrease of approximately 11% was primarily driven by a decrease in variable compensation expense and lower excise tax expense.
As a result of this operating activity, net investment income for the fourth quarter was $21.6 million, or 62 cents per basic share, an increase of 16% compared to $18.6 million, or 56 cents per share.
cents per basic share in Q3. For the full year of 2022, net investment income increased to $71.5 million as compared with $39 million in 2021, an increase of 83% year over year.
We recorded net unrealized appreciation of $13.6 million during the quarter. We recognized unrealized appreciation of $23.2 million in our debt portfolio and $885,000 in our equity and warrant portfolio.
offset by the flip of $10.5 million to realize losses on portfolio investment previously depreciated on an unrealized basis. Approximately $18.2 million of the unrealized depreciation in the debt portfolio was related to the performance issues with the two portfolio companies that Kyle previously reviewed.
The remainder of the unrealized appreciation was primarily attributed to market adjustment due to general market volatility and interest rate changes. Our operating activities generated stronger turns for our shareholders with our ROAE based on NII over average equity of 17.9 percent.
And our ROAA based on NII over average to the lesser of 7.7%. I will now hand the call over to Mike Tester, our Chief Accounting Officer. We'll discuss our credit performance, liquidity, and capital allocation. Mike? Thanks, Dave. Starting with credit quality, our portfolio companies continue to perform well in foot quarter of 2022.
with approximately 95% of our portfolios performing at cloth. As Kyle mentioned at the end of the quarter, we have four investments on non-accrual, representing just 1.7% of the fair value of the investment portfolio.
Our average credit rating for the fourth quarter stood at 2.8 based on our 1-5 rating system with 5 and a 2-1 very strong performance. This rating is just slightly lowered than our average credit rating at 2.9 and 2.3. Our overall credit quality has remained solid. You've taken practical approach to all of those.
in our portfolio. We continue to diligently monitor our portfolio company's performance, being mindful of the macro environments that could impact our operations. Moving to equity, as of December 31, 2022, we had total equity of approximately $173 million, comprised of approximately $162 million of undroned capacity under our credit facility, and $11 million in unrestricted cash and cash equivalents.
Our net leverage ratio, which represents dead outstanding less cash on hand, increased to 1.33 times this quarter, as a result of a barring on our credit facility, which contributed to our portfolio growth. As of December 1, total debt principal outstanding was 620 million, and had a weighted average cost of debt of 6.8% up from 6.3% at September 30, due to the higher base rates on their credit ratio.
Unsecured debt represented 70% of the total debt at quarter end down slightly from the prior quarter as we borrowed under our credit system.
With the majority of our investment portfolio and floating reinvestments compared to the majority of our outstanding borrowing that fix rates, we expect that further increases in the base rates in 2023 with positive impact are net interest margin and NII margin.
But the majority of our investment portfolio and floating reinvestments compared to the majority of our outstanding borrowings at fixed rates would expect that further increases in the base rates in 2023 with positive impact or net interest margin and NII margin. Our leverage position.
liquidity strength and access to the capital continue to be at the forefront of our strategy. Continue to explore all capital options that will be accreted to our shareholders. This includes funding investments under our recent announced JD and the RIA that we are looking at. Who?
which will allow for complimentary off balance sheet growth and additional fee income to Trinity. In Q4, we announced our stock repurchase program that will allow us to repurchase up to 25 million of our common stock. We believe that stock buybacks are an accretive use of shareholder capital when the stock is trading at a meaningful discount to MAV. To that end, we repurchased approximately 186,000 shares at an average price of $10.77 per share. you
for an aggregate repurchase price of $2 million. The program demonstrates our commitment to creating value for our shareholders as a repurchase had a creative impact of $0.02 per share on NAD. In conclusion, on December 15, 2022, our board declared a cash dividend of $0.46 per share for the fourth quarter of 2022, representing a 2% increase in total
from Q3 2022. This is the eighth quarter in our road that we have increased our core dividends. Our gap in an I-generated coverage of approximately 135 percent of our regular dividends for the quarter. Additionally, the board approved a 15-set per share supplemental dividend. Old dividends were paid on January 13, 2023. At Board of Directors, Kelly.
makes a determination of our dividend distributions on a QOA basis and we anticipate making an announcement of our Q123.3 in the second half of March. With that, I'll now open the line up for questions about voltage.
Thank you, sir. At this time, if you would like to ask a question, please press star 1 on your touch-tone phone.
You may remove yourself from the queue at any time by pressing star queue. Once again that is star one to ask a question. And our first question will come from Estinian O'Shea with Wells Fargo. Your line is open. Hi everyone, thanks and good afternoon.
Our first question, are you able to provide us any color on the portfolio company level, liquidity, cash runway and so forth and maybe a higher level fundraising backdrop? Yeah, this is Ron. In terms of portfolio.
aggregate. We don't keep track of the aggregate, but we take each of those into account as we grade and value the portfolio.
For all new investments then we do track and I'd say the one maybe adjustment to underwriting that we're considering is we really want to see 18 to 24 months or more but run away for any new investment coming to portfolio and something that we continue to focus on.
Okay, that's helpful. Thank you. And then just to follow up on the RIA, any sort of type of vehicle in mind. And is this something that you would potentially or likely commit training equity to get vehicle started?
That's a good question. I think part of the purpose of the RAA is to manage other people's money. And so the goal will be to generate new fee income and carry interest in a fund structure utilizing someone else's capital primarily. And we are in process.
Currently, we have begun those discussions with investors and potential investors. And we believe that funds managed by the RA have the potential to generate a significant amount of income to the BDC in the future. Go invest. And the structure of it would also be, I think, primarily, at least initially, a co-investment vehicle, which would be complementary and help us continue to make new investments.
generate new income and not and give us the again just like the JV the ability to be nimble at the BDC level maximize our capital there and then for investments that don't fit the BDC whether it's bad income or you know there's a variety of reasons we could come up with but we have a significant portfolio
And pipeline opportunities, not everything fits inside of a BBC. So we want our shareholders to be able to capitalize on those investments as well. And so we see a future where we have funds that can take advantage of those opportunities as well.
Great, thanks so much. Thank you. As a reminder, that is star one to get into the questioning queue.
And our next question will come from Christopher Nolan with Latinburg Salmon. Your line is open. Hey guys, Steve, what is the leverage level that you guys are looking for at the range? Yeah, the range is sort of the one 15 to 135 range.
but any thoughts of de-risking the portfolio at all? I mean any thoughts of
equity raises given that your stock is slightly above book? I think we're gonna we're gonna look at equity raises cautiously. You know we we have proven the ability with our existing portfolio as it sits today to generate meaningful numbers relative to income that investment income and distributions.
And so we can certainly continue, we believe, to perform like that if we don't grow the portfolio, which means if we don't raise money. But obviously if our stock price reacts positively and we have the ability to raise some capital and do it judiciously, we'll certainly do that. As Kyle mentioned with the off balance sheet activity now, we can raise capital there and we can continue to be active in the marketplace on a co-
visiting with the board here later this month. I think as Mike said in his prepared remarks and we do have we do have still over income as you know we've continued to grow our core dividend and for the eighth trade quarter we increased it so we'll sit down with the board and look at all of those factors and make a decision later this month. Okay thank you.
You bet. Thanks, Chris. Thank you. As a reminder, that is star one to ask a question, and our next question comes from Ryan Lynch with KBW. Your line is open. Hey, good afternoon. First question I have, following up on the question regarding the RIA, I'm just curious. I know there's a lot of variables and a lot of uncertainty, but I'm wondering if there's a lot of uncertainty in the RIA.
CDC.
So, timing is not 100% certain. I think you can expect sometime in the next six months that we'll have that ramped up and we'll be deploying capital out of it. We mentioned the JV, we've begun deploying out of that. Steve didn't mention this before, but that also provides us with an liquidity at the JVC level because we're...
We're doing a look back and we're able to provide advance against funding we've already done. So that income, that off-felt sheet income, it's already begun. And it will continue. And our intention is for that to grow. Okay. My other question was, let's just hear your guys perspective on what is the pulse of venture capital investors and this environment.
their willingness and ability to support portfolio companies that aren't cratering, but may be performing slightly below expectations in this environment. At one point there was kind of free money and it felt like everybody was getting capital. Certainly the strong companies who are outperforming expectations, I think would still be able to get capital. The ones who are...
severely underperforming probably aren't, but I'm curious about those companies that are maybe just slightly underperforming expectations and venture capital participants' willingness and ability to continue to help support those companies. Yeah, Ryan, this is Kyle. So a couple things. You know, one, I don't think venture capital or private equity generally are supporting companies that are cratering anyway in good markets or bad markets.
We have, we believe the way we've underwritten that our companies have a real true moat around the technology. They're growing in the face of headwinds. We've seen this over and over again with the investments we've made over the last couple of years. And when they need more capital, they get it. And you know, but I would say what companies are having to come to grips with is that that money is not free. Like you said, it's not cheap.
maybe like it was in 2021, 2022. They're in our own portfolio and the new investments we make, founders and CEOs are having to come to grips with the fact that that company's just not worth the multiple that existed for them a year or two ago. And so what we continue to see are our companies get funded. We see it quite regularly in our own portfolio and they're getting the capital they need to get a couple of years down the road and continue to grow in the face of headwinds.
But the valuation is decreasing. As a secured lender, you know, I'll be cautious how I say this, it's not that we don't care, we do care, but the majority of our returns are fee income, rate and fee income, current income. And so the valuation, whether it's high with the free money or it's low with more prudent capital, that doesn't affect our returns, it doesn't inhibit our ability to collect from our borrowers. So it doesn't necessarily affect our ability to collect from our borrowers.
hurt our position. So we monitor it, we track it. We want to see our company continues to receive capital and they are getting it. Most of those companies are getting it at a revaluation, a lower amount. Yeah, probably the only thing I'd add to that Ryan is the expectation on the founders is no longer unfettered growth but pivoting to profitability. Let's make this capital last, let's make the cash life last. That's why the cash life question.
is difficult one, right? Because you get a much different answer on a trailing 12 month basis than you do on a forward 12 basis across virtually any company within the portfolio, right? Because they're all tightening their belts, pivoting to profitability, and there's real enterprise value in the company's member, right? So they're getting the equity. It just may not be the valuations that the Congress would love. Okay, understood. Appreciate the time this afternoon.
expenses. Obviously you've grown the headcount quite a bit to ramp up. You noted you're 57 employees now. How should we think about the growth of the employee base as we look out over the next next couple years? Yeah I can tell you, you know, Bryson, our annual plan for this...
So growing judiciously, you know, we mentioned in our prepared remarks, we've added a life science practice in 2022. We will be expanding that per our plans, but the head count growth is going to be very moderated in 2023 compared to last year. Okay, that's helpful. Thank you.
And maybe shifting gears here, just thinking about the comment you made around Core Scientific and where it's marked as of December 31 and relative to maybe the performance of Bitcoin here in 2023. One was that mark determined.
And was there any ability to kind of go back and reflect, you know, what the mark might look like today with some of the better information you have to work with?
Yeah, Bryce, you're going to see us be real consistent with our marks and our evaluations.
On 1231, that was the value of that equipment and we have to look at it that way. The way we look at it is what could we sell this for right now, right today. And listen, we could argue about it all day long about what it's worth today. It doesn't matter. As of 1231, that's what it was worth.
Is Bitcoin up 40% since then? Yes. We are working with the company. We're going to do our best to collect every dollar of that. And we'll see what happens here. But as of 1231, that was the valuation. That's what we're reporting. And you're going to see us be real consistent on the valuations.
Excellent. Okay, that's helpful. And then maybe last one for me, you've got a chart in the K and in the presentation about kind of internal risk ratings. Can you walk through kind of the some of the migration we saw quarter over quarter? Is it kind of more reflection of the environment than anything else?
Yeah, I mean, happy to, you know, where we saw migration within the portfolio was, you know, we, as you know, we have five bins, you know, three of which are different levels of performance. And so, you know, we saw more companies in that, you know, center performance bin versus one of the higher. Yeah.
And so these are still performing loans, you know, that doesn't indicate distress. When you look at our risk rating, performance to plan is a very big aspect to that, right? So, you know, our portfolio companies faced quite an inflection within 2022.
where we just spoke about it earlier, the growth plans that they made of might have laid in early in the year, you know, needed to be tempered quite a bit. So, you know, but the portfolios were bust on the lower two categories, you know, we've been stable. You know, got two credits that we talked about in the past. So, you know, we don't we don't see great danger there in that migration.
but it reflects the reality as of year end. Got it. That's helpful. Appreciate you guys answering the questions. Have a good one. Thanks, Bryce. Thank you. As a reminder, that is star one to ask a question.
And at this time we have no further questions in the queue.
We do have one last question from Vilas Abraham with UBS. Your line is open.
Hi everyone, thanks for taking the last second question. Just on loan spreads, what are you guys seeing there now and are you trying to push those at all with new borrowers and new investments?
This is Kyle. We do continue to push on pricing. We continue to push on warrants and we have seen that trend up. We will continue to be aggressive.
on transactions that make the finish line from a pricing perspective. So, on a percentage basis, it's not a significant increase, but it is an increase nonetheless.
At this stage, we keep a relatively constant spread over prime. So you'll see it anywhere from 6.5 to 7.5% over prime on most of our underwriting. So it's going to move more with the prime than necessarily we're moving the spread. Got it. That makes sense. And then just maybe just a broader question.
general thoughts around there. And I guess how that plays into, you know, new investments and the conversations around how I just could look like at some point. Thanks, bye.
I think we have seen a lot of PE interests. That will continue to be an M&A. We'll see M&A increase in that category. I think the ICO
and traditional exit markets, public markets are probably less interesting for the time being. But I think private equity is absolutely significant around, and you might see more of that here. It's about 2023. Yeah, if you look at our key for the early repayments was pretty much a low water mark, I think,pectedly connected.
14 million days 14.8 so you know which which makes the 62 cents even more impressive right because it wasn't built on You know early repayment fees We don't see that material a picking up in q1 But maybe second half of the year, I think
We'll see a little bit more activity. That's what the crystal ball says, but we don't have a map. Okay, that's it for me. Thank you. Thanks, Dan. Thank you.
Our next question will come from Casey Alexander with Compass Point. Your line is open. Hi, good afternoon. One is a technical question and then one is more of a broader picture question. First the technical question. In relation to HUT8, normally if an equipment finance loan prepays,
My understanding is that they have to pre-pay the principal and all contractual interest payments that would have been due to the end of the loan. In the case of a merger where you're calling for a payoff, is it the...
Is it the same or do they just have to pay off the principal? Hey Casey, it's Kyle. We can force a payoff and they are on the hook for all future payments. Okay. That's great. Thank you. Thank you guys so much for watching and I'll see you guys next time. Bye. Bye.
From a bigger picture, it's obviously a volatile time in venture capital and venture debt. I mean, we're seeing that with most of the earnings reports, and we've seen that with yours also. So, I mean, do you, from a strategic sort of sense, do you think it's the right time to be intentionally running at the top end of the leverage range? And do you think...
By doing so, is it your opinion that credit's going to improve over the next two or three quarters? So, a couple things. You know, I think, A, the JV provides us with liquidity, right? We believe we're also going to be able to recycle capital in the BDC. You know, the portfolio as it is right now, even with these non-accruals, is generating a significant amount of income. And we believe that will continue. And then the additional off-balance and altitude activity that we are in the process of raising right now is really going to fill out a nice void or just help to continue to help us.
providing incremental deployment. So, you know, that leverage ratio is gonna swing between the ranges Steve gave you, utilizing that capital. And also we're gonna start seeing some of the loans come off of interest only. And so we're gonna be able to recycle some of that capital back into the marketplace to support our companies and continue investing. So it's a time for good opportunity Casey.
All right, great. Thanks for taking my questions. Thanks, Casey. Thank you. At this time, there are no further questions in the queue. So I would like to turn the call back over to Steve Brown, Chairman and CEO , for closing remarks. Thank you. And again, thanks to everybody that dialed in today. We appreciate your support. And we're excited about the results for 2022 in the fourth quarter. And we look forward to getting back with you at the end of Q1.