Q1 2023 Trinity Capital Inc Earnings Call
Yes.
Good afternoon. My name is Leo and I will be your conference operator today at this time I would like to welcome everyone to Trinity Capital's first quarter 2023 earnings conference call.
Our hosts for todays call are Steve Brown, Chairman and Chief Executive Officer.
Phil Brown, President and Chief investment Officer.
David Lund Chief Financial Officer.
Michael Tester, Chief Accounting Officer, and Sarah Stanton General Counsel.
Jeremy harder Chief operating officer, and Ron <unk>, Chief Credit Officer are also present.
Today's call is being recorded and will be made available for replay at eight o'clock P. M. Eastern time, the replay dial in number is one 808 399145 and no conference ideas required for access at.
At this time, all participants have been placed in a listen only mode and the floor will be opened 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. Please pickup 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 Sara Stanton. Please go ahead.
Thank you Leo and welcome everyone to Trinity Capital's earnings conference call for the first quarter of 2023.
Trinity's first quarter financial results were released just after today's market close and can be accessed from Trinity's Investor Relations website at IR Dot Trinity cap stock Com a replay of the call is available on trinity's webpage 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, maybe 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 statements. Please note that the information reported on this call speaks only as of today may 4th 2023, Therefore, you're advised that time sensitive information may no longer be accurate at the time.
Any replay listening or transcript reading.
Now allow me to introduce Trinity Capitals, Chairman and CEO , Steve Brown.
Thank you Sarah and thank you to everyone joining us today we.
We started the year with strong operating performance building off the momentum of a record year in 2022.
I'm going to start my remarks by addressing current market conditions, and then transition to our first quarter performance.
We continue to see market dynamics shift given the uncertainty in the U S economy and increased concerns over the banking sector.
We know that both challenges and opportunities exist in every economic environment, our business model and platform at Trinity are built to thrive in stronger markets and perform well through difficult ones.
Since our last call we have seen the closures of Silicon Valley Bank and signature bank as well as the acquisition of first Republic Bank.
FCB, particularly hits the Trinity team close to home because we have both partnered with and to a lesser degree competed against them for many years, we have a great deal of respect for the business they created and the people that built it.
We are disappointed to see these institutions shudder, but are pleased with the actions of the FDIC took to protect depositors and customers connected with these banks.
While the absence of these banks as a short term effect on the venture ecosystem.
That impact is mostly related to banking services and receivable type financing avoid that other banks are already stepping in to fill.
Our secured nonbank lenders Trinity and our industry peers will remain the primary source of term debt lending to the V. C ecosystem, we are well positioned to meet the emerging needs of strong D. C. Another institutional backed companies.
Despite recent disruption the B C industry is strong and able to navigate the current macro environment.
While headlines will focus on recent year over year comparisons and venture equity funding fundraising commitments are still at pre pandemic levels strong companies are receiving equity support and funding period.
Many of these portfolio companies are demonstrating this fact year to date more than 25 of our portfolio companies have received over 1 billion of new equity.
We are seeing worthy companies get funding, we do want to note that it is typically at lower valuations.
Equity support at any evaluation is an overall positive for Trinny Trinity and its loan portfolio.
The funding that our portfolio companies are securing insurers that they can perform on any outstanding obligations to us.
Yeah, and just down rounds persist that's financing remains a crucial solution for venture backed companies that want to continue to fund growth without dilution.
At Trinity, we have made it our goal to only finance the companies that should and will continue to get support from their equity investors in any market. This.
This means that we are highly selective to put that into perspective, we generally find only about 5% of the opportunities that we see.
We have a regular rigorous due diligence process that will continue in today's operating environment.
Turning to credit our portfolio has stabilized and strengthened during the quarter. Our overall internal risk rating remained constant at 2.8. When you look at historical loss rates Trinity has been consistent over at 16 year history at approximately 24 basis points annually when you factor in realized gains.
Rates are a net positive.
We take a proactive approach to managing our portfolio Trinity's dedicated portfolio management team monitors our investments on a day to day basis communicates with all of our portfolio companies and participates in our quarterly valuation process in.
In Q1, our NAV increased by 10 million in part due to the stability of our portfolio.
We have recently heard concerns over NAV decline in the BDC space in 2022, similar to our BDC peers, we experienced a decline in NAV due to the unrealized losses attributed to multiple interest rate changes market volatility and some specific valuation adjustments. Additionally, we had an.
Usually than in Q1 in which we converted a prior year unrealized depreciation on two public company investments into a historic $50 million net realized gain that resulted in a decline and now have approximately 67 cents per share because of that flip.
I also would like to remind our investors that 60 cents of the NAV decline in 2022 was related to the special dividends, we paid to our shareholders.
We have begun and we believe we will continue to grow our NAV in the long term our loan portfolio should recover markdowns due to interest rate movements as we hold our loans to maturity. We also seek to recover losses from market volatility and valuation adjustments over time as we continue to work with our portfolio companies during market uncertainty.
T to garner full recoveries.
Since becoming a BDC in January of 2020, we have paid out over $5 per share in dividends to our shareholders and we've generated over 5% NAV growth, we view generating strong returns for our shareholders, while achieving NAV appreciation life to date as a BDC is a good reason to be optimistic.
About the future for Trinity.
Now I'd like to turn to a few key highlights from our first quarter performance.
Q1, net investment income was $19 million or NII per share of 55 cents.
Providing 117% coverage on our core dividend mean.
Meaningful undistributed NII as of Q1 will be reinvested into our business both supporting our current portfolio companies and used to fund new commitments.
We increased our quarterly dividend by over 2% to 47 cents per share marking the ninth consecutive quarter that we have increased our dividend.
I would also like to remind our shareholders that we had spillover income of approximately $1.64 per share at year end that will continue to reinvest.
Management has diligently evaluating our liquidity position in this market and regularly discusses the various uses of our capital with our board.
Including the possibility of special dividends in 2023, However, our board has not made any affirmative decisions on the special dividend at this time.
In closing Trinity is operating through volatile times with a measured approach and capitalizing on certain opportunities as they emerge our portfolio is built for times like these and our investment criteria and underwriting process remain as rigorous as ever Trinity's platform and capabilities are growing and we are committed to R V.
Asian or building the world's best lending platform for growth stage companies.
I'll now hand, the call over to Kyle to provide more detail on our portfolio composition and investment performance style.
Thanks, Steve.
In previous quarters, we announced the creation of two unique value driving investment vehicles, and direct lending joint venture and a registered investment advisor. These initiatives solidify our ability to continue to grow and deploy capital via off balance sheet investments. The benefits of this off balance sheet growth, including fee interest income will provide incremental returns that were.
Flow to our shareholders at the BDC, you're generating profitable growth and building a unique platform here at Trinity.
Q1 was the first quarter that we started to recognize the benefits of the JV through both fee income and liquidity.
Subsequent to quarter end, we closed the JV credit facility with Keybank and intend to leverage that financing similar to the BDC.
Trinity is prepared for the current environment and our portfolio is differentiated by several key factors that put us in an advantageous position in terms of mitigating risk first we have deep relationships with the vast number of institutional sponsors who are active in the market and we are in regular communication with them. Additionally, we have no concentration risk with any one sponsor.
Second each of our lending verticals have highly diversified assets.
Across investment type, both term loans and equipment financing transaction size industry and geography. This distribution protects our portfolio from being relying on any one deal structure or industry.
And lastly, our senior portfolio managers are in constant communication with all of our portfolio companies proactively monitoring their performance and finding ways to add value.
As Steve mentioned year to date 25 of our portfolio companies have raised just over $1 billion. This speaks to the quality of our portfolio companies and the investors that are backing them. What we're seeing is that a liquidity crunch, but rather a repricing of paas valuations. Good companies continue to get funded fundings.
Fundings in Q1 were approximately $70 million proceeds received from repayments of the company's debt investments. During Q1 totaled approximately 83 million, which included $13 million from early debt repayments $28 million from normal amortization and 42 million from the sale of assets to the joint venture the.
The composition of our portfolio remains consistent with prior quarters and shows diversification across 20 different industries.
We have intentionally structured our portfolio with varied industry segmentation with our largest industry exposure, representing only 12% of the portfolio at cost.
Additionally, we continued to build out our life science vertical.
At fair value of 70, 474% of our debt portfolio or 808 million is comprised of secured loans, while 22% or $239 million is invested in equipment financings. The remainder of our portfolio of $44 million at fair value is comprised of the equity and warrants are.
Our credit quality of the portfolio remained stable with approximately 98% of our debt investments at fair value are performing.
In Q1, the number of loans on non accrual remained unchanged with the same four debt investments that have a cumulative investment cost and fair value of approximately 49 million and 24 million respectively.
For reference this represents 445% to 3% as a percentage of the company's total debt portfolio at cost and fair value respectively.
6 million increase in fair value on the nonaccrual assets is related to a fair a fair value market adjustment to our investment in core scientific the company is benefiting from improved underlying market conditions.
Looking at our pipeline, we finished the quarter with 339 million of unfunded commitments, all of which are subject to ongoing diligence and approval by our investment Committee.
In addition, we had signed term sheets for 312 million at the end of Q1.
We are seeing significant opportunity with the volatility in the banking industry companies looking for alternative lenders are continues to increase more now than ever looking ahead Trinity will continue to be an attractive partner for prospective portfolio companies seeking capital to fund their growth.
We are dedicated to capitalizing this business for the long term.
We are diversifying our capital base with access to both public and private markets. We think this provides our shareholder base with significant upside potential that we've only now just begun to realize with that I'll pass the call Dave.
To discuss our operating performance in more detail Dave.
Thank you Kyle and welcome to everyone joining us today.
We entered 2023 with a flexible balance sheet and a strong first quarter operational performance.
We recorded total investment income of $41.5 million at 35% increase over the same period in 2022.
This increase was attributable to the higher average loan balances in our investment portfolio and the benefit of increases in the prime rate since Q1 of 2022 that positively impacted our floating rate loans.
Our effective yield on the portfolio for Q1 was 15, 2% compared to 15, 5% in the fourth quarter, our core yield which excludes nonrecurring fee income increased to 14, 3% from 14, 2% in the prior quarter.
The decrease in the effective yield is attributed to lower early repayments of the core yield benefited from the recent increase to the prime rate.
This yield performance was contributed to our solid NII performance.
Our debt portfolio continues to be well positioned against the recent interest rate hikes with 70% of our debt investments at floating rates, but on the borrowing side, 30% of our outstanding debt at the end of the first quarter, whereas at a variable sofa rate contributing to a solid net interest margin or NIM.
Of 11, 1% for the quarter.
We incurred a total of $11 $1 million in interest expense and amortization of deferred financing costs on our various debt facilities as compared to $10 $3 million in Q4.
The increase in interest expense was primarily due to the higher average debt outstanding during the quarter and the increase in the base rates under our Keybank credit facility.
Our other operating expenses, excluding estimated excise taxes were approximately $10 $5 million during Q1 as compared to approximately $9 $2 million during Q4.
The increase of approximately 14, 6% was primarily driven by an increase in variable compensation employee benefits and professional fees.
As a result of this operating activity net investment income for the first quarter was $19 $3 million or <unk> 55 per basic share an increase of 23, 7% compared to $15 $6 million or 57 cents per basic share in the same period of the prior year.
We recorded net unrealized depreciation of $3 $5 million during the quarter as a result of $2.8 million of credit specific adjustments $1.4 million related to the impact of interest rate changes.
And the flip of $318000 to realized losses, offset by $950000 of depreciation related to market volatility.
We recognized unrealized depreciation of $8 $2 million and our debt portfolio and unrealized depreciation of $4 $7 million in our equity and warrant portfolio primarily related to market volatility.
Approximately $6 $6 million of our unrealized appreciation in the debt portfolio, that's really to two portfolio companies or scientific that Kyle mentioned earlier and Fab Tech health both of which we have previously identified.
<unk> Tec was realized after quarter end and the impact is reflected in our first quarter and a V.
Our operating activities generated strong returns for our shareholders with an R. O a E based on NII average equity of 16, 5% and our R. O a a based on NII on average total assets of six 8%.
Lastly, as of March 31, 2023, and a V increased 2.2% to $469 $7 million driven by our $22.5 million of net operating income.
On a per share decreased to $13 seven compared to $13.15. The decrease in any of the per share was primarily related to the impact of additional shares issued under Trinity's restricted stock Award program.
I will now hand, the call over to Mike <unk>, Our Chief Accounting Officer, who will discuss our credit performance liquidity and capital allocation.
Thanks, Steve starting with credit quality, our portfolio of companies continue to perform well in the first quarter of 2023 with approximately 90% of our portfolio performing at fair value.
You maintained the number of non accruals and watch list companies from last quarter with four debt investments on nonaccrual, representing just two 3% of the fair value of the total debt portfolio.
Our average credit rating for the first quarter stood at 2.8 based on our one to five rating system with five indicating very strong performance.
This rating is in line with our average credit rating of two eight in Q4 looking.
Looking ahead, we see solid credit opportunities in our pipeline.
As those potential investments convert we will continue to be rigorous with our due diligence underwriting and portfolio management processes.
Moving to liquidity as of March 31, 2023, we had total liquidity of approximately $175 million comprised of approximately $167 million of undrawn capacity under our credit facility.
And $8 million in unrestricted cash and cash equivalents.
Additionally, we commenced co investing with our joint venture that provides additional investment liquidity.
Our net leverage ratio, which represents principal debt outstanding less cash on hand decreased slightly to 1.29 times. This quarter as a result of net portfolio activity, including the sales of investment to our joint venture.
As of March 31, 2023.
Old debt principal outstanding was $616 million.
And had a weighted average cost of debt of 7%.
Up slightly from six 8% at December 31, 2022, due to higher base rates under our credit facility.
Unsecured debt represented.
70% of toll borings at quarter end with the majority of our investment portfolio in floating rate investments and the majority of our corporate debt at fixed rates, we continue to be well positioned in a rising rate environment.
70% of toll borings at quarter end with the majority of our investment portfolio in floating rate investments and the majority of our corporate debt at fixed rates, we continue to be well positioned in a rising rate environment.
To reiterate what the rest of the team has already touched on we are confident in our capital structure and balance sheet, especially with the commencement of the JV and our I E.
Both are expected to provide us with access to additional liquidity and are just two examples of how we are raising capital in ways that are accretive to our shareholders, while being opportunistic at the BDC level.
We also utilized our ATM offering program during the quarter, raising approximately $4 $2 million.
Further supporting the long term growth of training.
We look forward to sharing more updates on these initiatives in future earnings call.
Finally on March 14th 2023, our board declared a cash dividend of 47 cents per share for the first quarter of 2023, representing a 2% increase from Q4 2022.
Our board of directors directors generally makes a determination of our dividend distributions on a quarterly basis.
With that I will now open the line up for questions operator.
Certainly at this time, if you would like to ask a question. Please press star one now on your telephone keypad that is star one to withdraw yourself from the queue. You May press star two one moment, while we queue.
Okay.
And once again that is star one to ask a question.
We'll take a question from Casey Alexander of Compass point Your line is open.
Yeah. Good afternoon first of all.
Can you could you tell us exactly how big do you expect the JV to get in terms of AUR you.
Drops down $42 million this quarter I mean, what's the capacity there before it's all said and done.
Yeah. Casey. This is Mike we did previously report this but we did have the total size of the capital equity capital was $171 million and we did closed subsequent to Q1 $75 million of debt.
That facility with Keybanc so we.
We do think that will be levered similar to what the BDC is that.
And then with recycling you know, we'll see you know 400 to 500 million likely over time that is available to invest in the marketplace from that JV.
Okay.
You know pretty healthy mark up of $5 7 million.
Was your markup just generally driven by what you saw in the macro or do you have indications in your negotiations from core that lead you to believe that there is a better outcome for the loan and for the equipment Finance facility and you know also.
Do you have some sort of a sense of timing when they're likely to reemerge.
Yeah.
Hey, Casey this is Jerry.
So.
The backdrop of course.
You know to that Mark the trading price of Bitcoin 16.5, K on December 31st you know that was about 27 28.
400 as of March 31st So you know a 72% increase in.
In the digital asset price, you know kind of as a backdrop to the whole thing.
We don't have any particular insights into the process, but you know there are publicly reported events with respect to the bankruptcy.
Replacement dip financing was finally approved by the bankruptcy court in early March that is better overall terms.
But we have no knowledge with respect to our valuation we did a scenario analysis, considering the likelihood everything from a worst case outcome to a best case outcome.
With the most probable scenario in our minds being a a negotiated settlement.
And so that's that's how we set our book.
Hi.
Just two follow ons to that first of all I mean, you said you don't have any insight to the process. You guys are involved in the process. So I'm not sure I understand that statement.
But and they have to negotiate part of the settlement with you.
So.
Yeah, I think I think Casey I don't really quite understand your statement there.
Well I think you know we're certainly we are.
We're able to access all of the same information that that.
Others are publicly we're not in control of the process I think is probably a more correct statement.
Yeah.
Alright, alright, thank you for taking my questions.
Thanks, Nick.
We'll take our next question from Christopher Nolan of Ladenburg Thalmann. Your line is open.
Oh, there's one for Gerry again.
Gerry do you could you give some color in terms of where you see.
Pricing on deals I mean, right now it seems like you're getting roughly.
10 points above the risk free rate and.
Just trying to get a little color, if you don't like going up or what.
Okay.
You cut out a little bit there, but I think you were asking about the pricing on our issued new issuance is that right yeah for new investments.
Yeah, we are I mean, I think it speaks to the overall market conditions. We think there is less capital that capital available.
And we are absolutely, making sure that we take advantage of that pushing pricing.
And we have can see continue to see that increase quarter over quarter for the better part of a year and we see that trend continuing.
Okay. So the general just as we should see yield sort of creep up through the year.
Yes, I think youre seeing that Chris in the you know.
Our core yields quarter over quarter have been rising throughout 2022 as well as into the first quarter of 2023.
We do see that trend continuing.
Great.
That's it for me if I could.
And once again to ask a question that is star one now on your telephone keypad.
We'll move next to Ryan Lynch of K B W. Your line is open.
Hey, good afternoon.
First question I had was just relating to the overall fund raising environment. It sounds like your overall portfolio was pretty active and had a pretty healthy level of fund raising in Q1, which is which is positive and it goes kind of counter trend.
I think what we're broadly seen in VC investments and broader BC fund fundraising I'm just curious though have.
Have you seen any noticeable change in the environment for your portfolio of companies raising capital post the STB.
Collapsing, obviously that was a pretty.
A pretty big.
For the market and I wanted to know.
VC investors sentiment has changed and their willingness to support companies broadly if you've seen any changes post seb.
Hey, Ryan Thanks for the question this is Kyle.
It wants to enter but he wants to enter at the right price and so there's this balance right now you have companies delaying as best they can to increase their valuation prior to taking pain in.
In the form of a dilutive down round and you have capital that is being patient.
That wants to deploy but we will not do it unless they make the right investments I mean, just just as I think that we are in a position right now of having incredible opportunity we need to make sure. We make the right investments I think the equities had they had that same mindset theyre going to be judged on some of the investments they make on a go forward basis and so the S C b and the banking volatility.
<unk> has shown us that and I think the numbers speak to it that these banks, even though C. B, who owned 50 plus percent of the market share. They did not have a significant amount of term loans, what we do right and on some of our peers do you know if they had 1 billion ish term senior secured term loans out there for that type of market share.
That's relatively low and so the banking services receivable lines. These are we're seeing it with our own portfolio. Many banks are willing to do that take that business and so on.
There has not been a direct result from the venture activity.
Okay.
And then just the other one had.
You guys.
<unk> had a pretty close relationship with Cvs as far as I'm still lending partner.
I know you guys have done a lot of infrastructure growth Oh overall platform hiring people over the last year or so.
Obviously <unk>.
It was kind of an unexpected event that provide maybe a new opportunity for additional growth of the platform have you guys been has there been any additional hires.
From from that.
That event.
Absolutely.
Many of which we haven't announced yet and so there'll be some things forthcoming, but we're being incredibly opportunistic we had a great relationship with all the major tech banks and for talent.
That we deem worthy we are absolutely pursuing some of which we've already locked down and we're moving forward others. We're in continued conversations with but we intend to be opportunistic here and pick up talent, that's gonna help benefit our platform.
Okay.
I appreciate the time this afternoon.
Thanks Ryan.
And once again that is star one to ask a question, we'll move next to Bryce Rowe of B Riley.
Thanks, Good evening, just a real quick one for me.
The JV contribute any fee income here in the quarter.
Hey, Brian This is Mike and Yeah, I think we disclosed that in our earnings release. It was about a half a million dollars. Again. This is early first quarter, where you started to ramp but as a part of the fees and net interest income of about a half a million this quarter okay.
And then maybe one more in terms of kind of restricted stock grants.
Maybe to expect on a quarterly basis annual basis, whatever whatever makes the most sense.
This is a plan that we've had in place really for.
And the larger portion of that is this quarter and the hit us this quarter and.
And it was good to see now.
We are.
Well into that plan there are more shares available under it so I think youll see it again.
Okay.
I think that's it for me I appreciate it.
Thank you Bryce.
And we'll take a question from Vilas Abraham of UBS.
Yeah.
Hey, everyone I just wanted to get your thoughts your latest thoughts on leverage and just how you see the cadence throughout this year and then just potentially using that JV to to manage some of the on balance sheet leverage that you have any thoughts around that would be great.
They're heavy loss this is Kyle.
We've given that target kind of range of one to 135 and our.
Hey.
Accretive returns as well simultaneously. So yeah I think we're our intention there is to make sure we stay within the guidance, we've given and then use our off balance sheet activity to continue to drive down.
Okay.
And then maybe just one more just in terms of how you guys are thinking about due diligence now given the environment. We're in are there any things you're doing are changing or tweaking to optimize.
Optimize their just questions, you're asking things like that how many or any thoughts there would be helpful.
Sure. This is Ron <unk>, Chief Credit Officer, I'll I'll take that.
You've heard over past quarters Trinity prides itself on our rigorous due diligence process.
Proud of it we have a <unk>.
Standalone credit team. Unlike many in the industry their sole job all day everyday is evaluating incoming credits.
We're not really making any significant changes to our process of course like the rest of US were interested in cash runway. We are interested in the broader macro environment with regard to the venture industry, but our process is sound.
We're continuing to cooperate with it.
Yeah.
Okay. Thank you.
And once again to ask a question that is star one on your telephone keypad.
And it appears that we have no further questions at this time I'd be happy to return the call to Steve Brown, Chief Executive Officer for closing remarks.
Thanks, Leo and thank you for joining the call today, we look forward to a positive a.
Next quarter and look forward to visiting with you sometime in early August about those results I appreciate your time today.
This does conclude today's conference you may now disconnect your lines and everyone have a great day.
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