Q2 2023 Trinity Capital Inc Earnings Call
1023 earnings conference call.
Our hosts for todays call are Steve Brown, Chairman and Chief Executive Officer.
Kyle Brown, President and Chief investment Officer.
David Lund Chief Financial Officer.
Michael Tester, Chief Accounting Officer, and Ben Malcolmson director of Investor Relations.
Jerry harder Chief operating officer.
Ron <unk>, Chief Credit Officer, and Sara Stanton, Chief Compliance Officer, and General Counsel are also present.
Today's call is being recorded and will be made available for replay at three P. M Eastern time.
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It is now my pleasure to turn the call over to Paul Malcolmson.
Please go ahead.
Thank you Chelsea and welcome everyone to <unk> Capital's earnings conference call for the second quarter of 2023.
Trinity's second quarter financial results were released earlier this morning, and can be accessed from <unk> Investor Relations website at IR Dot <unk> Dot com.
A replay of the call will be available on <unk> website or by using the telephone numbers are 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.
To be deemed forward looking statements under federal Securities laws.
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 those 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 August <unk> 2023.
And therefore, you're advised that time sensitive information may no.
May no longer be accurate at the time of any replay listening.
Transcript reading.
Now please allow me to introduce Trinity Capitals, Chairman and CEO, Steve Brown.
Thank you Ben and thank you to everyone. Joining us today, we finished the first half of the year with a strong operating performance and we are pleased with the results achieved in the second quarter with the most notable highlights including growth in our net asset value of 41% year over year improvement in net investment income and the increase in our <unk>.
<unk> dividend for the 10th consecutive quarter.
Digging a bit further into our highlights in Q2 now.
NAV increased by eight to $13 15 per share.
Due in part to the stability of our portfolio, our earning our distributions and accretive stock issuances under our ATM program.
We believe our consistent track record of delivering solid returns combined with a portfolio that is proving resilient even in a disrupted market is leading to a stable NAV.
Second quarter net investment income was $22 1 million for NII per share of <unk> 61.
Providing a 127% coverage on our regular dividend.
Last month, we increased our quarterly regular dividend to <unk> 48 per share furthering trinity's consistent track record of increasing our dividends since our IPO.
We also announced a supplemental dividend of <unk> <unk> per share to comply with tax regulations. We will further evaluate our tax position in Q3 and determine if additional supplemental dividends are required.
We continue to out earn our regular dividend and in addition to the undistributed income from 'twenty to 'twenty. Two we are always looking for new ways to strategically invest in our platform to provide greater returns for our shareholders. We look forward to providing more updates on this front in the quarters to come.
Our focus continues to be on execution as we build a business that serves our customers with uncommon care and delivers accretive value to our shareholders.
I'll now turn the call over to our President and Chief Investment Officer, Kyle Brown, who will dive deeper into <unk> competitive positioning reviewing our growing platform and provide a portfolio update Kyle.
Great. Thanks, Steve Yeah, looking at the macro environment. The VC industry is finding solid footing as the disruption caused by the recent banking crisis continues to be absorbed by the financial community.
Capital dry powder in the U S remains at record levels with experts estimating there's more than a half a trillion dollars of capital ready to be deployed in.
In the second quarter total VC industry investments were $40 billion, which is higher than pre 2021 investment levels were.
We're seeing the companies with the right team technology and market continued to receive financing, albeit a mini at lower valuations, even though we would prefer that our portfolio companies receive higher valuations equity supported any valuation is an overall positive for Trinity and its portfolio as a proof point year to date 30 of our portfolio companies have received more than $1 4 billion.
Of new equity fundings.
Financing such as Trinity's provides a crucial solution to the current market for venture backed companies that want to continue to fund growth without major dilution.
The evolving competitive landscape has been real favorable for Trinity with volatility in the banking industry, creating outsized opportunities for non based solutions like us.
Seeing more opportunities at the top of the pipeline, but a smaller percentage of deals are being approved as we remain vigilant and adhering to our proven underwriting process.
We are committed to continuing to execute our rigorous diligence process that is foundational to our business model.
We've had a very exciting first half of the year and as part of our growth strategy, We announced several important updates in the second quarter included including many new items surrounding our life science vertical we believe that the life science industry holds immense potential for growth as we continue to make investments to capitalize on the opportunities we see in this sector.
In early 2022 Trinity brought on Rob Lake a seasoned professional with more than two decades of experience as a senior managing director to spearhead our growth efforts in the life science sector.
Since then the proportion of our assets under management dedicated life Science investments has continued to grow with the portfolio now totaling over $100 million. This quarter, we added to the team with the appointment of igo to cruise as managing director, who brings more than 12 years of experience in the industry.
We also announced a new office location, San Diego designed to support the company's ongoing expansion expansion in the sector a city known for its disruptive research and innovation the strategic hub now places Trinity at the heart of major life Science hub.
Additionally, we are expanding our tech lending platforms presence on the East coast with the addition of Andrew granted as managing director based in Manhattan, Andrew brings more than a decade of experience lending to venture back technology companies with 31 billion of venture capital investment last year in New York is a key market for Trinity's go forward basis.
We're building a unique internally managed BDC platform and executing initiatives that support our ability to grow and deploy capital both on and off balance sheet.
In the second quarter, we continued to realize the benefits of our direct lending joint venture.
<unk> expanded our lending capacity with the addition of a credit facility with Keybank. This off balance sheet growth provides incremental returns that flow to our shareholders. During the second quarter, we added <unk> <unk> per share to our net investment income from our joint venture fees and that's just the beginning we intend to significantly ramp up our off balance sheet activity and deployment and assets under management.
Many of these newly formed <unk>.
He's also engaged with several potential investment partners and we expect to have more to announce on that strategy over the next several quarters.
Gross fundings in Q2 were approximately $155 million. The proceeds received from repayments of the company's debt investments during Q2 totaled approximately $104 million.
The composition of our portfolio remains consistent with prior quarters and shows diversification across 19 different industries. We are intent intentionally constructed a portfolio with varied industry segmentation with our largest industry exposure, representing only 12% of the portfolio at cost. Additionally, our pipeline is robust we finished the quarter with $345 million.
Unfunded commitments all of which are subject to milestones ongoing diligence and approval by our investment Committee. In addition, we had signed term sheets in the quarter of $157 million at the end of Q2.
As we look to the second half of the year. We believe companies will continue to seek alternative lending solutions, we intend to be <unk> solution and Linda for growth stage companies, providing all financing solutions with the exception of the inexpensive receivable financing that they can get from banks and our team has built an attractive platform to support the needs of growth stage companies and a unique partnership.
Unique partnerships, we maintain with current and prospective portfolio companies is unmatched.
We are well positioned to continue to profitably grow this business and as we increase our off balance sheet activity, we will see new ways to improve returns for our shareholders as an internally managed BDC. We are focused on return on equity.
Delivering a steady dividend to our shareholders.
A real consistent with that messaging from day, one our efforts on and off balance sheet or to generate outsized ROE for our shareholders Trinity will continue to seek opportunities to further diversify our capital base with access to both public and private markets as we drive value for our shareholders. Our CFO, David <unk> will now discuss our operating performance in more detail Dave.
Thank you Kyle and welcome to everyone joining us today as you saw in our earnings release issued this morning, and the first half of the year, we maintained a flexible balance sheet and generated strong operational performance and.
In Q2, we recorded total investment income of $46 million.
A 37, 6% increase over the same period in 2022.
This increase was attributable to interest earned on the higher average loan balances in our debt investment portfolio. The.
The benefit of increases in the prime rate since Q2 of 'twenty two and.
In OID acceleration.
Our effective yield on the portfolio for Q2 was 16, 2% compared to 15% in the first quarter.
Our core yield, which excludes nonrecurring fee income increased to 14, 8% from 14, 3% in the prior quarter.
This yield growth has contributed to our solid NII performance in the quarter.
Our debt portfolio remains well positioned against the recent interest rate hike was 72% of our debt investments at floating rates.
While on the borrowing side, 35% of our outstanding debt at the end of the second quarter was that a variable sofa rate contributing to a solid net interest margin or NIM of 12, 1% for the quarter.
Total operating expenses, including interest expense were $22 9 million in the second quarter compared to $17 $7 million in the comparable period in the prior year.
The increase was primarily related to higher interest expense on higher debt outstanding and a higher weighted average cost of debt.
Net investment income for the second quarter was $22 1 million.
<unk> 61 per basic share an increase of 41% compared to $15 $7 million or <unk> 51 per basic share in the same period of the prior year.
We recorded unrealized depreciation of $24 4 million and realized losses of $26 $6 million.
This investment activity was primarily related to the flip out Perm Tech that was written down in prior quarters and became a realized loss in the current quarter.
Our operating activities generated strong returns for our shareholders with ROA E based on NII over average equity of 18, 4% and ROA based on NII over average total assets of seven 6%.
Lastly, as of June 32023, NAV increased to 6% or $482 million in NAV per share increased to $13 15 compared to $13 seven in Q1.
The increase in NAV per share was primarily the result of net investment income that exceeded the company's declared dividend and accretive ATM activity.
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, Dave the credit quality of our portfolio remains strong and stable with approximately 98% of our portfolio performing at fair value or.
Our average internal credit rating for the second quarter fit at two eight based on our 1% to five rating system with five indicating very strong performance. This rating is in line with our average credit rating of two eight in Q1.
When you look at historical loss rates training has been consistent over its 15 year history.
And when factoring in realized gains from warrant and equity positions loss rates are a net positive.
We take a proactive approach to managing our portfolio to mitigate risk trinity's dedicated portfolio management team monitors our investments on a day to day basis regularly communicate with all our portfolio companies and participate in our quarterly valuation process.
We currently have three portfolio companies on nonaccrual a decrease from prior quarter. The total fair value of these investments were approximately $22 $5 million, representing just 2% of the total debt portfolio.
Moving to liquidity as of June 32023, we had total liquidity of approximately $130 million comprised of approximately $118 million of undrawn capacity under our credit facility and.
And $12 million in unrestricted cash and cash equivalents.
Additionally, we continue to co invest with our joint venture.
This provides additional investment liquidity and as of Q2 had $100 million of assets under management.
During the quarter, we expanded our liquidity through the JV with execution of a $75 million credit facility with Keybank, bringing their total investment capacity through the joint venture to $246 million.
Our net leverage ratio, which represents principal debt outstanding less cash on hand increased slightly to 135 times this quarter as a result of net portfolio growth.
Subsequent to June 30, <unk> received early loan repayments of $69 million, thereby reducing our debt to equity ratio significantly.
As of June 32023, total debt principal outstanding was $664 $5 million and had a weighted average cost of debt of seven 2% up.
Up slightly from the first quarter due to the higher base rates on their credit facility.
With the majority of our investment portfolio in floating rate investments and the majority of our corporate debt at fixed rates, we are well positioned in a rising rate environment.
We also utilize our ATM offering program during the quarter raising approximately $10 million in gross proceeds further supporting our long term growth of Trinity.
We are focused on our capital structure and balance sheet, especially with the successful execution of the joint venture and potential investment partners.
Not yet.
These vehicles provide accretive earnings to our to the BDC, while providing additional liquidity to the platform.
And with that I'll now open the lineup for questions operator.
Yes.
Thank you.
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Okay.
Our first question will come from Finian O'shea with Wells Fargo Securities.
Hi, everyone. Good morning.
Okay.
How are you.
<unk>.
A question on life Sciences is their experience.
At the CIO level, and if not how does the investment committee sort of organized around.
Those opportunities brought by the lifestyle deal teams.
Thanks, Dan.
Our starting that business and have kicked off the majority of that portfolio is really focus on commercialized products and execution risk, which is what we're very familiar with so.
So first and foremost the portfolios, it's not going to be filled with a lot of biotech deals.
A lot of it's FDA approved and we're really kind of focused on a company that is ramping up production and sales. So that's the first thing and then Jerry you can you can pick up there.
Kyle referenced it in his prepared remarks, right, Rob Lake Who's running that vertical market for us as <unk>.
<unk> 20, plus years of experience.
With different organizations sourcing and underwriting and managing these types of companies.
Obviously going to be expanding our.
Our credit team there as we grow that team, but as Carl said, we're starting out with that same sort of execution risk that we historically take with our tech lending practice.
That's helpful. Thank you and just a follow up on the joint venture it looks like the.
The partner took on something close to it.
40% allocation this quarter on origination.
Does that mean a quarter like this would it be unprofitable for the BDC. After you account for your G&A compensation and so forth.
Yes fin. This is Mike I, just wanted to point out when we do have youll see some.
Actually benefit in the quarter, where theres, a quite a bit more JV sales given how the fee structure is set up at the joint venture with a lot of that.
100 basis points.
Okay.
So youll see that come through and you saw in this quarter and the results.
700 K of <unk>.
Income from the joint venture, which helps to offset.
<unk> portfolios.
Sales to the JV and.
Income from those positions.
All incremental though I think it is.
Yes, I mean, it's all incremental to the BDC. The other thing I would say then is the the sale to a JV is going to lag our funding by about 45 days in general.
Looking at the cohort of what we add to the portfolio at the BDC level in any given quarter and looking with the JV ads.
It's it's time shifted by about half a quarter.
So just something to be cognizant of as you're as you're modeling.
Okay. Thanks, so much.
Thanks Ben.
Our next question will come from Bryce Rowe with B Riley.
Thanks, and good afternoon from the East Coast.
Hey, Brian I wanted to I wanted to ask about just growth of the platform and.
Any commentary you can you can add on.
The advantage of hiring opportunities.
Et cetera that you've seen.
From fallout from Silicon Valley me it looked like you had.
The employee count or at least the professional count goes from 55 to 61 quarter over quarter.
So again is that is that tied to what you've seen.
Here in the first half of the year or was that was that was that point.
So we've been really opportunistic with a lot of the volatility in the banking space. We have decades of experience working with seasoned veterans and we took a bit of a sniper approach to and for talent and we're really excited to talk about some of the people that we've added to the team who are bringing.
Their network and incredible knowledge and value.
And we expect Youll see some more announcements in the future about that as well.
Okay. That's helpful and then maybe a related question.
Just.
Around around appetite for equity raises especially considering the stock.
Being up as much as it is year to date and now with a with a nice premium over over NAV.
The obvious opportunities to build out the platform just kind of curious what your what your appetite might be above and beyond.
<unk> using the ATM from an equity perspective.
So we are we're really focused on building platform, both on and off balance sheet.
To the extent that its accretive and good for investors, we've proven that from day, one when we raise equity we put it to work and we out or and we just we're going to continue doing that.
So what the off balance sheet business does both the JV and the RIAA. It really gives us the ability to grow and make sure that anytime we do grow its accretive and good for investors. So we're going to be opportunistic.
And.
We're excited to see some of the positive momentum, but again, we're as.
As an internally managed BDC were just really hyper focused on Roe.
Got it okay. That's it for me appreciate the time.
Yeah.
Our next question will come from Christopher Nolan with Ladenburg Thalmann.
Hey, guys.
Three quick questions any change in terms of your leverage limit or a threshold, which sort of falls on prices question given your leverage levels are high.
Hey, Chris It's Mike Yeah, as I mentioned in my prepared remarks, we were slightly above the top end of range, but when you take into account the cash on hand, we're right there.
As I mentioned also we had some significant.
Payoffs that push from June to July so that does help.
And at the point in time, Yes, we are at at the high end of the range, but yes, I think with the JV, having that liquidity those sales also will help.
And again another quarter of low repayments.
And portfolio growth, that's driving that number we're honed in on the we're honed in on making sure that NII is up into the right dividends up into the right and our off balance sheet.
Activity, there helps us really manage that.
Net debt to equity.
Great and I didn't see it.
Was the increase in compensation related to the amortization of restricted stock grants.
That's right, yes. This was a full quarter of that.
Yep.
Final question Big picture.
In today's Wall Street Journal, there's an article talking about private equity and hedge fund space for us.
Coming FCC overhaul.
Does that touch the BDC sector at all.
I don't know the article that you're referencing.
It couldnt speak to it.
But.
Big picture we are.
We are seeing a lot of opportunities for growth non bank solutions.
Banks lending less and looking to alternative solutions, and we intend to be that solution.
Got it okay. Thank you.
Our next question will come from Casey Alexander with Compass point.
Yeah.
Hi.
Good morning, there seems to be kind of a.
Mix shift in the portfolio from.
With a higher percentage of secured loans and a lower percentage of equipment finance, making up the portfolio. So I'm just wondering as rates have risen have those who are seeking to finance equipment.
Found.
More competitive solutions and maybe the mandates that youre seeing for equipment finance have declined some.
Simply because there are fully collateralized loan solution, and perhaps theres more competition in that and that and that sleeve.
So 21% of the portfolio is equipment.
That's consistent year over year.
Deployment wise that might just be a lag in some fundings.
But I think I think we're actually gonna stay real consistent with the idea that equipment is somewhere around a quarter of our deployment.
We will continue to be and we're going to we have the ability to grow that business. The other part of that question. Yeah, I think Casey as we add the life Sciences business right.
Becoming more relevant at over $100 million and so those are going to be loans.
So if you look at the historical mix of equipment versus term loans used to be equipment financing and tech lending now its equipment financing tech lending and life Sciences lending right. So I do think if you look across.
Historical numbers.
You might see what looks like a shift in less equipment, but I think it's just more opportunity in the new areas, where we're where we're growing.
Hence there being a shift.
Well, there's a difference between a shift between existing business units and a change in denominator due to adding business units, so I disagree with him.
Alright.
Hum.
Any further color on the on the payoffs that shifted from June to July.
Can you help us with how much we might be seeing in terms of payoffs in the third quarter because the last few quarters, obviously have been some of the lowest that you've ever had in history.
Yeah for sure in the last three as a matter of fact, I think going back to Q4 of 'twenty. Two so as Mike mentioned, we've got $69 million in early repayments within July.
That was three credits.
And I don't know that I would read a broader trend into that in terms of.
More of that within the quarter in general we are seeing a bit more activity in the marketplace. So I think clear.
Clearly even with that July result, we're coming off those historical lows, but I wouldn't I wouldn't declare open season, yet it was just idiosyncratic that we got those three within July.
Last question.
Unless I missed it any reason that you didn't give the details of the ATM program in the quarter in the press release.
No there should have been $10 million of gross proceeds that we see.
ATM.
So you did tap that.
This quarter.
Okay.
It would be helpful. If you threw that into future quarters.
Sure.
Our next question will come from Ryan Lynch with K B W.
Yeah.
Hey, Good afternoon first question I had.
The roughly $700000 in fee income from the JV.
Do you have a rough breakdown of what percentage of that was structuring fees versus loan servicing fees and I'm. Just also trying to get a sense of if this JV kind of ramps to Chad you know roughly the mass capacity over.
Timeframe that takes what sort of level of fee income do you think.
<unk> can generate once fully ramped.
Yeah, I mean I think.
<unk>.
You saw the benefit this quarter, mostly in origination fees I think to the tune of 600 of that 700.
And as this stays as it is ramping you see more sales that will probably continue for the next couple of quarters until it's fully deployed and then youll see more on that.
Management fees administrative fee.
Fee component and then Youll see again start to see our dividend, but as well we have our debt investment.
<unk> has a current coupon associated with it and there's also a point in income from the JV.
So we actually do you have a set do you have a sense of it is 700000, obviously theres going be a period, where you keep ramping up so structuring fees will be high over that period of time and then like you said it was sort of shift for them. Once this starts to get fully ramped our structuring fees will go down but that the loan servicing fees will go up.
Is this sort of a good run rate then for the foreseeable future. The 700000 or do you expect it to expand to any higher levels.
Yes, I think in that in these next two quarters thats, probably around that level, but we do expect those to increase overtime.
Okay.
And then the other question I had was just surrounding kind of your existing portfolio companies receiving funding and this is maybe a broader question.
But but obviously out there you know the term AI as a sort of captured a lot of mind share from certainly the media as well as I think vcs.
Has there to any extent then.
This sort of shift away from D. CS.
You know any sort of pullback in funding companies out there that don't have a specific AI ban sedan, which would could hurt.
You know really well companies out there, who maybe are directing that AI field from receiving additional funding given that we all know capital Raisings down investments are down exits are down in the VC space. So capital is already a little limited and I'm, just wondering if you're having kind of an outsized.
Funding stores AI related investments does that pull away from from existing investments and in other businesses.
Ryan This is Ron <unk>, Chief Credit Officer, I'll take that question.
The quick answer is no we're still seeing a very diversified mix of companies entering the top of our pipeline.
AI is obviously.
Category of interest as you alluded to whether it's in the press or in reality, we are seeing more.
Broadly speaking companies hit the portfolio I'm, sorry, I hit the pipeline.
That is not taking away from the other <unk>.
Industries.
The industry segments that have been within our pipeline for the last several years.
Okay.
That's all for me I appreciate the time today. Thank.
Thank you Ron.
As a reminder, that is star one to ask a question.
Our next question will come from Kyle Joseph with Jefferies.
Hey, good morning, guys. Congrats on a good quarter and thanks for taking my questions.
Just I guess assets are obviously good yield expansion on the portfolio.
That primarily are 100% base rates are what are you seeing in terms of spreads in your market.
We are and have continued to push the scale, we've continued to push pricing.
And we've continued to see an increase and so some of thats.
As rates going up and then some of it is.
Demand for our products and and I'd say less liquidity out there.
From a supply perspective, and so we are we're pushing pricing, we're still pushing pricing.
You've seen that gradually increase over the last year and a half right.
Got it and then.
With the IPO market showing signs of life I E. You highlighted kind of near term repayment activity, but kind of give us a kind of intermediate longer term outlook do you expect repayments.
Prepayments to go towards historical levels.
How does the rate environment impact that as well.
So historically the majority of our exits are coming through refinances amortization M&A type activity.
And then Ipos are certainly.
Just it's a positive thing so to the extent there are more ipos that is only a good thing for us and some of our more mature companies right.
And giving them another liquidity options. So there's nothing on the horizon nothing we can point to right now certainly some candidates hopefully.
No that's a great option for some of them.
Got it and then one last one for me, obviously credit appear stable they see non accruals come down, but just give us a sense for kind of a revenue growth trends you've been seeing at the portfolio level and how that how that is compared to recent quarters.
Yes. This is Ron again, Chief credit Officer.
Quarter over quarter over the past several quarters I mean, yes revenues are.
Some companies have been impacted on the revenue growth side, but.
I'll circle back to our rigorous underwriting we do any company. We led into the portfolio is is on a growth path is a growing topline story and we've seen that our portfolio has stood the test of time over the last several quarters. Our companies are growing they are raising capital when they need to.
And.
Part of them along the way I would say there is just less focus on the explosive growth rate than we saw prior to you about a year ago right. Our portfolio companies are making their cash last are growing at more modest levels theyre, focusing on reaching cash flow positivity versus that grow at all cost.
Yes, and that began in Q1 Q2 of 2022, yeah right. So I think our industry in general was a little bit ahead of the curve because they have to be right and so a lot of these adjustments reduction of burn we sold out across the portfolio.
We've seen that for the last six quarters right. So.
They acted quick and we've continued to be a little more prudent.
Okay.
Got it thanks to assure asking my questions.
Thanks Kelvin.
Next we have <unk> Abraham with UBS.
Hey, everyone. Thanks for taking the question.
Just just one from me just on the supplemental dividend and it sounds like your hand was forced a little bit here recently.
With that and just wondering if we are going to see.
<unk> per share kind of consistent with what we saw for Q2 is it fair to expect that the supplemental dividend.
Keep coming here.
Is it for me thanks.
This is Dave the supplemental dividend had more to do with the 'twenty two spillover than it does with the current operations. So I mean, we're continuing to grow our dividend have done so over the last 10 quarters.
So we will take a look during the third quarter and determine whether or not we need to do another supplemental dividend simply to pay out the balance of the 'twenty twos cologuard.
Yes.
Okay. Thank you guys.
Okay.
Alright, thank you.
At this time, we have 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.
Okay.
Thank you we really appreciate everybody's participation today.
We appreciate your support and we look forward to reporting on Q3 on the phone. Thank you so much.
Thank you ladies and gentlemen, this concludes today's call and we appreciate your participation you may disconnect at any time.